ufs-10q_20190630.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to_______

COMMISSION FILE NUMBER 001-33164

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

20-5901152

(State of Incorporation)

(I.R.S. Employer

Identification No.)

234 Kingsley Park Drive, Fort Mill, SC 29715

(Address of principal executive offices)

(zip code)

(803) 802-7500

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on the New York Stock Exchange; trading symbol UFS.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At July 31, 2019, 62,583,352 shares of the issuer’s common stock were outstanding.

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2019

INDEX

PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

	CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)	3

	CONSOLIDATED BALANCE SHEETS	4

	CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS	7

	INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	41

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	51

ITEM 4.	CONTROLS AND PROCEDURES	52

PART II	OTHER INFORMATION	52

ITEM 1.	LEGAL PROCEEDINGS	52

ITEM 1A.	RISK FACTORS	52

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	53

ITEM 4.	MINE SAFETY DISCLOSURES	53

ITEM 5.	OTHER INFORMATION	53

ITEM 6.	EXHIBITS	54

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	Three months ended			Three months ended			Six months ended			Six months ended
	June 30,			June 30,			June 30,			June 30,
	2019			2018			2019			2018
	(Unaudited)
	$			$			$			$
Sales		1,317			1,353			2,693			2,698
Operating expenses
Cost of sales, excluding depreciation and amortization		1,079			1,096			2,131			2,180
Depreciation and amortization		74			79			147			158
Selling, general and administrative		105			118			228			228
Impairment of long-lived assets (NOTE 11)		15			—			25			—
Closure and restructuring costs (NOTE 11)		8			—			12			—
Other operating loss (income), net (NOTE 6)		2			(2	)		1			(7	)
		1,283			1,291			2,544			2,559
Operating income		34			62			149			139
Interest expense, net		13			16			26			32
Non-service components of net periodic benefit cost (NOTE 5)		(2	)		(5	)		(5	)		(9	)
Earnings before income taxes and equity loss		23			51			128			116
Income tax expense (NOTE 7)		5			8			29			19
Equity loss, net of taxes		—			—			1			—
Net earnings		18			43			98			97
Per common share (in dollars) (NOTE 4)
Net earnings
Basic		0.29			0.68			1.56			1.54
Diluted		0.28			0.68			1.55			1.54
Weighted average number of common shares outstanding (millions)
Basic		63.0			62.9			63.0			62.8
Diluted		63.3			63.2			63.3			63.1
Cash dividends per common share		0.44			0.44			0.87			0.85

Net earnings		18			43			98			97
Other comprehensive income (loss) (NOTE 12):
Net derivative gains (losses) on cash flow hedges:
Net gains (losses) arising during the period, net of tax of $(1) and $(5), respectively (2018 – $2 and $5, respectively)		3			(7	)		14			(16	)
Less: Reclassification adjustment for losses (gains) included in net earnings, net of tax of $(1) and $(1), respectively (2018 – nil and $1, respectively)		1			—			2			(2	)
Foreign currency translation adjustments		20			(50	)		22			(61	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(2), respectively (2018 – $(1) and $(2), respectively)		2			2			5			4
Other comprehensive income (loss)		26			(55	)		43			(75	)
Comprehensive income (loss)		44			(12	)		141			22

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

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	At
	June 30,			December 31,
	2019			2018
	(Unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		93			111
Receivables, less allowances of $7 and $6		634			670
Inventories (NOTE 8)		823			762
Prepaid expenses		39			24
Income and other taxes receivable		41			22
Total current assets		1,630			1,589
Property, plant and equipment, net		2,563			2,605
Operating lease right-of-use assets (NOTE 9)		71			—
Intangible assets, net (NOTE 10)		586			597
Other assets		143			134
Total assets		4,993			4,925
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness		3			—
Trade and other payables		682			757
Income and other taxes payable		30			25
Operating lease liabilities due within one year (NOTE 9)		24			—
Long-term debt due within one year		1			1
Total current liabilities		740			783
Long-term debt		824			853
Operating lease liabilities (NOTE 9)		63			—
Deferred income taxes and other		483			476
Other liabilities and deferred credits		264			275
Commitments and contingencies (NOTE 14)
Shareholders' equity (NOTE 13)
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued 65,001,104 and 65,001,104 shares		1			1
Treasury stock $0.01 par value; 2,094,939 and 2,086,535 shares		—			—
Additional paid-in capital		1,977			1,981
Retained earnings		1,065			1,023
Accumulated other comprehensive loss		(424	)		(467	)
Total shareholders' equity		2,619			2,538
Total liabilities and shareholders' equity		4,993			4,925

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended
	June 30, 2019
	Issued and outstanding common shares (millions of shares)			Common stock, at par		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
				$		$			$			$			$
Balance at March 31, 2019		63.1			1		1,982			1,075			(450	)		2,608
Stock-based compensation, net of tax		—			—		3			—			—			3
Net earnings		—			—		—			18			—			18
Net derivative gains on cash flow hedges:
Net gains arising during the period, net of tax of $(1)		—			—		—			—			3			3
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(1)		—			—		—			—			1			1
Foreign currency translation adjustments		—			—		—			—			20			20
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1)		—			—		—			—			2			2
Stock repurchase		(0.2	)		—		(8	)		—			—			(8	)
Cash dividends declared		—			—		—			(28	)		—			(28	)
Balance at June 30, 2019		62.9			1		1,977			1,065			(424	)		2,619

	For the six months ended
	June 30, 2019
	Issued and outstanding common shares (millions of shares)			Common stock, at par		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
				$		$			$			$			$
Balance at December 31, 2018		62.9			1		1,981			1,023			(467	)		2,538
Stock-based compensation, net of tax		0.2			—		4			—			—			4
Net earnings		—			—		—			98			—			98
Net derivative gains on cash flow hedges:
Net gains arising during the period, net of tax of $(5)		—			—		—			—			14			14
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(1)		—			—		—			—			2			2
Foreign currency translation adjustments		—			—		—			—			22			22
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(2)		—			—		—			—			5			5
Stock repurchase		(0.2	)		—		(8	)		—			—			(8	)
Cash dividends declared		—			—		—			(56	)		—			(56	)
Balance at June 30, 2019		62.9			1		1,977			1,065			(424	)		2,619

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended
	June 30, 2018
	Issued and outstanding common shares (millions of shares)		Common stock, at par		Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
			$		$		$			$			$
Balance at March 31, 2018		62.8		1		1,972		876			(356	)		2,493
Stock-based compensation, net of tax		0.1		—		5		—			—			5
Net earnings		—		—		—		43			—			43
Net derivative losses on cash flow hedges:
Net losses arising during the period, net of tax of $2		—		—		—		—			(7	)		(7	)
Less: Reclassification adjustment for gains included in net earnings, net of tax of nil		—		—		—		—			—			—
Foreign currency translation adjustments		—		—		—		—			(50	)		(50	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1)		—		—		—		—			2			2
Cash dividends declared		—		—		—		(28	)		—			(28	)
Balance at June 30, 2018		62.9		1		1,977		891			(411	)		2,458

	For the six months ended
	June 30, 2018
	Issued and outstanding common shares (millions of shares)		Common stock, at par		Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
			$		$		$			$			$
Balance at December 31, 2017		62.7		1		1,969		849			(336	)		2,483
Stock-based compensation, net of tax		0.2		—		8		—			—			8
Net earnings		—		—		—		97			—			97
Net derivative losses on cash flow hedges:
Net losses arising during the period, net of tax of $5		—		—		—		—			(16	)		(16	)
Less: Reclassification adjustment for gains included in net earnings, net of tax of $1		—		—		—		—			(2	)		(2	)
Foreign currency translation adjustments		—		—		—		—			(61	)		(61	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(2)		—		—		—		—			4			4
Cash dividends declared		—		—		—		(55	)		—			(55	)
Balance at June 30, 2018		62.9		1		1,977		891			(411	)		2,458

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

	For the six months ended
	June 30, 2019			June 30, 2018
	(Unaudited)
	$			$
Operating activities
Net earnings		98			97
Adjustments to reconcile net earnings to cash flows from operating activities
Depreciation and amortization		147			158
Deferred income taxes and tax uncertainties		(1	)		(5	)
Impairment of long-lived assets		25			—
Net gains on disposals of property, plant and equipment		—			(4	)
Stock-based compensation expense		5			5
Equity loss, net		1			—
Other		—			(1	)
Changes in assets and liabilities
Receivables		40			27
Inventories		(54	)		(10	)
Prepaid expenses		(11	)		(11	)
Trade and other payables		(76	)		1
Income and other taxes		(14	)		9
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		1			(1	)
Other assets and other liabilities		13			2
Cash flows from operating activities		174			267
Investing activities
Additions to property, plant and equipment		(101	)		(62	)
Proceeds from disposals of property, plant and equipment		1			4
Other		—			(6	)
Cash flows used for investing activities		(100	)		(64	)
Financing activities
Dividend payments		(55	)		(53	)
Stock repurchase		(8	)		—
Net change in bank indebtedness		3			—
Proceeds from receivables securitization facility		80			—
Repayments of receivables securitization facility		(110	)		(25	)
Repayments of long-term debt		(1	)		—
Other		(1	)		2
Cash flows used for financing activities		(92	)		(76	)
Net (decrease) increase in cash and cash equivalents		(18	)		127
Impact of foreign exchange on cash		—			(2	)
Cash and cash equivalents at beginning of period		111			139
Cash and cash equivalents at end of period		93			264
Supplemental cash flow information
Net cash payments for:
Interest		23			28
Income taxes		50			25

