FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2002.
DOMTAR INC.
395 DE MAISONNEUVE BLVD. WEST, MONTREAL, QUEBEC H3A 1L6
[Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.]
Form 20-F Form 40-F [check mark]
------------------------ ------------------------
[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.]
Yes No [check mark]
---------------------------- ----------------------------
[If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-.........
ENCLOSED ARE DOMTAR INC.'S THIRD QUARTER RESULTS FOR THE PERIOD ENDED
SEPTEMBER 30, 2002.
(DOMTAR LOGO)
3. Domtar Inc.
Third Quarter 2002
"The new strength of paper, you'll find it on shelves everywhere."
(PROMOTIONAL PICTURE)
HIGHLIGHTS
-- Net earnings of $59 million, or $0.26 per common share.
-- Operating profit of $136 million.
-- Net debt-to-total-capitalization ratio reduced from 55% as at December 31,
2001, to 51% as at September 30, 2002.
RECENT DEVELOPMENTS
-- Acquisition synergies reached an annualized run rate of US$60 million as at
September 30, 2002, vs a US$65 million target as at December 31, 2002.
-- Creation of a new Forest Products Group, which combines both timber and
lumber operations.
-- Domtar stock included for a fourth consecutive year in the Dow Jones
Sustainability Group Index.
Domtar is the third largest producer of uncoated freesheet paper in North
America. It is also a leading manufacturer of business papers, printing and
publishing papers, and specialty and technical papers. Domtar manages according
to internationally recognized standards 22 million acres of forestland in Canada
and the United States, and produces lumber and other wood products. Domtar has
12,500 employees across North America. The Company also has a 50% investment
interest in Norampac Inc., the largest Canadian producer of containerboard.
For further information
Investor relations
Christian Dube
Senior Vice-President
and Chief Financial Officer
Tel.: (514) 848-5511
Fax: (514) 848-5638
Jean-Sebastien Vanbrugghe
Manager, Investor Relations
Tel.: (514) 848-5469
Fax: (514) 848-5638
Email: ir@domtar.com
Communications
William George
Vice-President,
Communications &
Government Relations
Tel.: (514) 848-5103
Fax: (514) 848-6878
Head Office
395 de Maisonneuve Blvd. West
Montreal, Quebec H3A 1L6
Tel.: (514) 848-5400
Internet: www.domtar.com
Brokerage firms that follow Domtar:
Bank of America
BMO Nesbitt Burns
CIBC World Markets
D.A. Davidson & Company
Deutsche Bank Securities
Equity Research Associates
Goldman Sachs
J.P. Morgan
Merrill Lynch
Morgan Stanley Dean Witter
National Bank Financial
Raymond James
RBC Capital Markets
Salomon Smith Barney
Scotia Capital Markets
TD Newcrest
UBS Warburg
Valeurs mobilieres Desjardins
Your life, our products
Customers Products Applications
Papers Businesses BUSINESS PAPERS Photocopies
60% (1) Quick printers High volume Office documents
Homes copy paper Presentations
Premium imaging/
technology paper
Commercial COMMERCIAL Pamphlets
Printers PRINTING PAPERS Brochures
Offset Direct mail
Opaque Commercial printing
Coated Forms and envelopes
Paper Designers DESIGNER PAPERS Annual reports
Merchants Text, cover and writing Stationery
22% (1) Premium coated High-end printing
Publishers PUBLICATION PAPERS Books
Uncoated lightweights Catalogues
Coated lightweights Magazines
Heavyweight book
Converters TECHNICAL AND Food and candy
Makers of SPECIALTY PAPERS wrapping
end products Flexible packaging Surgical gowns
Label papers Security check papers
Medical disposables Wallpapers
Decorative papers
Wood Home improvement VALUE-ADDED AND Building and
7% (1) centers DIMENSIONAL LUMBER remodeling
Wholesalers and Premium, J-Grade, Residential
Distributors Decking, MSR, I-Joist Construction
Dimensional lumber
Studs
Re-manufacturers WOOD COMPONENTS Re-manufactured
of wood products Wood components into bed frames,
shelving, door
and window
components, etc
Packaging Makers of boxes PACKAGING Packaging of very
11% (1) End users of Custom made boxes small to very large
containerboard boxes objects
(1) As per net sales in 3rd quarter of 2002.
3. Domtar Inc. Third Quarter 2002
HIGHLIGHTS
NET SALES
(In millions of CAN$)
(BAR CHART)
2000(2) 2001(2) 2002
EBITDA(1)
(In millions of CAN$)
(BAR CHART)
NET EARNINGS (LOSS)
(In millions of CAN$)
(BAR CHART)
NET EARNINGS (LOSS)
PER BASIC SHARE (in CAN$)
(BAR CHART)
SELECTED FINANCIAL DATA
(In millions of Canadian dollars, unless otherwise noted)
Three months ended Year ended
---------------------------------------- December 31(2)
September 30 June 30 September 30(2) ------------------
2002 2002 2001 2001 2000
------------ ------- --------------- ----- -----
$ $ $ $ $
(Unaudited)
OPERATING RESULTS
Net sales 1,390 1,416 1,177 4,377 3,598
EBITDA(1) 233 217 163 607 715
Operating profit 136 118 83 313 476
Financing expenses 51 43 64 167 119
Net earnings 59 55 14 140 262
Net earnings per common share 0.26 0.24 0.08 0.72 1.42
Cash flows provided from operating activities
per common share 0.74 1.13 0.85 3.80 3.21
Weighted average number of common shares
outstanding (millions) 227.4 227.3 180.8 191.2 182.9
BALANCE SHEET DATA
Total assets 6,958 7,055 4,235
Long-term debt 2,675 2,872 973
Shareholders' equity 2,524 2,426 1,809
Net debt-to-total-capitalization 51% 55% 36%
Book value per common share 10.89 10.51 9.79
OTHERS
Cash flows provided from operating activities 169 727 587
Free cash flow 119 441 345
Annualized return on equity (ROE) 10% 7% 16%
--------
(1) Earnings before interest expense, income taxes and amortization
(2) Figures have been restated to reflect the application of amended accounting
recommendations
RELATIVE PERFORMANCE - DTC Index:1998 = 1
(LINE CHART)
DOMTAR STOCK PRICE
(LINE CHART)
(DOMTAR LOGO)
Nolin Branding & Design
Printed in Canada
Printed 4-color process on new FSC Domtar Plainfield 80 lb. cover and 70 lb.
text. FSC Trademark(C)1996 Forest Stewardship Council A.C. SW-COC-681
The FSC Trademark identifies forests which have been certified in accordance
with the rules of the Forest Stewardship Council.
(FOREST STEWARDSHIP LOGO)
(PROMOTIONAL PHOTO)
Dear Shareholder,
The results of the third quarter are invigorating for the Domtar team. In fact,
the growing demand for our products is an indication of our clients'
satisfaction with the quality of our products and our prompt, efficient service.
This customer loyalty, a reflection of Domtar's different feel, combined with
the rigourous implementation of our two profitability improvement programs,
resulted in an outstanding third quarter, in which we tripled our earnings per
share over the same quarter last year.
What this means is that we are well on our way to meeting the 2002 objectives we
set for our profitability improvement programs and our debt-to-equity ratio.
Indeed, at the end of the third quarter, synergies related to the acquisition of
four U.S. paper mills already reached an annualized run rate of US$60 million,
versus a US$65 million target at the end of 2002. For the same period, our net
debt-to-total-capitalization ratio was 51%, compared to our objective of 50%
target at December 31, 2002.
In the lumber sector, which accounts for approximately 7% of our sales for the
quarter, the imposition of various duties by the U.S. as well as difficult
market conditions have led us to consolidate management of our timber and lumber
operations under a single group, in order to improve our performance in this
business segment.
Finally, we are proud to note that Domtar's overall performance in the area of
sustainable development was recognized when its stock was reconfirmed for a
fourth consecutive year in the Dow Jones Sustainability Index.
All these factors are helping to position Domtar to take full advantage of any
improvements in the economy and provide a 15% return on equity or more over a
normal business cycle.
Raymond Royer
President and Chief Executive officer
MD&A
The Management's Discussion and Analysis contains statements that are
forward-looking in nature. Such statements involve known and unknown risks and
uncertainties, such as: general economic and business conditions, product
selling prices, raw material and operating costs, changes in foreign currency
exchange rates, our ability to integrate acquired businesses into our existing
operations, and other factors referenced herein and in the Corporation's
continuous disclosure filings. Therefore, the actual results of the Corporation
may be materially different from those expressed or implied by such
forward-looking statements. Except where otherwise indicated, all financial
information reflected herein is expressed in Canadian dollars and determined on
the basis of Canadian generally accepted accounting principles (Canadian GAAP).
