e40vf
TABLE OF CONTENTS
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 40-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005
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Commission File Number 9682 |
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Domtar
Inc.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrants name into English (if applicable)
Canada
(Province or other jurisdiction of incorporation or organization)
2621
(Primary Standard Industrial Classification Code-Number (if applicable))
Not applicable
(I.R.S. Employer Identification Number (if applicable))
395 de
Maisonneuve Blvd. West, Montreal, Quebec, Canada H3A 1L6
(514) 848-5400
(Address and telephone number of Registrants principal executive offices)
CT Corporation System, 111 Eighth Avenue, New York, N.Y. 10011, (212) 664-1666
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class |
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Name of each exchange on which registered |
Common Shares no par value
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New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not
Applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
8.75% Notes due 2006, 7.875% Notes due 2011, 5.375% Notes due 2013,
7.125% Notes due 2015 and
91/2%
Debentures due 2016
(Title of Class)
For annual reports, indicate by check mark the information filed with this Form:
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o Annual Information form
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þ Audited annual financial statements |
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
Common Shares 230,967,488 shares
Indicate by check mark whether the Registrant by filing the information contained in this form
is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934 (the Exchange Act). If Yes is marked, indicate the file number
assigned to the Registrant in connection with such Rule.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 last 90 days.
FORWARD-LOOKING STATEMENTS
This annual report on Form 40-F may contain forward-looking statements relating to trends in, or
representing managements beliefs about, Domtars future growth, results of operations, performance
and business prospects and opportunities. These forward-looking statements are generally denoted
by the use of words such as anticipate, believe, expect, intend, aim, target, plan,
continue, estimate, may, will, should and similar expressions. These statements reflect
managements current beliefs and are based on information currently available to management.
Forward-looking statements are necessarily based upon a number of estimates and assumptions that,
while considered reasonable by management, are inherently subject to known and unknown risks and
uncertainties such as, but not limited to, general economic and business conditions, product
selling prices, raw material and operating costs, changes in foreign currency exchange rates, the
ability to integrate acquired businesses into existing operations, the ability to realize
anticipated cost savings, the performance of manufacturing operations, and other factors referenced
herein and in Domtars continuous disclosure filings. These factors should be considered carefully
and undue reliance should not be placed on the forward-looking statements. Although the
forward-looking statements contained in this annual report on Form 40-F are based upon what
management believes to be reasonable estimates and assumptions, Domtar cannot ensure that actual
results will not be materially different from those expressed or implied by these forward-looking
statements. Domtar assumes no obligation to update or revise these forward-looking statements to
reflect new events or circumstances. These risks, uncertainties and other factors include, among
other things, those discussed under Risk Factors as well as those discussed elsewhere in this
annual report on Form 40-F.
Form 40-F
Domtar Inc.
March 27, 2006
TABLE OF CONTENTS
Disclosure Controls and Procedures;
Managements Discussion and Analysis of Annual Results of Operations;
Managements statement of responsibility and Auditors report;
Audited consolidated financial statements of Domtar Inc. as at and for the year ended December 31,
2005;
Audit Committee;
Code of Ethics;
Principal Accountant fees and services;
Exhibits
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1.0 |
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Consent of Independent Auditors |
2.1 |
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CEO 302 Certification |
2.2 |
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CFO 302 Certification |
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CEO 906 Certification |
3.2 |
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CFO 906 Certification |
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In accordance with the rules of the Securities and Exchange Commission, Domtar maintains a system
of disclosure controls and procedures that is designed to ensure that information required to be
disclosed by Domtar in the reports that it files or submits pursuant
to the Securities Exchange Act
of 1934 is accumulated and communicated to management, including the Chief Executive Officer and
the Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Domtars management, under the supervision and with the participation of its Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and
operation of these disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, Domtars Chief Executive Officer and Chief Financial Officer
concluded that Domtars system of disclosure controls and procedures is effective.
Change in Internal Controls over Financial Reporting
Domtar maintains a system of internal controls over financial reporting. There were no changes in
Domtars internal controls that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, Domtars internal control over
financial reporting.
MANAGEMENTS DISCUSSION & ANALYSIS
22
Domtar Inc.
2005
Annual Report
MD&A
Montreal,
Quebec, February 22, 2006
Managements Discussion and Analysis (MD&A) relates to the financial condition and results of
Domtars operations. Throughout this MD&A, unless otherwise specified, Domtar, we, us and
our refer to Domtar Inc., its subsidiaries, as well as its joint ventures, and the Corporation
refers to Domtar Inc. excluding its interest in Norampac Inc. (Norampac) and other joint
ventures. Domtars common shares are listed on the Toronto and New York stock exchanges. Except
where otherwise indicated, all financial information reflected herein is determined on the basis of
Canadian generally accepted accounting principles (GAAP). This MD&A should be read in conjunction
with Domtars audited consolidated financial statements and
notes thereto.
In accordance with
industry practice, in this MD&A, the term ton or the symbol ST refers to a short ton, an
imperial unit of measurement equal to 0.9072 metric tons, and the term tonne or the symbol MT
refers to a metric ton. In this MD&A, unless otherwise indicated, all dollar amounts are expressed
in Canadian dollars, and the term dollars and the symbols $ and CAN$ refer to Canadian
dollars. The term U.S. dollars and the symbol US$ refer to United States dollars.
FORWARD-LOOKING STATEMENTS
This MD&A may contain forward-looking statements relating to trends in, or representing
managements beliefs about, Domtars future growth, results of operations, performance and business
prospects and opportunities. These forward-looking statements are generally denoted by the use of
words such as anticipate, believe, expect, intend, aim, target, plan, continue,
estimate, may, will, should and similar expressions. These statements reflect managements
current beliefs and are based on information currently available to management. Forward-looking
statements are necessarily based upon a number of estimates and assumptions that, while considered
reasonable by management, are inherently subject to known and unknown risks and uncertainties such
as, but not limited to, general economic and business conditions, product selling prices, raw
material and operating costs, changes in foreign currency exchange rates, the ability to integrate
acquired businesses into existing operations, the ability to realize anticipated cost savings, the
performance of manufacturing operations, and other factors referenced herein and in Domtars
continuous disclosure filings. These factors should be considered carefully and undue reliance
should not be placed on the forward-looking statements. Although the forward-looking statements
contained in this MD&A are based upon what management believes to be reasonable estimates and
assumptions, Domtar cannot ensure that actual results will not be materially different from
those expressed or implied by these forward-looking statements. Domtar assumes no obligation to
update or revise these forward-looking statements to reflect new events or circumstances. These
risks, uncertainties and other factors include, among other things, those discussed under Risk
Factors as well as those discussed elsewhere in this MD&A.
MANAGEMENTS DISCUSSION & ANALYSIS
23
Domtar Inc.
2005
Annual Report
2005 Overview
Our 2005 results were negatively impacted by the continued strengthening of the Canadian
dollar and higher costs, especially for purchased fiber, chemicals, energy and freight. This was
only partially offset by higher U.S. dollar selling prices for most of our products. In order to
preserve cash, reduce our cost base and return the Company to profitability as quickly as possible,
we announced in October 2005 the suspension of our common share dividend, and in November 2005, a
restructuring plan which included the permanent closures of mills and paper machines and which
entailed a charge of
approximately $400 million in the fourth quarter. We anticipate that additional costs related to
this restructuring plan of approximately $80 million will occur over the next few years.
Despite
all the challenges encountered, we achieved our goal of delivering annualized targeted savings of
$100 million by the end of 2005, mainly due to headcount reductions. We also improved our product
offering by broadening our range of Domtar Earth Choice® environmental FSC papers and by completing the transition, in all of our mills, to the production of the new 92 bright standard for our
paper products.
Our Business
Domtars reporting segments correspond
to the following business activities: Papers,
Paper Merchants, Wood and Packaging.
1 Including sales of Domtar paper through our Paper Merchants business.
2 Excluding sales of Domtar paper.
SALES
BY SEGMENT
2005
PAPERS
We are the
third largest integrated manufacturer and marketer of uncoated free sheet paper in
North America. We operate four pulp and paper facilities in Canada (reflecting the announced permanent closure of the Cornwall and Ottawa mills and the decision to sell the Vancouver mill) and five
in the United States, with an annual paper production capacity of approximately 2.3 million tons,
complemented by strategically located warehouses and sales offices. Approximately 65% of our paper
production capacity is located in the United States, and approximately 90% of our paper sales are
made to customers in the United States. Uncoated and coated free sheet papers are used for business,
commercial printing and publication, and technical and specialty applications. The chart on the
next page illustrates the principal paper products we produce and our annual paper production
capacity.
We sell paper primarily through a large network of owned and independent merchants that distribute
our paper products throughout North America. We also sell our products to a variety of customers,
including business offices, office equipment manufacturers, retail outlets, commercial printers,
publishers and converters. In addition, we sell pulp in excess of our own internal requirements. We
also purchase pulp to optimize paper production and reduce freight costs. In 2005, our net market
pulp position (the amount of pulp produced in excess of our internal requirements) was
approximately 554,000 tons. In 2006, our net market pulp position is expected to be approximately
950,000 tons as a result of the announced paper mill closures.
Our Papers business is our most
important segment, representing 55% of consolidated sales in 2005, or
61% when including sales of
Domtar paper through our own Paper Merchants business.
MANAGEMENTS DISCUSSION & ANALYSIS
24
Domtar Inc.
2005
Annual Report
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COMMERCIAL PRINTING |
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TECHNICAL AND |
CATEGORY |
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BUSINESS PAPERS |
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AND PUBLICATION PAPERS |
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SPECIALTY PAPERS |
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UNCOATED |
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COATED |
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UNCOATED AND |
TYPE |
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FREESHEET |
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FREESHEET |
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COATED FREESHEET |
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GRADE
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Copy
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Premium
imaging/technology
papers
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Offset
Business
converting
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Lightweight
Opaques
Text, covered
writing
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Lightweight
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Flexible packaging Abrasive papers
Decorative papers
Imaging papers
Label papers
Medical disposables |
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APPLICATION
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Photocopies
Office documents
Presentations
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Pamphlets
Brochures
Direct Mail
Commercial
printing
Forms &
envelopes
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Stationery
Brochures
Annual reports
Books
Catalogs
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Brochures
Annual reports
Books Magazines
Catalogs
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Food & candy wrappings
Surgical growns
Repositionable note pads
Security check papers |
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CAPACITY * |
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As at February 22, 2006: |
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approximately
2.3 million tons |
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0.8 million tons 36% |
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0.1 million tons 4% |
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0.7 million tons 28% |
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0.2 million tons 11% |
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0.1 million tons 5% |
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0.4 million tons 16% |
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The allocation of production capacity may vary from period to period in order to take
advantage of market conditions. On November 30, 2005, we announced our decision to permanently
close the Cornwall and Ottawa paper mills and our decision to sell the Vancouver paper mill. These
permanent closures and sale, impacting 450,000 tons of paper, have been assumed to be effective as
at January 1, 2006 and have been reflected in the above capacity. |
PAPER MERCHANTS
Our Paper Merchants business comprises the purchasing, warehousing, sale and distribution
of various products made by Domtar and other manufacturers. These products include business and
printing papers, graphic arts supplies and certain industrial products. Domtar-owned paper
merchants operate in the United States and Canada under a single banner and umbrella name, the
Domtar Distribution Group, which is the fifth largest paper merchant organization in North America.
Ris Paper operates throughout the Northeast, Mid-Atlantic and Midwest areas from 20 locations in
the United States, including 16 distribution centers. The Canadian business operates as Buntin Reid
in three locations in Ontario; JBR/La Maison du Papier in two locations in Quebec; and The Paper
House from two locations in Atlantic Canada. Our Paper Merchants business represented 21% of
consolidated sales in 2005, or 15% when excluding sales of Domtar paper.
WOOD
Our Wood business comprises the manufacturing, marketing and distribution of lumber and wood-based
value-added products, and the management of forest resources. We operate eight sawmills (four in
Quebec and four in Ontario, following the permanent closure of the Chapleau, Ontario sawmill
effective March 6, 2005 and the permanent closure of Grand-Remous and Malartic sawmills effective
in the second quarter of 2006) and one remanufacturing facility (in Quebec), for an annual capacity of approximately 1.1 billion board
feet of lumber. We also have investments in four businesses that produce wood products. We seek to
optimize 17 million acres of forestland directly licensed or owned by the Corporation in Canada and
the United States through efficient management and the application of certified sustainable forest
management practices such that a continuous supply of wood is available for future needs. Our Wood
business represented 11% of consolidated sales in 2005.
PACKAGING
Our Packaging business comprises our 50% ownership interest in Norampac, a joint venture
between Domtar Inc. and Cascades Inc. We do not manage the day-to-day operations of Norampac. The
Board of Directors of Norampac is composed of four representatives each from Domtar Inc. and
Cascades Inc. The Chairman of the Board is proposed by Domtar Inc. and appointed by the Board,
while the President and Chief Executive Officer is proposed by Cascades Inc. and appointed by the
Board. Norampacs debt is non-recourse to Domtar Inc. As required by GAAP, we account for our 50%
interest in Norampac using the proportionate consolidation method.
Norampacs network of 26 corrugated packaging plants (reflecting the closure of the Concord plant
in March 2005, the Buffalo plant in August 2005, the expected closure of the
MANAGEMENTS DISCUSSION & ANALYSIS
25
Domtar Inc.
2005
Annual Report
Montreal plant in the second quarter of 2006 and the acquisition of three corrugated packaging
plants in October 2005), strategically located across Canada and the United States, provides
full-service packaging solutions and produces a broad range of products. Norampacs eight
containerboard mills (located in Ontario, Quebec, British Columbia, New York State and northern
France), having a combined annual capacity of approximately 1.45 million tons, directly or
indirectly supply essentially all the containerboard requirements of the corrugated packaging
plants. Our Packaging business represented 13% of consolidated sales in 2005.
BUSINESS STRATEGY
Our overall strategic objective is to be a world leader in the paper industry. We have
developed our business strategies around three pillars: meeting and
anticipating the ever-changing needs of customers, providing our shareholders with attractive returns, and fostering a dynamic and creative
environment for our employees in which shared human values and personal commitment prevail.
Our business strategies are to continue to:
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anticipate and meet the needs of our customers in order to enhance customer loyalty |
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improve the productivity of our mills and the quality of our products and services |
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broaden our distribution capabilities |
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grow through acquisitions and alliances within our areas of expertise |
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maintain strict financial discipline |
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foster the personal growth and participation of employees |
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act as a responsible corporate citizen. |
Summary of Financial Results
FINANCIAL
HIGHLIGHTS YEARS ENDED DECEMBER 31
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2005 |
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2004 |
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2003 |
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(IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) |
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Sales |
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4,966 |
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5,115 |
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5,167 |
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EBITDA1 |
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224 |
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428 |
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514 |
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Excluding specified items2 |
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351 |
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434 |
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511 |
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Operating profit (loss)1 |
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(463 |
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49 |
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(95 |
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Excluding specified items2 |
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(24 |
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66 |
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126 |
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Net loss |
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(388 |
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(42 |
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(193 |
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Excluding specified items2 |
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(86 |
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(33 |
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(10 |
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Net loss per share (in dollars):
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Basic |
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(1.69 |
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(0.19 |
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(0.86 |
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Basic, excluding specified items2 |
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(0.37 |
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(0.15 |
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(0.05 |
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Diluted |
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(1.69 |
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(0.19 |
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(0.86 |
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Operating profit (loss), excluding specified items, per segment2: |
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Papers |
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(74 |
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(7 |
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126 |
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Paper Merchants |
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16 |
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21 |
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20 |
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Wood |
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(3 |
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(13 |
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(66 |
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Packaging |
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30 |
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52 |
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48 |
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Corporate |
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7 |
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13 |
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(2 |
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Total |
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(24 |
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66 |
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126 |
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Average exchange rates |
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CAN $ |
1.211 |
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1.301 |
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1.401 |
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US $ |
0.826 |
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0.769 |
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0.714 |
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Dividends per share (in dollars): |
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Series A Preferred Shares |
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2.25 |
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2.25 |
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2.25 |
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Series B Preferred Shares |
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0.78 |
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0.73 |
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0.86 |
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Common shares |
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0.18 |
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0.24 |
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0.22 |
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Total assets |
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5,192 |
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5,681 |
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5,848 |
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Total long-term debt, including current portion |
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2,259 |
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2,034 |
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2,059 |
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1 |
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EBITDA (Earnings Before Interest (Financing expenses), Taxes and Amortization) is a
non-GAAP measure and is determined by adding back amortization expense, including portions related
to specified items (impairment losses and write-downs), financing expenses and income taxes to net
earnings (see EBITDA table). Operating profit is also a non-GAAP measure that is determined by
deducting cost of sales, selling, general and administrative expenses (SG&A), amortization expense
and closure and restructuring costs from sales. We focus on EBITDA and operating profit as these
measures enable us to compare our results between periods without regard to debt service or income
taxes (for operating profit) and without regard to amortization (for EBITDA). As such, we believe
it would be useful for investors and other users to be aware of these measures so they can better
assess our performance. Our EBITDA and operating profit measures have no standardized meaning
prescribed by GAAP and are not necessarily comparable to similar measures presented by other
companies and therefore should not be considered in isolation. |
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See Specified items affecting results and non-GAAP measures.
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MANAGEMENTS DISCUSSION & ANALYSIS
26
Domtar Inc.
2005
Annual Report
SPECIFIED
ITEMS AFFECTING RESULTS AND NON-GAAP MEASURES
Our operating results include specified items that, in our view, do not typify normal
operating activities, thus affecting the comparability of our results. We define specified items as
items such as the impacts of impairment of assets, facility or machine closures, changes in income
tax legislation, debt restructuring, unrealized mark-to-market gains or losses on hedging contracts
not considered as hedges for accounting purposes, foreign exchange impact on long-term debt
translation and other items that, in our view, do not typify normal
operating activities.
To
measure our performance and that of our business segments from period to period without regard to
variations caused by these specified items, we focus on certain
measures excluding specified items. These financial measures excluding specified items are non-GAAP measures. We
believe that it is useful for investors and other users to be aware of the specified items that
positively or adversely impacted our GAAP results, and that these non-GAAP measures provide
investors and other users with a measure of performance to compare our results between periods
without regard to these specified items. Measures excluding specified items have no standardized
meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by
other companies, and therefore should not be considered in isolation. The following tables
reconcile these measures excluding specified items to their closest GAAP financial measures.
SPECIFIED
ITEMS Years ended December
31
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2005 |
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2004 |
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2003 |
(IN MILLIONS OF |
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OPER- |
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NET LOSS |
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OPER- |
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NET LOSS |
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OPERATING |
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NET LOSS |
CANADIAN DOLLARS, |
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|
ATING |
|
NET |
|
PER SHARE |
|
|
|
|
|
ATING |
|
NET |
|
PER SHARE |
|
|
|
|
|
PROFIT |
|
NET |
|
PER SHARE |
UNLESS OTHERWISE NOTED) |
|
EBITDA |
|
LOSS |
|
LOSS |
|
(IN DOLLARS) |
|
EBITDA |
|
PROFIT |
|
LOSS |
|
(IN DOLLARS) |
|
EBITDA |
|
(LOSS) |
|
LOSS |
|
(IN DOLLARS) |
|
As per GAAP* |
|
|
224 |
|
|
|
(463 |
) |
|
|
(388 |
) |
|
|
(1.69 |
) |
|
|
428 |
|
|
|
49 |
|
|
|
(42 |
) |
|
|
(0.19 |
) |
|
|
514 |
|
|
|
(95 |
) |
|
|
(193 |
) |
|
|
(0.86 |
) |
Specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of property, plant and
equipment (i) |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
(33 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closure and restructuring costs
(ii) |
|
|
121 |
|
|
|
433 |
|
|
|
285 |
|
|
|
|
|
|
|
37 |
|
|
|
48 |
|
|
|
33 |
|
|
|
|
|
|
|
1 |
|
|
|
24 |
|
|
|
16 |
|
|
|
|
|
Unrealized mark-to- market gains or
losses(iii) |
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
|
|
Foreign exchange gains or losses on
long-term debt(iv) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
Income tax legislation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
changes(v) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal settlement(vi) |
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinancing
costs (vii) |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
Impairment of assets
(viii) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
135 |
|
|
|
|
|
Write-off of
deferred costs (ix) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
Insurance recoveries
(x) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
439 |
|
|
|
302 |
|
|
|
1.32 |
|
|
|
6 |
|
|
|
17 |
|
|
|
9 |
|
|
|
0.04 |
|
|
|
(3 |
) |
|
|
221 |
|
|
|
183 |
|
|
|
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding specified items |
|
|
351 |
|
|
|
(24 |
) |
|
|
(86 |
) |
|
|
(0.37 |
) |
|
|
434 |
|
|
|
66 |
|
|
|
(33 |
) |
|
|
(0.15 |
) |
|
|
511 |
|
|
|
126 |
|
|
|
(10 |
) |
|
|
(0.05 |
) |
|
* |
|
Except for EBITDA and operating profit (loss), which are non-GAAP measures. |
MANAGEMENTS DISCUSSION & ANALYSIS
27
Domtar Inc.
2005
Annual Report
SPECIFIED
ITEMS three months ended
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
(IN MILLIONS OF |
|
|
|
|
|
OPER- |
|
|
|
|
|
|
NET LOSS |
|
|
|
|
|
|
OPER- |
|
|
|
|
|
|
NET LOSS |
|
|
|
|
|
|
OPER- |
|
|
|
|
|
|
NET LOSS |
|
CANADIAN DOLLARS, |
|
|
|
|
|
ATING |
|
|
NET |
|
|
PER SHARE |
|
|
|
|
|
|
ATING |
|
|
NET |
|
|
PER SHARE |
|
|
|
|
|
|
ATING |
|
|
NET |
|
|
PER SHARE |
|
UNLESS OTHERWISE NOTED) |
|
E(L)BITDA |
|
|
LOSS |
|
|
LOSS |
|
|
IN DOLLARS) |
|
|
EBITDA |
|
|
LOSS |
|
|
LOSS |
|
|
(IN DOLLARS) |
|
|
EBITDA |
|
|
LOSS |
|
|
LOSS |
|
|
IN DOLLARS) |
|
|
As per GAAP* |
|
|
(77 |
) |
|
|
(478 |
) |
|
|
(348 |
) |
|
|
(1.51 |
) |
|
|
90 |
|
|
|
(12 |
) |
|
|
(26 |
) |
|
|
(0.11 |
) |
|
|
55 |
|
|
|
(265 |
) |
|
|
(231 |
) |
|
|
(1.01 |
) |
Specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of property, plant and
equipment(i) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
(29 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closure and restructuring costs
(ii) |
|
|
99 |
|
|
|
402 |
|
|
|
265 |
|
|
|
|
|
|
|
29 |
|
|
|
40 |
|
|
|
27 |
|
|
|
|
|
|
|
6 |
|
|
|
29 |
|
|
|
19 |
|
|
|
|
|
Unrealized
mark-to- market gains or
losses (iii) |
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gains or losses on
long-term debt (iv) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
Income tax legislation changes
(v) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
Legal settlement (vi) |
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinancing costs (vii) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Impairment of assets
(viii) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
135 |
|
|
|
|
|
Write-off of deferred costs
(ix) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115 |
|
|
|
418 |
|
|
|
289 |
|
|
|
1.26 |
|
|
|
(1 |
) |
|
|
10 |
|
|
|
6 |
|
|
|
0.02 |
|
|
|
8 |
|
|
|
232 |
|
|
|
188 |
|
|
|
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding specified items |
|
|
38 |
|
|
|
(60 |
) |
|
|
(59 |
) |
|
|
(0.25 |
) |
|
|
89 |
|
|
|
(2 |
) |
|
|
(20 |
) |
|
|
(0.09 |
) |
|
|
63 |
|
|
|
(33 |
) |
|
|
(43 |
) |
|
|
(0.19 |
) |
|
* |
|
Except for EBITDA and operating profit (loss), which are non-GAAP measures. |
(i) |
|
Our results reflect gains or losses on sales of property, plant and equipment. These
gains or losses are presented under Net gains on disposals of property, plant and equipment in
the financial statements. |
|
(ii) |
|
Our results reflect closure and restructuring charges. These charges are presented under
Closure and restructuring costs in the financial statements. See Closure and restructuring
costs for further information. |
|
(iii) |
|
Our results include unrealized mark-to-market gains or losses on commodity swap contracts and
foreign exchange contracts not considered as hedges for accounting purposes. Such gains or losses
are presented under Selling, general and administrative expenses in the financial statements. |
|
(iv) |
|
Our results include foreign exchange gains or losses on the translation of a portion of our
long-term debt. Such gains or losses are presented under Financing expenses in the financial
statements. |
|
(v) |
|
Our results include charges related to modifications to the income tax legislation. These
charges are presented under Income tax recovery in the financial statements. |
|
(vi) |
|
Our results include a charge related to a legal settlement. This charge is presented under
Selling, general and administrative expenses in the financial statements. |
|
(vii) |
|
Our results include refinancing expenses. These refinancing expenses are presented under
Financing expenses in the financial statements. |
|
(viii) |
|
Our results include an impairment loss on the net book value of property, plant and
equipment. This
loss is presented under Impairment loss in the financial statements. |
|
(ix) |
|
Our results include write-offs of deferred costs. These costs are presented under Selling,
general and administrative expense in the financial statements. |
|
(x) |
|
Our results include insurance recoveries. These recoveries are presented under Selling,
general and administrative expenses in the financial statements.
|
MANAGEMENTS DISCUSSION & ANALYSIS
28
Domtar Inc.
2005
Annual Report
2005 vs 2004
Annual Overview
SALES OF $5 BILLION
Sales in 2005 amounted to $4,966 million, a decrease of $149 million or 3% from sales of
$5,115 million in 2004. This decrease was mainly attributable to the negative impact of a 7% rise
in the year-over-year average value of the Canadian dollar relative to the U.S. dollar (from $0.769
to $0.826) and, to a lesser extent, to lower shipments for pulp and paper. These factors were
partially offset by higher average selling prices for all of our major products and higher
shipments for lumber and packaging products.
OPERATING LOSS OF $463 MILLION
Cost of sales decreased by $48 million or 1% in 2005 compared to 2004. This decrease was
mainly attributable to the positive impact of a stronger Canadian dollar on our U.S. dollar
denominated expenses, lower shipments for pulp and paper, the realization of savings stemming from
restructuring activities and lower duties on our softwood lumber exports to the U.S. These factors
were partially offset by higher costs for purchased fiber, chemicals, energy and freight, and
higher shipments for lumber and packaging products.
Selling, general and administrative (SG&A) expenses decreased by $14 million or 5% in 2005 compared
to 2004. SG&A in 2005 included unrealized mark-to-market losses on financial instruments of $3
million, a charge of $12.5 million related to a legal settlement with regards to an investigation
by the Canadian Competition Bureau and insurance recoveries of $3 million, while SG&A in 2004
included unrealized mark-to- market losses of $2 million. When excluding these specified items,
SG&A decreased by $25 million or 8% compared to 2004. This decrease was mainly attributable to the realization of savings stemming from
restructuring activities.
Operating loss in 2005 amounted to $463 million compared to an operating profit of $49 million in
2004. Excluding specified items, operating loss totaled $24 million in 2005 compared to an
operating profit of $66 million in 2004. The $90 million decrease in operating profit excluding
specified items was largely attributable to the $124 million negative impact of a stronger Canadian
dollar (net of the positive effect of our hedging program), higher costs for purchased fiber,
chemicals, energy and freight, and lower shipments for pulp and paper. These factors were partially
offset by higher average selling prices for all of our major products, the realization of savings
stemming from restructuring activities, higher shipments for lumber and packaging products, and
lower duties on our softwood lumber exports to the U.S.
VARIANCE ANALYSIS 2005 vs 2004
|
|
|
|
|
|
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
2004 operating profit, excluding specified items |
|
|
66 |
|
|
Selling prices |
|
|
162 |
|
|
Foreign exchange (net of hedging programs) |
|
|
(124 |
) |
|
Purchased fiber and chemical costs |
|
|
(53 |
) |
|
Energy costs |
|
|
(46 |
) |
|
Freight costs |
|
|
(39 |
) |
|
Shipments and mix |
|
|
(12 |
) |
|
Softwood lumber duties |
|
|
15 |
|
|
Other costs |
|
|
7 |
|
|
|
|
|
|
|
2005 operating loss, excluding specified items |
|
|
(24 |
) |
|
|
SALES
IN MILLIONS OF CAN$
OPERATING PROFIT (LOSS)
IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS
EBITDA
IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS
NET LOSS
IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS
MANAGEMENTS DISCUSSION & ANALYSIS
29
Domtar Inc.
2005
Annual Report
EBITDA for the fourth quarter of 2005 compared to the fourth quarter of 2004 and 2003, as well
as for the year 2005 compared to 2004 and 2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE
MONTHS ENDED DEC. 31 |
|
|
|
|
|
YEARS
ENDED DEC. 31 |
EBITDA |
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
2003 |
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(348 |
) |
|
|
(26 |
) |
|
|
(231 |
) |
|
|
(388 |
) |
|
|
(42 |
) |
|
|
(193 |
) |
Income tax recovery |
|
|
(170 |
) |
|
|
(20 |
) |
|
|
(73 |
) |
|
|
(225 |
) |
|
|
(52 |
) |
|
|
(67 |
) |
Financing expenses |
|
|
41 |
|
|
|
35 |
|
|
|
39 |
|
|
|
155 |
|
|
|
148 |
|
|
|
169 |
|
Amortization of deferred gain |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
Amortization |
|
|
98 |
|
|
|
91 |
|
|
|
96 |
|
|
|
375 |
|
|
|
368 |
|
|
|
385 |
|
Impairment loss |
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
201 |
|
Closure and restructuring costs (portion
related to fixed asset write-downs) |
|
|
303 |
|
|
|
11 |
|
|
|
23 |
|
|
|
312 |
|
|
|
11 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E(L)BITDA |
|
|
(77 |
) |
|
|
90 |
|
|
|
55 |
|
|
|
224 |
|
|
|
428 |
|
|
|
514 |
|
|
SPECIFIC COST REDUCTION INITIATIVES
The Corporation has made an ongoing commitment to adjust production to meet its customers
needs, as well as maintain operational flexibility and a competitive manufacturing base. These
efforts have mainly impacted our Papers and Wood segments and have resulted in workforce
reductions throughout the organization.
In 2004, we announced several initiatives aimed at achieving a run-rate of $100 million in annual
cost reductions by the end of 2005. These included:
- |
|
The shutdown of one of two paper machines at our Vancouver mill, resulting in the permanent
curtailment of 45,000 tons of paper manufacturing capacity and the elimination of approximately
85 permanent positions; |
|
- |
|
The elimination of approximately 730 additional permanent positions throughout Domtar,
including approximately 150 management and staff positions; |
|
- |
|
The shutdown, for an indefinite period, of the pulp mill, one paper machine and its sheeter at
our Cornwall mill until economic and market conditions allowed these assets to operate
profitably. This resulted in a temporary curtailment of 160,000 tons of pulp and 85,000 tons of
paper and impacted approximately 390 positions for an indefinite period; |
|
- |
|
The restructuring of our lumber operations in northeastern Ontario, which led to the closure of
our
Chapleau sawmill and the elimination of 67 permanent positions. |
As at December 31, 2005, we had achieved our goal to deliver $100 million of annualized savings
stemming from these initiatives.
In November 2005, still faced with a number of economic conditions
that adversely impacted our business, such as higher energy prices and the rapid rise of the
Canadian dollar, we
announced a series of additional targeted measures aimed at returning the Company to profitability.
The measures included the following initiatives:
- |
|
The permanent closure of our Cornwall mill, effective March 31, 2006, which will eliminate
approximately 910 permanent positions (including the 390 positions already affected by the
indefinite shutdown of the pulp mill, paper machine and sheeter announced in late 2004). This will
result in the permanent curtailment of 265,000 tons of uncoated and coated printing grades, as
well as 160,000 tons of pulp (including 85,000 tons of paper and 160,000 tons of pulp impacted by
the indefinite shutdown announced in late 2004); |
|
- |
|
The permanent closure of our Ottawa mill, effective March 31, 2006, which will eliminate
approximately 185 permanent positions and will result in the permanent curtailment of 65,000 tons
of paper; |
|
- |
|
The intention to sell our Vancouver coated paper mill, effective June 30, 2006. If unsold by
June 30, 2006, it will be permanently shut down, which will eliminate approximately 285 permanent
positions and will result in the permanent curtailment of 120,000 tons of coated paper; |
|
- |
|
The permanent closure of our Grand-Remous and Malartic sawmills, effective in the second quarter
of 2006, which will eliminate approximately 200 permanent positions; |
|
- |
|
Further measures to reduce costs, as follows: |
|
- |
|
Reducing SG&A expenses by permanently eliminating approximately 100 additional corporate and
divisional permanent positions, as well as other SG&A expenses; |
|
|
- |
|
Implementing further cost reductions at the mill level by eliminating approximately 200
additional operational positions; |
|
|
- |
|
Consolidating North American administrative offices in Montreal and Cincinnati. |
MANAGEMENTS DISCUSSION & ANALYSIS
30
Domtar Inc.
