TICKER SYMBOL DTC (TSX,NYSE) MONTREAL, Oct. 31
/PRNewswire-FirstCall/ -- Domtar Inc. announced today earnings from
continuing operations of $38 million ($0.16 per common share) in
the third quarter of 2006 compared to a loss from continuing
operations of $3 million ($0.01 per common share) in the second
quarter of 2006 and a loss from continuing operations of $48
million ($0.21 per common share) in the third quarter of 2005.
SUMMARY OF RESULTS Q3 2006 Q2 2006 Q3 2005
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(In millions of Canadian dollars, unless otherwise noted) Sales
1,177 1,159 1,241 Operating profit (loss) from continuing
operations(1) 89 26 (44) Earnings (loss) from continuing operations
38 (3) (48) Net earnings (loss) 38 (9) (52) Earnings (loss) from
continuing operations per common share (in dollars) 0.16 (0.01)
(0.21) Net earnings (loss) per common share (in dollars) 0.16
(0.04) (0.23) Excluding specified items(1) Operating profit (loss)
from continuing operations 98 44 (26) Earnings (loss) from
continuing operations 44 3 (35) Earnings (loss) from continuing
operations per common share (in dollars) 0.19 0.01 (0.15)
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(1) Operating profit from continuing operations is a non-GAAP
measure. For a discussion on specified items and the use of
non-GAAP measures, see "Notes to the summary of results" in the
appendix. "I am pleased with Domtar's third quarter results, the
best we've seen for several quarters, as our decisions over the
past year and the sustained efforts of our employees to deliver on
restructuring initiatives have been rewarded," said Raymond Royer,
President and Chief Executive Officer. "Higher selling prices for
paper, pulp, and packaging combined with lower operating costs have
also contributed to these positive results. Given the better
operating rates in the North American uncoated freesheet market, we
believe we can grow and prosper in this business. On the softwood
lumber front, Domtar will start receiving refunds for duties
collected by the United States in the near future. Meanwhile, the
deteriorating housing market and high fiber costs will keep the
lumber industry in a challenging position," added Mr. Royer. Mr.
Royer also stated that "the transition work to create the new
Domtar, the largest fine paper company in North America, in the
first quarter of 2007, is progressing according to plan, and we are
encouraged by the recent favorable decision of the United States
antitrust authorities regarding the transaction. We continue to
work on the other closing conditions, including regulatory
approvals under the Competition Act (Canada) and the Investment
Canada Act." OPERATIONAL REVIEW THIRD QUARTER 2006 COMPARED TO
SECOND QUARTER 2006 ----------- In accordance with Canadian
generally accepted accounting principles, effective in the second
quarter of 2006, the information pertaining to our Vancouver paper
mill was no longer included in our Papers business but presented as
a discontinued operation and assets held for sale. In July 2006, we
reached an agreement to sell the Vancouver paper mill property,
subject to a number of closing conditions. PAPERS Q3 2006 Q2 2006
Variance
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(In millions of Canadian dollars) Operating profit from continuing
operations 75 17 58 Operating profit from continuing operations,
excluding specified items 83 36 47
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The $47 million increase in operating profit from continuing
operations excluding specified items in the Papers segment was
mainly the result of higher average selling prices for paper and
pulp, the settlement of a contract dispute resulting in a payment
to Domtar of $14 million, recognition of investment tax credits
related to research and development expenditures from prior years,
lower energy and freight costs as well as the realization of
savings stemming from restructuring activities. These factors were
partially offset by lower shipments for paper. PAPER MERCHANTS Q3
2006 Q2 2006 Variance
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(In millions of Canadian dollars) Operating profit from continuing
operations 3 3 - Operating profit from continuing operations,
excluding specified items 3 3 -
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Operating profit from continuing operations in the Paper Merchants
segment remained stable. Although shipments were down during the
quarter, it was offset by higher average selling prices for paper.
