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 ~~September 30, 2018~~March 31, 2019

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

For the transition period from ________to_______

COMMISSION FILE NUMBER 001-33164

~~DOMTAR CORPORATION~~

~~(Exact name of registrant as specified in its charter)~~

D~~elaware~~

~~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)~~

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 October 31, 2018, 62,901,876 shares of the issuer’s common stock were outstanding.~~

~~DOMTAR CORPORATION~~

~~FORM 10-Q~~

~~For the Quarterly Period Ended September 30, 2018~~

~~INDEX~~

~~PART I.~~	~~FINANCIAL INFORMATION~~	3

~~ITEM 1.~~	~~FINANCIAL STATEMENTS (UNAUDITED)~~	3

	~~CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE 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~~	41

~~ITEM 3.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK~~	52

~~ITEM 4.~~	~~CONTROLS AND PROCEDURES~~	52

~~PART II~~	~~OTHER INFORMATION~~	52

~~ITEM 1.~~	~~LEGAL PROCEEDINGS~~	52

~~ITEM 1A.~~	~~RISK FACTORS~~	53

~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~	53

~~ITEM 3.~~	~~DEFAULT UPON SENIOR SECURITIES~~	53

~~ITEM 4.~~	~~MINE SAFETY DISCLOSURES~~	53

~~ITEM 5.~~	~~OTHER INFORMATION~~	53

~~ITEM 6.~~	~~EXHIBITS~~	54

~~PART I: FINANCIAL INFORMATION~~

~~ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)~~

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

20-5901152

(State ofIncorporation)

(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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

At April 30, 2019, 63,100,572 shares of the issuer’s common stock were outstanding.

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2019

INDEX

PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

	CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE 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	45

ITEM 4.	CONTROLS AND PROCEDURES	45

PART II	OTHER INFORMATION	45

ITEM 1.	LEGAL PROCEEDINGS	45

ITEM 1A.	RISK FACTORS	46

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	46

ITEM 4.	MINE SAFETY DISCLOSURES	46

ITEM 5.	OTHER INFORMATION	46

ITEM 6.	EXHIBITS	47

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	Three months ended			Three months ended			Nine months ended			Nine months ended			Three months ended			Three months ended
	September 30,			September 30,			September 30,			September 30,			March 31,			March 31,
	2018			2017			2018			2017			2019			2018
	(Unaudited)												(Unaudited)
	$			$			$			$			$			$
Sales		1,367			1,290			4,065			3,813			1,376			1,345
Operating expenses
Cost of sales, excluding depreciation and amortization		1,059			1,016			3,239			3,066			1,052			1,084
Depreciation and amortization		75			80			233			239			73			79
Selling, general and administrative		115			116			343			329			123			110
Other operating loss (income), net (NOTE 6)		4			(7	)		(3	)		(6	)
Impairment of property, plant and equipment (NOTE 11)														10			—
Closure and restructuring costs (NOTE 11)														4			—
Other operating income, net (NOTE 6)														(1	)		(5	)
		1,253			1,205			3,812			3,628			1,261			1,268
Operating income		114			85			253			185			115			77
Interest expense, net		15			16			47			50			13			16
Non-service components of net periodic benefit cost (NOTE 5)		(4	)		(4	)		(13	)		(10	)		(3	)		(4	)
Earnings before income taxes and equity loss		103			73			219			145			105			65
Income tax expense (NOTE 7)		3			3			22			17			24			11
Equity loss, net of taxes		1			—			1			—			1			—
Net earnings		99			70			196			128			80			54
Per common share (in dollars) (NOTE 4)
Net earnings
Basic		1.57			1.12			3.12			2.04			1.27			0.86
Diluted		1.57			1.11			3.11			2.04			1.27			0.86
Weighted average number of common shares outstanding (millions)
Basic		62.9			62.7			62.8			62.6			63.0			62.7
Diluted		63.2			62.9			63.1			62.8			63.2			62.9
Cash dividends per common share		0.44			0.42			1.29			1.25			0.44			0.42

Net earnings		99			70			196			128			80			54
Other comprehensive income (loss) (NOTE 10):
Other comprehensive income (loss) (NOTE 12):
Net derivative gains (losses) on cash flow hedges:
Net gains (losses) arising during the period, net of tax of $(2) and $3, respectively (2017 – $(6) and $(8), respectively)		7			9			(9	)		11
Less: Reclassification adjustment for gains included in net earnings, net of tax of $(1) and nil, respectively (2017 – $2 and $4, respectively)		—			(2	)		(2	)		(6	)
Net gains (losses) arising during the period, net of tax of $(4) (2018 – $3)														11			(9	)
Less: Reclassification adjustment for losses (gains) included in net earnings, net of tax of nil (2018 – $1)														1			(2	)
Foreign currency translation adjustments		12			60			(49	)		142			2			(11	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of nil and $(2), respectively (2017 – $(1) and $(3), respectively)		2			2			6			7
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) (2018 – $(1))														3			2
Other comprehensive income (loss)		21			69			(54	)		154			17			(20	)
Comprehensive income		120			139			142			282			97			34

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						At
	September 30,			December 31,			March 31,			December 31,
	2018			2017			2019			2018
	(Unaudited)						(Unaudited)
	$			$			$			$
Assets
Current assets
Cash and cash equivalents		256			139			94			111
Receivables, less allowances of $6 and $7		702			704
Receivables, less allowances of $7 and $6								699			670
Inventories (NOTE 8)		772			757			813			762
Prepaid expenses		33			33			25			24
Income and other taxes receivable		17			24			21			22
Total current assets		1,780			1,657			1,652			1,589
Property, plant and equipment, net		2,621			2,765			2,564			2,605
Intangible assets, net (NOTE 9)		607			633
Operating lease right-of-use assets (NOTE 9)								81			—
Intangible assets, net (NOTE 10)								587			597
Other assets		174			157			138			134
Total assets		5,182			5,212			5,022			4,925
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness								3			—
Trade and other payables		717			716			675			757
Income and other taxes payable		32			24			49			25
Operating lease liabilities due within one year (NOTE 9)								25			—
Long-term debt due within one year		1			1			1			1
Total current liabilities		750			741			753			783
Long-term debt		1,103			1,129			853			853
Operating lease liabilities (NOTE 9)								65			—
Deferred income taxes and other		488			491			477			476
Other liabilities and deferred credits		288			368			266			275
Commitments and contingencies (NOTE 12)
Shareholders' equity (NOTE 11)
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			1			1
Treasury stock $0.01 par value; 2,101,336 and 2,305,419 shares		—			—
Treasury stock $0.01 par value; 1,900,532 and 2,086,535 shares								—			—
Additional paid-in capital		1,979			1,969			1,982			1,981
Retained earnings		963			849			1,075			1,023
Accumulated other comprehensive loss		(390	)		(336	)		(450	)		(467	)
Total shareholders' equity		2,553			2,483			2,608			2,538
Total liabilities and shareholders' equity		5,182			5,212			5,022			4,925

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	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			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)															(Unaudited)
			$		$		$			$			$					$		$		$			$			$
Balance at December 31, 2017		62.7		1		1,969		849			(336	)		2,483
Balance at December 31, 2018																	62.9		1		1,981		1,023			(467	)		2,538
Stock-based compensation, net of tax		0.2		—		10		—			—			10			0.2		—		1		—			—			1
Net earnings		—		—		—		196			—			196			—		—		—		80			—			80
Net derivative losses on cash flow hedges:
Net losses arising during the period, net of tax of $3		—		—		—		—			(9	)		(9	)
Less: Reclassification adjustment for gains included in net earnings, net of tax of nil		—		—		—		—			(2	)		(2	)
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		—		—		—		—			(49	)		(49	)		—		—		—		—			2			2
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $~~(2)~~(1)		—		—		—		—			6			6			—		—		—		—			3			3
Cash dividends declared		—		—		—		(82	)		—			(82	)		—		—		—		(28	)		—			(28	)
Balance at September 30, 2018		62.9		1		1,979		963			(390	)		2,553
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 nine months ended						For the three months ended
	September 30, 2018			September 30, 2017			March 31, 2019			March 31, 2018
	(Unaudited)						(Unaudited)
	$			$			$			$
Operating activities
Net earnings		196			128			80			54
Adjustments to reconcile net earnings to cash flows from operating activities
Depreciation and amortization		233			239			73			79
Deferred income taxes and tax uncertainties		3			(19	)		(3	)		(3	)
Impairment of property, plant and equipment								10			—
Net gains on disposals of property, plant and equipment		(4	)		(4	)		—			(1	)
Stock-based compensation expense		7			6			2			3
Equity loss, net		1			—			1			—
Other		—			1			—			(1	)
Changes in assets and liabilities
Receivables		(7	)		(28	)		(30	)		(2	)
Inventories		(23	)		(10	)		(49	)		(13	)
Prepaid expenses		(4	)		(2	)		—			(2	)
Trade and other payables		(6	)		11			(69	)		(37	)
Income and other taxes		(16	)		30			26			16
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		(46	)		(33	)		1			—
Other assets and other liabilities		3			5			13			(3	)
Cash flows from operating activities		337			324			55			90
Investing activities
Additions to property, plant and equipment		(111	)		(111	)		(46	)		(25	)
Proceeds from disposals of property, plant and equipment		4			8			—			1
Other		(6	)		—			—			(4	)
Cash flows used for investing activities		(113	)		(103	)		(46	)		(28	)
Financing activities
Dividend payments		(81	)		(78	)		(27	)		(26	)
Net change in bank indebtedness		—			(12	)		3			—
Change in revolving credit facility		—			(50	)
Proceeds from receivables securitization facility		—			25			20			—
Repayments of receivables securitization facility		(25	)		(35	)		(20	)		(25	)
Repayments of long-term debt		—			(63	)
Other		1			1			(1	)		—
Cash flows used for financing activities		(105	)		(212	)		(25	)		(51	)
Net increase in cash and cash equivalents		119			9
Net (decrease) increase in cash and cash equivalents								(16	)		11
Impact of foreign exchange on cash		(2	)		9			(1	)		2
Cash and cash equivalents at beginning of period		139			125			111			139
Cash and cash equivalents at end of period		256			143			94			152
Supplemental cash flow information
Net cash payments for:
Interest		48			49			16			19
Income taxes		40			18			6			4

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

INDEX FOR NOTES TO ~~CONSOLIDATED~~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	1311

NOTE 4	EARNINGS PER COMMON SHARE	15

NOTE 5	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	16

NOTE 6	OTHER OPERATING INCOME, NET	17

NOTE 7	INCOME TAXES	18

NOTE 58	~~PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS~~INVENTORIES	19

NOTE 69	~~OTHER OPERATING LOSS (INCOME), NET~~LEASES	2120

NOTE 710	~~INCOME TAXES~~	22

~~NOTE 8~~	~~INVENTORIES~~INTANGIBLE ASSETS	23

NOTE 911	~~INTANGIBLE ASSETS~~CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT	24

NOTE 1012	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	25

NOTE 1113	SHAREHOLDERS’ EQUITY	27

NOTE 14	COMMITMENTS AND CONTINGENCIES	28

NOTE 1215	~~COMMITMENTS AND CONTINGENCIES~~SEGMENT DISCLOSURES	2930

NOTE 1316	~~SEGMENT DISCLOSURES~~	31

~~NOTE 14~~	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	33

~~NOTE 15~~	~~SUBSEQUENT EVENT~~	40
		31

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first ~~nine~~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, ~~2017,~~2018, as filed with the Securities and Exchange Commission. The December 31, ~~2017~~2018 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

~~Since~~On January 1, ~~2018,~~2019, upon the adoption of ASU ~~2014-09, as issued by FASB,~~2016-02, “~~Revenue from Contracts with Customers~~Leases”, the Company’s accounting policy related to ~~revenue recognition is~~leases became as follows:

~~REVENUE RECOGNITION~~

The Company’s revenue is generated from the sale of finished goods to customers. Revenue is recognized at a single point in time when the performance obligation is satisfied which occurs when the control over the goods is transferred to customers. For shipping and handling activities performed after customers obtain control of the goods, the Company elected to account for these activities as fulfillment activities rather than assessing such activities as separate performance obligations. Accordingly, the sale of goods to customers represents a single performance obligation to which the entire transaction price is allocated.

The point in time when the control of goods is transferred to customers is largely dependent on delivery terms. Revenue is recorded at the time of shipment for delivery terms designated free on board (“f.o.b.”) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for goods transferred to customers. Revenue is recognized net of variable consideration in the form of rebates, discounts and other commercial incentives extended to customers. Variable consideration is recognized using the most likely amounts which are based on an analysis of historical experience and current period expectations. The Company includes estimated amounts of variable consideration in revenue to the extent that it is probable that there will not be a significant reversal of recognized revenue when the uncertainty related to that variable consideration is resolved.