2005
Annual Report
The complete implementation of these measures will result in a 25% reduction in our workforce
and a 16% reduction in paper production capacity when compared to January 1, 2004.
In addition to these measures, we intend to improve profitability by implementing supply chain
initiatives that are expected to reduce operational costs and improve customer satisfaction. These
initiatives are aimed at increasing the efficiency of our converting and distribution centers and
the cost effectiveness of transportation for just-in-time deliveries. Furthermore, we plan to
transfer some of our paper grades to more profitable papermaking facilities and machines within our
network. Above all, we plan to continue to provide our customers with products, services and
solutions that meet their needs.
We believe that these actions, as well as the decision to suspend our common share dividend, will
improve our cash flow and help us return to profitability.
CLOSURE AND RESTRUCTURING COSTS
Closure and restructuring costs for the fourth quarter of 2005 compared to the fourth quarter
of 2004, as well
as for the year 2005 compared to 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE
MONTHS ENDED DEC. 31 |
|
YEARS
ENDED DEC. 31 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to the permanent closures
of our Cornwall, Vancouver and Ottawa paper
mills (severance, termination, environment and
pension costs, as well as $280 million for
write-down of property, plant and
equipment) |
|
|
363 |
|
|
|
|
|
|
|
363 |
|
|
|
|
|
Costs related to the permanent closure of
two sawmills at Malartic and Grand-Remous
(severance, termination, environment and
pension costs, as well as $23 million for the
write-down of property, plant and
equipment) |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
Costs related to specific cost reduction
initiatives (severance, termination, training
and outplacement costs) |
|
|
6 |
|
|
|
24 |
|
|
|
17 |
|
|
|
40 |
|
Costs related to the indefinite closure
of a paper machine, a sheeter and pulp mill at
our Cornwall paper mill |
|
|
|
|
|
|
2 |
|
|
|
6 |
|
|
|
2 |
|
Costs related to the permanent closure of
our Chapleau sawmill (including $11 million for
write-down of property, plant and
equipment) |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Costs related to the permanent closure of
our St. Catharines paper mill (reversal of
provision following the sale of the paper mill
in its existing state) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Costs related to the permanent closures
of Norampacs Concord and Montreal corrugated
products plants, as well as a paper machine at
its Red Rock containerboard plant |
|
|
3 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
Write-down of property, plant and
equipment related to the permanent closures of
Norampacs Buffalo corrugated products plant,
as well as a paper machine at its Red Rock
containerboard plant |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total closure and restructuring costs |
|
|
402 |
|
|
|
40 |
|
|
|
433 |
|
|
|
48 |
|
|
MANAGEMENTS DISCUSSION & ANALYSIS
31
Domtar Inc.
2005
Annual Report
NET LOSS OF $388 MILLION
Net loss amounted to $388 million ($1.69 per common share) in
2005 compared to a net loss of $42 million ($0.19 per common
share) in 2004. Excluding specified items, net loss amounted to
$86 million ($0.37 per common share) in 2005 compared to a
net loss of $33 million ($0.15 per common share) in 2004. The
$53 million deterioration in net loss excluding specified items
was mainly attributable to the factors mentioned above, partially
offset by a higher income tax recovery.
LIQUIDITY AND CAPITAL
Cash flows used for operating activities in 2005 amounted to
$10 million compared to cash flows provided from operating
activities of $122 million in 2004. Net additions to property,
plant and equipment amounted to $147 million in 2005 compared
to $163 million in 2004. We posted negative free cash
flow1 of $157 million in 2005 compared to negative free cash
flow of $41 million in 2004. This $116 million deterioration
mainly reflects a decline in profitability, as well as increased
requirements for working capital.
Our total long-term debt increased by $225 million, largely
due to additional net borrowings of $293 million, partially
offset by the $68 million positive impact of a stronger Canadian
dollar (based on month-end foreign exchange rates) on our U.S.
dollar denominated debt. Our net debt-to-total capitalization
ratio2 as at December 31, 2005 stood at 57.7% compared to
49.5% as at December 31, 2004.
Q4 2005
vs Q4 2004 Quarterly Overview
SALES OF $1.2 BILLION
Sales in the fourth quarter of 2005 amounted to $1,159 million, a
decrease of $50 million or 4% from sales of $1,209 million in the
fourth quarter of 2004. This decrease was attributable to the negative
impact of a 4% rise in the quarter over quarter average value
of the Canadian dollar relative to the U.S. dollar (from $0.819
to $0.852), lower shipments for pulp, and lower average selling
prices for all of our major products except for pulp. These factors
were partially offset by higher shipments for paper, lumber and
packaging products, and higher average selling prices for pulp.
OPERATING LOSS OF $478 MILLION
Cost of sales increased by $6 million or 1% in the fourth quarter
of 2005 compared to the fourth quarter of 2004. This increase
was mainly attributable to higher costs for energy, freight and
chemicals, as well as higher shipments for paper, lumber and
packaging products. These factors were partially offset by the
positive impact of a stronger Canadian dollar on our U.S. dollar
denominated operating expenses, the realization of savings
stemming from restructuring activities, and lower duties on our
softwood lumber exports to the U.S.
SG&A expenses increased by $11 million or 14% in the
fourth quarter of 2005 compared to the fourth quarter of
2004. SG&A in the fourth quarter of 2005 included a charge of
$12.5 million for a legal settlement with regards to an investigation
by the Canadian Competition Bureau and unrealized mark-to-market losses of $3 million. SG&A in the fourth quarter of
2004 included an unrealized mark-to-market gain of $1 million.
Excluding these specified items, SG&A decreased by $6 million
or 8% in the fourth quarter of 2005 compared to 2004. This
decrease was mainly attributable to the realization of savings
stemming from restructuring activities.
Operating loss in the fourth quarter of 2005 amounted to
$478 million, or $60 million when excluding specified items,
compared to an operating loss of $12 million, or $2 million
when excluding specified items, for the fourth quarter of 2004.
The $58 million deterioration in operating loss excluding
specified items was principally attributable to higher costs for
energy, freight and chemicals, the negative impact of a stronger
Canadian dollar, as well as lower average selling prices for all of
our major products except for pulp. These factors were partially
offset by higher shipments for paper, lumber and packaging
products, the realization of savings stemming from restructuring
activities, higher average selling prices for pulp, as well as lower
duties on our softwood lumber exports to the U.S.
NET LOSS OF $348 MILLION
Net loss amounted to $348 million ($1.51 per common share)
in the fourth quarter of 2005 compared to a net loss of $26 million
($0.11 per common share) in the fourth quarter of 2004.
Excluding specified items, net loss amounted to $59 million
($0.25 per common share) in the fourth quarter of 2005 compared
to a net loss of $20 million ($0.09 per common share) in
the fourth quarter of 2004. This $39 million deterioration in
net loss excluding specified items was mainly attributable to the
factors mentioned above.
|
|
|
1 See Free Cash Flow table and definition in the Liquidity & Capital Resources section. |
|
2 See Net debt-to-total capitalization ratio table and definition in the Liquidity & Capital
Resources section. |
MANAGEMENTS DISCUSSION & ANALYSIS
32
Domtar Inc.
2005
Annual Report
Papers
|
|
|
|
|
|
|
|
|
SELECTED
INFORMATION YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2004 |
|
(IN MILLIONS OF CANADIAN DOLLARS, |
|
|
|
|
|
|
|
|
UNLESS OTHERWISE NOTED) |
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
Total sales |
|
|
3,000 |
|
|
|
3,188 |
|
Intersegment sales to Paper Merchants |
|
|
(287 |
) |
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
2,713 |
|
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
106 |
|
|
|
268 |
|
Sales of property, plant and equipment 1 |
|
|
(4 |
) |
|
|
(33 |
) |
Closure and restructuring costs 1 |
|
|
106 |
|
|
|
33 |
|
Unrealized mark-to-market gains or losses 1 |
|
|
(5 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
EBITDA, excluding specified items |
|
|
203 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(451 |
) |
|
|
(10 |
) |
Sales of property, plant and equipment 1 |
|
|
(4 |
) |
|
|
(33 |
) |
Closure and restructuring costs 1 |
|
|
386 |
|
|
|
33 |
|
Unrealized mark-to-market gains or losses 1 |
|
|
(5 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
Operating loss, excluding specified items |
|
|
(74 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
Shipments |
|
|
|
|
|
|
|
|
Paper (in thousands of st) |
|
|
2,510 |
|
|
|
2,562 |
|
Pulp
(in thousands of adst) |
|
|
633 |
|
|
|
808 |
|
|
|
|
|
|
|
|
|
|
Paper shipments by product offering (%): |
|
|
|
|
|
|
|
|
Copy and offset grades |
|
|
56 |
|
|
|
52 |
|
Uncoated commercial printing
& publication and premium
imaging grades |
|
|
15 |
|
|
|
21 |
|
Coated commercial
printing & publication grades |
|
|
12 |
|
|
|
12 |
|
Technical and specialty grades |
|
|
17 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
Benchmark prices2: |
|
|
|
|
|
|
|
|
Copy 20 1b
sheets (us$/ton) |
|
|
820 |
|
|
|
794 |
|
Offset 50 1b
rolls (us$/ton) |
|
|
726 |
|
|
|
676 |
|
Coated publication,
no. 3, 60 1b rolls (us$/ton) |
|
|
902 |
|
|
|
811 |
|
Pulp NBSK-U.S. market (us$/admt) |
|
|
647 |
|
|
|
640 |
|
Pulp NBHK- Japan market3 (us$/admt) |
|
|
526 |
|
|
|
490 |
|
|
|
|
1 See Specified items affecting results and non-GAAP measures. |
|
2 Source: Pulp & Paper Week. As such, these prices do not necessarily reflect our transaction
prices. |
|
3 Based on Pulp and Paper Weeks Southern Bleached Hardwood Kraft pulp prices for Japan,
increased by an average differential of US$15/ADMT between Northern and Southern Bleached
Hardwood Kraft pulp prices. |
PAPERS-SALES
in millions of can$
SALES AND OPERATING PROFIT
Sales in our Papers business amounted to $2,713 million in 2005,
a decrease of $178 million or 6% fro
m sales of $2,891 million
in 2004. This decrease in sales was mainly attributable to the
negative impact of a 7% rise in the Canadian dollar, as well
as lower shipments for pulp and paper in 2005 compared to
2004, partially offset by higher average selling prices for both
paper and pulp.
Operating loss in our Papers business totaled $451 million in
2005 (or $74 million when excluding specified items) compared
to an operating loss of $10 million (or $7 million when excluding
specified items) for 2004. Excluding specified items, the
$67 million deterioration in operating loss is largely the result
of the negative impact of a stronger Canadian dollar, higher
overall costs for purchased fiber, chemicals, energy and freight,
as well as lower shipments for pulp and paper in 2005 compared
to 2004. These factors were partially offset by higher average
selling prices for paper and pulp and the realization of savings
stemming from restructuring activities.
PRICING ENVIRONMENT
In our Papers business, our average transaction prices, denominated
in U.S. dollars, increased in 2005 compared to 2004. Our
average transaction prices denominated in Canadian dollars
decreased in 2005 compared to 2004 as the rise of the Canadian
dollar negatively impacted our Canadian dollar denominated
prices, which are derived from U.S. dollar denominated prices.
Our average transaction prices, denominated in U.S. dollars,
for our basket of copy and offset grades, increased on average
by approximately 7% in 2005 compared to 2004. Within this
basket, our average transaction prices for copy 20 lb sheets and
offset 50 lb rolls, which represented approximately 31% of
our paper sales in 2005, were higher on average by US$24/ton
and US$64/ton, respectively, in 2005 compared to 2004. The
US$60/ton price increase for cut-size copy and offset rolls
announced as of March 15, 2005 initially went through, but as
it subsequently eroded, we returned to previous pricing levels.
A subsequent US$40/ton price increase announced on cut-size
copy paper and offset grades effective mid-September 2005
was postponed. We announced a US$60/ton price increase for
PAPERS-OPERATING
PROFIT
(LOSS)
IN
MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS
MANAGEMENTS DISCUSSION & ANALYSIS
33
Domtar Inc.
2005
Annual Report
SHIPMENTS BY PRODUCT OFFERING
2005
offset paper grades effective mid-January 2006, followed by a
US$60/ton price increase on cut-size copy paper effective mid-February 2006.
Our average transaction prices for Northern Bleached
Softwood Kraft (NBSK) pulp decreased by US$3/tonne and
our average transaction prices for Northern Bleached Hardwood
Kraft (NBHK) pulp increased by US$49/tonne in 2005 compared
to 2004. From January to April 2005, several price
increases were implemented for both NBSK and NBHK as pulp
markets were experiencing shortages in supply (particularly
from the U.S. South) and paper markets were stronger than
seasonal norms. From May to August 2005, however, prices
for pulp decreased as weakening paper markets impacted pulp
demand. The US$20/tonne price increase for softwood pulp and
US$10/tonne price increase for hardwood pulp announced in
October 2005 were successfully implemented. Effective February
2006, a US$20/tonne price increase was announced for both
softwood and hardwood pulp.
OPERATIONS
Shipments
Our paper shipments to capacity ratio stood at 96.2% in 2005
compared to 95.1% in 2004. Lower shipments on a year-over-year
PAPERS-SHIPMENTS
PAPER-IN THOUSANDS OF ST
basis, primarily due to soft market conditions, were offset
by lower capacity due to the closure of a paper machine at
our Cornwall mill.
Our pulp shipments decreased by 175,000 tons in 2005
compared to 2004. In December 2004, we closed the pulp
dryer at our Ashdown SBHK (Southern Bleached Hardwood
Kraft) and SBSK (Southern Bleached Softwood Kraft) pulp mill
due to a wood shortage arising from competitive pressures and
wet weather conditions in the south of the U.S. in the fourth
quarter of 2004 and early 2005. The mill lost approximately
30,000 tons of market pulp through the end of March 2005
and was forced to seek purchased wood fiber outside its normal
fiber basket to supply its machines, which led to higher costs.
The pulp dryer resumed production in late February 2005. The
indefinite closure of the Cornwall pulp mill also affected pulp
market shipments as a portion of the pulp from our Woodland,
Windsor and Espanola pulp mills, which previously was sold
in the market, was now used internally to supply the Cornwall
mill. In addition, pulp market shipments in 2005 were affected
by market downtime that was taken at our Lebel-sur-Quévillon
pulp mill during the last three quarters of the year, as well as by
the temporary shutdown of the mill in November 2005 due to
unfavorable economic conditions.
PAPERS-SHIPMENTS
PULP-IN THOUSANDS OF ADST
MANAGEMENTS DISCUSSION & ANALYSIS
34
Domtar Inc.
2005
Annual Report
Labor
Negotiations are ongoing for the renewal of certain collective
agreements that expired in April 2004 for our Lebel-sur-Quévillon mill (affecting approximately 350 employees) and
in April 2005 for our Windsor mill (affecting approximately
760 employees). During the second quarter of 2005, certain
collective agreements at our Espanola mill (affecting approximately
610 employees) were successfully renegotiated. During
the third quarter of 2005, certain collective agreements at our
Cornwall mill (affecting approximately 730 employees) and our
Ottawa-Hull mill (affecting approximately 380 employees) were
successfully renegotiated.
Brightness
In the third quarter of 2005, an initiative was introduced to
raise the current North American brightness standard from
84 GE brightness (Technical Association of the Pulp and Paper
Industry TAPPI standard that measures brightness) to 92 GE
brightness for regular uncoated freesheet grades and from
92 GE brightness to 96 GE brightness for opaque grades. As
of year-end, we have completed the transition to 92 GE brightness
in all our paper mills. Inventory of 84 GE brightness
uncoated freesheet and 92 GE brightness opaques are being
depleted according to plan.
Restructuring
In early 2004, we decided to shut down one of two paper machines
at our Vancouver mill, resulting in the permanent curtailment of
45,000 tons of paper manufacturing capacity and the elimination
of approximately 85 permanent positions. We also announced the
elimination of approximately 330 permanent positions over the
course of 2004 2006 within our paper operations.
In the fourth quarter of 2004, we announced the shutdown,
for an indefinite period, of the pulp mill, one paper machine
and one sheeter at our Cornwall mill, which became effective
January 27, 2005, until economic and market conditions
allowed these assets to operate profitably. This resulted in a
temporary curtailment of 150,000 tons of pulp and 85,000 tons
of paper per annum and impacted approximately 390 positions
for an indefinite period.
In November 2005, we announced the permanent shutdown
of our Cornwall pulp and paper mill as well as our Ottawa mill,
which will be effective March 31, 2006. We also announced our
intention to seek a buyer for our Vancouver coated paper mill. If
unsold by June 30, 2006, it will be permanently shut down. These
closures will result in a reduction of our production capacity of
160,000 tons of pulp and 450,000 tons of paper per annum and
will impact approximately 1,380 positions (including 390 positions
already affected by the temporary closure of the Cornwall
mill announced in the last quarter of 2004). We further announced
that approximately 200 permanent positions, mainly related to
our paper operations, will be eliminated by the end of 2006. In
addition to these measures, we intend to improve profitability by
implementing supply chain initiatives that are expected to reduce
operational costs and improve customer satisfaction. These initiatives
are aimed at increasing the efficiency of our converting and
distribution centers and the cost effectiveness of transportation
for just-in-time deliveries. Furthermore, we plan to transfer some
of our paper grades to more profitable papermaking facilities and
machines within our network. Above all, we plan to continue
providing our customers with products, services and solutions
that meet their needs. We expect these initiatives to result in
increased productivity and optimized production in our more
efficient operations.
Other
In addition, as part of our capital expenditures program, we
continued to invest in 2005 in an Enterprise Resource Planning
(ERP) system and a paper logistics management system with
the goal of improving the quality and efficiency of our services.
As at December 31, 2005, the roll-out of the ERP system was
completed across our operations, and we achieved our goal
of processing approximately 85% of our transactions with
this system.
During the second quarter of 2005, we sold our facility and
land in Senneville, Quebec for proceeds of $6 million and a corresponding
gain of $4 million ($3 million net of income taxes). The
sale was originally contingent on the city of Montreal rezoning
the site to accommodate the needs of the acquirer. The required
rezoning took place in January 2005, and the sale was concluded
in June 2005. In November 2004, a motion was filed by a third
party to have the rezoning declared illegal. Nonetheless, both
parties agreed to complete the sale, and in the event that the
court declares the rezoning illegal, the sale of the premises shall
become null and void without recourse of either party against
the other. In such an event, Domtar would reimburse the entire
sales proceeds of $6 million without interest and reclaim possession
of the property, conditional on the property being restored
back to its original state. We believe that the likelihood of such
an event occurring is remote.
MANAGEMENTS DISCUSSION & ANALYSIS
35
Domtar Inc.
2005
Annual Report
Paper Merchants
|
|
|
|
|
|
|
|
|
SELECTED
INFORMATION YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2004 |
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
Sales |
|
|
1,047 |
|
|
|
1,057 |
|
EBITDA |
|
|
6 |
|
|
|
23 |
|
Legal
settlement 1 |
|
|
13 |
|
|
|
|
|
Closure and restructuring costs 1 |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
EBITDA, excluding specified items |
|
|
19 |
|
|
|
24 |
|
Operating profit |
|
|
3 |
|
|
|
20 |
|
Legal settlement1 |
|
|
13 |
|
|
|
|
|
Closure and restructuring costs 1 |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
Operating profit, excluding specified items |
|
|
16 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
1 See Specified items affecting results and non-GAAP measures. |
SALES AND OPERATING PROFIT
Our Paper Merchants business generated sales of $1,047 million
in 2005, a decrease of $10 million compared to 2004. This
decrease was attributable to the negative impact of a stronger
Canadian dollar, partially offset by higher average paper selling
prices and higher shipments.
Operating profit amounted to $3 million in 2005 compared
to $20 million in 2004. In 2005, the operating profit included
a charge of $12.5 million related to a legal settlement with
regards to an investigation by the Canadian Competition Bureau
relating to the sales of carbonless sheet paper in Ontario and
Quebec in a one-year period during part of 1999 and 2000. In
2004, the operating profit included closure and restructuring
costs of $1 million. When excluding specified items, our operating
profit amounted to $16 million (reflecting an operating margin of
1.5%) in 2005 compared to $21 million (reflecting an operating
margin of 2.0%) in 2004. The $5 million decrease in operating
profit excluding specified items was primarily due to lower
operating margins resulting from higher purchased paper costs
not being fully reflected in paper selling prices, partially offset by
savings stemming from cost reduction initiatives.
PAPER MERCHANTS-SALES
IN MILLION OF CAN$
PAPER MERCHANTS-OPERATING PROFIT
IN MILLIONS OF CAN$ EXCLUDING SPECIFIED ITEMS
Wood
|
|
|
|
|
|
|
|
|
SELECTED
INFORMATION YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2004 |
|
(IN MILLIONS OF CANADIAN DOLLARS, |
|
|
|
|
|
|
|
|
UNLESS OTHERWISE NOTED) |
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
Lumber sales |
|
|
521 |
|
|
|
496 |
|
Wood chips and other sales |
|
|
176 |
|
|
|
175 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
697 |
|
|
|
671 |
|
Intersegment sales |
|
|
(124 |
) |
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
573 |
|
|
|
541 |
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
34 |
|
|
|
31 |
|
Closure and restructuring costs 1 |
|
|
7 |
|
|
|
3 |
|
|
|
|
|
|
|
|
EBITDA, excluding specified items |
|
|
41 |
|
|
|
34 |
|
Operating loss |
|
|
(33 |
) |
|
|
(27 |
) |
Closure and restructuring costs 1 |
|
|
30 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Operating loss, excluding specified items |
|
|
(3 |
) |
|
|
(13 |
) |
Shipments (millions of fbm) |
|
|
1,107 |
|
|
|
1,009 |
|
Shipments by product offering (%): |
|
|
|
|
|
|
|
|
Random lengths |
|
|
33 |
|
|
|
36 |
|
Studs |
|
|
35 |
|
|
|
36 |
|
Value-added |
|
|
27 |
|
|
|
23 |
|
Industrial |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
Benchmark prices2: |
|
|
|
|
|
|
|
|
Lumber G.L. 2x4x8 stud (us$/mfbm) |
|
|
418 |
|
|
|
417 |
|
Lumber G.L. 2x4 R/L
no. 1 & no. 2 (uss/mfbm) |
|
|
420 |
|
|
|
459 |
|
Lumber duties (cash deposits) |
|
|
54 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
1 See Specified items affecting results and non-GAAP measures. |
|
2 Source: Random Lengths. As
such, these prices do not necessarily reflect our transaction prices. |
WOOD-SALES
IN MILLIONS OF CAN$
MANAGEMENTS DISCUSSION & ANALYSIS
36
Domtar Inc.
2005
Annual Report
SHIPMENTS BY PRODUCT OFFERING
2005
SALES AND OPERATING PROFIT
Sales in our Wood business amounted to $573 million in 2005, an increase of $32
million or 6% compared to sales of $541 million in 2004. This increase is largely attributable to
higher shipments, partially offset by the negative impact of a stronger Canadian dollar.
Operating
loss in our Wood business totaled $33 million in 2005 (or $3 million when excluding specified
items) compared to an operating loss of $27 million (or $13 million when excluding specified items)
in 2004. The $10 million improvement in operating loss excluding specified items was mainly
attributable to lower duties on our softwood lumber exports to the U.S., higher shipments and the
realization of savings stemming from restructuring activities. These factors were partially
mitigated by the negative impact of a stronger Canadian dollar, as well as higher freight and
energy costs.
Cash deposits of $54 million were made on our softwood lumber exports to the U.S. in
2005 compared to $69 million in 2004. The $15 million decrease in duties was largely due to the
decrease in countervailing and antidumping duties rate
(countervailing and antidumping duties rate was decreased gradually from 21.21% to 20.15%, and in
December 2005, the rate was lowered to 10.80%) as well as to a decrease in shipments exported to
the U.S. Since May 22, 2002, cash deposits of $198 million (US$150 million) for countervailing and
antidumping duties have been made and expensed by Domtar.
WOOD-OPERATING LOSS
IN MILLIONS OF CAN$, EXCLUDING SPECIFIED ITEMS
PRICING ENVIRONMENT
Our average
transaction price for Great Lakes 2x4 stud increased by US$1/MFBM and our average transaction price
for Great Lakes 2x4 random length decreased by US$40/MFBM in 2005 compared to 2004.
OPERATIONS
In
early 2005, we announced, in conjunction with Tembec Inc. (Tembec), the restructuring of our
northeastern Ontario sawmill operations, resulting in the permanent closure of our Chapleau sawmill
as of March 6, 2005 and an investment in a new finger-joint plant with Tembec, to be located on the
site of Tembecs Kirkland Lake sawmill, which was slated for closure. This measure impacted 67
permanent positions. This initiative arose from a review of our northeastern Ontario sawmill
operations in light of prevailing challenging conditions. This initiative allowed us to add a third
shift at our Elk Lake sawmill in April 2005 to process additional fiber resulting from the Chapleau
closure and consequent fiber swap with Tembec.
In early March 2005, a fire destroyed our planer at
Elk Lake but did not impact either the sawmill or the kiln dryers. Dressing activities were
temporarily transferred primarily to our Chapleau mill facility. The Elk Lake planer was rebuilt
and it started up in November 2005.
WOOD-SHIPMENTS
IN MILLIONS OF FBM
MANAGEMENTS DISCUSSION & ANALYSIS
37
Domtar Inc.
2005
Annual Report
In May 2005, forest fires in Quebec negatively impacted our operations and further
resulted in the loss of 25,000 cubic meters of cut wood and 30,000 acres of forest.
In November
2005, we announced the permanent closure of our Grand-Remous and Malartic sawmills, effective in
the second quarter of 2006, due to lower softwood fiber allocations and higher fiber costs in
Quebec. These measures will impact approximately 200 permanent positions. Subject to the
governments approval, the wood fiber allocations for Grand-Remous and Malartic will be
transferred to Domtars other Quebec sawmills. We expect that this will result in more efficient
operations by going to three shifts and will offer the possibility for approximately 80 employees
from the closed sawmills to transfer to new positions created by the third shift. We are also
working with a partner, and in collaboration with the government, on a value-added project using
the Grand-Remous and Malartic infrastructures.
Throughout 2004, certain of our operations were
negatively impacted by temporary mill closures. Production at our White River sawmill, which was
halted in mid-2003 due to difficult market conditions, reopened only in late February 2004.
Operations at our Chapleau sawmill were reduced to one shift, effective April 30, 2004, due to a
substantial reduction in fiber supply availability. Labor disruptions at a transportation supplier
and particularly cold weather further affected our productivity.
We will continue examining
opportunities to further improve the profitability of our Wood business through additional cost
reductions and strategic initiatives.
Fiber supply
The Province of Quebec adopted new legislation,
which became effective April 1, 2005, that reduced allowable wood-harvesting volumes by an average
of 20% on public lands and 25% on territories covered by an agreement between the Government of
Quebec and Cree First Nations. As a result, the amount of fiber we are permitted to harvest
annually, under our existing licenses from the Quebec government, was reduced by approximately
500,000 cubic meters, or 21%. This affects the supply of fiber for our Northern Quebec softwood
sawmill and market pulp operations.
PACKAGING-SALES
IN MILLIONS OF CAN$
We are currently working on finding solutions such as
obtaining alternate sources of fiber. The reduction in harvest volume increases the unit cost of
wood delivered to the sawmills. If we are unable to maintain an adequate supply of fiber and
mitigate the significant cost increase and wood delivery cost, our Northern Quebec softwood sawmill
and market pulp operations would have to operate at a level significantly below capacity, which
would have a material adverse impact on these operations and may result in closures or impairment
of assets.
Packaging
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
SELECTED INFORMATION |
|
|
|
|
|
|
|
|
(IN MILLIONS OF CANADIAN DOLLARS, |
|
|
|
|
|
|
|
|
UNLESS OTHERWISE NOTED) |
|
|
|
|
|
|
|
|
Sales |
|
|
633 |
|
|
|
626 |
|
EBITDA |
|
|
55 |
|
|
|
86 |
|
Closure and restructuring costs 1 |
|
|
8 |
|
|
|
|
|
Sales of property, plant and equipment 1 |
|
|
(3 |
) |
|
|
|
|
Unrealized mark-to-market gains or losses 1 |
|
|
8 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
EBITDA, excluding specified items |
|
|
68 |
|
|
|
85 |
|
Operating profit |
|
|
8 |
|
|
|
53 |
|
Closure and restructuring costs 1 |
|
|
17 |
|
|
|
|
|
Sales of property, plant and equipment 1 |
|
|
(3 |
) |
|
|
|
|
Unrealized mark-to-market gains or losses 1 |
|
|
8 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Operating profit, excluding specified items |
|
|
30 |
|
|
|
52 |
|
Shipments 2: |
|
|
|
|
|
|
|
|
Containerboard (in thousands of st) |
|
|
322 |
|
|
|
300 |
|
Corrugated containers(IN MILLIONS OF SQUARE FEET) |
|
|
6,868 |
|
|
|
6,802 |
|
Benchmark prices 3: |
|
|
|
|
|
|
|
|
Unbleached kraft linerboard,
42 1b East (us$/ton) |
|
|
478 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Refer to Specified items affecting results and non-GAAP measures. |
|
2 |
|
Represents 50% of
Norampacs trade shipments. |
|
3 |
|
Source: Pulp & Paper Week. As such, these prices do not necessarily
reflect our transaction prices. |
PACKAGING-OPERATING PROFIT
IN MILLIONS OF CAN$ EXCLUDING SPECIFIED ITEMS
MANAGEMENTS DISCUSSION & ANALYSIS
38
Domtar Inc.
2005
Annual Report
PACKAGING SHIPMENTS
CONTAINERBOARD IN THOUSANDS OF ST
SALES AND OPERATING PROFIT
Our
50% share of Norampacs sales amounted to $633 million in 2005, an increase of $7 million or 1%
compared to 2004. This increase was mainly attributable to higher average selling prices for
containerboard and corrugated containers, as well as higher shipments for corrugated containers and
containerboard, partially offset by the negative impact of a stronger Canadian dollar.
Our 50%
share of Norampacs operating profit amounted to $8 million (or an operating profit of $30 million
when excluding specified items) in 2005 compared to an operating profit of $53 million (or $52
million when excluding specified items) in 2004. The $22 million decrease in operating profit
excluding specified items was mainly attributable to the negative impact of a stronger Canadian
dollar, as well as higher overall costs, particularly energy and freight, partially offset by
higher average selling prices and shipments.
PRICING ENVIRONMENT
Norampacs average transaction
prices for both containerboard and corrugated containers, denominated in U.S. dollars, increased in
2005 compared to 2004. Its average transaction prices, denominated in Canadian dollars, for
containerboard decreased in 2005 compared to 2004 and remained stable for corrugated containers as
the rise of the Canadian dollar negatively impacted its Canadian dollar denominated prices, which
are derived from U.S. dollar denominated prices.
OPERATIONS
Norampacs North American integration
level, the percentage of containerboard produced by Norampac that is consumed by its own box
plants, decreased to 61% in 2005, down from 64% in 2004.
During the first quarter of 2005, Norampac
closed its Concord, Ontario corrugated products plant with the goal of improving efficiency and
profitability at its other plants. This led to the disposal of Concord-related property, plant and
equipment for a total net gain realized of $7 million (our 50% share amounting to $3 million).
In
the second quarter of 2005, as part of its reorganization plan of its Quebec operations, Norampac
announced the closure of its Montreal corrugated products plant, slated for the second
quarter of 2006, as well as an
investment plan totaling close to $30 million for its other Quebec facilities. The closure of the
Montreal plant is expected to impact approximately 215 employees. In addition, in the second
quarter of 2005, Norampac announced the transfer of its Buffalo, New York corrugated products plant
to its Lancaster, New York facility, which occured in August 2005.
In the third quarter of 2005,
Norampac announced the permanent closure of a paper machine at its Red Rock containerboard mill,
impacting approximately 125 to 175 positions, due to the impact of a stronger Canadian dollar and
increases in energy and wood fiber costs in Northern Ontario. In addition, in October 2005,
Norampac announced the acquisition of three corrugated products converting plants, with a combined
annual production capacity of approximately 2 billion square feet, from Standard Paper Box Canada
Inc. The announced Vaudreuil-Dorion expansion, under the reorganization of its Quebec operations,
will be downsized due to these recent acquisitions.