WOOD Q3 2006 Q2 2006 Variance
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(In millions of Canadian dollars) Operating loss from continuing
operations (17) (10) (7) Operating loss from continuing operations,
excluding specified items (17) (9) (8)
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Operating loss from continuing operations excluding specified items
in the Wood segment increased by $8 million, or $1 million if we
exclude the $7 million Crown stumpage fees refund recorded in the
second quarter of 2006. This increase is mainly attributable to
lower average selling prices, partially offset by lower duties on
softwood lumber and benefits realized pursuant to the closure in
the second quarter of 2006 of the Malartic and Grand-Remous
sawmills. Effective October 12, 2006, Domtar is entitled to receive
a refund for duties collected by the U.S. Government since 2002
plus interest, for a total consideration of approximately US$183
million ($204 million). This refund could be subject to a special
charge of 19% by the Canadian Government. PACKAGING Q3 2006 Q2 2006
Variance
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(In millions of Canadian dollars) Operating profit from continuing
operations 23 16 7 Operating profit from continuing operations,
excluding specified items 24 14 10
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The $10 million increase in operating profit from continuing
operations excluding specified items in the Packaging segment (our
50% share of Norampac Inc.) was mainly attributable to higher
average selling prices for both containerboard and corrugated
containers with lower maintenance costs, partially offset by higher
fiber costs. LIQUIDITY AND CAPITAL ----------- FREE CASH FLOW(1) Q3
2006 Q2 2006 Q3 2005
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(In millions of Canadian dollars) Cash flows provided from
operating activities of continuing operations before changes in
working capital and other items 120 79 17 Changes in working
capital and other items (37) (21) 1 ----------------------------
Cash flows provided from operating activities of continuing
operations 83 58 18 Net additions to property, plant and equipment
(31) (33) (34) ---------------------------- Free cash flow 52 25
(16)
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Free cash flow amounted to $52 million in the third quarter of 2006
including $37 million of cash requirements for working capital.
Domtar's net debt-to-total capitalization ratio(1) as at September
30, 2006 stood at 56.7% compared to 57.7% as at December 31, 2005.
Domtar's net indebtedness decreased by $105 million, largely due to
the positive impact of a stronger Canadian dollar (based on
month-end exchange rates) on our U.S. dollar denominated debt and
repayments on our revolving credit facility. (1) For a discussion
on the use of non-GAAP measures, see "Notes to the summary of
results" in the appendix. OUTLOOK ----------- Domtar does not
anticipate any significant changes to current paper and pulp market
conditions. The Company will continue to monitor market conditions
and respond accordingly. Domtar expects lumber markets to remain
weak for the foreseeable future. Nonetheless, the Company intends
to realize the full potential of its restructuring plan.
FORWARD-LOOKING STATEMENTS ----------- This press release may
contain forward-looking statements relating to trends in, or
representing management's beliefs about, Domtar's 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 management's 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
Domtar's 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
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. Unless specifically required by law,
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" in Domtar's
Management's Discussion and Analysis (MD&A). THIRD QUARTER 2006
RESULTS WEBCAST ----------- You are invited to listen to a live
broadcast of the conference call with financial analysts that the
Company will be holding today to present its third quarter 2006
financial results. It will take place at 4:00 p.m. (EDT) on the
Domtar corporate website at: http://www.domtar.com/. DOMTAR IS THE
THIRD LARGEST PRODUCER OF UNCOATED FREESHEET PAPER IN NORTH
AMERICA. IT IS ALSO A LEADING MANUFACTURER OF BUSINESS PAPERS,
COMMERCIAL PRINTING AND PUBLICATION PAPERS, AND TECHNICAL AND
SPECIALTY PAPERS. DOMTAR MANAGES ACCORDING TO INTERNATIONALLY
RECOGNIZED STANDARDS 17 MILLION ACRES OF FORESTLAND IN CANADA AND
THE UNITED STATES, AND PRODUCES LUMBER AND OTHER WOOD PRODUCTS.