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

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1	BASIS OF PRESENTATION	9

NOTE 2	RECENT ACCOUNTING PRONOUNCEMENTS	10

NOTE 3	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	12

NOTE 4	EARNINGS PER COMMON SHARE	16

NOTE 5	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	17

NOTE 6	OTHER OPERATING LOSS (INCOME), NET	19

NOTE 7	INCOME TAXES	20

NOTE 8	INVENTORIES	21

NOTE 9	LEASES	22

NOTE 10	INTANGIBLE ASSETS	25

NOTE 11	CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS	26

NOTE 12	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	27

NOTE 13	SHAREHOLDERS’ EQUITY	30

NOTE 14	COMMITMENTS AND CONTINGENCIES	31

NOTE 15	SEGMENT DISCLOSURES	33

NOTE 16	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	34

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first six months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission. The December 31, 2018 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

On January 1, 2019, upon the adoption of ASU 2016-02, “Leases”, the Company’s accounting policy related to leases became as follows:

LEASES

At inception of an arrangement, the Company determines whether the arrangement contains a lease. A lease conveys the right to control the use of identified property, plant, or equipment (asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the Company has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

For each lease arrangement that has an original lease term of more than 12 months, a right-of-use asset and a lease liability are recorded in the Consolidated Balance Sheets. The right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents the obligation to make lease payments arising from the lease. The right-of-use asset and the lease liability are initially recorded at the same amount at the lease commencement date based on the present value of the remaining lease payments discounted using the rate implicit in the lease when readily determined or, in most cases, the Company’s incremental borrowing rate. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The right-of-use asset is tested for impairment in accordance with ASC 360 – “Property, Plant and Equipment”.

The terms of a lease arrangement determine how a lease is classified (operating or finance), the resulting recognition pattern in the Consolidated Statements of Earnings and Comprehensive Income (Loss) and the classification in the Consolidated Balance Sheets.

Finance lease expense is represented by the interest on the lease liability determined using the effective interest method and the amortization of the finance lease right-of-use asset calculated using the straight-line method over the estimated useful life of the identified asset. Finance lease related balances are included in the Consolidated Balance Sheets in Property, plant and equipment, net, Long-term debt due within one year and Long-term debt.

Operating lease expense is recorded on a straight-line basis over the lease term by adding interest expense determined using the effective interest method to the amortization of the right-of-use asset. Operating lease related balances are included in the Consolidated Balance Sheets in Operating lease right-of-use assets, Operating lease liabilities due within one year and Operating lease liabilities. Operating lease right-of-use assets are reduced by previously recognized liabilities relating to unfavorable terms of leases acquired as part of a business combination and impairments.

For operating lease arrangements with lease and non-lease components, the Company accounts for the lease and non-lease components as a single lease component.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

LEASES

The Company elected to initially apply the new leases standard as of January 1, 2019 with certain available practical expedients which are discussed below. No cumulative-effect adjustments on retained earnings were necessary as of January 1, 2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting for finance leases remains substantially unchanged.

In transitioning to the new standard, the Company elected to use the practical expedient package. Accordingly, we did not reassess the following:

•

Whether existing or expired contracts are, or contained, a lease (including executory contracts).

•

The lease classification of existing or expired leases previously made by management.

•

Whether initial direct costs for existing leases would qualify under the new standard.

Furthermore, the Company elected to use the hindsight practical expedient in determining the lease term and assessing impairment of the right-of-use assets.

For all comparative periods prior to the adoption of the new leases standard, the Company will continue to report operating leases in the consolidated financial statements under ASC 840 “Leases” and provide the related required disclosures.

COMPREHENSIVE INCOME

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, regarding the reclassification of certain income tax effects reported in accumulated comprehensive income (loss) in response to the U.S. Tax Cuts and Jobs Acts (“U.S. Tax Reform”) enacted on December 22, 2017. For businesses, one of the main provisions of the U.S. Tax Reform was the reduction in the corporate federal income tax rate to 21% from 35%. Under current income tax accounting requirements, an entity was required to remeasure applicable U.S. deferred tax assets and deferred tax liabilities at the 21% tax rate effective on the U.S. Tax Reform enactment date. This remeasurement was required to be recognized in an entity’s income tax provision in its income statement. However, certain of these deferred tax assets and deferred tax liabilities relate to income tax effects initially recognized at the 35% tax rate through other comprehensive income (loss) on items reported within accumulated other comprehensive income (loss) on an entity’s balance sheet. Consequently, an entity’s financial statements will reflect an inconsistency between the deferred tax assets and deferred tax liabilities measured at 21% and the related income tax effects in accumulated other comprehensive income (loss) recorded at 35%. Accordingly, this guidance provides a one-time option to remeasure the income tax effects within accumulated other comprehensive income (loss) at the 21% income tax rate. The impact from this remeasurement is to be recorded directly in retained earnings on an entity’s balance sheet.

This guidance became effective for the Company on January 1, 2019. The Company has decided not to elect this option, as permitted in the new guidance.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

FUTURE ACCOUNTING CHANGES

IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. Under the guidance, implementation costs for cloud computing arrangements (“CCA”) should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software and expensed over the term of the hosting arrangement. The ASU also provides the following guidance on presentation and disclosure:

•	Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted CCA service, if any (generally as an “other asset”).

•

The amortization of capitalized implementation costs should be presented in the same statement of earnings line item as the fees associated with the hosted CCA service. Accordingly, the amortization of capitalized implementation costs should not be included with depreciation or amortization expense related to property, plant, and equipment or intangible assets.

•	Cash flows related to capitalized implementation costs should be presented as operating activities, consistent with the presentation of cash flows for the fees related to the hosted CCA service.

•	Entities are required to disclose the nature of the hosting arrangements that are service contracts and significant judgments made when applying the guidance. Additionally, companies are required to provide quantitative disclosures, including amounts capitalized, amortized, and impaired.

This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

While the Company is still evaluating the impact of adopting the new standard, it does not expect this new guidance to have a material impact on the consolidated financial statements.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, and interest rates. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The ineffective portion of the qualifying instrument is immediately recognized to earnings. The amount of ineffectiveness recognized was immaterial for all periods presented. The Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of June 30, 2019, two of Domtar’s Pulp and Paper segment customers located in the U.S. represented 12% or $78 million, and 12% or $75 million, respectively, of the Company’s receivables (December 31, 2018 – one Pulp and Paper segment customer located in the U.S. represented 10% or $67 million).

The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.

INTEREST RATE RISK

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, revolving credit facility and securitization, term loan and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

COST RISK

Cash flow hedges:

The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next 54 months.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of June 30, 2019 to hedge forecasted purchases:

Commodity	Notional contractual quantity under derivative contracts MMBtu⁽²⁾		Notional contractual value under derivative contracts (in millions of dollars)			Percentage of forecasted purchases under derivative contracts
Natural gas
2019 ⁽¹⁾		6,390,000		$	19	47%
2020		11,165,000		$	34	40%
2021		9,270,000		$	27	33%
2022		9,270,000		$	25	33%
2023		4,210,000		$	11	15%

⁽¹⁾	Represents the remaining six months of 2019

⁽²⁾	MMBtu: Millions of British thermal units

The natural gas derivative contracts were fully effective as of June 30, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 resulting from hedge ineffectiveness (three and six months ended June 30, 2018 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States, Canada and Europe. As a result, it is exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and European currencies. The Company’s European subsidiaries are also exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than their Euro functional currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.

Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next 24 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of June 30, 2019 to hedge forecasted purchases and sales:

Currency exposure hedged

Business Segment

Year of

maturity

Notional

contractual value

Percentage of

forecasted net

exposures under

contracts

Average

Protection rate

Average

Obligation rate

CAD/USD

Pulp and Paper

2019⁽¹⁾

350 CAD

78%

1 USD = 1.2913

1 USD = 1.3120

CAD/USD

Pulp and Paper

2020

488 CAD

54%

1 USD = 1.2967

1 USD = 1.3109

CAD/USD

Pulp and Paper

2021

163 CAD

18%

1 USD = 1.3192

⁽¹⁾Represents the remaining six months of 2019

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The foreign exchange derivative contracts were fully effective as of June 30, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 resulting from hedge ineffectiveness (three and six months ended June 30, 2018 – nil).

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures, establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) below) at June 30, 2019 and December 31, 2018, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:	June 30, 2019		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$
Derivatives designated as hedging instruments:
Asset derivatives
Currency derivatives		4		—		4		—	(a)	Prepaid expenses
Currency derivatives		2		—		2		—	(a)	Other assets
Total Assets		6		—		6		—

Liabilities derivatives
Currency derivatives		5		—		5		—	(a)	Trade and other payables
Natural gas swap contracts		7		—		7		—	(a)	Trade and other payables
Currency derivatives		1		—		1		—	(a)	Other liabilities and deferred credits
Natural gas swap contracts		6		—		6		—	(a)	Other liabilities and deferred credits
Total Liabilities		19		—		19		—

Other Instruments:
Stock-based compensation - liability awards		7		7		—		—		Trade and other payables
Stock-based compensation - liability awards		16		16		—		—		Other liabilities and deferred credits
Long-term debt		877		—		877		—	(b)	Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $13 million at June 30, 2019, of which a loss of $7 million will be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at June 30, 2019.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The net cumulative gain or loss recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is nil at June 30, 2019. A loss of $1 million will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at June 30, 2019.