PACKAGING SHIPMENTS
CORRUGATED CONTAINERS IN MILLIONS OF SQUARE FEET
Financing
Expenses
and Income Taxes
FINANCING EXPENSES
In 2005, financing expenses amounted to $155 million (or $154 million when excluding
specified items of $7 million relating to early redemption expenses arising from the refinancing of
a portion of our long-term debt and $6 million relating to a foreign exchange gain on the
translation of a portion of our long-term debt) compared to $148 million (or $153 million when
excluding specified items of $5 million relating to a foreign exchange gain on the translation of a
portion of our long-term debt) in 2004. The $1 million increase in financing expenses when
excluding specified items was largely due to higher interest rates and borrowings on a
year-over-year basis, offset by the positive impact of a stronger Canadian dollar on our U.S.
dollar interest expense.
INCOME TAXES
In 2005, our income tax recovery totaled $225 million
compared to an income tax recovery of $52 million in 2004. This variation is primarily due to the
greater losses incurred year over- year. To a lesser extent, the variation in our income tax
MANAGEMENTS DISCUSSION & ANALYSIS
39
Domtar Inc.
2005
Annual Report
recovery results from a
combination of other factors, including tax recovery adjustments of $10 million ($6 million
recorded in the first quarter of 2005 and $4 million recorded in the third quarter of 2005)
following the income tax reassessment of prior years by tax authorities, an increase in statutory
enacted income tax rates that resulted in a reduction in income tax recovery of $9 million, the
relative effect of permanent differences in a minimal profit/loss situation, the mix and level of
earnings subject to different tax jurisdictions and differences in tax rates applicable to our
foreign subsidiaries.
Balance Sheet
Our total consolidated assets were $5,192 million as at December
31, 2005 compared to $5,681 million as at December 31, 2004. Receivables amounted to $294 million
as at December 31, 2005, an increase of $68 million when compared to $226 million as at December
31, 2004. This increase is mostly due to the termination of the off balance sheet Canadian
securitization program, as well as higher average selling prices for all of our products.
Inventories as at December 31, 2005 totaled $715 million, a decrease of $8 million when compared to
$723 million as at December 31, 2004. This decrease is mostly
attributable to the write-offs of operating and maintenance supplies inventory resulting from the
restructuring plan announced in November 2005, as well as lower levels of finished goods inventory
due to higher shipment levels compared to production. This decrease was partially offset by higher
levels of raw materials inventory held at the paper mills in anticipation of wet weather conditions
in the winter months. Property, plant and equipment as at December 31, 2005 amounted to $3,634
million compared to $4,215 million as at December 31, 2004. This $581 million decrease was mainly
attributable to the write-offs related to the restructuring plan announced in November 2005, as
well as a greater level of amortization expense compared to capital expenditures and the impact of
a stronger Canadian dollar (based on month-end exchange rates) on our U.S. mill assets. Other
assets stood at $309 million as at December 31, 2005 compared to $265 million as at December 31,
2004. This $44 million increase was attributable to, among others, higher funding of our pension
assets compared to pension expense.
Trade and other payables stood at $651 million as at December
31, 2005, an increase of $4 million compared to $647 million as at December 31, 2004. This increase
is mainly attributable to provisions for restructuring costs and the timing of payments and
expenses in December 2005 versus December 2004, partially offset by a decrease in dividends payable
following the suspension of the common share dividend. Long-term debt (including the portion due
within one year) stood at $2,259 million as at December 31, 2005, an increase of $225 million
compared to $2,034 million as at December 31, 2004. This increase reflects additional net
borrowings of $293 million, partially offset by the $68 million positive impact of a stronger
Canadian dollar (based on month-end exchange rates) on our U.S. dollar denominated debt. Future
income taxes stood at $292 million as at December 31, 2005, a $265 million decrease compared to
$557 million as at December 31, 2004. This decrease is primarily due to the tax effect of the
property, plant and equipment write-downs resulting from the restructuring plan, as well as to the
increase in operating loss carryforwards. Accumulated foreign currency translation adjustments were
negative $205 million as at December 31, 2005 compared to negative $190 million as at December 31,
2004. This variation reflects the net impact of a stronger Canadian dollar on the net assets of our
self-sustaining U.S. subsidiaries, or $69 million, net of the impact of a stronger Canadian dollar
on the longterm debt designated as a hedge of the above-mentioned net assets, or $65 million, and
its corresponding income tax effect of $11 million.
Liquidity &
Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
FREE CASH FLOW |
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2004 |
|
|
2003 |
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided from
operating activities before
changes in working capital
and other items
|
|
|
179 |
|
|
|
249 |
|
|
|
349 |
|
Changes in working capital
and other items |
|
|
(189 |
) |
|
|
(127 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows provided
from (used for)
operating activities |
|
|
(10 |
) |
|
|
122 |
|
|
|
348 |
|
Net additions to property,
plant and equipment |
|
|
(147 |
) |
|
|
(163 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
Free cash flow 1 |
|
|
(157 |
) |
|
|
(41 |
) |
|
|
123 |
|
|
|
|
|
1 Free cash flow is a non-GAAP measure that we define as the amount by which cash flows
provided from operating activities, as determined in accordance with GAAP, exceeds net additions to
property, plant and equipment, as determined in accordance with GAAP (additions to property, plant
and equipment net of proceeds from disposals of property, plant and equipment). We use free cash
flow in evaluating our ability and that of our business segments to service our debt and pay
dividends to our shareholders and, as such, believe it would be useful for investors and other
users to be aware of this measure so they can better assess our performance. Our free cash flow
measure has no standardized meaning prescribed by GAAP and is not necessarily comparable to similar
measures presented by other companies and therefore should not be
considered in isolation. |
MANAGEMENTS DISCUSSION & ANALYSIS
40
Domtar Inc.
2005
Annual Report
CASH FLOWS PROVIDED FROM (USED FOR) OPERATING ACTIVITIES
IN MILLIONS OF CAN$
FREE CASH FLOW
IN MILLIONS OF CAN$
Our principal cash
requirements are for working capital, capital expenditures, principal and interest payments on our
debt and dividend payments. We expect to fund our liquidity needs primarily with internally
generated funds from our operations and, to the extent necessary, through borrowings under our
revolving credit facility. We also have the ability to fund liquidity requirements through the sale
of assets or through new financings, subject to satisfactory market conditions and/or credit
ratings.
OPERATING ACTIVITIES
Cash flows used for operating activities totaled $10 million in 2005
compared to cash flows provided from operating activities of $122 million in 2004. This $132
million decline in cash flows generated from operations mainly reflects a decline in profitability,
as well as increased requirements for working capital. Our operating cash flow requirements are
primarily for salaries and benefits, the purchase of fiber, energy and raw materials and other
expenses such as property taxes.
In the first quarter of 2004, we terminated, prior to maturity,
interest rate swap contracts for net cash proceeds of $20 million (US$15 million). The resulting
gain of
$17 million recorded under Other liabilities and deferred credits is being amortized over the
original designated hedging period of the underlying 5.375% notes due in November 2013.
NET ADDITIONS OF PROPERTY, PLANT AND EQUIPMENT
IN MILLIONS OF CAN$
NET DEBT-TO-TOTAL CAPITALIZATION RATIO
IN %
INVESTING ACTIVITIES
Cash flows used for investing activities totaled $187 million in 2005 compared to $183
million in 2004. The $4 million increase in cash flows used for investing activities was mainly
attributable to more business acquisitions in 2005 compared to 2004, partially offset by fewer
additions to property, plant and equipment. We intend to limit our annual capital expenditures to
below 75% of amortization. Capital expenditures required to maintain existing operations are
approximately $120 million annually.
Free cash flow in 2005 was negative $157 million compared to
negative $41 million in 2004. The $116 million decrease in free cash flow generated primarily
reflects a decrease in profitability, as well as increased requirements for working capital.
FINANCING ACTIVITIES
In 2005, cash flows provided from financing activities amounted to $226
million compared to $64 million in 2004. This $162 million increase in cash flows provided from
financing activities is largely attributable to an increase in issuance of long-term debt,
partially offset by higher net repayments of our long-term debt and revolving credit facility.
On
October 27, 2005, as part of its plan to improve its free cash flow availability, Domtar announced
that it was suspending its $0.24 per common share dividend. This decision will result in annual
cash savings of approximately $55 million.
MANAGEMENTS DISCUSSION & ANALYSIS
41
Domtar Inc.
2005
Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DEBT-TO-TOTAL CAPITALIZATION RATIO1 as at december 31 |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
(IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) |
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness |
|
|
21 |
|
|
|
22 |
|
|
|
19 |
|
Long-term debt (including portion due within one year) |
|
|
2,259 |
|
|
|
2,034 |
|
|
|
2,059 |
|
Cash and cash equivalents |
|
|
(83 |
) |
|
|
(52 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
Net debt |
|
|
2,197 |
|
|
|
2,004 |
|
|
|
2,030 |
|
Shareholders equity |
|
|
1,609 |
|
|
|
2,046 |
|
|
|
2,168 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
|
3,806 |
|
|
|
4,050 |
|
|
|
4,198 |
|
Net debt-to-total capitalization (%) |
|
|
57.7 |
% |
|
|
49.5 |
% |
|
|
48.4 |
% |
|
|
|
1 |
|
Net debt-to-total capitalization ratio is a non-GAAP measure. We track this ratio on a
regular basis in order to assess our debt position. We therefore believe it would be useful for
investors and other users to be aware of this measure so they can better assess our performance.
Net debt-to-total capitalization ratio has no standardized meaning prescribed by GAAP and is
not necessarily comparable to similar measures presented by other companies and therefore should
not be considered in isolation. |
As at December 31, 2005, our net debt-to-total capitalization ratio stood at 57.7%
compared to 49.5% as at December 31, 2004. Net indebtedness, including $200 million representing
our 50% share of the net indebtedness of Norampac, was $2,197 million as at December 31, 2005.
This compares to $2,004 million as at December 31, 2004, including $174 million for our 50% share
of the net indebtedness of Norampac. The $193 million increase in net indebtedness was largely due
to additional net borrowings, partially offset by the positive impact of a stronger Canadian
dollar (based on month-end exchange rates).
On August 5, 2005, the Corporation issued $487 million (US$400 million) 7.125% notes due in
2015 at an issue price of $482 million (US$396 million). The gross proceeds from the sale of notes
was used to redeem the 8.75% notes due in August 2006 for an amount of approximately $176 million
(US$150 million) and to repay a substantial portion of our unsecured revolving credit facility.
Issuance expenses for the new notes of $5 million (US$4 million) were deferred and will be
amortized over the duration of the notes. The Corporation recorded under Financing expenses an
amount of $7 million (US$6 million) for the premium required to redeem the 8.75% notes.
On March 3, 2005, the Corporation entered into a new five-year unsecured revolving credit
facility of US$700 million. This new facility replaced the prior credit facility, which consisted
of a US$500 million unsecured revolving credit facility and a US$70 million unsecured term loan
that was scheduled to mature in July 2006.
Borrowings under this new unsecured revolving credit facility bear interest at a rate based on the
Canadian dollar bankers acceptance or U.S. dollar LIBOR rate, each with an added spread that
varies with our credit rating, or on the Canadian or US prime rate. This new credit facility also
requires commitment fees that vary with our credit rating.
On November 23, 2005, Domtar amended its credit facility maturing in 2010 in order to improve
financial flexibility. This amendment contains certain financial covenants which require Domtar,
excluding the proportionate consolidation of Norampac, on a rolling four quarter basis, to maintain
(a) a minimum EBITDA to interest ratio of 1.05 : 1.0 in early 2006, increasing gradually over time
to 1.5 : 1.0 by the end of 2006 and 2.5 : 1.0 at the beginning of 2008, excluding from the
calculation most of the charges related to our restructuring plans, and (b) a minimum EBITDA of
$225 million in 2006, increasing to $325 million in 2007, excluding from the calculation most of
the charges related to our restructuring plans. Domtar, including the proportionate consolidation
of Norampac, on a quarterly basis, is required not to exceed a maximum debt-to-total capitalization
ratio of 60%, excluding from the calculation most of the impact of the restructuring plans. The
amendment also included a reduction in the size of the facility from US$700 million to US$600
million, and provided for guarantees by Domtars subsidiaries.
As at December 31, 2005, this credit facility had drawings totaling US$137 million ($160
million), US$18 million ($21 million) of letters of credit outstanding and US$13 million
MANAGEMENTS DISCUSSION & ANALYSIS
42
Domtar Inc.
2005
Annual Report
($15 million) drawn in the form of bank overdraft and included in Bank
indebtedness, resulting in US$432 million ($503 million) of availability for future drawings
under this facility. As of December 31, 2004, under the prior facility, we had drawings of US$112
million ($135 million), US$9 million ($10 million) letters of credit outstanding, no amounts drawn
in the form of bank overdraft and included in Bank indebtedness and US$71 million ($86 million)
outstanding under the term loan.
As at December 31, 2005, we had a provision of $4 million related to these letters of credit
($5 million as at December 31, 2004).
In addition, as at December 31, 2005, separate letters of credit of $5 million were
outstanding. No provisions relating to these letters of credit were recorded.
Our borrowing agreements contain restrictive covenants. See the discussion above for covenants
related to our unsecured bank credit facility. The indentures related to the 10% and 10.85%
debentures limit the amount of dividends that may be paid and the amount of shares that may be
repurchased for cancellation. These indentures also require that no new long-term debt be incurred,
unless total long-term debt is less than 50% of consolidated net tangible assets, excluding the
proportionate consolidation of Norampac, but does not restrict the incurrence of new long-term debt
related to the purchase of property or the replacement of existing long-term debt or the issuance
of short-term debt. We believe that new long-term borrowings for the remainder of 2006 will be used
to finance the purchase of property, with any remaining cash requirements, if any, financed by
short-term borrowings. All our borrowing agreements contain restrictions on the amount of secured
borrowings we can incur with other lenders.
|
|
|
|
|
CREDIT RATINGS |
|
|
|
|
RATING AGENCY |
|
SECURITY |
|
RATING |
|
Dominion Bond Rating Service |
|
Unsecured Notes and Debentures |
|
BB (high) |
|
|
Preferred Shares |
|
Pfd-4 |
Moodys Investors Services |
|
Unsecured Notes and Debentures |
|
Bl |
Standard & Poors |
|
Unsecured Notes and Debentures |
|
B+ |
|
The above ratings represent a risk assessment of our public unsecured debt securities.
The rating by Dominion Bond Rating Service (DBRS) is the fifth best rating in terms of quality
within ten rating gradations, with the high indicating a ranking in the higher end of this rating
category. The rating by Moodys Investors Services (Moodys) is the sixth best rating in terms
of quality within nine rating gradations, with the numerical modifier 1 indicating a ranking
at the higher end of this rating category. The rating by Standard & Poors (S&P) is the sixth best
rating in terms of quality within ten rating gradations, with the plus indicating a ranking at
the higher end of this category. DBRS, Moodys and S&P, have a negative outlook with respect to
our credit ratings.
During the past year, our rating with DBRS fell from BBB (low) to BB (high). Our rating with
Moodys fell from Baa3 to B1, and our rating with S&P fell from BBB- to B+. These reductions in our
credit ratings have significantly impacted our access to and cost of capital and financial
flexibility. Further reductions in our credit ratings would have an added negative impact on our
financial flexibility. The above ratings are not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the above rating agencies.
Common shares
In 2005, common shares amounting to $7 million were issued, net of expenses, pursuant to our
stock option and share purchase plans versus $19 million in 2004.
As at January 31, 2005, we had 231,027,097 common shares, 68,176 Series A Preferred Shares
and 1,350,000 Series B Preferred Shares issued and outstanding.
As at January 31, 2005, we had 4,640,564 common share purchase options issued and outstanding
under the Executive stock option and share purchase plan.
Off Balance Sheet Arrangements
In the normal course of business, we finance certain of our activities off balance sheet
through leases and securitization.
LEASES
On an ongoing basis, we enter into operating leases for property, plant and equipment.
Minimum future rental payments under these operating leases, determined as at December 31, 2005,
amounted to $110 million, of which $25 million related to our proportionate 50% share of Norampac,
SECURITIZATIONS
The Corporation sells a portion of its trade receivables through securitization programs. The
Corporation uses securitization of its receivables as a source of financing by reducing its working
capital requirements. This securitization consists of the sale of receivables, or the sale of
senior beneficial interest in them, to special purpose trusts managed by financial institutions
MANAGEMENTS DISCUSSION & ANALYSIS
43
Domtar Inc.
2005
Annual Report
for multiple sellers of receivables. The agreements normally allow the daily sale of
new receivables to replace those that have been collected. They also limit the cash that can be
received from the sale of the senior beneficial interest. The subordinate interest retained by the
Corporation is included in Receivables and will be collected only after the senior beneficial
interest has been settled.
On December 15, 2005, Domtar decided not to renew its agreement for the securitization of
Canadian receivables, which was set to expire in December 2005. As such, Domtar repurchased the
receivables previously sold.
As at December 31, 2005 and December 31, 2004, the value of securitized receivables amounted
to $163 million and $236 million, respectively. The Corporation expects to continue selling
receivables on an ongoing basis, given the attractive discount rates. Should these programs be
discontinued either by managements decision or due to termination of the programs by the
providers, the Corporations working capital and bank debt requirements would increase. Such sales
of receivables are contingent upon annual renewals and retaining specified credit ratings.
Domtars agreement for the securitization of its U.S. receivables, which was to expire in
December 2005, has been extended by the administrator of the program pending its renewal. In
addition, the condition to maintain certain required credit ratings was waived. As at February 22,
2006, we expect to finalize a new three-year agreement that would include both U.S. and Canadian
receivables in the near future.
Guarantees
INDEMNIFICATIONS
In the normal course of business, the Corporation offers indemnifications relating to the
sale of its businesses and real estate. In general, these indemnifications may relate to claims
from past business operations, the failure to abide by covenants and the breach of representations
and warranties included in the sales agreements. Typically, such representations and warranties
relate to taxation, environmental, product and employee matters. The terms of these indemnification
agreements are generally for an unlimited period of time. As at December 31, 2005, the Corporation
is unable to estimate the potential maximum liabilities for these types of indemnification
guarantees as the amounts are contingent upon the outcome of future events, the nature and
likelihood of which cannot be reasonably estimated at this time. Accordingly, no provisions have
been recorded in the financial statements. These indemnifications have not yielded significant
expenses in the past.
PENSION PLANS
We have indemnified and held harmless the trustees of Domtars pension funds, and the
respective officers, directors, employees and agents of such trustees, from any and all costs and
expenses arising out of the performance of their obligations under the relevant trust agreements,
including in respect of their reliance on authorized instructions of Domtar or for failing to act
in the absence of authorized instructions. These indemnifications survive the termination of such
agreements. As at December 31, 2005, we had not recorded a liability associated with these
indemnifications, as we do not expect to make any payments pertaining to these indemnifications.
E.B. EDDY ACQUISITION
On July 31, 1998, the Corporation acquired all of the issued and outstanding shares of E.B.
Eddy Limited and E.B. Eddy Paper, Inc. (E.B. Eddy), an integrated producer of specialty paper and
wood products. The purchase agreement includes a purchase price adjustment whereby, in the event of
the acquisition by a third party of more than 50% of the shares of the Corporation in specified
circumstances, the Corporation may have to pay up to a maximum of $120 million, an amount which is
gradually declining over a 25-year period. As at December 31, 2005, the maximum amount of the
purchase price adjustment was $110 million. No provision was recorded related to this potential
purchase price adjustment, as the Corporation does not expect to make any payments pertaining to
this purchase price adjustment.
DEBT AGREEMENTS
Certain debt agreements require the Corporation to indemnify the parties in the event of
changes in elements such as withholding tax regulations. As the nature and scope of such
indemnifications are contingent on future events, none of which can be foreseen as at December 31,
2005, and the structure of such transactions make these events unlikely, no provisions have been
recorded in the financial statements.
LEASES
The Corporation has guaranteed to various lessors $8 million of the residual value of its
assets under operating leases with expiry dates in 2006. If the fair values of the assets at the
end of the lease terms are lower than the residual values guaranteed, the Corporation would be
held liable for the shortfall. The Corporation reviews its guarantees relative to the residual
value and records anticipated losses as a charge to earnings. As at December 31, 2005, the
Corporation recorded approximately $1 million of provision relating to anticipated shortfall in
the fair values of the assets, based on the likelihood that the guarantees will be exercised.
MANAGEMENTS DISCUSSION & ANALYSIS
44
Domtar Inc.
2005
Annual Report
Contractual
Obligations &
Commercial Commitments
In the normal course of business, we enter into certain contractual obligations and
commercial commitments. The following tables provide our obligations and commitments as at December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACTUAL OBLIGATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT TYPE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
THEREAFTER |
|
|
TOTAL |
|
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures and notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,877 |
|
|
|
1,877 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
59 |
|
|
|
3 |
|
|
|
160 |
|
|
|
156 |
|
|
|
382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
2 |
|
|
|
2 |
|
|
|
59 |
|
|
|
3 |
|
|
|
160 |
|
|
|
2,033 |
|
|
|
2,259 |
|
Operating leases |
|
|
30 |
|
|
|
21 |
|
|
|
15 |
|
|
|
11 |
|
|
|
9 |
|
|
|
24 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
obligations |
|
|
32 |
|
|
|
23 |
|
|
|
74 |
|
|
|
14 |
|
|
|
169 |
|
|
|
2,057 |
|
|
|
2,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMERCIAL OBLIGATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT TYPE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
THEREAFTER |
|
|
TOTAL |
|
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
20 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Other commercial commitments* |
|
|
125 |
|
|
|
65 |
|
|
|
56 |
|
|
|
39 |
|
|
|
21 |
|
|
|
72 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commitments |
|
|
145 |
|
|
|
66 |
|
|
|
56 |
|
|
|
39 |
|
|
|
21 |
|
|
|
72 |
|
|
|
399 |
|
|
* |
|
Includes commitments to purchase roundwood, wood, chips, gas, electricity and certain
chemicals. |
For 2006 and the foreseeable future, we expect cash flows from operations and from our
various sources of financing to be sufficient to meet our contractual obligations and commercial
commitments.
MANAGEMENTS DISCUSSION & ANALYSIS
45
Domtar Inc.
2005
Annual Report
Selected Quarterly
Financial Information
Selected quarterly financial information for the eight most recently completed quarters ending
December 31, 2005 is disclosed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
1st |
|
|
2nd |
|
|
3rd |
|
|
4th |
|
|
Year |
|
|
1st |
|
|
2nd |
|
|
3rd |
|
|
4th |
|
|
Year |
|
|
(IN MILLIONS
OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
1,225 |
|
|
|
1,346 |
|
|
|
1,335 |
|
|
|
1,209 |
|
|
|
5,115 |
|
|
|
1,259 |
|
|
|
1,287 |
|
|
|
1,261 |
|
|
|
1,159 |
|
|
|
4,966 |
|
EBITDA |
|
|
58 |
|
|
|
122 |
|
|
|
158 |
|
|
|
90 |
|
|
|
428 |
|
|
|
124 |
|
|
|
128 |
|
|
|
49 |
|
|
|
(77 |
) |
|
|
224 |
|
Excluding specified items |
|
|
61 |
|
|
|
127 |
|
|
|
157 |
|
|
|
89 |
|
|
|
434 |
|
|
|
125 |
|
|
|
128 |
|
|
|
60 |
|
|
|
38 |
|
|
|
351 |
|
Operating profit (loss) |
|
|
(33 |
) |
|
|
28 |
|
|
|
66 |
|
|
|
(12 |
) |
|
|
49 |
|
|
|
34 |
|
|
|
31 |
|
|
|
(50 |
) |
|
|
(478 |
) |
|
|
(463 |
) |
Excluding specified items |
|
|
(30 |
) |
|
|
33 |
|
|
|
65 |
|
|
|
(2 |
) |
|
|
66 |
|
|
|
35 |
|
|
|
33 |
|
|
|
(32 |
) |
|
|
(60 |
) |
|
|
(24 |
) |
Net earnings (loss) |
|
|
(44 |
) |
|
|
(1 |
) |
|
|
29 |
|
|
|
(26 |
) |
|
|
(42 |
) |
|
|
10 |
|
|
|
2 |
|
|
|
(52 |
) |
|
|
(348 |
) |
|
|
(388 |
) |
Excluding specified items |
|
|
(40 |
) |
|
|
4 |
|
|
|
23 |
|
|
|
(20 |
) |
|
|
(33 |
) |
|
|
9 |
|
|
|
3 |
|
|
|
(39 |
) |
|
|
(59 |
) |
|
|
(86 |
) |
Net earnings
(loss) per share (in dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.19 |
) |
|
|
(0.01 |
) |
|
|
0.13 |
|
|
|
(0.11 |
) |
|
|
(0.19 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
(0.23 |
) |
|
|
(1.51 |
) |
|
|
(1.69 |
) |
Basic, excluding specified items |
|
|
(0.18 |
) |
|
|
0.02 |
|
|
|
0.10 |
|
|
|
(0.09 |
) |
|
|
(0.15 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
(0.17 |
) |
|
|
(0.25 |
) |
|
|
(0.37 |
) |
Diluted |
|
|
(0.19 |
) |
|
|
(0.01 |
) |
|
|
0.13 |
|
|
|
(0.11 |
) |
|
|
(0.19 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
(0.23 |
) |
|
|
(1.51 |
) |
|
|
(1.69 |
) |
Trade shipments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Papers (in thousands of st) |
|
|
663 |
|
|
|
659 |
|
|
|
649 |
|
|
|
591 |
|
|
|
2,562 |
|
|
|
637 |
|
|
|
616 |
|
|
|
660 |
|
|
|
597 |
|
|
|
2,510 |
|
Market pulp (in thousands of adst) |
|
|
210 |
|
|
|
199 |
|
|
|
182 |
|
|
|
217 |
|
|
|
808 |
|
|
|
146 |
|
|
|
156 |
|
|
|
176 |
|
|
|
155 |
|
|
|
633 |
|
Lumber (in millions of fbm) |
|
|
228 |
|
|
|
267 |
|
|
|
272 |
|
|
|
242 |
|
|
|
1,009 |
|
|
|
280 |
|
|
|
304 |
|
|
|
264 |
|
|
|
259 |
|
|
|
1,107 |
|
Containerboard (in thousands of st) |
|
|
77 |
|
|
|
74 |
|
|
|
75 |
|
|
|
74 |
|
|
|
300 |
|
|
|
84 |
|
|
|
80 |
|
|
|
82 |
|
|
|
76 |
|
|
|
322 |
|
Corrugated containers
(in millions of sf) |
|
|
1,630 |
|
|
|
1,736 |
|
|
|
1,767 |
|
|
|
1,669 |
|
|
|
6,802 |
|
|
|
1,631 |
|
|
|
1,791 |
|
|
|
1,738 |
|
|
|
1,708 |
|
|
|
6,868 |
|
Benchmark prices 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Papers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copy 20 lb sheets |
(us$/st) |
|
|
723 |
|
|
|
783 |
|
|
|
818 |
|
|
|
850 |
|
|
|
794 |
|
|
|
817 |
|
|
|
843 |
|
|
|
813 |
|
|
|
803 |
|
|
|
820 |
|
Offset 50 lb rolls (us$/st) |
|
|
587 |
|
|
|
652 |
|
|
|
715 |
|
|
|
750 |
|
|
|
676 |
|
|
|
733 |
|
|
|
753 |
|
|
|
713 |
|
|
|
703 |
|
|
|
726 |
|
Coated publication,
no. 3, 60 lb rolls |
(us$/st) |
|
|
775 |
|
|
|
772 |
|
|
|
827 |
|
|
|
870 |
|
|
|
811 |
|
|
|
870 |
|
|
|
920 |
|
|
|
913 |
|
|
|
903 |
|
|
|
902 |
|
Pulp
NBSK-U.S. market
(uss/admt) |
|
|
600 |
|
|
|
660 |
|
|
|
670 |
|
|
|
630 |
|
|
|
640 |
|
|
|
670 |
|
|
|
653 |
|
|
|
625 |
|
|
|
638 |
|
|
|
647 |
|
Pulp NBHK-
Japan
market2 |
(us$/admt) |
|
|
467 |
|
|
|
520 |
|
|
|
510 |
|
|
|
465 |
|
|
|
490 |
|
|
|
497 |
|
|
|
538 |
|
|
|
535 |
|
|
|
535 |
|
|
|
526 |
|
Wood
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lumber G.L. 2x4x8 studs
(us$/mfbm) |
|
|
368 |
|
|
|
435 |
|
|
|
461 |
|
|
|
401 |
|
|
|
417 |
|
|
|
462 |
|
|
|
433 |
|
|
|
397 |
|
|
|
379 |
|
|
|
418 |
|
Lumber
G.L. 2x4 R/L,
no.l & no. 2 |
(uss/mfbm) |
|
|
431 |
|
|
|
495 |
|
|
|
502 |
|
|
|
409 |
|
|
|
459 |
|
|
|
462 |
|
|
|
429 |
|
|
|
397 |
|
|
|
392 |
|
|
|
420 |
|
Packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbleached kraft
linerboard, 42 lb East |
(us$/st) |
|
|
412 |
|
|
|
462 |
|
|
|
500 |
|
|
|
500 |
|
|
|
468 |
|
|
|
500 |
|
|
|
490 |
|
|
|
448 |
|
|
|
475 |
|
|
|
478 |
|
Average
exchange rates |
can$ |
|
|
1.318 |
|
|
|
1.359 |
|
|
|
1.307 |
|
|
|
1.221 |
|
|
|
1.301 |
|
|
|
1.227 |
|
|
|
1.244 |
|
|
|
1.202 |
|
|
|
1.173 |
|
|
|
1.211 |
|
us$ |
|
|
0.759 |
|
|
|
0.736 |
|
|
|
0.765 |
|
|
|
0.819 |
|
|
|
0.769 |
|
|
|
0.815 |
|
|
|
0.804 |
|
|
|
0.832 |
|
|
|
0.852 |
|
|
|
0.826 |
|
|
1 |
|
Source: Pulp & Paper Week and Random Lengths. As such, these prices do not necessarily
reflect our transaction prices. |
|
2 |
|
Based on Pulp & Paper Weeks Southern Bleached Hardwood Kraft pulp prices for Japan, increased by
an average differential of US$15/ADMT between Northern and Southern Bleached Hardwood
Kraft pulp prices. |
MANAGEMENTS DISCUSSION & ANALYSIS
46
Domtar Inc.
2005
Annual Report
The first quarter of 2004 started in much the same fashion as the fourth quarter of
2003, mostly due to the impact of higher shipments and sustained efforts to reduce costs, offset by
lower selling prices. However, the second and third quarters of 2004 showed a marked improvement,
despite the continued strengthening of the Canadian dollar, due to higher average selling prices
for all of our products as price increases were implemented. Our paper shipments remained
relatively stable from the beginning of 2004 through to the third quarter of 2004. The fourth
quarter of 2004 was weak, as demand for the majority of our products slowed, the strengthening of
the Canadian dollar continued to impact our results and we continued to face high fiber and energy
costs. Shipments for papers, lumber and corrugated containers for the fourth quarter of 2004 were
lower than for the third quarter, mainly due to the seasonally weaker demand that typically occurs
during the first and the fourth quarters.
The first quarter of 2005 reflected an improvement over
the fourth quarter of 2004. Selling prices for pulp and lumber remained strong, while selling
prices for papers declined marginally. Demand for our paper and lumber products also remained
strong. However, the indefinite closure of our pulp mill in Cornwall and the wood shortage problems
experienced at our Ashdown pulp mill resulted in lower pulp shipments. Overall lower costs,
partially resulting from the realization of savings stemming from restructuring initiatives
throughout our business segments and productivity gains in our Wood business, further improved
results in the first quarter of 2005. The second quarter of 2005 mirrored the first quarter of the
year, with average selling prices for paper and pulp increasing further. Volumes of pulp, lumber
and packaging products were higher, although paper shipments decreased. Meanwhile, our results
continued to be negatively affected by the strengthening of the Canadian dollar and high costs for
purchased chemicals, wood, energy and freight. These were partially offset by the realization of
savings stemming from restructuring initiatives. Results for the third quarter of 2005, however,
showed a marked deterioration. Despite higher shipments for paper and pulp, average selling prices
were lower for most of our major products and shipments for lumber and packaging products were
lower as well. In addition, our results continued to be negatively affected by the persistent
strengthening of the Canadian dollar, as well as by higher costs for purchased energy and freight.
These were partially offset by the realization of savings stemming from restructuring initiatives.