DOMTAR HAS APPROXIMATELY 8,500 EMPLOYEES ACROSS NORTH AMERICA. THE
COMPANY ALSO HAS A 50% INVESTMENT INTEREST IN NORAMPAC INC., THE
LARGEST CANADIAN PRODUCER OF CONTAINERBOARD. APPENDIX ----------
NOTES TO THE SUMMARY OF RESULTS NOTE 1. ------- SPECIFIED ITEMS In
Domtar's view, specified items are items that do not typify normal
operating activities. The following table reconciles operating
profit (loss) from continuing operations, earnings (loss) from
continuing operations, earnings (loss) from continuing operations
per share, determined in accordance with GAAP(x), to operating
profit (loss) from continuing operations, earnings (loss) from
continuing operations, earnings (loss) from continuing operations
per share, excluding specified items. Q3 2006 Q2 2006
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(In millions of Canadian dollars, unless otherwise noted) Earnings
Earnings (loss) from Opera- from Operating conti- ting Earnings
conti- profit Earnings nuing profit (loss) nuing from from opera-
from from opera- conti- conti- tions conti- conti- tions nuing
nuing per share nuing nuing per share opera- opera- (in dol- opera-
opera- (in dol- tions tions lars) tions tions lars) As per GAAP(x)
89 38 0.16 26 (3) (0.01) Specified items: Closure and restructuring
costs (a) 8 5 19 13 Unrealized mark-to-market (gains) losses (b) 1
1 (1) (1) Income tax legislation modification (c) - - - (4) Foreign
exchange (gains) losses on long-term debt (d) - - - (2) Refinancing
costs (e) - - - - --------------------------
-------------------------- 9 6 0.03 18 6 0.02
-------------------------- -------------------------- Excluding
specified items 98 44 0.19 44 3 0.01
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Q3 2005
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Loss Operat- from ing conti- loss Loss nuing from from opera-
conti- conti- tions nuing nuing per share opera- opera- (in dol-
tions tions lars) As per GAAP(x) (44) (48) (0.21) Specified items:
Closure and restructuring costs (a) 15 10 Unrealized mark-to-market
(gains) losses (b) 3 2 Income tax legislation modification (c) - -
Foreign exchange (gains) losses on long-term debt (d) - (4)
Refinancing costs (e) - 5 -------------------------- 18 13 0.06
-------------------------- Excluding specified items (26) (35)
(0.15)
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(x) Except for operating profit (loss) from continuing operations
which is a non-GAAP measure. See note 2. a) Closure and
restructuring costs Domtar's results include closure and
restructuring charges. These charges are presented under "Closure
and restructuring costs" in the financial statements. b) Unrealized
mark-to-market gains or losses Domtar's 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.
c) Income tax legislation modification Domtar's results include
charges related to modifications to the income tax legislation.
These charges are presented under "Income tax recovery" in the
financial statements. d) Foreign exchange impact on long-term debt
Domtar's results include foreign exchange gains or losses on the
translation of a portion of its long-term debt. Such gains or
losses are presented under "Financing expenses" in the financial
statements. e) Refinancing costs Domtar's results include
refinancing expenses. These refinancing expenses are presented
under "Financing expenses" in the financial statements. NOTE 2.
------- USE OF NON-GAAP MEASURES Except where otherwise indicated,
all financial information reflected herein is determined on the
basis of Canadian GAAP. Operating profit (loss) from continuing
operations is a non-GAAP measure that is calculated within Domtar's
financial statements. Domtar focuses on operating profit (loss)
from continuing operations as this measure enables it to compare
its results between periods without regard to debt service or
income taxes. Operating profit (loss) from continuing operations
excluding specified items, earnings (loss) from continuing
operations excluding specified items, earnings (loss) from
continuing operations per common share excluding specified items
are non-GAAP measures. Measures excluding specified items are used
in evaluating the Company's performance between periods without
regard to specified items that adversely or positively affected its
GAAP measures. Free cash flow is a non-GAAP measure that is defined
as the amount by which cash flows provided from continuing
operating activities, as determined in accordance with GAAP, exceed
net additions to property, plant and equipment, as determined in
accordance with GAAP. Free cash flow is used in evaluating the
Company's ability to service its debt and pay dividends to its
shareholders. Net debt-to-total capitalization ratio is a non-GAAP
measure that is calculated as long-term debt and bank indebtedness,
net of cash and cash equivalents, to the sum of net debt and
shareholders' equity. Domtar's management tracks this ratio on a
regular basis in order to assess its debt position. The above