OUR BUSINESS
BUSINESS PROFILE
Domtar's reporting segments correspond to the following four business
activities: Papers, Paper Merchants, Wood and Packaging. For the year ended
December 31, 2001, our consolidated net sales were $4.4 billion, including the
net sales from the four U.S. integrated pulp and paper mills (the Acquired
Mills) acquired on August 7, 2001 (the Acquisition). If the Acquisition had
occurred on January 1, 2001, our pro forma consolidated net sales would have
been $5.5 billion.
PAPERS
We are the third largest integrated manufacturer and marketer of uncoated
freesheet paper in North America. We operate six pulp and paper mills in Canada
and five in the United States, with an annual paper production capacity of
approximately 2.7 million tons, which are complemented by strategically located
warehouses and sales offices. More than 50% of our paper production capacity is
located in the United States and approximately 85% of our paper sales are
generated in that country. Uncoated and coated freesheet papers, our principal
products, are used for business, printing and publishing, and technical and
specialty applications. The chart below illustrates our principal paper products
and our annual paper production capacity.
We sell paper principally through a large network of owned and independent
merchants that distribute our paper products from over 350 locations throughout
North America. Sales are made also to a variety of customers that include
business offices, office equipment manufacturers, retail outlets, commercial
printers, publishers and converters. In addition, we sell pulp that we produce
in excess of our internal requirements. Our net market pulp position is
approximately 630,000 tons. Our Papers business is our most important segment
and represented approximately 58% of our consolidated net sales during the first
nine months of 2002.
CATEGORIES Business Papers Printing and Publishing Papers Technical
and Specialty
Papers
TYPES Uncoated Freesheet Coated Uncoated and
Freesheet Coated Freesheet
GRADES Copy Premium imaging Offset Lightweight Lightweight Flexible packaging
Business converting Opaques Premium Abrasive papers
Text and cover Regular Decorative papers
Imaging papers
Label papers
Medical disposables
APPLICATIONS Photocopies Pamphlets Stationery Brochures Food & candy
Office documents Brochures Brochures Annual reports wrappings
Presentations Direct mail Annual reports Books Surgical gowns
Commercial Books Magazines Repositionable
printing Catalogues Catalogues note pads
Forms & envelopes Security check
papers
Wallpapers
CAPACITY* As at September 30, 2002: 2,700,000 tons
700,000 tons 200,000 tons 500,000 tons 535,000 tons 400,000 tons 365,000 tons
(26%) (7%) (19%) (20%) (15%) (13%)
--------
* The allocation of production capacity may vary from year to year in order
to take advantage of market conditions. The production capacity reflects
the announcement we made on March 27, 2002, to close three paper machines:
two in St. Catharines, Ontario and one in Nekoosa, Wisconsin resulting in
the reduction of 50,000 tons of paper manufacturing capacity at St.
Catharines and 30,000 tons at Nekoosa. St. Catharines ceased operations at
the end of September 2002.
2
PAPER MERCHANTS
Our Paper Merchants business involves the purchasing, warehousing, sale and
distribution of business and printing papers, graphic arts supplies and
industrial products made by us as well as by other manufacturers. Our Canadian
paper merchants operate a total of eight branches in eastern Canada (Buntin Reid
in Ontario, JBR/La Maison du Papier in Quebec and The Paper House in the
Atlantic Provinces) while our US paper merchant (RIS Paper) services a large
client base from 20 locations in the Northeast, Midwest and the Mid-Atlantic
regions of the United States. Our Paper Merchants business represented 22% of
our consolidated net sales during the first nine months of 2002.
WOOD
Our Wood business includes the manufacturing and distribution of lumber and
wood-based value-added products as well as the management of forest resources.
We operate 14 sawmills and two re-manufacturing facilities, with an annual
capacity of 1.2 billion board feet. We seek to maximize the utilization of
forestlands for which we are responsible through efficient management and by
following certified sustainable forest management practices so that a continuous
supply of wood is available for future needs. Our Wood business represented 9%
of our consolidated net sales during the first nine months of 2002.
PACKAGING
Our Packaging business represents our 50% ownership interest in Norampac, a
joint venture between Domtar Inc. and Cascades Inc. We do not manage Norampac
and its debt is non-recourse to us. As required by Canadian GAAP, we account for
our 50% interest in Norampac by the proportionate consolidation method.
Norampac's network of 25 corrugated packaging plants, strategically located
across Canada and including facilities in the United States and Mexico, provides
full-service packaging solutions and produces a broad range of products. These
facilities are fully integrated on a direct or indirect basis with Norampac's
eight containerboard mills that have a combined annual capacity of more than 1.6
million tons. Our Packaging business represented 11% of our consolidated net
sales during the first nine months of 2002.
SUMMARY OF OPERATING RESULTS
FINANCIAL HIGHLIGHTS
Three months ended Nine months ended
September 30 September 30
(In millions of Canadian dollars, ------------------ ------------------
except per share amounts) 2002 2001(1) 2002 2001(1)
----- ------ ----- ------
$ $ $ $
Net sales 1,390 1,177 4,134 3,075
EBITDA 233 163 592 450
Operating profit 136 83 286 249
Net earnings 59 14 103 122
Net earnings per share (basic) 0.26 0.08 0.45 0.66
Net sales allocation by segment (%):
Papers 60 54 58 48
Paper Merchants 22 25 22 29
Wood 7 9 9 10
Packaging 11 12 11 13
----- ----- ----- -----
Total 100 100 100 100
Selling price index (%) 92 94 91 97
----- ----- ----- -----
--------
(1) Figures have been restated following the application of amended accounting
recommendations that are described in "Accounting Changes".
THIRD QUARTER 2002 VS THIRD QUARTER 2001
NET SALES OF $1.4 BILLION
Net sales for the third quarter of 2002 totaled $1,390 million, up $213 million
(or 18%) from net sales of $1,177 million in the third quarter of 2001. This
increase was mainly due to the inclusion of net sales of the Acquired Mills for
the full three months in 2002 compared to only two months in the corresponding
quarter in 2001, as well as the inclusion of our share of net sales of
Norampac's recent acquisitions. Excluding the impact of the acquisitions
mentioned above, net sales in the third quarter of 2002 would have decreased by
$2 million compared to net sales of the third quarter of 2001. This decrease was
mainly due to lower transaction prices for all of our businesses except pulp, as
well as by the $11 million net impact of duties on exports of softwood lumber to
the United States ($17 million cash deposits made in the third quarter of 2002
compared to a $6 million provision recorded in the corresponding period of
2001). These factors were partially offset by higher shipments in all of our
businesses except containerboard, as well as by a stronger U.S. dollar, net of
costs related to our hedging program. Overall, product pricing for the third
quarter of 2002 is at 92% of our selling price index, compared to 94% during the
corresponding period of 2001. (See Sensitivity Analysis.)
3
OPERATING PROFIT OF $136 MILLION
Cost of sales increased by $145 million (or 15%) in the third quarter of 2002
compared to the corresponding period of 2001 mainly due to the inclusion of cost
of sales of the Acquired Mills for the full three months in 2002 compared to
only two months in the corresponding quarter in 2001, to our share of Norampac's
cost of sales related to recent acquisitions and to higher shipments except
containerboard. This increase was partially offset by lower energy costs and a
$12 million investment tax credit related to research and development
expenditures of prior years.
Selling, general and administrative (SG&A) expenses decreased by $2 million (or
3%) in the third quarter of 2002 compared to the same period of 2001. This
decrease was mainly due to the impact of the cost reduction initiatives
undertaken, partially offset by the inclusion of SG&A expenses of the Acquired
Mills for the full three months in 2002 compared to only two months in 2001, as
well as to our share of Norampac's SG&A related to recent acquisitions.
As a result of the factors mentioned above, EBITDA (earnings before financing
expenses, income taxes and amortization) for the third quarter of 2002 amounted
to $233 million compared to $163 million in the third quarter of 2001 and
operating profit for the third quarter of 2002 amounted to $136 million compared
to $83 million for the corresponding quarter of 2001.
NET EARNINGS OF $59 MILLION
Net earnings for the third quarter of 2002 amounted to $59 million
($0.26 per common share) compared to net earnings of $14 million ($0.08 per
common share) for the same quarter in 2001. The third quarter 2001 results
included the recognition of unrealized foreign exchange losses in accordance
with amended accounting recommendations, representing $8 million net of income
taxes ($0.04 per common share).