Results for the fourth quarter of 2005 continued to deteriorate. Shipments for products in the
fourth quarter of 2005 were lower than in the third quarter, mainly due to seasonally weaker
demand. In addition, pulp shipments were affected by the temporary closure of the
Lebel-sur-Quévillon pulp mill in late November 2005. We also continued to be negatively affected by
the strengthening of the Canadian dollar, lower average selling prices for our paper and lumber
products, and higher costs for purchased energy and freight.
2004 Compared to 2003
Sales in 2004 amounted to $5,115 million, a decrease of $52 million from sales of $5,167
million in 2003. This decrease was attributable to the negative impact of an 8% decline in the
year-over-year average value of the U.S. dollar relative to the Canadian dollar, partially offset
by higher shipments for the majority of our products and higher average selling prices for lumber,
pulp and packaging products.
Overall, our U.S. dollar denominated average transaction prices for 2004 were higher than
those of 2003 due to significantly higher average selling prices for lumber as well as higher
average selling prices for pulp and packaging products. Our U.S. dollar denominated average
transaction prices for papers in 2004 were below those of 2003.
Cost of sales increased by $46 million or 1 % in 2004 compared to 2003. This increase mainly
reflected higher shipments for the majority of our products, higher costs, particularly for
purchased fiber and freight, as well as higher duties on our softwood lumber exports to the U.S.
These factors were partially offset by the positive impact of a stronger Canadian dollar on our
U.S. dollar denominated costs, as well as savings realized from restructuring activities.
Selling, general and administrative (SG&A) expenses decreased by $13 million or 4% in 2004
compared to 2003. Excluding specified items, SG&A decreased by $19 million or 6% in 2004 compared
to 2003. This decrease was attributable to the $11 million impact of higher royalty revenues
relating to a license (expiring in May 2007) granted for the use of our wood preserving patent as
well as the positive impact of a stronger Canadian dollar on our U.S. dollar denominated costs.
Operating profit in 2004 amounted to $49 million compared to an operating loss of $95 million
in 2003. Excluding specified items, operating profit totaled $66 million in 2004 compared to $126
million in 2003. This decrease in operating profit excluding specified items was largely
attributable to the $175 million negative impact of a stronger Canadian dollar (net of the effect
of our hedging program), higher costs, particularly for purchased fiber and freight, as well as
higher softwood lumber duties. Partially offsetting the effect of higher costs and a stronger
Canadian dollar were higher average selling prices for lumber, pulp and packaging products as well
as higher overall shipments for the majority of our products, savings realized from restructuring
activities and lower amortization expense.
Net loss for 2004 amounted to $42 million ($0.19 per common share) compared to a net loss of
$193 million ($0.86 per common share) in 2003. Excluding specified items, net loss amounted to $33
million ($0.15 per common share) compared to $10 million ($0.05 per common share) in 2003. The
decline in net earnings excluding specified items was attributable to the factors mentioned above
as well as to lower income tax recovery, partially offset by lower financing expenses.
MANAGEMENTS DISCUSSION & ANALYSIS
47
Domtar Inc.
2005
Annual Report
Cash flows provided from operating activities in 2004 amounted to $122 million
compared to $348 million in 2003. Net additions to property, plant and equipment amounted to $163
million in 2004 compared to $225 million in 2003. We posted a negative free cash flow1
of $41 million compared to positive $123 million in 2003. This decrease in free cash flow
generation was due to the continued strength of the Canadian dollar relative to the U.S. dollar,
the impact of higher costs across our operations and higher working capital requirements.
Our total long-term debt decreased by $25 million, largely due to the $127 million positive
impact of a stronger Canadian dollar on our U.S. dollar denominated debt, partially offset by net
borrowings of $102 million. Our net debt-to-total capitalization ratio2 as at December
31, 2004 stood at 49.5% compared to 48.4% as at December 31, 2003.
Accounting
Change
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On January 1, 2005, we adopted the new Canadian Institute of Chartered Accountants (CICA) Accounting Guideline No. 15 (AcG-15) Consolidation of Variable Interest Entities. AcG-15 has been revised to harmonize with the new Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46R) Consolidation of Variable Interest Entities. AcG-15 requires that an enterprise holding other than a voting interest in a variable interest entity (VIE) could, subject to certain conditions, be required to consolidate the VIE if it is considered its primary beneficiary whereby it would absorb the majority of the VIEs expected losses and/or receive the majority of its expected residual returns. In addition, AcG-15 prescribes certain disclosures for VIEs that are not consolidated but in which an enterprise has a significant variable interest. Effective January 1, 2004, we adopted FIN 46R on a U.S. GAAP basis. There was no initial impact on the consolidated financial statements under U.S. GAAP following the adoption of this guideline. The adoption of this guideline has no impact on the consolidated financial statements under Canadian GAAP.
Impact of Accounting
Pronouncements not
yet Implemented
FINANCIAL INSTRUMENTS
In April 2005, the CICA issued three new Handbook Sections in relation with financial
instruments: Section 3855 Financial Instruments-Recognition and Measurement, Section 3865
Hedges and Section 1530 Comprehensive Income. These Sections apply to fiscal years beginning
on or after October 1,2006.
Section 3855 expands on Handbook Section 3860 Financial Instruments-Disclosure and Presentation,
by prescribing when a financial instrument is to be recognized on the balance sheet and at what
amount. It also specifies how financial instrument gains and losses are to be presented.
Section 3865 provides alternative accounting treatments to Section 3855 for entities which
choose to designate qualifying transactions as hedges for accounting purposes. It replaces and
expands on AcG-13 Hedging Relationship, and the hedging guidance in Section 1650 Foreign
Currency Translation by specifying how hedge accounting is applied and what disclosures are
necessary when it is applied.
Section 1530 introduces a new requirement to present certain revenues, expenses, gains and
losses, that otherwise would not be immediately recorded in income, in a comprehensive income
statement with the same prominence as other statements that constitute a complete set of financial
statements.
The application of these new Handbook Sections for financial instruments is not expected to
have a significant effect on Domtars financial position, earnings or cash flows, but will require
Domtar to present a new statement entitled Comprehensive Income.
IMPLICIT VARIABLE INTEREST
In October 2005, the CICA Emerging Issues Committee issued Abstract 157 (EIC-157) Implicit
Variable Interest under AcG-15. EIC-157 clarifies that an implicit variable interest is an implied
pecuniary interest in an entity that changes with changes in the fair value of that entitys net
assets exclusive of variable interest. An implicit variable interest is similar to an explicit
variable interest, except that it involves the absorbing and/or receiving of variability indirectly
from the entity, rather than directly. The determination of whether an implicit variable interest
exists is a matter of judgment that depends on the relevant facts and circumstances. EIC-157 will
be effective for Domtar in the first quarter of 2006. EIC-157 is substantially the same as the new
FASB Staff Position No. 46R-5 (FSP FIN 46R-5) Implicit Variable Interests under FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities under U.S. GAAP. Effective in
the second quarter of 2005, Domtar adopted FSP FIN 46R-5 on a U.S. GAAP basis. There was no initial
impact on the consolidated financial statements under U.S. GAAP following the adoption of these
recommendations. Domtar does not expect these recommendations to have an initial impact on its
consolidated financial statements under Canadian GAAP.
EARNINGS PER SHARE
In November 2005, the CICA issued proposed amendments to Section 3500 Earnings per Share.
Proposed Section 3500 has been revised to harmonize with amendments being made under U.S. GAAP to
SFAS 128 Earnings per Share. The proposed
|
|
|
1. |
|
See Free Cash Flow table and definition in the Liquidity & Capital Resources section. |
|
2. |
|
See Net debt-to-total capitalization ratio table and definition in the Liquidity & Capital Resources section |
MANAGEMENTS DISCUSSION & ANALYSIS
48
Domtar Inc.
2005
Annual Report
amendments would require that shares that will be issued upon conversion of a
mandatorily convertible instrument to be included in the weighted-average number of ordinary shares
outstanding used in computing basic earnings per share from the date when conversion becomes
mandatory. The proposed change will also amend the computational guidance in Section 3500 for
calculating the number of incremental shares included in diluted earnings per share when applying
the treasury stock method. It would also eliminate the provisions that allow an entity to rebut the
assumption that contracts with the option of settling in either cash or common shares, at the
issuers option, will be settled in common shares. The effective date will be determined upon
issuance of the final standards, expected in the first quarter of 2006. However, the effective date
should correspond with the effective date of SFAS 128. The application of the proposed amendments
of Section 3500 is not expected to have a significant effect on Domtars calculation of earnings
per share.
Critical
Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect our results of operations and financial position. On an
ongoing basis, management reviews its estimates, including those related to environmental matters,
useful lives, impairment of long-lived assets and goodwill, pension and other employee future
benefit plans, income taxes and asset retirement obligations based upon currently available
information. Actual results could differ from those estimates.
These critical accounting policies reflect matters that contain a significant level of
management estimates about future events, reflect the most complex and subjective judgments, and
are subject to a fair degree of measurement uncertainty.
ENVIRONMENTAL MATTERS AND OTHER ASSET RETIREMENT OBLIGATIONS
Environmental expenditures for effluent treatment, air emissions, landfill operation and
closure, asbestos containment and removal, bark pile management, silvicultural activities and site
remediation (together referred to as environmental matters) are expensed or capitalized depending
on their future economic benefit. In the normal course of business, we incur certain operating
costs for environmental matters that are expensed as incurred. Expenditures for property, plant and
equipment that prevent future environmental impacts are capitalized and amortized on a
straight-line basis over 10 to 40 years. Provisions for environmental matters are not discounted
and are recorded when remediation efforts are likely and can be
reasonably determined.
We recognize asset retirement obligations at fair value in the period in which we incur a legal
obligation associated to the retirement of an asset. Our asset retirement obligations are
principally linked to landfill capping obligations, asbestos removal obligations and demolition of
certain abandoned buildings. The associated costs are capitalized as part of the carrying value of
the related asset and depreciated over its remaining useful life. The liability is accreted using
a credit adjusted risk-free interest rate.
The estimate of fair value is based on the results of the expected future cash flow approach,
in which multiple cash flow scenarios that reflect a range of possible outcomes are considered. We
have established cash flow scenarios for each individual asset retirement obligation. Probabilities
are applied to each of the cash flow scenarios to arrive at an expected future cash flow. There is
no supplemental risk adjustment made to the expected cash flows. The expected cash flows for each
of the asset retirement obligations are discounted using the credit adjusted risk-free interest
rate for the corresponding period until the settlement date. The rates used vary, based on the
prevailing rate at the moment of recognition of the liability and on its settlement period. The
rates used vary between 4.25% and 9.40%.
Cash flow estimates incorporate either assumptions that marketplace participants would use in
their estimates of fair value, whenever that information is available without undue cost and
effort, or assumptions developed by internal experts.
While we believe that we have determined the costs for environmental matters likely to be
incurred, based on known information, our ongoing efforts to identify potential environmental
concerns that may be associated with our former and present operations may lead to future
environmental investigations. These efforts may result in the determination of additional
environmental costs and liabilities, which cannot be reasonably estimated at this time.
As at December 31, 2005, we had a provision of $63 million for environmental matters and
other asset retirement obligations. Additional costs, not known or identifiable, could be incurred
for remediation efforts. Based on policies and procedures in place to monitor environmental
exposure, we believe that such additional remediation costs would not have a material adverse
effect on our financial position, earnings or cash flows.
In addition, the pulp and paper industry in the United States is subject to Cluster Rules and
Boiler Maximum Achievable Control Technology (MACT) Rules that further regulate effluent and air
emissions. We comply with all present regulations and we anticipate spending approximately $17
million over the next two years to meet such requirements.
MANAGEMENTS DISCUSSION & ANALYSIS
49
Domtar Inc.
2005
Annual Report
As at December 31, 2005, anticipated payments in each of the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
THEREAFTER |
|
|
TOTAL |
|
|
Environmental matters |
|
|
21 |
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
3 |
|
|
|
25 |
|
|
|
63 |
|
Cluster Rules obligations |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Boiler MACT Rules obligation |
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
9 |
|
|
|
5 |
|
|
|
4 |
|
|
|
3 |
|
|
|
25 |
|
|
|
80 |
|
|
In 2005, our operating expenses for environmental matters totaled $68 million and we
capitalized an additional $17 million for environmental projects mainly related to the improvement
of air emissions, effluent treatment and remedial actions taken to address environmental
compliance. In 2006, we expect to capitalize approximately $17 million for environmental projects,
including Cluster Rules and Boiler MACT Rules obligations. We are unable to estimate the total
amount of capital expenditures (other than Cluster Rules and Boiler MACT Rules obligations) that
may be required beyond 2006 for environmental compliance. However, we do not expect any additional
required expenditures to have a material adverse effect on our financial position, earnings or
cash flows.
USEFUL LIVES
Our property, plant and equipment are stated at cost less accumulated amortization,
including asset impairment write-down. Interest costs are capitalized for capital projects in
excess of $10 million and having a duration in excess of one year. For timber limits and
timberlands, amortization is calculated using the unit of production method. For all other assets,
amortization is calculated using the straight-line method over the estimated useful lives of the
assets.
On a regular basis, we review the estimated useful lives of our property, plant and equipment.
Assessing the reasonableness of the estimated useful lives of property, plant and equipment
requires judgment and is based on currently available information. Changes in circumstances such as
technological advances, changes to our business strategy, changes to our capital strategy or
changes in regulation can result in the actual useful lives differing from our estimates. Revisions
to the estimated useful lives of property, plant and equipment constitute a change in accounting
estimate and are dealt with prospectively by amending amortization rates. A change in the remaining
estimated useful life of a group of assets, or their estimated net salvage value, will affect the
amortization rate used to amortize the group of assets and thus affect amortization expense as
reported in our results of operations. A change of one year in the composite estimated useful life of our fixed
asset base would impact annual depreciation expense by approximately $22 million.
In 2005, we recorded total amortization expense of $375 million (or $687 million when
including specified items pertaining to write-downs in the value of property, plant and equipment
as a result of closures) compared to $368 million in 2004 (or $379 million when including
specified items pertaining to write-downs in the value of property, plant and equipment as a
result of closures). As at December 31, 2005, we had property, plant and equipment with a net book
value of $3,634 million ($4,215 million in 2004).
With the write-downs in the value of property, plant and equipment recorded in the fourth
quarter of 2005, our future amortization expense was reduced by approximately $39 million on an
annual basis.
IMPAIRMENT OF LONG-LIVED ASSETS
We review the carrying amount of long-lived assets when events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable through future operations.
This is accomplished by determining whether projected undiscounted future cash flows from
operations exceed the net carrying amount of the assets as of the assessment date (Step I test).
Impaired assets are recorded at fair value, determined principally by using discounted future cash
flows expected from their use and eventual disposition (Step II test). Estimates of future cash
flows and fair value require judgment and may change over time.
During the fourth quarter of 2005, as a result of operating losses, we conducted Step I of
the impairment tests on most of our Canadian pulp and paper manufacturing facilities, our Wood
segment and three containerboard mills in our Packaging segment.
Estimates of future cash flows used to test the recoverability of a long-lived asset included
key assumptions related to trend prices and the long-term forecasted exchange rate for the U.S.
dollar. Other significant assumptions are the estimated useful life
MANAGEMENTS DISCUSSION & ANALYSIS
50
Domtar Inc.
2005
Annual Report
of the long-lived assets and the effect of the ongoing softwood lumber dispute with
the United States.
The trend prices were based on an analysis of external price trends, including Resource
Information Systems, Inc. (RISI), as well as normalized pulp, paper, wood and unbleached kraft
linerboard pricing over a business cycle at the mills subjected to the impairment tests.
The forecasted Canadian-U.S. foreign exchange rate assumptions were based on managements
best estimate using independent market information, as well as analysis of historical data, trends
and cycles. Management expects the longer-term average rate to be between CAN$1.00 = US$0.74 and
CAN$1.00 = US$0.75.
As a result of the November 30, 2005 restructuring announcement, certain business units
analyzed for impairment were written off to their fair value. We concluded that the recognition of
an impairment loss for the remaining business units analyzed was not required.
Certain pulp and paper and packaging mills are particularly sensitive to the key assumptions.
Given the inherent imprecision and corresponding importance of the key assumptions used in the
impairment test, it is reasonably possible that changes in future conditions may lead management
to use different key assumptions, which could require a material change in the net carrying amount
of these assets. The total net carrying amount of these mills was $750 million as at December 31,
2005.
During
the fourth quarter of 2003, as a result of operating losses at our
Lebel-sur-Quévillon
pulp mill and our Wood business, we conducted impairment tests of the long-lived assets of these
business units. In addition, due to the decision to close one paper machine at our Vancouver paper
mill and the potential impact of a stronger Canadian dollar on the results of operations of our
Canadian pulp and paper mills, we also conducted impairment tests of the long-lived assets of our
Vancouver paper mill and other Canadian pulp and paper mills. As a result of these tests in
December 2003, we recorded an impairment loss of $201 million related to the impairment of our
Lebel-sur-Quévillon pulp mill.
In
the Step II test, performed in 2003 on our Lebel-sur-Quévillon pulp mill only, the
assumptions used to determine the discounted future cash flows (fair value) of the business unit
were the same as those used in the Step I tests, except that future cash flows used were on an
after-tax basis and were discounted at our risk-adjusted weighted average cost of capital.
GOODWILL
Goodwill is not amortized and is subject to an annual impairment test, or more frequently if
events or changes in circumstances indicate that it might be impaired. Testing for impairment is
accomplished mainly by determining whether the fair value of a segment, based upon discounted cash flows, exceeds the net carrying amount of that segment as of
the assessment date. If the fair value is greater than the net carrying amount, no impairment is
necessary. In the event that the net carrying amount exceeds the sum of the discounted cash flows,
a second test must be performed whereby the fair value of the segments goodwill must be estimated
to determine if it is less than its net carrying amount. Fair value of goodwill is estimated in the
same way as goodwill was determined at the date of the acquisition in a business combination, that
is, the excess of the fair value of the segment over the fair value of the identifiable net assets
of the segment. Estimates of cash flows and fair value require judgment and may change.
PENSION AND OTHER EMPLOYEE FUTURE BENEFIT PLANS
Domtar contributes to several defined contribution, multi-employer and 401(k) plans. The
pension expense under these plans is equal to Domtars contribution. The 2005 pension expense was
$17 million ($17 million in 2004).
Domtar also has several defined benefit pension plans covering substantially all employees,
including one closed plan for certain non-unionized employees in Canada. Non-unionized employees
in Canada joining Domtar after June 1, 2000 participate in defined contribution plans. The defined
benefit plans are generally contributory in Canada and non-contributory in the United States. The
pension expense and the obligation related to the defined benefit plans are actuarially determined
using managements most probable assumptions.
In 2006, pursuant to the decision in November 2005 to close the Cornwall and Ottawa, Ontario
paper mills, the Corporation will declare a partial wind-up of the non-unionized and unionized
plans related to the Ontario participants in the plan.
We account for pension and other employee future benefits in accordance with CICA
recommendations. As such, assumptions are made regarding the valuation of benefit obligations and
performance of plan assets. Deferred recognition of differences between actual results and those
assumed is a guiding principle of these recommendations. This approach allows for a gradual
recognition of changes in benefit obligations and plan performance over the expected average
remaining service life of the active employee group covered by the plans.
Pension and other employee future benefit assumptions include the discount rate, the expected
long-term rate of return on plan assets, the rate of compensation increase, health care cost trend
rates, mortality rates, employee early retirements and terminations or disabilities. Changes in
these assumptions result in actuarial gains or losses which, in accordance with CICA
recommendations, we have elected to amortize over the expected average remaining service life of
the active employee group covered by the plans only to the extent that the unrecognized
MANAGEMENTS DISCUSSION & ANALYSIS
51
Domtar Inc.
2005
Annual Report
net actuarial gains and losses are in excess of 10% of the greater of the accrued
benefit obligation and the market-related value of plan assets as at the beginning of the year.
An expected rate of return on plan assets of 7.2% was considered appropriate by our management
for the determination of 2005 pension expense. Effective January 1, 2006, Domtar will use 6.4% as
the expected return on plan assets, which reflects the current view of long-term investment
returns.
The expected return on plan assets assumption for the Corporation is based on an analysis of
the target asset allocation and expected return by asset class. This rate is adjusted for an
equity risk premium and by 0.5% to take into consideration the active investment management of the
plan assets.
The expected return on plan assets assumption for Norampac is based on a periodic analysis of
the target asset allocation, expected return by asset class, the risk for each class (standard
deviation) and the correlation between asset classes. It takes into consideration historical
returns and future anticipation.
We set our discount rate assumption annually to reflect the rates available on high-quality,
fixed income debt instruments, with a duration that is expected to match the timing and amount of
expected benefit payments. High-quality debt instruments are corporate bonds with a rating of AA
or better. The discount rates as at December 31, 2005 for pension and other employee future
benefit plans were estimated at 5.0% for the accrued benefit obligation and 5.8% for the net
periodic benefit cost for 2005.
The rate of compensation increase is another significant assumption in the actuarial model
for pension (set at 2.7% for the accrued benefit obligation and 3.4% for the net periodic benefit
cost) and for other employee future benefits (set at 3.5% for both the accrued benefit obligation
and the net
periodic benefit cost) and is determined based upon our long-term plans for such increases.
For measurement purposes, 7.3% weighted-average annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2006, based on external data and our own
historical trends for health care costs. The rate was assumed to decrease gradually to 4.1% by
2012 and remain at that level thereafter.
At the end of 2005, a change was made to the mortality table used to determine the accrued
benefit obligation in both the Canadian and U.S. plans. The change was made to reflect improved
mortality rate assumptions, which include the GAM94 for the Canadian plans and RP-2000 projected
for the U.S. plans. The net periodic benefit cost, which is determined using assumptions taken at
the beginning of the year, was determined using the GAM83.
The net periodic benefit cost for defined benefit plans as at December 31, 2005, increased by
$6 million, related to the impact of the negotiated collective agreement between Domtar Inc. and
the Communications, Energy and Paperworkers union of Canada, and increased by $13 million related
to the impact of the workforce reduction and restructuring plan announced in November 2005.
The following table provides a sensitivity analysis of the key weighted average economic
assumptions used in measuring the accrued pension benefit obligation, the accrued other employee
future benefit obligation and related net periodic benefit cost for 2005. The sensitivity analysis
should be used with caution as it is hypothetical and changes in each key assumption may not be
linear. The sensitivities in each key variable have been calculated independently of each other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SENSITIVITY ANALYSIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHEREMPLOYEE |
|
PENSION AND OTHER EMPLOYEE FUTURE BENEFITS |
|
|
|
|
|
PENSION |
|
|
|
|
|
|
FUTURE BENEFITS |
|
|
|
|
|
ACCRUED |
|
|
NET |
|
|
ACCRUED |
|
|
NET |
|
|
|
BENEFIT |
|
|
PERIODIC |
|
|
BENEFIT |
|
|
PERIODIC |
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
OBLIGATION |
|
|
BENEFIT COST |
|
|
OBLIGATION |
|
|
BENEFIT COST |
|
Expected rate of return on assets
Impact of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% increase |
|
|
N/A |
|
|
|
(12 |
) |
|
|
N/A |
|
|
|
N/A |
|
1% decrease |
|
|
N/A |
|
|
|
12 |
|
|
|
N/A |
|
|
|
N/A |
|
Discount rate Impact of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% increase |
|
|
(177 |
) |
|
|
(13 |
) |
|
|
(12 |
) |
|
|
(1 |
) |
1% decrease |
|
|
183 |
|
|
|
11 |
|
|
|
12 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed overall health care
cost trend Impact of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% increase |
|
|
N/A |
|
|
|
N/A |
|
|
|
9 |
|
|
|
2 |
|
1% decrease |
|
|
N/A |
|
|
|
N/A |
|
|
|
(7 |
) |
|
|
(1 |
) |
|
MANAGEMENTS DISCUSSION & ANALYSIS
52
Domtar Inc.
2005
Annual Report
The assets of the pension plans are held by a number of independent
trustees and are accounted for separately in Domtars pension funds. The investment strategy for
the assets in the pension plans is to maintain a diversified portfolio of assets, invested in a
prudent manner to maintain the security of funds while maximizing returns within the guidelines
provided in the investment policy. The Corporations pension funds are
not permitted to own any of the Corporations shares or debt instruments. The target asset
allocation is based on the expected duration of the benefit obligation, which includes the impact
of a partial wind-up related to the mill closures.
The following table shows the allocation of the plan assets, based on the fair value of the
assets held at December 31, 2005 and 2004 and the target allocation for 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TARGET |
|
|
|
|
|
|
|
ALLOCATION OF PLAN ASSETS AS AT DECEMBER 31 |
|
ALLOCATION |
|
|
2005 |
|
|
2004 |
|
|
(IN %) |
Fixed income securities |
|
|
58%-68 |
% |
|
|
63 |
% |
|
|
51 |
% |
Equity securities |
|
|
32%-42 |
% |
|
|
37 |
% |
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
Our funding policy is to contribute annually the amount required to provide for benefits
earned in the year and to fund past service obligations over periods not exceeding those permitted
by the applicable regulatory authorities. Past service obligations primarily arise from
improvements to plan benefits. The latest actuarial valuations were conducted as at December 31,
2004, for plans representing approximately 94%, and as at December 31, 2003, for plans representing
approximately 6% of the total plans asset fair value. These valuations indicated a funding
deficiency. The next actuarial valuations will be completed between December 31,2005 and March
1,2008. Domtar expects to contribute for a total amount of $80 million in 2006 compared to $85
million in 2005.
The estimated future benefit payments for the next 10 years as at December 31, 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE |
|
|
|
|
|
|
|
FUTURE |
|
ESTIMATED FUTURE BENEFIT PAYMENTS |
|
PENSION |
|
|
BENEFITS |
|
|
(IN MILLIONS OF CANADIAN DOLLARS) |
|
|
|
|
|
|
|
|
2006 |
|
|
80 |
|
|
|
6 |
|
2007 |
|
|
281 |
|
|
|
7 |
|
2008 |
|
|
77 |
|
|
|
7 |
|
2009 |
|
|
79 |
|
|
|
7 |
|
2010 |
|
|
80 |
|
|
|
7 |
|
2011-2015 |
|
|
429 |
|
|
|
42 |
|
|
|
|
|
|
|
|
Total |
|
|
1,026 |
|
|
|
76 |
|
|
INCOME TAXES
We use the asset and liability method of accounting for income taxes. Under this method,
future tax assets and liabilities are determined according to differences between the carrying
amounts and tax bases of the assets and liabilities. The change in
the net future tax asset or liability is included in earnings and in the Accumulated foreign
currency translation adjustments account in Shareholders equity. Future tax assets and
liabilities are measured using enacted or substantively enacted tax rates and laws expected to
apply in the years in which assets and liabilities are expected to be recovered or settled. For
these years, a projection of taxable income and an assumption of the ultimate recovery or
settlement period for temporary differences are required. The projection of future taxable income
is based on managements best estimate and may vary from actual taxable income.
On an annual basis, we assess the need to establish a valuation allowance for future tax
assets and, if it is deemed more likely than not that our future tax assets will not be realized
based on these taxable income projections, a valuation allowance is recorded. As at December 31,
2005, we expect that our future tax assets will not be fully recovered from future taxable income,
and we have therefore set up a valuation allowance of $4 million.
Our future tax assets are mainly composed of temporary differences related to accounting
provisions for acquisitions, restructuring, environmental matters, as well as loss carry forwards.
The majority of these accruals will be utilized or paid out over the next five years. Our future
tax liabilities are mainly composed of temporary differences pertaining to plant, equipment and
others. Estimating the ultimate settlement period, given the amortization rates in effect are based
on information as it develops, requires judgment and our best estimates. The reversal of timing
differences is expected at future substantially enacted tax rates, which could change due to
changes in income tax laws or the introduction of tax changes through the presentation of annual
budgets by different governments. As a result, a change in the timing and the income tax rate at
which the components will reverse could materially affect future tax expense as recorded in
our results of operations.
MANAGEMENTS DISCUSSION & ANALYSIS
53
Domtar Inc.
2005
Annual Report
A one percentage point change in our reported effective income tax rate would have the
effect of changing the income tax expense by approximately $7 million.
In addition, Canadian, American and international tax rules and regulations are subject to
interpretation and require judgment that may be challenged by taxation authorities. We believe
that, to the best of our knowledge, we have adequately provided for our future tax consequences
based upon current facts and circumstances and current tax law.
For the year ended December 31, 2005, we recorded a total net tax recovery of $225 million
(recovery of $52 million in 2004), of which $23 8 million was for future income tax recovery
(recovery of $75 million in 2004). Our net future tax liability as at December 31, 2005 was $242
million ($470 million in 2004).
CLOSURE AND RESTRUCTURING COSTS
In recent years, Domtar has committed to several closure and restructuring initiatives, the
most significant of which is the series of targeted measures announced on November 30, 2005. The
impact of these measures is presented in Closure and restructuring costs in the income statement
and the related liability is included in Trade and other payables and in Other liabilities and
deferred credits. In general, closure and restructuring costs are recognized as liabilities in
the period when they are incurred and are measured at their fair value. For such recognition to
occur, management, with the appropriate level of authority, must have approved and committed to a
firm plan and appropriate communication to those affected must have occurred. These provisions
require an estimation of costs such as severance and termination benefits, pension and
curtailments and environmental remediation, and an evaluation of the fair value of the working
capital and property, plant and equipment is required to determine the required write-offs. The
closure and restructuring expense also includes costs relating to demolition, contractual
obligations, training and outplacement. As at December 31, 2005, Domtar had recorded a closure and
restructuring charge of $433 million, including $312 million relating to property, plant and
equipment write-offs. The liability was $99 million.
Estimates of cash flows and fair value relating to closures and restructurings require
judgment. Closure and restructuring costs are based on managements best estimates of future events
at December 31, 2005. Closure costs and restructuring estimates are dependent on future events.
Although we do not anticipate significant changes, the actual costs may differ from these estimates
due to subsequent developments such as the results of environmental studies, the ability to find a
buyer for assets set to be dismantled and demolished and other
business developments. As such, additional costs and further working capital and property, plant and equipment write-downs
may be required in future periods. Additional restructuring costs related to the November 2005
announcement of approximately $80 million are expected to be incurred over 2006 and thereafter.
RISKS & UNCERTAINTIES
The risks and uncertainties described below are not the only ones we may face. Additional
risks and uncertainties of which we are unaware, or that we currently deem to be immaterial, may
also become important factors that affect us. If any of the following risks actually occurs, our
business, financial condition or results of operations could be materially adversely affected.
PRODUCT PRICES AND INDUSTRY CONDITIONS
Our financial performance is sensitive to the selling prices of our products that are
impacted by supply and demand.
The markets for most paper, pulp, lumber and packaging products are cyclical and are
influenced by a variety of factors beyond our control. These factors include periods of excess
product supply due to industry capacity additions, periods of decreased demand due to weak general
economic activity in North American or international markets, inventory de-stocking by customers,
and fluctuations in currency exchange rates. Demand for lumber also depends on the level of housing
starts, commercial building activity and the availability and cost of mortgage financing.
Markets for most of our products are also highly competitive, with a number of major
companies competing in each market. We compete with both Canadian and U.S. producers in all of our
product lines and with global producers in certain of our product lines, some of which may have
greater financial resources and lower production costs than Domtar. While the principal basis for
competition is selling price, competition can be based upon quality and customer service,
including, in some cases, providing technical advice to customers. Other factors, such as foreign
exchange rates, cost of fiber and other input costs, as well as the ongoing softwood lumber
dispute between the U.S. and Canada, can also impact our competitive position.
In addition, we may compete with product substitutes, which can impact demand for our
products. Our paper products compete with electronic transmission and document storage
alternatives, as well as grades of paper we do not produce. As the use of these alternatives
grows, demand for our paper products may decline or shift to other paper grades. Moreover, demand
for some of our wood products may decline if customers purchase steel alternatives. Demand for
some of our corrugated container products may decline if customers purchase plastic
alternatives.
MANAGEMENTS DISCUSSION & ANALYSIS
54
Domtar Inc.
2005
Annual Report
During periods of low prices, we have experienced in the past, and could experience in
the future, reduced revenues and margins, resulting in substantial declines in profitability and
sometimes net losses. See Sensitivity Analysis.
Any substantial shift in demand for our products or sustained period of low prices could have
a material adverse effect on our business, financial results and financial condition, including,
but not limited to, facility closures or impairment of assets.
FOREIGN EXCHANGE
The revenues for most of our products are affected by fluctuations in the exchange rate
between the Canadian dollar and the U.S. dollar. As a result, any decrease in the value of the U.S.
dollar relative to the Canadian dollar reduces our profitability. Our U.S. dollar sales, net of
U.S. dollar purchases for our operating activities, represent approximately US$1 billion annually
(excluding Norampac). In addition, our sales in Canada are impacted by exchange rate fluctuations,
as the prices for many of our products are generally driven by U.S. prices for similar products.
