ufs-10q_20200331.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 March 31, 2020

☐	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 April 30, 2020, 55,191,705 shares of the issuer’s common stock were outstanding.

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2020

INDEX

PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

	CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE (LOSS) INCOME	3

	CONSOLIDATED BALANCE SHEETS	4

	CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS	6

	INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	48

ITEM 4.	CONTROLS AND PROCEDURES	48

PART II	OTHER INFORMATION	48

ITEM 1.	LEGAL PROCEEDINGS	48

ITEM 1A.	RISK FACTORS	49

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	50

ITEM 4.	MINE SAFETY DISCLOSURES	50

ITEM 5.	OTHER INFORMATION	50

ITEM 6.	EXHIBITS	51

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE (LOSS) INCOME

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended
	March 31,			March 31,
	2020			2019
	(Unaudited)
	$			$
Sales		1,278			1,376
Operating expenses
Cost of sales, excluding depreciation and amortization		1,083			1,052
Depreciation and amortization		72			73
Selling, general and administrative		102			123
Impairment of long-lived assets (NOTE 11)		—			10
Closure and restructuring costs (NOTE 11)		—			4
Other operating loss (income), net (NOTE 6)		2			(1	)
		1,259			1,261
Operating income		19			115
Interest expense, net		14			13
Non-service components of net periodic benefit cost (NOTE 5)		(4	)		(3	)
Earnings before income taxes and equity loss		9			105
Income tax expense (NOTE 7)		3			24
Equity loss, net of taxes		1			1
Net earnings		5			80
Per common share (in dollars) (NOTE 4)
Net earnings
Basic		0.09			1.27
Diluted		0.09			1.27
Weighted average number of common shares outstanding (millions)
Basic		56.1			63.0
Diluted		56.2			63.2
Cash dividends per common share		0.46			0.44

Net earnings		5			80
Other comprehensive (loss) income (NOTE 12):
Net derivative (losses) gains on cash flow hedges:
Net (losses) gains arising during the period, net of tax of $16 (2019 – $(4))		(49	)		11
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2) (2019 – nil)		7			1
Foreign currency translation adjustments		(74	)		2
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) (2019 – $(1))		1			3
Other comprehensive (loss) income		(115	)		17
Comprehensive (loss) income		(110	)		97

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
	March 31,			December 31,
	2020			2019
	(Unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		152			61
Receivables, less allowances of $10 and $6		600			577
Inventories (NOTE 8)		740			786
Prepaid expenses		32			33
Income and other taxes receivable		27			61
Total current assets		1,551			1,518
Property, plant and equipment, net		2,493			2,567
Operating lease right-of-use assets (NOTE 9)		77			81
Intangible assets, net (NOTE 10)		561			573
Other assets		151			164
Total assets		4,833			4,903
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness		—			9
Trade and other payables		700			705
Income and other taxes payable		26			23
Operating lease liabilities due within one year (NOTE 9)		27			28
Long-term debt due within one year		1			1
Total current liabilities		754			766
Long-term debt		1,102			938
Operating lease liabilities (NOTE 9)		65			69
Deferred income taxes and other		457			479
Other liabilities and deferred credits		274			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; 9,810,777 and 8,120,194 shares		—			—
Additional paid-in capital		1,710			1,770
Retained earnings		978			998
Accumulated other comprehensive loss		(508	)		(393	)
Total shareholders' equity		2,181			2,376
Total liabilities and shareholders' equity		4,833			4,903

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
	March 31, 2020
	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, 2019		56.9			1		1,770			998			(393	)		2,376
Stock-based compensation, net of tax		0.1			—		(1	)		—			—			(1	)
Net earnings		—			—		—			5			—			5
Net derivative losses on cash flow hedges:
Net losses arising during the period, net of tax of $16		—			—		—			—			(49	)		(49	)
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2)		—			—		—			—			7			7
Foreign currency translation adjustments		—			—		—			—			(74	)		(74	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1)		—			—		—			—			1			1
Stock repurchase		(1.8	)		—		(59	)		—			—			(59	)
Cash dividends declared		—			—		—			(25	)		—			(25	)
Balance at March 31, 2020		55.2			1		1,710			978			(508	)		2,181

	For the three months ended
	March 31, 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		—		1		—			—			1
Net earnings		—		—		—		80			—			80
Net derivative gains on cash flow hedges:
Net gains arising during the period, net of tax of $(4)		—		—		—		—			11			11
Less: Reclassification adjustment for losses included in net earnings, net of tax of nil		—		—		—		—			1			1
Foreign currency translation adjustments		—		—		—		—			2			2
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1)		—		—		—		—			3			3
Cash dividends declared		—		—		—		(28	)		—			(28	)
Balance at March 31, 2019		63.1		1		1,982		1,075			(450	)		2,608

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 three months ended
	March 31, 2020			March 31, 2019
	(Unaudited)
	$			$
Operating activities
Net earnings		5			80
Adjustments to reconcile net earnings to cash flows from operating activities
Depreciation and amortization		72			73
Deferred income taxes and tax uncertainties		1			(3	)
Impairment of long-lived assets		—			10
Stock-based compensation expense		1			2
Equity loss, net		1			1
Changes in assets and liabilities
Receivables		(28	)		(30	)
Inventories		28			(49	)
Prepaid expenses		(5	)		—
Trade and other payables		(16	)		(69	)
Income and other taxes		39			26
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		(1	)		1
Other assets and other liabilities		(9	)		13
Cash flows from operating activities		88			55
Investing activities
Additions to property, plant and equipment		(62	)		(46	)
Cash flows used for investing activities		(62	)		(46	)
Financing activities
Dividend payments		(26	)		(27	)
Stock repurchase		(59	)		—
Net change in bank indebtedness		(10	)		3
Change in revolving credit facility		140			—
Proceeds from receivables securitization facility		25			20
Repayments of receivables securitization facility		—			(20	)
Other		(3	)		(1	)
Cash flows provided from (used for) financing activities		67			(25	)
Net increase (decrease) in cash and cash equivalents		93			(16	)
Impact of foreign exchange on cash		(2	)		(1	)
Cash and cash equivalents at beginning of period		61			111
Cash and cash equivalents at end of period		152			94
Supplemental cash flow information
Net cash payments (refund) for:
Interest		17			16
Income taxes		(25	)		6

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

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1	BASIS OF PRESENTATION	8

NOTE 2	RECENT ACCOUNTING PRONOUNCEMENTS	9

NOTE 3	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	10

NOTE 4	EARNINGS PER COMMON SHARE	14

NOTE 5	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	15

NOTE 6	OTHER OPERATING LOSS (INCOME), NET	16

NOTE 7	INCOME TAXES	17

NOTE 8	INVENTORIES	18

NOTE 9	LEASES	19

NOTE 10	INTANGIBLE ASSETS	21

NOTE 11	CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS	22

NOTE 12	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	23

NOTE 13	SHAREHOLDERS’ EQUITY	25

NOTE 14	COMMITMENTS AND CONTINGENCIES	26

NOTE 15	SEGMENT DISCLOSURES	28

NOTE 16	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	30

NOTE 17	SUBSEQUENT EVENTS	36

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 three 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, 2019, as filed with the Securities and Exchange Commission. The December 31, 2019 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.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS

In August 2018, the FASB issued Accounting Standards Update (“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 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 guidance on presentation and disclosure.