For all the Company’s contracts, customer payments are due in less than one year. Accordingly, the Company does not adjust the amount of revenue recognized for the effects of a significant financing component.

~~Sales taxes, and other similar taxes, collected from customers are excluded from revenue.~~

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE~~ 2.

~~_________________~~

~~RECENT ACCOUNTING PRONOUNCEMENTS~~

~~ACCOUNTING CHANGES IMPLEMENTED~~

~~REVENUE FROM CONTRACTS WITH CUSTOMERS~~

~~In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers~~”. The core principal of this guidance is that an entity should recognize revenue, to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration for which the entity is entitled to, in exchange for those goods and services. This new guidance supersedes the revenue recognition requirements found in topic 605.

On January 1, 2018, the Company adopted the standard using the full retrospective method which resulted in a reclassification in the Company’s Consolidated Statement of Earnings and Comprehensive Income for the three and nine months ended September 30, 2017. The previously reported amounts for Sales and Selling, general and administrative expenses were decreased by $2 million and $7 million, respectively, in relation to the reclassification of certain payments made to customers classified as a reduction of Sales under the new standard. These reclassifications are exclusively contained within the Company’s Consolidated Statement of Earnings and Comprehensive Income and do not have a cumulative effect on retained earnings or other components of equity or net assets in the Company’s Consolidated Balance Sheet as of January 1, 2017.

~~No practical expedients were used in the transition to the new standard as they were not applicable.~~

~~RETIREMENT BENEFITS~~

~~In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~”, which requires an entity to present the service cost component of the net periodic benefit cost with other employee compensation costs in operating income. Only the service cost components will be eligible for capitalization in assets. The other components of the net periodic benefit cost (i.e. interest expense, expected return on plan assets, amortization of actuarial gains or losses and amortization of prior year service costs) will be presented outside of any subtotal of operating income.

On January 1, 2018, the Company adopted the guidance of this accounting standard update which resulted in a reclassification in the Company’s Consolidated Statement of Earnings and Comprehensive Income for the three and nine months ended September 30, 2017. The previously reported amounts of Cost of sales were increased by $4 million and $11 million, respectively, Selling, general and administrative expenses were decreased by nil and $1 million, respectively, both with a corresponding impact in Non-service components of net periodic benefit cost. The Company utilized a practical expedient included in the accounting standard update which allowed the Company to use amounts previously disclosed in its pension plans and other post-retirement benefits plans note for the prior periods as the estimation basis for applying the required retrospective presentation requirements. In addition, these required retrospective reclassifications resulted in adjustments to the previously reported Operating income within the Company’s reportable operating segment disclosures for the three and nine months ended September 30, 2017.

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)~~

Three months ended September 30, 2017

As Reported

Impact of
ASU 2014-09

Impact of
ASU 2017-07

As Adjusted

(Unaudited)

$

$

$

$

Sales

1,292

(2
)

—

1,290

Operating expenses

Cost of sales, excluding depreciation
and amortization

1,012

—

4

1,016

Depreciation and amortization

80

—

—

80

Selling, general and administrative

118

(2
)

—

116

Other operating income, net

(7
)

—

—

(7
)

1,203

(2
)

4

1,205

Operating income (loss)

89

—

(4
)

85

Interest expense, net

16

—

—

16

Non-service components of net periodic
benefit cost

—

—

(4
)

(4
)
Earnings before income taxes

73

—

—

73

Income tax expense

3

—

—

3

Net earnings

70

—

—

70

Nine months ended September 30, 2017

As Reported

Impact of
ASU 2014-09

Impact of
ASU 2017-07

As Adjusted

(Unaudited)

$

$

$

$

Sales

3,820

(7
)

—

3,813

Operating expenses

Cost of sales, excluding depreciation
and amortization

3,055

—

11

3,066

Depreciation and amortization

239

—

—

239

Selling, general and administrative

337

(7
)

(1
)

329

Other operating income, net

(6
)

—

—

(6
)

3,625

(7
)

10

3,628

Operating income (loss)

195

—

(10
)

185

Interest expense, net

50

—

—

50

Non-service components of net periodic
benefit cost

—

—

(10
)

(10
)
Earnings before income taxes

145

—

—

145

Income tax expense

17

—

—

17

Net earnings

128

—

—

128

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)~~

~~FINANCIAL INSTRUMENTS~~

~~In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities~~”, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.

~~The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.~~

~~DERIVATIVES AND HEDGING~~

~~In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships~~”, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship. As long as all other hedge accounting criteria in ASC 815 are met, a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to both cash flow and fair value hedging relationships.

~~The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.~~

~~CLASSIFICATION OF CASH FLOWS~~

~~In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows~~”, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.

~~The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.~~

~~DERIVATIVES AND HEDGING~~

~~In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities~~”, which amends the hedge accounting recognition and presentation requirements in ASC 815. The objectives of the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.

~~The Company early adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.~~

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)~~

~~FUTURE ACCOUNTING CHANGES~~

LEASES

~~In February~~ ~~2016~~,At inception of an arrangement, the ~~FASB issued ASU 2016-02, “Leases”, which requires lessees~~Company determines whether the arrangement contains a lease. A lease conveys the right to ~~recognize~~control the use of identified property, plant, or equipment (asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the Company has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

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

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

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

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

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

LEASES

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for all of their operating leases ~~with a lease term greater than 12 months~~ while continuing to recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income in a manner similar to ~~current~~previous accounting standards. ~~The accounting for lessors remains largely unchanged from existing guidance. Enhanced~~Under the new standard, disclosures ~~will also be~~are required to ~~give~~meet the objective of enabling users of financial ~~statement users the ability~~statements to assess the amount, timing and uncertainty of cash flows arising from leases.

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

In transitioning to the new standard, the Company elected to use the practical expedient package. Accordingly, we did not ~~recorded on~~reassess the ~~balance sheet but are recorded~~following:

•

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

•

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

•

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

Furthermore, the Company elected to use the hindsight practical expedient in determining the ~~statement~~lease term and assessing impairment of ~~earnings as expense is incurred. Upon~~the right-of-use assets.

For all comparative periods prior to the adoption of the new ~~guidance, lease expense will generally be recognized on a straight-line basis over the lease term and the Company will be required to record substantially all~~ leases ~~on the Consolidated Balance Sheets as a right-of-use asset and a lease liability.~~

While the precise amount of the right-of-use asset and lease liability will not be known until closer to the adoption date, management estimates the amount to be less than 5% of both total assets and total liabilities. This estimate is based on the Company’s Consolidated Balance Sheet and lease portfolio, both as of September 30, 2018. The adoption of the guidance will likely have an insignificant impact on the Company’s Consolidated Statements of Earnings and Comprehensive Income.

~~The Company will adopt the new lease guidance on January 1, 2019 and, if required, recognize a cumulative-effect adjustment to the retained earnings as of that date. Upon adoption,~~standard, the Company will continue to report ~~comparative periods presented~~operating leases in the consolidated financial statements under ~~current GAAP (ASC~~ASC 840 ~~Leases)~~“Leases” and provide the related required ~~disclosures under ASC 840~~disclosures.

COMPREHENSIVE INCOME

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

This guidance became effective for ~~all periods presented under ASC 840.~~the Company on January 1, 2019. The Company has decided not to elect this option, as permitted in the new guidance.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

FUTURE ACCOUNTING CHANGES

IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS

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

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

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

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

•

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

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

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

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

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

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

1210

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

~~________________~~_________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

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

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

CREDIT RISK

The Company is exposed to credit risk on ~~the~~ accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of ~~September 30, 2018, one~~March 31, 2019, two of Domtar’s Pulp and Paper segment customers located in the U.S. represented ~~11%~~13% or ~~$75~~$93 million, ~~(December 31, 2017 – 12%~~and 10% or ~~$83 million)~~$73 million, respectively, of the Company’s ~~receivables.~~receivables (December 31, 2018 – one Pulp and Paper segment customer located in the U.S. represented 10% or $67 million).

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

INTEREST RATE RISK

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

COST RISK

Cash flow hedges:

The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next 45 months.

1311

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of ~~September 30, 2018~~March 31, 2019 to hedge forecasted purchases:

Commodity	Notional contractual quantity under derivative contracts MMBTU⁽²⁾		Notional contractual value under derivative contracts (in millions of dollars)			Percentage of forecasted purchases under derivative contracts	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
2018 ⁽¹⁾		3,275,000		$	10	48%
2019		11,430,000		$	34	45%
2019 ⁽¹⁾								9,030,000		$	27	45%
2020		8,880,000		$	27	35%		11,165,000		$	34	40%
2021		3,920,000		$	12	16%		9,270,000		$	27	33%
2022		2,070,000		$	6	8%		9,270,000		$	25	33%

⁽¹⁾	Represents the remaining ~~three~~nine months of ~~2018~~2019

⁽²⁾	~~MMBTU:~~MMBTu: Millions of British thermal units

The natural gas derivative contracts were fully effective as of ~~September 30, 2018.~~March 31, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 resulting from hedge ineffectiveness (three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

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

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

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

Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next 24 months. Derivatives are also currently used to hedge a portion of forecasted sales in British pounds and Norwegian krone and a portion of forecasted purchases in U.S. dollars and Swedish krona by its European subsidiaries over the next 5 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 ~~September 30, 2018~~March 31, 2019 to hedge forecasted purchases and sales:

Currency exposure hedged

Business Segment

Year of

maturity

Notional

contractual value

Percentage of

forecasted net

exposures under

contracts

Average

Protection rate

Average

Obligation rate

CAD/USD

Pulp and Paper

2019⁽¹⁾

526 CAD

78%

1 USD = 1.2914

1 USD = 1.3176

CAD/USD

Pulp and Paper

2020

405 CAD

67%

1 USD = 1.2944

1 USD = 1.3028

CAD/USD

Pulp and Paper

2021

76 CAD

13%

1 USD = 1.3124

~~Currency exposure hedged~~⁽¹⁾

~~Business Segment~~

~~Year~~Represents the remaining nine months of

~~maturity~~

~~Notional~~

~~contractual value~~

~~Percentage of~~

~~forecasted net~~

~~exposures under~~

~~contracts~~

~~Average~~

~~Protection rate~~

~~Average~~

~~Obligation rate~~

~~2018~~ ⁽¹⁾

~~CAD/USD~~

~~Pulp and Paper~~

~~146 CAD~~

~~69%~~

~~1 USD = 1.2801~~

~~1 USD = 1.3217~~

~~USD/Euro~~

~~Personal Care~~

~~15 USD~~

~~67%~~

~~1 Euro = 1.2053~~

2019

~~CAD/USD~~

~~Pulp and Paper~~

~~489 CAD~~

~~58%~~

~~1 USD = 1.2746~~

~~1 USD = 1.3091~~

~~USD/Euro~~

~~Personal Care~~

~~9 USD~~

~~10%~~

~~1 Euro = 1.2233~~

~~1 Euro = 1.2959~~

~~2020~~

~~CAD/USD~~

~~Pulp and Paper~~

~~208 CAD~~

~~24%~~

~~1 USD = 1.2851~~

⁽¹⁾~~Represents the remaining three months of 2018~~ 12

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The foreign exchange derivative contracts were fully effective as of ~~September 30, 2018.~~March 31, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 resulting from hedge ineffectiveness (three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 – nil).

FAIR VALUE MEASUREMENT

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

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

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

Level 3

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

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

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

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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:	September 30, 2018		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification	March 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		5		—		5		—	(a)	Prepaid expenses		2		—		2		—	(a)	Prepaid expenses
Natural gas swap contracts		1		—		1		—	(a)	Prepaid expenses		1		—		1		—	(a)	Other assets
Currency derivatives		1		—		1		—	(a)	Other assets
Total Assets		7		—		7		—				3		—		3		—

Liabilities derivatives
Currency derivatives		4		—		4		—	(a)	Trade and other payables		11		—		11		—	(a)	Trade and other payables
Natural gas swap contracts		2		—		2		—	(a)	Trade and other payables		1		—		1		—	(a)	Trade and other payables
Currency derivatives		1		—		1		—	(a)	Other liabilities and deferred credits		4		—		4		—	(a)	Other liabilities and deferred credits
Natural gas swap contracts		6		—		6		—	(a)	Other liabilities and deferred credits		6		—		6		—	(a)	Other liabilities and deferred credits
Total Liabilities		13		—		13		—				22		—		22		—

Other Instruments:
Stock-based compensation - liability awards		10		10		—		—		Trade and other payables		6		6		—		—		Trade and other payables
Stock-based compensation - liability awards		20		20		—		—		Other liabilities and deferred credits		17		17		—		—		Other liabilities and deferred credits
Long-term debt		1,130		—		1,130		—	(b)	Long-term debt		875		—		875		—	(b)	Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $7$6 million at ~~September 30, 2018,~~March 31, 2019, of which a loss of $1 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 ~~September 30, 2018.~~March 31, 2019.

