SEC Info - Domtar Corp. - ‘10-Q’ for 3/31/21

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, 2020

i 55.2

i 1

i 1,717

i 846

( i 304

)

i 2,260

Stock-based compensation, net of tax

i 0.1

—

( i 1

)

—

( i 1

)

Net loss

—

( i 29

)

—

( i 29

)

Net derivative gains on cash flow hedges:

Net gains arising during the period,

net of tax of $( i 3)

—

i 9

Less: Reclassification adjustment for gains

included in net loss, net of tax of $( i 1)

—

( i 2

)

( i 2

)

Foreign currency translation adjustments

—

i 72

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of $( i 1)

—

i 5

Stock repurchase

( i 5.1

)

—

( i 223

)

—

( i 223

)

Balance at March 31, 2021

i 50.2

i 1

i 1,493

i 817

( i 220

)

i 2,091

For the three months ended

March 31, 2020

Issued and outstanding common shares

(millions of shares)

Common stock, at par

Additional paid-in capital

Retained

earnings

Accumulated other comprehensive loss

Total shareholders' equity

(Unaudited)

Balance at December 31, 2019

i 56.9

i 1

i 1,770

i 998

( i 393

)

i 2,376

Stock-based compensation, net of tax

i 0.1

—

( i 1

)

—

( i 1

)

Net earnings

—

i 5

—

i 5

Net derivative losses on cash flow hedges:

Net losses arising during the period,

net of tax of $ i 16

—

( i 49

)

( i 49

)

Less: Reclassification adjustment for losses

included in net earnings, net of tax of $( i 2)

—

i 7

Foreign currency translation adjustments

—

( i 74

)

( i 74

)

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of $( i 1)

—

i 1

Stock repurchase

( i 1.8

)

—

( i 59

)

—

( i 59

)

Cash dividends declared

—

( i 25

)

—

( i 25

)

Balance at March 31, 2020

i 55.2

i 1

i 1,710

i 978

( i 508

)

i 2,181

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

	For the three months ended
	March 31, 2021			March 31, 2020
	(Unaudited)
	$			$
Operating activities
Net (loss) earnings		( i 29	)		i 5
Adjustments to reconcile net (loss) earnings to cash flows from operating activities
Depreciation and amortization		i 64			i 72
Deferred income taxes and tax uncertainties (NOTE 8)		( i 4	)		i 1
Impairment of long-lived assets (NOTE 11)		i 6			—
Net loss on disposition of discontinued operations (NOTE 3)		i 32			—
Stock-based compensation expense		i 2			i 1
Equity method investment loss, net		—			i 1
Other		i 2			—
Changes in assets and liabilities, excluding the effect of sale of business
Receivables		( i 68	)		( i 28	)
Inventories		i 32			i 28
Prepaid expenses		i 3			( i 5	)
Trade and other payables		( i 6	)		( i 16	)
Income and other taxes		i 4			i 39
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		( i 3	)		( i 1	)
Other assets and other liabilities		( i 2	)		( i 9	)
Cash flows from operating activities		i 33			i 88
Investing activities
Additions to property, plant and equipment		( i 51	)		( i 62	)
Proceeds from sale of business, net of cash disposed (NOTE 3)		i 897			—
Cash flows provided from (used for) investing activities		i 846			( i 62	)
Financing activities
Dividend payments		—			( i 26	)
Stock repurchase		( i 223	)		( i 59	)
Net change in bank indebtedness		i 4			( i 10	)
Change in revolving credit facility		—			i 140
Proceeds from receivables securitization facility		—			i 25
Repayments of long-term debt		( i 294	)		—
Other		( i 3	)		( i 3	)
Cash flows (used for) provided from financing activities		( i 516	)		i 67
Net increase in cash and cash equivalents		i 363			i 93
Impact of foreign exchange on cash		( i 1	)		( i 2	)
Cash and cash equivalents at beginning of period		i 309			i 61
Cash and cash equivalents at end of period		i 671			i 152
Supplemental cash flow information
Net cash payments (refund) for:
Interest		i 18			i 17
Income taxes		( i 7	)		( i 25	)

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

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1	BASIS OF PRESENTATION	8

NOTE 2	RECENT ACCOUNTING PRONOUNCEMENTS	9

NOTE 3	DISCONTINUED OPERATIONS	10

NOTE 4	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	13

NOTE 5	(LOSS) EARNINGS PER COMMON SHARE	17

NOTE 6	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	18

NOTE 7	OTHER OPERATING (INCOME) LOSS, NET	19

NOTE 8	INCOME TAXES	20

NOTE 9	INVENTORIES	21

NOTE 10	LEASES	22

NOTE 11	CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS	24

NOTE 12	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	25

NOTE 13	SHAREHOLDERS’ EQUITY	27

NOTE 14	COMMITMENTS AND CONTINGENCIES	28

NOTE 15	SEGMENT DISCLOSURES	31

NOTE 16	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	32

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first three months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission. The December 31, 2020 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