The Company adopted the new guidance on January 1, 2020 with no significant impact on the consolidated financial statements.

RECEIVABLES

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss.

The Company adopted the new guidance on January 1, 2020 with no significant impact on the consolidated financial statements.

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

On March 12, 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The amendments in the ASU are elective and apply to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company has begun its impact assessment and while its evaluation of this guidance is in the early stages, the Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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, interest rates and prices of the Company’s common stock with regard to the Company’s stock-based compensation program. 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 Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on 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 March 31, 2020, one Pulp and Paper segment customer located in the U.S. represented 13% or $81 million of the Company’s receivables (December 31, 2019 – two Pulp and Paper segment customers located in the U.S. represented 11% or $66 million, and 11% or $65 million, respectively).

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.

EQUITY RISK

The Company is exposed to changes in share prices with regard to its stock-based compensation program. The Company manages its exposure through the use of derivative instruments such as equity swap contracts. In March 2020, the Company entered into a total return swap agreement covering 500,000 common shares maturing on March 4, 2022.

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 45 months.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 March 31, 2020 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
2020 ⁽¹⁾		6,265,000		$	19	34%
2021		9,270,000		$	27	36%
2022		9,270,000		$	25	36%
2023		4,210,000		$	12	16%

⁽¹⁾	Represents the remaining nine months of 2020

⁽²⁾	MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of March 31, 2020.

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 March 31, 2020 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

2020⁽¹⁾

659 CAD

95%

1 USD = 1.3211

1 USD = 1.3379

CAD/USD

Pulp and Paper

2021

565 CAD

60%

1 USD = 1.3417

1 USD = 1.3479

CAD/USD

Pulp and Paper

2022

112 CAD

12%

1 USD = 1.3591

⁽¹⁾	Represents the remaining nine months of 2020

The foreign exchange derivative contracts were effective as of March 31, 2020.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

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 March 31, 2020 and December 31, 2019, 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:	March 31, 2020		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
Currency derivatives		1		—		1		—	(a)	Other assets
Total Assets		2		—		2		—

Liabilities derivatives
Currency derivatives		37		—		37		—	(a)	Trade and other payables
Natural gas swap contracts		7		—		7		—	(a)	Trade and other payables
Currency derivatives		17		—		17		—	(a)	Other liabilities and deferred credits
Natural gas swap contracts		7		—		7		—	(a)	Other liabilities and deferred credits
Total Liabilities		68		—		68		—

Other instruments:
Stock-based compensation - liability awards		2		2		—		—		Trade and other payables
Stock-based compensation - liability awards		9		9		—		—		Other liabilities and deferred credits
Equity swap contracts		3		3		—		—		Other liabilities and deferred credits
Long-term debt		1,082		—		1,082		—	(b)	Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $14 million at March 31, 2020, 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 March 31, 2020.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The net cumulative loss recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $52 million at March 31, 2020, of which a loss of $36 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 March 31, 2020.

Fair Value of financial instruments at:	December 31, 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		4		—		4		—	(a)	Other assets
Total Assets		8		—		8		—

Liabilities derivatives
Currency derivatives		2		—		2		—	(a)	Trade and other payables
Natural gas swap contracts		9		—		9		—	(a)	Trade and other payables
Natural gas swap contracts		8		—		8		—	(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		18		18		—		—		Other liabilities and deferred credits
Long-term debt		1,030		—		1,030		—	(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 March 31, 2020 and December 31, 2019. The carrying value of the Company’s long-term debt is $1,103 million and $939 million at March 31, 2020 and December 31, 2019, 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

MARCH 31, 2020

(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
	March 31,		March 31,
	2020		2019
Net earnings	$	5	$	80
Weighted average number of common shares outstanding (millions)		56.1		63.0
Effect of dilutive securities (millions)		0.1		0.2
Weighted average number of diluted common shares outstanding (millions)		56.2		63.2

Basic net earnings per common share (in dollars)	$	0.09	$	1.27
Diluted net earnings per common share (in dollars)	$	0.09	$	1.27

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
	March 31,		March 31,
	2020		2019
Options to purchase common shares		410,547		198,219

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 months ended March 31, 2020, the pension expense was $12 million (2019 – $14 million).

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. that 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
	March 31, 2020
	Pension plans			Other post-retirement benefit plans
	$			$
Service cost		7			—
Interest expense		11			—
Expected return on plan assets		(17	)		—
Amortization of net actuarial loss		2			—
Net periodic benefit cost		3			—

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

	For the three months ended
	March 31, 2019
	Pension plans			Other post-retirement benefit plans
	$			$
Service cost		8			—
Interest expense		13			—
Expected return on plan assets		(20	)		—
Amortization of net actuarial loss		3			—
Amortization of prior year service costs		1			—
Net periodic benefit cost		5			—

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

For the three months ended March 31, 2020, the Company contributed $2 million (2019 – $3 million) to the pension plans and $1 million (2019 – $1 million) to the other post-retirement benefit plans.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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
	March 31,			March 31,
	2020			2019
	$			$
Bad debt expense		4			—
Environmental provision		1			1
Foreign exchange (gain) loss		(2	)		1
Other		(1	)		(3	)
Other operating loss (income), net		2			(1	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

INCOME TAXES

For the first quarter of 2020, the Company’s income tax expense was $3 million, consisting of $2 million of current income tax expense and a deferred income tax expense of $1 million. This compares to an income tax expense of $24 million in the first quarter of 2019, consisting of $27 million of current income tax expense and a deferred income tax benefit of $3 million. The Company received refunds, net of income tax payments, of $25 million during the first quarter of 2020. The effective tax rate was 33% compared with an effective tax rate of 23% in the first quarter of 2019. The effective tax rate for 2020 was impacted by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits. The effective tax rate for the first quarter of 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 related to Global Intangible Low-Taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also favorably impacted by the recognition of a $1 million research and development credit in a U.S. state.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

INVENTORIES

The following table presents the components of inventories:

	March 31,		December 31,
	2020		2019
	$		$
Work in process and finished goods		372	401
Raw materials		142	153
Operating and maintenance supplies		226	232
		740	786

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 13 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.