1613

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The net cumulative ~~gain~~loss recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $1$13 million at ~~September 30, 2018,~~March 31, 2019, of which a ~~gain~~loss of $1$9 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 ~~September 30, 2018.~~March 31, 2019.

Fair Value of financial instruments at:	December 31, 2017		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification	December 31, 2018		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$				$		$		$		$
Derivatives designated as hedging instruments:
Asset derivatives
Currency derivatives		16		—		16		—	(a)	Prepaid expenses
Currency derivatives		4		—		4		—	(a)	Other assets		1		—		1		—	(a)	Prepaid expenses
Natural gas swap contracts		1		—		1		—	(a)	Other assets		1		—		1		—	(a)	Prepaid expenses
Total Assets		21		—		21		—				2		—		2		—

Liabilities derivatives
Currency derivatives		5		—		5		—	(a)	Trade and other payables		19		—		19		—	(a)	Trade and other payables
Natural gas swap contracts		2		—		2		—	(a)	Trade and other payables		2		—		2		—	(a)	Trade and other payables
Currency derivatives												11		—		11		—	(a)	Other liabilities and deferred credits
Natural gas swap contracts		5		—		5		—	(a)	Other liabilities and deferred credits		5		—		5		—	(a)	Other liabilities and deferred credits
Total Liabilities		12		—		12		—				37		—		37		—

Other Instruments:
Stock-based compensation - liability awards		6		6		—		—		Trade and other payables		6		6		—		—		Trade and other payables
Stock-based compensation - liability awards		20		20		—		—		Other liabilities and deferred credits		14		14		—		—		Other liabilities and deferred credits
Long-term debt		1,216		—		1,216		—	(b)	Long-term debt		858		—		858		—	(b)	Long-term debt

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

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

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

(b)

Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is ~~$1,104 million and $1,130~~$854 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017, respectively.~~2018.

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.

1714

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE4.

_________________

EARNINGS PER COMMON SHARE

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

	For the three months ended				For the nine months ended				For the three months ended
	September 30,		September 30,		September 30,		September 30,		March 31,		March 31,
	2018		2017		2018		2017		2019		2018
Net earnings	$	99	$	70	$	196	$	128	$	80	$	54
Weighted average number of common shares outstanding (millions)		62.9		62.7		62.8		62.6		63.0		62.7
Effect of dilutive securities (millions)		0.3		0.2		0.3		0.2		0.2		0.2
Weighted average number of diluted common shares outstanding (millions)		63.2		62.9		63.1		62.8		63.2		62.9

Basic net earnings per common share (in dollars)	$	1.57	$	1.12	$	3.12	$	2.04	$	1.27	$	0.86
Diluted net earnings per common share (in dollars)	$	1.57	$	1.11	$	3.11	$	2.04	$	1.27	$	0.86

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

For the three months ended

For the nine months ended

September 30,

September 30,

September 30,

September 30,

2018

2017

2018

2017

Options

201,599

312,893

201,599

419,161

	For the three months ended
	March 31,		March 31,
	2019		2018
Options		198,219		230,601

1815

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, the pension expense was ~~$18~~$14 million ~~and $40 million, respectively (2017~~(2018 – ~~$9 million and $30 million, respectively)~~$13 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. ~~who~~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

For the nine months ended

September 30, 2018

September 30, 2018

Pension plans

Other post-retirement benefit plans

Pension plans

Other post-retirement benefit plans

$

$

$

$

Service cost

8

—

25

1

Interest expense

14

1

41

2

Expected return on plan assets

(22
)

—

(65
)

—

Amortization of net actuarial loss

2

—

6

—

Amortization of prior year service costs

1

—

4

(1
)
Net periodic benefit cost

3

1

11

2

	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			—

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

For the three months ended

For the nine months ended

September 30, 2017

September 30, 2017

Pension plans

Other post-retirement benefit plans

Pension plans

Other post-retirement benefit plans

$

$

$

$

Service cost

8

1

23

2

Interest expense

13

—

38

2

Expected return on plan assets

(20
)

—

(60
)

—

Amortization of net actuarial loss

2

—

6

—

Amortization of prior year service costs

1

—

4

—

Net periodic benefit cost

4

1

11

4

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

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

	For the three months ended
	March 31, 2018
	Pension plans			Other post-retirement benefit plans
	$			$
Service cost		8			—
Interest expense		14			—
Expected return on plan assets		(21	)		—
Amortization of net actuarial loss		2			—
Amortization of prior year service costs		1			—
Net periodic benefit cost		4			—

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 ~~Statement~~Statements of Earnings and Comprehensive Income.

For the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, the Company contributed ~~$48~~$3 million ~~and $55 million, respectively (2017~~(2018 – ~~$38 million and $44 million, respectively)~~$3 million) to the pension plans and $1 million ~~and $3 million, respectively (2017~~(2018 – ~~nil and $2 million, respectively)~~$1 million) to the other post-retirement benefit plans.

2016

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

OTHER OPERATING ~~LOSS (INCOME),~~INCOME, NET

Other operating ~~loss (income),~~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),~~income, net includes the following:

	For the three months ended					For the nine months ended						For the three months ended
	September 30,		September 30,			September 30,			September 30,			March 31,			March 31,
	2018		2017			2018			2017			2019			2018
	$		$			$			$			$			$
Gain on sale of property, plant and equipment		—		(4	)		(4	)		(4	)		—			(1	)
Reversal of contingent consideration		—		(2	)		—			(2	)
Bad debt expense		—		—			1			1			—			1
Environmental provision		2		—			2			2			1			—
Foreign exchange loss (gain)		2		—			(1	)		1			1			(3	)
Other		—		(1	)		(1	)		(4	)		(3	)		(2	)
Other operating loss (income), net		4		(7	)		(3	)		(6	)
Other operating income, net													(1	)		(5	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

INCOME TAXES

For the ~~third~~first quarter of ~~2018,~~2019, the Company’s income tax expense was $3$24 million, consisting of a$27 million of current income tax ~~benefit of $5 million~~expense and a deferred income tax ~~expense of $8 million. This compares to an income tax expense of $3 million in the third quarter of 2017, consisting of a current income tax expense of $10 million and a deferred income tax~~ benefit of $7 million. The Company made income tax payments, net of refunds, of $15 million during the third quarter of 2018. The effective tax rate was 3% compared with an effective tax rate of 4% in the third quarter of 2017. The effective tax rate for the third quarter of 2018 was favorably impacted by the income tax effects of the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”), including the benefit related to additional an pension contribution, and the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. The effective tax rate for the third quarter of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. The effective tax rates for both the third quarter of 2018 and 2017 were favorably impacted by the finalization of certain estimates in connection with the filing of the Company’s 2017 and 2016 income tax returns, respectively.

~~For the first nine months of 2018, the Company’s income tax expense amounted to $22 million, consisting of a current income tax expense of $19 million and a deferred income tax expense~~ of $3 million. This compares to an income tax expense of ~~$17~~$11 million in the first ~~nine months~~quarter of ~~2017,~~2018, consisting of a$14 million of current income tax expense ~~of $36 million~~ and a deferred income tax benefit of ~~$19~~$3 million. The Company made ~~income~~ tax payments, net of tax refunds, of ~~$40~~$6 million during the first ~~nine months~~quarter of 2019. The effective tax rate was 23% compared with an effective tax rate of 17% in the first quarter of 2018. The effective tax rate for 2019 was ~~10% compared~~impacted by the inclusion of additional forecasted tax expense for 2019 related to ~~an effective~~Global Intangible Low-Taxed Income and for forecasted withholding tax ~~rate of 12% in the first nine months of 2017.~~on unremitted foreign earnings. The effective tax rate for the first ~~nine months~~quarter of 2019 was also favorably impacted by the recognition of a $1 million research and development credit in a U.S. state. The effective tax rate for the first quarter of 2018 was favorably impacted by the ~~income tax effects~~recognition of ~~the U.S. Tax Reform, including the benefit related to an additional pension contribution, the recognition~~$1 million of previously unrecognized tax benefits due to ~~the~~a statute expiration ~~of certain statutes of limitations, as well as by enacted law changes~~ in several U.S. states. The effective tax rate for both the first nine months of 2018 and 2017 were favorably impacted by the finalization of certain estimates in connection with the filing of the Company’s 2017 and 2016 income tax returns, respectively.

~~On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application in situations where~~ a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. SAB 118 provides guidance which allows companies to use a measurement period, similar to that used in business combinations, to account for the impacts of the U.S. Tax Reform. The U.S. Tax Reform provides for a mandatory one-time deemed repatriation tax on the Company’s undistributed foreign earnings and profits. The Company recorded a provisional repatriation tax amount of $46 million in its consolidated financial statements as of December 31, 2017. As of September 30, 2018, the Company has finalized its U.S. tax returns for the 2017 tax year which include a repatriation tax amount of $39 million. The difference between the provisional amount and the final amount is included as a benefit to income tax expense in the third quarter of 2018 and favorably impacts the effective tax rate for both the third quarter and the first nine months of 2018.jurisdiction.

2218

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

INVENTORIES

The following table presents the components of inventories:

	September 30,		December 31,	March 31,		December 31,
	2018		2017	2019		2018
	$		$	$		$
Work in process and finished goods		397	399		448	410
Raw materials		145	135		133	126
Operating and maintenance supplies		230	223		232	226
		772	757		813	762

2319

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9.

_________________

LEASES

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

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

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

The components of lease expense were as follows:

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

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

For the three months ended March 31, 2018, total operating lease expense amounted to $7 million.

Supplemental cash flow information related to leases was as follows:

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9. LEASES (CONTINUED)

Supplemental balance sheet information related to leases was as follows:

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

	Lease liabilities due within one year			25
	Operating lease liabilities			65
				90

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

	Long-term debt due within one year			1
	Long-term debt			10
				11

	Weighted-average remaining lease term
		Operating leases	5.5 years
		Finance leases	10.6 years

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

Maturities of lease liabilities at March 31, 2019 were as follows:

	Operating leases		Finance leases
	$		$
2019 ⁽¹⁾		20		1
2020		23		2
2021		18		2
2022		13		2
2023		10		1
Thereafter		18		7
Total lease payments		102		15

Less: Imputed interest		12		4

Total lease liabilities		90		11

⁽¹⁾

Represents the remaining nine months of 2019.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9. LEASES (CONTINUED)

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

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

Less: Imputed interest	N/A			4

Total lease liabilities	N/A			11

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

_________________

INTANGIBLE ASSETS

The following table presents the components of intangible assets:

		September 30, 2018							December 31, 2017								March 31, 2019							December 31, 2018
	Estimated useful lives (in years)	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net		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	40		3		(1	)		2		3		(1	)		2
Customer relationships	10 – 40		386		(91	)		295		392		(79	)		313	10 – 40		380		(97	)		283		384		(94	)		290
Technology	7 – 20		8		(4	)		4		8		(4	)		4	7 – 20		8		(4	)		4		8		(4	)		4
Non-Compete	9		1		(1	)		—		1		(1	)		—	9		1		(1	)		—		1		(1	)		—
License rights	12		28		(12	)		16		29		(11	)		18	12		29		(14	)		15		28		(13	)		15
			426		(109	)		317		433		(96	)		337			421		(117	)		304		424		(113	)		311
Indefinite-lived intangible assets not subject to amortization
Water rights			4		—			4		4		—			4			4		—			4		4		—			4
Trade names			240		—			240		245		—			245			235		—			235		238		—			238
License rights			6		—			6		6		—			6			6		—			6		6		—			6
Catalog rights			40		—			40		41		—			41			38		—			38		38		—			38
Total			716		(109	)		607		729		(96	)		633			704		(117	)		587		710		(113	)		597

Amortization expense related to intangible assets for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 was $4$5 million ~~and $14 million, respectively (2017~~(2018 – ~~$4 million and $14 million, respectively)~~$5 million).

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

2018

2019

2020

2021

2022

$

$

$

$

$

Amortization expense related to intangible assets

21 ⁽¹⁾

21

21

21

20

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

⁽¹⁾

Represents twelve months of amortization

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

_________________

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

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 is expected to cease operations in the third quarter of 2019.