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

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

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

DISCONTINUED OPERATIONS

Sale of Personal Care business

On March 1, 2021, Domtar completed the previously announced sale of the Company’s Personal Care business to American Industrial Partners (“AIP”) for a purchase price of $ i 920 million in cash, including elements of working capital estimated at $ i 130 million, subject to customary adjustments. Domtar received a net amount of $ i 897 million, which represents the selling price minus the estimated settlements of the net indebtedness and other elements of working capital adjustments. In connection with the sale, the Company entered into Transition Services Agreements with AIP pursuant to which the Company agreed to provide various back-office and information technology support until the business is fully separated from Domtar.

The results of operations of the Company’s Personal Care business were reclassified to discontinued operations. These results have been summarized in (Loss) earnings from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations. Personal Care was previously disclosed as a separate reportable business segment.

Major components of (loss) earnings from discontinued operations:

	For the three months ended
	March 31,			March 31,
	2021			2020
	$			$
Sales		i 154			i 266
Operating expenses
Cost of sales, excluding depreciation and amortization		i 111			i 196
Depreciation and amortization		i 10			i 14
Selling, general and administrative		i 24			i 36
Closure and restructuring costs		i 1			—
Other operating loss, net		i 1			—
		i 147			i 246
Operating income		i 7			i 20
Net loss on disposition of discontinued operations		( i 32	)		—
(Loss) earnings from discontinued operations before income taxes		( i 25	)		i 20
Income tax benefit		( i 3	)		—
Net (loss) earnings from discontinued operations		( i 22	)		i 20

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

Major classes of assets and liabilities classified as held for sale in the accompanying Balance Sheets were as follows:

	At
	December 31,
	2020
	$
Assets
Receivables		i 110
Inventories		i 138
Prepaid expenses		i 3
Income and other taxes receivable		i 3
Property, plant and equipment, net		i 351
Operating lease right-of-use assets		i 15
Intangible assets, net ⁽²⁾⁽³⁾		i 554
Other assets		i 2
Total assets		i 1,176
Loss on classification as held for sale		( i 43	)
Total assets of the disposal group classified as held for sale on the Consolidated Balance Sheets ⁽¹⁾		i 1,133

Liabilities
Trade and other payables		i 128
Income and other taxes payable		i 12
Operating lease liabilities due within one year		i 8
Long-term debt		i 1
Operating lease liabilities		i 8
Deferred income taxes and other		i 130
Other liabilities and deferred credits		i 8
Total liabilities of the disposal group classified as held for sale on the Consolidated Balance Sheets ⁽¹⁾		i 295

⁽¹⁾

Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company’s Consolidated Balance Sheet at December 31, 2020.

⁽²⁾

Intangible assets, net at December 31, 2020 are comprised of $ i 290 million of indefinite-lived assets and $ i 264 million of definite-lived assets.

⁽³⁾

Indefinite-lived intangible assets of the disposal group held for sale consists of trade names ($ i 248 million) and catalog rights ($ i 42 million) following the business acquisitions in the Company’s former Personal Care segment.

Cash Flows from Discontinued Operations:

	For the three months ended
	March 31,			March 31,
	2021			2020
	$			$
Cash flows from operating activities		i 16			i 6
Cash flows used for investing activities		( i 3	)		( i 8	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

Use of proceeds

As previously announced, the Company intends to use $ i 600 million of the proceeds of the sale to reduce debt and $ i 300 million to repurchase shares.

During the quarter, the Company used $ i 223 million of the proceeds to repurchase shares and repaid the $ i 294 million of outstanding indebtedness under its Term Loan Agreement.

Additionally, on April 8, 2021, the Company redeemed the 4.4% Notes, originally due in 2022, at a redemption price of i 100 percent of the principal amount of $ i 300 million, plus accrued and unpaid interest, as well as a make-whole premium of $ i 11 million. i As at March 31, 2021, the 4.4% Notes were reclassified and presented under Long-term debt due within one year on the Consolidated Balance Sheets. The debt extinguishment as well as the related loss on debt extinguishment, will be recognized in the second quarter of 2021.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

_________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

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

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of March 31, 2021, i two customers located in the U.S. represented i 13% or $ i 59 million, and i 11% or $ i 51 million, respectively, of the Company’s receivables (December 31, 2020 – i two customers located in the U.S. represented i 15% or $ i 58 million, and i 12% or $ i 46 million, respectively).