non-GAAP 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. Domtar believes that it would be useful for investors
and other users to be aware of these measures so they can better
assess the Company's performance. Consolidated Financial Statements
Three months ended Nine months ended CONSOLIDATED September 30
September 30 EARNINGS 2006 2006 2005 2006 2006 2005
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(In millions of Canadian dollars, unless otherwise noted)
--------(Unaudited)------- ---------(Unaudited)------- US$ $ $ US$
$ $ (NOTE 2) (NOTE 2) Sales 1,055 1,177 1,241 3,163 3,527 3,743
Operating expenses Cost of sales 844 942 1,104 2,668 2,976 3,218
Selling, general and administra- tive 53 59 76 157 175 193
Amortization 71 79 90 213 237 270 Closure and restructuring costs
(NOTE 3) 7 8 15 27 30 31 --------------------------
--------------------------- 975 1,088 1,285 3,065 3,418 3,712
-------------------------- --------------------------- Operating
profit (loss) from continuing operations 80 89 (44) 98 109 31
Financing expenses 35 39 41 107 119 114 Amortization of deferred
gain (1) (1) (2) (4) (4) (4) --------------------------
--------------------------- Earnings (loss) from continuing
operations before income taxes 46 51 (83) (5) (6) (79) Income tax
expense (recovery) 12 13 (35) (17) (19) (50)
-------------------------- --------------------------- Earnings
(loss) from continuing operations 34 38 (48) 12 13 (29) Loss from
discontinued operations (NOTE 4) - - (4) (7) (8) (11)
-------------------------- --------------------------- Net earnings
(loss) 34 38 (52) 5 5 (40) --------------------------
--------------------------- --------------------------
--------------------------- Per common share (in dollars) (NOTE 5)
Earnings (loss) from continuing operations Basic 0.14 0.16 (0.21)
0.04 0.05 (0.13) Diluted 0.14 0.16 (0.21) 0.04 0.05 (0.13) Net
earnings (loss) Basic 0.14 0.16 (0.23) 0.02 0.02 (0.18) Diluted
0.14 0.16 (0.23) 0.02 0.02 (0.18) Weighted average number of common
shares outstanding (millions) Basic 230.6 230.6 229.8 230.4 230.4
229.6 Diluted 230.6 230.6 229.8 230.4 230.4 229.6
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CONSOLIDATED Three months ended Nine months ended RETAINED
September 30 September 30 EARNINGS 2006 2006 2005 2006 2006 2005
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(In millions of Canadian dollars, unless otherwise noted)
--------(Unaudited)------- ---------(Unaudited)------- US$ $ $ US$
$ $ (NOTE 2) (NOTE 2) Retained earnings (deficit) at beginning of
period (47) (53) 395 (17) (19) 412 Net earnings (loss) 34 38 (52) 5
5 (40) Dividends on common shares - - (13) - - (41) Dividends on
preferred shares - - - (1) (1) (1) Discount on purchase for
cancellation of preferred shares 1 1 - 1 1 -
-------------------------- --------------------------- Retained
earnings (deficit) at end of period (12) (14) 330 (12) (14) 330
-------------------------- ---------------------------
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The accompanying notes are an integral part of the consolidated
financial statements. September September December 30 30 31
CONSOLIDATED BALANCE SHEETS As at 2006 2006 2005
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(In millions of Canadian dollars, unless otherwise noted)
----------(Unaudited)-------- US$ $ $ (NOTE 2) Assets Current
assets Cash and cash equivalents 56 62 83 Receivables 282 315 294
Inventories 568 633 715 Prepaid expenses 24 27 11 Income and other
taxes receivable 18 20 16 Future income taxes 31 35 38
--------------------------- 979 1,092 1,157 Property, plant and
equipment 3,028 3,377 3,634 Assets held for sale (NOTE 4) 22 24 -
Goodwill 76 85 92 Other assets 271 303 309
--------------------------- 4,376 4,881 5,192 Liabilities and
shareholders' equity Current liabilities Bank indebtedness 56 63 21
Trade and other payables 504 562 651 Income and other taxes payable
38 42 29 Long-term debt due within one year 2 2 2
--------------------------- 600 669 703 Long-term debt 1,873 2,089
2,257 Future income taxes 215 240 292 Other liabilities and
deferred credits 257 287 331 Shareholders' equity Preferred shares
30 33 36 Common shares 1,602 1,787 1,783 Contributed surplus 13 15
14 Deficit (12) (14) (19) Accumulated foreign currency translation
adjustments (NOTE 7) (202) (225) (205) ---------------------------
1,431 1,596 1,609 --------------------------- 4,376 4,881 5,192
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The accompanying notes are an integral part of the consolidated
financial statements. Three months ended Nine months ended
CONSOLIDATED September 30 September 30 CASH FLOWS 2006 2006 2005
2006 2006 2005
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(In millions of Canadian dollars, unless otherwise noted)
--------(Unaudited)------- ---------(Unaudited)------- US$ $ $ US$
$ $ (NOTE 2) (NOTE 2) Operating activities Earnings (loss) from
continuing operations 34 38 (48) 12 13 (29) Non-cash items:
Amortization and write-down of property, plant and equipment 71 79