NINE MONTHS ENDED SEPTEMBER 30, 2002 VS NINE MONTHS ENDED SEPTEMBER 30, 2001
NET SALES OF $4.1 BILLION
Net sales for the nine months ended September 30, 2002, totaled $4,134 million,
up $1,059 million (or 34%) from net sales of $3,075 million, over the same
period in 2001. This increase was mainly due to the inclusion of net sales of
the Acquired Mills for the full nine months in 2002 compared to only two months
in 2001, as well as the inclusion of our share of net sales of Norampac's recent
acquisitions. Excluding the impact of the acquisitions mentioned above, net
sales in the first nine months of 2002 would have decreased by $7 million
compared to net sales of the corresponding period in 2001. This decrease was
mainly due to lower transaction prices for all of our businesses as well as by
the $16 million net impact of duties on exports of softwood lumber to the United
States ($22 million cash deposits made in the first nine months of 2002 compared
to a $6 million provision recorded in the corresponding period of 2001). These
factors were partially offset by the $20 million net impact of the reversal of
provision for countervailing and antidumping duties on exports of softwood
lumber to the United States ($28 million reversal of a provision in the second
quarter of 2002 net of the $8 million provision recorded in the first quarter of
2002), higher shipments in all of our businesses except containerboard, as well
as by a stronger U.S. dollar, net of costs related to our hedging program.
Overall, product pricing for the first nine months of 2002 is at 91% of our
selling price index, compared to 97% during the corresponding period in 2001.
OPERATING PROFIT OF $286 MILLION
On March 27, 2002, we announced plans to permanently shutdown the St.
Catharines, Ontario, paper mill as well as one paper machine in the Nekoosa,
Wisconsin, paper mill. The shutdown of the St.Catharines paper mill, which
occurred at the end of September 2002, resulted in a charge to first quarter
2002 earnings of $45 million ($30 million net of income taxes, or $0.13 per
common share) which included $14 million related to the write down to the
estimated net realizable value of property, plant and equipment as well as $31
million of charges for other commitments and contingencies related to this paper
mill.
The shutdown of a paper machine at the Nekoosa paper mill, acquired in the third
quarter of 2001, was a result of a study since its acquisition. In accordance
with Canadian Institute of Chartered Accountants (CICA) recommendations, charges
related to the closure of this paper machine, amounting to $10 million (US$6
million), are accounted for as part of the allocation of the purchase price to
the assets acquired and liabilities assumed as of the acquisition date and thus
do not affect the nine months ended September 30, 2002 earnings.
Cost of sales increased by $830 million (or 34%) in the first nine months of
2002 compared to the corresponding period of 2001 mainly due to the inclusion of
cost of sales of the Acquired Mills for the full nine months in 2002 compared to
only two months in 2001, to our share of Norampac's cost of sales related to
recent acquisitions, and by higher shipments except containerboard. This
increase was partially offset by lower purchased fiber and energy costs as well
as by a $12 million investment tax credit related to research and development
expenditures of prior years.
SG&A expenses increased by $56 million (or 31%) in the first nine months of 2002
compared to the same period of 2001. This increase was mainly due to the
inclusion of SG&A expenses of the Acquired Mills for the full nine months in
2002 compared to only two months in 2001, to our share of Norampac's SG&A
related to recent acquisitions, as well as to the cashing in of certain
insurance policies that were applied to SG&A expenses in the second quarter of
2001. This increase was partially offset by the impact of the cost reduction
initiatives undertaken.
As a result of the factors mentioned above, EBITDA for the first nine months of
2002 amounted to $592 million (or $623 million excluding closure costs) compared
to $450 million in the first nine months of 2001 and operating profit for the
first nine months of 2002 amounted to $286 million (or $331 million excluding
closure costs) compared to $249 million for the corresponding period of 2001.
These factors were partially offset by the impact of the cost reduction
initiatives undertaken.
4
NET EARNINGS OF $103 MILLION
The net earnings for the first nine months of 2002 amounted
to $103 million ($0.45 per common share) compared to net earnings of $122
million ($0.66 per common share) for the same period in 2001. The year-to-date
2002 net earnings included closure costs described previously of $30 million net
of income taxes ($0.13 per common share), as well as earnings from the net
impact of the reversal of a provision for countervailing and antidumping duties
on exports of softwood lumber to the United States, representing $14 million net
of income taxes ($0.06 per common share). The year-to-date 2001 net earnings
included earnings from non-recurring items primarily related to the cashing in
of certain insurance policies, representing $9 million net of income taxes
($0.05 per common share), the recognition of unrealized foreign exchange losses
in accordance with amended accounting recommendations, representing $10 million
net of income taxes ($0.06 per common share), as well as a reduction of $33
million ($0.18 per common share) of income tax expense related to a reduction in
enacted income tax rates.
PAPERS
SELECTED INFORMATION
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
---- ---- ----- -----
Net sales (millions of Canadian dollars) 833 638 2,413 1,460
Operating profit (millions of Canadian dollars) 121 59 199 177
Operating profit excluding closure costs
(millions of Canadian dollars) 121 59 244 177
Shipments:
Paper ('000 ST) 676 514 1,973 1,188
Pulp ('000 ADST) 196 141 584 292
Shipment paper product offering (%):
Copy and offset grades 57 48 55 45
Uncoated printing & publishing and
premium imaging grades 17 21 18 20
Coated printing & publishing grades 13 18 13 23
Technical & specialty grades 13 13 14 12
--- --- ----- -----
Total 100 100 100 100
Benchmark nominal prices(1):
Copy 20 lb sheets (US$/ton) 772 789 771 827
Offset 50 lb rolls (US$/ton) 690 697 685 730
Coated publication, no. 3, 60 lb rolls (US$/ton) 740 820 767 863
Pulp NBSK (US$/tonne) 510 487 491 578
--- --- ----- -----
--------
(1) Source: Pulp & Paper Week.
SALES, SHIPMENTS AND OPERATING PROFIT
Net sales in our Papers business, representing 60% of consolidated net sales in
the third quarter of 2002, amounted to $833 million, an increase of $195 million
(or 31%) compared to the third quarter of 2001. This increase was primarily due
to the inclusion of net sales of the Acquired Mills for the full three months in
2002 compared to only two months in 2001, to the effect of increases in
transaction prices for pulp and higher shipments for paper at mills excluding
Acquired Mills, as well as to the favorable effect of a stronger U.S. dollar,
net of costs related to our hedging program. This increase was partially offset
by the decline in transaction prices for paper. On a year-to-date basis, net
sales of paper and pulp increased by $953 million (or 65%) compared to the same
period in 2001, for the same reasons noted above except that no increases were
registered in transaction prices for pulp on a year-to-date basis.
Operating profit in the Papers business amounted to $121 million in the third
quarter of 2002, a 105% increase compared to $59 million in the third quarter of
2001. This increase was primarily due to the inclusion of operating profit of
the Acquired Mills for the full three months in 2002 compared to only two months
in 2001 and to the realization of Acquisition-related synergies. The Papers
business also benefited from a $12 million investment tax credit related to
research and development expenditures of prior years, the favorable effect of a
stronger U.S. dollar, net of costs related to our hedging program, lower
purchased fiber and energy costs, higher prices for pulp, as well as higher
shipments for paper at mills excluding Acquired Mills. These positive factors
were partially offset by lower prices for paper. On a year-to-date basis,
operating profit amounted to $199 million, a 12% increase compared to the same
period of 2001. Excluding the $45 million provision related to closure costs of
the St. Catharines mill, operating profit amounted to $244 million, a $67
million increase (or 38%) compared to $177 million in the third quarter of 2001.
This increase was attributable to all the factors mentioned above except that
pulp transaction prices decreased on a year-to-date basis.
5
PRICING ENVIRONMENT
Our average transaction prices in the third quarter of 2002
for 20 lb copy sheets (business papers) and 50 lb offset rolls (uncoated
printing and publishing papers) decreased by US$7/ton compared to the prices
experienced in the third quarter of 2001. For the nine months ended September
30, 2002, average transaction prices for 50 lb offset rolls and 20 lb copy
sheets decreased by US$36/ton compared to the average prices experienced in the
corresponding period of 2001. Effective at the end of September 2002, we
announced a US$40/ton price increase for copy and offset grades.
Our weighted average transaction price for all our coated printing & publishing
papers in the third quarter of 2002 decreased by US$53/ton compared to the
corresponding quarter of 2001. For the nine months ended September 30, 2002,
average transaction prices decreased by US$46/ton.
Discipline by pulp producers to manage supply resulted in the implementation of
a US$10/tonne price increase for both hardwood and softwood pulp in July 2002.
Our average Northern Bleached Softwood Kraft (NBSK) and Northern Bleached
Hardwood Kraft (NBHK) pulp transaction prices in the third quarter of 2002
increased by an average of US$67/tonne compared to the same quarter in 2001. For
the nine months ended September 30, 2002, average transaction prices decreased
by US$52/tonne compared to the same period last year.
PRODUCTION EFFICIENCY
In the Papers business, we pursued our efforts to integrate our newly Acquired
Mills. A majority of our new employees (91% of employees of the new Acquired
Mills) have already participated in interactive training sessions on Domtar's
management philosophy and corporate values.
In the third quarter of 2002, we took market-related downtime, curtailing
production by 6,000 tons of paper, representing approximately 1% of our third
quarter 2002 production capacity. In addition, during the third quarter of 2002,
we slowed back or curtailed production of pulp by 1,000 tons. On a year-to-date
basis, we have curtailed production by 50,000 tons of paper and 39,000 tons of
pulp. This reflects our commitment to adjust production to our customers' needs
and the impact of the closures of three paper machines in St. Catharines and
Nekoosa described previously.