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

INTEREST RATE RISK

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

EQUITY RISK

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

COST RISK

Cash flow hedges:

The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next i 33 months.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of March 31, 2021 to hedge forecasted purchases:

Commodity

Notional contractual quantity

under derivative contracts

MMBtu⁽²⁾

Notional contractual value

under derivative contracts

(in millions of dollars)

Percentage of forecasted

purchases under

derivative contracts

Natural gas

2021 ⁽¹⁾

i 6,575,000

i 19

i 37%

2022

i 9,270,000

i 25

i 35%

2023

i 4,210,000

i 12

i 15%

⁽¹⁾	Represents the remaining nine months of 2021

⁽²⁾	MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of March 31, 2021.

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in Canadian dollars 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. 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 i 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 i 24 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of March 31, 2021 to hedge forecasted purchases and sales:

Currency exposure hedged

Year of

maturity

Notional

contractual value

Percentage of

forecasted net

exposures under

contracts

Average

Protection rate

Average

Obligation rate

CAD/USD

2021⁽¹⁾

i 555 CAD

i 78%

1 USD = 1.3334

1 USD = 1.3520

CAD/USD

2022

i 442 CAD

i 47%

1 USD = 1.3327

1 USD = 1.3405

CAD/USD

2023

i 66 CAD

i 7%

1 USD = 1.2685

⁽¹⁾	Represents the remaining nine months of 2021

The foreign exchange derivative contracts were effective as of March 31, 2021.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

FAIR VALUE MEASUREMENT

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

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

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

Level 3

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

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) and (c) below) at March 31, 2021 and December 31, 2020, 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:

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

i 34

—

i 34

—

(a)

Prepaid expenses

Natural gas swap contracts

i 1

—

i 1

—

(a)

Prepaid expenses

Currency derivatives

i 14

—

i 14

—

(a)

Other assets

Total Assets

i 49

—

i 49

—

Liabilities derivatives

Currency derivatives

i 1

—

i 1

—

(a)

Trade and other payables

Natural gas swap contracts

i 1

—

i 1

—

(a)

Trade and other payables

Natural gas swap contracts

i 2

—

i 2

—

(a)

Other liabilities and deferred credits

Total Liabilities

i 4

—

i 4

—

Other instruments:

Stock-based compensation -

liability awards

i 4

—

Trade and other payables

Stock-based compensation -

liability awards

i 13

—

Other liabilities and deferred credits

Equity swap contracts

i 5

—

Other assets

Long-term debt due within

one year

i 312

—

i 312

—

(b)

Long-term debt due within one year

Long-term debt

i 632

—

i 632

—

(c)

Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $ i 2 million at March 31, 2021, which will be recognized in Cost of sales upon maturity of the derivatives at the then prevailing values, which may be different from those at March 31, 2021.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $ i 47 million at March 31, 2021, of which a gain of $ i 33 million will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at March 31, 2021.

Fair Value of financial instruments at:

December 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

i 31

—

i 31

—

(a)

Prepaid expenses

Currency derivatives

i 16

—

i 16

—

(a)

Other assets

Natural gas swap contracts

i 1

—

i 1

—

(a)

Other assets

Total Assets

i 48

—

i 48

—

Liabilities derivatives

Currency derivatives

i 1

—

i 1

—

(a)

Trade and other payables

Natural gas swap contracts

i 2

—

i 2

—

(a)

Trade and other payables

Natural gas swap contracts

i 3

—

i 3

—

(a)

Other liabilities and deferred credits

Total Liabilities

i 6

—

i 6

—

Other Instruments:

Stock-based compensation -

liability awards

i 5

—

Trade and other payables

Stock-based compensation -

liability awards

i 11

—

Other liabilities and deferred credits

Equity swap contracts

i 2

Other assets

Long-term debt due within

one year

i 13

—

i 13

—

(b)

Long-term debt due within one year

Long-term debt

i 1,221

—

i 1,221

—

(c)

Long-term debt

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

For currency derivatives: Foreign currency forward and option contracts are valued using standard valuation models. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques.

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

(b)

Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at March 31, 2021 and December 31, 2020. The carrying value of the Company’s long-term debt due within one year is $ i 301 million and $ i 13 million at March 31, 2021 and December 31, 2020, respectively.

(c)	The carrying value of the Company’s long-term debt is $ i 503 million and $ i 1,084 million at March 31, 2021 and December 31, 2020, respectively.

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

_________________

(LOSS) EARNINGS PER COMMON SHARE

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

	For the three months ended
	March 31,			March 31,
	2021			2020
Loss from continuing operations	$	( i 7	)	$	( i 15	)
(Loss) earnings from discontinued operations, net of taxes	$	( i 22	)	$	i 20
Net (loss) earnings	$	( i 29	)	$	i 5
Weighted average number of common shares outstanding (millions)		i 53.5			i 56.1
Effect of dilutive securities (millions)		—			i 0.1
Weighted average number of diluted common shares outstanding (millions)		i 53.5			i 56.2