For the three months ended March 31, 2019, the Company recorded $10 million of accelerated depreciation under Impairment of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive 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

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~10.~~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 ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and the year ended December 31, ~~2017:~~2018:

	Net derivative gains (losses) on cash flow hedges			Pension items⁽²⁾			Post-retirement benefit items⁽²⁾			Foreign currency items			Total			Net derivative gains (losses) on cash flow hedges			Pension items⁽²⁾			Post-retirement benefit items⁽²⁾			Foreign currency items			Total
	$			$			$			$			$			$			$			$			$			$
Balance at December 31, 2016		11			(221	)		(11	)		(278	)		(499	)
Natural gas swap contracts		(5	)	N/A			N/A			N/A				(5	)
Currency options		11		N/A			N/A			N/A				11
Net (gain) loss	N/A				(6	)		17		N/A				11
Foreign currency items	N/A			N/A			N/A				146			146
Other comprehensive income (loss) before reclassifications		6			(6	)		17			146			163
Amounts reclassified from Accumulated other comprehensive loss		(9	)		9			—			—			—
Net current period other comprehensive (loss) income		(3	)		3			17			146			163
Balance at December 31, 2017		8			(218	)		6			(132	)		(336	)		8			(218	)		6			(132	)		(336	)
Natural gas swap contracts		(1	)	N/A			N/A			N/A				(1	)		1		N/A			N/A			N/A				1
Currency options		(6	)	N/A			N/A			N/A				(6	)		(12	)	N/A			N/A			N/A				(12	)
Foreign exchange forward contracts		(2	)	N/A			N/A			N/A				(2	)		(19	)	N/A			N/A			N/A				(19	)
Net (gain) loss																N/A				(23	)		6		N/A				(17	)
Foreign currency items	N/A			N/A			N/A				(49	)		(49	)	N/A			N/A			N/A				(91	)		(91	)
Other comprehensive loss before reclassifications		(9	)		—			—			(49	)		(58	)
Other comprehensive (loss) income before reclassifications																	(30	)		(23	)		6			(91	)		(138	)
Amounts reclassified from Accumulated other comprehensive loss		(2	)		7			(1	)		—			4			(2	)		10			(1	)		—			7
Net current period other comprehensive (loss) income		(11	)		7			(1	)		(49	)		(54	)		(32	)		(13	)		5			(91	)		(131	)
Balance at September 30, 2018		(3	)		(211	)		5			(181	)		(390	)
Balance at December 31, 2018																	(24	)		(231	)		11			(223	)		(467	)
Natural gas swap contracts																	1		N/A			N/A			N/A				1
Currency options																	3		N/A			N/A			N/A				3
Foreign exchange forward contracts																	7		N/A			N/A			N/A				7
Foreign currency items																N/A			N/A			N/A				2			2
Other comprehensive income before reclassifications																	11			—			—			2			13
Amounts reclassified from Accumulated other comprehensive loss																	1			3			—			—			4
Net current period other comprehensive income																	12			3			—			2			17
Balance at March 31, 2019																	(12	)		(228	)		11			(221	)		(450	)

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

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~10.~~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⁽¹⁾

For the three months ended

September 30, 2018

September 30, 2017

$

$

Net derivative losses on cash flow hedge

Natural gas swap contracts

—

1

⁽²⁾
Currency options and forwards

1

(5
)
⁽²⁾
Total before tax

1

(4
)

Tax (expense) benefit

(1
)

2

Net of tax

—

(2
)

Amortization of defined benefit pension items

Amortization of net actuarial loss

2

2

⁽³⁾
Amortization of prior year service cost

1

1

⁽³⁾
Total before tax

3

3

Tax expense

(1
)

(1
)

Net of tax

2

2

Amortization of other post-retirement benefit items

Amortization of net actuarial loss

—

—

⁽³⁾
Amortization of prior year service cost

—

—

⁽³⁾
Total before tax

—

—

Tax benefit

—

—

Net of tax

—

—

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 10. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)~~

Details about Accumulated other comprehensive loss components								Amounts reclassified from Accumulated other comprehensive loss⁽¹⁾
	Amounts reclassified from Accumulated other comprehensive loss⁽¹⁾							For the three months ended
	For the nine months ended							March 31, 2019			March 31, 2018
	September 30, 2018			September 30, 2017				$			$
	$			$
Net derivatives losses on cash flow hedge
Net derivative gains (losses) on cash flow hedge
Natural gas swap contracts(2)		—			—		⁽²⁾		—			(1	)
Currency options and forwards(2)		(2	)		(10	)	⁽²⁾		1			(2	)
Total before tax		(2	)		(10	)			1			(3	)
Tax benefit		—			4				—			1
Net of tax		(2	)		(6	)			1			(2	)

Amortization of defined benefit pension items
Amortization of net actuarial loss(3)		6			6		⁽³⁾		3			2
Amortization of prior year service cost(3)		4			4		⁽³⁾		1			1
Total before tax		10			10				4			3
Tax expense		(3	)		(3	)			(1	)		(1	)
Net of tax		7			7				3			2

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

⁽¹⁾	Amounts in parentheses indicate losses.

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

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

2726

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~11.~~ 13.

_________________

SHAREHOLDERS’ EQUITY

On January 29, 2018, May 8, 2018 and August 7, 2018, the Company’s Board of Directors approved a quarterly dividend of $0.435 per share, respectively, to be paid to holders of the Company’s common stock. Dividends of $27 million, $28 million and $27 million were paid on April 16, 2018, July 16, 2018 and October 15, 2018, respectively, to shareholders of record on April 2, 2018, July 3, 2018 and October 2, 2018, respectively.

~~On November 6, 2018,~~February 19, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.435 per share, to be paid to holders of the Company’s common stock. Total dividends of approximately $28 million were paid on April 15, 2019 to shareholders of record on April 2, 2019.

On May 8, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.455 per share, an increase of $0.02 or 4.6%, to be paid to holders of the Company’s common stock. This dividend is to be paid on ~~January 15,~~July 16, 2019, to shareholders of record on ~~January~~July 2, 2019.

STOCK REPURCHASE PROGRAM

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

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

During the first ~~nine months~~quarter of ~~2018~~2019 and ~~2017,~~2018, there were no shares repurchased under the Program.

Since the inception of the Program, the Company has repurchased 24,853,827 shares at an average price of $39.33 for a total cost of $977 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

2827

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~12.~~ 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 alleged 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 ~~is expected to be~~was completed in the first quarter of 2019. The Company previously recorded an environmental reserve to address its estimated exposure. The possible cost in excess of the reserve is not considered to be material for this matter.

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

	~~September 30, 2018~~March 31, 2019
	$
Balance at beginning of year		4437
Additions and other changes		1
Environmental spending		(8	)
~~Effect of foreign currency exchange rate change~~		(13	)
Balance at end of period		35

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

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 Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers located in these jurisdictions.~~

The EPA Clean Power Plan regulation is being litigated and has been stayed. The EPA has proposed to repeal and replace the Clean Power ~~Plan in accordance with President Trump’s Executive Order issued on March 28, 2017.~~Plan. The proposed replacement rule, entitled the “Affordable Clean Energy” (“ACE”) rule, was published on August 31, 2018, and the EPA plans to finalize the rule in the first part of 2019. ACE would require states to develop plans imposing standards of performance mandating efficiency improvements at all fossil fuel-fired electric utility boilers. The litigation over the Clean Power Plan remains held in abeyance by the D.C. circuit while the EPA completes its rulemaking process. Regardless of the outcome for the Clean Power Plan and ACE, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.

The ~~Government~~province of ~~Canada is reviewing national policies to further reduce~~Quebec has a greenhouse gases (“GHG”) ~~and~~cap-and-trade system with reduction targets. British Columbia has ~~announced its intent~~a carbon tax that applies to ~~impose a cost on carbon emissions.~~the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures compared with other pulp and paper producers located in ~~Canada.~~these jurisdictions.

2928

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~12.~~14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

In October 2018, the Government of Canada proposed to establish a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. This system is expected to become effective in 2019. The ~~province~~Government of ~~Quebec has a~~Canada is seeking to impose its carbon pricing program for regulating GHG ~~cap-and-trade systems with reduction targets. British Columbia has a carbon tax that applies to~~emissions in Ontario. To reduce GHG emissions and recognize the ~~purchase~~unique circumstances of ~~fossil fuels within~~ the ~~province. The province of~~province’s diverse economy, Ontario has ~~announced~~entered into discussions with the ~~ending of its GHG cap-and-trade program and is working~~Canadian Government on ~~an “orderly wind-down”. The Company does not expect to~~adopting a Made-in-Ontario provincial program. Additional environmental costs may result from this effort which cannot be ~~disproportionately affected by these activities compared to the other pulp and paper producers located in these provinces.~~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 ~~September 30, 2018,~~March 31, 2019, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At ~~September 30, 2018,~~March 31, 2019, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At ~~September 30, 2018,~~March 31, 2019 the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

3029

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~13.~~ 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.~~

•	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.~~

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

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

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,			For the three months ended
SEGMENT DATA	2018			2017			2018			2017			March 31, 2019			March 31, 2018
	$			$			$			$			$			$
Sales by segment ⁽¹⁾
Sales by segment
Pulp and Paper		1,146			1,054			3,369			3,126			1,147			1,100
Personal Care		237			251			746			736			247			262
Total for reportable segments		1,383			1,305			4,115			3,862			1,394			1,362
Intersegment sales		(16	)		(15	)		(50	)		(49	)		(18	)		(17	)
Consolidated sales		1,367			1,290			4,065			3,813			1,376			1,345

Sales by product group
Communication papers		639			597			1,904			1,798			685			631
Specialty and packaging papers		181			167			536			486			169			174
Market pulp		310			275			879			793			275			278
Absorbent hygiene products		237			251			746			736			247			262
Consolidated sales		1,367			1,290			4,065			3,813			1,376			1,345

Depreciation and amortization
Pulp and Paper		58			63			180			190			57			61
Personal Care		17			17			53			49			16			18
Consolidated depreciation and amortization		75			80			233			239
Total for reportable segments														73			79
Impairment of property, plant and equipment - Personal Care														10			—
Consolidated depreciation and amortization and impairment of property, plant and equipment														83			79

Operating income (loss)⁽²⁾
Operating income (loss)
Pulp and Paper		135			89			290			181			144			76
Personal Care		(3	)		8			7			37			(8	)		8
Corporate		(18	)		(12	)		(44	)		(33	)		(21	)		(7	)
Consolidated operating income		114			85			253			185			115			77
Interest expense, net		15			16			47			50			13			16
Non-service components of net periodic benefit cost		(4	)		(4	)		(13	)		(10	)		(3	)		(4	)
Earnings before income taxes and equity loss		103			73			219			145			105			65
Income tax expense		3			3			22			17			24			11
Equity loss, net of taxes		1			—			1			—			1			—
Net earnings		99			70			196			128			80			54

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~13. SEGMENT DISCLOSURES (CONTINUED)~~

⁽¹⁾

~~As a result of adopting ASU 2014-09 “Revenue from Contracts with Customers,~~” the Company has revised its 2017 segment disclosures to conform to the new guideline. (Previously reported numbers for Sales for the three and nine months ended September 30, 2017 were as follows: Pulp and Paper: $1,054 million and $3,126 million, respectively; Personal Care: $253 million and $743 million, respectively; Intersegment sales: $(15) million and $(49) million, respectively.)

⁽²⁾

~~As a result of adopting ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,~~” the Company has revised its 2017 segment disclosures to conform to the new guideline. (Previously reported numbers for Operating income (loss) for the three and nine months ended September 30, 2017 were as follows: Pulp and Paper: $93 million and $192 million, respectively; Personal Care: $8 million and $37 million, respectively; Corporate: $(12) million and $(34) million, respectively.)

