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

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

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

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

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

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

At ~~July 31, 2019, 62,583,352~~April 30, 2020, 55,191,705 shares of the issuer’s common stock were outstanding.

	Three months ended			Three months ended			Six months ended			Six months ended			For the three months ended
	June 30,			June 30,			June 30,			June 30,			March 31,			March 31,
	2019			2018			2019			2018			2020			2019
	(Unaudited)												(Unaudited)
	$			$			$			$			$			$
Sales		1,317			1,353			2,693			2,698			1,278			1,376
Operating expenses
Cost of sales, excluding depreciation and amortization		1,079			1,096			2,131			2,180			1,083			1,052
Depreciation and amortization		74			79			147			158			72			73
Selling, general and administrative		105			118			228			228			102			123
Impairment of long-lived assets (NOTE 11)		15			—			25			—			—			10
Closure and restructuring costs (NOTE 11)		8			—			12			—			—			4
Other operating loss (income), net (NOTE 6)		2			(2	)		1			(7	)		2			(1	)
		1,283			1,291			2,544			2,559			1,259			1,261
Operating income		34			62			149			139			19			115
Interest expense, net		13			16			26			32			14			13
Non-service components of net periodic benefit cost (NOTE 5)		(2	)		(5	)		(5	)		(9	)		(4	)		(3	)
Earnings before income taxes and equity loss		23			51			128			116			9			105
Income tax expense (NOTE 7)		5			8			29			19			3			24
Equity loss, net of taxes		—			—			1			—			1			1
Net earnings		18			43			98			97			5			80
Per common share (in dollars) (NOTE 4)
Net earnings
Basic		0.29			0.68			1.56			1.54			0.09			1.27
Diluted		0.28			0.68			1.55			1.54			0.09			1.27
Weighted average number of common shares outstanding (millions)
Basic		63.0			62.9			63.0			62.8			56.1			63.0
Diluted		63.3			63.2			63.3			63.1			56.2			63.2
Cash dividends per common share		0.44			0.44			0.87			0.85			0.46			0.44

Net earnings		18			43			98			97			5			80
Other comprehensive income (loss) (NOTE 12):
Net derivative gains (losses) on cash flow hedges:
Net gains (losses) arising during the period, net of tax of $(1) and $(5), respectively (2018 – $2 and $5, respectively)		3			(7	)		14			(16	)
Less: Reclassification adjustment for losses (gains) included in net earnings, net of tax of $(1) and $(1), respectively (2018 – nil and $1, respectively)		1			—			2			(2	)
Other comprehensive (loss) income (NOTE 12):
Net derivative (losses) gains on cash flow hedges:
Net (losses) gains arising during the period, net of tax of $16 (2019 – $(4))														(49	)		11
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2) (2019 – nil)														7			1
Foreign currency translation adjustments		20			(50	)		22			(61	)		(74	)		2
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(2), respectively (2018 – $(1) and $(2), respectively)		2			2			5			4
Other comprehensive income (loss)		26			(55	)		43			(75	)
Comprehensive income (loss)		44			(12	)		141			22
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) (2019 – $(1))														1			3
Other comprehensive (loss) income														(115	)		17
Comprehensive (loss) income														(110	)		97

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

	At						At
	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
	(Unaudited)						(Unaudited)
	$			$			$			$
Assets
Current assets
Cash and cash equivalents		93			111			152			61
Receivables, less allowances of $7 and $6		634			670
Receivables, less allowances of $10 and $6								600			577
Inventories (NOTE 8)		823			762			740			786
Prepaid expenses		39			24			32			33
Income and other taxes receivable		41			22			27			61
Total current assets		1,630			1,589			1,551			1,518
Property, plant and equipment, net		2,563			2,605			2,493			2,567
Operating lease right-of-use assets (NOTE 9)		71			—			77			81
Intangible assets, net (NOTE 10)		586			597			561			573
Other assets		143			134			151			164
Total assets		4,993			4,925			4,833			4,903
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness		3			—			—			9
Trade and other payables		682			757			700			705
Income and other taxes payable		30			25			26			23
Operating lease liabilities due within one year (NOTE 9)		24			—			27			28
Long-term debt due within one year		1			1			1			1
Total current liabilities		740			783			754			766
Long-term debt		824			853			1,102			938
Operating lease liabilities (NOTE 9)		63			—			65			69
Deferred income taxes and other		483			476			457			479
Other liabilities and deferred credits		264			275			274			275
Commitments and contingencies (NOTE 14)
Shareholders' equity (NOTE 13)
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued 65,001,104 and 65,001,104 shares		1			1			1			1
Treasury stock $0.01 par value; 2,094,939 and 2,086,535 shares		—			—
Treasury stock $0.01 par value; 9,810,777 and 8,120,194 shares								—			—
Additional paid-in capital		1,977			1,981			1,710			1,770
Retained earnings		1,065			1,023			978			998
Accumulated other comprehensive loss		(424	)		(467	)		(508	)		(393	)
Total shareholders' equity		2,619			2,538			2,181			2,376
Total liabilities and shareholders' equity		4,993			4,925			4,833			4,903

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

For the three months ended

June 30, 2019

Issued and outstanding common shares
(millions of shares)

Common stock, at par

Additional paid-in capital

Retained
earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

$

$

$

$

$

Balance at March 31, 2019

63.1

1

1,982

1,075

(450
)

2,608

Stock-based compensation, net of tax

—

—

3

—

—

3

Net earnings

—

—

—

18

—

18

Net derivative gains on cash flow hedges:

Net gains arising during the period,
   net of tax of $(1)

—

—

—

—

3

3

Less: Reclassification adjustment for losses
   included in net earnings, net of tax of $(1)

—

—

—

—

1

1

Foreign currency translation adjustments

—

—

—

—

20

20

Change in unrecognized gains and prior service cost
   related to pension and post-retirement benefit
   plans, net of tax of $(1)

—

—

—

—

2

2

Stock repurchase

(0.2
)

—

(8
)

—

—

(8
)
Cash dividends declared

—

—

—

(28
)

—

(28
)
Balance at June 30, 2019

62.9

1

1,977

1,065

(424
)

2,619

For the six months ended

June 30, 2019

Issued and outstanding common shares
(millions of shares)

Common stock, at par

Additional paid-in capital

Retained
earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

$

$

$

$

$

Balance at December 31, 2018

62.9

1

1,981

1,023

(467
)

2,538

Stock-based compensation, net of tax

0.2

—

4

—

—

4

Net earnings

—

—

—

98

—

98

Net derivative gains on cash flow hedges:

Net gains arising during the period,
   net of tax of $(5)

—

—

—

—

14

14

Less: Reclassification adjustment for losses
   included in net earnings, net of tax of $(1)

—

—

—

—

2

2

Foreign currency translation adjustments

—

—

—

—

22

22

Change in unrecognized gains and prior service cost
   related to pension and post-retirement benefit
   plans, net of tax of $(2)

—

—

—

—

5

5

Stock repurchase

(0.2
)

—

(8
)

—

—

(8
)
Cash dividends declared

—

—

—

(56
)

—

(56
)
Balance at June 30, 2019

62.9

1

1,977

1,065

(424
)

2,619

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

	For the three months ended															For the three months ended
	June 30, 2018															March 31, 2020
	Issued and outstanding common shares (millions of shares)		Common stock, at par		Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity			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 March 31, 2018		62.8		1		1,972		876			(356	)		2,493
Balance at December 31, 2019																	56.9			1		1,770			998			(393	)		2,376
Stock-based compensation, net of tax		0.1		—		5		—			—			5			0.1			—		(1	)		—			—			(1	)
Net earnings		—		—		—		43			—			43			—			—		—			5			—			5
Net derivative losses on cash flow hedges:
Net losses arising during the period, net of tax of $2		—		—		—		—			(7	)		(7	)
Less: Reclassification adjustment for gains included in net earnings, net of tax of nil		—		—		—		—			—			—
Net losses arising during the period, net of tax of $16																	—			—		—			—			(49	)		(49	)
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2)																	—			—		—			—			7			7
Foreign currency translation adjustments		—		—		—		—			(50	)		(50	)		—			—		—			—			(74	)		(74	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1)		—		—		—		—			2			2			—			—		—			—			1			1
Stock repurchase																	(1.8	)		—		(59	)		—			—			(59	)
Cash dividends declared		—		—		—		(28	)		—			(28	)		—			—		—			(25	)		—			(25	)
Balance at June 30, 2018		62.9		1		1,977		891			(411	)		2,458
Balance at March 31, 2020																	55.2			1		1,710			978			(508	)		2,181