Basic net (loss) earnings per common share (in dollars)
Loss from continuing operations	$	( i 0.13	)	$	( i 0.27	)
(Loss) earnings from discontinued operations	$	( i 0.41	)	$	i 0.36
Basic net (loss) earnings per common share	$	( i 0.54	)	$	i 0.09

Diluted net (loss) earnings per common share (in dollars)
Loss from continuing operations	$	( i 0.13	)	$	( i 0.27	)
(Loss) earnings from discontinued operations	$	( i 0.41	)	$	i 0.36
Diluted net (loss) earnings per common share	$	( i 0.54	)	$	i 0.09

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

	For the three months ended
	March 31,		March 31,
	2021		2020
Options to purchase common shares		i 191,720		i 410,547

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three months ended March 31, 2021, the pension expense was $ i 10 million (2020 – $ i 11 million).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

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

Components of net periodic benefit cost for pension plans:

	For the three months ended
	March 31,			March 31,
	2021			2020
	$			$
Service cost		i 7			i 7
Interest expense		i 8			i 11
Expected return on plan assets		( i 16	)		( i 17	)
Amortization of net actuarial loss		i 2			i 2
Net periodic benefit cost		i 1			i 3

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

For the three months ended March 31, 2021, the Company contributed $ i 3 million (2020 – $ i 2 million) to the pension plans and $ i 1 million (2020 – $ i 1 million) to the other post-retirement benefit plans.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

OTHER OPERATING (INCOME) LOSS, NET

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

	For the three months ended
	March 31,			March 31,
	2021			2020
	$			$
Bad debt expense		( i 2	)		i 4
Environmental provision		i 1			i 1
Foreign exchange loss (gain)		i 1			( i 2	)
Other		( i 2	)		( i 1	)
Other operating (income) loss, net		( i 2	)		i 2

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

INCOME TAXES

For the first quarter of 2021, the Company had i no income tax expense or benefit, as $ i 1 million of current income tax benefit was offset by the deferred income tax expense of $ i 1 million. This compares to an income tax expense of $ i 3 million in the first quarter of 2020, consisting of $ i 3 million of current income tax benefit and a deferred income tax expense of $ i 6 million. The Company received refunds, net of income tax payments, of $ i 7 million during the first quarter of 2021. The effective tax rate was i 0% compared with an effective tax rate of - i 27% in the first quarter of 2020. The effective tax rate for the first quarter of 2021 was impacted by additional tax expense on stock-based compensation which vested during the quarter. Also, a weaker US dollar resulted in an increase in the Company’s deferred tax liability on unremitted foreign earnings. The effective tax rate for the first quarter of 2020 was impacted by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9.

_________________

INVENTORIES

The following table presents the components of inventories:

	March 31,		December 31,
	2021		2020
	$		$
Work in process and finished goods		i 292	i 321
Raw materials		i 103	i 107
Operating and maintenance supplies		i 205	i 202
		i 600	i 630

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

_________________

LEASES

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

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

The Company has remaining lease terms ranging from i 1 year to i 12 years, some of which may include options to extend the leases for up to i 10 years, and some of which may include options to terminate the leases within i 1 year.

The components of lease expense were as follows:

	For the three months ended
	March 31,		March 31,
	2021		2020
	$		$
Operating lease expense		i 6		i 5

Supplemental cash flow information related to leases was as follows:

For the three months ended

March 31,

2021

2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

i 6

i 5

Right-of-use assets obtained in exchange for lease liabilities:

Operating leases

i 1

i 2

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10. LEASES (CONTINUED)

Supplemental balance sheet information related to leases was as follows:

March 31,

December 31,

2021

2020

Operating leases

Operating leases right-of-use assets

i 55

i 59

Lease liabilities due within one year

i 19

i 20

Long-term operating lease liabilities

i 47

i 50

i 66

i 70

Finance leases

Property, plant and equipment

i 11

Accumulated depreciation

( i 3

)

( i 3

)

i 8

Long-term debt due within one year

i 1

Long-term debt

i 9

i 10

Weighted-average remaining lease term

Operating leases

i 4.7 years

Finance leases

i 8.6 years

i 8.8 years

Weighted-average discount rate

Operating leases

i 4.4

Finance leases

i 6.1

Maturities of lease liabilities at March 31, 2021 were as follows:

Operating leases

Finance leases

March 31,

2021

2021 ⁽¹⁾

i 15

i 1

2022

i 18

i 2

2023

i 15

i 2

2024

i 10

i 2

2025

i 6

i 1

Thereafter

i 9

i 5

Total lease payments

i 73

i 13

Less: Imputed interest

i 7

i 3

Total lease liabilities

i 66

i 10

⁽¹⁾

Represents the remaining nine months of 2021.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

_________________

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

Cost reduction program

The Company is implementing a cost savings program. As part of this program, on August 7, 2020, the Company announced the permanent closure of the uncoated freesheet manufacturing at the Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at the Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. These actions will reduce the Company’s annual uncoated freesheet paper capacity by approximately i 721,000 short tons, and result in a workforce reduction of approximately i 750 employees. The Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. The Ridgefields converting center ceased operations at the end of the third quarter of 2020, while the Port Huron mill shut down at the end of February 2021.