Fair Value of financial instruments at:	December 31, 2018		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$
Derivatives designated as hedging instruments:
Asset derivatives
Currency derivatives		1		—		1		—	(a)	Prepaid expenses
Natural gas swap contracts		1		—		1		—	(a)	Prepaid expenses
Total Assets		2		—		2		—

Liabilities derivatives
Currency derivatives		19		—		19		—	(a)	Trade and other payables
Natural gas swap contracts		2		—		2		—	(a)	Trade and other payables
Currency derivatives		11		—		11		—	(a)	Other liabilities and deferred credits
Natural gas swap contracts		5		—		5		—	(a)	Other liabilities and deferred credits
Total Liabilities		37		—		37		—

Other Instruments:
Stock-based compensation - liability awards		6		6		—		—		Trade and other payables
Stock-based compensation - liability awards		14		14		—		—		Other liabilities and deferred credits
Long-term debt		858		—		858		—	(b)	Long-term debt

(a)	Fair value of the Company’s derivatives are classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows:

For currency derivatives: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques.

For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates.

(b)

Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at June 30, 2019 and December 31, 2018. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $825 million and $854 million at June 30, 2019 and December 31, 2018, respectively.

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

_________________

EARNINGS PER COMMON SHARE

The following table provides the reconciliation between basic and diluted earnings per common share:

	For the three months ended				For the six months ended
	June 30,		June 30,		June 30,		June 30,
	2019		2018		2019		2018
Net earnings	$	18	$	43	$	98	$	97
Weighted average number of common shares outstanding (millions)		63.0		62.9		63.0		62.8
Effect of dilutive securities (millions)		0.3		0.3		0.3		0.3
Weighted average number of diluted common shares outstanding (millions)		63.3		63.2		63.3		63.1

Basic net earnings per common share (in dollars)	$	0.29	$	0.68	$	1.56	$	1.54
Diluted net earnings per common share (in dollars)	$	0.28	$	0.68	$	1.55	$	1.54

The following table provides the securities that could potentially dilute basic earnings per common share in the future, but were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive:

	For the three months ended				For the six months ended
	June 30,		June 30,		June 30,		June 30,
	2019		2018		2019		2018
Options		219,211		230,601		219,211		230,601

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and six months ended June 30, 2019, the pension expense was $9 million and $23 million, respectively (2018 – $9 million and $22 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. who are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

	For the three months ended						For the six months ended
	June 30, 2019						June 30, 2019
	Pension plans			Other post-retirement benefit plans			Pension plans			Other post-retirement benefit plans
	$			$			$			$
Service cost		7			1			15			1
Interest expense		14			1			27			1
Expected return on plan assets		(20	)		—			(40	)		—
Amortization of net actuarial loss		2			(1	)		5			(1	)
Amortization of prior year service costs		2			—			3			—
Net periodic benefit cost		5			1			10			1

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

	For the three months ended						For the six months ended
	June 30, 2018						June 30, 2018
	Pension plans			Other post-retirement benefit plans			Pension plans			Other post-retirement benefit plans
	$			$			$			$
Service cost		9			1			17			1
Interest expense		13			1			27			1
Expected return on plan assets		(22	)		—			(43	)		—
Amortization of net actuarial loss		2			—			4			—
Amortization of prior year service costs		2			(1	)		3			(1	)
Net periodic benefit cost		4			1			8			1

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statement of Earnings and Comprehensive Income (Loss).

For the three and six months ended June 30, 2019, the Company contributed $4 million and $7 million, respectively (2018 – $4 million and $7 million, respectively) to the pension plans and $1 million and $2 million, respectively (2018 – $1 million and $2 million, respectively) to the other post-retirement benefit plans.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

OTHER OPERATING LOSS (INCOME), NET

Other operating loss (income), net is an aggregate of both recurring and occasional loss or income items and, as a result, can fluctuate from period to period. The Company’s other operating loss (income), net includes the following:

	For the three months ended					For the six months ended
	June 30,		June 30,			June 30,			June 30,
	2019		2018			2019			2018
	$		$			$			$
Gain on sale of property, plant and equipment		—		(3	)		—			(4	)
Bad debt expense		1		—			1			1
Environmental provision		—		—			1			—
Foreign exchange loss (gain)		1		—			2			(3	)
Other		—		1			(3	)		(1	)
Other operating loss (income), net		2		(2	)		1			(7	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

INCOME TAXES

For the second quarter of 2019, the Company’s income tax expense was $5 million, consisting of a current income tax expense of $3 million and a deferred income tax expense of $2 million. This compares to an income tax expense of $8 million in the second quarter of 2018, consisting of a current income tax expense of $10 million and a deferred income tax benefit of $2 million. The Company made income tax payments, net of refunds, of $44 million during the second quarter of 2019. The effective tax rate was 22% compared with an effective tax rate of 16% in the second quarter of 2018. The effective tax rate for the second quarter of 2019 was favorably impacted by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the second quarter of 2018 was favorably impacted by the enacted law changes in Sweden and several U.S states.

For the first six months of 2019, the Company’s income tax expense amounted to $29 million, consisting of a current income tax expense of $30 million and a deferred income tax benefit of $1 million. This compares to an income tax expense of $19 million in the first six months of 2018, consisting of a current income tax expense of $24 million and a deferred income tax benefit of $5 million. The Company made income tax payments, net of refunds, of $50 million during the first six months of 2019. The effective tax rate was 23% compared to an effective tax rate of 16% in the first six months of 2018. The effective tax rate for the first six months of 2019 was favorably impacted by the recognition of a $1 million R&D credit in a U.S. state as well as by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the first half of 2018 was favorably impacted by the recognition of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction as well as by enacted law changes in Sweden and several U.S states.

During the second quarter of 2019, the Internal Revenue Service (“IRS”) issued final regulations involving certain guidance related to Global Intangible Low-Taxed Income (“GILTI”). The final regulations are effective retroactive to January 1, 2018, and the Company has accounted for the effect of these final regulations in its tax expense for the second quarter of 2019 with no significant impacts.

Furthermore, during the quarter, the IRS proposed additional GILTI regulations, which are still pending approval. While the Company is still evaluating the impact, it does not expect those proposed regulations to have a material impact on the consolidated financial statements.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

INVENTORIES

The following table presents the components of inventories:

	June 30,		December 31,
	2019		2018
	$		$
Work in process and finished goods		457	410
Raw materials		131	126
Operating and maintenance supplies		235	226
		823	762

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9.

_________________

LEASES

In the normal course of business, the Company enters into operating and finance leases mainly for manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and manufacturing equipment.

While the Company’s lease payments are generally fixed over the lease term, some leases may include price escalation terms that are fixed at the lease commencement date.

The Company has remaining lease terms ranging from 1 year to 14 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.

For the three months ended June 30, 2019, the Company recorded $9 million of impairment of operating lease right-of-use assets under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss).

The components of lease expense were as follows:

	For the three months ended		For the six months ended
	June 30,		June 30,
	2019		2019
	$		$
Operating lease expense		7		14

Finance lease expense:
Amortization of right-of-use assets		—		—
Interest on lease liabilities		—		—
Total finance lease expense		—		—

For the three and six months ended June 30, 2018, total operating lease expense amounted to $7 million and $14 million, respectively.

Supplemental cash flow information related to leases was as follows:

		For the six months ended
		June 30,
		2019
		$
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows from operating leases		15
	Operating cash flows from finance leases		—
	Financing cash flows from finance leases		—

Right-of-use assets obtained in exchange for lease liabilities:
	Operating leases		11
	Finance leases		—

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9. LEASES (CONTINUED)

Supplemental balance sheet information related to leases was as follows:

			June 30,
			2019
			$
Operating leases
	Operating leases right-of-use assets			71

	Lease liabilities due within one year			24
	Operating lease liabilities			63
				87

Finance leases
	Property, plant and equipment			14
	Accumulated depreciation			(6	)
				8

	Long-term debt due within one year			1
	Long-term debt			9
				10

	Weighted-average remaining lease term
		Operating leases	5.1 years
		Finance leases	10.4 years

	Weighted-average discount rate
		Operating leases		4.6	%
		Finance leases		6.8	%

Maturities of lease liabilities at June 30, 2019 were as follows:

	Operating leases		Finance leases
	$		$
2019 ⁽¹⁾		14		1
2020		23		2
2021		18		2
2022		14		2
2023		10		1
Thereafter		20		7
Total lease payments		99		15

Less: Imputed interest		12		5

Total lease liabilities		87		10

⁽¹⁾

Represents the remaining six months of 2019.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9. LEASES (CONTINUED)

Maturities of lease commitments at December 31, 2018 were as follows:

	Operating leases		Capital leases
	$		$
2019		26		2
2020		21		2
2021		17		2
2022		12		1
2023		10		1
Thereafter		17		7
Total lease payments		103		15

Less: Imputed interest	N/A			4

Total lease liabilities	N/A			11

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

_________________

INTANGIBLE ASSETS

The following table presents the components of intangible assets:

		June 30, 2019							December 31, 2018
	Estimated useful lives (in years)	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
		$		$			$		$		$			$
Definite-lived intangible assets subject to amortization
Water rights	40		3		(1	)		2		3		(1	)		2
Customer relationships	10 – 40		382		(101	)		281		384		(94	)		290
Technology	7 – 20		8		(5	)		3		8		(4	)		4
Non-Compete	9		1		(1	)		—		1		(1	)		—
License rights	12		29		(14	)		15		28		(13	)		15
			423		(122	)		301		424		(113	)		311
Indefinite-lived intangible assets not subject to amortization
Water rights			4		—			4		4		—			4
Trade names			237		—			237		238		—			238
License rights			6		—			6		6		—			6
Catalog rights			38		—			38		38		—			38
Total			708		(122	)		586		710		(113	)		597

Amortization expense related to intangible assets for the three and six months ended June 30, 2019 was $4 million and $9 million, respectively (2018 – $5 million and $10 million, respectively).