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE~~ ~~14.~~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”). AThe 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 ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Statements of Earnings and Comprehensive Income ~~for the three~~ and ~~nine months ended September 30, 2018 and 2017 and the Statements of~~ Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ 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															For the three months ended
	September 30, 2018															March 31, 2019
							Non-															Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating									Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated			Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$			$			$			$			$			$
Sales		—			1,115			559			(307	)		1,367			—			1,126			531			(281	)		1,376
Operating expenses
Cost of sales, excluding depreciation and amortization		—			954			412			(307	)		1,059			—			930			403			(281	)		1,052
Depreciation and amortization		—			53			22			—			75			—			51			22			—			73
Selling, general and administrative		4			31			80			—			115			6			56			61			—			123
Impairment of property, plant and equipment																	—			10			—			—			10
Closure and restructuring costs																	—			2			2			—			4
Other operating (income) loss, net		—			(1	)		5			—			4			—			(4	)		3			—			(1	)
		4			1,037			519			(307	)		1,253			6			1,045			491			(281	)		1,261
Operating (loss) income		(4	)		78			40			—			114			(6	)		81			40			—			115
Interest expense (income), net		15			23			(23	)		—			15			17			20			(24	)		—			13
Non-service components of net periodic benefit cost		—			1			(5	)		—			(4	)		—			—			(3	)		—			(3	)
(Loss) earnings before income taxes		(19	)		54			68			—			103			(23	)		61			67			—			105
Income tax (benefit) expense		(11	)		—			14			—			3			(6	)		14			16			—			24
Equity loss, net of taxes		—			—			1			—			1			—			—			1			—			1
Share in earnings of equity accounted investees		107			53			—			(160	)		—			97			50			—			(147	)		—
Net earnings		99			107			53			(160	)		99			80			97			50			(147	)		80
Other comprehensive income		21			21			13			(34	)		21			17			17			4			(21	)		17
Comprehensive income		120			128			66			(194	)		120			97			114			54			(168	)		97

3331

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~14.~~16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the nine months ended															For the three months ended
	September 30, 2018															March 31, 2018
							Non-															Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating									Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated			Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$			$			$			$			$			$
Sales		—			3,287			1,671			(893	)		4,065			—			1,083			548			(286	)		1,345
Operating expenses
Cost of sales, excluding depreciation and amortization		—			2,840			1,292			(893	)		3,239			—			943			427			(286	)		1,084
Depreciation and amortization		—			164			69			—			233			—			56			23			—			79
Selling, general and administrative		11			99			233			—			343			4			45			61			—			110
Other operating income, net		—			(2	)		(1	)		—			(3	)		—			(2	)		(3	)		—			(5	)
		11			3,101			1,593			(893	)		3,812			4			1,042			508			(286	)		1,268
Operating (loss) income		(11	)		186			78			—			253			(4	)		41			40			—			77
Interest expense (income), net		47			68			(68	)		—			47			16			22			(22	)		—			16
Non-service components of net periodic benefit cost		—			1			(14	)		—			(13	)		—			1			(5	)		—			(4	)
(Loss) earnings before income taxes		(58	)		117			160			—			219			(20	)		18			67			—			65
Income tax (benefit) expense		(19	)		12			29			—			22			(4	)		4			11			—			11
Equity loss, net of taxes		—			—			1			—			1
Share in earnings of equity accounted investees		235			130			—			(365	)		—			70			56			—			(126	)		—
Net earnings		196			235			130			(365	)		196			54			70			56			(126	)		54
Other comprehensive loss		(54	)		(54	)		(47	)		101			(54	)		(20	)		(18	)		(10	)		28			(20	)
Comprehensive income		142			181			83			(264	)		142			34			52			46			(98	)		34

For the three months ended

September 30, 2017

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Guarantor

Consolidating

AND COMPREHENSIVE INCOME

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Sales

—

1,059

520

(289
)

1,290

Operating expenses

Cost of sales, excluding depreciation and amortization

—

901

404

(289
)

1,016

Depreciation and amortization

—

58

22

—

80

Selling, general and administrative

4

37

75

—

116

Other operating income, net

—

—

(7
)

—

(7
)

4

996

494

(289
)

1,205

Operating (loss) income

(4
)

63

26

—

85

Interest expense (income), net

15

21

(20
)

—

16

Non-service components of net periodic benefit cost

—

—

(4
)

—

(4
)
(Loss) earnings before income taxes

(19
)

42

50

—

73

Income tax (benefit) expense

(4
)

(4
)

11

—

3

Share in earnings of equity accounted investees

85

39

—

(124
)

—

Net earnings

70

85

39

(124
)

70

Other comprehensive income

69

69

61

(130
)

69

Comprehensive income

139

154

100

(254
)

139

3432

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)~~

For the nine months ended

September 30, 2017

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Guarantor

Consolidating

AND COMPREHENSIVE INCOME

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Sales

—

3,156

1,530

(873
)

3,813

Operating expenses

Cost of sales, excluding depreciation and amortization

—

2,749

1,190

(873
)

3,066

Depreciation and amortization

—

175

64

—

239

Selling, general and administrative

8

101

220

—

329

Other operating income, net

—

(2
)

(4
)

—

(6
)

8

3,023

1,470

(873
)

3,628

Operating (loss) income

(8
)

133

60

—

185

Interest expense (income), net

48

63

(61
)

—

50

Non-service components of net periodic benefit cost

—

—

(10
)

—

(10
)
(Loss) earnings before income taxes

(56
)

70

131

—

145

Income tax (benefit) expense

(13
)

1

29

—

17

Share in earnings of equity accounted investees

171

102

—

(273
)

—

Net earnings

128

171

102

(273
)

128

Other comprehensive income

154

163

146

(309
)

154

Comprehensive income

282

334

248

(582
)

282

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)~~

September 30, 2018

Non-

Guarantor

Guarantor

Consolidating

CONDENSED CONSOLIDATING BALANCE SHEET

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Assets

Current assets

Cash and cash equivalents

172

8

76

—

256

Receivables

—

422

280

—

702

Inventories

—

518

254

—

772

Prepaid expenses

9

15

9

—

33

Income and other taxes receivable

57

1

15

(56
)

17

Intercompany accounts

368

168

54

(590
)

—

Total current assets

606

1,132

688

(646
)

1,780

Property, plant and equipment, net

—

1,789

832

—

2,621

Intangible assets, net

—

260

347

—

607

Investments in affiliates

3,622

2,669

—

(6,291
)

—

Intercompany long-term advances

5

1

1,608

(1,614
)

—

Other assets

22

31

139

(18
)

174

Total assets

4,255

5,882

3,614

(8,569
)

5,182

Liabilities and shareholders' equity

Current liabilities

Trade and other payables

51

436

230

—

717

Intercompany accounts

129

77

384

(590
)

—

Income and other taxes payable

2

62

24

(56
)

32

Long-term debt due within one year

—

—

1

—

1

Total current liabilities

182

575

639

(646
)

750

Long-term debt

793

299

11

—

1,103

Intercompany long-term loans

663

950

1

(1,614
)

—

Deferred income taxes and other

—

351

155

(18
)

488

Other liabilities and deferred credits

64

85

139

—

288

Shareholders' equity

2,553

3,622

2,669

(6,291
)

2,553

Total liabilities and shareholders' equity

4,255

5,882

3,614

(8,569
)

5,182

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 14.~~16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	December 31, 2017											March 31, 2019
					Non-											Non-
			Guarantor		Guarantor		Consolidating							Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated		Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$		$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		3		14		122		—			139		2		6		86		—			94
Receivables		—		402		302		—			704		—		100		599		—			699
Inventories		—		522		235		—			757		—		559		254		—			813
Prepaid expenses		5		22		6		—			33		2		17		6		—			25
Income and other taxes receivable		7		1		16		—			24		8		—		18		(5	)		21
Intercompany accounts		380		314		45		(739	)		—		482		464		168		(1,114	)		—
Total current assets		395		1,275		726		(739	)		1,657		494		1,146		1,131		(1,119	)		1,652
Property, plant and equipment, net		—		1,870		895		—			2,765		—		1,763		801		—			2,564
Operating lease right-of-use assets													—		65		16		—			81
Intangible assets, net		—		268		365		—			633		—		254		333		—			587
Investments in affiliates		3,892		2,609		—		(6,501	)		—		3,760		2,673		—		(6,433	)		—
Intercompany long-term advances		6		81		1,513		(1,600	)		—		5		1		1,626		(1,632	)		—
Other assets		22		24		129		(18	)		157		19		48		107		(36	)		138
Total assets		4,315		6,127		3,628		(8,858	)		5,212		4,278		5,950		4,014		(9,220	)		5,022
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness													—		3		—		—			3
Trade and other payables		55		424		237		—			716		47		397		231		—			675
Intercompany accounts		244		63		432		(739	)		—		113		279		722		(1,114	)		—
Income and other taxes payable		1		14		9		—			24		2		29		23		(5	)		49
Operating lease liabilities due within one year													—		19		6		—			25
Long-term debt due within one year		—		—		1		—			1		—		—		1		—			1
Total current liabilities		300		501		679		(739	)		741		162		727		983		(1,119	)		753
Long-term debt		792		300		37		—			1,129		793		—		60		—			853
Operating lease liabilities													—		55		10		—			65
Intercompany long-term loans		674		925		1		(1,600	)		—		684		947		1		(1,632	)		—
Deferred income taxes and other		—		356		153		(18	)		491		—		359		154		(36	)		477
Other liabilities and deferred credits		66		153		149		—			368		31		102		133		—			266
Shareholders' equity		2,483		3,892		2,609		(6,501	)		2,483		2,608		3,760		2,673		(6,433	)		2,608
Total liabilities and shareholders' equity		4,315		6,127		3,628		(8,858	)		5,212		4,278		5,950		4,014		(9,220	)		5,022

3733

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)~~

For the nine months ended

September 30, 2018

CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS

Parent

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Consolidating
Adjustments

Consolidated

$

$

$

$

$

Operating activities

Net earnings

196

235

130

(365
)

196

Changes in operating and intercompany assets and
liabilities and non-cash items, included in net earnings

(376
)

202

(50
)

365

141

Cash flows (used for) provided from operating activities

(180
)

437

80

—

337

Investing activities

Additions to property, plant and equipment

—

(73
)

(38
)

—

(111
)
Proceeds from disposals of property, plant and equipment

—

—

4

—

4

Other

—

(2
)

(4
)

—

(6
)
Cash flows used for investing activities

—

(75
)

(38
)

—

(113
)
Financing activities

Dividend payments

(81
)

—

—

—

(81
)
Repayments of receivables securitization facility

—

—

(25
)

—

(25
)
Increase in long-term advances to related parties

—

(368
)

(61
)

429

—

Decrease in long-term advances to related parties

429

—

—

(429
)

—

Other

1

—

—

—

1

Cash flows provided from (used for) financing activities

349

(368
)

(86
)

—

(105
)
Net increase (decrease) in cash and cash equivalents

169

(6
)

(44
)

—

119

Impact of foreign exchange on cash

—

—

(2
)

—

(2
)
Cash and cash equivalents at beginning of period

3

14

122

—

139

Cash and cash equivalents at end of period

172

8

76

—

256

~~DOMTAR CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~SEPTEMBER 30, 2018~~

~~(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED~~)

~~(UNAUDITED)~~

~~NOTE 14.~~16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the nine months ended

September 30, 2017

CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS

Parent

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Consolidating
Adjustments

Consolidated

$

$

$

$

$

Operating activities

Net earnings

128

171

102

(273
)

128

Changes in operating and intercompany assets and
liabilities and non-cash items, included in net earnings

43

(176
)

56

273

196

Cash flows provided from (used for) operating activities

171

(5
)

158

—

324

Investing activities

Additions to property, plant and equipment

—

(61
)

(50
)

—

(111
)
Proceeds from disposals of property, plant and equipment

—

—

8

—

8

Cash flows used for investing activities

—

(61
)

(42
)

—

(103
)
Financing activities

Dividend payments

(78
)

—

—

—

(78
)
Net change in bank indebtedness

—

(12
)

—

—

(12
)
Change in revolving credit facility

(50
)

—

—

—

(50
)
Proceeds from receivables securitization facility

—

—

25

—

25

Repayments of receivables securitization facility

—

—

(35
)

—

(35
)
Repayments of long-term debt

(63
)

—

—

—

(63
)
Increase in long-term advances to related parties

—

—

(79
)

79

—

Decrease in long-term advances to related parties

12

67

—

(79
)

—

Other

1

—

—

—

1

Cash flows (used for) provided from financing activities

(178
)

55

(89
)

—

(212
)
Net (decrease) increase in cash and cash equivalents

(7
)

(11
)

27

—

9

Impact of foreign exchange on cash

—

—

9

—

9

Cash and cash equivalents at beginning of period

17

14

94

—

125

Cash and cash equivalents at end of period

10

3

130

—

143

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

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2018~~MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE ~~15.~~ 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

~~_________________~~

~~SUBSEQUENT EVENT~~

	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

On November 1, 2018, the Company announced a margin improvement plan within the Personal Care Division. As part of this plan, the Company’s 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 of approximately 214 employees across the division.

DOMTAR CORPORATION

The Waco, Texas facility is expected to cease operations in the third quarter of 2019. The aggregate pre-tax earnings charge in connection with this margin improvement plan is estimated to be $57 million, which includes: a) an estimated $29 million in charges relating to accelerated depreciation of the carrying amounts of certain manufacturing equipment and the write-down of related spare parts; b) $10 million of estimated severance and related employee benefits; c) $11 million of estimated relocation and other costs; and d) $7 million of an estimated amount related to the future lease payments at the Waco facility, net of expected sublease revenues. The Company is also expected to incur approximately $5 million of capital expenditures related to certain equipment installation costs. The estimated total charge is expected to be recognized starting in the fourth quarter of 2018 through the third quarter of 2019.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Closure and restructuring costs are based on management’s best estimates. Although the Company does not anticipate significant changes, actual costs may differ from these estimates due to subsequent business developments. As such, additional costs and further impairment charges may be required in future periods.