The Company plans to enter the linerboard market with the conversion of the Kingsport paper machine. Domtar estimates the conversion cost to be between $ i 300 and $ i 350 million. During the quarter, the Company also completed the conversion of the Ashdown mill to i 100% softwood and fluff pulp, which was necessary for an eventual expansion into containerboard. For the three months ended March 31, 2021, the Company recorded $ i 6 million of accelerated depreciation under Impairment of long-lived assets, and $ i 3 million of severance and termination costs under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, the Company recorded $ i 8 million under Asset conversion costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) as part of the conversion of its Kingsport, Tennessee mill to a linerboard mill.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component⁽¹⁾ for the three months ended March 31, 2021 and the year ended December 31, 2020:

Net derivative

gains (losses) on

cash flow hedges

Pension items⁽²⁾

Post-retirement

benefit items⁽²⁾

Foreign currency

items

Total

Balance at December 31, 2019

( i 5

)

( i 197

)

i 11

( i 202

)

( i 393

)

Natural gas swap contracts

i 1

N/A

i 1

Currency options

i 3

N/A

i 3

Foreign exchange forward contracts

i 23

N/A

i 23

Net loss

N/A

( i 21

)

( i 1

)

N/A

( i 22

)

Foreign currency items

N/A

i 63

Other comprehensive income (loss)

before reclassifications

i 27

( i 21

)

( i 1

)

i 63

i 68

Amounts reclassified from Accumulated

other comprehensive loss

i 12

i 11

( i 2

)

—

i 21

Net current period other comprehensive

income (loss)

i 39

( i 10

)

( i 3

)

i 63

i 89

Balance at December 31, 2020

i 34

( i 207

)

i 8

( i 139

)

( i 304

)

Natural gas swap contracts

i 1

N/A

i 1

Currency options

i 1

N/A

i 1

Foreign exchange forward contracts

i 7

N/A

i 7

Foreign currency items

N/A

i 72

Other comprehensive income

before reclassifications

i 9

—

i 72

i 81

Amounts reclassified from Accumulated

other comprehensive loss

( i 2

)

i 5

—

i 3

Net current period other comprehensive

income

i 7

i 5

—

i 72

i 84

Balance at March 31, 2021

i 41

( i 202

)

i 8

( i 67

)

( i 220

)

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

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

/ /

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

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

Details about Accumulated other comprehensive loss components	Amounts reclassified from Accumulated other comprehensive loss
	For the three months ended
	March 31, 2021			March 31, 2020
	$			$
Net derivative losses on cash flow hedge
Natural gas swap contracts ⁽¹⁾		—			( i 5	)
Currency options and forwards ⁽¹⁾		i 10			( i 4	)
Net investment hedge ⁽²⁾		( i 9	)		—
Total before tax		i 1			( i 9	)
Tax benefit		i 1			i 2
Net of tax		i 2			( i 7	)

Amortization of defined benefit pension items
Amortization of net actuarial loss ⁽³⁾		( i 2	)		( i 2	)
Discontinued operations		( i 4	)		—
Total before tax		( i 6	)		( i 2	)
Tax benefit		i 1			i 1
Net of tax		( i 5	)		( i 1	)

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

⁽²⁾	These amounts are included in (Loss) earnings from discontinued operations, net of taxes in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

⁽³⁾	These amounts are included in the computation of net periodic benefit cost (see Note 6 “Pension Plans and Other Post-Retirement Benefit Plans” for more details).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13.

_________________

SHAREHOLDERS’ EQUITY

DIVIDENDS

On i February 18, 2020, the Company’s Board of Directors approved a quarterly dividend of $ i 0.455 per share, to be paid to holders of the Company’s common stock. Total dividends of approximately $ i 25 million were paid on i April 15, 2020 to shareholders of record on i April 2, 2020. On May 5, 2020, due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to $ i 1.6 billion. 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.

On February 11, 2021, the Company announced that it will resume its stock repurchase program. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

On March 2, 2021, the Company announced that it entered into an accelerated share repurchase (“ASR”) agreement with JPMorgan Chase Bank, N.A. to repurchase $ i 200 million of its common stock with available cash on hand, including cash received from the divestiture of its Personal Care segment closed on March 1, 2021.

Under the ASR agreement, the Company paid $200 million in exchange for an initial delivery of i 4,430,906 shares. The final number of shares to be repurchased by Domtar will be based on the average of the daily volume-weighted average stock prices of Domtar’s common stock during the valuation period of the agreement, less a discount and subject to adjustments. The resulting adjustments may affect the total amount spent by the Company or the aggregate number of shares it repurchases.