97 213 237 279 Future income taxes 5 5 (47) (30) (33) (70)
Amortization of deferred gain (1) (1) (2) (4) (4) (4) Closure and
restructuring costs, excluding write-down of property, plant and
equipment (NOTE 3) 7 8 8 27 30 22 Other (8) (9) 9 (14) (16) 2
-------------------------- --------------------------- 108 120 17
204 227 200 -------------------------- ---------------------------
Changes in working capital and other items Receivables (31) (34)
(42) (34) (38) (71) Inventories (13) (15) 46 42 47 (12) Prepaid
expenses (4) (5) 2 (12) (13) (7) Trade and other payables 20 22 (5)
(31) (35) (22) Income and other taxes 7 8 12 11 12 11 Other (4) (4)
(6) (8) (9) (23) Payments of closure and restructuring costs (8)
(9) (6) (58) (64) (33) --------------------------
--------------------------- (33) (37) 1 (90) (100) (157)
-------------------------- --------------------------- Cash flows
provided from operating activities of continuing operations 75 83
18 114 127 43 --------------------------
--------------------------- Cash flows used for operating
activities of discontinued operations (NOTE 4) (2) (2) (6) (9) (10)
(27) -------------------------- --------------------------- Cash
flows provided from operating activities 73 81 12 105 117 16
-------------------------- --------------------------- Investing
activities Additions to property, plant and equipment (31) (35)
(34) (84) (94) (113) Proceeds from disposals of property, plant and
equipment 3 4 - 5 6 14 Business acquisition 1 1 - 1 1 - Other - - 3
(3) (3) - -------------------------- ---------------------------
Cash flows used for investing activities of continuing operations
(27) (30) (31) (81) (90) (99) --------------------------
--------------------------- Cash flows used for investing
activities of discontinued operations (NOTE 4) - - - - - (1)
-------------------------- --------------------------- Cash flows
used for investing activities (27) (30) (31) (81) (90) (100)
-------------------------- --------------------------- Financing
activities Dividend payments - - (14) (1) (1) (42) Change in bank
indebtedness 1 1 3 37 41 11 Change in revolving bank credit, net of
expenses (77) (86) (301) (78) (87) (111) Issuance of long-term
debt, net of expenses 1 1 482 1 1 482 Repayment of long-term debt -
- (177) (1) (1) (267) Premium on redemption of long-term debt - -
(7) - - (7) Common shares issued, net of expenses 1 1 2 3 3 6
Redemptions of preferred shares (1) (1) - (2) (2) (2)
-------------------------- --------------------------- Cash flows
provided from (used for) financing activities of continuing
operations (75) (84) (12) (41) (46) 70 --------------------------
--------------------------- Cash flows provided from financing
activities of discontinued operations (NOTE 4) - - - - - -
-------------------------- --------------------------- Cash flows
provided from (used for) financing activities (75) (84) (12) (41)
(46) 70 -------------------------- --------------------------- Net
decrease in cash and cash equivalents (29) (33) (31) (17) (19) (14)
Translation adjustments related to cash and cash equivalents 1 1 1
(2) (2) 2 Cash and cash equivalents at beginning of period 84 94 70
75 83 52 -------------------------- ---------------------------
Cash and cash equivalents at end of period 56 62 40 56 62 40
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Cash and cash equivalents at end of period, related to: Continuing
operations 56 62 40 56 62 40 Discontinued operations - - - - - -
-------------------------- --------------------------- Cash and
cash equivalents at end of period 56 62 40 56 62 40
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The accompanying notes are an integral part of the consolidated
financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER 2006 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS
OTHERWISE NOTED) NOTE I. ------- BASIS OF PRESENTATION In the
opinion of management, the accompanying unaudited interim
consolidated financial statements, prepared in accordance with
Canadian generally accepted accounting principles, contain all
adjustments necessary to present fairly Domtar Inc.'s (Domtar)
financial position as at September 30, 2006 and December 31, 2005,
as well as its results of operations and its cash flows for the
three months and nine months ended September 30, 2006 and 2005.
While management believes that the disclosures presented are
adequate, these unaudited interim consolidated financial statements
and notes should be read in conjunction with Domtar's annual
consolidated financial statements. These unaudited interim
consolidated financial statements follow the same accounting
policies as the most recent annual consolidated financial
statements. NOTE 2. ------- UNITED STATES DOLLAR AMOUNTS The
unaudited interim consolidated financial statements are expressed
in Canadian dollars and, solely for the convenience of the reader,
the 2006 unaudited interim consolidated financial statements and
the tables of certain related notes have been translated into U.S.