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the three months ended
	March 31, 2018
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		54			70			56			(126	)		54
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings		(36	)		(66	)		12			126			36
Cash flows from operating activities		18			4			68			—			90
Investing activities
Additions to property, plant and equipment		—			(13	)		(12	)		—			(25	)
Proceeds from disposals of property, plant and equipment		—			—			1			—			1
Other		—			—			(4	)		—			(4	)
Cash flows used for investing activities		—			(13	)		(15	)		—			(28	)
Financing activities
Dividend payments		(26	)		—			—			—			(26	)
Repayments of receivables securitization facility		—			—			(25	)		—			(25	)
Increase in long-term advances to related parties		—			—			(17	)		17			—
Decrease in long-term advances to related parties		7			10			—			(17	)		—
Cash flows (used for) provided from financing activities		(19	)		10			(42	)		—			(51	)
Net (decrease) increase in cash and cash equivalents		(1	)		1			11			—			11
Impact of foreign exchange on cash		—			—			2			—			2
Cash and cash equivalents at beginning of period		3			14			122			—			139
Cash and cash equivalents at end of period		2			15			135			—			152

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, ~~2017,~~2018, filed with the Securities and Exchange Commission (“SEC”) on February ~~23, 2018.~~22, 2019. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” ~~“us��~~“us” and “our” ~~refer~~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 (loss), and shipment volumes are based on the three month periods ended March 31, 2019 and ~~nine months ended September 30, 2018 and 2017.~~2018. The three ~~month and nine~~ month periods are also referred to as the ~~third~~first quarter of 2019 and ~~first nine months of 2018 and 2017.~~2018. 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:

~~Recent development~~

•

Overview

~~Overview~~

•

Highlights for the three month period ended March 31, 2019

•

Outlook

•

Consolidated Results of Operations and Segment Review

•

Liquidity and Capital Resources

~~Highlights~~

In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for ~~the three month and nine month periods ended September 30, 2018~~

~~Outlook~~

~~Consolidated Results~~all of ~~Operations and Segment Review~~

~~Liquidity and Capital Resources~~

~~On January 1, 2018, we adopted the new accounting standard on revenue from contracts with customers using the full retrospective method, which resulted in a reclassification~~their operating leases while continuing to recognize expenses in the ~~Company’s~~ Consolidated Statement of Earnings and Comprehensive Income ~~for the three and nine months ended September 30, 2017.~~in a manner similar to previous accounting standards. The ~~previously reported amounts for Sales and Selling, general and administrative expenses were decreased by $2 million and $7 million, respectively, in relation~~Company elected to ~~the reclassification of certain payments made to customers classified as a reduction of Sales under~~initially apply the new standard. These reclassifications are exclusively contained within the Company’s Consolidated Statement of Earnings and Comprehensive Income and do not have a cumulative effect on retained earnings or other components of equity or net assets in the Company’s Consolidated Balance Sheetleases standard as of January 1, ~~2017.~~

On2019 with certain available practical expedients. No cumulative-effect adjustments on retained earnings were necessary as of January 1, ~~2018, we adopted~~2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting ~~guidance on improving~~for finance leases remains substantially unchanged. For all comparative periods prior to the ~~presentation~~adoption of ~~net periodic pension cost and net periodic postretirement benefit costs, which resulted in a reclassification~~the new leases standard, the Company will continue to report operating leases in the ~~Company’s Consolidated Statement of Earnings~~consolidated financial statements under ASC 840 “Leases” and ~~Comprehensive Income for~~provide the three and nine months ended September 30, 2017. The previously reported amounts of Cost of sales were increased by $4 million and $11 million, respectively, Selling, general and administrative expenses were decreased by nil and $1 million, respectively, both with a corresponding impact in Non-service components of net periodic benefit cost. We utilized a practical expedient included in the accounting standard update which allowed us to use amounts previously disclosed in our pension plans and other post-retirement benefits plans note for the prior peri ~~ods as the estimation basis for applying the~~related required retrospective presentation requirements. In addition, these required retrospective reclassifications resulted in adjustments to the previously reported Operating income within the Company’s reportable operating segment disclosures for the three and nine months ended September 30, 2017.disclosures.

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

~~RECENT DEVELOPMENT~~

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, Personal Care manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction of approximately 214 employees across the division.

The Waco, Texas facility is expected to cease operations in the third quarter of 2019. The aggregate pre-tax earnings charge in connection with this margin improvement plan is estimated to be $57 million, which includes: a) an estimated $29 million in charges relating to accelerated depreciation of the carrying amounts of certain manufacturing equipment and the write-down of related spare parts; b) $10 million of estimated severance and related employee benefits; c) $11 million of estimated relocation and other costs; and d) $7 million of an estimated amount related to the future lease payments at the Waco facility, net of expected sublease revenues. We also expect to incur approximately $5 million of capital expenditures related to certain equipment installation costs. The estimated total charge is expected to be recognized starting in the fourth quarter of 2018 through the third quarter of 2019.

Closure and restructuring costs are based on management’s best estimates. Although we do not anticipate significant changes, actual costs may differ from these estimates due to subsequent business developments. As such, additional costs and further impairment charges may be required in future periods.

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.~~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~~.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 ~~SEPTEMBER 30, 2018~~MARCH 31, 2019

~~Operating income and net earnings increased by 34% and 41%, respectively, from the third quarter of 2017~~

•

Operating income and net earnings increased by 49% and 48%, respectively, from the first quarter of 2018

Sales increased by 6% from the third quarter of 2017. Net average selling prices for pulp and paper were up from the third quarter of 2017. Our manufactured paper volumes were up while our pulp volumes were down when compared to the third quarter of 2017

•

Sales increased by 2% from the first quarter of 2018. Net average selling prices for pulp and paper were up from the first quarter of 2018. Our manufactured paper volume and pulp volume were down and our Personal Care business had unfavorable mix and lower volume when compared to the first quarter of 2018

~~We paid $28 million in dividends~~

~~HIGHLIGHTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2018~~

~~Operating income and net earnings increased by 37% and 53%, respectively, from the first nine months of 2017~~

Sales increased by 7% from the first nine months of 2017. Net average selling prices for pulp and paper were up from the first nine months of 2017. Our manufactured paper volumes were up while our pulp volumes were down when compared to the first nine months of 2017

~~We paid $81 million in dividends~~

•

We paid $27 million in dividends

		Three months ended									Nine months ended										Three months ended
						Variance										Variance									Variance
FINANCIAL HIGHLIGHTS		September 30, 2018		September 30, 2017		$		%			September 30, 2018			September 30, 2017		$		%			March 31, 2019		March 31, 2018		$		%
(In millions of dollars, unless otherwise noted)
Sales		$	1,367	$	1,290		77		6		$	4,065		$	3,813		252		7		$	1,376	$	1,345	$	31		2	%
Operating income	Operating income		114		85		29			34			253		185		68		37	Operating income		115		77		38		49	%
Net earnings			99		70		29		41			196			128		68		53			80		54	$	26		48	%
Net earnings per common share (in dollars)¹:
Basic		$	1.57	$	1.12		0.45		40		$	3.12		$	2.04		1.08		53		$	1.27	$	0.86	$	0.41		48	%
Diluted		$	1.57	$	1.11		0.46		41		$	3.11		$	2.04		1.07		52		$	1.27	$	0.86	$	0.41		48	%

																At September 30, 2018		At December 31, 2017							At March 31, 2019		At December 31, 2018
Total assets																$	5,182	$	5,212						$	5,022	$	4,925
Total long-term debt, including current portion																$	1,104	$	1,130						$	854	$	854

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

OUTLOOK

InOur paper shipments should benefit from higher demand from our customers following the ~~fourth quarter,~~industry capacity closures while our paper prices will further improve as we ~~expect lower maintenance costs in Pulp and Paper. Paper and pulp should~~ continue to ~~realize higher prices following~~implement our recently announced price increases. The second quarter will be adversely affected by seasonally higher maintenance activity in our Pulp and Paper business as we move into the annual shutdowns at some of our major facilities. Personal Care ~~should~~is expected to benefit from ~~higher volume and~~ our margin improvement ~~efforts while commodity~~plan and the ramp-up of a new customer, partially offset by further raw material cost ~~inflation is expected to remain at elevated levels.~~inflation.

CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW

This section presents a discussion and analysis of our ~~third~~first quarter of 2019 and ~~first nine months of~~ 2018 ~~and 2017~~ sales, operating income (loss) and other information relevant to the understanding of our results of operations.

As a result of adopting the new accounting standard “Revenue from Contracts with Customers,” we have revised our 2017 segment disclosures to conform to the new guideline. Previously reported numbers for Sales were as follows: $1,054 million for Pulp and Paper, $253 million for Personal Care, and $(15) million for Intersegment sales for the third quarter of 2017 and $3,126 million for Pulp and Paper, $743 million for Personal Care and $(49) million for Intersegment sales for the first nine months of 2017.

ANALYSIS OF NET SALES
By Business Segment	Three months ended
							Variance
	March 31, 2019			March 31, 2018			$			%
Pulp and Paper	$	1,147		$	1,100			47		4%
Personal Care		247			262			(15	)	-6%
Total for reportable segments		1,394			1,362			32		2%
Intersegment sales		(18	)		(17	)		(1	)
Consolidated		1,376			1,345			31		2%

Shipments
Paper - manufactured (in thousands of ST)		736			769			(33	)	-4%
Communication Papers		615			640			(25	)	-4%
Specialty and Packaging		121			129			(8	)	-6%
Paper - sourced from third parties (in thousands of ST)		23			28			(5	)	-18%
Paper - total (in thousands of ST)		759			797			(38	)	-5%
Pulp (in thousands of ADMT)		349			374			(25	)	-7%

As a result of adopting the new accounting guideline “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” we have revised our 2017 segment disclosures to conform to the new guideline. Previously reported numbers for Operating income (loss) were as follows: $93 million for Pulp and Paper, $8 million for Personal Care, and $(12) million for Corporate for the third quarter of 2017 and $192 million for Pulp and Paper, $37 million for Personal Care, and $(34) million for Corporate for the first nine months of 2017.

ANALYSIS OF NET SALES

By Business Segment

Three months ended

Nine months ended

Variance

Variance

September 30, 2018

September 30, 2017

$

%

September 30, 2018

September 30, 2017

$

%

Pulp and Paper

$
1,146

$
1,054

92

9

$
3,369

$
3,126

243

8

Personal Care

237

251

(14
)

-6

746

736

10

1

Total for reportable segments

1,383

1,305

78

6

4,115

3,862

253

7

Intersegment sales

(16
)

(15
)

(1
)

(50
)

(49
)

(1
)

Consolidated

1,367

1,290

77

6

4,065

3,813

252

7

Shipments

Paper - manufactured (in thousands of ST)

727

722

5

1

2,250

2,165

85

4

Communication Papers

596

597

(1
)

-

1,851

1,801

50

3

Specialty and Packaging

131

125

6

5

399

364

35

10

Paper - sourced from third parties (in thousands of ST)

30

29

1

3

84

84

-

-

Paper - total (in thousands of ST)

757

751

6

1

2,334

2,249

85

4

Pulp (in thousands of ADMT)

390

424

(34
)

-8

1,141

1,260

(119
)

-9

ANALYSIS OF CHANGES IN SALES

Third quarter of 2018 versus Third quarter of 2017

First nine months of 2018 versus First nine months of 2017

% Change in Net Sales due to

% Change in Sales due to

Net Price

Volume / Mix

Currency

Total

Net Price

Volume / Mix

Currency

Total

Pulp and Paper

10
%

-1
%

-
%

9
%

8
%

-
%

-
%

8
%
Personal Care

-1
%

-4
%

-1
%

-6
%

-1
%

-1
%

3
%

1
%
Consolidated sales

8
%

-2
%

-
%

6
%

6
%

-
%

1
%

7
%

ANALYSIS OF OPERATING INCOME (LOSS)

Three months ended

Nine months ended

By Business Segment

Variance

Variance

September 30, 2018

September 30, 2017

$

%

September 30, 2018

September 30, 2017

$

%

Operating income (loss)

Pulp and Paper

$
135

$
89

46

52

$
290

$
181

109

60

Personal Care

(3
)

8

(11
)

-138

7

37

(30
)

-81

Corporate

(18
)

(12
)

(6
)

-50

(44
)

(33
)

(11
)

-33

Consolidated operating income

114

85

29

34

253

185

68

37

ANALYSIS OF CHANGES IN SALES
	First quarter of 2019 versus First quarter of 2018
	% Change in Net Sales due to
	Net Price			Volume / Mix			Currency			Total
Pulp and Paper		9	%		-5	%		-	%		4	%
Personal Care		-	%		-2	%		-4	%		-6	%
Consolidated sales		7	%		-4	%		-1	%		2	%

Third quarter of 2018 versus Third quarter of 2017
ANALYSIS OF OPERATING INCOME (LOSS)
																									Three months ended
By Business Segment																															Variance
	$ Change in Segmented Operating Income (Loss) due to																								March 31, 2019^(a)			March 31, 2018			$			%
	Volume/Mix			Net Price			Input Costs ^(a)			Operating Expenses^(b)			Currency		Depreciation/ Impairment ^(c)		Restructuring ^(d)		Other Income/ Expense ^(e)			Total
Operating income (loss)
Pulp and Paper		(3	)		109			(14	)		(47	)		3		5		—		(7	)		46			144			76			68			89	%
Personal Care		—			(2	)		(7	)		(2	)		—		—		—		—			(11	)		(8	)		8			(16	)		-200	%
Corporate		—			—			—			(2	)		—		—		—		(4	)		(6	)		(21	)		(7	)		(14	)		-200	%
Consolidated operating income (loss)		(3	)		107			(21	)		(51	)		3		5		—		(11	)		29
Consolidated operating income																										115			77			38			49	%

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

First quarter of 2019 versus First quarter of 2018

	$ Change in Segmented Operating Income (Loss) due to
	Volume/Mix			Net Price		Input Costs ^(a)			Operating Expenses^(b)			Currency			Depreciation/ Impairment ^(c)			Restructuring ^(d)			Other Income/ Expense ^(e)			Total
Pulp and Paper		(9	)		97		(9	)		(14	)		4			3			—			(4	)		68
Personal Care		(5	)		1		—			4			(2	)		(9	)		(4	)		(1	)		(16	)
Corporate		—			—		—			(15	)		—			—			—			1			(14	)
Consolidated operating income (loss)		(14	)		98		(9	)		(25	)		2			(6	)		(4	)		(4	)		38

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

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

(c)

Depreciation charges were lower by $5$4 million in the ~~third~~first quarter of ~~2018,~~2019, excluding foreign currency impact. In our Personal Care segment, in the first quarter of 2019, we recorded $10 million of accelerated depreciation under Impairment of property, plant and equipment related to our margin improvement plan.