During the first quarter of 2021, in addition to the ASR, the Company repurchased i 629,959 shares on the open market at an average price of $ i 35.72 for a total cost of $ i 23 million.

During the first quarter of 2020, the Company repurchased i 1,798,306 shares at an average price of $ i 33.05 for a total cost of $ i 59 million.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14.

_________________

COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL MATTERS

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

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

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

The Province issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that never has been owned by the Company. The Director's order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.

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

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

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

	March 31, 2021
	$
Balance at beginning of year		i 47
Additions and other changes		i 1
Environmental spending		( i 1	)
Balance at end of period		i 47

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at March 31, 2021, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, compliance with laws, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At March 31, 2021, 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, i no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At March 31, 2021 the Company has i not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

CLIMATE CHANGE AND AIR QUALITY REGULATION

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

The EPA repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”) rule. The ACE rule was legally challenged in the U.S. Court of Appeals for the D.C. Circuit. The Court ruled the EPA wrongly understood the Clean Air Act and the ACE rule and its embedded repeal of the Clean Power Plan was vacated and sent back to the EPA for further consideration. Regardless of the outcome of the EPA’s further consideration, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.

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

The Government of Canada has established a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. The Government of Canada has imposed its carbon pricing program for regulating GHG emissions in Ontario, which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario finalized its own GHG Emission Performance Standards regulation. The Ontario Government has been in discussions with the Canadian Government to replace the federal program in Ontario with its provincial program. The Canadian Government has accepted Ontario’s program as an alternative to the federal program and work to transition has begun. The Company does not expect to be disproportionately affected compared with other pulp and paper producers located in Ontario.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The EPA proposed to revise its Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”), or Boiler MACT, in a notice published on August 24, 2020. The proposed rule is a response to two court decisions that remanded certain issues for further review by the EPA, and it includes revisions to 34 different emission limitations that could apply to some of the Company’s facilities. Although the EPA has indicated that a small number of facilities may need to reduce emissions further compared to the current limits, the Company does not expect its facilities to be disproportionately affected compared to other U.S. pulp and paper producers.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15.

_________________

SEGMENT DISCLOSURES

Following the sale of the Company’s Personal Care business on March 1, 2021, the Company now operates as a single reportable segment as described below, which also represents its only operating segment:

•	Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp and high quality airlaid and ultrathin laminated cores.

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

	For the three months ended
SEGMENT DATA	March 31, 2021			March 31, 2020
	$			$
Sales by product group
Communication papers		i 488			i 623
Specialty and packaging papers		i 137			i 150
Market pulp		i 308			i 247
Absorbent core materials		i 11			i 11
Consolidated sales		i 944			i 1,031
Operating income (loss) from continuing operations ⁽¹⁾
Pulp and Paper		i 12			i 4
Corporate		( i 10	)		( i 5	)
Consolidated operating income (loss) from continuing operations		i 2			( i 1	)
Interest expense, net		i 15			i 14
Non-service components of net periodic benefit cost		( i 6	)		( i 4	)
Loss before income taxes and equity loss		( i 7	)		( i 11	)
Income tax expense		—			i 3
Equity method investment loss, net of taxes		—			i 1
Loss from continuing operations		( i 7	)		( i 15	)
(Loss) earnings from discontinued operations, net of taxes		( i 22	)		i 20
Net (loss) earnings		( i 29	)		i 5

⁽¹⁾

The Government of Canada created the Canada Emergency Wage Subsidy ("CEWS") to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. For the three months ended March 31, 2021, the Company recognized $ i 4 million as a reduction of costs related to this program (CDN $ i 5 million) ($ i 3 million in Cost of sales (CDN $ i 4 million) and $ i 1 million in Selling, general and administrative (CDN $ i 1 million)).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16.

_________________

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar’s significant i 100% owned domestic subsidiaries, including Domtar Paper Company, LLC, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Domtar A.W. LLC and EAM Corporation, (“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 i 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.

Prior to the sale of the Company’s Personal Care Business on March 1, 2021, Attends Healthcare Products Inc., Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co, were Guarantor Subsidiaries.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at March 31, 2021 and December 31, 2020, the Statements of Earnings (Loss) and Comprehensive Income (Loss) and Cash Flows for the three months ended March 31, 2021 and 2020 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

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Consolidating

(LOSS) AND COMPREHENSIVE INCOME

Parent

Adjustments

Consolidated

Sales

—

i 814

i 403

( i 273

)

i 944

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 759

i 323

( i 273

)

i 809

Depreciation and amortization

—

i 38

i 16

—

i 54

Selling, general and administrative

i 2

i 29

i 33

—

i 64

Impairment of long-lived assets

—

i 6

—

i 6

Closure and restructuring costs

—

i 3

—

i 3

Asset conversion costs

—

i 8

—

i 8

Other operating income, net

( i 2

)