Amortization expense for the next five years related to intangible assets is expected to be as follows:

	2019	2020		2021		2022		2023
	$	$		$		$		$
Amortization expense related to intangible assets	21 ⁽¹⁾		21		21		20		20

⁽¹⁾

Represents twelve months of amortization

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

_________________

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

Waco, Texas facility

On November 1, 2018, the Company announced a margin improvement plan within the Personal Care Division. As part of this plan, the Board of Directors approved the permanent closure of its Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of its manufacturing assets and a workforce reduction across the division. The Waco, Texas facility ceased operations during the second quarter of 2019.

For the three and six months ended June 30, 2019, the Company recorded $15 million and $25 million, respectively, of accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). For the three and six months ended June 30, 2019, the Company also recorded $1 million and $4 million, respectively, of severance and termination costs; nil and $1 million, respectively, of a write-down of inventory; and $7 million and $7 million, respectively, of relocation and other costs, under Closure and restructuring costs.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component⁽¹⁾ for the six months ended June 30, 2019 and the year ended December 31, 2018:

	Net derivative gains (losses) on cash flow hedges			Pension items⁽²⁾			Post-retirement benefit items⁽²⁾			Foreign currency items			Total
	$			$			$			$			$
Balance at December 31, 2017		8			(218	)		6			(132	)		(336	)
Natural gas swap contracts		1		N/A			N/A			N/A				1
Currency options		(12	)	N/A			N/A			N/A				(12	)
Foreign exchange forward contracts		(19	)	N/A			N/A			N/A				(19	)
Net (gain) loss	N/A				(23	)		6		N/A				(17	)
Foreign currency items	N/A			N/A			N/A				(91	)		(91	)
Other comprehensive (loss) income before reclassifications		(30	)		(23	)		6			(91	)		(138	)
Amounts reclassified from Accumulated other comprehensive loss		(2	)		10			(1	)		—			7
Net current period other comprehensive (loss) income		(32	)		(13	)		5			(91	)		(131	)
Balance at December 31, 2018		(24	)		(231	)		11			(223	)		(467	)
Natural gas swap contracts		(5	)	N/A			N/A			N/A				(5	)
Currency options		5		N/A			N/A			N/A				5
Foreign exchange forward contracts		14		N/A			N/A			N/A				14
Foreign currency items	N/A			N/A			N/A				22			22
Other comprehensive income before reclassifications		14			—			—			22			36
Amounts reclassified from Accumulated other comprehensive loss		2			6			(1	)		—			7
Net current period other comprehensive income (loss)		16			6			(1	)		22			43
Balance at June 30, 2019		(8	)		(225	)		10			(201	)		(424	)

⁽¹⁾	All amounts are after tax. Amounts in parentheses indicate losses.

⁽²⁾	The accrued benefit obligation is actuarially determined on an annual basis as of December 31.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

The following tables present reclassifications out of Accumulated other comprehensive loss for the three and six months ended June 30, 2019 and 2018:

Details about Accumulated other comprehensive loss components	Amounts reclassified from Accumulated other comprehensive loss⁽¹⁾
	For the three months ended
	June 30, 2019			June 30, 2018
	$			$
Net derivative gains (losses) on cash flow hedge
Natural gas swap contracts ⁽²⁾		—			1
Currency options and forwards ⁽²⁾		2			(1	)
Total before tax		2			—
Tax expense		(1	)		—
Net of tax		1			—

Amortization of defined benefit pension items
Amortization of net actuarial loss ⁽³⁾		2			2
Amortization of prior year service cost ⁽³⁾		2			2
Total before tax		4			4
Tax expense		(1	)		(1	)
Net of tax		3			3

Amortization of other post-retirement benefit items
Amortization of net actuarial loss ⁽³⁾		(1	)		—
Amortization of prior year service cost ⁽³⁾		—			(1	)
Total before tax		(1	)		(1	)
Tax benefit		—			—
Net of tax		(1	)		(1	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

	Amounts reclassified from Accumulated other comprehensive loss⁽¹⁾
	For the six months ended
	June 30, 2019			June 30, 2018
	$			$
Net derivatives gains (losses) on cash flow hedge
Currency options and forwards ⁽²⁾		3			(3	)
Total before tax		3			(3	)
Tax (expense) benefit		(1	)		1
Net of tax		2			(2	)

Amortization of defined benefit pension items
Amortization of net actuarial loss ⁽³⁾		5			4
Amortization of prior year service cost ⁽³⁾		3			3
Total before tax		8			7
Tax expense		(2	)		(2	)
Net of tax		6			5

Amortization of other post-retirement benefit items
Amortization of net actuarial loss ⁽³⁾		(1	)		—
Amortization of prior year service cost ⁽³⁾		—			(1	)
Total before tax		(1	)		(1	)
Tax benefit		—			—
Net of tax		(1	)		(1	)

⁽¹⁾	Amounts in parentheses indicate losses.

⁽²⁾	These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive Income (Loss).

⁽³⁾	These amounts are included in the computation of net periodic benefit cost (see Note 5 “Pension Plans and Other Post-Retirement Benefit Plans” for more details).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13.

_________________

SHAREHOLDERS’ EQUITY

On February 19, 2019, and May 8, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.435 and $0.455 per share, respectively, to be paid to holders of the Company’s common stock. Dividends of $28 million each were paid on April 15, 2019 and July 16, 2019, respectively, to shareholders of record on April 2, 2019 and July 2, 2019, respectively.

On August 6, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.455 per share to be paid to holders of the Company’s common stock. This dividend is to be paid on October 15, 2019, to shareholders of record on October 2, 2019.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up to $1.3 billion. Under the Program, the Company is authorized to repurchase, from time to time, shares of its outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of stock options and awards, and to improve shareholders’ returns.

The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company may enter into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements would require the Company to make up-front payments to the counterparty financial institutions, which would result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

During the first six months of 2019, the Company repurchased 194,407 shares at an average price of $42.26 for a total cost of $8 million.

During the first six months of 2018, there were no shares repurchased under the Program.

Since the inception of the Program, the Company has repurchased 25,048,234 shares at an average price of $39.35 for a total cost of $986 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14.

_________________

COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL MATTERS

The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. The Company may also incur substantial costs in relation to enforcement actions (including orders requiring corrective measures, installation of pollution control equipment or other remedial actions) as a result of violations of, or liabilities under, environmental laws and regulations applicable to its past and present properties. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with such properties may result in additional environmental costs and liabilities which cannot be reasonably estimated at this time.

In connection with contamination of a site bordering Burrard Inlet in North Vancouver, on February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan International Ltd. and the Company, in order to define and implement an action plan to address soil, sediment and groundwater issues. Construction began in January 2017 and was completed in the first quarter of 2019. The Company previously recorded an environmental reserve to address its estimated exposure. The possible cost in excess of the reserve is not considered to be material for this matter.

A former owner of the Company’s Dryden, Ontario manufacturing site (the "Dryden Property") operated a chlor-alkali plant during the 1960s and 1970s, during which time, mercury and other pollutants were used and discharged into the natural environment. In conjunction with the sale and redevelopment of the Dryden Property, the Province of Ontario (the “Province”) provided a broad indemnity (the "Indemnity") in 1985 to the then purchaser of the Dryden Property and its successors and assigns with respect to the discharge of any pollutant, including mercury, by the historical operators of the Dryden Property. This Indemnity was subsequently assigned to the Company in connection with its 2007 purchase of the Dryden Property.

As the current owner of the Dryden Property, Domtar is actively engaged with the Province with respect to the management of the historical contamination.

The Province has challenged whether certain owners of the Dryden Property prior to Domtar can benefit from the Indemnity in relation to the historic contamination. The Province was unsuccessful in the lower courts and has appealed to the Supreme Court of Canada, whose decision is pending.

The Province may also challenge whether Domtar has the benefit of the Indemnity. Should it be determined that Domtar does not have the benefit of the Indemnity, Domtar may be exposed to future costs that could have a material financial impact on the Company’s results of operations and financial condition.

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

	June 30, 2019
	$
Balance at beginning of year		37
Additions and other changes		1
Environmental spending		(4	)
Effect of foreign currency exchange rate change		1
Balance at end of period		35

The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund”, and similar state laws with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of operating sites, due to possible soil, sediment or groundwater contamination.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Climate change regulation

Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.

On July 8, 2019, the EPA published a final rule to repeal the Clean Power Plan and replace it with the “Affordable Clean Energy” (“ACE”) rule. Unlike the Clean Power Plan, which would have required significant changes across the entire power sector, ACE only requires states to develop plans for efficiency improvements at coal-fired electric utility generating units. The rule was immediately challenged in the U.S. Court of Appeals for the D.C. Circuit. Regardless of the outcome for the Clean Power Plan and ACE, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.

The province of Quebec has a greenhouse gases (“GHG”) cap-and-trade systems with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures compared to the other pulp and paper producers located in these provinces.

The Government of Canada has established a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. The Government of Canada will be imposing its carbon pricing program for regulating GHG emissions in Ontario. This regulatory system took effect in Ontario on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario recently finalized its own GHG Emission Performance Standards regulation. The Ontario Government is in discussions with the Canadian Government to replace the federal program in Ontario with its provincial program. Additional environmental costs may result from this effort which cannot be reasonably estimated at this time.

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at June 30, 2019, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At June 30, 2019, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At June 30, 2019, the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15.

_________________

SEGMENT DISCLOSURES

The Company’s two reportable segments described below also represent its two operating segments. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of the Company’s reportable segments:

•	Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.