Our exposure to the U.S. dollar is reduced by the interest on our U.S. dollar denominated debt
(approximately $0.1 billion annually, excluding Norampac). Exchange rate fluctuations are beyond
our control and the U.S. dollar may continue to depreciate against the Canadian dollar in the
future, which would result in lower revenues and margins. Sustained periods of a strong Canadian
dollar could have a material adverse effect on our business, financial results and financial
condition, including, but not limited to, facility closures or impairment of assets.
OPERATIONAL RISKS
The activities conducted by our businesses are subject to a number of operational risks
including competition, performance of key suppliers, distributors and customers, renewal of
collective agreements, regulatory risks, successful integration of new acquisitions, realization of
anticipated cost savings, performance of manufacturing operations, retention of key personnel and
reliability of information systems. In addition, operating costs for our businesses can be affected
by changes in energy prices, fiber and other raw material prices, and freight costs as a result of
changing economic or political conditions or due to particular supply and demand considerations.
Fiber supply
We use hardwood and softwood fiber for the production of paper and softwood for the
production of lumber. Our forestry strategy is to optimize wood flows within our fiber supply area
and to maximize value and minimize cost while securing an adequate wood supply for our operations.
Our hardwood and softwood fiber resources are obtained from harvesting rights on public lands,
purchases from third parties and from our owned land.
The Province of Quebec adopted new legislation, which became effective April 1, 2005, that
reduced allowable wood-harvesting volumes by an average of 20% on public lands and 25% on
territories covered by an agreement between the Government of Quebec and the Cree First Nations.
As a result, the amount of fiber we are permitted to harvest annually, under our existing licenses
from the Quebec government, was reduced by approximately 500,000 cubic meters or 21%. This affects
the supply of fiber for our Northern Quebec softwood sawmill and market pulp operations.
We are currently working on finding solutions such as obtaining alternate sources of fiber.
The reduction in harvest volume increases the unit cost of wood delivered to the sawmills. If we
are unable to maintain an adequate supply of fiber and mitigate the significant cost increase and
wood delivery cost, our Northern Quebec softwood sawmill and market pulp operations would have to
operate significantly below capacity, which would have a material adverse impact on these
operations and may result in closures or impairment of assets.
There is no assurance that access to fiber will continue at the same levels achieved in the
past. The cost of hardwood and softwood fiber and the availability of wood chips may be affected.
Labor
We are currently in the process of renegotiating certain collective bargaining agreements. As
is the case with any negotiation, we may not be able to negotiate acceptable new collective
bargaining agreements, which could result in strikes or work stoppages by affected workers. Renewal
of collective bargaining agreements could also result in higher wages or benefits paid to union
members. Therefore, we could experience a disruption of our operations or higher ongoing labor
costs, which could have a material adverse effect on our business, financial results and financial
condition.
MANAGEMENTS DISCUSSION & ANALYSIS
55
Domtar Inc.
2005
Annual Report
Cost savings
The Company has undertaken, and may continue to undertake, productivity initiatives,
including cost reduction programs and organizational restructurings to improve performance and
generate cost savings. There can be no assurance that these will be completed or will be
beneficial to the Company. Also, there can be no assurance that any estimated cost savings from
such activities will be realized.
Significant customers
Although no single customer accounts for more than 10% of our consolidated sales, if any of
our significant customers reduces, delays or cancels substantial orders for any reason, our
business and results of operations could be negatively affected, particularly for the quarter in
which the delay or cancellation occurs.
ENVIRONMENT
We are subject to U.S. and Canadian environmental laws and regulations for effluent and air
emissions, harvesting, silvicultural activities, waste management and groundwater quality, among
others. In addition, the pulp and paper industry in the United States is subject to Cluster Rules
and Boiler Maximum Achievable Control Technology (MACT) Rules that further regulate effluent and
air emissions. These laws and regulations require us to obtain and comply with the authorization
requirements of the appropriate governmental authorities, who exercise considerable discretion for
permit issuances and their timing. Changes in environmental laws and regulations and/or their
application may require us to make significant expenditures that could negatively impact our
business, financial results and financial condition.
Failure to comply with applicable environmental laws, regulations and permit requirements may
result in fines, penalties or enforcement actions by the regulators, including regulatory or
judicial orders enjoining or curtailing operations or requiring corrective measures, installation
of environmental control equipment or remedial actions, any of which could entail significant
expenditures and negatively impact our business, financial results and financial condition.
We continue to take remedial action under our Care and Control program at a number of former
operating sites, especially in the wood preserving sector, due to possible soil, sediment or
groundwater contamination. The investigation and remediation process is lengthy and subject to the
uncertainties of changes in
legal requirements, technological developments and the allocation of liability among potentially
responsible parties.
LUMBER EXPORT DUTIES
Since
May 22, 2002, based upon a final decision of the United States International Trade
Commission, we have made the required cash deposits on our exports of softwood lumber to the United
States at an aggregate countervailing and antidumping rate of 27.22%, that is, 18.79% for
countervailing and 8.43% for antidumping. The Canadian government has challenged both the
countervailing and antidumping rates with the World Trade Organization and under the North American
Free Trade Agreement. Since January 1,2005, cash deposits for countervailing and antidumping duties
were being made and expensed by Domtar at new rates decreasing from 21.21% to 20.15%, that is, from
17.18% to 16.37% for countervailing and from 4.03% to 3.78% for antidumping. In December 2005, the
rate was lowered to 10.80%, that is, 8.70% for countervailing and 2.10% for antidumping.
We are currently experiencing, and may continue to experience, reduced revenues and margins
in our Wood business as a result of countervailing and antidumping duty applications or any new
arrangements between the United States and Canada.
LEGAL PROCEEDINGS
In the normal course of our operations, we become involved in various legal actions mostly
related to contract disputes, patent infringements, environmental and product warranty claims and
labor issues. While the final outcome with respect to actions outstanding or pending cannot be
predicted with certainty, it is our belief that their resolution will not have a material adverse
effect on our business, financial results and financial condition.
CAPITAL AND LIQUIDITY
Our operations require substantial capital. If our capital resources are inadequate to
provide for our operating needs, capital expenditures and other cash requirements, this shortfall
could have a material adverse effect on our business and liquidity and impact our ability to
service our debt. There can be no assurance that we will be able to generate sufficient cash flows
from operations, as we are subject to a number of general economic, business, financial,
competitive, legislative, regulatory and other factors beyond our control, or that, in the event we
fail to comply with our covenants, we will be able to renegotiate credit arrangements or terms
which will be satisfactory.
MANAGEMENTS DISCUSSION & ANALYSIS
56
Domtar Inc.
2005
Annual Report
SENSITIVITY ANALYSIS
Our operating profit, net earnings and earnings per share can be impacted by the following
sensitivities:
APPROXIMATE ANNUAL IMPACT ON 1,2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS |
|
|
|
OPERATING |
|
|
NET |
|
|
PER SHARE |
|
(IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) |
|
PROFIT7 |
|
|
EARNINGS |
|
|
(IN DOLLARS) |
|
Each US$10/unit change in the selling price of the following products:3,4 |
|
|
|
|
|
|
|
|
|
|
|
|
Papers |
|
|
|
|
|
|
|
|
|
|
|
|
Copy and offset grades |
|
|
17 |
|
|
|
11 |
|
|
|
0.05 |
|
Uncoated commercial printing & publication and premium imaging grades |
|
|
|
|
|
|
3 |
|
|
|
0.01 |
|
Coated commercial printing & publication grades |
|
|
1 |
|
|
|
1 |
|
|
|
0.00 |
|
Technical & specialty grades |
|
|
|
|
|
|
3 |
|
|
|
0.01 |
|
Pulp -net position |
|
|
10 |
|
|
|
7 |
|
|
|
0.03 |
|
Wood |
|
|
|
|
|
|
|
|
|
|
|
|
Lumber |
|
|
12 |
|
|
|
8 |
|
|
|
0.04 |
|
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard |
|
|
9 |
|
|
|
6 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange (CAN$0.01 change in relative value to the U.S. dollar before hedging)3 |
|
|
|
|
|
|
|
|
|
|
|
|
Impact of US$ pricing on export sales, net of US$ purchases, excluding Norampac |
|
|
10 |
6 |
|
|
7 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
1% change in interest rate on our floating rate debt (excluding Norampac) |
|
|
n/a |
|
|
|
3 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Energy3,5 (excluding Norampac) |
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas: US$0.25/MMBtu change in price before hedging |
|
|
2 |
|
|
|
1 |
|
|
|
0.00 |
|
Crude oil: US $1/barrel change in price before hedging |
|
|
1 |
|
|
|
1 |
|
|
|
0.00 |
|
|
|
|
|
1 |
|
Based on an exchange rate of $1.1905. |
|
2 |
|
Based on a marginal tax rate of 35%. |
|
3 |
|
Assumes the permanent closure of the Cornwall, Ottawa and Vancouver mills, effective January 1, 2006. |
|
4 |
|
Based on budgeted capacity (in tons, tonnes or MFBM). |
|
5 |
|
Based on budgeted 2006 consumption levels. The allocation between energy sources may vary during the period in
order to take advantage of market conditions. |
|
6 |
|
In addition to this direct impact, significant fluctuations in the value of the U.S. currency
will have an indirect impact on our product pricing in Canada overtime given that Canadian pricing
is derived from
U.S. dollar denominated prices. The combined direct and indirect impact of a CAN$0.01 change
in the relative value to the U.S. dollar before hedging and excluding Norampac could reach $12
million. |
|
7 |
|
Operating profit is a non-GAAP measure; see section Specified items affecting results and
non-GAAP measures. |
|
|
|
Note that Domtar may, from time to time, hedge part of its foreign exchange, net pulp,
containerboard, interest rate and energy positions, which may therefore impact the above
sensitivities. |
MANAGEMENTS DISCUSSION & ANALYSIS
57
Domtar Inc.
2005
Annual Report
Benchmark Prices1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
|
1996 |
|
|
1997 |
|
|
1998 |
|
|
1999 |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
1996 + |
|
|
Papers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copy 20 lb sheets |
|
(us$/ton) |
|
|
848 |
|
|
|
769 |
|
|
|
780 |
|
|
|
778 |
|
|
|
877 |
|
|
|
815 |
|
|
|
776 |
|
|
|
768 |
|
|
|
794 |
|
|
|
820 |
|
|
|
803 |
|
Offset 50 lb rolls |
|
(us$/ton) |
|
|
736 |
|
|
|
756 |
|
|
|
666 |
|
|
|
659 |
|
|
|
757 |
|
|
|
719 |
|
|
|
692 |
|
|
|
628 |
|
|
|
676 |
|
|
|
726 |
|
|
|
702 |
|
Coated publication,
no. 3, 60 lb rolls |
|
(us$/ton) |
|
|
943 |
|
|
|
941 |
|
|
|
909 |
|
|
|
851 |
|
|
|
948 |
|
|
|
853 |
|
|
|
767 |
|
|
|
804 |
|
|
|
811 |
|
|
|
902 |
|
|
|
873 |
|
Pulp NBSK-U.S. market |
|
(us$/admt) |
|
|
586 |
|
|
|
588 |
|
|
|
544 |
|
|
|
541 |
|
|
|
685 |
|
|
|
558 |
|
|
|
491 |
|
|
|
553 |
|
|
|
640 |
|
|
|
647 |
|
|
|
583 |
|
Pulp NBHK-
Japan market2 |
|
(us$/admt) |
|
|
501 |
|
|
|
514 |
|
|
|
444 |
|
|
|
508 |
|
|
|
681 |
|
|
|
485 |
|
|
|
427 |
|
|
|
470 |
|
|
|
490 |
|
|
|
526 |
|
|
|
505 |
|
Wood |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lumber 2x4x8 stud |
|
(us$/mfbm) |
|
|
403 |
|
|
|
386 |
|
|
|
375 |
|
|
|
390 |
|
|
|
319 |
|
|
|
345 |
|
|
|
336 |
|
|
|
327 |
|
|
|
417 |
|
|
|
418 |
|
|
|
372 |
|
Lumber 2x4 R/L,
no. 1 & no. 2 |
|
(us$/mfbm) |
|
|
441 |
|
|
|
447 |
|
|
|
377 |
|
|
|
440 |
|
|
|
351 |
|
|
|
345 |
|
|
|
331 |
|
|
|
340 |
|
|
|
459 |
|
|
|
420 |
|
|
|
395 |
|
Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbleached kraft
linerboard, 42 lb East |
|
(us$/ton) |
|
|
371 |
|
|
|
336 |
|
|
|
373 |
|
|
|
400 |
|
|
|
468 |
|
|
|
445 |
|
|
|
427 |
|
|
|
421 |
|
|
|
468 |
|
|
|
478 |
|
|
|
419 |
|
Average exchange rates |
|
can$ |
|
|
1.364 |
|
|
|
1.385 |
|
|
|
1.484 |
|
|
|
1.486 |
|
|
|
1.485 |
|
|
|
1.549 |
|
|
|
1.570 |
|
|
|
1.401 |
|
|
|
1.301 |
|
|
|
1.211 |
|
|
|
|
|
|
|
|
|
|
|
|
0.733 |
|
|
|
0.722 |
|
|
|
0.674 |
|
|
|
0.673 |
|
|
|
0.673 |
|
|
|
0.646 |
|
|
|
0.637 |
|
|
|
0.714 |
|
|
|
0.769 |
|
|
|
0.826 |
|
|
|
|
|
|
|
|
|
1 |
|
Source: Pulp & Paper Week and Random Lengths. As such, these prices do not
necessarily reflect our transaction prices. |
|
2 |
|
Based on Pulp & Paper Weeks Southern Bleached Hardwood Kraft pulp prices for Japan, increased
by an average differential of US$15/ADMT between Northern and Southern Bleached Hardwood Kraft
pulp prices. |
PRODUCTS
Outlook
In 2006, we intend to carry out our announced restructuring plan and continue to improve our
operations. Although we expect challenging market conditions in 2006, we are encouraged by recently
announced price increases for most of our key products.
Internal
Controls
As requested by the Sarbanes-Oxley Act enacted by the U.S. Congress in July 2002 and the rules
promulgated by the U.S. Securities and Exchange Commission (SEC) thereunder, we have filed with the
SEC certificates relating to, among others, the accuracy of the financial information contained in
our 2005 Annual Report, including our MD&A and annual financial statements and notes thereto, and
the adequacy of our procedures and controls relating to disclosure and financial reporting.
Additional
information, including our Annual Information Form, is available on SEDAR at www.sedar.com And Edgar at www.sec.gov/edgar.shtml
58
Domtar Inc.
2005
Annual Report
Consolidated
Financial Statements
MANAGEMENTS
STATEMENT OF RESPONSIBILITY
The consolidated financial statements contained in this Annual Report are the responsibility
of management, and have been prepared in accordance with Canadian generally accepted accounting
principles. Where necessary, management has made judgments and estimates of the outcome of events
and transactions, with due consideration given to materiality. Management is also responsible for
all other information in the Annual Report and for ensuring that this information is consistent,
where appropriate, with the information and data included in the consolidated financial
statements.
To discharge its responsibility, management maintains a system of internal controls to
provide reasonable assurance as to the reliability of financial information and the safeguarding
of assets.
The Corporations external auditors are responsible for auditing the consolidated financial
statements and giving an opinion thereon. In addition, the Corporation maintains a staff of
internal auditors whose functions include reviewing internal controls and their application on an
ongoing basis.
The Board of Directors carries out its responsibility relative to the consolidated financial
statements principally through its Audit Committee, consisting solely of independent directors,
which reviews the consolidated financial statements and reports thereon to the Board. The
Committee meets periodically with the external auditors, internal auditors and management to
review their respective activities and the discharge of each of their responsibilities. Both the
external auditors and the internal auditors have free access to the Committee, with or without
management, to discuss the scope of their audits, the adequacy of the system of internal controls
and the adequacy of financial reporting.
|
|
|
(signed)
|
|
(signed) |
|
|
|
RAYMOND ROYER
|
|
DANIEL BURON |
President and Chief Executive Officer
|
|
Senior Vice President
and Chief Financial Officer |
Montreal, Quebec |
|
|
February 22, 2006 |
|
|
AUDITORS REPORT
To the Shareholders of Domtar Inc.
We have audited the consolidated balance sheets of Domtar Inc. as at December 31, 2005 and 2004
and the consolidated statements of earnings, retained earnings and cash flows for each of the
years in the three-year period ended December 31, 2005. These financial statements are the
responsibility of the Corporations management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of Domtar Inc. as at
December 31, 2005 and 2004 and the results of
its operations and its cash flows for each of the years in the three-year period ended December
31, 2005 in accordance with Canadian generally accepted accounting principles.
(signed)
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Montreal, Quebec
February 22, 2006
CONSOLIDATED
FINANCIAL STATEMENTS
59
Domtar Inc.
2005
Annual Report
CONSOLIDATED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(IN MILLIONS OF CANADIAN DOLLARS,
UNLESS OTHERWISE NOTED) |
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
Sales
(note 2) |
|
|
4,259 |
|
|
|
4,966 |
|
|
|
5,115 |
|
|
|
5,167 |
|
Operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (note 2) |
|
|
3,716 |
|
|
|
4,333 |
|
|
|
4,381 |
|
|
|
4,335 |
|
Selling, general and administrative (note 2) |
|
|
250 |
|
|
|
292 |
|
|
|
306 |
|
|
|
319 |
|
Amortization |
|
|
322 |
|
|
|
375 |
|
|
|
368 |
|
|
|
385 |
|
Closure and restructuring costs (note 6) |
|
|
371 |
|
|
|
433 |
|
|
|
48 |
|
|
|
24 |
|
Impairment loss (note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
Net gains on disposals of property, plant and equipment |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(37 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,656 |
|
|
|
5,429 |
|
|
|
5,066 |
|
|
|
5,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss) |
|
|
(397 |
) |
|
|
(463 |
) |
|
|
49 |
|
|
|
(95 |
) |
Financing expenses (note 7) |
|
|
133 |
|
|
|
155 |
|
|
|
148 |
|
|
|
169 |
|
Amortization of deferred gain |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes |
|
|
(526 |
) |
|
|
(613 |
) |
|
|
(94 |
) |
|
|
(260 |
) |
Income tax recovery (note 8) |
|
|
(193 |
) |
|
|
(225 |
) |
|
|
(52 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(333 |
) |
|
|
(388 |
) |
|
|
(42 |
) |
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share (in
dollars) (note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(1.45 |
) |
|
|
(1.69 |
) |
|
|
(0.19 |
) |
|
|
(0.86 |
) |
Diluted |
|
|
(1.45 |
) |
|
|
(1.69 |
) |
|
|
(0.19 |
) |
|
|
(0.86 |
) |
|
CONSOLIDATED
RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(IN MILLIONS OF CANADIAN DOLLARS,
UNLESS OTHERWISE NOTED) |
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of yearas reported |
|
|
354 |
|
|
|
412 |
|
|
|
512 |
|
|
|
753 |
|
Cumulative effect of change in accounting policy (note 2) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of yearas restated |
|
|
354 |
|
|
|
412 |
|
|
|
509 |
|
|
|
753 |
|
Net loss |
|
|
(333 |
) |
|
|
(388 |
) |
|
|
(42 |
) |
|
|
(193 |
) |
Dividends on common shares |
|
|
(36 |
) |
|
|
(42 |
) |
|
|
(54 |
) |
|
|
(49 |
) |
Dividends on preferred shares |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings (deficit) at end of year |
|
|
(16 |
) |
|
|
(19 |
) |
|
|
412 |
|
|
|
509 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED
FINANCIAL STATEMENTS
60
Domtar Inc.
2005
Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
AS AT DECEMBER 31 |
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
(IN
MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) |
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
71 |
|
|
|
83 |
|
|
|
52 |
|
Receivables
(note 10) |
|
|
252 |
|
|
|
294 |
|
|
|
226 |
|
Inventories (note 11) |
|
|
613 |
|
|
|
715 |
|
|
|
723 |
|
Prepaid expenses |
|
|
9 |
|
|
|
11 |
|
|
|
12 |
|
Income and other taxes receivable |
|
|
14 |
|
|
|
16 |
|
|
|
17 |
|
Future
income taxes (note 8) |
|
|
33 |
|
|
|
38 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
992 |
|
|
|
1,157 |
|
|
|
1,117 |
|
Property,
plant and equipment
(note 12) |
|
|
3,117 |
|
|
|
3,634 |
|
|
|
4,215 |
|
Goodwill |
|
|
79 |
|
|
|
92 |
|
|
|
84 |
|
Other
assets (note 13) |
|
|
265 |
|
|
|
309 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,453 |
|
|
|
5,192 |
|
|
|
5,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness |
|
|
18 |
|
|
|
21 |
|
|
|
22 |
|
Trade and other payables (note 14) |
|
|
558 |
|
|
|
651 |
|
|
|
647 |
|
Income and other taxes payable |
|
|
25 |
|
|
|
29 |
|
|
|
32 |
|
Long-term debt due within one year (note 15) |
|
|
2 |
|
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603 |
|
|
|
703 |
|
|
|
709 |
|
Long-term
debt (note 15) |
|
|
1,936 |
|
|
|
2,257 |
|
|
|
2,026 |
|
Future
income taxes (note 8)
|
|
|
250 |
|
|
|
292 |
|
|
|
557 |
|
Other
liabilities and deferred credits
(note 16) |
|
|
284 |
|
|
|
331 |
|
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (note
17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares (note 18) |
|
|
31 |
|
|
|
36 |
|
|
|
39 |
|
Common shares (note 18) |
|
|
1,529 |
|
|
|
1,783 |
|
|
|
1,775 |
|
Contributed surplus (note 18) |
|
|
12 |
|
|
|
14 |
|
|
|
10 |
|
Retained earnings (deficit) |
|
|
(16 |
) |
|
|
(19 |
) |
|
|
412 |
|
Accumulated foreign currency translation adjustments (note 20) |
|
|
(176 |
) |
|
|
(205 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,380 |
|
|
|
1,609 |
|
|
|
2,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,453 |
|
|
|
5,192 |
|
|
|
5,681 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Approved by the Board:
|
|
|
|
|
|
(signed)
|
|
(signed) |
|
|
|
BRIAN M. LEVITT
Director
|
|
RAYMOND ROYER
Director |
CONSOLIDATED
FINANCIAL STATEMENTS
61
Domtar Inc.
2005
Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31 |
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
(IN
MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) |
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(333 |
) |
|
|
(388 |
) |
|
|
(42 |
) |
|
|
(193 |
) |
Non-cash items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and write-down of property, plant and equipment (note 6) |
|
|
589 |
|
|
|
687 |
|
|
|
379 |
|
|
|
408 |
|
Future income taxes (note 8) |
|
|
(204 |
) |
|
|
(238 |
) |
|
|
(75 |
) |
|
|
(81 |
) |
Amortization of deferred gain |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(4 |
) |
Closure and restructuring costs, excluding write-down
of property, plant and equipment (note 6) |
|
|
103 |
|
|
|
121 |
|
|
|
37 |
|
|
|
1 |
|
Impairment loss (note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 |
|
Refinancing expenses (note 7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Net gains on disposals of property, plant and equipment |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(37 |
) |
|
|
(2 |
) |
Other |
|
|
5 |
|
|
|
6 |
|
|
|
(8 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153 |
|
|
|
179 |
|
|
|
249 |
|
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in working capital and other items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables (note 10) |
|
|
(62 |
) |
|
|
(72 |
) |
|
|
(39 |
) |
|
|
71 |
|
Inventories |
|
|
(15 |
) |
|
|
(18 |
) |
|
|
(77 |
) |
|
|
4 |
|
Prepaid expenses |
|
|
2 |
|
|
|
3 |
|
|
|
8 |
|
|
|
(1 |
) |
Trade and other payables |
|
|
(29 |
) |
|
|
(34 |
) |
|
|
(39 |
) |
|
|
(47 |
) |
Income and other taxes |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
20 |
|
|
|
(2 |
) |
Early settlement of interest rate swap contracts (note 19) |
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
Other |
|
|
(17 |
) |
|
|
(20 |
) |
|
|
(8 |
) |
|
|
(17 |
) |
Payments of closure and restructuring costs, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of proceeds on disposition |
|
|
(38 |
) |
|
|
(44 |
) |
|
|
(12 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
|
|
(189 |
) |
|
|
(127 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided from (used for) operating activities |
|
|
(9 |
) |
|
|
(10 |
) |
|
|
122 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(140 |
) |
|
|
(163 |
) |
|
|
(204 |
) |
|
|
(236 |
) |
Proceeds from disposals of property, plant and equipment |
|
|
14 |
|
|
|
16 |
|
|
|
41 |
|
|
|
11 |
|
Business
acquisitions (note 5) |
|
|
(32 |
) |
|
|
(37 |
) |
|
|
(19 |
) |
|
|
(11 |
) |
Other |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for investing activities |
|
|
(160 |
) |
|
|
(187 |
) |
|
|
(183 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
|
(48 |
) |
|
|
(56 |
) |
|
|
(56 |
) |
|
|
(45 |
) |
Change in bank indebtedness |
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
|
(4 |
) |
Change in revolving bank credit, net of expenses |
|
|
60 |
|
|
|
70 |
|
|
|
105 |
|
|
|
22 |
|
Issuance of long-term debt, net of expenses |
|
|
413 |
|
|
|
482 |
|
|
|
2 |
|
|
|
617 |
|
Repayment of long-term debt |
|
|
(230 |
) |
|
|
(268 |
) |
|
|
(8 |
) |
|
|
(691 |
) |
Premium on redemption of long-term debt |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
Common shares issued, net of expenses |
|
|
6 |
|
|
|
7 |
|
|
|
19 |
|
|
|
15 |
|
Redemptions of preferred shares |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided from (used for) financing activities |
|
|
194 |
|
|
|
226 |
|
|
|
64 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
25 |
|
|
|
29 |
|
|
|
3 |
|
|
|
14 |
|
Translation adjustments related to cash and cash equivalents |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(4 |
) |
Cash and cash equivalents at beginning of year |
|
|
44 |
|
|
|
52 |
|
|
|
48 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
|
71 |
|
|
|
83 |
|
|
|
52 |
|
|
|
48 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
62
Domtar Inc.
2005
Annual Report
Notes
to Consolidated Financial Statements
December 31, 2005 (in millions of Canadian dollars, unless otherwise noted)
NOTE 1
Summary
of significant accounting policies
The consolidated financial statements are expressed in Canadian dollars and have been prepared
in accordance with Canadian
generally accepted accounting principles (Canadian GAAP). These financial statements differ in
certain respects from those
prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) and
are not intended to provide
certain disclosures which would typically be found in financial statements prepared in accordance
with U.S. GAAP. The significant
differences are described in Note 25. These consolidated financial statements are dated February
22, 2006.
BASIS
OF CONSOLIDATION
The consolidated financial statements include the accounts of Domtar Inc. and its subsidiaries
(the Corporation) as well as its joint
ventures (collectively Domtar). Investments over which the Corporation exercises significant
influence are accounted for using
the equity method. The Corporations interests in joint ventures are accounted for using the
proportionate consolidation method.
USE OF
ESTIMATES
The consolidated financial statements have been prepared in conformity with Canadian GAAP,
which require management to
make estimates and assumptions that affect the reported amounts of revenues and expenses during the
year, the reported amounts
of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements.
On an ongoing basis, management reviews its estimates, including those related to environmental
matters, useful lives, impairment
of long-lived assets and goodwill, pension and other employee future benefit plans, income taxes
and asset retirement obligations,
based on currently available information. Actual results could differ from those estimates.
TRANSLATION
OF FOREIGN CURRENCIES
Self-sustaining
foreign operations
For foreign subsidiaries that are considered financially and operationally self-sustaining, the
current rate method of translation
of foreign currencies has been used. Under this method, assets and liabilities are translated into
Canadian dollars at the rate in
effect at the balance sheet date and revenues and expenses are translated at the average exchange
rates during the year. All gains
and losses arising from the translation of the financial statements of these foreign subsidiaries
are included in the Accumulated
foreign currency translation adjustments account under Shareholders equity.
Foreign
currency transactions and integrated foreign operations
For foreign currency transactions and foreign subsidiaries that are considered financially and
operationally integrated, the temporal
method of translation of foreign currencies has been used. Monetary items are translated at the
rate in effect at the balance sheet
date, non-monetary items are translated at their historical rate (as well as the related
amortization) and revenues and expenses are
translated at the rate in effect at the transaction date or at the average exchange rates during
the year as appropriate. Translation
gains and losses, except those on long-term debt, are included in Selling, general and
administrative expenses.
Foreign
currency long-term debt
For the Corporations long-term debt designated as a hedge of the net investment in
self-sustaining foreign subsidiaries, exchange gains
and losses are included in the Accumulated foreign currency translation adjustments account under
Shareholders equity. Prior to
the fourth quarter of 2004, a portion of the foreign currency denominated long-term debt of the
Corporation was designated as a hedge
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
63
Domtar Inc.
2005
Annual Report
of future U.S. dollar revenue stream and exchange gains and losses were deferred and will be
recognized when the designated revenue
is earned or when it becomes probable that the forecasted transaction will not occur, as the hedge
then ceases to be effective.
Norampac Inc. and its subsidiaries (Norampac) (a 50-50 joint venture with Cascades Inc.) has also
designated a portion of
its U.S. dollar denominated long-term debt as a hedge of its net investment in self-sustaining
foreign subsidiaries. For such debt
designated as a hedge of the net investment in self-sustaining foreign subsidiaries, exchange gains
and losses are included in
the Accumulated foreign currency translation adjustments account in Shareholders equity. For
the remaining U.S. dollar
denominated long-term debt, exchange gains and losses are included in Financing expenses.
VARIABLE
INTEREST ENTITIES
Variable interest entities (VIEs) are entities in which equity investors do not have a
controlling financial interest or the equity
investment at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support
provided by other parties. Domtar consolidates the VIE if Domtar is considered the VIEs primary
beneficiary, defined as the party
that receives the majority of the expected residual returns and/or that absorbs the majority of the
entitys expected losses.
REVENUE
RECOGNITION
Domtar recognizes revenue when persuasive evidence of an arrangement exists, when goods are
shipped, when there are no
uncertainties surrounding product acceptance, when the related revenue is fixed or determinable,
when collection is considered
reasonably assured and when the customer takes title and assumes the majority of the risks and
rewards of ownership.
INCOME
TAXES
Domtar uses the asset and liability method of accounting for income taxes. Under this method,
future tax assets and liabilities are
determined according to differences between the carrying amounts and tax bases of the assets and
liabilities. The change in the net
future tax asset or liability is included in earnings and in the Accumulated foreign currency
translation adjustments account under
Shareholders equity. Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates and laws
expected to apply in the years in which the assets and liabilities are expected to be recovered or
settled. Domtar does not provide
for income taxes on undistributed earnings of foreign subsidiaries that are not expected to be
repatriated in the foreseeable future.
CASH
AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with original maturities of
less than three months and are
presented at cost.
RECEIVABLES
Receivables are recorded at cost net of a provision for doubtful accounts that is based on
expected collectibility. Gains or losses
on securitization of receivables are calculated as the difference between the carrying amount of
the receivables sold and the sum
of the cash proceeds on sale and the fair value of the retained subordinate interest in such
receivables on the date of transfer. Fair
value is determined on a discounted cash flow basis. Costs related to the sales of receivables are
recognized in earnings in the
period when the sale occurs.
INVENTORIES
Inventories of operating and maintenance supplies and raw materials are valued at the lower
of average cost and replacement
cost. Work in process and finished goods are valued at the lower of average cost and net realizable
value,
and include the cost of
raw materials, direct labor and manufacturing overhead expenses.
PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated amortization including
asset impairment write-down. Interest
costs are capitalized for capital projects in excess of $10 million and having a duration in excess
of one year. For timber limits
and timberlands, amortization is calculated using the unit of production method. For all other
assets, amortization is calculated
using the straight-line method over the estimated useful lives of the assets. Buildings are
amortized over periods of 10 to 40 years
and machinery and equipment over periods of 3 to 20 years. The amortization expense is reported net
of the amount of the
amortization of deferred credits related to property, plant and equipment. No amortization is
recorded on assets under construction.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
64
Domtar Inc.
2005
Annual Report
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT
OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in
circumstances indicating that the
carrying value of the assets may not be recoverable, as measured by comparing their net book value
to the estimated undiscounted
future cash flows generated by their use. Impaired assets are recorded at fair value, determined
principally by using discounted
future cash flows expected from their use and eventual disposition.