	For the six months ended															For the three months ended
	June 30, 2018															March 31, 2019
	Issued and outstanding common shares (millions of shares)		Common stock, at par		Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity			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		—		8		—			—			8			0.2		—		1		—			—			1
Net earnings		—		—		—		97			—			97			—		—		—		80			—			80
Net derivative losses on cash flow hedges:
Net losses arising during the period, net of tax of $5		—		—		—		—			(16	)		(16	)
Less: Reclassification adjustment for gains included in net earnings, net of tax of $1		—		—		—		—			(2	)		(2	)
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		—		—		—		—			(61	)		(61	)		—		—		—		—			2			2
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $~~(2)~~(1)		—		—		—		—			4			4			—		—		—		—			3			3
Cash dividends declared		—		—		—		(55	)		—			(55	)		—		—		—		(28	)		—			(28	)
Balance at June 30, 2018		62.9		1		1,977		891			(411	)		2,458
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.

	For the six months ended						For the three months ended
	June 30, 2019			June 30, 2018			March 31, 2020			March 31, 2019
	(Unaudited)						(Unaudited)
	$			$			$			$
Operating activities
Net earnings		98			97			5			80
Adjustments to reconcile net earnings to cash flows from operating activities
Depreciation and amortization		147			158			72			73
Deferred income taxes and tax uncertainties		(1	)		(5	)		1			(3	)
Impairment of long-lived assets		25			—			—			10
Net gains on disposals of property, plant and equipment		—			(4	)
Stock-based compensation expense		5			5			1			2
Equity loss, net		1			—			1			1
Other		—			(1	)
Changes in assets and liabilities
Receivables		40			27			(28	)		(30	)
Inventories		(54	)		(10	)		28			(49	)
Prepaid expenses		(11	)		(11	)		(5	)		—
Trade and other payables		(76	)		1			(16	)		(69	)
Income and other taxes		(14	)		9			39			26
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		1			(1	)		(1	)		1
Other assets and other liabilities		13			2			(9	)		13
Cash flows from operating activities		174			267			88			55
Investing activities
Additions to property, plant and equipment		(101	)		(62	)		(62	)		(46	)
Proceeds from disposals of property, plant and equipment		1			4
Other		—			(6	)
Cash flows used for investing activities		(100	)		(64	)		(62	)		(46	)
Financing activities
Dividend payments		(55	)		(53	)		(26	)		(27	)
Stock repurchase		(8	)		—			(59	)		—
Net change in bank indebtedness		3			—			(10	)		3
Change in revolving credit facility								140			—
Proceeds from receivables securitization facility		80			—			25			20
Repayments of receivables securitization facility		(110	)		(25	)		—			(20	)
Repayments of long-term debt		(1	)		—
Other		(1	)		2			(3	)		(1	)
Cash flows used for financing activities		(92	)		(76	)
Net (decrease) increase in cash and cash equivalents		(18	)		127
Cash flows provided from (used for) financing activities								67			(25	)
Net increase (decrease) in cash and cash equivalents								93			(16	)
Impact of foreign exchange on cash		—			(2	)		(2	)		(1	)
Cash and cash equivalents at beginning of period		111			139			61			111
Cash and cash equivalents at end of period		93			264			152			94
Supplemental cash flow information
Net cash payments for:
Net cash payments (refund) for:
Interest		23			28			17			16
Income taxes		50			25			(25	)		6

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first ~~six~~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, ~~2018,~~2019, as filed with the Securities and Exchange Commission. The December 31, ~~2018~~2019 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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

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

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

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

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

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

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

~~In February 2016, the FASB issued ASU 2016-02, “Leases~~”, which requires lessees to recognize right-of-use assets and lease liabilities for all of their operating leases while continuing to recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income (Loss) in a manner similar to previous accounting standards. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

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

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

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

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

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

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

In August 2018, the FASB issued ~~ASU~~Accounting Standards Update (“ASU”) 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. Under the guidance, implementation costs for cloud computing arrangements ~~(“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:~~disclosure.

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

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is ~~effective~~based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for ~~fiscal years beginning after December 15, 2019,~~its estimate of expected credit losses and ~~interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period.~~ applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss.

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

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

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

The Company has begun its impact assessment and while its evaluation of this ~~ASU should be applied either retrospectively or prospectively to all implementation costs incurred after~~guidance is in the ~~date of adoption.~~

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

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

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The ~~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.

The Company is exposed to credit risk on ~~the~~ accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of ~~June 30,~~March 31, 2020, 1Pulp and Paper segment customer located in the U.S. represented 13% or $81 million of the Company’s receivables (December 31, 2019 ~~two of Domtar’s~~– 2 Pulp and Paper segment customers located in the U.S. represented ~~12%~~11% or ~~$78~~$66 million, and ~~12%~~11% or ~~$75~~$65 million, ~~respectively, of the Company’s receivables (December 31, 2018 – one Pulp and Paper segment customer located in the U.S. represented 10% or $67 million)~~respectively).

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

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.

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

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 5445 months.

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

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of ~~June 30, 2019~~March 31, 2020 to hedge forecasted purchases:

The natural gas derivative contracts were ~~fully~~ effective as of June 30, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 resulting from hedge ineffectiveness (three and six months ended June 30, 2018 – nil).March 31, 2020.

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

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

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of ~~June 30, 2019~~March 31, 2020 to hedge forecasted purchases and sales:

⁽¹⁾~~Represents the remaining~~ ~~six months~~The foreign exchange derivative contracts were effective as of ~~2019~~ March 31, 2020.

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

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

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.

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) below) at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:	June 30, 2019		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification	March 31, 2020		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$				$		$		$		$
Derivatives designated as hedging instruments:
Asset derivatives
Currency derivatives		4		—		4		—	(a)	Prepaid expenses		1		—		1		—	(a)	Prepaid expenses
Currency derivatives		2		—		2		—	(a)	Other assets		1		—		1		—	(a)	Other assets
Total Assets		6		—		6		—				2		—		2		—

Liabilities derivatives
Currency derivatives		5		—		5		—	(a)	Trade and other payables		37		—		37		—	(a)	Trade and other payables
Natural gas swap contracts		7		—		7		—	(a)	Trade and other payables		7		—		7		—	(a)	Trade and other payables
Currency derivatives		1		—		1		—	(a)	Other liabilities and deferred credits		17		—		17		—	(a)	Other liabilities and deferred credits
Natural gas swap contracts		6		—		6		—	(a)	Other liabilities and deferred credits		7		—		7		—	(a)	Other liabilities and deferred credits
Total Liabilities		19		—		19		—				68		—		68		—

Other Instruments:
Other instruments:
Stock-based compensation - liability awards		7		7		—		—		Trade and other payables		2		2		—		—		Trade and other payables
Stock-based compensation - liability awards		16		16		—		—		Other liabilities and deferred credits		9		9		—		—		Other liabilities and deferred credits
Equity swap contracts												3		3		—		—		Other liabilities and deferred credits
Long-term debt		877		—		877		—	(b)	Long-term debt		1,082		—		1,082		—	(b)	Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is ~~$13~~$14 million at ~~June 30, 2019,~~March 31, 2020, of which a loss of $7 million will be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at ~~June 30, 2019.~~March 31, 2020.

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

The net cumulative ~~gain or~~ loss recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is ~~nil~~$52 million at ~~June 30, 2019. A~~March 31, 2020, of which a loss of $1$36 million will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at ~~June 30, 2019.~~March 31, 2020.