•	Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

	For the three months ended						For the six months ended
SEGMENT DATA	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	$			$			$			$
Sales by segment
Pulp and Paper		1,096			1,123			2,243			2,223
Personal Care		237			247			484			509
Total for reportable segments		1,333			1,370			2,727			2,732
Intersegment sales		(16	)		(17	)		(34	)		(34	)
Consolidated sales		1,317			1,353			2,693			2,698

Sales by product group
Communication papers		643			634			1,328			1,265
Specialty and packaging papers		162			181			331			355
Market pulp		275			291			550			569
Absorbent hygiene products		237			247			484			509
Consolidated sales		1,317			1,353			2,693			2,698

Depreciation and amortization
Pulp and Paper		58			61			115			122
Personal Care		16			18			32			36
Total for reportable segments		74			79			147			158
Impairment of long-lived assets - Personal Care		15			—			25			—
Consolidated depreciation and amortization and impairment of long-lived assets		89			79			172			158

Operating income (loss)
Pulp and Paper		62			79			206			155
Personal Care		(18	)		2			(26	)		10
Corporate		(10	)		(19	)		(31	)		(26	)
Consolidated operating income		34			62			149			139
Interest expense, net		13			16			26			32
Non-service components of net periodic benefit cost		(2	)		(5	)		(5	)		(9	)
Earnings before income taxes and equity loss		23			51			128			116
Income tax expense		5			8			29			19
Equity loss, net of taxes		—			—			1			—
Net earnings		18			43			98			97

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16.

_________________

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar’s significant 100% owned domestic subsidiaries, including Domtar Paper Company, LLC, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Domtar A.W. LLC, Attends Healthcare Products Inc., EAM Corporation, Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co., (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt is not guaranteed by certain of Domtar’s foreign and non-significant domestic subsidiaries, all 100% owned, (collectively the “Non-Guarantor Subsidiaries”). A subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at June 30, 2019 and December 31, 2018, the Statements of Earnings and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018 and the Statements of Cash Flows for the six months ended June 30, 2019 and 2018 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.

	For the three months ended
	June 30, 2019
						Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor		Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries		Subsidiaries			Adjustments			Consolidated
	$			$		$			$			$
Sales		—			1,082		488			(253	)		1,317
Operating expenses
Cost of sales, excluding depreciation and amortization		—			925		407			(253	)		1,079
Depreciation and amortization		—			53		21			—			74
Selling, general and administrative		1			55		49			—			105
Impairment of long-lived assets		—			15		—			—			15
Closure and restructuring costs		—			8		—			—			8
Other operating loss, net		—			—		2			—			2
		1			1,056		479			(253	)		1,283
Operating (loss) income		(1	)		26		9			—			34
Interest expense (income), net		17			22		(26	)		—			13
Non-service components of net periodic benefit cost		—			—		(2	)		—			(2	)
(Loss) earnings before income taxes		(18	)		4		37			—			23
Income tax (benefit) expense		(3	)		—		8			—			5
Share in earnings of equity accounted investees		33			29		—			(62	)		—
Net earnings		18			33		29			(62	)		18
Other comprehensive income		26			31		21			(52	)		26
Comprehensive income		44			64		50			(114	)		44

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the six months ended
	June 30, 2019
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			2,208			1,019			(534	)		2,693
Operating expenses
Cost of sales, excluding depreciation and amortization		—			1,855			810			(534	)		2,131
Depreciation and amortization		—			104			43			—			147
Selling, general and administrative		7			111			110			—			228
Impairment of long-lived assets		—			25			—			—			25
Closure and restructuring costs		—			10			2			—			12
Other operating (income) loss, net		—			(4	)		5			—			1
		7			2,101			970			(534	)		2,544
Operating (loss) income		(7	)		107			49			—			149
Interest expense (income), net		34			42			(50	)		—			26
Non-service components of net periodic benefit cost		—			—			(5	)		—			(5	)
(Loss) earnings before income taxes and equity loss		(41	)		65			104			—			128
Income tax (benefit) expense		(9	)		14			24			—			29
Equity loss, net of taxes		—			—			1			—			1
Share in earnings of equity accounted investees		130			79			—			(209	)		—
Net earnings		98			130			79			(209	)		98
Other comprehensive income		43			48			25			(73	)		43
Comprehensive income		141			178			104			(282	)		141

	For the three months ended
	June 30, 2018
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE (LOSS) INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			1,089			564			(300	)		1,353
Operating expenses
Cost of sales, excluding depreciation and amortization		—			943			453			(300	)		1,096
Depreciation and amortization		—			55			24			—			79
Selling, general and administrative		3			23			92			—			118
Other operating loss (income), net		—			1			(3	)		—			(2	)
		3			1,022			566			(300	)		1,291
Operating (loss) income		(3	)		67			(2	)		—			62
Interest expense (income), net		16			23			(23	)		—			16
Non-service components of net periodic benefit cost		—			(1	)		(4	)		—			(5	)
(Loss) earnings before income taxes		(19	)		45			25			—			51
Income tax (benefit) expense		(4	)		8			4			—			8
Share in earnings of equity accounted investees		58			21			—			(79	)		—
Net earnings		43			58			21			(79	)		43
Other comprehensive loss		(55	)		(57	)		(50	)		107			(55	)
Comprehensive (loss) income		(12	)		1			(29	)		28			(12	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the six months ended
	June 30, 2018
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			2,172			1,112			(586	)		2,698
Operating expenses
Cost of sales, excluding depreciation and amortization		—			1,886			880			(586	)		2,180
Depreciation and amortization		—			111			47			—			158
Selling, general and administrative		7			68			153			—			228
Other operating income, net		—			(1	)		(6	)		—			(7	)
		7			2,064			1,074			(586	)		2,559
Operating (loss) income		(7	)		108			38			—			139
Interest expense (income), net		32			45			(45	)		—			32
Non-service components of net periodic benefit cost		—			—			(9	)		—			(9	)
(Loss) earnings before income taxes		(39	)		63			92			—			116
Income tax (benefit) expense		(8	)		12			15			—			19
Share in earnings of equity accounted investees		128			77			—			(205	)		—
Net earnings		97			128			77			(205	)		97
Other comprehensive loss		(75	)		(75	)		(60	)		135			(75	)
Comprehensive income		22			53			17			(70	)		22

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	June 30, 2019
					Non-
			Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		1		1		91		—			93
Receivables		—		162		472		—			634
Inventories		—		571		252		—			823
Prepaid expenses		12		19		8		—			39
Income and other taxes receivable		52		10		21		(42	)		41
Intercompany accounts		416		378		44		(838	)		—
Total current assets		481		1,141		888		(880	)		1,630
Property, plant and equipment, net		—		1,745		818		—			2,563
Operating lease right-of-use assets		—		55		16		—			71
Intangible assets, net		—		250		336		—			586
Investments in affiliates		3,823		2,700		—		(6,523	)		—
Intercompany long-term advances		5		1		1,652		(1,658	)		—
Other assets		20		37		112		(26	)		143
Total assets		4,329		5,929		3,822		(9,087	)		4,993
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness		—		3		—		—			3
Trade and other payables		59		390		233		—			682
Intercompany accounts		115		198		525		(838	)		—
Income and other taxes payable		2		45		25		(42	)		30
Operating lease liabilities due within one year		—		18		6		—			24
Long-term debt due within one year		—		—		1		—			1
Total current liabilities		176		654		790		(880	)		740
Long-term debt		793		—		31		—			824
Operating lease liabilities		—		53		10		—			63
Intercompany long-term loans		710		947		1		(1,658	)		—
Deferred income taxes and other		—		350		159		(26	)		483
Other liabilities and deferred credits		31		102		131		—			264
Shareholders' equity		2,619		3,823		2,700		(6,523	)		2,619
Total liabilities and shareholders' equity		4,329		5,929		3,822		(9,087	)		4,993

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	December 31, 2018
					Non-
			Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		—		—		111		—			111
Receivables		—		146		524		—			670
Inventories		—		525		237		—			762
Prepaid expenses		6		12		6		—			24
Income and other taxes receivable		1		3		18		—			22
Intercompany accounts		498		392		35		(925	)		—
Total current assets		505		1,078		931		(925	)		1,589
Property, plant and equipment, net		—		1,802		803		—			2,605
Intangible assets, net		—		256		341		—			597
Investments in affiliates		3,645		2,611		—		(6,256	)		—
Intercompany long-term advances		5		1		1,569		(1,575	)		—
Other assets		18		26		104		(14	)		134
Total assets		4,173		5,774		3,748		(8,770	)		4,925
Liabilities and shareholders' equity
Current liabilities
Trade and other payables		52		464		241		—			757
Intercompany accounts		125		264		536		(925	)		—
Income and other taxes payable		1		12		12		—			25
Long-term debt due within one year		—		—		1		—			1
Total current liabilities		178		740		790		(925	)		783
Long-term debt		793		—		60		—			853
Intercompany long-term loans		636		938		1		(1,575	)		—
Deferred income taxes and other		—		335		155		(14	)		476
Other liabilities and deferred credits		28		116		131		—			275
Shareholders' equity		2,538		3,645		2,611		(6,256	)		2,538
Total liabilities and shareholders' equity		4,173		5,774		3,748		(8,770	)		4,925