GOODWILL
Goodwill is not amortized and is subject to an annual impairment test, or more frequently if events
or changes in circumstances
indicate that it might be impaired. Testing for impairment is accomplished mainly by determining
whether the fair value of a
segment, based upon discounted cash flows, exceeds the net carrying amount of that segment as of
the assessment date. If the
fair value is greater than the net carrying amount, no impairment is necessary. In the event that
the net carrying amount exceeds
the sum of the discounted cash flows, a second test must be performed whereby the fair value of the
segments goodwill must be
estimated to determine if it is less than its net carrying amount. Fair value of goodwill is
estimated in the same way as goodwill
was determined at the date of the acquisition in a business combination, that is, the excess of the
fair value of the segment over
the fair value of the identifiable net assets of the segment.
OTHER
ASSETS
Other assets are recorded at cost. Expenses and discounts related to the issuance of
long-term debt are deferred and amortized
on a straight-line basis over the term of the related obligation.
DEFERRED
CREDITS
Deferred credits comprise the deferred gain on the contribution of net assets to Norampac,
the deferred net gain on early settlements
of interest rate swap contracts and grants and investment tax credits obtained upon the acquisition
of property, plant and
equipment. The deferred gain on the contribution of net assets to Norampac is amortized on a
straight-line basis over 15 years.
The deferred net gain on early settlements of interest rate swap contracts is amortized as an
adjustment to Financing expenses
over the initially designated periods of the respective interest payments. Investment tax credits
are amortized on the same basis
as the related property, plant and equipment.
ENVIRONMENTAL
COSTS
Environmental expenditures for effluent treatment, air emission, landfill operation and
closure, asbestos containment and removal,
bark pile management, silvicultural activities and site remediation (together referred to as
environmental matters) are expensed or
capitalized depending on their future economic benefit. In the normal course of business, Domtar
incurs certain operating costs
for environmental matters that are expensed as incurred. Expenditures for property, plant and
equipment that prevent future
environmental impacts are capitalized and amortized on a straight-line basis over 10 to 40 years.
Provisions for environmental
matters are not discounted and are recorded when remediation efforts are likely and can be
reasonably determined.
ASSET
RETIREMENT OBLIGATIONS
Asset retirement obligations are recognized, at fair value, in the period in which Domtar
incurs a legal obligation associated to the
retirement of an asset. Conditional asset retirement obligations are recognized, at fair value,
when the fair value of the liability
can be reasonably estimated. The associated costs are capitalized as part of the carrying value of
the related
asset and depreciated
over its remaining useful life. The liability is accreted using a credit adjusted risk-free
interest rate.
STOCK-BASED
COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Domtar uses the fair value based approach of accounting for stock-based payments to directors
and for stock options granted to
its employees. Any consideration paid by plan participants on the exercise of share options or the
purchase of shares is credited
to stated capital together with any related stock-based compensation expense.
Stock-based compensation expense is recognized over the vesting period of the options, share
purchase rights and bonus shares.
For employee share purchase discounts, compensation expense is recognized when employees purchase
shares. The contributed
surplus component of the stock-based compensation is transferred to capital stock upon the issuance
of common shares.
Deferred Share Units are amortized over their vesting periods and remeasured at each reporting
period, until settlement, using
the quoted market value. The cost of the common shares acquired by the Corporation under the
Restricted Stock Plan is amortized
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
65
Domtar Inc.
2005
Annual Report
over the restricted period. Deferred Share Units and common shares acquired under the
Restricted Stock Plan are accounted for
in compensation expense, in Other liabilities and deferred credits and Other assets.
DERIVATIVE
INSTRUMENTS
Derivative instruments are contracts that require or provide an option to exchange cash flows
or payments determined by applying
certain rates, indices or changes therein to notional contract amounts. Derivative instruments are
utilised by Domtar in the
management of its foreign currency, price risk and interest rate exposures. Except for two interest
rate swap contracts of Norampac,
which were assumed through business acquisitions, Domtar does not use derivative instruments for
speculative purposes.
Derivatives designated for hedge accounting
In order for a derivative to qualify for hedge accounting, the hedge relationship must be
designated and formally documented
at its inception, outlining the particular risk management objective and strategy, the specific
asset, liability or cash flow being
hedged, as well as how effectiveness is assessed. The derivative must be effective in accomplishing
the objective of offsetting
either changes in the fair value or cash flow attributable to the risk being hedged both at
inception and over the term of the
hedging relationship.
When derivative instruments have been designated within a hedge relationship and are highly
effective in offsetting the identified
risk characteristics of specific financial assets and liabilities, or group of financial assets and
liabilities, hedge accounting is applied
to these derivative instruments. Hedge accounting requires that gains, losses, revenues and
expenses of a hedging item be recognized
in the same period that the associated gains, losses, revenues and expenses of the hedged item are
recognized.
Realized and unrealized gains or losses associated with hedging instruments for which the
underlying hedged items are either sold,
paid or terminated are recognized to earnings. Realized and unrealized gains or losses when hedging
instruments have ended or ceased
to be effective prior to their maturity are deferred and recognized in earnings concurrently with
the recognition of the item being hedged.
Domtar hedges its foreign exchange exposure on anticipated sales denominated in U.S. dollars
through the use of options
and forward contracts. Resulting gains and losses, including premiums on options, are recognized
when the designated sale is
recognized and are included in Sales.
Domtar hedges its exposure to price risk associated with purchases of bunker oil and electricity
through the use of cash settled commodity
swaps. Resulting gains and losses are recognized when the designated purchase is recognized and are
included in Cost of sales.
Domtar hedges its exposure to interest rate on its long-term debt through the use of interest rate
swap contracts. Amounts
accounted for under interest rate swap contracts are included in Financing expenses.
Derivatives not designated for hedge accounting
For the exposure to price risk associated with sales of Northern Bleached Softwood Kraft
(NBSK) pulp swap contracts, as well as
old corrugated containers, unbleached kraft linerboard and semi-chemical medium paper, Domtar does
not meet the requirements
for hedge accounting. As a result, Domtar accounts for these contracts at their fair value with
resulting gains and losses being
included in Selling, general and administrative expenses.
For the two interest rate swap contracts of Norampac, which are used for speculative purposes, the
change in their fair value
is recorded in Selling, general and administrative expenses.
PENSIONS
Domtars plans include funded and unfunded defined benefit pension plans and defined
contribution plans. Domtar accrues the
cost of defined benefit plans as determined by independent actuaries. The net periodic benefit cost
includes the following:
the cost of pension benefits provided in exchange for employees services rendered during the
year
the interest cost of pension obligations
the expected long-term return on pension fund assets based on a market-related value determined
using a five-year moving
average market value for equity securities and fair value for other asset classes
gains or losses on settlements and curtailments
the straight-line amortization of past service costs and plan amendments over the average
remaining service period of
approximately 12 years of the active employee group covered by the plans
the amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of
the greater of the accrued
benefit obligation or market-related value of plan assets at the beginning of the year over the
average remaining service period
of approximately 12 years of the active employee group covered by the plans.
The defined benefit plans obligations are determined in accordance with the projected benefit
method prorated on services.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
66
Domtar Inc.
2005
Annual Report
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
EMPLOYEE FUTURE BENEFIT PLANS
Domtar accrues the cost of post-retirement benefits other than pensions as determined by
independent actuaries. These benefits,
which are funded by Domtar as they become due, include life insurance programs, medical and dental
benefits and short-term and
long-term disability programs. Domtar amortizes the cumulative unrecognized net actuarial gains and
losses in excess of 10% of
the accrued benefit obligation at the beginning of the year over the average remaining service
period of approximately 14 years
of the active employee group covered by the plans.
INVESTMENT
TAX CREDITS
Investment tax credits are recognized in earnings as a reduction of research and development
expenses when Domtar has made
the qualifying expenditures and has a reasonable assurance that the credits will be realized.
DISCLOSURE
OF GUARANTEES
A guarantee is a contract or an indemnification agreement that contingently requires Domtar
to make payments to the other party
of the contract or agreement, based on changes in an underlying item that is related to an asset, a
liability or an equity security of
the other party or on a third partys failure to perform under an obligating agreement. It could
also be an indirect guarantee of the
indebtedness of another party, even though the payment to the other party may not be based on
changes in an underlying item that
is related to an asset, a liability or an equity security of the other party.
COUNTERVAILING
AND ANTIDUMPING DUTIES
Cash deposits for countervailing and antidumping duties (lumber duties) are expensed as the
deposits for softwood lumber export
sales to the United States are made. The lumber duties expense is presented in Cost of sales.
Recoveries of cash deposits for
lumber duties are only recognized when the amounts are reasonably measurable and their recovery is
virtually certain.
NOTE 2
Accounting changes
2005
CONSOLIDATION
OF VARIABLE INTEREST ENTITIES
On January 1, 2005, Domtar adopted the new Canadian Institute of Chartered Accountants
(CICA) Accounting Guideline No. 15
(AcG-15) Consolidation of Variable Interest Entities. AcG-15 has been revised to harmonize with
the new Financial Accounting
Standards Board (FASB) Interpretation No. 46 (FIN 46R) Consolidation of Variable Interest
Entities. AcG-15 requires that an
enterprise holding other than a voting interest in a variable interest entity (VIE) could, subject
to certain conditions, be required
to consolidate the VIE if it is considered its primary beneficiary whereby it would absorb the
majority of the VIEs expected losses
and/or receive the majority of its expected residual returns. In addition, AcG-15 prescribes
certain disclosures for VIEs that are not
consolidated but in which an enterprise has a significant variable interest. Effective January 1,
2004, Domtar adopted FIN 46R on a
U.S. GAAP basis. There was no initial impact on the consolidated financial statements under U.S.
GAAP following the adoption of this
guideline (Note 25). The adoption of this guideline has no impact on the consolidated financial
statements under Canadian GAAP.
2004
GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENT
PRESENTATION
On January 1, 2004, Domtar adopted the new CICA Handbook Section 1100 Generally Accepted
Accounting Principles
recommendations and Section 1400 General Standards of Financial Statement Presentation
recommendations. Section 1100
describes what constitutes GAAP and its sources and provides guidance on sources to consult when
selecting accounting policies
and determining appropriate disclosures when a matter is not dealt with explicitly in the primary
sources of GAAP, thereby
recodifying the Canadian GAAP hierarchy. Section 1400 provides general guidance on financial
statement presentation and further
clarifies what constitutes fair presentation in accordance with GAAP.
Accordingly, Domtar reclassified delivery costs as well as countervailing and antidumping duties on
exports of softwood
lumber to the United States from Sales to Cost of sales. As of December 31, 2005, delivery
costs amounted to $431 million
(2004-$411 million;
2003-$345 million) and countervailing and antidumping duties amounted to $54
million (2004-$69 million;
2003-$45 million).
The adoption of these recommendations had no other significant impact on the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
67
Domtar Inc.
2005
Annual Report
HEDGING
RELATIONSHIPS
On January 1, 2004, Domtar adopted the new CICA Accounting Guideline No. 13 (AcG-13) Hedging
Relationships.
This
accounting guideline addresses the identification, designation, documentation and effectiveness of
the hedging relationships for
the purpose of applying hedge accounting. In addition, it deals with the discontinuance of hedge
accounting and establishes
conditions for applying hedge accounting. Under this guideline, documentation of the information
related to hedging relationships
is required and the effectiveness of the hedges must be demonstrated and documented. Since January
1, 2004, Domtar had in
place all necessary hedge documentation to apply hedge accounting for interest rate swap contracts,
forward foreign exchange
contracts, foreign currency options and bunker oil and electricity swap contracts.
For the exposure to price risk associated with sales of NBSK pulp swap contracts, as well as old
corrugated containers, unbleached
kraft linerboard and semi-chemical medium paper swap contracts, Domtar does not meet the Canadian
GAAP criteria for hedge
effectiveness. As a result, Domtar accounts for these contracts at their fair value. The fair value
of these contracts is re-evaluated
each quarter and a gain or loss is recorded in the Consolidated earnings. Notwithstanding the fact
that these commodity swap
contracts do not meet the Canadian GAAP criteria under AcG-13, Domtar believes, from an operational
and a cash flow point
of view, that these contracts are effective in managing its risk. For the year ended December 31,
2005, a loss of $4 million, $0.02
per common share, is included in Selling, general and administrative expenses (2004-loss of $2
million, $0.01 per common
share), representing the loss on the marked to market of the commodity swap contracts.
ASSET RETIREMENT OBLIGATIONS
On January 1,2004, Domtar adopted retroactively with restatement of prior periods the new
CICA Handbook Section 3110 Asset
Retirement Obligations, which requires entities to record a liability at fair value, in the period
in which it incurs a legal obligation
associated to the retirement of an asset. The associated costs are capitalized as part of the
carrying value of the related asset and
depreciated over its remaining useful life. The liability is accreted using a credit adjusted
risk-free interest rate. Section 3110 is
analogous to the requirements of Statement of Financial Accounting Standards (SFAS) 143 Accounting
for Asset Retirement
Obligations, which was adopted for U.S. GAAP purposes on January 1, 2003. Asset retirement
obligations in connection with
the adoption of Section 3110 were primarily linked to landfill capping obligations, asbestos
removal obligations and demolition
of certain abandoned buildings. For such assets, a liability is initially recognized in the period
in which sufficient information
exists to estimate a range of possible settlement dates. The adoption of Section 3110 has decreased
the December 31, 2003
retained earnings by $3 million, $0.01 per common share, decreased assets by $7 million and
decreased liabilities by $4 million.
EMPLOYEE
FUTURE BENEFITS
On January 1, 2004, the CICA amended Handbook Section 3461 Employee Future Benefits
recommendations. Section 3461
requires additional disclosures about the assets, cash flows and net periodic benefit cost of
defined benefit pension plans and
other employee future benefit plans. The new annual disclosures are effective for years ending on
or after June 30, 2004. Domtar
adopted the amendments of Section 3461 and provided additional disclosures of the defined benefit
pension plans and other
employee future benefit plans in Notes 22 and 23, respectively.
2003
SHARE
PURCHASE FINANCING
On January 1, 2003, Domtar prospectively adopted the new CICA Emerging Issues Committee
Abstract 132 (EIC-132) Share
Purchase Financing recommendations relating to share purchase loans (the loans) receivable.
Accordingly, loans as at January 1,
2003, amounting to $11 million, were reclassified from Other assets to Common shares and
interest revenue was treated as
a reduction of dividends. The common shares purchased with these loans are held in trust as
security for the loans. The loans are
interest bearing at the dividend rate and have defined repayment terms not exceeding 10 years.
These common shares were not
considered as being outstanding for the calculation of the basic earnings per share but were
considered in the calculation of the
diluted earnings per share. The adoption of these recommendations had no significant impact on the
diluted earnings per share
for the year ended December 31, 2003.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
68
Domtar Inc.
2005
Annual Report
NOTE 2. ACCOUNTING CHANGES (CONTINUED)
IMPAIRMENT
OF LONG-LIVED ASSETS
On January 1, 2003, Domtar early adopted the new CICA Handbook Section 3063 Impairment of
Long-lived Assets
recommendations. These recommendations provide accounting guidance for the recognition, measurement
and disclosure of
impairment of long-lived assets, including property, plant and equipment and intangible assets with
finite useful lives. They require
the recognition of an impairment loss for a long-lived asset when events or changes in
circumstances cause its carrying value to
exceed the total undiscounted future cash flows expected from its use and eventual disposition. The
impairment loss is calculated
by deducting the fair value of the asset from its carrying value. This change in accounting policy
has been applied prospectively.
Domtar reviews the carrying amount of the long-lived assets when events or changes in circumstances
indicate that the carrying
value of the assets may be not recoverable through future operations (Note 3).
EXIT
AND DISPOSAL ACTIVITIES
Disposal
of long-lived assets and discontinued operations
Domtar prospectively adopted the revised CICA Handbook Section 3475 Disposal of Long-lived
Assets and Discontinued
Operations recommendations for disposal activities initiated on or after May 1, 2003, as required
by the transitional provisions.
These recommendations establish standards for the recognition, measurement, presentation and
disclosure of disposals of long-
lived assets, as well as for the presentation and disclosure of discontinued operations. The
adoption of these recommendations
had no significant impact on the December 31, 2003, consolidated financial statements.
Severance,
termination benefits and costs associated with exit and disposal
activities
Domtar prospectively adopted the CICA Emerging Issues Committee Abstract 134 (EIC-134)
Accounting for Severance and
Termination Benefits recommendations and Abstract 135 (EIC-135) Accounting for Costs Associated
with Exit and Disposal
Activities (Including Costs Incurred in a Restructuring) recommendations relating to exit or
disposal activities initiated after
March 31, 2003, as required by their transitional provisions. These recommendations provide
guidance on the timing of
recognition and measurement of liabilities, as well as disclosures for the various types of
severance and termination benefits
related to the termination of employees services prior to normal retirement and costs associated
with an exit or disposal activity.
Under these recommendations, liabilities for these costs are to be recognized in the period when
they are incurred and measured
at their fair value.
IMPACT
OF ACCOUNTING PRONOUNCEMENTS NOT YET IMPLEMENTED
FINANCIAL
INSTURMENTS
In April 2005, the CICA issued three new Handbook Sections in relation with financial
instruments: Section 3855 Financial
Instruments-Recognition and Measurement, Section 3865 Hedges and Section 1530 Comprehensive
Income. These Sections
apply to fiscal years beginning on or after October 1, 2006.
Section 3855 expands on Handbook Section 3860 Financial Instruments-Disclosure and Presentation,
by prescribing when
a financial instrument is to be recognized on the balance sheet and at what amount. It also
specifies how financial instrument
gains and losses are to be presented.
Section 3865 provides alternative accounting treatments to those found in Section 3855 for entities
who choose to designate
qualifying transactions as hedges for accounting purposes. It replaces and expands on AcG-13
Hedging Relationships, and
the hedging guidance in Section 1650 Foreign Currency Translation by specifying how hedge
accounting is applied and what
disclosures are necessary when it is applied.
Section 1530 introduces a new requirement to present certain revenues, expenses, gains and losses,
that otherwise would not
be immediately recorded in income, in a comprehensive income statement with the same prominence as
other statements that
constitute a complete set of financial statements.
The application of these new Handbook Sections for financial instruments is not expected to have a
significant effect on Domtars
financial position, earnings or cash flows but will require Domtar to present a new statement
entitled Comprehensive Income.
IMPLICIT
VARIABLE INTEREST
In October 2005, the CICA Emerging Issues Committee issued Abstract 157 (EIC-157) Implicit
Variable Interest under AcG-15.
EIC-157 clarifies that an implicit variable interest is an implied pecuniary interest in an entity
that changes with changes in the
fair value of that entitys net assets exclusive of variable interest. An implicit variable
interest is similar to an explicit variable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
69
Domtar Inc.
2005
Annual Report
interest except that it involves the absorbing and/or receiving of variability indirectly
from the entity, rather than directly. The
determination of whether an implicit variable interest exists is a matter of judgment that depends
on the relevant facts and
circumstances. EIC-157 will be effective for Domtar in the first quarter of 2006. EIC-157 is
substantially the same as the new
FASB Staff Position
No. 46R-5 (FSP FIN 46R-5) Implicit Variable Interests under FASB
Interpretation No. 46R, Consolidation
of Variable Interest Entities under U.S. GAAP. Effective in the second quarter of 2005, Domtar
adopted FSP FIN 46R-5 on a U.S.
GAAP basis. There was no initial impact on the consolidated financial statements under U.S. GAAP
following the adoption of
these recommendations (Note 25). Domtar does not expect these recommendations to have an initial
impact on its consolidated
financial statements under Canadian GAAP.
EARNINGS
PER SHARE
In November 2005, the CICA issued proposed amendments to Section 3500 Earnings per Share.
Proposed Section 3500 has
been revised to harmonize with amendments being made under U.S. GAAP to SFAS 128 Earnings per
Share. The proposed
amendments would require that shares that will be issued upon conversion of a mandatorily
convertible instrument to be included
in the weighted-average number of ordinary shares outstanding used in computing basic earnings per
share from the date
when conversion becomes mandatory. The proposed change will also amend the computational guidance
in Section 3500 for
calculating the number of incremental shares included in diluted earnings per share when applying
the treasury stock method.
Also, it would eliminate the provisions that allow an entity to rebut the assumption that contracts
with the option of settling
in either cash or common shares, at the issuers option, will be settled in common shares. The
effective date will be determined
upon issuance of the final standards, expected in the first quarter of 2006. However, the effective
date should correspond with
the effective date of SFAS 128. The application of the proposed amendments of Section 3500 is not
expected to have a significant
effect on Domtars calculation of earnings per share.
NOTE 3
Measurement
uncertainty
IMPAIRMENT
OF LONG-LIVED ASSETS
Domtar reviews the carrying amount of long-lived assets when events or changes in
circumstances indicate that the carrying value of
the assets may not be recoverable through future operations. This is accomplished by determining
whether projected undiscounted
future cash flows from operations exceed the net carrying amount of the assets as of the assessment
date (Step I test). Impaired
assets are recorded at fair value, determined principally by using discounted future cash flows
expected from their use and eventual
disposition (Step II test). Estimates of future cash flows and fair value require judgment and may
change over time.
During the fourth quarter of 2005, as a result of operating losses, Domtar conducted Step I
impairment tests on most of the
Canadian Pulp and Paper manufacturing facilities, the Wood segment and three mills in the Packaging
segment.
Estimates of future cash flows used to test the recoverability of a long-lived asset included key
assumptions related to trend
prices and the 10 to 20 years forecasted exchange rate for the U.S. dollar. Other significant
assumptions are the estimated useful
life of the long-lived assets and the effect of the ongoing softwood lumber dispute with the United
States.
The trend prices were based on an analysis of external price trends, including Resource Information
Systems, Inc. (RISI), as
well as normalized pulp, paper, wood and unbleached kraft linerboard pricing over a business cycle
at the mills subjected to the
impairment tests.
The forecasted Canadian-U.S. foreign exchange rate assumptions were based on independent market
information, as well as
analysis of historical data, trends and cycles. Management expects the 10 to 20 years average rate
to be between CAN$1.00 =US$0.74
and CAN$1.00 = US$0.75.
Domtar concluded that the recognition of an impairment loss for the business units analyzed was not
required.
Certain pulp and paper and packaging mills as well as the Wood segment are particularly sensitive
to the key assumptions. Given the
inherent imprecision and corresponding importance of the key assumptions used in the impairment
test, it is reasonably possible
that changes in future conditions may lead management to use different key assumptions, which could
require a material change
in the net carrying amount of these assets. The total net carrying amount of these mills was $750
million as at December 31, 2005.
As a result of the impairment tests performed in December 2003, Domtar recorded an impairment loss
of $201 million related
to the impairment of the Lebel-sur-Quévillon pulp mill.
In the Step II test, performed in 2003 on the Lebel-sur-Quévillon pulp mill only, the assumptions
used to determine the discounted
future cash flows (fair value) of the business unit were the same as those used in the Step I
tests, except that future cash flows used
were on an after-tax basis and were discounted at the risk-adjusted weighted average cost of
capital.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
70
Domtar Inc.
2005
Annual Report
NOTE 4
United States dollar amounts
The consolidated financial statements are expressed in Canadian dollars and, solely for the
convenience of the reader, the 2005 consolidated financial statements and the tables of certain
related notes have been translated into U.S. dollars at the year-end rate of CAN$1.00 = US$0.8577.
This translation should not be construed as an application of the recommendations relating to the
accounting for foreign currency translation, but rather as supplemental information for the
reader.
NOTE 5
Business acquisitions
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
In 2005, Norampac acquired businesses
for a cash consideration of $75 million
(the Corporations proportionate share
being $38 million).
|
|
In 2004, Norampac acquired
businesses for a cash consideration
of $36 million (US$28 million) (the
Corporations proportionate share
being $18 million (US$14 million)).
|
|
In 2003, Norampac acquired businesses
for a cash consideration of $21 million
(US$14 million) and a transfer of assets
of $12 million (US$8 million) (the
Corporations proportionate share
being $11 million (US$7 million) and
$6 million (US$4 million), respectively). |
|
|
|
|
|
GOODWILL
|
|
GOODWILL
|
|
GOODWILL |
In 2005, goodwill increased by
$8 million, consisting of a $10 million
increase related to business acquisitions
completed by Norampac and a
$2 million decrease related to foreign
currency exchange rate changes.
|
|
In 2004, goodwill increased by
$7 million related to business acquisitions completed by Norampac.
|
|
In 2003, goodwill decreased by
$2 million, consisting of a $2 million
increase related to business acquisitions
completed by Norampac and a
$4 million decrease related to
foreign currency exchange rate changes. |
|
|
|
|
NOTE 6
Closure and restructuring costs
In 2005, Domtars management announced a series of targeted measures aimed at returning the
Corporation to profitability. The plan includes closures of the Cornwall and Ottawa, Ontario paper
mills, the Grand-Remous and Malartic, Quebec sawmills, the sale of the Vancouver, British Columbia
paper mill and cost-cutting initiatives. This workforce reduction and restructuring plan is in
addition to the plans announced in 2004, which covered the Corporations paper and merchant
operations in Canada and the United States. The total charge for the year ended December 31, 2005
amounted to $416 million (2004$42 million), including severance and termination costs of $66
million (2004$39 million), $302 million (2004nil) related to the write-down of property, plant
and equipment to their estimated net realizable value, $19 million (2004nil) related to the
write-down of certain inventory items and spare parts to their net recoverable amounts, $11 million
(2004nil) for environmental costs, a reversal of $3 million (2004nil) related to a revision of
estimates regarding asset retirement obligations, $12 million (2004$2 million) for pension
curtailment costs, and $6 million (2004nil) of other closure related costs. In addition, training
costs of $3 million were incurred for the year ended
December 31, 2005 (2004$1 million). Further
costs related to the plans expected to be incurred over 2006 and thereafter include pension
settlement costs of $58 million, other employee related costs of $5 million, dismantling costs of
$12 million, and various other costs of $2 million, which will be expensed as incurred. As at
December 31, 2005, the balance of the provision was
$94 million (2004$32 million).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
71
Domtar Inc.
2005
Annual Report
Estimates of cash flows and fair value relating to closures and restructurings require
judgment. Closure and restructuring costs are based on managements best estimates of future
events at December 31, 2005. Closure costs and restructuring estimates are dependent on future
events. Although Domtar does not anticipate significant changes, the actual costs may differ from
these estimates due to subsequent developments such as the results of environmental studies, the
ability to find a buyer for assets set to be dismantled and demolished and other business
developments. As such, additional costs and further working capital and property, plant and
equipment write-downs may be required in future periods.
In 2005, Norampacs management decided to permanently shut down one paper machine at its Red
Rock, Ontario containerboard plant and also decided to close three corrugated products plants
located in Concord, Ontario, Montreal, Quebec and Buffalo, New York. The total charge for the year
ended December 31, 2005, representing the Corporations proportionate share, amounted to $17
million, including severance and termination costs of $5 million, $9 million related to the
write-down of property, plant and equipment to their estimated net realizable value, $1 million
related to the write-down of certain inventory items and spare parts to their net recoverable
amounts, $1 million for pension curtailment costs and $1 million for other closure related costs.
As at December 31, 2005, the balance of the provision was $2 million, representing the
Corporations proportionate share.
In 2004, Domtar sold the St. Catharines, Ontario paper mill, which was closed in 2002, for $1
million to a third party who agreed to purchase it in its existing state. As such, the majority of
the remaining closure cost provision was reversed, leaving a balance
of $1 million (2004$1
million) as at December 31, 2005, representing the remaining severance and commitments and
contingencies related to environmental matters.
In 2004, Domtars management decided to permanently shut down the sawmill located in
Chapleau, Ontario, resulting in a charge of $14 million in December 2004, including $11 million
related to the write-down of property, plant and equipment to their estimated net realizable value
and $3 million related to a provision for severance and related costs. As at December 31, 2005,
the balance of the provision was $2 million.
In 2003, Domtars management decided to permanently shut down one paper machine at the
Vancouver, British Columbia paper mill. The decision to close the paper machine resulted in a
charge of $29 million in December 2003, including $23 million related to the write-down of
property, plant and equipment to their estimated net realizable value, $5 million related to a
provision for severance and related costs, which were contractual obligations as at the time of
the decision, and $1 million related to the write-down of certain inventory items and spare parts
to their net recoverable amounts. Further costs of $1 million related to the dismantling of the
paper machine, net of salvage proceeds, were recorded in the second quarter of 2004, as well as a
provision reversal of $2 million regarding severance and related costs. As at December 31, 2005,
the balance of the provision was nil (2004-$2 million).
The following table provides a reconciliation of all closure and restructuring cost
provisions for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
|
$ |
|
|
|
$ |
|
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
33 |
|
|
|
38 |
|
|
|
13 |
|
Severance payments |
|
|
(29 |
) |
|
|
(34 |
) |
|
|
(12 |
) |
Reversal of provision |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
Proceeds on disposition |
|
|
|
|
|
|
|
|
|
|
1 |
|
Other |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
Labor costs |
|
|
72 |
|
|
|
84 |
|
|
|
45 |
|
Environmental costs |
|
|
9 |
|
|
|
11 |
|
|
|
|
|
Dismantling costs |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
85 |
|
|
|
99 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
72
Domtar Inc.
2005
Annual Report
NOTE 7
Financing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
|
137 |
|
|
|
160 |
|
|
|
160 |
|
|
|
158 |
|
Exchange gains on long-term debt |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
Receivables securitization |
|
|
7 |
|
|
|
8 |
|
|
|
6 |
|
|
|
12 |
|
Net interest recoveries related to interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
Refinancing expenses a |
|
|
6 |
|
|
|
7 |
|
|
|
|
|
|
|
17 |
|
Amortization of deferred net gain on early settlements of interest
rate swap contracts |
|
|
(12 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
|
|
(4 |
) |
Amortization of debt issue costs and other |
|
|
3 |
|
|
|
3 |
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136 |
|
|
|
158 |
|
|
|
152 |
|
|
|
173 |
|
Less: Income from short-term investments |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
Capitalized interest |
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
155 |
|
|
|
148 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments (cash receipts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of interest income and amounts capitalized |
|
|
124 |
|
|
|
145 |
|
|
|
156 |
|
|
|
160 |
|
Net cash receipts related to interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
145 |
|
|
|
136 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a |
|
The Corporation recorded $7 million (US$6 million) for a call premium paid to
redeem the 8.75% notes. The Refinancing expenses for the year ended December 31, 2003
include $10 million representing Domtars proportionate share of Norampacs debt
refinancing expenses and $7 million representing the Corporations debt refinancing
expenses. |
NOTE
8
Income taxes
The following table provides a reconciliation of income taxes computed at the
Canadian statutory rate to income tax recovery presented on the Consolidated earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined basic Canadian federal and provincial tax rate
(statutory income tax rate) |
|
|
33.6 |
% |
|
|
33.6 |
% |
|
|
33.7 |
% |
|
|
35.2 |
% |
Income tax recovery based on statutory income tax rate |
|
|
(177 |
) |
|
|
(206 |
) |
|
|
(32 |
) |
|
|
(92 |
) |
Large corporation tax |
|
|
3 |
|
|
|
4 |
|
|
|
6 |
|
|
|
6 |
|
Canadian manufacturing and processing activities |
|
|
4 |
|
|
|
5 |
|
|
|
1 |
|
|
|
5 |
|
Foreign rate differential |
|
|
(20 |
) |
|
|
(23 |
) |
|
|
(25 |
) |
|
|
(18 |
) |
Reassessment of prior years by tax authorities |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(4 |
) |
|
|
|
|
Impact of increase in income tax rate on future income taxes |
|
|
8 |
|
|
|
9 |
|
|
|
|
|
|
|
31 |
|
Other |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax recovery |
|
|
(193 |
) |
|
|
(225 |
) |
|
|
(52 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
11 |
|
|
|
13 |
|
|
|
23 |
|
|
|
14 |
|
Future |
|
|
(204 |
) |
|
|
(238 |
) |
|
|
(75 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193 |
) |
|
|
(225 |
) |
|
|
(52 |
) |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash payments for income taxes in 2005, net of cash receipts, amounted to $6 million
(2004payments amounted to $9 million; 2003receipts amounted to $1 million).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
73
Domtar Inc.