During the third quarter of 2002, we continued to focus our efforts on reducing
our costs and on achieving synergies related to the Acquisition. As at September
30, 2002, we reached an annualized run rate of US$60 million on our synergies
and we are committed to meeting our objective of achieving an annualized run
rate of US$65 million by the end of 2002.
PAPER MERCHANTS
SELECTED INFORMATION
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales (millions of Canadian dollars) 300 291 897 903
Operating profit (millions of Canadian dollars) 6 3 20 13
---- ---- ---- ----
SALES AND OPERATING PROFIT
Net sales in the Paper Merchants business, representing 22% of consolidated net
sales in the third quarter of 2002, amounted to $300 million, an increase of $9
million (or 3%) compared to the corresponding period of 2001. This increase is
due to continued volume growth and market share gains realized throughout 2002,
partially offset by lower average selling price levels in comparison to the
corresponding quarter of 2001. On a year-to-date basis, net sales of Paper
Merchants amounted to $897 million, a decrease of $6 million (or 1%) compared to
the same period in 2001 due to lower average selling prices.
Operating profit in the Paper Merchants business of $6 million generated an
operating margin of 2% in the third quarter of 2002 compared to operating profit
of $3 million and an operating margin of 1% in the corresponding period of 2001.
The increase in operating profit was due to margin enhancement and improved cost
control. On a year-to-date basis, operating profit of $20 million generated an
operating margin of 2.2% compared to operating profit of $13 million and an
operating margin of 1.4% for the same period of 2001. The increase in operating
profit is due to continuing margin improvement from volume gains combined with
more efficient cost of doing business across our own North American merchant
network.
6
WOOD
SELECTED INFORMATION
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales (millions of Canadian dollars) 100 106 371 305
Operating profit (loss) (millions of Canadian dollars) (10) (4) 13 (20)
Shipments (millions of FBM) 254 247 784 713
Shipments product offering (%):
Random lengths 42 44 43 42
Studs 38 35 36 36
Value-added 15 14 15 15
Industrial 5 7 6 7
---- ---- ---- ----
Total 100 100 100 100
Benchmark nominal prices(1):
Lumber 2x4x8 R/L no. 1 & no. 2 (US$/MFBM) 319 382 345 355
Lumber 2x4x8 stud (US$/MFBM) 328 372 350 361
==== ==== ==== ====
--------
(1) Source: Random Lengths.
SALES, SHIPMENTS AND OPERATING PROFIT
Net sales in the Wood business, representing 7% of our consolidated net sales in
the third quarter of 2002, amounted to $100 million, a decrease of $6 million
(or 6%) compared to the third quarter of 2001. Net sales decreased primarily due
to the $11 million net impact of duties on exports of softwood lumber to the
United States ($17 million cash deposits made in the third quarter of 2002
compared to a $6 million provision recorded in the corresponding period of
2001), as well as lower selling prices. This decrease was partially offset by
higher shipments and a better sales mix stemming from recent investments made in
new equipment. On a year-to-date basis, net sales amounted to $371 million, an
increase of $66 million (or 22%) compared to the first nine months of 2001. This
was primarily as a result of the $20 million net impact of the reversal of
provision for countervailing and antidumping duties on exports of softwood
lumber to the United States ($28 million reversal of a provision in the second
quarter of 2002 net of the $8 million provision recorded in the first quarter of
2002), higher shipments, a better sales mix stemming from recent investments
made in new equipment and the favorable effect of a stronger U.S. dollar. These
positive factors were partially offset by the $16 million net impact of duties
on exports of softwood lumber to the United States ($22 million cash deposits
made in the first nine months of 2002 compared to a $6 million provision
recorded in the corresponding period of 2001).
Operating loss amounted to $10 million in the third quarter of 2002 compared to
$4 million in the third quarter of 2001. The $6 million increase in operating
loss is primarily due to the duties on exports of softwood lumber to the United
States (as described previously) and lower selling prices, partially offset by
lower costs due to cost reduction initiatives as well as a better sales mix
stemming from recent investments made in new equipment. For the first nine
months of 2002, operating profit was $13 million compared to an operating loss
of $20 million for the same period last year. The $33 million increase is
primarily due to the $20 million net impact of the reversal of provision for
duties on exports of softwood lumber to the United States (as described
previously), higher shipments, a better sales mix stemming from recent
investments made in new equipment and the favorable effect of a stronger U.S.
dollar. This increase was partially offset by the $16 million net impact of
duties on exports of softwood lumber to the United States ($22 million cash
deposits made in the first nine months of 2002 compared to a $6 million
provision recorded in the corresponding period of 2001).
PRICING ENVIRONMENT
In the third quarter of 2002, average transaction prices for Great Lakes 2x4
studs were lower by US$29/MFBM and prices for random lengths were lower by
US$44/MFBM compared to the corresponding quarter in 2001. On a year-to-date
basis, average transaction prices for Great Lakes 2x4 studs and random lengths
remained approximately at the same level as prices in the corresponding period
of 2001.
PRODUCTION EFFICIENCY
In September 2002, Domtar announced the creation of a new Forest Products Group,
which combines timber and lumber operations. This initiative was necessary to
further increase productivity, reduce costs and improve service to customers in
difficult market conditions.
Due to the Canada-US softwood lumber dispute, the Ste-Marie and Ste-Aurelie
sawmill operations are still halted for an undetermined period of time. The
Grand-Remous sawmill has also ceased operations on July 26, 2002, due to a
dispute between the Barriere Lake First Nation and the governments of Quebec and
Canada. Although the dispute was settled, the sawmill has not been restarted
because of market conditions.
7
PACKAGING
SELECTED INFORMATION
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
----- ----- ----- -----
Net sales (millions of Canadian dollars) 157 142 453 407
Operating profit (millions of Canadian dollars) 21 25 56 65
Shipments(1):
Containerboard ('000 ST) 84 94 256 267
Corrugated containers (millions of square feet) 1,671 1,341 4,837 3,918
Benchmark nominal prices(2):
Linerboard 42 lb (US$/ton) 437 442 423 451
----- ----- ----- -----
--------
(1) Represents 50% of Norampac's trade shipments.
(2) Source: Pulp & Paper Week.
SALES, SHIPMENTS AND OPERATING PROFIT
Our 50% share of Norampac's net sales, representing 11% of our consolidated net
sales in the third quarter of 2002, amounted to $157 million, an increase of $15
million (or 11%) compared to the third quarter of 2001. This was primarily due
to higher volume for corrugated products related to Norampac's recent
acquisitions. Not taking into account the recently acquired facilities,
shipments of corrugated containers increased nonetheless compared to the third
quarter of 2001. On a year-to-date basis, Domtar's 50% share of the net sales of
Norampac amounted to $453 million, an increase of $46 million (or 11%) compared
to the corresponding period last year for the same reasons stated above.
Our 50% share of Norampac's operating profit amounted
to $21 million, a decrease of $4 million (or 16%) from the $25 million reported
in the third quarter of 2001. This reduction is mainly attributable to an
increase in recycled fiber costs and a reduction of the net selling price of
containerboard and corrugated products, partially offset by higher volumes of
corrugated containers resulting from recent acquisitions. On a year-to-date
basis, operating profit amounted to $56 million, a $9 million decrease (or 14%)
compared to the same period last year, mainly due to the same reasons stated for
the quarter-over-quarter analysis.
PRICING ENVIRONMENT
Prices for both medium and linerboard increased by approximately US$25/ton
during the third quarter of 2002 reflecting, respectively, most of the US$40/ton
and US$30/ton price increases announced for July 2002, while the 9% price
increase announced for corrugated boxes has been fully implemented. Despite
these price increases, containerboard transaction prices in the third quarter of
2002 decreased by US$24/ton compared to the third quarter of 2001. On a
year-to-date basis, the average kraft linerboard transaction price decreased by
US$30/ton compared to the first nine months of 2001.
PRODUCTION EFFICIENCY
During the third quarter of 2002, Norampac took market-related downtime at its
containerboard mills for a total of 15,600 tons, representing approximately 4%
of its third quarter 2002 North American production capacity. For the first nine
months of the year, downtime amounted to 71,600 tons, representing approximately
6% of Norampac's North American capacity for that period. This reflects
Norampac's commitment to adjust production to customers' needs.
FINANCING EXPENSES AND INCOME TAXES
FINANCING EXPENSES
During the third quarter of 2002, financing expenses were $51 million, a $13
million decrease compared to the third quarter of 2001, mainly due to a lower
level of indebtedness, lower interest rates, as well as by the recognition in
2001 of $11 million of unrealized foreign exchange losses in accordance with
amended accounting recommendations. On a year-to-date basis, financing expenses
amounted to $146 million, a $32 million increase compared to the first nine
months of 2001, primarily due to the additional indebtedness we incurred with
respect to the Acquisition, partially offset by the recognition in 2001 of $13
million of unrealized foreign exchange losses in accordance with amended
accounting recommendations.