The Company has revised the Receivables balance within the December 31, 2018 Guarantor Subsidiaries column (decreased) and Non-Guarantor Subsidiaries column (increased) by $198 million, respectively, as receivables from third parties for the Guarantor Subsidiaries were netted with intercompany receivables.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the six months ended
	June 30, 2019
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		98			130			79			(209	)		98
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings		(89	)		(116	)		72			209			76
Cash flows from operating activities		9			14			151			—			174
Investing activities
Additions to property, plant and equipment		—			(62	)		(39	)		—			(101	)
Proceeds from disposals of property, plant and equipment		—			1			—			—			1
Cash flows used for investing activities		—			(61	)		(39	)		—			(100	)
Financing activities
Dividend payments		(55	)		—			—			—			(55	)
Stock repurchase		(8	)		—			—			—			(8	)
Net change in bank indebtedness		—			3			—			—			3
Proceeds from receivables securitization facility		—			—			80			—			80
Repayments of receivables securitization facility		—			—			(110	)		—			(110	)
Repayments of long-term debt		—			—			(1	)		—			(1	)
Increase in long-term advances to related parties		—			—			(101	)		101			—
Decrease in long-term advances to related parties		56			45			—			(101	)		—
Other		(1	)		—			—			—			(1	)
Cash flows (used for) provided from financing activities		(8	)		48			(132	)		—			(92	)
Net increase (decrease) in cash and cash equivalents		1			1			(20	)		—			(18	)
Cash and cash equivalents at beginning of period		—			—			111			—			111
Cash and cash equivalents at end of period		1			1			91			—			93

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the six months ended
	June 30, 2018
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		97			128			77			(205	)		97
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings		34			(104	)		35			205			170
Cash flows from operating activities		131			24			112			—			267
Investing activities
Additions to property, plant and equipment		—			(33	)		(29	)		—			(62	)
Proceeds from disposals of property, plant and equipment		—			—			4			—			4
Other		—			(2	)		(4	)		—			(6	)
Cash flows used for investing activities		—			(35	)		(29	)		—			(64	)
Financing activities
Dividend payments		(53	)		—			—			—			(53	)
Repayments of receivables securitization facility		—			—			(25	)		—			(25	)
Increase in long-term advances to related parties		—			—			(90	)		90			—
Decrease in long-term advances to related parties		58			32			—			(90	)		—
Other		2			—			—			—			2
Cash flows provided from (used for) financing activities		7			32			(115	)		—			(76	)
Net increase (decrease) in cash and cash equivalents		138			21			(32	)		—			127
Impact of foreign exchange on cash		—			—			(2	)		—			(2	)
Cash and cash equivalents at beginning of period		3			14			122			—			139
Cash and cash equivalents at end of period		141			35			88			—			264

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q. This MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 22, 2019. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refer to Domtar Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States.

The information contained on our website, www.domtar.com, is not incorporated by reference into this Form 10-Q and should in no way be construed as a part of this or any other report that we file with or furnish to the SEC.

In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volumes are based on the three and six months ended June 30, 2019 and 2018. The three month and six month periods are also referred to as the second quarter and first half of 2019 and 2018. References to notes refer to footnotes to the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q.

This MD&A is intended to provide investors with an understanding of our recent performance, financial condition and outlook. Topics discussed and analyzed include:

•

Overview

•

Highlights for the three month and six month periods ended June 30, 2019

•

Outlook

•

Consolidated Results of Operations and Segment Review

•

Liquidity and Capital Resources

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for all of their operating leases while continuing to recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income (Loss) in a manner similar to previous accounting standards. The Company elected to initially apply the new leases standard as of January 1, 2019 with certain available practical expedients. No cumulative-effect adjustments on retained earnings were necessary as of January 1, 2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting for finance leases remains substantially unchanged. For all comparative periods prior to the adoption of the new leases standard, we will continue to report operating leases in the consolidated financial statements under ASC 840 “Leases” and provide the related required disclosures.

For more details, refer to Note 2 “Recent Accounting Pronouncements” and Note 9 “Leases” of the financial statements in this Quarterly Report on Form 10-Q.

OVERVIEW

We design, manufacture, market and distribute a wide variety of fiber-based products, including communication papers, specialty and packaging papers, and absorbent hygiene products. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. More than 50% of our pulp production is consumed internally to manufacture paper and other consumer products, with the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end users. We are also a marketer and producer of a broad line of incontinence care products as well as infant diapers. To learn more, visit www.domtar.com.

We have two reportable segments as described below, which also represent our two operating segments. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of our reportable segments.

Pulp and Paper: Our Pulp and Paper segment consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.

Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.

HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2019

•

Operating income and net earnings decreased by 45% and 58%, respectively, from the second quarter of 2018

•

Sales decreased by 3% from the second quarter of 2018. Net average selling prices for paper were up while net average selling prices for pulp were down from the second quarter of 2018. Our manufactured paper volume and pulp volume were down and our Personal Care business had lower volume when compared to the second quarter of 2018

•

We paid $28 million in dividends

HIGHLIGHTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2019

•

Operating income and net earnings increased by 7% and 1%, respectively, from the first half of 2018

•

Sales remained relatively flat from the first half of 2018. Net average selling prices for paper and personal care were up whereas net average selling prices for pulp were slightly down from the first half of 2018. Our manufactured paper volume and pulp volume were down and our Personal Care business had lower volume when compared to the first half of 2018

•

We paid $55 million in dividends

	Three months ended										Six months ended
					Variance										Variance
FINANCIAL HIGHLIGHTS	June 30, 2019		June 30, 2018		$			%			June 30, 2019		June 30, 2018		$			%
(In millions of dollars, unless otherwise noted)
Sales	$	1,317	$	1,353		(36	)		-3	%	$	2,693	$	2,698		(5	)		-	%
Operating income		34		62		(28	)		-45	%		149		139		10			7	%
Net earnings		18		43		(25	)		-58	%		98		97		1			1	%
Net earnings per common share (in dollars)¹:
Basic	$	0.29	$	0.68	$	(0.39	)		-57	%	$	1.56	$	1.54	$	0.02			1	%
Diluted	$	0.28	$	0.68	$	(0.40	)		-59	%	$	1.55	$	1.54	$	0.01			1	%

															At June 30, 2019			At December 31, 2018
Total assets															$	4,993		$	4,925
Total long-term debt, including current portion															$	825		$	854

¹	See Note 4 “Earnings per Common Share” of the financial statements in this Quarterly Report on Form 10-Q for more information on the calculation of net earnings per common share.

OUTLOOK

For the remainder of the year, we expect our paper volumes to improve and trend in line with the market while our paper prices should remain relatively stable. We will continue to balance our production to our customer demand in our Paper business. We anticipate some volatility in softwood and fluff pulp markets but should recover cyclically and seasonally in the back end of 2019. Personal Care is expected to benefit from our margin improvement plan and increased sales driven by a stronger order book. We expect moderate inflation in our costs for the second half of the year.

CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW

This section presents a discussion and analysis of our second quarter and first half of 2019 and 2018 sales, operating income (loss) and other information relevant to the understanding of our results of operations.

ANALYSIS OF NET SALES
By Business Segment	Three months ended										Six months ended
							Variance										Variance
	June 30, 2019			June 30, 2018			$			%	June 30, 2019			June 30, 2018			$			%
Pulp and Paper	$	1,096		$	1,123			(27	)	-2%	$	2,243		$	2,223			20		1%
Personal Care		237			247			(10	)	-4%		484			509			(25	)	-5%
Total for reportable segments		1,333			1,370			(37	)	-3%		2,727			2,732			(5	)	-%
Intersegment sales		(16	)		(17	)		1				(34	)		(34	)		—
Consolidated		1,317			1,353			(36	)	-3%		2,693			2,698			(5	)	-%

Shipments
Paper - manufactured (in thousands of ST)		681			754			(73	)	-10%		1,417			1,523			(106	)	-7%
Communication Papers		567			615			(48	)	-8%		1,182			1,255			(73	)	-6%
Specialty and Packaging		114			139			(25	)	-18%		235			268			(33	)	-12%
Paper - sourced from third parties (in thousands of ST)		21			26			(5	)	-19%		44			54			(10	)	-19%
Paper - total (in thousands of ST)		702			780			(78	)	-10%		1,461			1,577			(116	)	-7%
Pulp (in thousands of ADMT)		370			377			(7	)	-2%		719			751			(32	)	-4%

ANALYSIS OF CHANGES IN SALES
	Second quarter of 2019 versus Second quarter of 2018												First half of 2019 versus First half of 2018
	% Change in Net Sales due to												% Change in Sales due to
	Net Price			Volume / Mix			Currency			Total			Net Price			Volume / Mix			Currency			Total
Pulp and Paper		5	%		-7	%		-	%		-2	%		7	%		-6	%		-	%		1	%
Personal Care		-	%		-1	%		-3	%		-4	%		1	%		-2	%		-4	%		-5	%
Consolidated sales		4	%		-6	%		-1	%		-3	%		6	%		-5	%		-1	%		-	%

ANALYSIS OF OPERATING INCOME (LOSS)
	Three months ended												Six months ended
By Business Segment							Variance												Variance
	June 30, 2019^(a)			June 30, 2018			$			%			June 30, 2019^(b)			June 30, 2018			$			%
Operating income (loss)
Pulp and Paper	$	62		$	79			(17	)		-22	%	$	206		$	155			51			33	%
Personal Care		(18	)		2			(20	)		-1000	%		(26	)		10			(36	)		-360	%
Corporate		(10	)		(19	)		9			47	%		(31	)		(26	)		(5	)		-19	%
Consolidated operating income		34			62			(28	)		-45	%		149			139			10			7	%

(a)	Includes closure and restructuring charge as well as accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our announced margin improvement plan within our Personal Care segment, of $8 million and $15 million, respectively.

(b)	Includes closure and restructuring charge as well as accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our announced margin improvement plan within our Personal Care segment, of $12 million and $25 million, respectively.

Second quarter of 2019 versus Second quarter of 2018

	$ Change in Segmented Operating Income (Loss) due to
	Volume/Mix			Net Price		Input Costs ^(a)			Operating Expenses^(b)			Currency			Depreciation/ Impairment ^(c)			Restructuring ^(d)			Other Income/ Expense ^(e)			Total
Pulp and Paper		(13	)		56		(25	)		(37	)		4			3			—			(5	)		(17	)
Personal Care		(2	)		1		2			1			(1	)		(13	)		(8	)		—			(20	)
Corporate		—			—		—			8			—			—			—			1			9
Consolidated operating income (loss)		(15	)		57		(23	)		(28	)		3			(10	)		(8	)		(4	)		(28	)

(a)	Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy costs.