The components of lease expense were as follows:

	For the three months ended
	March 31,		March 31,
	2020		2019
	$		$
Operating lease expense		8		7

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

Supplemental cash flow information related to leases was as follows:

		For the three months ended
		March 31,		March 31,
		2020		2019
		$		$
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows from operating leases		8		7
	Operating cash flows from finance leases		—		—
	Financing cash flows from finance leases		—		—

Right-of-use assets obtained in exchange for lease liabilities:
	Operating leases		3		8
	Finance leases		—		—

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9. LEASES (CONTINUED)

Supplemental balance sheet information related to leases was as follows:

			March 31,			December 31,
			2020			2019
			$			$
Operating leases
	Operating leases right-of-use assets			77			81

	Lease liabilities due within one year			27			28
	Operating lease liabilities			65			69
				92			97

Finance leases
	Property, plant and equipment			13			15
	Accumulated depreciation			(6	)		(7	)
				7			8

	Long-term debt due within one year			1			1
	Long-term debt			8			9
				9			10

	Weighted-average remaining lease term
		Operating leases	4.8 years			4.9 years
		Finance leases	9.8 years			10 years

	Weighted-average discount rate
		Operating leases		4.5	%		4.6	%
		Finance leases		6.7	%		6.7	%

Maturities of lease liabilities at March 31, 2020 were as follows:

	Operating leases		Finance leases
	March 31,		March 31,
	2020		2020
	$		$
2020 ⁽¹⁾		21		1
2021		25		2
2022		20		1
2023		14		1
2024		9		1
Thereafter		14		6
Total lease payments		103		12

Less: Imputed interest		11		3

Total lease liabilities		92		9

⁽¹⁾

Represents the remaining nine months of 2020.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

_________________

INTANGIBLE ASSETS

The following table presents the components of intangible assets:

		March 31, 2020							December 31, 2019
	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		376		(111	)		265		380		(108	)		272
Technology	7 – 20		8		(5	)		3		8		(5	)		3
Non-Compete	9		1		(1	)		—		1		(1	)		—
License rights	12		28		(16	)		12		29		(16	)		13
			416		(134	)		282		421		(131	)		290
Indefinite-lived intangible assets not subject to amortization
Water rights			4		—			4		4		—			4
Trade names			231		—			231		235		—			235
License rights			6		—			6		6		—			6
Catalog rights			38		—			38		38		—			38
Total			695		(134	)		561		704		(131	)		573

Amortization expense related to intangible assets for the three months ended March 31, 2020 was $5 million (2019 – $5 million).

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

	2020	2021		2022		2023		2024
	$	$		$		$		$
Amortization expense related to intangible assets	21 ⁽¹⁾		21		20		20		20

⁽¹⁾

Represents twelve months of amortization

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 months ended March 31, 2019, the Company recorded $10 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive (Loss) Income. The Company also recorded $3 million of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 three months ended March 31, 2020 and the year ended December 31, 2019:

	Net derivative gains (losses) on cash flow hedges			Pension items⁽²⁾			Post-retirement benefit items⁽²⁾			Foreign currency items			Total
	$			$			$			$			$
Balance at December 31, 2018		(24	)		(231	)		11			(223	)		(467	)
Natural gas swap contracts		(10	)	N/A			N/A			N/A				(10	)
Currency options		5		N/A			N/A			N/A				5
Foreign exchange forward contracts		16		N/A			N/A			N/A				16
Net gain	N/A			1			1			N/A				2
Foreign currency items	N/A			N/A			N/A				21			21
Other comprehensive income before reclassifications		11			1			1			21			34
Amounts reclassified from Accumulated other comprehensive loss		8			33			(1	)		—			40
Net current period other comprehensive income		19			34			—			21			74
Balance at December 31, 2019		(5	)		(197	)		11			(202	)		(393	)
Natural gas swap contracts		(2	)	N/A			N/A			N/A				(2	)
Currency options		(8	)	N/A			N/A			N/A				(8	)
Foreign exchange forward contracts		(39	)	N/A			N/A			N/A				(39	)
Foreign currency items	N/A			N/A			N/A				(74	)		(74	)
Other comprehensive loss before reclassifications		(49	)		—			—			(74	)		(123	)
Amounts reclassified from Accumulated other comprehensive loss		7			1			—			—			8
Net current period other comprehensive (loss) income		(42	)		1			—			(74	)		(115	)
Balance at March 31, 2020		(47	)		(196	)		11			(276	)		(508	)

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

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The following table presents reclassifications out of Accumulated other comprehensive loss:

Details about Accumulated other comprehensive loss components	Amounts reclassified from Accumulated other comprehensive loss
	For the three months ended
	March 31, 2020			March 31, 2019
	$			$
Net derivative losses on cash flow hedge
Natural gas swap contracts ⁽¹⁾		(5	)		—
Currency options and forwards ⁽¹⁾		(4	)		(1	)
Total before tax		(9	)		(1	)
Tax benefit		2			—
Net of tax		(7	)		(1	)

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

⁽¹⁾	These amounts are included in Cost of sales in the Consolidated Statements of Earnings and Comprehensive (Loss) Income.

⁽²⁾	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

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13.

_________________

SHAREHOLDERS’ EQUITY

DIVIDENDS

On February 18, 2020, 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. Total dividends of approximately $25 million were paid on April 15, 2020 to shareholders of record on April 2, 2020.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to $1.3 billion. On November 5, 2019, the Company’s Board of Directors approved an increase to the Program from $1.3 billion to $1.6 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 quarter of 2020, the Company repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.

During the first quarter of 2019, there were no shares repurchased under the Program.

SUSPENSION OF CAPITAL RETURN PROGRAM

Due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company has suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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.

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 or generated and discharged into the 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 pollutants, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently was assigned to Domtar 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 issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that never has been owned by Domtar. The Director's order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.

In the future, the Province may challenge whether Domtar has the benefit of the Indemnity. In addition to the Indemnity, Domtar has other recourses relating to the historical contamination.

The situation involving the historical contamination is continuing to develop, and Domtar cannot predict its outcome. While Domtar currently does not believe that it will be required to incur costs that would have a material impact on its results of operations or financial condition, there is no certainty that this is in fact the case.

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

	March 31, 2020
	$
Balance at beginning of year		35
Additions and other changes		1
Environmental spending		(1	)
Effect of foreign currency exchange rate change		(2	)
Balance at end of period		33

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 former operating sites due to possible soil, sediment or groundwater contamination.

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.

The EPA has repealed the Clean Power Plan and replaced 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 has been challenged in the U.S. Court of Appeals for the D.C. Circuit. Regardless of the outcome for the ACE rule, 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 system 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 has imposed its carbon pricing program for regulating GHG emissions in Ontario which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario 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 March 31, 2020, 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 March 31, 2020, 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 March 31, 2020 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

MARCH 31, 2020

(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.