INCOME TAXES
Our income tax expense for the third quarter of 2002 was $28 million, reflecting
an effective tax rate of 32.2%, compared to income tax expense of $6 million,
reflecting an effective tax rate of 30%, in the corresponding period of 2001.
The year-to-date 2001 income tax expense was affected by a $33 million reduction
as a result of a decrease in future income tax liabilities due to a reduction in
enacted income tax rates, mainly in Ontario. On a year-to-date basis, the
effective tax rate was 28.5%, compared to 35.5% in the corresponding period of
2001 when excluding the reduction mentioned previously. The reduction in the
year-to-date effective tax rate for 2002 reflects lower overall income taxes
applicable to Domtar Inc. and its subsidiaries in certain jurisdictions.
8
LIQUIDITY AND CAPITAL RESOURCES
SELECTED INFORMATION
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
(In millions of Canadian dollars) 2002 2001 2002 2001
---- ---- ---- ----
Cash flows provided from operating activities
before changes in working capital and other items 176 98 466 319
Changes in working capital and other items (7) 55 (39) (28)
---- ---- ---- ----
Cash flows provided from operating activities 169 153 427 291
Net capital expenditures (50) (80) (119) (192)
---- ---- ---- ----
Free cash flow 119 73 308 99
Sept. 30 Dec. 31
2002 2001
-------- -------
Net debt-to-total-capitalization ratio (in %) 51 55
--- ---
Our principal liquidity requirements are for working capital, capital
expenditures, and principal and interest payments on our debt. 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.
Cash flows provided from operating activities in the first nine months of 2002,
amounted to $427 million, a $136 million increase compared to the corresponding
period of 2001. This increase was mainly due to an increase in EBITDA.
Net capital expenditures for the first nine months ended September 30, 2002,
amounted to $119 million, a $73 million decrease compared to the same period of
2001. We intend to limit our annual capital expenditures for 2002 and 2003 to
75% of amortization, or approximately $290 million per year. This amount
includes approximately $140 million for capital expenditures relating to the
long-term sustainability of our equipment.
Free cash flow (cash flows from operating activities less net capital
expenditures) for the first nine months of 2002 totaled $308 million compared to
$99 million in the corresponding period of 2001, reflecting the increase in
EBITDA, as well as our reduced level of capital spending. Free cash flow
generated in the first nine months of 2002 was applied primarily to debt
reduction.
As at September 30, 2002, our net debt-to-total-capitalization ratio was 51%, a
decrease of 4% compared to December 31, 2001. Net indebtedness, including our
50% share of the net indebtedness of Norampac of $215 million, was $2,643
million as at September 30, 2002, compared to $2,919 million at the end of 2001,
including our 50% share of the net indebtedness of Norampac of $192 million.
As at September 30, 2002, the off balance sheet sales of receivables represented
$239 million compared to $238 million as at December 31, 2001. We expect to
continue to sell receivables in the future on an ongoing basis, since the
implicit interest rate on sales of receivables is lower than the interest rate
on borrowing alternatives. If we were unable to do so in the future, our working
capital requirements would increase. Such sales of receivables are also subject
to Domtar retaining specified credit ratings.
As at September 30, 2002, the remainder of the US$1 billion bank term loan
totaled US$570 million ($904 million), a decrease of US$160 million ($259
million) from December 31, 2001. The term loan bears interest based on the U.S.
dollar LIBOR rate, or the U.S. prime rate, plus a margin that varies with
Domtar's credit rating.
As at September 30, 2002, our US$500 million revolving credit facility was
undrawn and letters of credit totaling US$8 million ($13 million) were
outstanding, resulting in US$492 million ($780 million) of availability under
this facility. As at December 31, 2001, US$9 million ($15 million) of the US$500
million revolving credit facility was drawn in the form of overdraft and
included in "Bank Indebtedness" and letters of credit totaling US$7 million ($11
million) were outstanding. Borrowings under the existing revolving credit
facility bear interest at a rate based on the Canadian dollar bankers'
acceptance or the U.S. dollar LIBOR rate or the prime rate, plus a margin that
varies with Domtar's credit rating.
The indentures or agreements under which some of our debt was issued contain
covenants, including a limitation on the amount of dividends on our shares that
we may pay, on the amount of shares that we may repurchase for cancellation and
on the amount of new debt we may incur. Our bank facilities contain certain
restrictive quarterly covenants. Our US$500 million unsecured revolving credit
facility also requires commitment fees in accordance with standard banking
practices.
As at October 31, 2002, we had 227,570,904 common shares, 69,576 Series A
Preferred Shares and 1,720,000 Series B Preferred Shares, which were issued and
outstanding.
9
RISKS AND UNCERTAINTIES
PRODUCT PRICES
Our financial performance is dependent on the selling prices
of our products. 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 America or international markets, inventory de-stocking by customers and
fluctuations in currency exchange rates. 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.)
OPERATING COSTS
Operating costs for our businesses can be affected by increases or decreases in
energy and other raw material prices as a result of changing economic conditions
or due to particular supply and demand considerations.
COMPETITION
The uncoated freesheet market is currently undergoing substantial consolidation,
with the top five producers representing approximately 75% of the North American
market. We are currently the third largest North American integrated
manufacturer and marketer of uncoated freesheet paper. We compete with a number
of substantial companies operating in this market. The coated paper products
market is large and subject to global competition. The markets for our wood and
market pulp are also large and highly fragmented. The packaging products market
in which Norampac competes has undergone significant consolidation in the past
several years resulting in the creation of a number of substantial competitors.
While the principal basis for competition in all our businesses is price,
competition can also be based upon quality and customer service, including, in
some cases, providing technical advice to customers. For example, the highly
technical nature of specialty papers limits competition since not all paper
mills can produce the required papers. Competition in this market is generally
based more on quality and service than on price.
FOREIGN EXCHANGE
Our revenues for many of our products are affected by fluctuations in the
exchange rate between the Canadian dollar and the U.S. dollar. The prices for
many of our products, including those we sell in Canada, are principally driven
by U.S. prices of similar products. We generate approximately $1 billion of U.S.
dollar denominated sales annually from our Canadian operations. As a result, any
decrease in the value of the U.S. dollar relative to the Canadian dollar reduces
the amount of Canadian dollar revenues we realize on sales. Exchange rate
fluctuations are beyond our control and the U.S. dollar may depreciate against
the Canadian dollar in the future, which would result in lower revenues and
margins. In order to reduce the potential negative effect of a weakening U.S.
dollar, we hedge the value of a portion of our future U.S. dollar net cash
inflows for periods of up to three years. Our hedging arrangements as at
September 30, 2002, totaling US$377 million (of which US$122 million matures
within 2002) protect the value of part of our expected net U.S. dollar cash
inflows at an average exchange rate of 1.45 for the next two years, and they
limit Domtar from benefiting from a higher U.S. dollar to a maximum average
exchange rate of 1.52 for that same period.
ENVIRONMENTAL REGULATIONS
The United States and Canadian environmental regulations to which we are subject
relate to, among other matters, air emissions, timber cutting, wastewater
discharges, waste management, groundwater quality, plant and wildlife
protection, landfill sites, employee health and safety and the discharge of
materials into the environment. These regulations require us to obtain and
operate in compliance with the conditions of permits and authorizations from the
appropriate governmental authorities. Regulatory authorities exercise
considerable discretion in whether or not to issue permits and the timing of
permit issuances. If we fail to comply with applicable requirements, our
operations at the affected facilities could be subject to significant fines and
to orders requiring additional expenditures, which could affect our financial
results and financial condition. In addition, changes in environmental laws and
regulations or their application could require us to make further significant
expenditures.
We expect to continue to incur ongoing capital and operating expenses to achieve
and maintain compliance with new environmental requirements and to upgrade
existing equipment. As at September 30, 2002, we made environmental capital
expenditures of $5 million, mostly for the improvement of air emissions.
ENVIRONMENTAL LIABILITIES
We are continuing to take remedial action at a number of current and former
sites, due in part to soil and some groundwater contamination at these sites. As
at September 30, 2002, we had a provision of $48 million for known and
determinable site remediation costs, primarily in connection with our former
wood preserving business, which we sold in 1993, and relating to sites in
various provinces and states. The process of investigation and remediation can
be lengthy and is subject to the uncertainties of changing legal requirements,
developing technologies, the allocation of liability among potentially
responsible parties and the discretion of regulators. Accordingly, we cannot
estimate with certainty the actual amount and timing of costs associated with
site remediation. Our costs for site remediation may ultimately exceed the
amount of the provision we have established. In addition, we are party to
environmental claims and lawsuits, which are being contested. We may incur costs
in excess of amounts we have reserved to cover such claims and lawsuits.