Fair Value of financial instruments at:	December 31, 2018		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification	December 31, 2019		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$				$		$		$		$
Derivatives designated as hedging instruments:
Asset derivatives
Currency derivatives		1		—		1		—	(a)	Prepaid expenses		4		—		4		—	(a)	Prepaid expenses
Natural gas swap contracts		1		—		1		—	(a)	Prepaid expenses
Currency derivatives												4		—		4		—	(a)	Other assets
Total Assets		2		—		2		—				8		—		8		—

Liabilities derivatives
Currency derivatives		19		—		19		—	(a)	Trade and other payables		2		—		2		—	(a)	Trade and other payables
Natural gas swap contracts		2		—		2		—	(a)	Trade and other payables		9		—		9		—	(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		8		—		8		—	(a)	Other liabilities and deferred credits
Total Liabilities		37		—		37		—				19		—		19		—

Other Instruments:
Stock-based compensation - liability awards		6		6		—		—		Trade and other payables		7		7		—		—		Trade and other payables
Stock-based compensation - liability awards		14		14		—		—		Other liabilities and deferred credits		18		18		—		—		Other liabilities and deferred credits
Long-term debt		858		—		858		—	(b)	Long-term debt		1,030		—		1,030		—	(b)	Long-term debt

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.

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

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:

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, the pension expense was $9$12 million ~~and $23 million, respectively (2018~~(2019 – ~~$9 million and $22 million, respectively)~~$14 million).

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 six months ended

June 30, 2019

June 30, 2019

Pension plans

Other post-retirement benefit plans

Pension plans

Other post-retirement benefit plans

$

$

$

$

Service cost

7

1

15

1

Interest expense

14

1

27

1

Expected return on plan assets

(20
)

—

(40
)

—

Amortization of net actuarial loss

2

(1
)

5

(1
)
Amortization of prior year service costs

2

—

3

—

Net periodic benefit cost

5

1

10

1

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

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

For the three months ended

For the six months ended

June 30, 2018

June 30, 2018

Pension plans

Other post-retirement benefit plans

Pension plans

Other post-retirement benefit plans

$

$

$

$

Service cost

9

1

17

1

Interest expense

13

1

27

1

Expected return on plan assets

(22
)

—

(43
)

—

Amortization of net actuarial loss

2

—

4

—

Amortization of prior year service costs

2

(1
)

3

(1
)
Net periodic benefit cost

4

1

8

1

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

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

For the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, the Company contributed $4$2 million ~~and $7 million, respectively (2018~~(2019 – ~~$4 million and $7 million, respectively)~~$3 million) to the pension plans and $1 million ~~and $2 million, respectively (2018~~(2019 – $1 ~~million and $2 million, respectively)~~million) to the other post-retirement benefit plans.

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

For the ~~second~~first quarter of ~~2019,~~2020, the Company’s income tax expense was $5$3 million, consisting of a$2 million of current income tax expense ~~of $3 million~~ and a deferred income tax expense of $2 million. This compares to an income tax expense of $8 million in the second quarter of 2018, consisting of a current income tax expense of $10 million and a deferred income tax benefit of $2 million. The Company made income tax payments, net of refunds, of $44 million during the second quarter of 2019. The effective tax rate was 22% compared with an effective tax rate of 16% in the second quarter of 2018. The effective tax rate for the second quarter of 2019 was favorably impacted by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the second quarter of 2018 was favorably impacted by the enacted law changes in Sweden and several U.S states.

~~For the first six months of 2019, the Company’s income tax expense amounted to $29 million, consisting of a current income tax expense of $30 million and a deferred income tax benefit~~ of $1 million. This compares to an income tax expense of ~~$19~~$24 million in the first ~~six months~~quarter of ~~2018,~~2019, consisting of a$27 million of current income tax expense ~~of $24 million~~ and a deferred income tax benefit of $5$3 million. The Company ~~made~~received refunds, net of income tax payments, ~~net~~ of ~~refunds, of $50~~$25 million during the first ~~six months~~quarter of 2020. The effective tax rate was 33% compared with an effective tax rate of 23% in the first quarter of 2019. The effective tax rate for 2020 was ~~23% compared to~~impacted by an ~~effective tax rate of 16%~~increase in the ~~first six months~~valuation allowance related to the expected realization of ~~2018.~~certain U.S. state tax credits. The effective tax rate for the first ~~six months~~quarter of 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 related to Global Intangible Low-Taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also favorably impacted by the recognition of a $1 million ~~R&D~~research and development credit in a U.S. state as well as by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the first half of 2018 was favorably impacted by the recognition of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction as well as by enacted law changes in Sweden and several U.S states.

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

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

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 1413 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Maturities of lease liabilities at ~~June 30, 2019~~March 31, 2020 were as follows:

Operating leases

Finance leases

$

$

2019 ⁽¹⁾

14

1

2020

23

2

2021

18

2

2022

14

2

2023

10

1

Thereafter

20

7

Total lease payments

99

15

Less: Imputed interest

12

5

Total lease liabilities

87

10

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

Less: Imputed interest		11		3

Total lease liabilities		92		9

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

		June 30, 2019							December 31, 2018								March 31, 2020							December 31, 2019
	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		382		(101	)		281		384		(94	)		290	10 – 40		376		(111	)		265		380		(108	)		272
Technology	7 – 20		8		(5	)		3		8		(4	)		4	7 – 20		8		(5	)		3		8		(5	)		3
Non-Compete	9		1		(1	)		—		1		(1	)		—	9		1		(1	)		—		1		(1	)		—
License rights	12		29		(14	)		15		28		(13	)		15	12		28		(16	)		12		29		(16	)		13
			423		(122	)		301		424		(113	)		311			416		(134	)		282		421		(131	)		290
Indefinite-lived intangible assets not subject to amortization
Water rights			4		—			4		4		—			4			4		—			4		4		—			4
Trade names			237		—			237		238		—			238			231		—			231		235		—			235
License rights			6		—			6		6		—			6			6		—			6		6		—			6
Catalog rights			38		—			38		38		—			38			38		—			38		38		—			38
Total			708		(122	)		586		710		(113	)		597			695		(134	)		561		704		(131	)		573

Amortization expense related to intangible assets for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 was $4$5 million ~~and $9 million, respectively (2018~~(2019 – $5 ~~million and $10 million, respectively)~~million).

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

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

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019, the Company recorded ~~$15~~$10 million ~~and $25 million, respectively,~~ of accelerated depreciation ~~and impairment of operating lease right-of-use assets~~ under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive ~~Income~~ (Loss)~~. For the three and six months ended June 30, 2019, the~~ Income. The Company also recorded $1$3 million ~~and $4 million, respectively,~~ of severance and termination ~~costs; nil~~costs and a $1 million ~~respectively, of a~~ write-down of ~~inventory; and $7 million and $7 million, respectively, of relocation and other costs,~~inventory under Closure and restructuring costs.

The following table presents the changes in Accumulated other comprehensive loss by component⁽¹⁾ for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and the year ended December 31, ~~2018:~~2019:

	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, 2017		8			(218	)		6			(132	)		(336	)
Natural gas swap contracts		1		N/A			N/A			N/A				1
Currency options		(12	)	N/A			N/A			N/A				(12	)
Foreign exchange forward contracts		(19	)	N/A			N/A			N/A				(19	)
Net (gain) loss	N/A				(23	)		6		N/A				(17	)
Foreign currency items	N/A			N/A			N/A				(91	)		(91	)
Other comprehensive (loss) income before reclassifications		(30	)		(23	)		6			(91	)		(138	)
Amounts reclassified from Accumulated other comprehensive loss		(2	)		10			(1	)		—			7
Net current period other comprehensive (loss) income		(32	)		(13	)		5			(91	)		(131	)
Balance at December 31, 2018		(24	)		(231	)		11			(223	)		(467	)		(24	)		(231	)		11			(223	)		(467	)
Natural gas swap contracts		(5	)	N/A			N/A			N/A				(5	)		(10	)	N/A			N/A			N/A				(10	)
Currency options		5		N/A			N/A			N/A				5			5		N/A			N/A			N/A				5
Foreign exchange forward contracts		14		N/A			N/A			N/A				14			16		N/A			N/A			N/A				16
Net gain																N/A			1			1			N/A				2
Foreign currency items	N/A			N/A			N/A				22			22		N/A			N/A			N/A				21			21
Other comprehensive income before reclassifications		14			—			—			22			36			11			1			1			21			34
Amounts reclassified from Accumulated other comprehensive loss		2			6			(1	)		—			7			8			33			(1	)		—			40
Net current period other comprehensive income (loss)		16			6			(1	)		22			43
Balance at June 30, 2019		(8	)		(225	)		10			(201	)		(424	)
Net current period other comprehensive income																	19			34			—			21			74
Balance at December 31, 2019																	(5	)		(197	)		11			(202	)		(393	)
Natural gas swap contracts																	(2	)	N/A			N/A			N/A				(2	)
Currency options																	(8	)	N/A			N/A			N/A				(8	)
Foreign exchange forward contracts																	(39	)	N/A			N/A			N/A				(39	)
Foreign currency items																N/A			N/A			N/A				(74	)		(74	)
Other comprehensive loss before reclassifications																	(49	)		—			—			(74	)		(123	)
Amounts reclassified from Accumulated other comprehensive loss																	7			1			—			—			8
Net current period other comprehensive (loss) income																	(42	)		1			—			(74	)		(115	)
Balance at March 31, 2020																	(47	)		(196	)		11			(276	)		(508	)