2005
Annual Report
The following table provides the geographic distribution of the income tax expense
(recovery):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
(572 |
) |
|
|
(667 |
) |
|
|
(213 |
) |
|
|
(361 |
) |
Foreign |
|
|
46 |
|
|
|
54 |
|
|
|
119 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(526 |
) |
|
|
(613 |
) |
|
|
(94 |
) |
|
|
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
5 |
|
|
|
6 |
|
|
|
11 |
|
|
|
12 |
|
Foreign |
|
|
6 |
|
|
|
7 |
|
|
|
12 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
13 |
|
|
|
23 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
(186 |
) |
|
|
(217 |
) |
|
|
(63 |
) |
|
|
(96 |
) |
Foreign |
|
|
(18 |
) |
|
|
(21 |
) |
|
|
(12 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204 |
) |
|
|
(238 |
) |
|
|
(75 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPONENTS OF
FUTURE INCOME TAX ASSETS AND LIABILITIES |
2005 |
|
2005 |
|
2004 |
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
Accounting provisions not deductible for tax purposes |
|
|
57 |
|
|
|
66 |
|
|
|
83 |
|
Losses and other deductions carryforward |
|
|
457 |
|
|
|
533 |
|
|
|
358 |
|
Deferred credits |
|
|
28 |
|
|
|
33 |
|
|
|
44 |
|
Capital losses carryforward |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542 |
|
|
|
632 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
(674 |
) |
|
|
(786 |
) |
|
|
(890 |
) |
Pension and other employee future benefit plans |
|
|
(19 |
) |
|
|
(22 |
) |
|
|
(17 |
) |
Impact of foreign exchange on long-term debt |
|
|
(51 |
) |
|
|
(60 |
) |
|
|
(55 |
) |
Other |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(749 |
) |
|
|
(874 |
) |
|
|
(966 |
) |
|
|
|
|
|
|
|
|
|
|
Total net future income tax liability |
|
|
(207 |
) |
|
|
(242 |
) |
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current future income tax asset |
|
|
33 |
|
|
|
38 |
|
|
|
87 |
|
Net non-current future income tax asset |
|
|
15 |
|
|
|
18 |
|
|
|
|
|
Net current future income tax liability |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
|
|
Net non-current future income tax liability |
|
|
(250 |
) |
|
|
(292 |
) |
|
|
(557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(207 |
) |
|
|
(242 |
) |
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
As at December 31, 2005, Domtar had federal net operating losses carryforward of
$1,315 million. These federal net operating losses carryforward are set to expire between
2010 and 2025.
NOTE 9
Earnings (loss) per share
The basic net earnings (loss) per share is computed by dividing the net earnings
(loss) applicable to common shares by
the weighted average number of common shares outstanding during the year.
The diluted net earnings (loss) per share is computed by dividing the net earnings
(loss) applicable to common shares by the weighted average number of common shares
outstanding during the year, plus the effects of dilutive common share equivalents such
as options and share purchase loans. The diluted net earnings (loss) per share is
calculated using the treasury method, as if
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
74
Domtar Inc.
2005
Annual Report
all common share equivalents had been exercised at the beginning of the year, or the
date of the issuance, as the case may be, and that the funds obtained thereby were used to
purchase common shares of Domtar at the average trading price of the common shares during
the year. Stock options to purchase common shares are not included in the computation of
diluted net earnings (loss) per share in years when net losses are recorded given that they
are anti-dilutive.
The following table provides the reconciliation between basic and
diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(333 |
) |
|
|
(388 |
) |
|
|
(42 |
) |
|
|
(193 |
) |
Dividend requirements of preferred shares |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares |
|
|
(334 |
) |
|
|
(389 |
) |
|
|
(43 |
) |
|
|
(195 |
) |
Weighted average number of common shares outstanding (millions) |
|
|
229.7 |
|
|
|
229.7 |
|
|
|
228.7 |
|
|
|
227.3 |
|
Effect of dilutive stock options (millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of diluted common shares outstanding
(millions) |
|
|
229.7 |
|
|
|
229.7 |
|
|
|
228.7 |
|
|
|
227.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share (in dollars) |
|
|
(1.45 |
) |
|
|
(1.69 |
) |
|
|
(0.19 |
) |
|
|
(0.86 |
) |
Diluted loss per share (in dollars) |
|
|
(1.45 |
) |
|
|
(1.69 |
) |
|
|
(0.19 |
) |
|
|
(0.86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the securities that could potentially dilute basic earnings
per share in the future but that were not included in the computation of diluted loss per
share because to do so would have been anti-dilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares: |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Options |
|
|
4,833,126 |
|
|
|
5,306,553 |
|
|
|
5,688,264 |
|
Bonus shares |
|
|
136,675 |
|
|
|
226,693 |
|
|
|
211,786 |
|
Rights |
|
|
84,500 |
|
|
|
84,500 |
|
|
|
46,000 |
|
|
|
|
|
|
|
|
NOTE
10
Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
|
119 |
|
|
|
139 |
|
|
|
67 |
|
Subordinate interest in securitized receivables |
|
|
93 |
|
|
|
108 |
|
|
|
112 |
|
Less: Allowance for doubtful accounts |
|
|
(12 |
) |
|
|
(14 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
233 |
|
|
|
163 |
|
Silvicultural credits receivable |
|
|
5 |
|
|
|
6 |
|
|
|
13 |
|
Sales taxes receivable |
|
|
12 |
|
|
|
14 |
|
|
|
17 |
|
Other receivables |
|
|
35 |
|
|
|
41 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
252 |
|
|
|
294 |
|
|
|
226 |
|
|
|
|
|
|
|
|
RECEIVABLES SECURITIZATION
Domtar uses securitization of its receivables as a source of financing by reducing
its working capital requirements. Domtars securitizations consist of the sale of
receivables, or the sale of senior beneficial interest in them, to special purpose trusts
managed by financial institutions for multiple sellers of receivables. The agreements
normally allow
the daily sale of new receivables to replace those that have been collected. They also
limit the cash that can be received from the sale of the senior beneficial interest. Such
sales of receivables are contingent upon annual renewals and retaining specified credit
ratings. The subordinate interest retained by Domtar is included in Receivables and will
be collected only after the senior beneficial interest has been settled. The book value of
the retained subordinated interests approximates fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
75
Domtar Inc.
2005
Annual Report
Domtar retains responsibility for servicing the receivables sold but does not record a
servicing asset or liability as the fees received by Domtar for this service approximate the fair
value of the services rendered.
In
2005, a net charge of $8 million (2004$6 million;
2003$12 million) resulted from the
programs described below and was included in Financing expenses.
U.S. ACCOUNTS RECEIVABLE PROGRAM
In January 2002, Domtar entered into an agreement, which was renewed in December 2004 and was
scheduled to mature in December 2005, for the securitization of U.S. receivables for a maximum
cash consideration of $204 million (US$175 million). The agreement has been extended by the
administrator of the program pending its renewal.
In addition, the condition to maintain certain required credit ratings was waived. As at
February 22, 2006. Domtar expects to finalize in a near future, a new three-year agreement, that
would include both U.S. and Canadian receivables. The maximum cash consideration that can be
received from the sale of receivables under the new combined agreement is $222 million (US$190
million).
At December 31, the following balances were outstanding under this program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
$ |
|
|
US$ |
|
|
|
$ |
|
|
US$ |
Receivables sold |
|
|
271 |
|
|
|
232 |
|
|
|
267 |
|
|
|
222 |
|
Senior beneficial interest held by third parties |
|
|
(163 |
) |
|
|
(140 |
) |
|
|
(178 |
) |
|
|
(148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinate interest in securitized receivables
retained by Domtar |
|
|
108 |
|
|
|
92 |
|
|
|
89 |
|
|
|
74 |
|
|
In 2005, the net cash outflow from the sale of senior beneficial interests in the U.S. receivables
was $9 million (US$8 million) (2004cash inflow
$17 million (US$14 million); 2003cash inflow $13
million (US$10 million)) and was included in the Consolidated cash flows as a use or source of
cash from receivables.
CANADIAN ACCOUNTS RECEIVABLE PROGRAM
In December 2000, Domtar entered into an agreement, which was renewed in December 2003, for
the securitization of Canadian receivables for a maximum cash consideration of $75 million. On
December 15, 2005, the parties agreed not to renew the agreement, which was set to expire in
December 2005.
At December 31, the following balances were outstanding under this program:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
$ |
|
|
|
$ |
|
Receivables sold |
|
|
|
|
|
|
81 |
|
Senior beneficial interest held by third parties |
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
|
Subordinate interest in securitized receivables retained by Domtar |
|
|
|
|
|
|
23 |
|
|
In 2005, the net cash outflow from the sale of senior beneficial interests in the Canadian
receivables was $58 million (2004cash inflow of
$5 million; 2003cash outflow of $13 million) and
was included in the Consolidated cash flows as a use or source of cash from receivables.
NOTE 11
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
|
2004 |
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4 |
) |
|
|
|
|
|
|
|
|
Work in process and finished goods |
|
|
322 |
|
|
|
376 |
|
|
|
390 |
|
Raw materials |
|
|
156 |
|
|
|
182 |
|
|
|
157 |
|
Operating and maintenance supplies |
|
|
135 |
|
|
|
157 |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613 |
|
|
|
715 |
|
|
|
723 |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
76
Domtar Inc.
2005
Annual Report
NOTE 12
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
NET |
|
|
|
|
|
|
|
|
|
|
NET |
|
|
|
|
|
|
|
|
|
|
NET |
|
|
|
CARRYING |
|
|
|
|
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
|
|
|
|
ACCUMULATED |
|
|
CARRYING |
|
|
|
AMOUNT |
|
|
COST |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
|
COST |
|
|
AMORTIZATION |
|
|
AMOUNT |
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
2,505 |
|
|
|
5,604 |
|
|
|
2,683 |
|
|
|
2,921 |
|
|
|
5,559 |
|
|
|
2,191 |
|
|
|
3,368 |
|
Buildings |
|
|
407 |
|
|
|
979 |
|
|
|
504 |
|
|
|
475 |
|
|
|
969 |
|
|
|
449 |
|
|
|
520 |
|
Timber limits and land |
|
|
154 |
|
|
|
209 |
|
|
|
30 |
|
|
|
179 |
|
|
|
209 |
|
|
|
31 |
|
|
|
178 |
|
Assets under construction |
|
|
51 |
|
|
|
59 |
|
|
|
|
|
|
|
59 |
|
|
|
149 |
|
|
|
|
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,117 |
|
|
|
6,851 |
|
|
|
3,217 |
|
|
|
3,634 |
|
|
|
6,886 |
|
|
|
2,671 |
|
|
|
4,215 |
|
|
As at
December 31, 2005, a net carrying amount of $7 million
(2004$6 million) included in
Buildings is held under capital leases ($9 million for cost
(2004$8 million) and $2 million for
accumulated amortization (2004$2 million)) and a net
carrying amount of $4 million (2004$4
million) included in Timber limits and land is held under capital leases.
NOTE 13
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
Accrued
benefit assetdefined benefit pension plans (note 22) |
|
|
175 |
|
|
|
204 |
|
|
|
183 |
|
Investment tax credits receivable |
|
|
28 |
|
|
|
33 |
|
|
|
26 |
|
Unamortized debt issue costs |
|
|
20 |
|
|
|
23 |
|
|
|
18 |
|
Future income tax assets |
|
|
15 |
|
|
|
18 |
|
|
|
|
|
Investments and advances |
|
|
10 |
|
|
|
12 |
|
|
|
15 |
|
Discount on long-term debt |
|
|
9 |
|
|
|
10 |
|
|
|
11 |
|
Other |
|
|
8 |
|
|
|
9 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265 |
|
|
|
309 |
|
|
|
265 |
|
|
NOTE 14
Trade and other payables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
Trade payables |
|
|
287 |
|
|
|
335 |
|
|
|
386 |
|
Payroll-related accruals |
|
|
102 |
|
|
|
119 |
|
|
|
118 |
|
Accrued interest |
|
|
34 |
|
|
|
40 |
|
|
|
33 |
|
Payables on capital projects |
|
|
7 |
|
|
|
8 |
|
|
|
10 |
|
Rebates accruals |
|
|
13 |
|
|
|
15 |
|
|
|
13 |
|
Accrued
benefit liabilitydefined benefit pension plans (note 22) |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
Accrued
benefit liabilityother employee future benefit plans (note 23) |
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
Provision
for environment and other asset retirement obligations
(note 17) |
|
18 |
|
|
|
21 |
|
|
|
21 |
|
Closure and restructuring costs excluding costs for defined benefit
pension plans and site remediation (note 6) |
|
|
64 |
|
|
|
75 |
|
|
|
36 |
|
Other |
|
|
26 |
|
|
|
30 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
558 |
|
|
|
651 |
|
|
|
647 |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
77
Domtar Inc.
2005
Annual Report
NOTE 15
Long-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATURITY |
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
(NOTE 4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured debentures and notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.75% Notes
(2005nil; 2004US$150) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
181 |
|
10% Debentures |
|
|
2011 |
|
|
|
70 |
|
|
|
82 |
|
|
|
82 |
|
7.875% Notes
(2005 and 2004US$600) |
|
|
2011 |
|
|
|
600 |
|
|
|
700 |
|
|
|
722 |
|
5.375% Notes
(2005 and 2004US$350) |
|
|
2013 |
|
|
|
350 |
|
|
|
408 |
|
|
|
421 |
|
7.125% Notes
(2005US$400; 2004nil) |
|
|
2015 |
|
|
|
400 |
|
|
|
466 |
|
|
|
|
|
9.5% Debentures (2005 and 2004US$125) |
|
|
2016 |
|
|
|
125 |
|
|
|
146 |
|
|
|
150 |
|
10.85% Debentures |
|
|
2017 |
|
|
|
65 |
|
|
|
75 |
|
|
|
75 |
|
Unsecured term loan (2005nil; 2004US$71) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
86 |
|
Unsecured revolving credit facility |
|
|
2010 |
|
|
|
137 |
|
|
|
160 |
|
|
|
135 |
|
Capital lease obligations |
|
|
2028 |
|
|
|
10 |
|
|
|
11 |
|
|
|
11 |
|
Other |
|
|
|
|
|
|
4 |
|
|
|
5 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,761 |
|
|
|
2,053 |
|
|
|
1,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norampac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75% Notes (2005 and 2004US$125) |
|
|
2013 |
|
|
|
125 |
|
|
|
146 |
|
|
|
150 |
|
Secured revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2005CAN$49 and 7; 2004CAN$9 and l) |
|
|
2008 |
|
|
|
50 |
|
|
|
58 |
|
|
|
10 |
|
Other |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
206 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,938 |
|
|
|
2,259 |
|
|
|
2,034 |
|
Less: Due within one year |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,936 |
|
|
|
2,257 |
|
|
|
2,026 |
|
|
As at December 31, 2005, principal long-term debt repayments, including capital lease obligations,
in each of the next five years amounted to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
2 |
|
|
2 |
|
|
|
59 |
|
|
|
3 |
|
|
|
160 |
|
|
THE CORPORATION
Unsecured debentures and notes
On August 5, 2005, the Corporation issued $487 million (US$400 million) 7.125% notes due in
2015 at an issue price of
$482 million (US$396 million). The gross proceeds from the sale of the notes was used to redeem the
8.75% notes due in August 2006 for an amount of approximately $176 million (US$150 million) and to repay most of the
unsecured revolving credit facility
then outstanding. Issuance expenses for the new notes of $5 million (US$4 million) were deferred
and will be amortized over the
duration of the notes.
In the first quarter of 2004, the Corporation terminated, prior to maturity, its interest
rate swap contracts entered into in 2003. As described in Note 19, these swap contracts had been
designated as hedges of the fair value of a portion of the interest payments on the 5.375% notes
payable.
The 10% and 10.85% debentures each have purchase fund requirements, whereby the Corporation
undertakes to make all reasonable efforts to purchase quarterly, for cancellation, a portion of
the aggregate principal amount of the debentures at prices not exceeding par.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
78
Domtar Inc.
2005
Annual Report
NOTE
15. LONG-TERM DEBT (CONTINUED)
Bank facility
On March 3, 2005, the Corporation entered into a new five-year unsecured revolving credit
facility of US$700 million. This
amount was reduced to US$600 million pursuant to an amendment to this facility in November 2005.
This new facility replaced
the prior credit facility, which consisted of a US$500 million unsecured revolving credit facility
and a US$70 million unsecured
term loan that was scheduled to mature in August 2006.
Borrowings under this new unsecured revolving credit facility bear interest at a rate based
on the Canadian dollar bankers acceptance or U.S. dollar LIBOR rate or on the Canadian or U.S.
prime rate, each with an added spread that varies with Domtars credit rating. This new credit
facility also requires commitment fees that vary with Domtars credit rating.
As
at December 31, 2005, $175 million (2004$135 million) of borrowings under the new
unsecured revolving credit facility were outstanding, of which
$15 million (2004nil) were in the
form of overdraft and included in Bank indebtedness, and
$160 million
(2004$135 million) were
included in Long-term debt. In addition, as at
December 31, 2005, the Corporation had outstanding
letters of credit pursuant to this bank credit for an amount of
$21 million (2004$10 million).
The Corporation also has other outstanding letters of credit for an
amount of $5 million (2004$3
million). A provision of $4 million (2004$5 million) was recorded related to letters of credits.
In 2005, the interest rates on outstanding borrowings under the bank facilities ranged from
3.21% to 7.25% (2004from 2.34% to 4.55%).
The Corporations borrowing agreements contain restrictive covenants. In particular, the
Corporations bank facility requires compliance with certain financial ratios on a quarterly
basis.
Certain debt agreements require the Corporation to indemnify the parties in the event of
changes in elements such as withholding tax regulations. As the nature and scope of such
indemnifications are contingent on future events, none of which can be foreseen as at December 31,
2005, and the structure of such transactions makes these events unlikely, no provisions have been
recorded in the consolidated financial statements.
NORAMPAC
Norampacs debt is non-recourse to the Corporation. The following amounts represent the
Corporations proportionate share.
Unsecured notes
The 6.75% unsecured notes issued in 2003 are redeemable in whole or in part at Norampacs
option under certain conditions
and subject to payment of a redemption premium.
Bank facility
Norampac has a five-year secured revolving credit facility of $175 million maturing in 2008.
The revolving credit facility is secured by all the inventories and receivables of Norampac Inc.
and its North American subsidiaries and by property, plant and equipment at two of its
containerboard mills and three of its converting facilities. Also, this facility requires
compliance with certain covenants. As at December 31, 2005, the Corporations proportionate share
of assets secured under this revolving credit facility relating to receivables, inventories and
property, plant and equipment amounted to $98 million
(2004$97 million), $69 million
(2004$69
million) and $223 million (2004$218 million), respectively. Borrowings under this credit facility
bear interest at floating rates plus a borrowing margin based on Norampacs credit rating. Standby
fees are payable on Norampacs available unused credit lines at an annual rate that varies
according to Norampacs credit rating.
As
at December 31, 2005, $58 million (2004$10 million) of borrowings under the secured
revolving credit facility were outstanding. In addition, as at December 31, 2005, Norampac had
outstanding letters of credit pursuant to this bank credit for an
amount of $4 million
(2004$6
million). No provision was recorded related to outstanding letters of credits.
In 2005, the interest rates on outstanding borrowings under the revolving credit facility
ranged from 3.44% to 5.56% (2004from 3.04% to 3.69%).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
79
Domtar Inc.
2005
Annual Report
NOTE
16
Other
liabilities and deferred credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
Other
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit liabilityother employee future benefit plans (note 23) |
|
|
81 |
|
|
|
94 |
|
|
|
88 |
|
Accrued
benefit liabilitydefined benefit pension plans (note 22) |
|
|
26 |
|
|
|
30 |
|
|
|
32 |
|
Provision for contracts assumed |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
Provision for environment and other asset retirement obligations |
|
|
36 |
|
|
|
42 |
|
|
|
36 |
|
Other |
|
|
38 |
|
|
|
44 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
credits |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gain on contribution of net assets to Norampac |
|
|
29 |
|
|
|
34 |
|
|
|
39 |
|
Deferred net gain on early settlements of interest rate swap contracts |
|
|
20 |
|
|
|
24 |
|
|
|
39 |
|
Deferred
foreign exchange gain on translation of long-term debta |
|
|
41 |
|
|
|
48 |
|
|
|
48 |
|
Investment tax credits and other |
|
|
12 |
|
|
|
14 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284 |
|
|
|
331 |
|
|
|
343 |
|
|
|
|
|
a |
|
In 2006, $7 million of the gain will be recognized to earnings and the remaining $41
million will be recognized to earnings in 2016. |
ASSET
RETIREMENT OBLIGATIONS
The asset retirement obligations are principally linked to landfill capping obligations,
asbestos removal obligations and demolition of certain abandoned buildings. As at December 31,
2005, Domtar has estimated the net present value of its asset retirement obligations to be $23
million (2004$25 million); the present value was based on probability weighted undiscounted cash
flows of $41 million (2004$37 million). The majority of asset retirement obligations are
estimated to be settled prior to December 31, 2025. However, some settlement scenarios call for
obligations to be settled as late as December 31, 2040. Domtars credit adjusted risk-free rates
were used to calculate the net present value of the asset retirement obligations. The rates used
vary between 4.25% and 9.40%, based on the prevailing rate at the moment of recognition of the
liability and on its settlement period.
The following table reconciles Domtars asset retirement
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
US$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
Asset retirement obligations, beginning of year |
|
|
21 |
|
|
|
25 |
|
|
|
26 |
|
Liabilities incurred during the year |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
Revisions to estimated cash flows |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Revisions to estimated cash flows related to restructurings (note 6) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
Liabilities settled during the year |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Accretion expense |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Effect of foreign currency exchange rate change |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations, end of year |
|
|
20 |
|
|
|
23 |
|
|
|
25 |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
80
Domtar Inc.
2005
Annual Report
NOTE
17
Commitments and contingencies
ENVIRONMENT
Domtar is subject to environmental laws and regulations enacted by federal, provincial, state
and local authorities.
In 2005, Domtars operating expenditures for environmental matters, as described in Note 1,
amounted to $68 million (2004$69 million; 2003$70 million).
Domtar
made capital expenditures for environmental matters of
$17 million in 2005 (2004$22
million; 2003$7 million) for the improvement of air emissions, effluent treatment and remedial
actions to address environmental compliance. At this time, Domtar cannot reasonably estimate the
additional capital expenditures that may be required. However, management expects any additional
required expenditure would not have a material adverse effect on Domtars financial position,
earnings or cash flows.
Domtar continues to take remedial action under its Care and Control Program at a number of
former operating sites, especially in the wood preserving sector, due to possible soil, sediment or
groundwater contamination. The investigation and remediation process is lengthy and subject to the
uncertainties of changes in legal requirements, technological developments and the allocation of
liability among potentially responsible parties.
While Domtar believes that it has determined the costs for environmental matters likely to be
incurred based on known information, Domtars ongoing efforts to identify potential environmental
concerns that may be associated with its properties may lead to future environmental
investigations. These efforts may result in the determination of additional environmental costs and
liabilities which cannot be reasonably estimated at this time.
As
at December 31, 2005, Domtar had a provision of $63 million
(2004$57 million) for
environmental matters and other asset retirement obligations. Additional costs, not known or
identifiable, could be incurred for remediation efforts. Based on policies and procedures in place
to monitor environmental exposure, management believes that such additional remediation costs would
not have a material adverse effect on Domtars financial position, earnings or cash flows.
In addition, the pulp and paper industry in the United States is subject to Cluster Rules and
Boiler Maximum Achievable Control Technology (MACT) Rules that further regulate effluent and air
emissions. Domtar complies with all present regulations and anticipates spending approximately $17
million over the next two years to meet such requirements.
As at December 31, 2005, anticipated payments in each of the next five years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
thereafter |
|
|
total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Environmental provision and
other asset retirement
obligations |
|
|
21 |
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
3 |
|
|
|
25 |
|
|
|
63 |
|
Cluster Rules obligation |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Boiler MACT Rules obligation |
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
CONTINGENCIES
In the normal course of operations, Domtar becomes involved in various legal actions mostly
related to contract disputes, patent infringements, environmental and product warranty claims, and
labor issues. While the final outcome with respect to actions outstanding or pending as at December
31,2005 cannot be predicted with certainty, it is managements opinion that their resolution will
not have a material adverse effect on Domtars financial position, earnings or cash flows.
In April 2003, the Canadian Competition Bureau began an investigation of Canadas major
distributors of carbonless paper and other fine paper products, including Domtar. In December 2005,
Domtar recorded a $12.5 million charge under Selling, general and administrative expenses
relating to a legal settlement with regards to the sales of carbonless paper in Ontario and Quebec
in a one-year period during part of 1999 and 2000.
E.B.
EDDY ACQUISITION
On July 31, 1998, Domtar acquired all of the issued and outstanding shares of E.B. Eddy
Limited and E.B. Eddy Paper, Inc. (E.B. Eddy), an integrated producer of specialty paper and wood
products. The purchase agreement includes a purchase price
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
81
Domtar Inc.
2005
Annual Report
adjustment whereby, in the event of the acquisition by a third party of more than 50% of the
shares of the Corporation in specified circumstances, the Corporation may have had to pay up to a
maximum of $120 million, an amount which is gradually declining over a 25-year period. As at
December 31, 2005, the maximum amount of the purchase price adjustment was $110 million. No
provision was recorded for this potential purchase price adjustment.
LEASE
AND OTHER COMMERCIAL COMMITMENTS
The Corporation has entered into operating leases for property, plant and equipment. The
Corporation also has commitments to purchase property, plant and equipment, roundwood, wood chips,
gas, electricity and certain chemicals. Minimum future payments under these operating leases and
other commercial commitments, determined as at December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
thereafter |
|
|
total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Operating leases |
|
|
24 |
|
|
|
16 |
|
|
|
11 |
|
|
|
8 |
|
|
|
7 |
|
|
|
19 |
|
|
|
85 |
|
Other commercial commitments |
|
|
87 |
|
|
|
40 |
|
|
|
33 |
|
|
|
24 |
|
|
|
9 |
|
|
|
18 |
|
|
|
211 |
|
|
Total operating lease expense amounted to $35 million in 2005 (2004$38 million; 2003$38 million).
Norampac has entered into operating leases for property, plant and equipment. Norampac also
has commitments to purchase property, plant and equipment, gas, electricity and steam. The
Corporations proportionate share of Norampacs minimum future payments under these operating
leases and other commercial commitments, determined as at December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
thereafter |
|
|
total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
Operating leases |
|
|
6 |
|
|
|
5 |
|
|
|
4 |
|
|
|
3 |
|
|
|
2 |
|
|
|
5 |
|
|
|
25 |
|
Other commercial commitments |
|
|
38 |
|
|
|
26 |
|
|
|
23 |
|
|
|
15 |
|
|
|
13 |
|
|
|
54 |
|
|
|
169 |
|
|
The Corporations proportionate share of Norampacs total operating lease expense amounted to $7
million in 2005 (2004$7 million;
2003$8 million).
GUARANTEES
Indemnifications
In the normal course of business, the Corporation offers indemnifications relating to the
sale of its businesses and real estate. In general, these indemnifications may relate to claims
from past business operations, the failure to abide by covenants and the breach of representations
and warranties included in the sales agreements. Typically, such representations and warranties
relate to taxation, environmental, product and employee matters. The terms of these
indemnification agreements are generally for an unlimited period of
time. As at December 31, 2005,
the Corporation is unable to estimate the potential maximum liabilities for these types of
indemnification guarantees as the amounts are contingent upon the outcome of future events, the
nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no
provisions have been recorded. These indemnifications have not yielded significant expenses in the
past.
Leases
The Corporation has guaranteed to various lessors $8 million of the residual value of its
assets under operating leases with expiry dates in 2006. If the fair value of the assets at the
end of the lease terms are lower than the residual values guaranteed, the Corporation would be
held liable for the shortfall. The Corporation reviews its guarantees relative to the residual
value and records anticipated losses as a charge included in Selling, general and administrative
expenses. As at December 31, 2005, the Corporation recorded
approximately $1 million (2004nil) of
provision relating to anticipated shortfall in the fair value of the assets, based on the
likelihood that the guarantees will be exercised.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE
NOTED)
82
Domtar Inc.
2005
Annual Report
NOTE 18
Stated capital and stock based compensation
PREFERRED
SHARES
The outstanding preferred shares at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
US$ |
|
|
NUMBER |
|
|
|
|
|
|
NUMBER |
|
|
|
|
|
|
(NOTE 4) |
|
|
OF SHARES |
|
|
$ |
|
|
OF SHARES |
|
|
$ |
|
Preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
2 |
|
|
|
68,176 |
|
|
|
2 |
|
|
|
69,576 |
|
|
|
2 |
|
Series B |
|
|
29 |
|
|
|
1,350,000 |
|
|
|
34 |
|
|
|
1,470,000 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
39 |
|
|
The authorized preferred shares consist of preferred shares issuable in an unlimited number of
series, ranking equal with respect to the payment of dividends and the distribution of assets.
The Series A Preferred shares are non-voting and redeemable at the Corporations option at
$25.00 per share since April 1, 1994. These shares carry a cumulative cash dividend per share of
$2.25 per annum.
The Series B Preferred shares are non-voting and redeemable at the Corporations option at
$25.00 per share. These shares carry a cumulative cash dividend equivalent to 72% of the bank
prime interest rate.
The Corporation has undertaken to make all reasonable efforts to purchase quarterly, for
cancellation, 1% of the number of Series A and Series B Preferred shares outstanding on April 2,
1992, at prices not exceeding $25.00 per share. In connection therewith, preferred shares
purchased for cancellation were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
|
|
|
NUMBER |
|
|
AVERAGE PRICE |
|
|
NUMBER |
|
|
AVERAGE PRICE |
|
|
NUMBER |
|
|
AVERAGE PRICE |
|
|
|
OF SHARES |
|
|
PER SHARE |
|
|
OF
SHARES |
|
|
PER SHARE |
|
|
OF SHARES |
|
|
PER SHARE |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
Series A |
|
|
1,400 |
|
|
|
25.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B |
|
|
120,000 |
|
|
|
22.57 |
|
|
|
120,000 |
|
|
|
24.68 |
|
|
|
120,000 |
|
|
|
23.48 |
|
|
COMMON
SHARES
The Corporation is authorized to issue an unlimited number of common shares. In 2005, a cash
dividend of $0.24 per share was paid on these shares (2004$0.24
per share; 2003$0.215 per
share). The changes in the number of outstanding common shares and their aggregate stated value
from January 1, 2003 to December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
NUMBER |
|
|
|
|
|
|
NUMBER |
|
|
|
|
|
|
NUMBER |
|
|
|
|
|
|
US$ |
|
|
OF SHARES |
|
|
$ |
|
|
OF SHARES |
|
|
$ |
|
|
OF SHARES |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
1,533 |
|
|
|
230,237,356 |
|
|
|
1,788 |
|
|
|
228,860,806 |
|
|
|
1,768 |
|
|
|
227,680,352 |
|
|
|
1,752 |
|
Shares issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option and share
purchase plans |
|
|
6 |
|
|
|
730,134 |
|
|
|
7 |
|
|
|
1,376,550 |
|
|
|
20 |
|
|
|
1,180,454 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before share purchase
financing agreements |
|
|
1,539 |
|
|
|
230,967,490 |
|
|
|
1,795 |
|
|
|
230,237,356 |
|
|
|
1,788 |
|
|
|
228,860,806 |
|
|
|
1,768 |
|
Share purchase financing
agreements |
|
|
(10 |
) |
|
|
(845,770 |
) |
|
|
(12 |
) |
|
|
(947,105 |
) |
|
|
(13 |
) |
|
|
(922,994 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year |
|
|
1,529 |
|
|
|
230,121,720 |
|
|
|
1,783 |
|
|
|
229,290,251 |
|
|
|
1,775 |
|
|
|
227,937,812 |
|
|
|
1,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common
share at end of year |
|
|
5.87 |
|
|
|
|
|
|
|
6.84 |
|
|
|
|
|
|
|
8.75 |
|
|
|
|
|
|
|
9.34 |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
83
Domtar Inc.
2005
Annual Report
Book value per common share is the sum of the stated value of common shares, contributed surplus,
retained earnings and accumulated foreign currency translation adjustments divided by the number
of common shares outstanding at year-end.
As at December 31, 2005, the Corporation had a receivable from its employees of $12 million
(2004$13 million; 2003$12 million) related to share purchase loans granted to them. These shares
are held in trust as security for the loans that are interest bearing at the dividend rate and
with defined repayment terms not exceeding 10 years. At the end of the year, there were 845,770
shares (2004947,105 shares;
2003922,994 shares) held in trust with respect to employee loans for
which the market value was $6.71 (2004$14.50; 2003$16.25) per share. These loans were included
as a reduction of Common shares.