dollars at the September 2006 month-end rate of CAN$1.00 =
US$0.8966. 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 3. ------- CLOSURE AND
RESTRUCTURING COSTS In 2005, Domtar's management announced a series
of targeted measures aimed at returning the Corporation to
profitability. The plan included 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 Corporation's paper and merchant operations in
Canada and the United States. In 2005, Norampac's 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. As at September 30, 2006, the balance
of the provision was $44 million, which includes $35 million
related to the Papers segment, $8 million related to the Wood
segment and $1 million related to Norampac, representing the
Corporation's proportionate share. The following tables provide a
reconciliation of all closure and restructuring costs: Three months
ended Three months ended September 30 September 30 Total Papers
Wood Packa- Total Papers Wood Packa- Total ging ging
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--------------(Unaudited)---------- -------(Unaudited)------- US$ $
$ $ $ $ $ $ $ (NOTE 2) Reversal of provision (11) (12) - - (12) - -
- - Labor costs 9 10 - - 10 3 - 4 7 Write-down of certain inventory
items 5 6 - - 6 - - - - Write-down of property, plant and equipment
- - - - - - - 7 7 Other closure related costs 4 4 - - 4 - - 1 1
------------------------------------------------------------
Closure and restructuring costs 7 8 - - 8 3 - 12 15
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Nine months ended Nine months ended September 30 September 30 Total
Papers Wood Packa- Total Papers Wood Packa- Total ging ging
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--------------(Unaudited)---------- -------(Unaudited)------- US$ $
$ $ $ $ $ $ $ (NOTE 2) Reversal of provision (12) (13) - - (13) (1)
- 1 (1) Labor costs 22 22 1 1 24 10 - 4 14 Write-down of certain
inventory items 6 7 - - 7 - - - - Write-down of property, plant and
equipment - - - - - - - 9 9 Other closure related costs 11 12 - -
12 8 - 1 9
------------------------------------------------------------
Closure and restructuring costs 27 28 1 1 30 17 - 14 31
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The following table provides a reconciliation of all closure and
restructuring cost provisions: September September December 30 30
31 2006 2006 2005
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----------(Unaudited)-------- US$ $ $ (NOTE 2) Balance at beginning
of period 76 85 37 Severance payments (40) (45) (32) Reversal of
provision (12) (13) (1) Additions Labor costs 11 12 71
Environmental costs - - 10 Other 4 5 - ---------------------------
Balance at end of period 39 44 85
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NOTE 4. ------- DISCONTINUED OPERATIONS In November 2005, as part
of its restructuring program, Domtar announced its intention to
sell the Vancouver, British Columbia paper mill. Effective in the
second quarter of 2006, the Vancouver paper mill was not sold and
has been permanently closed. Considering the fact that its major
product line will not continue to be sold, the Vancouver paper mill
will no longer be included in the Papers segment but classified as
a discontinued operations in the consolidated earnings and in the
consolidated cash flows and the property, plant and equipment as
held for sale in the consolidated balance sheets. The consolidated
earnings and cash flows for the three months and nine months ended
September 30, 2005 have been restated for purposes of comparability
with the basis of presentation adopted in the second quarter of
2006. In July 2006, Domtar reached an agreement to sell the
Vancouver paper mill property, subject to a number of closing
conditions. The loss from discontinued operations of the Vancouver
paper mill is summarized as follows: Three months ended Nine months
ended September 30 September 30 2006 2006 2005 2006 2006 2005
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----------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $
$ (NOTE 2) (NOTE 2) Sales 2 2 20 34 38 64
-------------------------- --------------------------- Earnings
(loss) from discontinued operations before income tax 1 1 (6) (10)
(11) (16) Income tax expense (recovery) 1 1 (2) (3) (3) (5)
-------------------------- --------------------------- Loss from
discontinued operations - - (4) (7) (8) (11) Basic loss from
discontinued operations per share (in dollars) - - (0.02) (0.02)
(0.03) (0.05) Diluted loss from discontinued operations per share
(in dollars) - - (0.02) (0.02) (0.03) (0.05)
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NOTE 5. ------- EARNINGS (LOSS) PER SHARE The following table
provides the reconciliation between basic and diluted earnings
(loss) per share: Three months ended Nine months ended September 30
September 30 2006 2006 2005 2006 2006 2005
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----------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $
$ (NOTE 2) (NOTE 2) Earnings (loss) from continuing operations 34
38 (48) 12 13 (29) Dividend requirements of preferred shares - - -
1 1 1 -------------------------- ---------------------------
Earnings (loss) from continuing operations applicable to common
shares 34 38 (48) 11 12 (30) Net earnings (loss) 34 38 (52) 5 5