(b)	Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs.

(c)

Depreciation charges were lower by $5 million in the second quarter of 2019, excluding foreign currency impact. In our Personal Care segment, in the second quarter of 2019, we recorded $15 million of accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our margin improvement plan.

(d)

We recorded $7 million of relocation and other costs and $1 million of severance and termination costs under Closure and restructuring costs in the second quarter of 2019 related to our announced margin improvement plan within the Personal Care segment. There were no restructuring charges in the second quarter of 2018.

(e)

Second quarter of 2019 other operating

income/expense includes:

Second quarter of 2018 other operating

income/expense includes:

- Bad debt expense ($1 million)

- Foreign currency loss on working capital items ($1 million)

- Gain on sale of property, plant and equipment ($3 million)

- Other expenses ($1 million)

Commentary – Second quarter of 2019 compared to Second quarter of 2018

Interest Expense, net

We incurred $13 million of net interest expense in the second quarter of 2019, a decrease of $3 million compared to net interest expense of $16 million in the second quarter of 2018. The net interest expense was impacted by the repayment of the $300 million Term Loan in the fourth quarter of 2018.

Income Taxes

For the second quarter of 2019, our income tax expense was $5 million, consisting of a current income tax expense of $3 million and a deferred income tax expense of $2 million. This compares to an income tax expense of $8 million in the second quarter of 2018, consisting of a current income tax expense of $10 million and a deferred income tax benefit of $2 million. We made income tax payments, net of refunds, of $44 million during the second quarter of 2019. The effective tax rate was 22% compared with an effective tax rate of 16% in the second quarter of 2018. The effective tax rate for the second quarter of 2019 was favorably impacted by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the second quarter of 2018 was favorably impacted by the enacted law changes in Sweden and several U.S. states.

During the second quarter of 2019, the Internal Revenue Service (“IRS”) issued final regulations involving certain guidance related to Global Intangible Low-Taxed Income (“GILTI”). The final regulations are effective retroactive to January 1, 2018, and we have accounted for the effect of these final regulations in our tax expense for the second quarter of 2019 with no significant impacts.

Furthermore, during the quarter, the IRS proposed additional GILTI regulations, which are still pending approval. While we are still evaluating the impact, we do not expect those proposed regulations to have a material impact on our consolidated financial statements.

First half of 2019 versus First half of 2018

	$ Change in Segmented Operating Income (Loss) due to
	Volume/Mix			Net Price		Input Costs ^(a)			Operating Expenses^(b)			Currency			Depreciation/ Impairment ^(c)			Restructuring ^(d)			Other Income/ Expense ^(e)			Total
Pulp and Paper		(22	)		152		(34	)		(50	)		8			6			—			(9	)		51
Personal Care		(7	)		2		2			5			(4	)		(21	)		(12	)		(1	)		(36	)
Corporate		—			—		—			(7	)		—			—			—			2			(5	)
Consolidated operating income (loss)		(29	)		154		(32	)		(52	)		4			(15	)		(12	)		(8	)		10

(a)	Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy costs.

(b)	Includes maintenance, freight costs, SG&A expenses and other costs.

(c)

Depreciation charges were lower by $10 million in the first half of 2019, excluding foreign currency impact. In our Personal Care segment, in the first half of 2019, we recorded $25 million of accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our margin improvement plan.

(d)

We recorded $7 million of relocation and other costs, $4 million of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs in the first half of 2019 related to our announced margin improvement plan within the Personal Care segment. There were no restructuring charges in the first half of 2018.

(e)

First half of 2019 other operating income/

expense includes:

First half of 2018 other operating income/

expense includes:

- Foreign exchange loss on working capital items ($2 million)

- Environmental provision ($1 million)

- Bad debt expense ($1 million)

- Other income ($3 million)

- Gain on sale of property, plant and equipment ($4 million)

- Foreign exchange gain on working capital items ($3 million)

- Bad debt expense ($1 million)

- Other income ($1 million)

Commentary – First half of 2019 compared to first half of 2018

Interest Expense, net

We incurred $26 million of net interest expense in the first half of 2019, a decrease of $6 million compared to net interest expense of $32 million in the first half of 2018. The net interest expense was impacted by the repayment of the $300 million Term Loan in the fourth quarter of 2018.

Income Taxes

For the first half of 2019, our income tax expense was $29 million, consisting of a current income tax expense of $30 million and a deferred income tax benefit of $1 million. This compares to an income tax expense of $19 million in the first half of 2018, consisting of a current income tax expense of $24 million and a deferred income tax benefit of $5 million. We made income tax payments, net of refunds, of $50 million during the first half of 2019. The effective tax rate was 23% compared to an effective tax rate of 16% in the first half of 2018. The effective tax rate for the first half of 2019 was favorably impacted by the recognition of a $1 million R&D credit in a U.S. state as well as by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the first half of 2018 was favorably impacted by the recognition of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction as well as by enacted law changes in Sweden and several U.S. states.

During the second quarter of 2019, IRS issued final regulations involving certain guidance related to Global Intangible Low-Taxed Income (“GILTI”). The final regulations are effective retroactive to January 1, 2018, and we have accounted for the effect of these final regulations in our tax expense for the second quarter of 2019 with no significant impacts.

Commentary – Segment Review

Pulp and Paper Segment

Sales in our Pulp and Paper segment decreased by $27 million, or 2%, when compared to sales in the second quarter of 2018. This decrease in sales is mostly due to a decrease in our paper and pulp sales volumes as well as a decrease in net average selling prices for pulp. This decrease was partially offset by an increase in net average selling prices for paper.

Operating income in our Pulp and Paper segment amounted to $62 million in the second quarter of 2019, a decrease of $17 million, when compared to operating income of $79 million in the second quarter of 2018. Our results were negatively impacted by:

•

Higher operating expenses ($37 million) mostly due to higher maintenance and fixed costs due to timing of major maintenance and lower production when compared to the second quarter of 2018

•

Higher input costs ($25 million) mostly related to higher costs of fiber due, in part, to wet weather in the second quarter of 2019 as well as unfavorable market conditions

•

Lower volume/mix ($13 million)

•

Lower other income ($5 million)

These decreases were partially offset by:

•

Higher net average selling prices for paper, partially offset by lower net average selling prices for pulp ($56 million)

•

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($4 million)

•

Lower depreciation charges ($3 million) due to certain assets being fully depreciated

Sales in our Pulp and Paper segment increased by $20 million, or 1%, when compared to sales in the first half of 2018. This increase in sales is mostly due to an increase in net average selling prices for paper. This increase was partially offset by a decrease in our pulp and paper sales volumes.

Operating income in our Pulp and Paper segment amounted to $206 million in the first half of 2019, an increase of $51 million, when compared to operating income of $155 million in the first half of 2018. Our results were positively impacted by:

•

Higher net average selling prices for paper, partially offset by lower net average selling prices for pulp ($152 million)

•

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($8 million)

•

Lower depreciation charges ($6 million) due to certain assets being fully depreciated

These increases were partially offset by:

•

Higher operating expenses ($50 million) mostly related to higher maintenance and fixed costs due to timing of major maintenance as well as lower production when compared to the first half of 2018

•

Higher input costs ($34 million) mostly related to higher costs of fiber due, in part, to wet weather in the first half of 2019, partially offset by lower energy costs

•

Lower volume/mix ($22 million)

•

Lower other income ($9 million)

The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products.

The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products.

Our Espanola pulp and specialty paper mill underwent an extensive audit and inspection of major components during their outage in June 2019. Following the inspection and given cyclically low pulp prices, we made the decision to fast-track some maintenance work that was originally planned for next year to address some reliability risks. We expect that this extended shutdown will impact the second half of 2019 by adding approximately $36 million of maintenance costs and lower our total pulp production by approximately 60,000 tonnes.

Personal Care Segment

Sales in our Personal Care segment decreased by $10 million, or 4%, when compared to sales in the second quarter of 2018. This decrease was mainly driven by lower volume and unfavorable foreign exchange, partially offset by favorable mix when compared to the second quarter of 2018.

Operating income decreased by $20 million, in the second quarter of 2019 compared to the second quarter of 2018. Our results were negatively impacted by:

•

Higher depreciation/impairment charge ($13 million) mostly due to the non-cash impairment of long-lived assets charge of $15 million recorded in the second quarter of 2019, related to our margin improvement plan

•

Higher closure and restructuring charges ($8 million) related to our margin improvement plan

•

Lower sales volume partially offset by favorable mix ($2 million)

•

Unfavorable foreign exchange ($1 million) mostly between the Euro and the U.S. dollar, net of our hedging program

These decreases were partially offset by:

•

Favorable input costs ($2 million)

•

Favorable net average selling prices ($1 million)

•

Lower operating expenses ($1 million) mostly due to lower SG&A expenses

Sales in our Personal Care segment decreased by $25 million, or 5%, when compared to sales in the first half of 2018. This decrease in sales was driven by unfavorable foreign exchange, mostly due to the fluctuation between the U.S. dollar and the Euro, as well as lower volume, partially offset by favorable mix and higher net average selling prices.