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

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

Details about Accumulated other comprehensive loss components

Amounts reclassified from
Accumulated other
comprehensive loss⁽¹⁾

For the three months ended

June 30, 2019

June 30, 2018

$

$

Net derivative gains (losses) on cash flow hedge

Natural gas swap contracts ⁽²⁾

—

1

Currency options and forwards ⁽²⁾

2

(1
)
Total before tax

2

—

Tax expense

(1
)

—

Net of tax

1

—

Amortization of defined benefit pension items

Amortization of net actuarial loss ⁽³⁾

2

2

Amortization of prior year service cost ⁽³⁾

2

2

Total before tax

4

4

Tax expense

(1
)

(1
)
Net of tax

3

3

Amortization of other post-retirement benefit items

Amortization of net actuarial loss ⁽³⁾

(1
)

—

Amortization of prior year service cost ⁽³⁾

—

(1
)
Total before tax

(1
)

(1
)
Tax benefit

—

—

Net of tax

(1
)

(1
)

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

Amounts reclassified from
Accumulated other
comprehensive loss⁽¹⁾

For the six months ended

June 30, 2019

June 30, 2018

$

$

Net derivatives gains (losses) on cash flow hedge

Currency options and forwards ⁽²⁾

3

(3
)
Total before tax

3

(3
)
Tax (expense) benefit

(1
)

1

Net of tax

2

(2
)

Amortization of defined benefit pension items

Amortization of net actuarial loss ⁽³⁾

5

4

Amortization of prior year service cost ⁽³⁾

3

3

Total before tax

8

7

Tax expense

(2
)

(2
)
Net of tax

6

5

Amortization of other post-retirement benefit items

Amortization of net actuarial loss ⁽³⁾

(1
)

—

Amortization of prior year service cost ⁽³⁾

—

(1
)
Total before tax

(1
)

(1
)
Tax benefit

—

—

Net of tax

(1
)

(1
)

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

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

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

~~On August 6, 2019,~~18, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.455 per share, to be paid to holders of the Company’s common stock. ~~This dividend is to be~~Total dividends of approximately $25 million were paid on ~~October~~April 15, ~~2019,~~2020 to shareholders of record on ~~October~~April 2, ~~2019.~~2020.

The Company’s Board of Directors has authorized a stock repurchase program ~~(the “Program”~~(“the Program”) of up to $1.3 billion. On November 5, 2019, the Company’s Board of Directors approved an increase to the Program from $1.3 billion to $1.6 billion. Under the Program, the Company is authorized to repurchase, from time to time, shares of its outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of stock options and awards, and to improve shareholders’ returns.

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

During the first ~~six months~~quarter of ~~2019,~~ 2020, the Company repurchased ~~194,407~~1,798,306 shares at an average price of ~~$42.26~~$33.05 for a total cost of $8$59 million.

During the first ~~six months~~quarter of ~~2018,~~2019, there were no0 shares repurchased under the Program.

Due to the ~~inception of the Program,~~unprecedented market conditions and uncertainty caused by COVID-19, the Company has ~~repurchased 25,048,234 shares at an average price~~suspended the payment of ~~$39.35 for a total cost~~its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment. The Board of ~~$986 million. All shares repurchased are recorded as Treasury stock on~~Directors will continue to evaluate the ~~Consolidated Balance Sheets under the par value method at $0.01 per share.~~Company’s capital return program based upon customary considerations, including market conditions.

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

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

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

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

The Province ~~has challenged whether~~issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that never has been owned by Domtar. The Director's order required certain work to be conducted by those prior ~~to Domtar can benefit from~~owners. The prior owners asserted that the Indemnity ~~in relation to~~covered the ~~historic contamination. The Province was unsuccessful in~~work required by the ~~lower courts and has appealed to~~Director’s order. Following extensive litigation, the Supreme Court of Canada ~~whose decision is pending.~~found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.

~~The~~In the future, the Province may ~~also~~ challenge whether Domtar has the benefit of the Indemnity. ~~Should it be determined that Domtar does not have the benefit of~~In addition to the Indemnity, Domtar ~~may~~has other recourses relating to the historical contamination.

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

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

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

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

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

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

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

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at ~~June 30, 2019,~~March 31, 2020, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At ~~June 30, 2019,~~March 31, 2020, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no0 provision has been recorded. These indemnifications have not yielded a significant expense in the past.

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At ~~June 30, 2019,~~March 31, 2020 the Company has ~~not~~0t recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

The Company’s ~~two~~2 reportable segments described below also represent its ~~two~~2 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:

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

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

	For the three months ended						For the six months ended						For the three months ended
SEGMENT DATA	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018			March 31, 2020			March 31, 2019
	$			$			$			$			$			$
Sales by segment
Pulp and Paper		1,096			1,123			2,243			2,223			1,031			1,157
Personal Care		237			247			484			509			266			239
Total for reportable segments		1,333			1,370			2,727			2,732			1,297			1,396
Intersegment sales		(16	)		(17	)		(34	)		(34	)		(19	)		(20	)
Consolidated sales		1,317			1,353			2,693			2,698			1,278			1,376

Sales by product group
Communication papers		643			634			1,328			1,265			623			685
Specialty and packaging papers		162			181			331			355			150			169
Market pulp		275			291			550			569			231			275
Absorbent hygiene products		237			247			484			509			274			247
Consolidated sales		1,317			1,353			2,693			2,698			1,278			1,376

Depreciation and amortization
Pulp and Paper		58			61			115			122			58			58
Personal Care		16			18			32			36			14			15
Total for reportable segments		74			79			147			158			72			73
Impairment of long-lived assets - Personal Care		15			—			25			—			—			10
Consolidated depreciation and amortization and impairment of long-lived assets		89			79			172			158			72			83

Operating income (loss)
Pulp and Paper		62			79			206			155			4			144
Personal Care		(18	)		2			(26	)		10			20			(8	)
Corporate		(10	)		(19	)		(31	)		(26	)		(5	)		(21	)
Consolidated operating income		34			62			149			139			19			115
Interest expense, net		13			16			26			32			14			13
Non-service components of net periodic benefit cost		(2	)		(5	)		(5	)		(9	)		(4	)		(3	)
Earnings before income taxes and equity loss		23			51			128			116			9			105
Income tax expense		5			8			29			19			3			24
Equity loss, net of taxes		—			—			1			—			1			1
Net earnings		18			43			98			97			5			80

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

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Statements of Earnings and Comprehensive (Loss) Income ~~(Loss) for the three~~ and ~~six months ended June 30, 2019 and 2018 and the Statements of~~ Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.