As a result of changes in Domtar’s organization structure, the Company has changed its segment reporting. Starting January 1, 2020, Domtar’s materials business, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under its Personal Care segment is now presented under its Pulp and Paper segment. Prior period segment results have been restated to the new segment presentation with no significant impact on segment results. There were no changes to the Company’s consolidated sales or operating income.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15. SEGMENT DISCLOSURES (CONTINUED)

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
SEGMENT DATA	March 31, 2020			March 31, 2019
	$			$
Sales by segment
Pulp and Paper		1,031			1,157
Personal Care		266			239
Total for reportable segments		1,297			1,396
Intersegment sales		(19	)		(20	)
Consolidated sales		1,278			1,376

Sales by product group
Communication papers		623			685
Specialty and packaging papers		150			169
Market pulp		231			275
Absorbent hygiene products		274			247
Consolidated sales		1,278			1,376

Depreciation and amortization
Pulp and Paper		58			58
Personal Care		14			15
Total for reportable segments		72			73
Impairment of long-lived assets - Personal Care		—			10
Consolidated depreciation and amortization and impairment of long-lived assets		72			83

Operating income (loss)
Pulp and Paper		4			144
Personal Care		20			(8	)
Corporate		(5	)		(21	)
Consolidated operating income		19			115
Interest expense, net		14			13
Non-service components of net periodic benefit cost		(4	)		(3	)
Earnings before income taxes and equity loss		9			105
Income tax expense		3			24
Equity loss, net of taxes		1			1
Net earnings		5			80

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 March 31, 2020 and December 31, 2019, the Statements of Earnings and Comprehensive (Loss) Income and Cash Flows for the three months ended March 31, 2020 and 2019 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
	March 31, 2020
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE LOSS	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			1,045			465			(232	)		1,278
Operating expenses
Cost of sales, excluding depreciation and amortization		—			947			368			(232	)		1,083
Depreciation and amortization		—			51			21			—			72
Selling, general and administrative		2			26			74			—			102
Other operating loss (income), net		—			4			(2	)		—			2
		2			1,028			461			(232	)		1,259
Operating (loss) income		(2	)		17			4			—			19
Interest expense (income), net		16			19			(21	)		—			14
Non-service components of net periodic benefit cost		—			(1	)		(3	)		—			(4	)
(Loss) earnings before income taxes		(18	)		(1	)		28			—			9
Income tax (benefit) expense		(2	)		3			2			—			3
Equity loss, net of taxes		—			1			—			—			1
Share in earnings of equity accounted investees		21			26			—			(47	)		—
Net earnings		5			21			26			(47	)		5
Other comprehensive loss		(115	)		(117	)		(73	)		190			(115	)
Comprehensive loss		(110	)		(96	)		(47	)		143			(110	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the three months ended
	March 31, 2019
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			1,126			531			(281	)		1,376
Operating expenses
Cost of sales, excluding depreciation and amortization		—			930			403			(281	)		1,052
Depreciation and amortization		—			51			22			—			73
Selling, general and administrative		6			56			61			—			123
Impairment of long-lived assets		—			10			—			—			10
Closure and restructuring costs		—			2			2			—			4
Other operating (income) loss, net		—			(4	)		3			—			(1	)
		6			1,045			491			(281	)		1,261
Operating (loss) income		(6	)		81			40			—			115
Interest expense (income), net		17			20			(24	)		—			13
Non-service components of net periodic benefit cost		—			—			(3	)		—			(3	)
(Loss) earnings before income taxes		(23	)		61			67			—			105
Income tax (benefit) expense		(6	)		14			16			—			24
Equity loss, net of taxes		—			—			1			—			1
Share in earnings of equity accounted investees		97			50			—			(147	)		—
Net earnings		80			97			50			(147	)		80
Other comprehensive income		17			17			4			(21	)		17
Comprehensive income		97			114			54			(168	)		97

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	March 31, 2020
					Non-
			Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		87		2		63		—			152
Receivables		—		157		443		—			600
Inventories		—		503		237		—			740
Prepaid expenses		3		18		11		—			32
Income and other taxes receivable		36		2		18		(29	)		27
Intercompany accounts		652		671		300		(1,623	)		—
Total current assets		778		1,353		1,072		(1,652	)		1,551
Property, plant and equipment, net		—		1,684		809		—			2,493
Operating lease right-of-use assets		—		62		15		—			77
Intangible assets, net		—		242		319		—			561
Investments in affiliates		3,532		2,441		—		(5,973	)		—
Intercompany long-term advances		5		1		1,517		(1,523	)		—
Other assets		14		24		126		(13	)		151
Total assets		4,329		5,807		3,858		(9,161	)		4,833
Liabilities and shareholders' equity
Current liabilities
Trade and other payables		46		437		217		—			700
Intercompany accounts		473		361		789		(1,623	)		—
Income and other taxes payable		27		14		14		(29	)		26
Operating lease liabilities due within one year		—		21		6		—			27
Long-term debt due within one year		—		—		1		—			1
Total current liabilities		546		833		1,027		(1,652	)		754
Long-term debt		1,013		—		89		—			1,102
Operating lease liabilities		—		56		9		—			65
Intercompany long-term loans		561		961		1		(1,523	)		—
Deferred income taxes and other		1		311		158		(13	)		457
Other liabilities and deferred credits		27		114		133		—			274
Shareholders' equity		2,181		3,532		2,441		(5,973	)		2,181
Total liabilities and shareholders' equity		4,329		5,807		3,858		(9,161	)		4,833

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	December 31, 2019
					Non-
			Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		1		11		49		—			61
Receivables		—		146		431		—			577
Inventories		—		543		243		—			786
Prepaid expenses		5		17		11		—			33
Income and other taxes receivable		34		—		27		—			61
Intercompany accounts		538		547		237		(1,322	)		—
Total current assets		578		1,264		998		(1,322	)		1,518
Property, plant and equipment, net		—		1,689		878		—			2,567
Operating lease right-of-use assets		—		63		18		—			81
Intangible assets, net		—		245		328		—			573
Investments in affiliates		3,627		2,493		—		(6,120	)		—
Intercompany long-term advances		5		1		1,482		(1,488	)		—
Other assets		14		30		131		(11	)		164
Total assets		4,224		5,785		3,835		(8,941	)		4,903
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness		—		9		—		—			9
Trade and other payables		57		390		258		—			705
Intercompany accounts		344		299		679		(1,322	)		—
Income and other taxes payable		1		12		10		—			23
Operating lease liabilities due within one year		—		21		7		—			28
Long-term debt due within one year		—		—		1		—			1
Total current liabilities		402		731		955		(1,322	)		766
Long-term debt		873		—		65		—			938
Operating lease liabilities		—		58		11		—			69
Intercompany long-term loans		541		946		1		(1,488	)		—
Deferred income taxes and other		—		324		166		(11	)		479
Other liabilities and deferred credits		32		99		144		—			275
Shareholders' equity		2,376		3,627		2,493		(6,120	)		2,376
Total liabilities and shareholders' equity		4,224		5,785		3,835		(8,941	)		4,903