—

( i 2

)

—

i 843

i 372

( i 273

)

i 942

Operating (loss) income

—

( i 29

)

i 31

—

i 2

Interest expense (income), net

i 16

i 14

( i 15

)

—

i 15

Non-service components of net periodic benefit cost

—

( i 2

)

( i 4

)

—

( i 6

)

(Loss) earnings before income taxes

( i 16

)

( i 41

)

i 50

—

( i 7

)

Income tax (benefit) expense

( i 9

)

( i 5

)

i 14

—

Share in earnings of equity accounted investees

( i 9

)

i 43

—

( i 34

)

—

(Loss) earnings from continuing operations

( i 16

)

i 7

i 36

( i 34

)

( i 7

)

(Loss) earnings from discontinued operations, net of taxes

( i 13

)

( i 16

)

i 7

—

( i 22

)

Net (loss) earnings

( i 29

)

( i 9

)

i 43

( i 34

)

( i 29

)

Other comprehensive income

i 84

i 82

i 76

( i 158

)

i 84

Comprehensive income

i 55

i 73

i 119

( i 192

)

i 55

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the three months ended

March 31, 2020

Non-

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Guarantor

Consolidating

AND COMPREHENSIVE LOSS

Parent

Adjustments

Consolidated

Sales

—

i 910

i 349

( i 228

)

i 1,031

Operating expenses

Cost of sales, excluding depreciation and amortization

—

i 844

i 290

( i 228

)

i 906

Depreciation and amortization

—

i 43

i 15

—

i 58

Selling, general and administrative

i 2

i 4

i 60

—

i 66

Other operating loss (income), net

—

i 3

( i 1

)

—

i 2

i 894

i 364

( i 228

)

i 1,032

Operating (loss) income

( i 2

)

i 16

( i 15

)

—

( i 1

)

Interest expense (income), net

i 16

i 19

( i 21

)

—

i 14

Non-service components of net periodic benefit cost

—

( i 1

)

( i 3

)

—

( i 4

)

(Loss) earnings before income taxes and equity loss

( i 18

)

( i 2

)

i 9

—

( i 11

)

Income tax (benefit) expense

( i 2

)

i 7

( i 2

)

—

i 3

Equity method investment loss, net of taxes

—

i 1

—

i 1

Share in earnings of equity accounted investees

i 21

i 26

—

( i 47

)

—

Earnings from continuing operations

i 5

i 16

i 11

( i 47

)

( i 15

)

Earnings from discontinued operations, net of taxes

—

i 5

i 15

—

i 20

Net earnings

i 5

i 21

i 26

( i 47

)

i 5

Other comprehensive loss

( i 115

)

( i 117

)

( i 73

)

i 190

( i 115

)

Comprehensive loss

( i 110

)

( i 96

)

( i 47

)

i 143

( i 110

)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

Non-

Guarantor

Consolidating

CONDENSED CONSOLIDATING BALANCE SHEET

Parent

Adjustments

Consolidated

Assets

Current assets

Cash and cash equivalents

i 646

i 2

i 23

—

i 671

Receivables

i 2

i 127

i 321

—

i 450

Inventories

—

i 391

i 209

—

i 600

Prepaid expenses

i 5

i 43

i 5

—

i 53

Income and other taxes receivable

i 44

—

i 11

( i 6

)

i 49

Intercompany accounts

i 942

i 989

i 618

( i 2,549

)

—

Total current assets

i 1,639

i 1,552

i 1,187

( i 2,555

)

i 1,823

Property, plant and equipment, net

—

i 1,348

i 674

—

i 2,022

Operating lease right-of-use assets

—

i 44

i 11

—

i 55

Intangible assets, net

—

i 24

i 5

—

i 29

Investments in affiliates

i 2,746

i 1,834

—

( i 4,580

)

—

Intercompany long-term advances

i 5

—

i 1,266

( i 1,271

)

—

Other assets

i 17

i 39

i 148

( i 12

)

i 192

Total assets

i 4,407

i 4,841

i 3,291

( i 8,418

)

i 4,121

Liabilities and shareholders' equity

Current liabilities

Bank indebtedness

—

i 4

—

i 4

Trade and other payables

i 20

i 333

i 151

—

i 504

Intercompany accounts

i 859

i 667

i 1,023

( i 2,549

)

—

Income and other taxes payable

i 10

i 9

i 3

( i 6

)

i 16

Operating lease liabilities due within one year

—

i 14

i 5

—

i 19

Long-term debt due within one year

i 300

—

i 1

—

i 301

Total current liabilities

i 1,189

i 1,027

i 1,183

( i 2,555

)

i 844

Long-term debt

i 494

—

i 9

—

i 503

Operating lease liabilities

—

i 41

i 6

—

i 47

Intercompany long-term loans

i 609

i 662

—

( i 1,271

)