	For the three months ended														For the three months ended
	June 30, 2019														March 31, 2020
						Non-															Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor		Guarantor			Consolidating									Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries		Subsidiaries			Adjustments			Consolidated
AND COMPREHENSIVE LOSS															Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$		$			$			$			$			$			$			$			$
Sales		—			1,082		488			(253	)		1,317			—			1,045			465			(232	)		1,278
Operating expenses
Cost of sales, excluding depreciation and amortization		—			925		407			(253	)		1,079			—			947			368			(232	)		1,083
Depreciation and amortization		—			53		21			—			74			—			51			21			—			72
Selling, general and administrative		1			55		49			—			105			2			26			74			—			102
Impairment of long-lived assets		—			15		—			—			15
Closure and restructuring costs		—			8		—			—			8
Other operating loss, net		—			—		2			—			2
Other operating loss (income), net																—			4			(2	)		—			2
		1			1,056		479			(253	)		1,283			2			1,028			461			(232	)		1,259
Operating (loss) income		(1	)		26		9			—			34			(2	)		17			4			—			19
Interest expense (income), net		17			22		(26	)		—			13			16			19			(21	)		—			14
Non-service components of net periodic benefit cost		—			—		(2	)		—			(2	)		—			(1	)		(3	)		—			(4	)
(Loss) earnings before income taxes		(18	)		4		37			—			23			(18	)		(1	)		28			—			9
Income tax (benefit) expense		(3	)		—		8			—			5			(2	)		3			2			—			3
Equity loss, net of taxes																—			1			—			—			1
Share in earnings of equity accounted investees		33			29		—			(62	)		—			21			26			—			(47	)		—
Net earnings		18			33		29			(62	)		18			5			21			26			(47	)		5
Other comprehensive income		26			31		21			(52	)		26
Comprehensive income		44			64		50			(114	)		44
Other comprehensive loss																(115	)		(117	)		(73	)		190			(115	)
Comprehensive loss																(110	)		(96	)		(47	)		143			(110	)

For the six months ended

June 30, 2019

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Guarantor

Consolidating

AND COMPREHENSIVE INCOME

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Sales

—

2,208

1,019

(534
)

2,693

Operating expenses

Cost of sales, excluding depreciation and amortization

—

1,855

810

(534
)

2,131

Depreciation and amortization

—

104

43

—

147

Selling, general and administrative

7

111

110

—

228

Impairment of long-lived assets

—

25

—

—

25

Closure and restructuring costs

—

10

2

—

12

Other operating (income) loss, net

—

(4
)

5

—

1

7

2,101

970

(534
)

2,544

Operating (loss) income

(7
)

107

49

—

149

Interest expense (income), net

34

42

(50
)

—

26

Non-service components of net periodic benefit cost

—

—

(5
)

—

(5
)
(Loss) earnings before income taxes and equity loss

(41
)

65

104

—

128

Income tax (benefit) expense

(9
)

14

24

—

29

Equity loss, net of taxes

—

—

1

—

1

Share in earnings of equity accounted investees

130

79

—

(209
)

—

Net earnings

98

130

79

(209
)

98

Other comprehensive income

43

48

25

(73
)

43

Comprehensive income

141

178

104

(282
)

141

For the three months ended

June 30, 2018

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Guarantor

Consolidating

AND COMPREHENSIVE (LOSS) INCOME

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Sales

—

1,089

564

(300
)

1,353

Operating expenses

Cost of sales, excluding depreciation and amortization

—

943

453

(300
)

1,096

Depreciation and amortization

—

55

24

—

79

Selling, general and administrative

3

23

92

—

118

Other operating loss (income), net

—

1

(3
)

—

(2
)

3

1,022

566

(300
)

1,291

Operating (loss) income

(3
)

67

(2
)

—

62

Interest expense (income), net

16

23

(23
)

—

16

Non-service components of net periodic benefit cost

—

(1
)

(4
)

—

(5
)
(Loss) earnings before income taxes

(19
)

45

25

—

51

Income tax (benefit) expense

(4
)

8

4

—

8

Share in earnings of equity accounted investees

58

21

—

(79
)

—

Net earnings

43

58

21

(79
)

43

Other comprehensive loss

(55
)

(57
)

(50
)

107

(55
)
Comprehensive (loss) income

(12
)

1

(29
)

28

(12
)

For the six months ended

June 30, 2018

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Guarantor

Consolidating

AND COMPREHENSIVE INCOME

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Sales

—

2,172

1,112

(586
)

2,698

Operating expenses

Cost of sales, excluding depreciation and amortization

—

1,886

880

(586
)

2,180

Depreciation and amortization

—

111

47

—

158

Selling, general and administrative

7

68

153

—

228

Other operating income, net

—

(1
)

(6
)

—

(7
)

7

2,064

1,074

(586
)

2,559

Operating (loss) income

(7
)

108

38

—

139

Interest expense (income), net

32

45

(45
)

—

32

Non-service components of net periodic benefit cost

—

—

(9
)

—

(9
)
(Loss) earnings before income taxes

(39
)

63

92

—

116

Income tax (benefit) expense

(8
)

12

15

—

19

Share in earnings of equity accounted investees

128

77

—

(205
)

—

Net earnings

97

128

77

(205
)

97

Other comprehensive loss

(75
)

(75
)

(60
)

135

(75
)
Comprehensive income

22

53

17

(70
)

22

June 30, 2019

Non-

Guarantor

Guarantor

Consolidating

CONDENSED CONSOLIDATING BALANCE SHEET

Parent

Subsidiaries

Subsidiaries

Adjustments

Consolidated

$

$

$

$

$

Assets

Current assets

Cash and cash equivalents

1

1

91

—

93

Receivables

—

162

472

—

634

Inventories

—

571

252

—

823

Prepaid expenses

12

19

8

—

39

Income and other taxes receivable

52

10

21

(42
)

41

Intercompany accounts

416

378

44

(838
)

—

Total current assets

481

1,141

888

(880
)

1,630

Property, plant and equipment, net

—

1,745

818

—

2,563

Operating lease right-of-use assets

—

55

16

—

71

Intangible assets, net

—

250

336

—

586

Investments in affiliates

3,823

2,700

—

(6,523
)

—

Intercompany long-term advances

5

1

1,652

(1,658
)

—

Other assets

20

37

112

(26
)

143

Total assets

4,329

5,929

3,822

(9,087
)

4,993

Liabilities and shareholders' equity

Current liabilities

Bank indebtedness

—

3

—

—

3

Trade and other payables

59

390

233

—

682

Intercompany accounts

115

198

525

(838
)

—

Income and other taxes payable

2

45

25

(42
)

30

Operating lease liabilities due within one year

—

18

6

—

24

Long-term debt due within one year

—

—

1

—

1

Total current liabilities

176

654

790

(880
)

740

Long-term debt

793

—

31

—

824

Operating lease liabilities

—

53

10

—

63

Intercompany long-term loans

710

947

1

(1,658
)

—

Deferred income taxes and other

—

350

159

(26
)

483

Other liabilities and deferred credits

31

102

131

—

264

Shareholders' equity

2,619

3,823

2,700

(6,523
)

2,619

Total liabilities and shareholders' equity

4,329

5,929

3,822

(9,087
)

4,993

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~~MARCH 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.

For the six months ended

June 30, 2019

CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS

Parent

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Consolidating
Adjustments

Consolidated

$

$

$

$

$

Operating activities

Net earnings

98

130

79

(209
)

98

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

(89
)

(116
)

72

209

76

Cash flows from operating activities

9

14

151

—

174

Investing activities

Additions to property, plant and equipment

—

(62
)

(39
)

—

(101
)
Proceeds from disposals of property, plant and equipment

—

1

—

—

1

Cash flows used for investing activities

—

(61
)

(39
)

—

(100
)
Financing activities

Dividend payments

(55
)

—

—

—

(55
)
Stock repurchase

(8
)

—

—

—

(8
)
Net change in bank indebtedness

—

3

—

—

3

Proceeds from receivables securitization facility

—

—

80

—

80

Repayments of receivables securitization facility

—

—

(110
)

—

(110
)
Repayments of long-term debt

—

—

(1
)

—

(1
)
Increase in long-term advances to related parties

—

—

(101
)

101

—

Decrease in long-term advances to related parties

56

45

—

(101
)

—

Other

(1
)

—

—

—

(1
)
Cash flows (used for) provided from financing activities

(8
)

48

(132
)

—

(92
)
Net increase (decrease) in cash and cash equivalents

1

1

(20
)

—

(18
)
Cash and cash equivalents at beginning of period

—

—

111

—

111

Cash and cash equivalents at end of period

1

1

91

—

93

For the six months ended

June 30, 2018

CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS

Parent

Guarantor
Subsidiaries

Non-
Guarantor
Subsidiaries

Consolidating
Adjustments

Consolidated

$

$

$

$

$

Operating activities

Net earnings

97

128

77

(205
)

97

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

34

(104
)

35

205

170

Cash flows from operating activities

131

24

112

—

267

Investing activities

Additions to property, plant and equipment

—

(33
)

(29
)