Operating income decreased by $36 million, in the first half of 2019 when compared to the first half of 2018. Our results were negatively impacted by:

•

Higher depreciation/impairment charge ($21 million) mostly due to the non-cash impairment of long-lived assets charge of $25 million recorded in the first half of 2019, related to our margin improvement plan

•

Higher closure and restructuring charges ($12 million) related to our margin improvement plan

•

Lower sales volume partially offset by favorable mix ($7 million)

•

Unfavorable foreign exchange ($4 million) mostly between the Euro and the U.S. dollar, net of our hedging program

•

Lower other income ($1 million)

These decreases were partially offset by:

•

Lower operating expenses ($5 million) mostly due to lower SG&A expenses

•

Favorable input costs ($2 million)

•

Higher net average selling prices ($2 million)

In our absorbent hygiene products business, we compete in an industry with fundamental drivers for long-term growth; however, competitive market pressures in the healthcare and retail markets have grown significantly in recent years. Although the impact of such pressures presents some uncertainties, we expect them to result in lower than previously anticipated sales and operating margins.

While we expect to benefit from the overall increase in healthcare spending due to an aging population, the pressures to limit spending on healthcare may impact overall consumption or the channels in which consumption occurs. Additionally, excess industry capacity

has increased pricing pressure in all markets and instigated a shift in the infant and adult private label retail space as competitors historically almost absent in our markets have increased their presence in such markets.

The principal methods and elements of competition remain brand recognition and loyalty, product innovation, quality and performance, price and marketing and distribution capabilities.

Personal Care is expected to benefit from our margin improvement plan and increased sales driven by a stronger order book. We expect moderate inflation in our costs for the second half of the year.

Margin Improvement Plan

On November 1, 2018, we announced a margin improvement plan within our Personal Care segment. As part of this plan, the Board of Directors approved the permanent closure of our Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction across the division. The Waco, Texas facility ceased operations during the second quarter of 2019.

For the three and six months ended June 30, 2019, we recorded $15 million and $25 million, respectively, of accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). For the three and six months ended June 30, 2019, we also recorded $1 million and $4 million, respectively, of severance and termination costs; nil and $1 million, respectively, of a write-down of inventory; and $7 million and $7 million, respectively, of relocation and other costs, under Closure and restructuring costs.

STOCK-BASED COMPENSATION EXPENSE

For the first half of 2019, stock-based compensation expense recognized in our results of operations was $20 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $11 million. This compares to a stock-based compensation expense of $10 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $2 million in the first half of 2018. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES

Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed $700 million credit facility, of which $700 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $81 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.

Our ability to make payments on the requirements mentioned above will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit and receivable securitization facilities and debt indentures impose various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

Operating Activities

Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials, including fiber and energy, and other expenses such as income tax and property taxes.

Cash flows from operating activities totaled $174 million in the first half of 2019, a $93 million decrease compared to cash flows from operating activities of $267 million in the first half of 2018. This decrease in cash flows from operating activities is primarily due to an increase in working capital requirements. We made income tax payments, net of refunds, of $50 million in the first half of 2019 compared to income tax payments, net of refunds, of $25 million during the first half of 2018.

Investing Activities

Cash flows used for investing activities in the first half of 2019 amounted to $100 million, a $36 million increase compared to cash flows used for investing activities of $64 million in the first half of 2018.

The use of cash in the first half of 2019 was attributable to additions to property, plant and equipment of $101 million. This use of cash was partially offset by proceeds from disposals of property, plant and equipment of $1 million.

The use of cash in the first half of 2018 was attributable to additions to property, plant and equipment of $62 million. Also, in the first half of 2018, we made an additional investment of $4 million in our joint venture CelluForce (a company that develops and manufactures nanocrystalline cellulose, a recyclable and renewable nanomaterial) and a $2 million investment in Prisma Renewable Composites, LLC (a company focused on developing advanced materials from lignin and other natural resources). These uses of cash were partially offset by proceeds of disposals of property, plant and equipment of $4 million.

Our capital expenditures for 2019 are expected to be between $220 million and $240 million.

Financing Activities

Cash flows used for financing activities totaled $92 million in the first half of 2019 compared to cash flows used for financing activities of $76 million in the first half of 2018.

The use of cash in the first half of 2019 was primarily the result of dividend payments ($55 million), the net repayments of borrowings under our receivable securitization ($30 million) and the repurchase of our common stock ($8 million).

The use of cash in the first half of 2018 was primarily the result of dividend payments ($53 million) and the net repayments of borrowings under our receivable securitization ($25 million).

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $735 million as of June 30, 2019 compared to $743 million as of December 31, 2018.

Term Loan

In the fourth quarter of 2018, we repaid the $300 million unsecured Term Loan that had been entered into in 2015 by a wholly-owned subsidiary of Domtar with certain domestic banks.

Revolving Credit Facility

In August 2018, we amended and restated our unsecured revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks, extending the Credit Agreement’s maturity date from August 18, 2021 to August 22, 2023. The amount available under the Credit Agreement remained at $700 million.

Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic subsidiaries. Borrowings by foreign borrowers under the Credit Agreement are guaranteed by the Company, our significant domestic subsidiaries and certain of our foreign significant subsidiaries.

Borrowings under the Credit Agreement bear interest at the LIBOR, EURIBOR, Canadian bankers’ acceptance or prime rate, as applicable, plus a margin linked to our credit rating. In addition, we pay facility fees quarterly at rates dependent on our credit ratings.

The Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). At June 30, 2019 and June 30, 2018, we were in compliance with these financial covenants, and had no borrowings. At June 30, 2019 and June 30, 2018, we had no outstanding letters of credit, leaving $700 million unused and available under this facility.

Receivables Securitization

We have a $150 million receivables securitization facility that matures in November 2021.

At June 30, 2019, borrowings under the receivables securitization facility amounted to $20 million, and we had $49 million of letters of credit under the program (June 30, 2018 – nil and $51 million, respectively). The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the Credit Agreement

or our failure to repay or satisfy material obligations. At June 30, 2019, we had $81 million unused and available under the receivable securitization facility.

Common Stock

On February 19, 2019 and May 8, 2019, our Board of Directors approved a quarterly dividend of $0.435 per share and $0.455 per share, respectively, to be paid to holders of our common stock. Dividends of $28 million each were paid on April 15, 2019 and July 16, 2019, respectively, to shareholders of record on April 2, 2019 and July 2, 2019, respectively.

On August 6, 2019, our Board of Directors approved a quarterly dividend of $0.455 per share to be paid to holders of our common stock. This dividend is to be paid on October 15, 2019, to shareholders of record on October 2, 2019.

GUARANTEES

Indemnifications

In the normal course of business, we offer indemnifications relating to the sale of our businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At June 30, 2019, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans

We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At June 30, 2019, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 “Recent Accounting Pronouncements,” of the financial statements in this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes, and contingencies related to legal claims. These critical accounting estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these accounting policies, and others, should be reviewed as they are essential to understanding our results of operations, cash flows and financial condition. Actual results could differ from those estimates.

For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2018.

There has not been any material change to our policies since December 31, 2018 except for the adoption of ASU 2016-02, “Leases” on January 1, 2019. For more details, refer to Note 2 “Recent Accounting Pronouncements” of the financial statements in this Quarterly Report on Form 10-Q.

FORWARD-LOOKING STATEMENTS

The information included in this Quarterly Report on Form 10-Q, contains forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance, liquidity 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”, “project”, “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 and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:

•

continued decline in usage of fine paper products in our core North American market;

•

our ability to implement our business diversification initiatives, including repurposing of assets and strategic acquisitions;

•

product selling prices;

•

raw material prices, including wood fiber, chemical and energy;

•

conditions in the global capital and credit markets, and the economy generally, particularly in the U.S., Canada and Europe;

•

performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance requirements;

•

the level of competition from domestic and foreign producers;

•

cyberattack or other security breaches;

•

the effect of, or change in, forestry, land use, environmental and other governmental regulations and accounting regulations;

•

the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;

•

transportation costs;

•

the loss of current customers or the inability to obtain new customers;

•

legal proceedings;

•

changes in asset valuations, including impairment of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons;

•

changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar and European currencies;

•

the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation;

•

performance of pension fund investments and related derivatives, if any; and

•

the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2018.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2018. There has not been any material change in our exposure to market risk since December 31, 2018. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 3 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of June 30, 2019, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019, our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 14 “Commitments and Contingencies” of the financial statements in this Quarterly Report on Form 10-Q for the discussion regarding legal proceedings.

For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2018, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share repurchase activity under our share repurchase program was as follows during the three-month period ended June 30, 2019:

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (in 000s)
April 1 through April 30, 2019		—	$	—		—	$	322,572
May 1 through May 31, 2019		148,457	$	42.20		148,457	$	316,307
June 1 through June 30, 2019		45,950	$	42.46		45,950	$	314,356
		194,407	$	42.26		194,407

During the second quarter and the first half of 2019, we repurchased 194,407 shares at an average price of $42.26 per share, for a total cost of $8 million under our stock repurchase program (the “Program”). We currently have approximately $314 million of remaining availability under our Program. The Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Program. The Program has no set expiration date. We repurchase our common stock, from time to time, in part to reduce the dilutive effects of our stock options and awards and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions, availability under the program as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share. During July 2019, we repurchased 322,813 shares at an average price of $41.61 per share, for a total cost of $13 million.

During 2018, there were no shares repurchased under the Program. As of December 31, 2018, the approximate dollar value of shares that may yet be purchased under the Program was $323 million.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

			Incorporated by reference to:
Exhibit Number	Exhibit Description		Form	Exhibit	Filing Date

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Extension Presentation Linkbase

SIGNATURE

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 thereto duly authorized.

DOMTAR CORPORATION

Date: August 8, 2019

By:	/s/ Daniel Buron
	Daniel Buron
	Senior Vice-President and Chief Financial Officer

By:	/s/ Razvan L. Theodoru
	Razvan L. Theodoru
	Vice-President, Corporate Law and Secretary