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the three months ended
	March 31, 2020
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		5			21			26			(47	)		5
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings		7			40			(11	)		47			83
Cash flows from operating activities		12			61			15			—			88
Investing activities
Additions to property, plant and equipment		—			(38	)		(24	)		—			(62	)
Cash flows used for investing activities		—			(38	)		(24	)		—			(62	)
Financing activities
Dividend payments		(26	)		—			—			—			(26	)
Stock repurchase		(59	)		—			—			—			(59	)
Net change in bank indebtedness		—			(10	)		—			—			(10	)
Change in revolving credit facility		140			—			—			—			140
Proceeds from receivables securitization facility		—			—			25			—			25
Increase in long-term advances to related parties		—			(22	)		—			22			—
Decrease in long-term advances to related parties		22			—			—			(22	)		—
Other		(3	)		—			—			—			(3	)
Cash flows provided from (used for) financing activities		74			(32	)		25			—			67
Net increase (decrease) in cash and cash equivalents		86			(9	)		16			—			93
Impact of foreign exchange on cash		—			—			(2	)		—			(2	)
Cash and cash equivalents at beginning of period		1			11			49			—			61
Cash and cash equivalents at end of period		87			2			63			—			152

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the three months ended
	March 31, 2019
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		80			97			50			(147	)		80
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings		(86	)		(86	)		—			147			(25	)
Cash flows (used for) provided from operating activities		(6	)		11			50			—			55
Investing activities
Additions to property, plant and equipment		—			(25	)		(21	)		—			(46	)
Cash flows used for investing activities		—			(25	)		(21	)		—			(46	)
Financing activities
Dividend payments		(27	)		—			—			—			(27	)
Net change in bank indebtedness		—			3			—			—			3
Proceeds from receivables securitization facility		—			—			20			—			20
Repayments of receivables securitization facility		—			—			(20	)		—			(20	)
Increase in long-term advances to related parties		—			—			(53	)		53			—
Decrease in long-term advances to related parties		36			17			—			(53	)		—
Other		(1	)		—			—			—			(1	)
Cash flows provided from (used for) financing activities		8			20			(53	)		—			(25	)
Net increase (decrease) in cash and cash equivalents		2			6			(24	)		—			(16	)
Impact of foreign exchange on cash		—			—			(1	)		—			(1	)
Cash and cash equivalents at beginning of period		—			—			111			—			111
Cash and cash equivalents at end of period		2			6			86			—			94

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17.

_________________

SUBSEQUENT EVENTS

TEMPORARY IDLING OF PAPER CAPACITY TO ADDRESS COVID-19 RELATED BUSINESS IMPACT

On April 6, 2020, Domtar announced the temporary idling of the operations of its Kingsport, Tennessee mill and the A62 paper machine at its Ashdown, Arkansas mill for three months in response to the unforeseeable business conditions created by the COVID-19 pandemic.

On April 27, 2020, Domtar further announced the temporary idling of the operations of its Hawesville, Kentucky mill beginning May 5^th, 2020. The Company expects to restart the H1 paper machine in June 2020, while the H2 paper machine will remain idle until July 2020.

The temporary shutdowns will reduce Domtar’s uncoated freesheet paper production capacity by approximately 227,000 short tons. As a result, the Company laid off approximately 304 employees at its Kingsport mill, 142 employees at its Ashdown mill and 400 employees at its Hawesville mill.

PURCHASE OF APPVION POINT OF SALE BUSINESS

On February 14, 2020, Domtar entered into a purchase agreement with Appvion Operations, Inc. to acquire Appvion’s Point of Sale paper business. The transaction was completed on April 27, 2020. The asset purchase agreement includes the coater and related equipment located only at the West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property.

TERM LOAN

On May 5, 2020, the Company entered into a $300 million Term Loan Agreement (the “Term Loan Agreement”) that matures on May 5, 2025. The Term Loan Agreement was fully drawn down at closing. The Company is using borrowings under the Term Loan Agreement to repay other debt, to pay related fees and expenses and to add to cash reserves. Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 2.5% and require principal repayments of $3 million each quarter. The Term Loan Agreement contains customary covenants, including two financial covenants: (i) an interest coverage ratio, as defined in the Term Loan Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Term Loan Agreement that must be maintained at a level of not greater than 3.75 to 1. All borrowings under the Term Loan are unsecured. Certain domestic subsidiaries of the Company unconditionally guarantee any obligations from time to time arising under the Term Loan Agreement.

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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed below under “Forward-looking statements”, as well as in item 1A, risk factors, in this report. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers 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, and shipment volumes are based on the three month periods ended March 31, 2020 and 2019. The three month periods are also referred to as the first quarter of 2020 and 2019. Reference to notes refers 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 period ended March 31, 2020

•

Impact of the COVID-19 pandemic and Outlook

•

Consolidated Results of Operations and Segment Review

•

Liquidity and Capital Resources

As a result of changes in our organizational structure, we have changed our segment reporting. Starting January 1, 2020, our materials business, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our Personal Care segment is now presented under our Pulp and Paper segment. There were no changes to our consolidated sales or operating income. Prior period segment results have been restated to the new segment presentation with no significant impact on segment results.

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 MARCH 31, 2020

•

Operating income and net earnings decreased by 83% and 94%, respectively, from the first quarter of 2019

•

Sales decreased by 7% from the first quarter of 2019. Net average selling prices for pulp and paper were down from the first quarter of 2019. Our manufactured paper volumes were down while our pulp volumes were up and our Personal Care business had higher volume and favorable mix when compared to the first quarter of 2019

•

We repurchased $59 million of our common stock and paid $26 million in dividends

	Three months ended
					Variance
FINANCIAL HIGHLIGHTS	March 31, 2020		March 31, 2019		$			%
(In millions of dollars, unless otherwise noted)
Sales	$	1,278	$	1,376		(98	)		-7	%
Operating income		19		115		(96	)		-83	%
Net earnings		5		80		(75	)		-94	%
Net earnings per common share (in dollars)¹:
Basic	$	0.09	$	1.27		(1.18	)		-93	%
Diluted	$	0.09	$	1.27		(1.18	)		-93	%

					At March 31, 2020			At December 31, 2019
Total assets					$	4,833		$	4,903
Total long-term debt, including current portion					$	1,103		$	939

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.

Impact of the COVID-19 pandemic

With the unprecedented and rapid spread of COVID-19 and social distancing measures implemented throughout the world due to the pandemic, we have seen the profound impact this virus is having on human health, the global economy and society in general. We are actively monitoring the impact of COVID-19 on all aspects of our business, including how it will impact our employees, operations, customers, suppliers, liquidity and capital resources.

Our operations are considered to be essential services in the jurisdictions where we operate. Certain of our paper products are used in the testing for COVID-19 as well as for personal protection medical gowns, and our personal care products are essential to the daily lives of consumers. All of our operating sites were in operation throughout the three months ended March 31, 2020. However, demand for our paper has declined significantly since the beginning of April, largely due to work-from-home rules and the overall economic slowdown. The length and severity of the reduction in paper demand is uncertain; at the current time, we expect the adverse impact to continue through the second quarter of 2020. Beyond the second quarter of 2020, paper demand will depend largely on when, and the extent to which, work-from-home reduces and on the timing of the return to normal global economic activities.