—

(62
)
Proceeds from disposals of property, plant and equipment

—

—

4

—

4

Other

—

(2
)

(4
)

—

(6
)
Cash flows used for investing activities

—

(35
)

(29
)

—

(64
)
Financing activities

Dividend payments

(53
)

—

—

—

(53
)
Repayments of receivables securitization facility

—

—

(25
)

—

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

—

—

(90
)

90

—

Decrease in long-term advances to related parties

58

32

—

(90
)

—

Other

2

—

—

—

2

Cash flows provided from (used for) financing activities

7

32

(115
)

—

(76
)
Net increase (decrease) in cash and cash equivalents

138

21

(32
)

—

127

Impact of foreign exchange on cash

—

—

(2
)

—

(2
)
Cash and cash equivalents at beginning of period

3

14

122

—

139

Cash and cash equivalents at end of period

141

35

88

—

264

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

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

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

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

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

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

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

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

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

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q. This MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the Securities and Exchange Commission (“SEC”) on February ~~22, 2019.~~ 25, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed below under “Forward-looking statements”, as well as in item 1A, risk factors, in this report.Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” ~~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, 2020 and ~~six months ended June 30, 2019 and 2018.~~2019. The three ~~month and six~~ month periods are also referred to as the ~~second~~first quarter of 2020 and ~~first half of 2019 and 2018. References~~2019. Reference to notes ~~refer~~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:

~~In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees~~

As a result of changes in our organizational structure, we have changed our segment reporting. Starting January 1, 2020, our materials business, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our Personal Care segment is now presented under our Pulp and Paper segment. There were no changes to ~~recognize right-of-use assets and lease liabilities for all of their~~our consolidated sales or operating ~~leases while continuing~~income. Prior period segment results have been restated to ~~recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income (Loss) in a manner similar to previous accounting standards. The Company elected to initially apply~~ the new ~~leases standard as of January 1, 2019~~segment presentation with ~~certain available practical expedients. No cumulative-effect adjustments on retained earnings were necessary as of January 1, 2019. The most~~no significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting for finance leases remains substantially unchanged. For all comparative periods prior to the adoption of the new leases standard, we will continue to report operating leases in the consolidated financial statements under ASC 840 “Leases” and provide the related required disclosures.on segment results.

~~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.~~

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.

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.

		Three months ended										Six months ended											Three months ended
						Variance										Variance											Variance
FINANCIAL HIGHLIGHTS		June 30, 2019		June 30, 2018		$			%			June 30, 2019		June 30, 2018		$			%				March 31, 2020		March 31, 2019		$			%
(In millions of dollars, unless otherwise noted)
Sales		$	1,317	$	1,353		(36	)		-3	%	$	2,693	$	2,698		(5	)		-	%		$	1,278	$	1,376		(98	)		-7	%
Operating income	Operating income		34		62		(28	)		-45	%		149		139		10			7	%	Operating income		19		115		(96	)		-83	%
Net earnings			18		43		(25	)		-58	%		98		97		1			1	%			5		80		(75	)		-94	%
Net earnings per common share (in dollars)¹:
Basic		$	0.29	$	0.68	$	(0.39	)		-57	%	$	1.56	$	1.54	$	0.02			1	%		$	0.09	$	1.27		(1.18	)		-93	%
Diluted		$	0.28	$	0.68	$	(0.40	)		-59	%	$	1.55	$	1.54	$	0.01			1	%		$	0.09	$	1.27		(1.18	)		-93	%

																At June 30, 2019			At December 31, 2018								At March 31, 2020			At December 31, 2019
Total assets									��							$	4,993		$	4,925							$	4,833		$	4,903
Total long-term debt, including current portion																$	825		$	854							$	1,103		$	939

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

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

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

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

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

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

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

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

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

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

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

The high degree of uncertainty and volatility day-to-day and the longer term potential impacts of the economic lockdown remain unclear. In Paper, we expect significantly lower demand in ~~our Paper business.~~the second quarter. We ~~anticipate some volatility in~~expect demand for softwood and fluff pulp ~~markets but should recover cyclically and seasonally~~to remain strong in the ~~back end of 2019.~~near-term driven by accelerated growth in tissue and towel, while containment measures across Europe and North America are expected to weigh on certain end-use markets. Personal Care ~~is expected~~will continue to benefit from ~~our margin improvement plan~~higher usage and ~~increased sales driven by~~the impact from new customer wins, but we expect a ~~stronger order book. We expect moderate inflation in our costs for the second half~~portion of the demand increase from consumer stock-up may reverse later in the year. Raw material costs are expected to remain stable.

This section presents a discussion and analysis of our ~~second~~first quarter of 2020 and ~~first half of~~ 2019 ~~and 2018~~ sales, operating income (loss) and other information relevant to the understanding of our results of operations.

ANALYSIS OF NET SALES
By Business Segment	Three months ended
							Variance
	March 31, 2020			March 31, 2019			$			%
Pulp and Paper	$	1,031		$	1,157			(126	)	-11%
Personal Care		266			239			27		11%
Total for reportable segments		1,297			1,396			(99	)	-7%
Intersegment sales		(19	)		(20	)		1
Consolidated		1,278			1,376			(98	)	-7%

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

ANALYSIS OF NET SALES

By Business Segment

Three months ended

Six months ended

Variance

Variance

June 30, 2019

June 30, 2018

$

%

June 30, 2019

June 30, 2018

$

%

Pulp and Paper

$
1,096

$
1,123

(27
)

-2%

$
2,243

$
2,223

20

1%

Personal Care

237

247

(10
)

-4%

484

509

(25
)

-5%

Total for reportable segments

1,333

1,370

(37
)

-3%

2,727

2,732

(5
)

-%

Intersegment sales

(16
)

(17
)

1

(34
)

(34
)

—

Consolidated

1,317

1,353

(36
)

-3%

2,693

2,698

(5
)

-%

Shipments

Paper - manufactured (in thousands of ST)

681

754

(73
)

-10%

1,417

1,523

(106
)

-7%

Communication Papers

567

615

(48
)

-8%

1,182

1,255

(73
)

-6%

Specialty and Packaging

114

139

(25
)

-18%

235

268

(33
)

-12%

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

21

26

(5
)

-19%

44

54

(10
)

-19%

Paper - total (in thousands of ST)

702

780

(78
)

-10%

1,461

1,577

(116
)

-7%

Pulp (in thousands of ADMT)

370

377

(7
)

-2%

719

751

(32
)

-4%

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

ANALYSIS OF OPERATING INCOME (LOSS)
	Three months ended												Six months ended												Three months ended
By Business Segment							Variance												Variance													Variance
	June 30, 2019^(a)			June 30, 2018			$			%			June 30, 2019^(b)			June 30, 2018			$			%			March 31, 2020			March 31, 2019			^(a)	$			%
Operating income (loss)
Pulp and Paper	$	62		$	79			(17	)		-22	%	$	206		$	155			51			33	%	$	4		$	144				(140	)		-97	%
Personal Care		(18	)		2			(20	)		-1000	%		(26	)		10			(36	)		-360	%		20			(8	)			28			350	%
Corporate		(10	)		(19	)		9			47	%		(31	)		(26	)		(5	)		-19	%		(5	)		(21	)			16			76	%
Consolidated operating income		34			62			(28	)		-45	%		149			139			10			7	%		19			115				(96	)		-83	%

Second quarter of 2019 versus Second quarter of 2018
First quarter of 2020 versus First quarter of 2019

	$ Change in Segmented Operating Income (Loss) due to																										$ 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			Volume/Mix			Net Price			Input Costs ^(a)		Operating Expenses^(b)			Currency			Depreciation/ Impairment ^(c)		Restructuring ^(d)		Other Income/ Expense ^(e)			Total
Pulp and Paper		(13	)		56		(25	)		(37	)		4			3			—			(5	)		(17	)		(9	)		(87	)		18		(64	)		2			—		—		—			(140	)
Personal Care		(2	)		1		2			1			(1	)		(13	)		(8	)		—			(20	)		6			—			9		(1	)		(1	)		11		4		—			28
Corporate		—			—		—			8			—			—			—			1			9			—			—			—		19			—			—		—		(3	)		16
Consolidated operating income (loss)		(15	)		57		(23	)		(28	)		3			(10	)		(8	)		(4	)		(28	)		(3	)		(87	)		27		(46	)		1			11		4		(3	)		(96	)