—

Deferred income taxes and other

i 1

i 238

i 97

( i 12

)

i 324

Other liabilities and deferred credits

i 23

i 127

i 162

—

i 312

Shareholders' equity

i 2,091

i 2,746

i 1,834

( i 4,580

)

i 2,091

Total liabilities and shareholders' equity

i 4,407

i 4,841

i 3,291

( i 8,418

)

i 4,121

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

December 31, 2020

Non-

Guarantor

Consolidating

CONDENSED CONSOLIDATING BALANCE SHEET

Parent

Adjustments

Consolidated

Assets

Current assets

Cash and cash equivalents

i 208

i 5

i 96

—

i 309

Receivables

—

i 65

i 315

—

i 380

Inventories

—

i 425

i 205

—

i 630

Prepaid expenses

i 8

i 37

i 5

—

i 50

Income and other taxes receivable

i 36

—

i 18

—

i 54

Intercompany accounts

i 759

i 902

i 433

( i 2,094

)

—

Asset held for sale

—

i 488

i 648

( i 3

)

i 1,133

Total current assets

i 1,011

i 1,922

i 1,720

( i 2,097

)

i 2,556

Property, plant and equipment, net

—

i 1,348

i 675

—

i 2,023

Operating lease right-of-use assets

—

i 48

i 11

—

i 59

Intangible assets, net

—

i 24

i 5

—

i 29

Investments in affiliates

i 3,558

i 2,169

—

( i 5,727

)

—

Intercompany long-term advances

i 5

—

i 1,157

( i 1,162

)

—

Other assets

i 11

i 41

i 143

( i 6

)

i 189

Total assets

i 4,585

i 5,552

i 3,711

( i 8,992

)

i 4,856

Liabilities and shareholders' equity

Current liabilities

Trade and other payables

i 26

i 294

i 167

( i 3

)

i 484

Intercompany accounts

i 677

i 491

i 926

( i 2,094

)

—

Income and other taxes payable

i 3

i 11

i 1

—

i 15

Operating lease liabilities due within one year

—

i 15

i 5

i 20

Long-term debt due within one year

i 12

—

i 1

—

i 13

Liabilities held for sale

—

i 121

i 174

—

i 295

Total current liabilities

i 718

i 932

i 1,274

( i 2,097

)

i 827

Long-term debt

i 1,075

—

i 9

—

i 1,084

Operating lease liabilities

—

i 44

i 6

—

i 50

Intercompany long-term loans

i 509

i 653

—

( i 1,162

)

—

Deferred income taxes and other

—

i 237

i 90

( i 6

)

i 321

Other liabilities and deferred credits

i 23

i 128

i 163

—

i 314

Shareholders' equity

i 2,260

i 3,558

i 2,169

( i 5,727

)

i 2,260

Total liabilities and shareholders' equity

i 4,585

i 5,552

i 3,711

( i 8,992

)

i 4,856

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the three months ended

CONDENSED CONSOLIDATING STATEMENT OF

CASH FLOWS

Parent

Guarantor

Non-

Guarantor

Consolidating

Adjustments

Consolidated

Operating activities

Net (loss) earnings

( i 29

)

( i 9

)

i 43

( i 34

)

( i 29

)

Changes in operating and intercompany assets and

liabilities and non-cash items, included in net (loss)

earnings

( i 7

)

i 96

( i 61

)

i 34

i 62

Cash flows (used for) provided from operating activities

( i 36

)

i 87

( i 18

)

—

i 33

Investing activities

Additions to property, plant and equipment

—

( i 40

)

( i 11

)

—

( i 51

)

Proceeds from sale of business, net of cash disposed

—

i 897

—

i 897

Cash flows (used for) provided from investing activities

—

( i 40

)

i 886

—

i 846

Financing activities

Stock repurchase

( i 223

)

—

( i 223

)

Net change in bank indebtedness

—

i 4

—

i 4

Repayments of long-term debt

( i 294

)

—

( i 294

)

Increase in long-term advances to related parties

—

( i 54

)

( i 940

)

i 994

—

Decrease in long-term advances to related parties

i 994

—

( i 994

)

—

Other

( i 3

)

—

( i 3

)

Cash flows provided from (used for) financing activities

i 474

( i 50

)

( i 940

)

—

( i 516

)

Net increase (decrease) in cash and cash equivalents

i 438

( i 3

)

( i 72

)

—

i 363

Impact of foreign exchange on cash

—

( i 1

)

—

( i 1

)

Cash and cash equivalents at beginning of period

i 208

i 5

i 96

—

i 309

Cash and cash equivalents at end of period

i 646

i 2

i 23

—

i 671

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

For the three months ended

March 31, 2020

CONDENSED CONSOLIDATING STATEMENT OF

CASH FLOWS

Parent

Guarantor

Non-

Guarantor