Effects from COVID-19 began for us at the end of the first quarter but were not material to the three-month’s results ended March 31, 2020. April shipments of paper were lower by approximately 35% when compared to the first quarter monthly average. Our April average selling price for paper decreased when compared to the average selling price for the first quarter of 2020. As a result of the decrease in demand, on April 6, 2020 we announced the temporary idling of 144,000 tons of capacity, and on April 27, 2020 we announced the temporary idling of a further 83,000 tons of capacity. These measures removed approximately 227,000 tons of our 2020 production capacity. At this point, these measures are expected to maintain inventory at appropriate levels. For more information on these announced temporary idlings, refer to Note 17 “Subsequent Events” of the financial statements in this Quarterly Report on Form 10-Q. We continue to monitor market demand and are prepared to further reduce capacity if necessary.

Our pulp shipments were steady in the three months ended March 31, 2020 despite some logistical challenges and a major shutdown of operations in China due to COVID-19. We experienced good demand from our North American consumer tissue customers, and we expect overall demand in the second quarter to remain strong, particularly in China as the Chinese government continues to reopen the economy. Although we are experiencing higher than normal demand, mostly due to tissue and towel sales, we do expect containment measures across Europe and North America to adversely impact certain end-use markets. April shipments of pulp were up when compared to the first quarter monthly average. Our average selling price was slightly up when compared to the average selling price for our first quarter of 2020.

Our Personal care business experienced minimal impacts due to COVID-19 during the three months ended March 31, 2020. At the end of our first quarter and in April, we experienced increased demand across substantially all our products, due to both new customer wins and consumer increases of home inventory levels in response to COVID-19. We expect to see continued strong demand for some of our products from higher usage and the impact from new customer wins, which may be followed later in the year by potential demand softness and volatility as consumers use existing home inventories and as demand returns to more normal levels. The ultimate timing and impact of this demand volatility will depend on the duration and scope of COVID-19, global economic conditions and consumer preferences.

Below we further describe specific impacts and the measures we have taken since March 2020.

Health and Safety of our Employees

The safety of our employees continues to be our primary focus. As COVID-19 has evolved, we have taken numerous steps to protect the health and safety of our employees, including: social distancing, providing personnel protection and thermal scanning, health monitoring, contact tracing and enhanced cleaning measures. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely.

Operations and Supply Chain

We continue to operate in compliance with the orders and restrictions imposed by government authorities in each of our locations, and we are working with our customers to meet their specific shipment needs. We continue to place a priority on business continuity and contingency planning, including potential extended closures of any key facilities, whether because of government action or workforce disruption, or because of disruptions related to our key suppliers that might arise related to COVID-19. At this point we have experienced only minor disruptions. We actively monitor our supply chain, and we may experience disruptions in our supply chain as the pandemic continues. We cannot reasonably estimate the potential impact or timing of those events, nor can we reasonably estimate our ability to mitigate such impact.

Maintenance and Other Cost Reductions

We completed a review of all planned maintenance spending for 2020. We reduced or delayed spending where feasible, without compromising on safety or regulatory compliance. Our current expectation is to spend between $445 million and $455 million in 2020, a reduction of approximately $40 million compared to our original plan. We also have completed a review of other costs including selling, general and administrative costs. We have suspended virtually all travel and cut discretionary spending, instituted a hiring freeze for vacant positions and cut non-essential projects.

Liquidity and Capital Resources

Subsequent to March 31, 2020, we have taken actions and may take other actions, intended to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets. On May 5, 2020, we entered into a five-year $300 million term loan. We also have suspended our dividend and share buyback program until further notice. In addition, we completed a review of all planned capital expenditures for 2020 and reduced or delayed spending without compromising on safety or regulatory compliance. Our capital expenditures for 2020 are expected to be between $140 million and $150 million, a decrease of approximately $100 million compared to our planned spending.

Government Assistance

The U.S. and Canadian governments have launched several support programs to provide assistance to companies during this COVID-19 pandemic. We are reviewing the details of the various programs to see whether we might qualify.

OUTLOOK

The high degree of uncertainty and volatility day-to-day and the longer term potential impacts of the economic lockdown remain unclear. In Paper, we expect significantly lower demand in the second quarter. We expect demand for softwood and fluff pulp to remain strong in the near-term driven by accelerated growth in tissue and towel, while containment measures across Europe and North America are expected to weigh on certain end-use markets. Personal Care will continue to benefit from higher usage and the impact from new customer wins, but we expect a portion of the demand increase from consumer stock-up may reverse later in the year. Raw material costs are expected to remain stable.

CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW

This section presents a discussion and analysis of our first quarter of 2020 and 2019 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
							Variance
	March 31, 2020			March 31, 2019			$			%
Pulp and Paper	$	1,031		$	1,157			(126	)	-11%
Personal Care		266			239			27		11%
Total for reportable segments		1,297			1,396			(99	)	-7%
Intersegment sales		(19	)		(20	)		1
Consolidated		1,278			1,376			(98	)	-7%

Shipments
Paper - manufactured (in thousands of ST)		679			736			(57	)	-8%
Communication Papers		569			615			(46	)	-7%
Specialty and Packaging		110			121			(11	)	-9%
Paper - sourced from third parties (in thousands of ST)		22			23			(1	)	-4%
Paper - total (in thousands of ST)		701			759			(58	)	-8%
Pulp (in thousands of ADMT)		389			349			40		11%

ANALYSIS OF CHANGES IN SALES
	First quarter of 2020 versus First quarter of 2019
	% Change in Net Sales due to
	Net Price			Volume / Mix			Currency			Total
Pulp and Paper		-8	%		-3	%		-	%		-11	%
Personal Care		-	%		13	%		-2	%		11	%
Consolidated sales		-6	%		-1	%		-	%		-7	%

ANALYSIS OF OPERATING INCOME (LOSS)
	Three months ended
By Business Segment								Variance
	March 31, 2020			March 31, 2019			^(a)	$			%
Operating income (loss)
Pulp and Paper	$	4		$	144				(140	)		-97	%
Personal Care		20			(8	)			28			350	%
Corporate		(5	)		(21	)			16			76	%
Consolidated operating income		19			115				(96	)		-83	%

(a)	Includes a closure and restructuring charge and accelerated depreciation under Impairment of long-lived assets related to our announced margin improvement plan within our Personal Care segment of $4 million and $10 million, respectively.

First quarter of 2020 versus First quarter of 2019

	$ 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		(9	)		(87	)		18		(64	)		2			—		—		—			(140	)
Personal Care		6			—			9		(1	)		(1	)		11		4		—			28
Corporate		—			—			—		19			—			—		—		(3	)		16
Consolidated operating income (loss)		(3	)		(87	)		27		(46	)		1			11		4		(3	)		(96	)

(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 $1 million in the first quarter of 2020, excluding foreign currency impact and there were no accelerated depreciation charges. In the first quarter of 2019, we recorded $10 million of accelerated depreciation under Impairment of long-lived assets related to our margin improvement plan in our Personal Care segment.