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

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

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

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

First half of 2019 versus First half of 2018

$ Change in Segmented Operating Income (Loss) due to

Volume/Mix

Net Price

Input Costs ^(a)

Operating
Expenses^(b)

Currency

Depreciation/
Impairment ^(c)

Restructuring ^(d)

Other Income/
Expense ^(e)

Total

Pulp and Paper

(22
)

152

(34
)

(50
)

8

6

—

(9
)

51

Personal Care

(7
)

2

2

5

(4
)

(21
)

(12
)

(1
)

(36
)
Corporate

—

—

—

(7
)

—

—

—

2

(5
)
Consolidated operating income (loss)

(29
)

154

(32
)

(52
)

4

(15
)

(12
)

(8
)

10

Commentary – First ~~half~~quarter of ~~2019~~2020 compared to ~~first half~~First quarter of ~~2018~~2019

We incurred ~~$26~~$14 million of net interest expense in the first ~~half~~quarter of ~~2019, a decrease of $6 million~~2020 compared to net interest expense of ~~$32~~$13 million in the first ~~half~~quarter of ~~2018.~~2019. The net interest expense was impacted by an increase in borrowings under the ~~repayment of the $300 million Term Loan in the fourth quarter of 2018.~~ revolving credit facility.

~~For~~In the first ~~half~~quarter of ~~2019,~~2020, our income tax expense was ~~$29~~$3 million, consisting of a$2 million of current income tax expense ~~of $30 million~~ and a deferred income tax ~~benefit~~expense of $1 million. This compares to an income tax expense of ~~$19~~$24 million in the first ~~half~~quarter of ~~2018,~~2019, consisting of a$27 million of current income tax expense ~~of $24 million~~ and a deferred income tax benefit of $5$3 million. We ~~made~~received income tax refunds, net of income tax payments, ~~net~~ of ~~refunds, of $50~~$25 million during the first ~~half~~quarter of 2020. The effective tax rate was 33% compared with an effective tax rate of 23% in the first quarter of 2019. The effective tax rate for 2020 was ~~23% compared to~~impacted by an ~~effective tax rate of 16%~~increase in the ~~first half~~valuation allowance related to the expected realization of ~~2018.~~certain U.S. state tax credits. The effective tax rate for the first ~~half~~quarter of 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 for Global Intangible Low-taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also favorably impacted by the recognition of a $1 million ~~R&D~~research and development credit in a U.S. state as well as by an enacted law change in the state of Arkansas, which was mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the first half of 2018 was favorably impacted by the recognition of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction as well as by enacted law changes in Sweden and several U.S. states. state.

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

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

Sales in our Pulp and Paper segment decreased by ~~$27~~$126 million, or 2%11%, when compared to sales in the ~~second~~first quarter of ~~2018.~~ 2019. This decrease in sales is mostly due to a decrease in ~~our~~net average selling prices for pulp and paper ~~and pulp sales volumes~~ as well as a decrease in ~~net average selling prices for pulp.~~our paper sales volumes. This decrease was partially offset by an increase in ~~net average selling prices for paper.~~our pulp sales volumes.

Operating income in our Pulp and Paper segment amounted to ~~$62~~$4 million in the ~~second~~first quarter of ~~2019,~~2020, a decrease of ~~$17~~$140 million, when compared to operating income of ~~$79~~$144 million in the ~~second~~first quarter of ~~2018.~~2019. Our results were negatively impacted by:

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

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

The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products. In addition, current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions in certain countries due to economic slowdowns and government restrictions on movement.

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

~~For~~The high degree of uncertainty and volatility day-to-day and the ~~remainder~~longer term potential impacts of the ~~year,~~economic lockdown remain unclear. In Paper, we expect ~~our paper volumes to improve and trend in line with the market while our paper prices should remain relatively stable. We will continue to balance our production to our customer~~significantly lower demand in ~~our Paper business.~~the second quarter. We ~~anticipate some volatility in~~expect demand for softwood and fluff pulp ~~markets but should recover cyclically and seasonally~~to remain strong in the ~~back end of 2019.~~

~~Our Espanola pulp~~near-term driven by accelerated growth in tissue and ~~specialty paper mill underwent an extensive audit~~towel, while certain containment measures across Europe and ~~inspection of major components during their outage in June 2019. Following the inspection and given cyclically low pulp prices, we made the decision~~North America are expected to ~~fast-track some maintenance work that was originally planned for next year~~weigh on certain end-use markets. Raw material costs are expected to address some reliability risks. We expect that this extended shutdown will impact the second half of 2019 by adding approximately $36 million of maintenance costs and lower our total pulp production by approximately 60,000 tonnes.remain stable.

Sales in our Personal Care segment ~~decreased~~increased by ~~$10~~$27 million, or 4%11%, when compared to sales in the ~~second~~first quarter of ~~2018.~~2019. This ~~decrease~~increase in sales was ~~mainly~~ driven by ~~lower~~higher volume and ~~unfavorable foreign exchange,~~favorable mix and partially offset by ~~favorable mix when~~unfavorable foreign currency exchange, mostly due to the fluctuation between the U.S dollar and the Euro.

Operating income increased by $28 million, or 350%, in the first quarter of 2020 compared to the ~~second~~first quarter of ~~2018.~~

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

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

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

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

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

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

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

Personal Care ~~is expected~~will continue to benefit from ~~our margin improvement plan~~higher usage and ~~increased sales driven by~~the impact from new customer wins, but we expect a ~~stronger order book. We expect moderate inflation in our costs for the second half~~portion of the demand increase from consumer stock-up may reverse later in the year.

On November 1, 2018, we announced a margin improvement plan within our Personal Care ~~segment.~~Division. As part of this plan, ~~the~~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 across the division. The Waco, Texas facility ceased operations during the second quarter of 2019.

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2019, we recorded ~~$15~~$10 million ~~and $25 million, respectively,~~ of accelerated depreciation ~~and impairment of operating lease right-of-use assets~~ under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). ~~For the three and six months ended June 30, 2019, we~~We also recorded $1$3 million ~~and $4 million, respectively,~~ of severance and termination ~~costs; nil~~costs and $1 million ~~respectively,~~ of a write-down of ~~inventory; and $7 million and $7 million, respectively, of relocation and other costs,~~inventory under Closure and restructuring costs.

For the first ~~half~~quarter of ~~2019,~~2020, stock-based compensation ~~expense~~income recognized in our results of operations was ~~$20~~$3 million for all outstanding awards which includes the mark-to-market recovery related to liability awards of $7 million. This compares to a stock-based compensation expense of $16 million for all outstanding awards which includes the mark-to-market expense related to liability awards of ~~$11 million. This compares to a stock-based compensation expense of $10 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $2~~$12 million in the first ~~half~~quarter of ~~2018.~~2019. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

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~~$480 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which ~~$81~~$11 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.

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

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

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

Cash flows from operating activities totaled ~~$174~~$88 million in the first ~~half~~quarter of ~~2019,~~2020, a ~~$93~~$33 million ~~decrease~~increase compared to cash flows from operating activities of ~~$267~~$55 million in the first ~~half~~quarter of ~~2018.~~2019. This ~~decrease~~increase in cash flows from operating activities is primarily due to ~~an increase~~a decrease in cash flow from working capital requirements,~~. We made income tax payments, net of refunds, of $50 million~~ partially offset by a decrease in profitability in the first ~~half~~quarter of ~~2019~~2020 when compared to the first quarter of 2019. We received income tax refunds, net of payments, of $25 million during the first quarter of 2020 compared to income tax payments, net of refunds, of ~~$25~~$6 million ~~during~~in the first ~~half~~quarter of ~~2018.~~ 2019.

Cash flows used for investing activities in the first ~~half~~quarter of ~~2019~~2020 amounted to ~~$100~~$62 million, a ~~$36~~$16 million increase compared to cash flows used for investing activities of ~~$64~~$46 million in the first ~~half~~quarter of ~~2018.~~2019.

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

The use of cash in the first quarter of 2019 was attributable to additions to property, plant and equipment of ~~$101 million. This use of cash was partially offset by proceeds from disposals of property, plant and equipment of $1 million.~~$46 million.