(d)

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. There were no restructuring charges in the ~~third~~first quarter of ~~2018 nor in the third quarter of 2017.~~2018.

(e)

~~Third~~First quarter of 2019 operating expenses/income includes:

First quarter of 2018 ~~other~~ operating

~~income/expense includes:~~

~~Third quarter of 2017 other operating~~

~~income/expense~~ expenses/income includes:

- Environmental provision ($21 million)

- Foreign currency loss on working capital items ($21 million)

- Other income ($3 million)

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

~~- Reversal of contingent consideration ($2 million)~~

~~- Other income ($~~1 ~~million)~~

~~Commentary –Third quarter of 2018 compared to Third quarter of 2017~~

~~Interest Expense, net~~

~~We incurred $15 million of net interest expense in the third quarter of 2018, a decrease of $1 million compared to net interest expense of $16 million in the third quarter of 2017.~~

~~Income Taxes~~

For the third quarter of 2018, our income tax expense was $3 million, consisting of a current income tax benefit of $5 million and a deferred income tax expense of $8 million. This compares to an income tax expense of $3 million in the third quarter of 2017, consisting of a current income tax expense of $10 million and a deferred income tax benefit of $7 million. We made income tax payments, net of refunds, of $15 million during the third quarter of 2018. Our effective tax rate was 3% compared with an effective tax rate of 4% in the third quarter of 2017. Our effective tax rate for the third quarter of 2018 was favorably impacted by the income tax effects of the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”), including the benefit related to an additional pension contribution, and the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. Our effective tax rate for the third quarter of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. Our effective tax rates for both the third quarter of 2018 and the third quarter of 2017 were favorably impacted by the finalization of certain estimates in connection with the filing of our 2017 and 2016 income tax returns.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. The U.S. Tax Reform provides for a mandatory one-time deemed repatriation tax on our undistributed foreign earnings and profits. We recorded a provisional repatriation tax amount of $46 million in our consolidated financial statements as of December 31, 2017. As of September 30, 2018, we have finalized our U.S. tax returns for the 2017 tax year which include a repatriation tax amount of $39 million. The difference between the provisional amount and the final amount is included as a benefit to income tax expense in the third quarter of 2018 and favorably impacts our effective tax rate for the quarter.

First nine months of 2018 versus First nine months of 2017

$ 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

8

242

(48
)

(96
)

(10
)

11

—

2

109

Personal Care

5

(5
)

(22
)

(7
)

2

(3
)

—

—

(30
)
Corporate

—

—

—

(6
)

—

—

—

(5
)

(11
)
Consolidated operating income (loss)

13

237

(70
)

(109
)

(8
)

8

—

(3
)

68

~~(a)~~

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

~~(b)~~

~~Includes maintenance, freight costs, SG&A expenses and other costs.~~

~~(c)~~

~~Depreciation charges were lower by $8 million in the first nine months of 2018, excluding foreign currency impact.~~

~~(d)~~

~~There were no restructuring charges in the first nine months of 2018 nor in the first nine months of 2017.~~

~~(e)~~

~~First nine months of 2018 other operating income/~~

~~expense includes:~~

~~First nine months of 2017 other operating income/~~

~~expense includes:~~

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

- Foreign ~~exchange~~currency gain on working capital items ($~~1 million)~~

~~- Environmental provision ($2~~3 million)

- Bad debt expense ($1 million)

- Other income ($~~1 million)~~

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

~~- Reversal of contingent consideration ($~~2 ~~million)~~

~~- Environmental provision ($2 million)~~

~~- Bad debt expense ($1 million)~~

~~- Foreign exchange loss ($1 million)~~

~~- Other income ($4~~ million)

Commentary – First ~~nine months~~quarter of ~~2018~~2019 compared to ~~first nine months~~First quarter of ~~2017~~2018

Interest Expense, net

We incurred ~~$47~~$13 million of net interest expense in the first ~~nine months~~quarter of ~~2018, a decrease of $3 million~~2019 compared to net interest expense of ~~$50~~$16 million in the first ~~nine months~~quarter of ~~2017. This decrease~~2018. The net interest expense was ~~mostly due to~~impacted by the repayment ~~at maturity in June 2017~~ of the ~~10.75% Notes and was partially offset by an increase~~$300 million Term Loan in ~~interest rate on~~ the ~~Term Loan.~~ fourth quarter of 2018.

Income Taxes

~~For~~In the first ~~nine months~~quarter of ~~2018,~~2019, our income tax expense was ~~$22~~$24 million, consisting of a$27 million of current income tax expense ~~of $19 million~~ and a deferred income tax ~~expense~~benefit of $3 million. This compares to an income tax expense of ~~$17~~$11 million in the first ~~nine months~~quarter of ~~2017,~~2018, consisting of a$14 million of current income tax expense ~~of $36 million~~ and a deferred income tax benefit of ~~$19~~$3 million. We made income tax payments, net of tax refunds, of ~~$40~~$6 million during the first ~~nine months~~quarter of ~~2018. Our~~2019. The effective tax rate was ~~10%~~23% compared towith an effective tax rate of ~~12%~~17% in the first ~~nine months~~quarter of ~~2017. Our~~2018. The effective tax rate for 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 ~~nine months~~quarter of 2019 was also favorably impacted by the recognition of a $1 million research and development credit in a U.S. state. The effective tax rate for the first quarter of 2018 was favorably impacted by the ~~income tax effects~~recognition of ~~the U.S. Tax Reform, including the benefit related to an additional pension contribution, by the recognition~~$1 million of previously unrecognized tax benefits due to ~~the~~a statute expiration ~~of certain statutes of limitations, as well as enacted law changes~~ in Sweden and several U.S. states. Our effective tax rate for the first nine months of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations as well as by enacted law changes in several U.S. states. Our effective tax rates for both the first nine months of 2018 and the first nine months of 2017 were favorably impacted by the finalization of certain estimates in connection with the filing of our 2017 and 2016 income tax returns, respectively.a foreign jurisdiction.

Commentary – Segment Review

Pulp and Paper Segment

Sales in our Pulp and Paper segment increased by ~~$92~~$47 million, or 9%4%, when compared to sales in the ~~third~~first quarter of ~~2017.~~ 2018. This increase in sales is mostly due to an increase in net average selling prices for pulp and ~~paper as well as an increase in our paper sales volumes.~~paper. This increase was partially offset by a decrease in our ~~pulp~~ sales ~~volume.~~volumes.

Operating income in our Pulp and Paper segment amounted to ~~$135~~$144 million in the ~~third~~first quarter of ~~2018,~~2019, an increase of ~~$46~~$68 million, when compared to operating income of ~~$89~~$76 million in the ~~third~~first quarter of ~~2017.~~2018. Our results were positively impacted by:

~~Higher average selling prices for pulp and paper ($109 million)~~

•

Higher net average selling prices for pulp and paper ($97 million)

~~Lower depreciation charges ($5 million) due to certain assets being fully depreciated~~

•

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

~~Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($3 million)~~

~~These increases were partially offset by:~~

~~Higher operating expenses ($47 million) mostly due to higher maintenance due to timing of planned major maintenance and higher freight costs~~

Higher input costs ($14 million) mostly related to higher costs of fiber and chemicals due to increased market demand as well as higher energy costs in part due to severe weather conditions in the third quarter of 2018

~~Lower volume/mix ($3 million) mostly related to lower volume of pulp~~

~~Lower other income ($7 million)~~

Sales in our Pulp and Paper segment increased by $243 million, or 8%, when compared to sales in the first nine months of 2017. This increase in sales is mostly due to an increase in net average selling prices for pulp and paper as well as an increase in our paper sales volume. This increase was partially offset by a decrease in our pulp sales volume.

Operating income in our Pulp and Paper segment amounted to $290 million in the first nine months of 2018, an increase of $109 million, when compared to operating income of $181 million in the first nine months of 2017. Our results were positively impacted by:

~~Higher average selling prices for pulp and paper ($242 million)~~

~~Lower depreciation charges ($11 million) due to certain assets being fully depreciated~~

~~Higher volume/mix ($8 million) mostly related to higher volume of paper, partially offset by lower volume of pulp~~

~~Higher other income ($2 million)~~

•

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

These increases were partially offset by:

Higher operating expenses ($96 million) mostly due to higher freight costs as a result of a shortage of truck capacity in North America and higher maintenance costs due to timing of planned major maintenance

•

Higher operating expenses ($14 million) mostly related to higher maintenance costs due to the timing of major maintenance as well as higher SG&A and freight charges, partially offset by higher production when compared to the first quarter of 2018

Higher input costs ($48 million) mostly related to higher costs of chemical, fiber, and energy in part due to severe weather conditions in the first nine months of 2018 as well as unfavorable market conditions

•

Higher input costs ($9 million) mostly related to higher costs of fiber due to weather-related wood supply shortage as well as unfavorable market conditions

•

Lower volume and mix ($9 million)

~~Negative impact of a stronger Canadian dollar on our Canadian denominated expenses, net of our hedging program ($10 million)~~

•

Lower other income ($4 million)

The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity

products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products.

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

Personal Care Segment

Sales in our Personal Care segment decreased by ~~$14~~$15 million, or 6%, when compared to sales in the ~~third~~first quarter of ~~2017.~~2018. This decrease ~~was mainly driven by lower volume, unfavorable foreign currency exchange, and lower selling prices, partially offset by favorable mix when compared to the third quarter of 2017.~~

~~Operating income decreased by $11 million, or 138% in the third quarter of 2018 compared to the third quarter of 2017. Our results were negatively impacted by:~~

~~Unfavorable input costs ($7 million) mostly due to increasing raw materials pricing~~

~~Higher operating expenses ($2 million) mostly due to higher manufacturing and freight costs partially offset by lower SG&A~~

~~Unfavorable average net selling prices ($2 million)~~

~~Sales in our Personal Care segment increased by $10 million, or 1%, when compared to sales in the first nine months of 2017. This increase~~ in sales was driven by ~~favorable~~unfavorable foreign currency exchange, mostly due to the fluctuation between the ~~U.S.~~U.S dollar and the Euro, as well as unfavorable mix and ~~favorable mix, partially offset by~~ lower ~~volume and selling prices.~~volume.

Operating income decreased by ~~$30~~$16 million, or ~~81%~~200%, in the first ~~nine months~~quarter of ~~2018 when~~2019 compared to the first ~~nine months~~quarter of ~~2017.~~2018. Our results were negatively impacted by:

~~Higher input costs ($22 million) mostly due to increasing raw materials pricing~~

•

Higher depreciation/impairment charges ($9 million) mostly due to the non-cash impairment of property, plant and equipment charge of $10 million recorded in the first quarter of 2019, related to our margin improvement plan

~~Unfavorable average net selling prices ($5 million)~~

•

Unfavorable mix and lower volume ($5 million)

~~Higher operating expenses ($7 million) mostly due to higher freight and manufacturing costs~~

•

Higher closure and restructuring charges ($4 million) related to our margin improvement plan

•

Unfavorable foreign exchange impact, net of our hedging program ($2 million)

~~Higher depreciation charges ($3 million)~~

•

Lower other income ($1 million)

These decreases were partially offset by:

~~Favorable mix partially offset by lower sales volume ($5 million)~~

•

Lower operating expenses ($4 million) mostly due to lower SG&A

•

Favorable net average selling prices ($1 million)

~~Favorable foreign exchange ($2 million) mostly between the Euro and the U.S. dollar, net of our hedging program~~

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 grew significantly in ~~the~~ recent years. Although the impact of such pressures presents some uncertainties, we expect them to result in lower than previously anticipated sales and operating margins.