10
LEGAL ACTIONS
In the normal course of our operations, we become involved
in various legal actions. While the final outcome with respect to actions
outstanding or pending as at September 30, 2002, cannot be predicted with
certainty, it is our opinion that their resolution will not have a material
adverse effect on our financial position, earnings or cash flows.
LUMBER EXPORT DUTIES
Our sales of Wood represent approximately 9% of our consolidated net sales and
we export approximately 62% of our softwood lumber products to the United
States.
The United States Department of Commerce announced that it had assessed the
Canadian softwood lumber industry with final aggregate countervailing and
antidumping duties at an average rate of 27.22%. On May 2, 2002, the United
States International Trade Commission rendered its final determination of injury
and consequently, cash deposits of 27.72% must be applied on Canadian exports of
softwood lumber to the United States as of May 22, 2002. The Government of
Canada has challenged the duties with the World Trade Organization and under the
North American Free Trade Agreement.
We are currently experiencing, and will continue to experience, reduced revenues
and margins in our Wood business as a result of countervailing and antidumping
duty applications.
SENSITIVITY ANALYSIS
Our operating profit, net earnings and earnings per share can be impacted by the
following sensitivities:
Annual Impact On (c)
-------------------------------
(In millions of Canadian dollars, except per share amounts) Operating Net Earnings
Profit Earnings Per Share
--------- -------- ---------
$ $ $
Each US$10/unit change in price of: (a)
Papers
Copy and offset grades 19 12 0.05
Uncoated printing & publishing and
premium imaging grades 11 7 0.03
Coated printing & publishing grades 6 4 0.02
Technical & specialty grades 6 4 0.02
Pulp - net position 7 5 0.02
Wood
Lumber 15 10 0.04
Packaging
Containerboard 6 4 0.02
--- --- ----
Foreign exchange
CAN 1(cent) change in relative value to the U.S. dollar
After hedging (b) 4 3 0.01
Before hedging 10 6 0.03
--- --- ----
Interest rate
1% change in interest rates on our floating rate debt N/A 9 0.04
--- --- ----
--------
(a) Based on 2002 capacity (in tons or MFBM).
(b) Based on currency hedging portfolio for the period of January 1 to December
31, 2002.
(c) Based on an exchange rate of 1.55 and a marginal tax rate of 35%.
11
Benchmark Nominal Prices (1)
Q3 Q3
1995 1996 1997 1998 1999 2000 Trend(2) 2001 2001 2002
---- ---- ---- ---- ---- ---- -------- ---- ---- ----
Papers:
Copy 20 lb sheets (US$/ton) 1,123 848 769 780 778 877 870 815 789 772
Offset 50 lb rolls (US$/ton) 983 736 756 666 659 757 748 719 697 690
Coated publication, no. 3,
60 lb rolls (US$/ton) 1,200 943 941 909 851 948 984 853 820 740
Pulp NBSK (US$/tonne) 874 586 588 544 541 685 625 558 487 510
Wood:
Lumber 2x4x8 (US$/MFBM) 335 403 383 376 390 316 328 345 372 328
Packaging:
Linerboard 42 lb (US$/ton) 511 371 336 373 400 468 431 445 442 437
Q3 Q3
1995 1996 1997 1998 1999 2000 Trend 2001 2001 2002
---- ---- ---- ---- ---- ---- ----- ---- ---- ----
Selling price index 120% 100% 99% 94% 93% 102%
---- ---- ---- ---- ---- ----
Selling price index after Acquisition 100% 96% 94% 92%
---- ---- ---- ----
--------
(1) Source: Pulp & Paper Week and Random Lengths.
The term "ton" refers to a short ton, an imperial unit of measurement which
equals 0.9072 metric tonnes, and the term "tonne" refers to a metric tonne.
(2) Source: Consensus of analysts.
ACCOUNTING CHANGES
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective January 1, 2002, we have adopted the new CICA recommendations relating
to the accounting for stock-based compensation and other stock-based payments.
The recommendations require the use of a fair-value based approach of accounting
for stock-based payments to non-employees. The recommendations do not require
the use of the fair value method when accounting for stock-based awards to
employees, except for stock-based compensation that meets specific criteria.
We have chosen to record an expense for the stock options granted to our
employees using the fair-value method. In accordance with the transitional
provisions of the new accounting recommendations, we have adopted the new
recommendations for awards granted after January 1, 2002. The effect of the
adoption of the recommendations has been reflected as a charge of $3 million for
the nine months ended September 30, 2002.
FOREIGN CURRENCY TRANSLATION
Effective January 1, 2002, we have adopted the amended CICA recommendations
relating to the accounting for foreign currency translation. These
recommendations eliminate the requirement to defer and amortize unrealized
exchange gains and losses on foreign currency denominated monetary items that
have a fixed or ascertainable life extending beyond the end of the fiscal year
following the current reporting period.
In accordance with the transitional provisions of the amended accounting
recommendations, we have applied these recommendations retroactively with
restatement of prior years. The cumulative effect of the adoption of the
recommendations has been reflected as a charge of $32 million ($22 million net
of income taxes) to opening retained earnings for the year ended December 31,
2001. Financing expenses for the three months and nine months ended September
30, 2001, were increased by $11 million ($8 million net of income taxes) and by
$13 million ($10 million net of income taxes), respectively, to reflect the
application of these recommendations. Financing expenses for the year ended
December 31, 2001, were increased by $15 million ($12 million net of income
taxes).
We have designated all of our U.S. dollar denominated long-term debt as a hedge
of our net investment in self-sustaining foreign subsidiaries and, to the extent
necessary, as a foreign currency hedge of our future U.S. dollar revenue
streams. 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. For the
remaining U.S. dollar denominated long-term debt designated as a hedge of future
U.S. dollar revenue streams, exchange gains and losses are deferred from being
recognized in earnings until the earlier of the debt repayment or such time as
the hedge ceases to be effective.
Norampac has 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. For the remaining U.S. dollar
denominated long-term debt the exchange gains and losses are included in
"Financing Expenses."
12
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, we have adopted the new CICA recommendations relating
to the accounting for goodwill and other intangible assets that require
intangible assets with an indefinite life and goodwill to no longer be amortized
and be tested annually for impairment by comparing the fair value of the assets
with their carrying amount. Intangible assets with a definite life will continue
to be amortized over their useful life.
In accordance with the transitional provisions of the new accounting
recommendations, we have performed the impairment test of our goodwill and have
determined that no write down for impairment was necessary. Also, we have
reclassified, from goodwill to timber limits and timberlands, presented under
"Property, plant and equipment," an amount of $12 million, resulting from prior
years' acquisitions that meets the criteria for recognition apart from goodwill.
In 2001, amortization expense related to goodwill was $1 million per quarter, or
$4 million for the year.
OUTLOOK
The improvement in the balance between supply and demand for the uncoated
freesheet market presents interesting prospects for the mid- to long-term
fundamentals in this market. Our ability to successfully implement our two
profitability improvement programs positions us to take full advantage of any
improvements in the economy and meet our target of 15% return on equity (ROE) or
more over a business cycle.