(d)

There were no restructuring charges in the first quarter of 2020. We recorded $3 million of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs in the first quarter of 2019 related to our announced margin improvement plan within the Personal Care segment.

(e) First quarter of 2020 operating expenses/income includes:

First quarter of 2019 operating expenses/income includes:

- Environmental provision ($1 million)

- Bad debt expense ($4 million)

- Foreign currency gain on working capital items ($2 million)

- Other income ($1 million)

- Environmental provision ($1 million)

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

- Other income ($3 million)

Commentary – First quarter of 2020 compared to First quarter of 2019

Interest Expense, net

We incurred $14 million of net interest expense in the first quarter of 2020 compared to net interest expense of $13 million in the first quarter of 2019. The net interest expense was impacted by an increase in borrowings under the revolving credit facility.

Income Taxes

In the first quarter of 2020, our income tax expense was $3 million, consisting of $2 million of current income tax expense and a deferred income tax expense of $1 million. This compares to an income tax expense of $24 million in the first quarter of 2019, consisting of $27 million of current income tax expense and a deferred income tax benefit of $3 million. We received income tax refunds, net of income tax payments, of $25 million during the first quarter of 2020. The effective tax rate was 33% compared with an effective tax rate of 23% in the first quarter of 2019. The effective tax rate for 2020 was impacted by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits. The effective tax rate for the first quarter of 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 for Global Intangible Low-taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also favorably impacted by the recognition of a $1 million research and development credit in a U.S. state.

Commentary – Segment Review

Pulp and Paper Segment

EAM’s results of operations, previously reported under our Personal Care segment, are now presented under our Pulp and Paper segment with no significant impact on our segments results. Prior period segment results have been restated to the new segment presentation.

Sales in our Pulp and Paper segment decreased by $126 million, or 11%, when compared to sales in the first quarter of 2019. This decrease in sales is mostly due to a decrease in net average selling prices for pulp and paper as well as a decrease in our paper sales volumes. This decrease was partially offset by an increase in our pulp sales volumes.

Operating income in our Pulp and Paper segment amounted to $4 million in the first quarter of 2020, a decrease of $140 million, when compared to operating income of $144 million in the first quarter of 2019. Our results were negatively impacted by:

•

Lower net average selling prices for pulp and paper ($87 million)

•

Higher operating expenses ($64 million) mostly related to higher maintenance costs due to the timing of major maintenance as well as lower production, partially offset by lower freight costs when compared to the first quarter of 2019

•

Lower volume and mix ($9 million)

These decreases were partially offset by:

•

Lower input costs ($18 million) mostly related to lower costs of fiber due to weather-related wood supply shortage in the first quarter of 2019

•

Positive impact of a weaker Canadian dollar on our Canadian dollar denominated expenses, net of our hedging program ($2 million)

Purchase of Appvion Point of Sale Business

On February 14, 2020, we entered into an asset purchase agreement with Appvion Operations, Inc. to acquire their Point of Sale paper business. The transaction was completed on April 27, 2020. The asset purchase agreement includes the coater and related equipment located only at the West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property.

Paper Machine Idling

On April 6, 2020, we announced the temporary idling of the operations of our Kingsport, Tennessee mill and the A62 paper machine at our Ashdown, Arkansas mill for three months in response to the unforeseeable business conditions created by the COVID-19 pandemic.

On April 27, 2020, we further announced the temporary idling of the operations of our Hawesville, Kentucky mill beginning May 5^th, 2020. We expect to restart the H1 paper machine in June 2020, while the H2 paper machine will remain idle until July 2020.

The temporary shutdowns will reduce our uncoated freesheet paper production capacity by approximately 227,000 short tons. As a result, we laid off approximately 304 employees at our Kingsport mill, 142 employees at our Ashdown mill and 400 employees at our Hawesville mill.

Economic conditions and uncertainties

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. In addition, current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions in certain countries due to economic slowdowns and government restrictions on movement.

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.

The high degree of uncertainty and volatility day-to-day and the longer term potential impacts of the economic lockdown remain unclear. In Paper, we expect significantly lower demand in the second quarter. We expect demand for softwood and fluff pulp to remain strong in the near-term driven by accelerated growth in tissue and towel, while certain containment measures across Europe and North America are expected to weigh on certain end-use markets. Raw material costs are expected to remain stable.

Personal Care Segment

Sales in our Personal Care segment increased by $27 million, or 11%, when compared to sales in the first quarter of 2019. This increase in sales was driven by higher volume and favorable mix and partially offset by unfavorable foreign currency exchange, mostly due to the fluctuation between the U.S dollar and the Euro.

Operating income increased by $28 million, or 350%, in the first quarter of 2020 compared to the first quarter of 2019. Our results were positively impacted by:

•

Lower depreciation/impairment charges ($11 million) mostly due to the non-cash impairment of long-lived assets charge of $10 million recorded in the first quarter of 2019, related to our margin improvement plan

•

Lower input costs mostly due to lower raw materials pricing ($9 million)

•

Higher volume and favorable mix ($6 million)

•

Lower closure and restructuring charges ($4 million) due to our 2019 margin improvement plan

These increases were partially offset by:

•

Unfavorable foreign exchange impact, net of our hedging program ($1 million)

•

Higher operating expenses ($1 million)

Economic conditions and uncertainties

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.

While we are expected 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 that were historically almost absent in our markets have increased their presence in such markets.

The principal levers of competition remain brand loyalty, product innovation, quality, price and marketing and distribution capabilities.

Personal Care will continue to benefit from higher usage and the impact from new customer wins, but we expect a portion of the demand increase from consumer stock-up may reverse later in the year.

Margin Improvement Plan

On November 1, 2018, we announced a margin improvement plan within our Personal Care Division. As part of this plan, our Board of Directors approved the permanent closure of our Waco, Texas 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 months ended March 31, 2019, we recorded $10 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). We also recorded $3 million of severance and termination costs and $1 million of write-down of inventory under Closure and restructuring costs.

STOCK-BASED COMPENSATION EXPENSE

For the first quarter of 2020, stock-based compensation income recognized in our results of operations was $3 million for all outstanding awards which includes the mark-to-market recovery related to liability awards of $7 million. This compares to a stock-based compensation expense of $16 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $12 million in the first quarter of 2019. 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 $480 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $11 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.

A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign subsidiaries reflect full provision for local income taxes. The U.S. Tax Reform includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries for which we recorded a provisional repatriation tax amount of $46 million in 2017 and adjusted by $7 million in 2018. After completing our evaluation of the U.S. Tax Reform’s impact on the business operations, we have determined that we are no longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after December 31, 2017. We remain indefinitely reinvested in the outside basis differences of our foreign subsidiaries.

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 $88 million in the first quarter of 2020, a $33 million increase compared to cash flows from operating activities of $55 million in the first quarter of 2019. This increase in cash flows from operating activities is primarily due to a decrease in cash flow from working capital requirements, partially offset by a decrease in profitability in the first quarter of 2020 when compared to the first quarter of 2019. We received income tax refunds, net of payments, of $25 million during the first quarter of 2020 compared to income tax payments, net of refunds, of $6 million in the first quarter of 2019.