While we ~~expect an~~are expected to benefit from the overall increase in healthcare spending due to an aging population, ~~it is not clear how~~the pressures to limit ~~this~~ spending ~~brought forth through administrative changes by various national governments~~on healthcare may ~~impact the source of the funding. Additional changes in the balance of public versus private funding may be forthcoming and these could~~ impact overall consumption or the channels in which consumption occurs. Additionally, excess industry capacity has increased pricing pressure in all markets and instigated a shift in the infant and adult private label retail space as competitors historically almost absent in our markets have increased their presence in such markets.

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

~~In the fourth quarter,~~ Personal Care ~~should~~is expected to benefit from ~~higher volume and~~ our margin improvement ~~efforts while commodity~~plan and the ramp-up of a new customer, partially offset by further raw material cost ~~inflation~~inflation.

Margin Improvement Plan

On November 1, 2018, we announced a margin improvement plan within our Personal Care segment. As part of this plan, the Board of Directors approved the permanent closure of our Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction across the division. The Waco, Texas facility is expected to ~~remain at elevated levels.~~ cease operations in the third quarter of 2019.

For the three months ended March 31, 2019, we recorded $10 million of accelerated depreciation under Impairment of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive Income. We also recorded $3 million of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs.

STOCK-BASED COMPENSATION EXPENSE

For the first ~~nine months~~quarter of ~~2018,~~2019, stock-based compensation expense recognized in our results of operations was ~~$19~~$16 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $7$12 million. This compares to a stock-based compensation expense of ~~$15~~$1 million for all outstanding awards which includes the mark-to-market ~~expense~~recovery related to liability awards of $1$3 million in the first ~~nine months~~quarter of ~~2017.~~2018. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES

Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed $700 million credit facility, of which $700 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which ~~$98~~$47 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. We continue to assess the impact of the U.S. Tax Reform with respect to our current strategy of reinvesting profits of foreign subsidiaries back into those foreign operations. We have not completed our analysis of the impact of the U.S. Tax Reform and how changes will impact operational decisions around the utilization of cash residing in the foreign subsidiaries and there have been no material changes to our estimated amounts.

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 ~~$337~~$55 million in the first ~~nine months~~quarter of ~~2018,~~2019, a ~~$13~~$35 million ~~increase~~decrease compared to cash flows from operating activities of ~~$324~~$90 million in the first ~~nine months~~quarter of ~~2017.~~2018. This ~~increase~~decrease in cash flows from operating activities is primarily due to an increase in ~~profitability, partly offset by a decrease in cash flow from~~ working capital ~~elements~~requirements in the first ~~nine months~~quarter of ~~2018~~2019 when compared to the first ~~nine months~~quarter of ~~2017.~~2018 partially offset by an increase in profitability. We made income tax payments, net of refunds, of ~~$40~~$6 million induring the first ~~nine months~~quarter of ~~2018~~2019 compared to income tax payments, net of refunds, of $18 million during the first nine months of 2017. We paid $46 million of employer pension and other post-retirement contribution in excess of pension and other post-retirement expense in the first nine months of 2018 compared to $33$4 million in the first ~~nine months~~quarter of ~~2017.~~2018.

Investing Activities

Cash flows used for investing activities in the first ~~nine months~~quarter of ~~2018~~2019 amounted to ~~$113~~$46 million, a ~~$10~~$18 million increase compared to cash flows used for investing activities of ~~$103~~$28 million in the first ~~nine months~~quarter of ~~2017.~~2018.

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

The use of cash in the first quarter of 2018 was attributable to additions to property, plant and equipment of ~~$111 million. Also, in the first nine months of 2018, we made an additional~~$25 million and additions to a joint venture investment of $4 million in our joint venture CelluForce (a company that develops and manufactures nanocrystalline cellulose, a recyclable and renewable nanomaterial) and a $2 million investment in Prisma Renewable Composites, LLC (a company focused on developing advanced materials from lignin and other natural resources). These uses of cash were partially offset by proceeds of disposals of property, plant and equipment of $4 million.

~~The use of cash in the first nine months of 2017 was attributable to additions to property, plant and equipment of $111~~ million, partially offset by proceeds of disposals of property, plant and equipment of $8$1 million.

Our capital expenditures for ~~2018~~2019 are expected to be ~~approximately~~ between ~~$200~~$220 million and ~~$220~~$240 million.

Financing Activities

Cash flows used for financing activities totaled ~~$105~~$25 million in the first ~~nine months~~quarter of ~~2018~~2019 compared to cash flows used for financing activities of ~~$212~~$51 million in the first ~~nine months~~quarter of ~~2017.~~2018.

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

The use of cash in the first quarter of 2018 was primarily the result of dividend payments ($8126 million) and ~~the~~ net repayments ~~of borrowings under our receivable securitization ($25 million).~~

~~The use of cash in the first nine months of 2017 was primarily the result of dividend payments ($78 million), the net repayment~~ of borrowings under our credit facilities (revolver and ~~receivable~~ receivables securitization) ~~and long-term debt~~ ($~~123 million) and a decrease in our bank indebtedness ($12~~25 million).

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was ~~$848~~$763 million as of ~~September 30, 2018~~March 31, 2019 comparedto ~~$991~~$743 million as of December 31, ~~2017.~~2018.

~~Notes Maturity~~

~~Our 10.75% Notes, in aggregate principal amount of $63 million, matured on June 1, 2017.~~42

Term Loan

In the ~~third~~fourth quarter of 2018, we repaid the $300 million unsecured Term Loan that had been entered into in 2015 by a ~~wholly owned~~wholly-owned subsidiary of Domtar ~~borrowed $300 million under an unsecured 10-year Term Loan Agreement that matures on July 20, 2025,~~ with certain domestic banks. ~~The Company and certain significant domestic subsidiaries of the Company unconditionally guarantee the borrowing under the Term Loan Agreement.~~

Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 1.875%. 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. At September 30, 2018, we were in compliance with these financial covenants.

Revolving Credit Facility

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

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

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

The Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). At ~~September 30,~~March 31, 2019 and March 31, 2018, we were in compliance with these financial covenants, and had no ~~borrowings (September 30, 2017– nil).~~borrowings. At ~~September 30,~~March 31, 2019 and March 31, 2018, we had no outstanding letters of credit, ~~(September 30, 2017 – nil),~~ leaving $700 million unused and available under this facility.

Receivables Securitization

We have a $150 million receivables securitization facility that matures in ~~March 2019.~~November 2021 .

At ~~September 30, 2018, we had no~~March 31, 2019, borrowings under the receivables securitization facility amounted to $50 million, and we had ~~$52~~$53 million of letters of credit under the program ~~(September 30, 2017 – $60 million~~(March 31, 2018– nil and $51 million, respectively). The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the Credit Agreement or our failure to repay or satisfy material obligations. At ~~September 30, 2018,~~March 31, 2019, we had ~~$98~~$47 million unused and available under the receivable securitization facility.

Common Stock

On January 29, 2018, May 8, 2018 and August 7, 2018, our Board of Directors approved a quarterly dividend of $0.435 per share, respectively, to be paid to holders of our common stock. Dividends of $27 million, $28 million and $27 million were paid on April 16, 2018, July 16, 2018 and October 15, 2018, respectively, to shareholders of record on April 2, 2018, July 3, 2018 and October 2, 2018, respectively.

~~On November 6, 2018,~~February 19, 2019, our Board of Directors approved a quarterly dividend of $0.435 per share, to be paid to holders of our common stock. Total dividends of approximately $28 million were paid on April 15, 2019 to shareholders of record on April 2, 2019.

On May 8, 2019, our Board of Directors approved a quarterly dividend of $0.455 per share, an increase of $0.02 or 4.6%, to be paid to holders of our common stock. This dividend is to be paid on ~~January 15,~~July 16, 2019, to shareholders of record on ~~January~~July 2, 2019.

~~OFF BALANCE SHEET ARRANGEMENTS~~GUARANTEES

Indemnifications

In the normal course of business, we ~~finance certain~~offer indemnifications relating to the sale of our ~~activities off balance sheet through operating leases.~~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, 2019, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans

We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized

instructions. These indemnifications survive the termination of such agreements. At March 31, 2019, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.

RECENT ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ~~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 ~~business combinations~~ 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, ~~2017.~~2018.

There has not been any material change to our policies since December 31, ~~2017~~2018 except for the adoption of ASU ~~2014-09,~~ 2016-02, “~~Revenue from Contracts with Customers~~”Leases” on January 1, ~~2018.~~2019. For more details, refer to Note 2 “Recent Accounting Pronouncements” and Note 9 “Leases” of the financial statements in this Quarterly Report on Form 10-Q.

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 strategic acquisitions;~~

~~product selling prices;~~

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

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

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

~~the level of competition from domestic and foreign producers;~~

~~cyberattack or other security breaches;~~

the effect of, or change in, forestry, land use, environmental and other governmental regulations (including tax positions and estimates of the impact of the U.S. Tax Reform on our future results), and accounting regulations;

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

•

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

•

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

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

•

product selling prices;

~~legal proceedings;~~

•

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

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

•

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

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

•

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

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

•

the level of competition from domestic and foreign producers;

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

•

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 other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2017.~~44

•

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

•

legal proceedings;

•

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

•

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

•

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

•

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

•

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. There ~~have~~has not been noany material ~~changes~~change in our exposure to market risk since December 31, ~~2017.~~2018. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 3 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of ~~September 30, 2018,~~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 ~~September 30, 2018,~~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.

P~~ART~~PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 1214 “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, ~~2017.~~2018.

I~~TEM~~45

ITEM 1A. RISKRISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There ~~have been~~were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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

During the ~~third~~first quarter ~~and the first nine months~~ of ~~2018,~~2019, we did not repurchase any shares under our stock repurchase program (the “Program”). We currently have $323 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 ~~2017,~~2018, there were no shares repurchased under the Program. As of December 31, ~~2017,~~2018, the approximate dollar value of shares that may yet be purchased under the Program was $323 million.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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

~~10.1~~		Third Amended and Restated Credit Agreement dated as of August 22, 2018, among the Company, Domtar Inc, Domtar Pulp and Paper General Partnership, Laboratorios Indas, S.A.U., and Attends Healthcare AB, Bank of Montreal, Goldman Sachs Bank USA, Royal Bank of Canada and Wells Fargo, N.A., as co-documentation agents, The Bank of Nova Scotia and Bank of America, N.A., as syndication agent and JP Morgan Chase Bank, N.A., as administrative 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		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Extension Presentation Linkbase

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

DOMTAR CORPORATION

Date: ~~November 8, 2018~~May 9, 2019

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

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

5548

	Three months ended September 30, 2017

	As Reported			Impact of ASU 2014-09			Impact of ASU 2017-07			As Adjusted
	(Unaudited)
	$			$			$			$
Sales		1,292			(2	)		—			1,290
Operating expenses
Cost of sales, excluding depreciation and amortization		1,012			—			4			1,016
Depreciation and amortization		80			—			—			80
Selling, general and administrative		118			(2	)		—			116
Other operating income, net		(7	)		—			—			(7	)
		1,203			(2	)		4			1,205
Operating income (loss)		89			—			(4	)		85
Interest expense, net		16			—			—			16
Non-service components of net periodic benefit cost		—			—			(4	)		(4	)
Earnings before income taxes		73			—			—			73
Income tax expense		3			—			—			3
Net earnings		70			—			—			70

	Nine months ended September 30, 2017

	As Reported			Impact of ASU 2014-09			Impact of ASU 2017-07			As Adjusted
	(Unaudited)
	$			$			$			$
Sales		3,820			(7	)		—			3,813
Operating expenses
Cost of sales, excluding depreciation and amortization		3,055			—			11			3,066
Depreciation and amortization		239			—			—			239
Selling, general and administrative		337			(7	)		(1	)		329
Other operating income, net		(6	)		—			—			(6	)
		3,625			(7	)		10			3,628
Operating income (loss)		195			—			(10	)		185
Interest expense, net		50			—			—			50
Non-service components of net periodic benefit cost		—			—			(10	)		(10	)
Earnings before income taxes		145			—			—			145
Income tax expense		17			—			—			17
Net earnings		128			—			—			128

~~Large accelerated filer~~

~~Accelerated filer~~

~~Non-accelerated filer~~

~~Small reporting company~~

~~Emerging growth company~~