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

Our capital expenditures for ~~2019~~2020 are expected to be between ~~$220~~$140 million and ~~$240~~$150 million.

Cash flows ~~used for~~provided from financing activities totaled ~~$92~~$67 million in the first ~~half~~quarter of ~~2019~~2020 compared to cash flows used for financing activities of ~~$76~~$25 million in the first ~~half~~quarter of ~~2018.~~2019.

~~The~~In the first quarter of 2020, we increased our net proceeds from borrowings under our credit facilities (revolver and receivables securitization) ($165 million). This was partially offset by the use of cash ~~in the first half of 2019 was~~ primarily ~~the result ofdividend payments ($55 million), the net repayments of borrowings under our receivable securitization ($30 million) and~~due to the repurchase of our common stock ($859 million) and dividend payments ($26 million).

The use of cash in the first ~~half~~quarter of ~~2018~~2019 was primarily the result of dividend payments ($5327 million) ~~and the net repayments of borrowings under our receivable securitization ($25 million)~~.

Net indebtedness, consisting of ~~bank indebtedness and~~ long-term debt, net of cash and cash equivalents, was ~~$735~~$951 million as of ~~June 30, 2019~~March 31, 2020 comparedto ~~$743~~$887 million as of December 31, ~~2018.~~

~~In the fourth quarter of 2018, we repaid the $300 million unsecured Term Loan that had been entered into in 2015 by a wholly-owned subsidiary of Domtar with certain domestic banks.~~2019.

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

Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic subsidiaries. Borrowings by certain foreign ~~borrowers~~subsidiaries 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 Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.

The Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). At ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and June 30, 2018,~~ we were in compliance with these financial covenants, and ~~had no borrowings.~~borrowings under the Credit Agreement amounted to $220 million (March 31, 2019 – nil). At ~~June 30,~~March 31, 2020 and March 31, 2019, our interest coverage ratio was 9.3 and ~~June 30, 2018,~~14.8, respectively, and our leverage ratio was 2.1 and 1.1, respectively. At March 31, 2020 and March 31, 2019, we had no outstanding letters of credit, leaving ~~$700~~$480 million unused and available under this facility.

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

At ~~June 30, 2019,~~March 31, 2020, borrowings under the receivables securitization facility amounted to ~~$20~~$80 million, and we had ~~$49~~$50 million of letters of credit under the program ~~(June 30, 2018~~(March 31, 2019 – ~~nil~~$50 million and ~~$51~~$53 million, respectively). The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the Credit Agreement

or our failure to repay or satisfy material obligations. At ~~June 30, 2019,~~March 31, 2020, we had ~~$81~~$11 million unused and available under the receivable securitization facility.

On February ~~19, 2019 and May 8, 2019,~~18, 2020, our Board of Directors approved a quarterly dividend of ~~$0.435 per share and~~ $0.455 ~~per share, respectively, to be paid to holders of our common stock. Dividends of $28 million each were paid on April 15, 2019 and~~ ~~July 16, 2019,~~ ~~respectively, to shareholders of record on April 2, 2019 and July 2, 2019, respectively.~~

~~On August 6, 2019, our Board of Directors approved a quarterly dividend~~ ~~of $0.455~~ per share, to be paid to holders of our common stock. ~~This dividend is to be~~Total dividends of approximately $25 million were paid on ~~October~~April 15, ~~2019,~~2020 to shareholders of record on ~~October~~April 2, ~~2019~~.2020.

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

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

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

In the normal course of business, we offer indemnifications relating to the sale of our businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At ~~June 30, 2019,~~March 31, 2020, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.

We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At ~~June 30, 2019,~~March 31, 2020, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets

impairment, pension and other post-retirement benefit plans, income taxes and contingencies related to legal claims. These critical accounting estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these accounting policies, and others, should be reviewed as they are essential to understanding our results of operations, cash flows and financial condition. Actual results could differ from those estimates.

For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

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

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:

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.

Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, ~~2018. There~~2019. Except for the addition of “Equity Risk”, there has not been any material change in our exposure to market risk since December 31, ~~2018.~~2019. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 3 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

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

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of ~~June 30,~~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 ~~June 30,~~March 31, 2019, our disclosure controls and procedures were effective.

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.

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

For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. ~~There~~Except as stated below, there were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

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

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

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

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

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

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

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

Share repurchase activity under our share repurchase program was as follows during the three-month period ended ~~June 30, 2019:~~March 31, 2020:

During the ~~second~~first quarter ~~and the first half~~ of ~~2019,~~2020, we repurchased ~~194,407~~1,798,306 shares at an average price of ~~$42.26~~$33.05 per share, for a total cost of $8$59 million under our stock repurchase program (the “Program”). ~~We currently~~As of March 31, 2020, we have ~~approximately $314~~$344 million of remaining availability under our Program. The Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Program. The Program has no set expiration date. We repurchase our common stock, from time to time, in part to reduce the dilutive effects of our stock options and awards and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions, availability under the program as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share. ~~During July 2019, we repurchased 322,813 shares at an average price of $41.61 per share, for a total cost of $13 million.~~

During ~~2018,~~the first quarter of 2019, there were no shares repurchased under the Program. As

Due to the unprecedented market conditions and uncertainty caused by the COVID-19 pandemic, we have suspended our capital return program; including the Company’s stock repurchase program, in order to preserve cash and provide additional flexibility in the current environment. Our Board of ~~December 31, 2018, the approximate dollar value of shares that may yet be purchased under the Program was $323 million.~~Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

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.

PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

	CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE (LOSS) INCOME ~~(LOSS)~~	3

	CONSOLIDATED BALANCE SHEETS	4

	CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS	76

	INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	87

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	98

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	4137

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	5148

ITEM 4.	CONTROLS AND PROCEDURES	5248

PART II	OTHER INFORMATION	5248

ITEM 1.	LEGAL PROCEEDINGS	5248

ITEM 1A.	RISK FACTORS	5249

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5250

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	5350

ITEM 4.	MINE SAFETY DISCLOSURES	5350

ITEM 5.	OTHER INFORMATION	5350

ITEM 6.	EXHIBITS	5451

NOTE 1	BASIS OF PRESENTATION	98

NOTE 2	RECENT ACCOUNTING PRONOUNCEMENTS	109

NOTE 3	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	1210

NOTE 4	EARNINGS PER COMMON SHARE	1614

NOTE 5	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	1715

NOTE 6	OTHER OPERATING LOSS (INCOME), NET	1916

NOTE 7	INCOME TAXES	2017

NOTE 8	INVENTORIES	2118

NOTE 9	LEASES	2219

NOTE 10	INTANGIBLE ASSETS	2521

NOTE 11	CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS	2622

NOTE 12	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	2723

NOTE 13	SHAREHOLDERS’ EQUITY	3025

NOTE 14	COMMITMENTS AND CONTINGENCIES	3126

NOTE 15	SEGMENT DISCLOSURES	3328

NOTE 16	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	3430

NOTE 17	SUBSEQUENT EVENTS	36

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
2019 ⁽¹⁾		6,390,000		$	19	47%
2020		11,165,000		$	34	40%
2020 ⁽¹⁾								6,265,000		$	19	34%
2021		9,270,000		$	27	33%		9,270,000		$	27	36%
2022		9,270,000		$	25	33%		9,270,000		$	25	36%
2023		4,210,000		$	11	15%		4,210,000		$	12	16%

	~~June 30, 2019~~March 31, 2020
	$
Balance at beginning of year		3735
Additions and other changes		1
Environmental spending		(41	)
Effect of foreign currency exchange rate change		1(2	)
Balance at end of period		3533

		For the three months ended		For the six months ended			For the three months ended
		June 30,		June 30,			March 31,		March 31,
		2019		2019			2020		2019
		$		$			$		$
Operating lease expense	Operating lease expense		7		14	Operating lease expense		8		7

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

	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

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

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

10.1		Term Loan Agreement, dated as of May 5, 2020, among Domtar Corporation, as borrower, the lenders party thereto and Cobank, ACB, a farm credit bank, as agent
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

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

101.SCH		Inline XBRL Taxonomy Extension Schema

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE		Inline XBRL Extension Presentation Linkbase

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

DOMTAR CORPORATION

Date: ~~August~~May 8, ~~2019~~2020

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company