(40) Dividend requirements of preferred shares - - - 1 1 1
-------------------------- --------------------------- Net earnings
(loss) applicable to common shares 34 38 (52) 4 4 (41) Weighted
average number of common shares outstanding (millions) 230.6 230.6
229.8 230.4 230.4 229.6 Effect of dilutive securities (millions) -
- - - - - -------------------------- ---------------------------
Weighted average number of diluted common shares outstanding
(millions) 230.6 230.6 229.8 230.4 230.4 229.6
-------------------------- --------------------------- Basic
earnings (loss) from continuing operations per share (in dollars)
0.14 0.16 (0.21) 0.04 0.05 (0.13) Diluted earnings (loss) from
continuing operations per share (in dollars) 0.14 0.16 (0.21) 0.04
0.05 (0.13) Basic net earnings (loss) per share (in dollars) 0.14
0.16 (0.23) 0.02 0.02 (0.18) Diluted net earnings (loss) per share
(in dollars) 0.14 0.16 (0.23) 0.02 0.02 (0.18)
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The following table provides the securities that could potentially
dilute basic earnings (loss) per share in the future but were not
included in the computation of diluted earnings (loss) per share
because to do so would have been anti-dilutive for the periods
presented: September 30 September 30 2006 2005
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Number of shares Options 4,589,495 5,050,990 Bonus shares 67,875
143,325 Rights 84,500 84,500
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NOTE 6. ------- RECEIVABLES As at February 22, 2006, Domtar
finalized a new three-year securitization agreement, which includes
both U.S. and Canadian receivables. The maximum cash consideration
that can be received from the sale of receivables under this new
combined agreement is $222 million (US$190 million). As at
September 30, 2006, the senior beneficial interest held by third
parties amounted to $193 million (US$173 million) under this new
securitization program compared to $163 million (US$140 million) as
at December 31, 2005 under the old U.S. and Canadian accounts
receivable programs. NOTE 7. ------- ACCUMULATED FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS September September December 30 30 31 2006
2006 2005
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----------(Unaudited)-------- US$ $ $ (NOTE 2) Balance at beginning
of period (184) (205) (190) Effect of changes in exchange rates
during the period: On net investment in self-sustaining foreign
subsidiaries (76) (85) (69) On certain long-term debt denominated
in foreign currencies designated as a hedge of net investment in
self-sustaining foreign subsidiaries" 70 78 65 Future income taxes
thereon (12) (13) (11) --------------------------- Balance at end
of period (202) (225) (205)
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NOTE 8. ------- FINANCIAL INSTRUMENTS 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: September December
September December 30 31 30 31 2006 2005 2006 2005
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---------------(Unaudited)---------- Average exchange Contractual
rate amounts (CAN$/US$) (In millions of U.S. dollars) Forward
foreign exchange contracts 0 to 12 months 1.18 1.24 144 295 13 to
24 months 1.13 - 2 - Currency options purchased 0 to 12 months 1.13
- 170 - 13 to 24 months 1.12 - 30 - Currency options sold 0 to 12
months 1.19 - 130 - 13 to 24 months 1.19 - 30 -
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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. NOTE 9.
------- DEFINED BENEFIT PLANS AND OTHER EMPLOYEE FUTURE BENEFIT
PLANS Three months ended Nine months ended September 30 September
30 2006 2006 2005 2006 2006 2005
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----------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $
$ (NOTE 2) (NOTE 2) Net periodic benefit cost for defined benefit
plans 14 16 11 40 45 31 Net periodic benefit cost for other
employee future benefit plans 2 2 3 6 7 9
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NOTE 10. -------- SEGMENTED DISCLOSURES Domtar operates in the four
reportable segments described below. Each reportable segment offers
different products and services and requires different technology
and marketing strategies. The following summary briefly describes
the operations included in each of Domtar's reportable segments: -
PAPERS - represents the aggregation of the manufacturing and
distribution of business, commercial printing and publication, and
technical and specialty papers, as well as pulp. - PAPER MERCHANTS
- involves the purchasing, warehousing, sale and distribution of
various products made by Domtar and by other manufacturers. These
products include business and printing papers, and certain
industrial products. - WOOD - comprises the manufacturing and
marketing of lumber and wood- based value-added products and the
management of forest resources. - PACKAGING - comprises the
Corporation's 50% ownership interest in Norampac, a company that
manufactures and distributes containerboard and corrugated
products. Domtar evaluates performance based on operating profit,
which represents sales, reflecting transfer prices between segments
at fair value, less allocable expenses before financing expenses
and income taxes. Three months ended Nine months ended September 30
September 30 2006 2006 2005 2006 2006 2005