13
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED EARNINGS
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
(In millions of Canadian dollars, 2002 2002 2001 2002 2002 2001
unless otherwise noted) ----- ----- ----- ----- ----- -----
------ (Unaudited) ------ ------ (Unaudited) ------
Restated Restated
(Note 2) (Note 2)
US$ $ $ US$ $ $
(Note 3) (Note 3)
Net sales 877 1,390 1,177 2,607 4,134 3,075
Operating expenses
Cost of sales 684 1,085 940 2,064 3,273 2,443
Selling, general and administrative 46 72 74 150 238 182
Amortization 61 97 80 184 292 201
Closure costs (Note 6) - - - 29 45 -
----- ----- ----- ----- ----- -----
791 1,254 1,094 2,427 3,848 2,826
----- ----- ----- ----- ----- -----
Operating profit 86 136 83 180 286 249
Financing expenses 32 51 64 92 146 114
Amortization of deferred gain (1) (2) (1) (3) (4) (3)
----- ----- ----- ----- ----- -----
Earnings before income taxes 55 87 20 91 144 138
Income tax expense (Note 8) 18 28 6 26 41 16
----- ----- ----- ----- ----- -----
Net earnings 37 59 14 65 103 122
===== ===== ===== ===== ===== =====
Per common share (Note 5)
Net earnings
Basic 0.16 0.26 0.08 0.28 0.45 0.66
Diluted 0.16 0.26 0.08 0.28 0.45 0.66
Weighted average number of common
shares outstanding (millions)
Basic 227.4 227.4 180.8 227.1 227.1 180.6
Diluted 228.3 228.3 181.6 228.0 228.0 181.4
----- ----- ----- ----- ----- -----
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED RETAINED EARNINGS
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
(In millions of Canadian dollars, 2002 2002 2001 2002 2002 2001
unless otherwise noted) ----- ----- ----- ----- ----- -----
------ (Unaudited) ------ ------ (Unaudited) ------
Restated Restated
(Note 2) (Note 2)
US$ $ $ US$ $ $
(Note 3) (Note 3)
Retained earnings at beginning
of period - as reported 424 672 652 428 679 557
Cumulative effect of changes in
accounting policies (Note 2) - - (24) (21) (34) (22)
----- ----- ----- ----- ----- -----
Retained earnings at beginning
of period - as restated 424 672 628 407 645 535
Net earnings 37 59 14 65 103 122
Dividends on common shares (5) (8) (6) (15) (24) (18)
Dividends on preferred shares - - - (1) (1) (2)
Premium on purchase for cancellation
of common shares - - - - - (1)
----- ----- ----- ----- ----- -----
Retained earnings at end of period 456 723 636 456 723 636
===== ===== ===== ===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
14
CONSOLIDATED BALANCE SHEETS
September 30 September 30 December 31
2002 2002 2001
------------ ------------ -----------
(In millions of Canadian dollars, unless otherwise noted) (Unaudited) (Unaudited)
Restated
(Note 2)
US$ $ $
(Note 3)
Assets
Current assets
Cash and cash equivalents 46 73 36
Receivables 269 426 300
Inventories 448 711 779
Prepaid expenses 17 27 24
Future income taxes 18 29 29
----- ----- -----
798 1,266 1,168
Property, plant and equipment 3,431 5,441 5,612
Goodwill 51 79 62
Other assets 108 172 213
----- ----- -----
4,388 6,958 7,055
----- ----- -----
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness 26 41 45
Trade and other payables 486 771 719
Income and other taxes payable 27 43 19
Long-term debt due within one year 38 60 38
----- ----- -----
577 915 821
Long-term debt 1,649 2,615 2,872
Future income taxes 347 551 528
Other liabilities and deferred credits 223 353 408
Shareholders' equity
Preferred shares 29 46 48
Common shares 1,103 1,749 1,731
Contributed surplus 1 2 -
Retained earnings 456 723 645
Accumulated foreign currency translation adjustments 3 4 2
----- ----- -----
1,592 2,524 2,426
----- ----- -----
4,388 6,958 7,055
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
15
CONSOLIDATED CASH FLOWS
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
(In millions of Canadian dollars, 2002 2002 2001 2002 2002 2001
unless otherwise noted) ----- ----- ----- ----- ----- -----
------ (Unaudited) ------ ------ (Unaudited) ------
Restated Restated
(Note 2) (Note 2)
US$ $ $ US$ $ $
(Note 3) (Note 3)
Operating activities
Net earnings 37 59 14 65 103 122
Non-cash items:
Amortization 61 97 80 193 306 201
Future income taxes 13 20 (16) 13 21 (29)
Amortization of deferred gain (1) (2) (1) (2) (4) (3)
Closure costs excluding write down
of property, plant and
equipment (Note 6) - - - 20 31 -
Payments of closure costs (3) (4) - (3) (4) -
Other 4 6 21 8 13 28
----- ----- ----- ----- ----- ------
111 176 98 294 466 319
Changes in working capital and other items
Receivables (38) (61) 23 (59) (94) 6
Inventories 6 10 3 43 69 (21)
Prepaid expenses - - (2) (1) (2) (7)
Trade and other payables 8 12 22 (32) (50) (22)
Income and other taxes payable 16 25 9 16 25 16
Other 4 7 - 8 13 -
----- ----- ----- ----- ----- ------
(4) (7) 55 (25) (39) (28)
----- ----- ----- ----- ----- ------
Cash flows provided from
operating activities 107 169 153 269 427 291
Investing activities
Net additions to property, plant and
equipment (31) (50) (80) (75) (119) (192)
Business acquisitions (Note 4) - - (2,563) (17) (27) (2,588)
Other 4 7 4 (5) (8) (13)
----- ----- ----- ----- ----- ------
Cash flows used for investing activities (27) (43) (2,639) (97) (154) (2,793)
Financing activities
Dividend payments (5) (8) (7) (16) (25) (21)
Change in bank indebtedness 4 6 58 (2) (4) 27
Change in revolving bank credit,
net of expenses (5) (7) (240) 18 29 (178)
Issuance of long-term debt, net of expenses - - 2,891 - - 2,891
Repayment of long-term debt (69) (110) (201) (159) (252) (217)
Common shares issued, net of expenses 2 3 2 11 18 5
Redemptions of preferred shares (1) (1) (1) (1) (2) (2)
----- ----- ----- ----- ----- ------
Cash flows provided from (used for)
financing activities (74) (117) 2,502 (149) (236) 2,505
----- ----- ----- ----- ----- ------
Net increase in cash
and cash equivalents 6 9 16 23 37 3
Cash and cash equivalents
at beginning of period 40 64 16 23 36 29
----- ----- ----- ----- ----- ------
Cash and cash equivalents
at end of period 46 73 32 46 73 32
===== ===== ===== ===== ===== ======
The accompanying notes are an integral part of the consolidated financial
statements.
16
NOTES
Three months and nine months ended September 30 (Unaudited)
(In millions of Canadian dollars, unless otherwise noted)
1. 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, 2002, and December
31, 2001, as well as its results of operations and its cash flows for the three
months and nine months ended September 30, 2002 and 2001.
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,
except as described in note 2.
2. ACCOUNTING CHANGES
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective January 1, 2002, Domtar has adopted the new Canadian Institute of
Chartered Accountants (CICA) recommendations relating to the accounting for
stock-based compensation and other stock-based payments. The recommendations
require the use of a fair-value based approach of accounting for stock-based
payments to non-employees. The recommendations do not require the use of the
fair value method when accounting for stock-based awards to employees, except
for stock-based compensation that meets specific criteria.
Domtar has chosen to record an expense for the stock options granted to its
employees using the fair value method. In accordance with the transitional
provisions of the new accounting recommendations, Domtar has adopted the new
recommendations for awards granted after January 1, 2002. The effect of the
adoption of the recommendations has been reflected as a charge of $3 million for
the nine months ended September 30, 2002.
FOREIGN CURRENCY TRANSLATION
Effective January 1, 2002, Domtar has adopted the amended CICA recommendations
relating to the accounting for foreign currency translation. These
recommendations eliminate the requirement to defer and amortize unrealized
exchange gains and losses on foreign currency denominated monetary items that
have a fixed or ascertainable life extending beyond the end of the fiscal year
following the current reporting period.
In accordance with the transitional provisions of the amended accounting
recommendations, Domtar has applied these recommendations retroactively with
restatement of prior years. The cumulative effect of the adoption of the
recommendations has been reflected as a charge of $32 million ($22 million net
of income taxes) to opening retained earnings for the year ended December 31,
2001. Financing expenses for the three months and nine months ended September
30, 2001, were increased by $11 million ($8 million net of income taxes) and by
$13 million ($10 million net of income taxes), respectively, to reflect the
application of these recommendations. Financing expenses for the year ended
December 31, 2001, were increased by $15 million ($12 million net of income
taxes).
The Corporation has designated all of its U.S. dollar denominated long-term debt
as a hedge of its net investment in self-sustaining foreign subsidiaries and, to
the extent necessary, as a foreign currency hedge of its future U.S. dollar
revenue streams. 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. For the
remaining U.S. dollar denominated long-term debt designated as a hedge of future
U.S. dollar revenue streams, exchange gains and losses are deferred from being
recognized in earnings until the earlier of the debt repayment or such time as
the hedge ceases to be effective.
Norampac (a 50-50 joint venture with Cascades Inc.) has 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. For the remaining U.S. dollar denominated long-term debt
the exchange gains and losses are included in "Financing expenses".
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, Domtar has adopted the new CICA recommendations
relating to the accounting for goodwill and other intangible assets that require
intangible assets with an indefinite life and goodwill to no longer be amortized
and be tested annually for impairment by comparing the fair value of the assets
with their carrying amount. Intangible assets with a definite life will continue
to be amortized over their useful life.
In accordance with the transitional provisions of the new accounting
recommendations, Domtar has performed the impairment test of its goodwill and
has determined that no write down for impairment was necessary. Also, the
Corporation reclassified, from goodwill to timber limits and timberlands,
presented under "Property, plant and equipment", an amount of $12 million,
resulting from prior years' acquisitions, that meets the criteria for
recognition apart from goodwill. In 2001, amortization expense related to
goodwill was $1 million per quarter or $4 million for the year.
17
Notes to consolidated financial statements
Three months and nine months ended September 30 (Unaudited)
(In millions of Canadian dollars, unless otherwise noted)
3. UNITED STATES DOLLAR AMOUNTS
The unaudited interim consolidated financial statements are expressed in
Canadian dollars and, solely for the convenience of the reader, the 2002
financial statements and the tables of certain related notes have been
translated into U.S. dollars at the September 2002 month-end rate of CAN$1.5858
= US$1.00. 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.