RESTRICTED STOCK PLAN
The Restricted Stock Plan (RSP) was introduced in 2005. Under the RSP, Domtars common shares may
be granted to executives and other key employees. The Corporation or a trustee selected by the
Corporation at its discretion will acquire, on the secondary market, the number of common shares
granted. The common shares granted pursuant to the RSP shall be held in trust for the benefit of
the participant with a trust company selected by the Corporation at its sole discretion for a
period which may not exceed three years from the date of each grant. At the end of the restricted
period, and provided that the participant has remained in continuous employment with the
Corporation since the date of grant, the participant will be entitled to receive a share
certificate representing 1) the number of shares of the initial grant, and 2) the additional
shares accumulated in the participants account by reinvestment of dividends, if any. During the
restricted period, no participant shall be entitled to exercise voting rights or any other rights
attaching to the ownership of the shares, nor shall any participant be considered the beneficial
owner of any shares until they become fully vested upon termination of the applicable restricted
period.
During the year, 394,080 common shares were acquired and are held in trust pursuant to the
RSP. The total expense recognized in Domtars results of operations related to these common shares
amounted to $1 million in 2005.
EXECUTIVE STOCK OPTION AND SHARE PURCHASE PLAN
Under the Executive Stock Option and Share Purchase Plan (Plan), options may be granted to
selected eligible employees. Options are granted at a price equal to the market value on the day
immediately preceding the date the options were granted and expire 10 years after the date of the
grant. Normally, one quarter of the options may be exercised at each anniversary date of the
grant. In 2005, the rights feature of the Plan was eliminated. Previously granted rights are not
affected by this measure. The actual granted rights permitted eligible employees to purchase
shares at 90% of the quoted market value on the day immediately preceding the date the rights were
granted, and provide for a one-for-four bonus share to be issued on the third anniversary date of
the grant of the rights.
In 2005, a new feature was introduced to the Plan for all grants starting with 2005 going
forward. Options granted before 2005 are not affected by this new feature. Pursuant to this new
feature, the granted stock options will vest in four increments of 25% on each anniversary date of
the grant. When vested, the relevant annual portion will be available for exercise provided the
price of Domtars common shares on the exercise date has increased by at least 20% over the grant
price. Upon exercise, 60% of the difference between the fair value of Domtars common shares at
the time of exercise and the grant price must be converted in common shares of Domtar, which must
be held by the participant for at least 12 months after the date of exercise. Any annual portion
that has not been exercised on or before the expiry date of the option will automatically lapse on
such expiry date. The options have been granted for a period of six years and will expire in
February 2011, subject to the terms and conditions of the Plan.
In 2003, a new performance feature was introduced to the Plan for all grants starting with
2003 going forward. Options granted before 2003 are not affected by this new feature. Pursuant to
this new feature, the granted stock options will vest in four increments of 25 % on each
anniversary date of the grant, provided the performance of Domtars common share price is equal to
or exceeds the average performance of an index composed of the S&P 500 Materials (U.S.) index
(50%) and the S&P/TSX Materials (Canada) index (50%). On each anniversary date of the grant, the
average closing price of Domtars common shares, during the 20 consecutive trading days on the
Toronto Stock Exchange immediately preceding each anniversary date of the grant, is used to
measure the performance of Domtars common share price and is compared to the average performance
of the index during the same reference period. The relevant annual portion only vests on a given
anniversary date if the performance of Domtars common share price equals or exceeds the average
index during the relevant reference period. Should this not be the case, the annual portion will
not vest but may vest on any following anniversary date if the foregoing test, applied on a
cumulative basis, is satisfied on a subsequent anniversary
date over the vesting period of four years. Any annual portion which has not vested on or
before the end of the vesting period of the option will automatically lapse on the expiry date.
The new performance options have a term of 10 years and will expire in February 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
84
Domtar Inc.
2005
Annual Report
NOTE
18. STATED CAPITAL AND STOCK BASED COMPENSATION (CONTINUED)
In 2001, all of the 900,000 performance options granted to the members of the Management Committee
in March 1997 became void as a result of not meeting the specified conditions to exercise the
options based on the market value of the Domtars common shares. A new performance option program
was then approved in June 2001, and 1,050,000 stock options were granted to members of the
Management Committee. Pursuant to this grant, and except in certain specified circumstances, there
was no prorata or early vesting prior to January 1, 2004, at which time the options became fully
vested if the holder of the options was still an employee of Domtar. After vesting, the options
may not be exercised unless both of the following two conditions have been met: 1) at any time
between January 1, 2001 and December 31, 2003, the weighted average trading price of the Domtars
common shares during 20 consecutive trading days on the Toronto Stock Exchange has reached or
exceeded $16.70, $18.51 or $20.32, whereupon 25%, 50% or 100% respectively, of the options
granted become exercisable; and 2) the appreciation in the market value of the Domtars common
shares between January 1, 2001 and the exercise date is equal to or exceeds the increase in the
Standard & Poors U.S. Paper & Forest Products index during the same period. As at December 31,
2005, only 14% of the options are exercisable, provided the above-mentioned conditions are met,
and the remaining 86% have been cancelled as the objectives of the program have not been attained.
The fair value of options granted during the years ended December 31, 2005, 2004 and 2003 was
estimated using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Risk-free interest rate |
|
|
4.0% |
|
|
|
4.2% |
|
|
|
5.2% |
|
Annual dividend per share (in dollars) |
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.14 |
|
Expected lives (years) |
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Volatility |
|
|
30.6% |
|
|
|
33.4% |
|
|
|
34.0% |
|
Estimated realization percentage-performance options |
|
|
61.4% |
|
|
|
69.8% |
|
|
|
69.8% |
|
Weighted average fair value of options granted |
|
|
|
|
|
|
|
|
|
|
|
|
during the year (in dollars per option) |
|
$ |
2.95 |
|
|
$ |
3.68 |
|
|
$ |
4.36 |
|
|
Changes in the number of options outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
WEIGHTED |
|
|
|
|
|
|
WEIGHTED |
|
|
|
|
|
|
WEIGHTED |
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
AVERAGE |
|
|
|
NUMBER |
|
|
EXERCISE |
|
|
NUMBER |
|
|
EXERCISE |
|
|
NUMBER |
|
|
EXERCISE |
|
|
|
OF OPTIONS |
|
|
PRICE |
|
|
OF OPTIONS |
|
|
PRICE |
|
|
OF OPTIONS |
|
|
PRICE |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
Outstanding at beginning
of year |
|
|
5,306,553 |
|
|
|
14.83 |
|
|
|
5,688,264 |
|
|
|
14.22 |
|
|
|
4,920,882 |
|
|
|
13.56 |
|
Granted |
|
|
495,250 |
|
|
|
11.44 |
|
|
|
1,266,000 |
|
|
|
15.53 |
|
|
|
1,243,850 |
|
|
|
15.95 |
|
Exercised |
|
|
(21,847 |
) |
|
|
11.12 |
|
|
|
(540,270 |
) |
|
|
11.57 |
|
|
|
(356,105 |
) |
|
|
10.61 |
|
Cancelled |
|
|
(946,830 |
) |
|
|
15.44 |
|
|
|
(1,107,441 |
) |
|
|
14.08 |
|
|
|
(120,363 |
) |
|
|
15.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
4,833,126 |
|
|
|
14.38 |
|
|
|
5,306,553 |
|
|
|
14.83 |
|
|
|
5,688,264 |
|
|
|
14.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
end of year |
|
|
2,424,793 |
|
|
|
13.77 |
|
|
|
2,287,587 |
|
|
|
13.79 |
|
|
|
1,988,289 |
|
|
|
12.98 |
|
|
The following table summarizes the information about options outstanding and exercisable as at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTIONS OUTSTANDING |
|
|
OPTIONS EXERCISABLE |
|
|
|
|
|
|
|
|
WEIGHTED |
|
|
WEIGHTED |
|
|
|
|
|
|
WEIGHTED |
|
|
|
|
|
|
|
AVERAGE |
|
|
AVERAGE |
|
|
|
|
|
|
AVERAGE |
|
RANGE OF EXERCISE |
|
NUMBER |
|
|
REMAINING |
|
|
EXERCISE |
|
|
NUMBER |
|
|
EXERCISE |
|
PRICES |
|
OF OPTIONS |
|
|
CONTRACTUAL LIFE |
|
|
PRICE |
|
|
OF OPTIONS |
|
|
PRICE |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
$9.12$13.26 |
|
|
1,691,076 |
|
|
|
3.6 |
|
|
|
11.47 |
|
|
|
1,247,076 |
|
|
|
11.48 |
|
$13.27$16.52 |
|
|
3,142,050 |
|
|
|
6.7 |
|
|
|
15.95 |
|
|
|
1,177,717 |
|
|
|
16.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,833,126 |
|
|
|
5.6 |
|
|
|
14.38 |
|
|
|
2,424,793 |
|
|
|
13.77 |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
85
Domtar Inc.
2005
Annual Report
During the
year, no shares (2004353,900; 2003320,350) were issued pursuant to the exercise of
rights and 70,393 bonus shares (200452,730; 200341,169) were issued. The total expense
recognized in Domtars results of operations related to these rights and bonus shares amounted to
$4 million in 2005 (2004$2 million; 2003$2 million). As at December 31, 2005, 136,675 bonus
shares could be issued over the next two years.
As at December 31, 2005, 16,000,000 common shares (200416,000,000; 200316,000,000) were
authorized for issuance under the Plan. Since its inception, 6,057,835 shares have been issued
under this plan.
During the year, under the Executive Stock Option and Share Purchase Plan and the Employee
Share Purchase Plan, as described below, $5 million (2004$4 million; 2003$3 million) was
included in Contributed surplus in conjunction with the
recognition of stock-based compensation
expense.
DEFERRED SHARE UNIT PLANS
Outside Directors
Under the Deferred Share Unit Plan for Outside Directors of the Corporation, deferred share units
(DSUs), equivalent in value to a common share, may be granted to eligible directors. In addition,
participants may elect to receive their annual retainer and attendance fees in DSUs. A participant
shall receive, not later than the 31st of January following the end of the year during which the
participant ceases to be a member of the Board of Directors, a lump sum payment in cash equal to
the number of DSUs recorded in the participants account on the termination date multiplied by the
termination value of the common shares or, if the participant so elects, a number of common shares
to be purchased on the open market equal to the number of DSUs then recorded in the participants
account less, in either case, any applicable withholding tax. A participant account shall be
credited with dividend equivalents in the form of additional DSUs when normal cash dividends are
paid on common shares. Upon payment in full of the DSUs, they shall be cancelled. The total
expense (reversal) recognized in Domtars results of operations amounted to $(0.3) million in 2005
(2004$0.4 million; 2003$0.6 million). In 2005,
99,389 DSUs (200437,940;
200332,263) were
issued and no DSUs (200445,334; 200311,262) were redeemed. As at December 31, 2005, 229,523 DSUs
(2004130,134; 2003137,528) were outstanding.
Executives
Under the Executive Deferred Share Unit Plan of the Corporation, DSUs may be granted to eligible
executives. A participant shall receive, no later than the 31st of January following the end of
the year during which occurred the participants date of retirement, death, determination of
long-term disability or termination of employment at the end of a continuous period that started
on or after January 1, 1999 and represents at least seven years of tenure as a member of the
Management Committee, a lump sum payment in cash equal to the number of DSUs then recorded in the
participants account on one of these dates multiplied by the redemption value of the common
shares or, if the participant so elects, a number of common shares to be purchased on the open
market equal to the number of DSUs then recorded in the participants account less, in either
case, any applicable withholding tax. A participant account shall be credited with dividend
equivalents in the form of additional DSUs when normal cash dividends are paid on common shares.
Upon payment in full of the DSUs, they shall be cancelled. In 2005, the Executive Deferred Share
Unit Plan was eliminated. Previously granted DSUs are not affected by this change. The total
expense (reversal) recognized in Domtars results of operations amounted to $(0.5) million in 2005
(2004$(0.6) million; 2003$0.4 million). As at December 31, 2005, 56,443 DSUs (200466,178;
200372,196) were outstanding under this plan.
Under the Executive Performance Share Unit Plan of the Corporation, approved in December
2003, Performance Share Units (PSUs) may be granted to eligible executives and other key employees
of Domtar or any of its affiliates. Each PSU, subject to the vesting conditions (including certain
conditions relating to the relative performance of Domtars common shares) set out in each grant
being fulfilled, gives a participant the right to receive one common share of Domtar or, at his
option, the cash equivalent at the time of vesting. In the event a participant elects to receive
common shares, Domtar will make arrangements for delivery of such shares equal to the number of
PSUs then recorded in the participants account through purchases on the open market less, in
either case, any applicable withholding tax. A participant account shall be credited with dividend
equivalents in the form of additional PSUs when normal cash dividends are paid on common shares.
The total expense recognized in Domtars results of operations amounted to $0.1 million in 2005
(2004$0.1 million), representing 740,812 units (2004725,989) authorized and issued since the
inception of the plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
86
Domtar Inc.
2005
Annual Report
NOTE 18. STATED CAPITAL AND STOCK BASED COMPENSATION (CONTINUED)
EMPLOYEE SHARE PURCHASE PLANS
Under the Employee Share Purchase Plans, all employees are eligible to purchase common shares at a
price of 90% of the quoted market value. Common shares are purchased under the plans on monthly
investment dates. Shares purchased under the Canadian plan are subject to a mandatory twelve-month
holding period. Employees who hold the shares for 18 months following the date of acquisition
(U.S. plan) or who hold the shares purchased in any calendar year until June 30 of the following
year (Canadian plan) are entitled to receive additional common shares equivalent to 10% of the
cost of such shares. As at December 31, 2005, 6,050,000 common
shares (20046,050,000;
20035,050,000) were authorized for issuance under the plans. During the year, 637,894 common
shares (2004421,825; 2003470,653) were issued under the plans at an average price of $9.08
(2004$15.77; 2003$15.32) per share. Since their inception, 5,139,262 shares have been issued
under these plans.
NOTE 19
Financial instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
FAIR |
|
|
CARRYING |
|
|
FAIR |
|
|
CARRYING |
|
|
FAIR |
|
|
CARRYING |
|
|
|
VALUE |
|
|
AMOUNT |
|
|
VALUE |
|
|
AMOUNT |
|
|
VALUE |
|
|
AMOUNT |
|
|
|
|
US$ |
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,770 |
|
|
|
1,938 |
|
|
|
2,064 |
|
|
|
2,259 |
|
|
|
2,244 |
|
|
|
2,034 |
|
|
The fair value of the long-term debt, including the portion due within one year, is principally
based on quoted market prices.
Due to their short-term maturity, the carrying amounts of cash and
cash equivalents, receivables, bank indebtedness, trade and other payables and income and other
taxes approximate their fair values.
INTEREST RATE RISK
Domtar is exposed to interest rate risk arising from fluctuations in interest rates on its cash
and cash equivalents, its bank indebtedness, its bank credit facility and its long-term debt.
Domtar may manage this interest rate exposure by the use of derivative instruments such as
interest rate swap contracts.
In 2004, the Corporation terminated, prior to maturity, interest rate swap contracts for net
cash proceeds of $20 million (US$15 million). The resulting gain of $17 million recorded under
Other liabilities and deferred credits was deferred and is recognized against financing expenses
over the period ending November 2013, the term of the underlying 5.375% notes.
In 2002, the Corporation terminated, prior to maturity, interest rate swap contracts for net
cash proceeds of $40 million (US$26 million). The net gain of $40 million recorded under Other
liabilities and deferred credits was deferred and is recognized against financing expenses over
the period of the interest rate payments ending October 2003 and October 2006, the original
designated hedging period of the underlying 7.875% notes. The net recognized amount will be $10
million in 2006. In 2005, a net amount of $13 million (2004$13 million) was recognized against
Financing expenses.
Norampac has interest rate swap contracts having nominal values of $2 million (US$2 million)
(2004$2 million (US$2 million)) and $1 million
(US$1 million) (2004$1 million (US$1 million)),
respectively, according to the Corporations proportionate share. Under the terms of these
contracts, maturing in December 2008 and October 2012, respectively, Norampac will, on a monthly
basis, receive interest calculated on the LIBOR one-month rate plus 1.5% and pay an average fixed
rate of 7.25% and 9.47%, respectively. Norampac is holding these derivative financial instruments
for speculative purposes and accordingly the derivatives are recorded at their fair value. As at
December 31,2005, these contracts had a fair value of nil
(2004negative fair value of $1 million
(US$1 million)).
In 2004, Norampac entered into additional interest rate swap contracts having both the same
nominal value of $15 million (US$13 million), according to the Corporations proportionate share.
Under the terms of these contracts, maturing in December 2013,
Norampac will, on a
semi-annual
basis, receive an average fixed interest rate of 6.75% and pay
interest calculated on the LIBOR six-month rate plus 2.16% and 2.17%, respectively. These swap
contracts are designated as hedges of the fair value of a portion of Norampacs Senior notes. As at
December 31, 2005, these interest rate swap contracts had a fair value of negative $1 million (US$1
million) (2004$1 million (US$1 million)).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
87
Domtar Inc.
2005
Annual Report
CREDIT RISK
Domtar is exposed to credit risk on the accounts receivable from its customers. In order to reduce
this risk, Domtar reviews new customers credit histories before granting credit and conducts
regular reviews of existing customers credit performance. As at December 31, 2005, one of
Domtars paper segment customers located in the United States represented 4% ($18 million)
(20045% ($25 million)) of the receivables, prior to the effect of the receivables securitization.
Domtar is also exposed to credit risk in the event of non-performance by counterparties to
its financial instruments. Domtar minimizes this exposure by entering into contracts with
counterparties that are believed to be of high credit quality. Collateral or other security to
support financial instruments subject to credit risk is usually not obtained. The credit standing
of counterparties is regularly monitored.
FOREIGN CURRENCY RISK
In order to reduce the potential negative effects of a fluctuating Canadian dollar, Domtar has
entered into various arrangements to stabilize anticipated future net cash inflows denominated in
U.S. dollars. The following table provides the detail of the arrangements used as hedging
instruments:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
AVERAGE EXCHANGE RATE |
|
|
CONTRACTUAL AMOUNTS |
|
|
|
(CAN$/US$) |
|
|
(IN MILLIONS OF U.S. DOLLARS) |
|
Forward foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 12 months |
|
|
1.24 |
|
|
|
1.27 |
|
|
|
295 |
|
|
|
189 |
|
13 to 24 months |
|
|
|
|
|
|
1.34 |
|
|
|
|
|
|
|
37 |
|
Currency options purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 12 months |
|
|
|
|
|
|
1.31 |
|
|
|
|
|
|
|
212 |
|
Currency options sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 12 months |
|
|
|
|
|
|
1.39 |
|
|
|
|
|
|
|
212 |
|
|
Forward foreign exchange contracts are contracts whereby Domtar has the obligation to sell U.S.
dollars at a specific rate.
Currency options purchased are contracts whereby Domtar has the right, but not the
obligation, to sell U.S. dollars at the strike rate if the U.S. dollar trades below that rate.
Currency options sold are contracts whereby Domtar has the obligation to sell U.S. dollars at the
strike rate if the U.S. dollar trades above that rate.
In 2004, Norampac had currency options sold, which did not qualify as hedging instruments.
The average exchange rate and contractual amounts at December 31, 2004 were $1.43 and US$8
million, respectively, representing the Corporations proportionate share. As at December 31,
2004, the fair value of these derivative financial instruments was nil.
The fair value of derivative financial instruments generally reflects the estimated amounts
that Domtar would receive or pay to settle the contracts at December 31,2005 and 2004. As at these
dates, the spot exchange rates were $1.17 and $1.20, respectively, and the fair value of the above
derivative financial instruments used as hedging items was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2005 |
|
2004 |
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
Unrealized gains on forward
foreign exchange
contracts
|
|
|
19 |
|
|
|
22 |
|
|
|
17 |
|
Unrealized gains on currency options |
|
|
|
|
|
|
|
|
|
|
24 |
|
|
PRICE RISK
In 2005, the Corporation entered into cash settled commodity swap agreements to manage price risk
associated with purchases of bunker oil covering a period starting January 2006 and ending
December 2006. These agreements fix the purchase price of bunker oil for 20,000 barrels per month.
These agreements are in addition to the 2004 and 2003 contracts, which fix the purchase price of
bunker oil for 7,000 and 15,000 barrels per month, respectively, ending in December 2006 and
December 2005, respectively. These contracts are designated as hedging instruments and hedge
approximately 26% of estimated bunker oil purchases. The fair value of these instruments as at
December 31, 2005 represented an unrealized gain of
$1 million (2004$2 million).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
88
Domtar Inc.
2005
Annual Report
NOTE 19. FINANCIAL INSTRUMENTS (CONTINUED)
During 2004, the Corporation entered into a cash settled commodity swap agreement to manage price
risk associated with sales of NBSK pulp covering a period starting July 2004 and ending June 2007.
The agreement fixes the sale price of NBSK pulp for 1,000 tonnes per month for 36 months. This
agreement is in addition to the 2003 and 2002 contracts, which fix the sale price of NBSK pulp for
1,500 tonnes per month for 36 months and are expiring in April 2006 and October 2005,
respectively. These contracts are not designated as hedging instruments and they are accounted for
at their fair value. The fair value of these instruments as at December 31, 2005, was negative $1
million (2004$6 million).
Norampac entered into cash settled commodity swap agreements to manage price risk associated
with sales of unbleached kraft linerboard and semi-chemical medium paper and purchases of old
corrugated containers and electricity. As at December 31, 2005, Norampac had entered into
contracts expiring in 2006 through 2008. According to the Corporations proportionate share, these
derivative agreements fix the sale price for 5,000 tonnes (200437,000 tonnes) of unbleached kraft
linerboard and nil tonnes (20042,500 tonnes) of semi-chemical medium paper and fix the purchase
price for 298,250 tonnes (2004286,750 tonnes) of old corrugated containers and 18,492 megawatts
(200468,387 megawatts) of electricity. The contracts related to unbleached kraft linerboard,
semi-chemical medium paper and old corrugated containers are not designated as hedging instruments
and they are accounted for at their fair value. The fair value of these instruments as at December
31, 2005, represented a net loss of $9 million (2004net gain of $1 million). The fair value of
the electricity contracts as at December 31, 2005, represented an unrealized gain of $1 million
(2004$1 million).
NOTE 20
Accumulated foreign currency translation adjustments
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(163 |
) |
|
|
(190 |
) |
|
|
(145 |
) |
|
|
2 |
|
Effect of changes in exchange rates during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On net investment in self-sustaining foreign subsidiaries |
|
|
(59 |
) |
|
|
(69 |
) |
|
|
(141 |
) |
|
|
(391 |
) |
On certain long-term debt denominated in foreign
currencies designated as a hedge of net
investment in self-sustaining foreign subsidiaries |
|
|
56 |
|
|
|
65 |
|
|
|
117 |
|
|
|
282 |
|
Future income taxes thereon |
|
|
(10 |
) |
|
|
(11 |
) |
|
|
(21 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year |
|
|
(176 |
) |
|
|
(205 |
) |
|
|
(190 |
) |
|
|
(145 |
) |
|
NOTE 21
Interests in joint ventures
The following amounts represent the Corporations proportionate interests in its joint ventures
(Norampac, Anthony-Domtar Inc. and Gogama Forest Products Inc.):
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|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
167 |
|
|
|
195 |
|
|
|
180 |
|
Long-term assets |
|
|
431 |
|
|
|
502 |
|
|
|
508 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
79 |
|
|
|
92 |
|
|
|
93 |
|
Long-term liabilities |
|
|
271 |
|
|
|
316 |
|
|
|
272 |
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
89
Domtar Inc.
2005
Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
551 |
|
|
|
643 |
|
|
|
640 |
|
|
|
629 |
|
Operating expenses |
|
|
(546 |
) |
|
|
(637 |
) |
|
|
(588 |
) |
|
|
(585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
5 |
|
|
|
6 |
|
|
|
52 |
|
|
|
44 |
|
Financing expenses |
|
|
10 |
|
|
|
12 |
|
|
|
8 |
|
|
|
17 |
|
Net earnings (loss) |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
32 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided from operating activities |
|
|
44 |
|
|
|
51 |
|
|
|
58 |
|
|
|
45 |
|
Cash flows used for investing activities |
|
|
(47 |
) |
|
|
(55 |
) |
|
|
(64 |
) |
|
|
(42 |
) |
Cash flows provided from financing activities |
|
|
32 |
|
|
|
37 |
|
|
|
15 |
|
|
|
4 |
|
|
NOTE 22
Pension plans
DEFINED CONTRIBUTION PLANS
Domtar contributes to several defined contribution, multi-employer and 401(k) plans. The pension
expense under these plans is equal to Domtars contribution. The 2005 pension expense was $17
million (2004$17 million; 2003$19 million).
DEFINED BENEFIT PLANS
Domtar has several defined benefit pension plans covering substantially all employees, including
one closed plan for certain non-unionized employees in Canada. Non-unionized employees in Canada
joining Domtar after June 1, 2000 participate in defined contribution plans. The defined benefit
plans are generally contributory in Canada and non-contributory in the United States. The pension
expense and the obligation related to the defined benefit plans are actuarially determined using
managements most probable assumptions.
In 2006, pursuant to the decision in November 2005 to close the Cornwall and Ottawa, Ontario
paper mills, the Corporation will declare a partial wind-up of the non-unionized and unionized
plans related to the Ontario participants in the plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPONENTS OF NET PERIODIC BENEFIT COST
FOR DEFINED BENEFIT PLANS |
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost for the year |
|
|
30 |
|
|
|
35 |
|
|
|
35 |
|
|
|
32 |
|
Interest expense |
|
|
67 |
|
|
|
78 |
|
|
|
74 |
|
|
|
72 |
|
Actual return on plan assets |
|
|
(112 |
) |
|
|
(131 |
) |
|
|
(104 |
) |
|
|
(115 |
) |
Recognized actuarial loss |
|
|
141 |
|
|
|
164 |
|
|
|
34 |
|
|
|
72 |
|
Plan amendments |
|
|
38 |
|
|
|
44 |
|
|
|
3 |
|
|
|
11 |
|
Curtailment and settlement loss (note 6) |
|
|
14 |
|
|
|
17 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs arising in the period |
|
|
178 |
|
|
|
207 |
|
|
|
44 |
|
|
|
72 |
|
Difference between costs arising in the period and
costs recognized in the period in respect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on plan assets |
|
|
40 |
|
|
|
47 |
|
|
|
23 |
|
|
|
36 |
|
Actuarial gain |
|
|
(130 |
) |
|
|
(151 |
) |
|
|
(22 |
) |
|
|
(67 |
) |
Plan amendments |
|
|
(33 |
) |
|
|
(39 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost for defined benefit plans |
|
|
55 |
|
|
|
64 |
|
|
|
44 |
|
|
|
31 |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED)
90
Domtar Inc.
2005
Annual Report
NOTE 22. PENSION PLANS (CONTINUED)
Domtars funding policy is to contribute annually the amount required to provide for
benefits earned in the year and to fund past service obligations over periods not exceeding
those permitted by the applicable regulatory authorities. Past service obligations primarily
arise from improvements to plan benefits. The latest actuarial valuations were conducted as
at December 31, 2004, for plans representing approximately 94% and as at December 31, 2003,
for plans representing approximately 6% of the total plans asset fair value. These valuations
indicated a funding deficiency. The next actuarial valuations will be completed between
December 31, 2005 and March 1, 2008. Domtar expects to contribute for a total amount of $80
million in 2006 compared to $85 million in 2005.
CHANGE IN ACCRUED BENEFIT OBLIGATION
The following table represents the change in the accrued benefit obligation as determined
by independent actuaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit obligation at beginning of year |
|
|
1,135 |
|
|
|
1,323 |
|
|
|
1,240 |
|
Service cost for the year |
|
|
30 |
|
|
|
35 |
|
|
|
35 |
|
Interest expense |
|
|
67 |
|
|
|
78 |
|
|
|
74 |
|
Plan participants contributions |
|
|
11 |
|
|
|
13 |
|
|
|
12 |
|
Actuarial loss |
|
|
148 |
|
|
|
173 |
|
|
|
36 |
|
Plan amendments |
|
|
38 |
|
|
|
44 |
|
|
|
3 |
|
Benefits paid |
|
|
(63 |
) |
|
|
(74 |
) |
|
|
(70 |
) |
Settlement |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Curtailment |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
Effect of foreign currency exchange rate
change |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Accrued benefit obligation at end of year |
|
|
1,357 |
|
|
|
1,582 |
|
|
|
1,323 |
|
|
CHANGE IN
FAIR VALUE OF DEFINED BENEFIT PLAN ASSETS
The following table represents the change in the fair value of assets of defined
benefit plans reflecting the actual return on plan assets, the contributions and the benefits
paid during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of defined benefit plan assets at beginning of year |
|
|
987 |
|
|
|
1,151 |
|
|
|
1,030 |
|
Actual return on plan assets |
|
|
112 |
|
|
|
131 |
|
|
|
104 |
|
Employer contributions |
|
|
73 |
|
|
|
85 |
|
|
|
80 |
|
Plan participants contributions |
|
|
11 |
|
|
|
13 |
|
|
|
12 |
|
Benefits paid |
|
|
(63 |
) |
|
|
(74 |
) |
|
|
(70 |
) |
Settlement |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Effect of foreign currency exchange rate change |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Fair
value of defined benefit plan assets at end of year |
|
|
1,115 |
|
|
|
1,300 |
|
|
|
1,151 |
|
|
DESCRIPTION OF FUNDED ASSETS
The assets of the pension plans are held by a number of independent trustees and are
accounted for separately in the Domtar pension funds. The investment strategy for the assets
in the pension plans is to maintain a diversified portfolio of assets, invested
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS
OTHERWISE NOTED)
91
Domtar Inc.
2005
Annual Report
in a prudent manner to maintain the security of funds while maximizing returns within the
guidelines provided in the investment policy. The Corporations pension funds are not permitted
to own any of the Corporations shares or debt instruments. The target asset allocation is based
on the expected duration of the benefit obligation, which includes the impact of a partial
wind-up related to the mill closures.
The following table shows the allocation of the plan assets, based on the fair value of the
assets held at December 31, 2005 and 2004 and the target allocation for 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TARGET |
|
PERCENTAGE PLAN |
|
|
ALLOCATION |
|
ASSETS AS AT DECEMBER 31 |
|
|
|
|
|
2005 |
|
2004 |
|
Fixed income
securities |
|
|
58% 68 |
% |
|
|
63 |
% |
|
|
51 |
% |
Equity securities |
|
|
32% 42 |
% |
|
|
37 |
% |
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
Domtar has indemnified and held harmless the trustees of Domtar pension funds, and the
respective officers, directors, employees and agents of such trustees, from any and all costs and
expenses arising out of the performance of their obligations under the relevant trust agreements,
including in respect of their reliance on authorized instructions of Domtar or for failing to act
in the absence of authorized instructions. These indemnifications survive the termination of such
agreements. As at December 31, 2005, Domtar has not recorded a liability associated with these
indemnifications, as Domtar does not expect to make any payments pertaining to these
indemnifications.
RECONCILIATION
OF FUNDED STATUS TO AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS
The following tables present the difference between the fair value of the defined benefit
plan assets and the actuarially determined accrued benefit obligation as at December 31, 2005 and
2004. This difference is also referred to as either the deficit or surplus, as the case may be,
or the funded status of the plans.
The tables further reconcile the amount of the surplus or deficit (funded status) to the net
amount recognized in the Consolidated balance sheets. This difference between the funded status
and the net amount recognized in the Consolidated balance sheets represents the portion of the
surplus or deficit not yet recognized for accounting purposes. Deferred recognition is a guiding
principle of these recommendations. This approach allows for a gradual recognition of changes in
accrued benefit obligations and plan performance over the expected average remaining service life
of the employee group covered by the plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
US$ |
|
|
$ |
|
|
$ |
|
|
|
(NOTE 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit obligation at end of year |
|
|
1,357 |
|
|
|
1,582 |
|
|
|
1,323 |
|
Fair value of defined benefit plan assets at end of year |
|
|
(1,115 |
) |
|
|
(1,300 |
) |
|
|
(1,151 |
) |
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
(242 |
) |
|
|
(282 |
) |
|
|
(172 |
) |
Reconciliation of funded status to amounts recognized
in the Consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized experience losses: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred investment losses (gains) due to use of
market-related value
to determine net benefit cost |
|
|
(27 |
) |
|
|
(31 |
) |
|
|
9 |
|
Unrecognized net actuarial loss a |
|
|
374 |
|
|
|
436 |
|
|
|
294 |
|
Unrecognized past service costs |
|
|
42 |
|
|
|
49 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in the Consolidated balance sheets |
|
|
147 |
|
|
|
172 |
|
|
|
151 |
|
|
|
|
|
a |
|
The amount to which these losses exceed the 10%
corridor (representing 10% of the accrued benefit obligation)
amounted to $288 million as at December 31, 2005 (2004$180 million). Any such
excess is amortized, commencing in the following year, over the expected average remaining service peri |