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---------(Unaudited)-------- ---------(Unaudited)-------- US$ $ $
US$ $ $ (NOTE 2) (NOTE 2) Sales Papers 650 725 751 1,910 2,130
2,233 Paper Merchants 233 260 275 711 793 794 Wood 96 107 159 345
385 545 Packaging 148 165 161 431 480 491
-------------------------- --------------------------- Total for
reportable segments 1,127 1,257 1,346 3,397 3,788 4,063
Intersegment sales - Papers (59) (66) (71) (194) (217) (211)
Intersegment sales - Wood (12) (13) (32) (37) (41) (104)
Intersegment sales - Packaging (1) (1) (2) (3) (3) (5)
-------------------------- --------------------------- Consolidated
sales 1,055 1,177 1,241 3,163 3,527 3,743
-------------------------- ---------------------------
-------------------------- --------------------------- Amortization
and write-down of property, plant and equipment Papers 55 61 70 164
183 209 Paper Merchants 1 1 - 2 2 2 Wood 8 9 12 24 27 34 Packaging
7 8 15 23 25 34 --------------------------
--------------------------- Consolidated amortization and
write-down of property, plant and equipment 71 79 97 213 237 279
-------------------------- ---------------------------
-------------------------- --------------------------- Operating
profit (loss) from continuing operations Papers 67 75 (30) 67 74
(12) Paper Merchants 3 3 4 9 10 13 Wood (15) (17) (12) (29) (32) 5
Packaging 20 23 (10) 45 50 14 --------------------------
--------------------------- Total for reportable segments 75 84
(48) 92 102 20 Corporate 5 5 4 6 7 11 --------------------------
--------------------------- Consolidated operating profit (loss)
from continuing operations 80 89 (44) 98 109 31
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NOTE 11. -------- SUBSEQUENT EVENT On April 27, 2006, the Canadian
and U.S. Governments signed a term sheet which addresses the refund
of duty deposits and sets out a framework for the management of
Canadian softwood lumber exports to the U.S. for a seven-year
period. On July 1, 2006, Canada and the U.S. signed a more detailed
legal text based upon the term sheet. On September 12, 2006, Canada
and the U.S. signed the Softwood Lumber Agreement 2006, which was
largely based on the July 1, 2006 legal text. Finally, on October
12, 2006, Canada and the U.S. agreed to certain amendments to the
Softwood Lumber Agreement, and the final Agreement took effect on
that date. Specific implications of the Agreement include the
immediate revocation by the U.S. of the antidumping and
countervailing duties orders, with retroactive effect to May 2002;
the cessation of countervailing and antidumping duties collections
by the U.S.; the termination of ongoing administrative reviews by
the U.S.; the prohibition of any new antidumping or countervailing
duties investigations in respect of softwood lumber from Canada for
the duration of the Agreement and the immediate imposition by the
Government of Canada of the export tax regime that is currently
before Parliament and has been tentatively approved by a Ways &
Means Motion. As at September 30, 2006, Domtar did not record a
receivable for the total cash deposits made since May 2002 and the
related interest because the agreement was not in effect. Effective
October 12, 2006, Domtar is entitled to receive a refund for duties
collected by the U.S. Government since 2002 plus interest for a
total consideration of approximately US$183 million ($204 million)
which could be subject to a special charge of 19% to be imposed by
the Canadian Government. NOTE 12. -------- ANNOUNCED TRANSACTION In
August 2006, Domtar signed a definitive agreement to combine with
Weyerhaeuser's fine paper business and related assets. Under the
terms of the transaction, Weyerhaeuser's fine paper business,
consisting of 10 primary pulp and paper mills (seven in the United
States and three in Canada), converting, forming and warehousing
facilities and two sawmills will be transferred into a newly formed
company for stock and a cash payment of US$1.35 billion to be
provided by the new company through borrowings under a credit
facility. Weyerhaeuser will distribute the shares of the new
company to its shareholders in either a spin-off or split-off
transaction at its own discretion. Domtar will combine with the
newly formed company to create the "new Domtar." At the time of the
closing, the combined company will be owned approximately 55% by
former Weyerhaeuser shareholders and 45% by former Domtar
shareholders. The combination is subject to approvals by the
shareholders of Domtar by a special resolution, the Superior Court
of Quebec, appropriate regulatory and other authorities, as well as
customary closing conditions. The transaction is expected to close
in the first quarter of 2007. As a result of this transaction,
Domtar will become an indirect wholly owned subsidiary of the "new
Domtar," a U.S. incorporated company. NOTE 13. -------- COMPARATIVE
FIGURES To conform with the basis of presentation adopted in the
current period, certain figures previously reported have been
reclassified. DATASOURCE: DOMTAR INC. CONTACT: Christian Tardif,
Senior Manager, Corporate and Financial Communications, (514)
848-5515, ; INVESTOR RELATIONS: Pascal Bosse, Manager, Investor
Relations, (514) 848-5938, ; SOURCE: Daniel Buron, Senior
Vice-President and Chief Financial Officer, (514) 848-5234,
Copyright