4. BUSINESS ACQUISITIONS
On January 21, 2002, Norampac acquired all the issued and outstanding shares of
Star Container Corp., a corrugated products converting plant located in
Leominster, Massachusetts, for a total cash consideration of approximately $50
million. Also in 2002, Norampac acquired other businesses for a total cash
consideration of $3 million. The Corporation's proportionate share of these
acquisitions is $27 million in 2002.
5. EARNINGS PER SHARE
The following table provides the reconciliation between basic and diluted
earnings per share:
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2002 2002 2001 2002 2002 2001
----- ----- ----- ----- ----- -----
------ (Unaudited) ------ ------ (Unaudited) ------
Restated Restated
(Note 2) (Note 2)
US$ $ $ US$ $ $
(Note 3) (Note 3)
Net earnings 37 59 14 65 103 122
Dividend requirements
of preferred shares - - - 1 1 2
----- ----- ----- ----- ----- -----
Net earnings applicable
to common shares 37 59 14 64 102 120
Weighted average number of common
shares outstanding (millions) 227.4 227.4 180.8 227.1 227.1 180.6
Effect of dilutive stock
options (millions) 0.9 0.9 0.8 0.9 0.9 0.8
----- ----- ----- ----- ----- -----
Weighted average number
of diluted common shares
outstanding (millions) 228.3 228.3 181.6 228.0 228.0 181.4
----- ----- ----- ----- ----- -----
Basic earnings per share 0.16 0.26 0.08 0.28 0.45 0.66
Diluted earnings per share 0.16 0.26 0.08 0.28 0.45 0.66
===== ====== ===== ===== ===== =====
6. CLOSURE COSTS
On March 27, 2002, Domtar announced plans to permanently shut down the St.
Catharines, Ontario, paper mill as well as one paper machine in the Nekoosa,
Wisconsin, paper mill. The shutdown of the St. Catharines paper mill, which
occurred at the end of September 2002, resulted in a charge to first quarter
2002 earnings of $45 million ($30 million net of income taxes, or $0.13 per
common share), which included $14 million related to the write down to the
estimated net realizable value of property, plant and equipment as well as $31
million of charges for other commitments and contingencies related to this paper
mill.
18
The shutdown of a paper machine at the Nekoosa paper mill, acquired in the third
quarter of 2001, was a result of a study since its acquisition. In accordance
with CICA recommendations, charges related to the closure of this paper machine,
amounting to $10 million (US$6 million), are accounted for as part of the
allocation of the purchase price to the assets acquired and liabilities assumed
as of the acquisition date and thus do not affect the nine months ended
September 30, 2002 earnings.
7. SEGMENTED DISCLOSURES
Domtar operates in the four reportable segments described below. Each reportable
segment offers different products and services and requires different technology
and marketing strategies. The following summary briefly describes the operations
included in each of Domtar's reportable segments:
PAPERS - represents the aggregation of the manufacturing and distribution of
business, printing and publishing, and technical and specialty papers, as well
as pulp.
PAPER MERCHANTS - involves the purchasing, warehousing, sale and distribution of
business and printing papers, graphic arts supplies and industrial products made
by Domtar as well as by other manufacturers.
WOOD - includes the manufacturing and distribution of lumber and wood-based
value-added products as well as the management of forest resources.
PACKAGING - comprises the Corporation's 50% ownership interest in Norampac, a
company that manufactures and distributes containerboard and corrugated
products.
Domtar evaluates performance based on operating profit, which represents sales,
reflecting transfer prices between segments at fair value, less allocable
expenses before financing expenses and income taxes. Segment assets are those
directly used in segment operations.
SEGMENTED DATA
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2002 2002 2001 2002 2002 2001
----- ----- ----- ----- ----- -----
------ (Unaudited) ------ ------ (Unaudited) ------
Restated Restated
(Note 2) (Note 2)
US$ $ $ US$ $ $
(Note 3) (Note 3)
Net sales
Papers 571 905 709 1,676 2,658 1,676
Paper Merchants 189 300 291 566 897 903
Wood(a) 83 131 126 276 437 374
Packaging 100 159 144 289 459 414
----- ----- ----- ----- ----- -----
Total for reportable segments 943 1,495 1,270 2,807 4,451 3,367
Intersegment sales-Papers (45) (72) (71) (154) (245) (216)
Intersegment sales-Wood (20) (31) (20) (42) (66) (69)
Intersegment sales-Packaging (1) (2) (2) (4) (6) (7)
----- ----- ----- ----- ----- -----
Consolidated net sales 877 1,390 1,177 2,607 4,134 3,075
===== ===== ===== ===== ===== =====
Amortization
Papers(b) 50 79 62 158 250 152
Paper Merchants -- -- 1 1 2 3
Wood 6 10 9 18 29 23
Packaging 5 8 7 15 23 21
----- ----- ----- ----- ----- -----
Total for reportable segments 61 97 79 192 304 199
Corporate - - 1 1 2 2
----- ----- ----- ----- ----- -----
Consolidated amortization 61 97 80 193 306 201
===== ===== ===== ===== ===== =====
Operating profit (loss)
Papers(b) (c) 76 121 59 125 199 177
Paper Merchants 4 6 3 13 20 13
Wood(a) (6) (10) (4) 8 13 (20)
Packaging 13 21 25 35 56 65
----- ----- ----- ----- ----- -----
Total for reportable segments 87 138 83 181 288 235
Corporate(d) (1) (2) -- (1) (2) 14
----- ----- ----- ----- ----- -----
Consolidated operating profit 86 136 83 180 286 249
===== ===== ===== ===== ===== =====
19
Notes to consolidated financial statements
Three months and nine months ended September 30 (Unaudited)
(In millions of Canadian dollars, unless otherwise noted)
7. SEGMENTED DISCLOSURES (CONTINUED)
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2002 2002 2001 2002 2002 2001
----- ----- ----- ----- ----- -----
------ (Unaudited) ------ ------ (Unaudited) ------
Restated Restated
(Note 2) (Note 2)
US$ $ $ US$ $ $
(Note 3) (Note 3)
Net additions to property,
plant and equipment
Papers 20 32 45 48 76 108
Paper Merchants - 1 1 1 2 4
Wood 8 12 20 15 23 49
Packaging 5 8 12 11 18 29
--- --- --- --- ---- ----
Total for reportable segments 33 53 78 75 119 190
Corporate 1 2 3 4 6 5
Disposals of property, plant and equipment (3) (5) (1) (4) (6) (3)
--- --- --- --- ---- ----
Consolidated net additions to property,
plant and equipment 31 50 80 75 119 192
=== === === === ==== ====
September 30 September 30 December 31
2002 2002 2001
------------ ------------ -----------
(Unaudited) (Unaudited)
Restated
(Note 2)
US$ $ $
(Note 3)
Segmented assets
Papers 3,355 5,320 5,512
Paper Merchants 117 185 208
Wood 382 606 563
Packaging 423 671 626
----- ----- -----
Total for reportable segments 4,277 6,782 6,909
Corporate 111 176 146
----- ----- -----
Consolidated assets 4,388 6,958 7,055
===== ===== =====
--------
(a) The net sales and the operating profit for the nine months ended September
30, 2002, reflect a reversal of a $20 million provision recorded in the
third quarter and fourth quarter of 2001; $6 million and $14 million
respectively, for countervailing and antidumping duties on exports of
softwood lumber to the United States.
(b) The 2002 year-to-date results reflect a $45 million charge, including $14
million related to the write down of property, plant and equipment,
relating to the shutdown of the St. Catharines, Ontario, paper mill.
(c) The three months and nine months ended September 30, 2002, include the
recognition of $12 million for investment tax credits related to research
and development expenses of prior years, reflected as a reduction of the
cost of sales.
(d) The nine months ended September 30, 2001, include $14 million primarily
related to the cashing in of certain insurance policies.
8. INCOME TAXES
Income tax expense has been reduced by $33 million as a result of a reduction in
statutory enacted income tax rates in June 2001. Excluding this item, income tax
expense for the nine months ended September 30, 2001, would have been $49
million.
9. DERIVATIVE FINANCIAL INSTRUMENTS
During the three months ended September 30, 2002, the Corporation entered into
cash settled swap agreements to manage price risk associated with sales of
Northern Bleached Softwood Kraft (NBSK) pulp covering a period starting November
2002 and ending October 2005. The agreements fix the sale price for 1,500 tonnes
per month for 36 months of NBSK pulp at US$558 per tonne.
10. COMPARATIVE FIGURES
To conform with the basis of presentation adopted in the current year, certain
figures previously reported have been reclassified.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DOMTAR INC.
-------------------------------------------
(Registrant)
Date: November 13, 2002 By RAZVAN L. THEODORU
-------------------------------------------
Razvan L. Theodoru
Assistant Secretary