Investing Activities

Cash flows used for investing activities in the first quarter of 2020 amounted to $62 million, a $16 million increase compared to cash flows used for investing activities of $46 million in the first quarter of 2019.

The use of cash in the first quarter of 2020 was attributable to additions to property, plant and equipment of $62 million.

The use of cash in the first quarter of 2019 was attributable to additions to property, plant and equipment of $46 million.

Our capital expenditures for 2020 are expected to be between $140 million and $150 million.

Financing Activities

Cash flows provided from financing activities totaled $67 million in the first quarter of 2020 compared to cash flows used for financing activities of $25 million in the first quarter of 2019.

In the first quarter of 2020, we increased our net proceeds from borrowings under our credit facilities (revolver and receivables securitization) ($165 million). This was partially offset by the use of cash primarily due to the repurchase of our common stock ($59 million) and dividend payments ($26 million).

The use of cash in the first quarter of 2019 was primarily the result of dividend payments ($27 million).

Capital Resources

Net indebtedness, consisting of long-term debt, net of cash and cash equivalents, was $951 million as of March 31, 2020 compared to $887 million as of December 31, 2019.

Revolving Credit Facility

In August 2018, we amended and restated our unsecured $700 million 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.

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

Borrowings under the Credit Agreement bear interest at 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 Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.

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 March 31, 2020 and March 31, 2019, we were in compliance with these financial covenants, and borrowings under the Credit Agreement amounted to $220 million (March 31, 2019 – nil). At March 31, 2020 and March 31, 2019, our interest coverage ratio was 9.3 and 14.8, respectively, and our leverage ratio was 2.1 and 1.1, respectively. At March 31, 2020 and March 31, 2019, we had no outstanding letters of credit, leaving $480 million unused and available under this facility.

Receivables Securitization

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

At March 31, 2020, borrowings under the receivables securitization facility amounted to $80 million, and we had $50 million of letters of credit under the program (March 31, 2019 – $50 million and $53 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 March 31, 2020, we had $11 million unused and available under the receivable securitization facility.

Common Stock

On February 18, 2020, our Board of Directors approved a quarterly dividend of $0.455 per share, to be paid to holders of our common stock. Total dividends of approximately $25 million were paid on April 15, 2020 to shareholders of record on April 2, 2020.

Recent Financing Actions

Subsequent to March 31, 2020, we have taken actions and may continue to take actions intended to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets.

On May 5, 2020, we entered into a $300 million new Term Loan Agreement that matures on May 5, 2025. The Term Loan Agreement was fully drawn down at closing. 2020. We are using borrowings under the Term Loan Agreement to repay other debt, to pay related fees and expenses and to add to cash reserves. For more information, refer to Note 17 “Subsequent Events” of the financial statements in this Quarterly Report on Form 10-Q for more information on the new Term Loan Agreement.

We have suspended our capital return program; including the company’s stock repurchase program and the suspension of our regular quarterly dividend. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

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 March 31, 2020, 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 March 31, 2020, 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 of America 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, 2019.

There has not been any material change to our policies since December 31, 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 our 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 long-lived assets, 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;

•

a material disruption in our supply chain, manufacturing or distribution operations such as public health crises that impact trade or the general economy, including COVID-19 and other viruses, diseases or illnesses; 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, 2019.

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, 2019. Except for the addition of “Equity Risk”, there has not been any material change in our exposure to market risk since December 31, 2019. 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.

EQUITY RISK

We are exposed to changes in share price with regard to our stock-based compensation program. We manage our exposure through the use of derivative instruments such as equity swap contracts. In March 2020, we entered into a total return swap agreement covering 500,000 common shares maturing on March 4, 2022.

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 March 31, 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 March 31, 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, 2019.

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2019, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. Except as stated below, there were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.

A global pandemic (or any disease outbreak, including epidemics, pandemics, or similar widespread public health concerns such as the recent COVID-19 pandemic) could have a material adverse effect on the Company’s business operations, results of operations, cash flows and financial position

The Company’s business may be negatively impacted by the fear of exposure to or actual effects of a disease outbreak, epidemic, pandemic, or similar widespread public health concern, such as travel restrictions or recommendations or mandates from governmental authorities to avoid large gatherings or to self-quarantine. These impacts include, but are not limited to:

• Significant reductions in demand or significant volatility in demand for one or more of the Company’s products, which may be caused by, among other things: the temporary inability of consumers to purchase the Company’s products due to illness, quarantine or other travel restrictions, financial hardship, shifts in demand away from one or more of our more discretionary or higher priced products to lower priced products or use of alternatives, stockpiling or similar pantry-loading activity; if prolonged, such impacts can further increase the difficulty of planning for operations and may adversely impact the Company’s results;

• Inability to meet the Company’s customers’ needs and achieve cost targets due to disruptions in the Company’s manufacturing and supply arrangements caused by constrained workforce capacity or the loss or disruption of other essential manufacturing and supply elements such as raw materials or other finished product components, transportation, or other manufacturing and distribution capability;

• Failure of third parties on which the Company rely, including the Company’s suppliers, distributors, contractors or commercial banks, to meet their obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact the Company’s operations; or

• Significant changes in the political conditions in the markets in which the Company’s manufacture, sell or distribute its products, including quarantines, import/export restrictions, price controls, or governmental or regulatory actions, closures or other restrictions that limit or close the Company’s operating and manufacturing facilities, restrict the Company’s employees’ ability to travel or perform necessary business functions, or otherwise prevent the Company’s suppliers, or customers from sufficiently staffing operations, including operations necessary for the production, distribution and sale of the Company’s products, which could adversely impact the Company’s results.

Despite the Company’s efforts to manage and remedy these impacts to the Company, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of any such outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects.

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 March 31, 2020:

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)
January 1 through January 31, 2020		172,087	$	35.15		172,087	$	396,992
February 1 through February 29, 2020		1,490,376	$	33.14		1,490,376	$	347,601
March 1 through March 31, 2020		135,843	$	29.45		135,843	$	343,601
		1,798,306	$	33.05		1,798,306

During the first quarter of 2020, we repurchased 1,798,306 shares at an average price of $33.05 per share, for a total cost of $59 million under our stock repurchase program (the “Program”). As of March 31, 2020, we have $344 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 the first quarter of 2019, there were no shares repurchased under the Program.

Due to the unprecedented market conditions and uncertainty caused by the COVID-19 pandemic, we have suspended our capital return program; including the Company’s stock repurchase program, in order to preserve cash and provide additional flexibility in the current environment. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

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

10.1		Term Loan Agreement, dated as of May 5, 2020, among Domtar Corporation, as borrower, the lenders party thereto and Cobank, ACB, a farm credit bank, as agent
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		Inline XBRL Taxonomy Extension Schema

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE		Inline XBRL Extension Presentation Linkbase

104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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: May 8, 2020

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