Domtar CORP (Form: 10-Q, Received: 08/01/2014 12:36:45)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

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

For the transition period from to

COMMISSION FILE NUMBER 001-33164

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE		20-5901152
(State of Incorporation)		(I.R.S. Employer Identification No.)

395 de Maisonneuve West, Montreal, Quebec H3A 1L6 Canada

(Address of principal executive offices) (zip code)

(514) 848-5555

(Registrant’s telephone number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES x NO ¨

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

At July 29, 2014, 65,001,104 shares of the issuer’s voting common stock were outstanding.

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2014

INDEX


PART I.	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

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

	CONSOLIDATED BALANCE SHEETS	4

	CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS	6

	INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	48

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	62

ITEM 4.	CONTROLS AND PROCEDURES	62

PART II	OTHER INFORMATION	62

ITEM 1.	LEGAL PROCEEDINGS	62

ITEM 1A.	RISK FACTORS	63

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	63

ITEM 3.	DEFAULT UPON SENIOR SECURITIES	63

ITEM 4.	MINE SAFETY DISCLOSURES	63

ITEM 5.	OTHER INFORMATION	63

ITEM 6.	EXHIBITS	64

PART I: FINANCIAL INFORMATION

ITEM 1:

FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

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

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)


	For the three months ended					For the six months ended
	June 30, 2014		June 30, 2013			June 30, 2014			June 30, 2013
	(Unaudited)
	$		$			$			$
Sales		1,385		1,312			2,779			2,657
Operating expenses
Cost of sales, excluding depreciation and amortization		1,108		1,082			2,211			2,164
Depreciation and amortization		96		93			195			188
Selling, general and administrative		100		95			214			186
Impairment and write-down of property, plant and equipment (NOTE 12)		—		5			—			15
Closure and restructuring costs (NOTE 12)		—		18			1			18
Other operating loss, net (NOTE 7)		2		49			—			67

		1,306		1,342			2,621			2,638

Operating income (loss)		79		(30	)		158			19
Interest expense, net		26		21			51			46

Earnings (loss) before income taxes and equity loss		53		(51	)		107			(27	)
Income tax expense (benefit)		13		(5	)		28			(27	)
Equity loss, net of taxes		—		—			—			1

Net earnings (loss)		40		(46	)		79			(1	)

Per common share (in dollars) (NOTE 5)
Net earnings (loss)
Basic		0.62		(0.69	)		1.22			(0.01	)
Diluted		0.61		(0.69	)		1.22			(0.01	)
Weighted average number of common and exchangeable shares outstanding (millions)
Basic		65.0		66.9			64.9			68.2
Diluted		65.1		66.9			65.0			68.2
Net earnings (loss)		40		(46	)		79			(1	)
Other comprehensive income (loss) (NOTE 13):
Net derivative gains (losses) on cash flow hedges:
Net gains (losses) arising during the period, net of tax of $6 and $3, respectively (2013 - $(5) and $(5), respectively)		8		(9	)		5			(8	)
Less: Reclassification adjustment for losses included in net earnings (loss), net of tax of $(1) and $(3), respectively (2013 - nil and $(1), respectively)		1		—			3			1
Foreign currency translation adjustments		24		(33	)		(12	)		(60	)
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(2), respectively (2013 - $(6) and $(8), respectively)		3		16			5			21
Other comprehensive income (loss)		36		(26	)		1			(46	)

Comprehensive income (loss)		76		(72	)		80			(47	)

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

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)


	At
	June 30, 2014			December 31, 2013
	(Unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		85			655
Receivables, less allowances of $7 and $4		675			601
Inventories (NOTE 9)		728			685
Prepaid expenses		37			23
Income and other taxes receivable		54			61
Deferred income taxes		46			52

Total current assets		1,625			2,077
Property, plant and equipment, at cost		9,032			8,883
Accumulated depreciation		(5,766	)		(5,594	)

Net property, plant and equipment		3,266			3,289
Goodwill (NOTE 10)		655			369
Intangible assets, net of amortization (NOTE 11)		648			407
Other assets		145			136

Total assets		6,339			6,278

Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness		15			15
Trade and other payables		702			673
Income and other taxes payable		32			17
Long-term debt due within one year		7			4

Total current liabilities		756			709
Long-term debt		1,410			1,510
Deferred income taxes and other		998			923
Other liabilities and deferred credits		349			354
Commitments and contingencies (NOTE 15)
Shareholders’ equity
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued: 65,001,104 and 85,148,956 shares		1			—
Treasury stock (NOTE 14) $0.01 par value; nil and 21,434,054 shares		—			—
Exchangeable shares No par value; unlimited shares authorized; issued and held by nonaffiliates: nil and 1,123,020 shares		—			44
Additional paid-in capital		2,048			1,999
Retained earnings		841			804
Accumulated other comprehensive loss		(64	)		(65	)

Total shareholders’ equity		2,826			2,782

Total liabilities and shareholders’ equity		6,339			6,278

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)


	Issued and outstanding common and exchangeable shares (millions of shares)		Common stock, at par		Exchangeable shares			Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity
	(Unaudited)
					$			$		$			$			$
Balance at December 31, 2013		32.4		—		44			1,999		804			(65	)		2,782
Conversion of exchangeable shares		—		—		(12	)		12		—			—			—
Stock split		32.5		1		—			—		—			—			1
Redemption of exchangeable shares		—		—		(32	)		32		—			—			—
Stock-based compensation, net of tax		0.1		—		—			5		—			—			5
Net earnings		—		—		—			—		79			—			79
Net derivative gains on cash flow hedges:
Net gains arising during the period, net of tax of $3		—		—		—			—		—			5			5
Less: Reclassification adjustments for losses included in net earnings, net of tax of $(3)		—		—		—			—		—			3			3
Foreign currency translation adjustments		—		—		—			—		—			(12	)		(12	)
Change in unrecognized gains and prior service cost related to pension and post retirement benefit plans, net of tax of $(2)		—		—		—			—		—			5			5
Cash dividends		—		—		—			—		(42	)		—			(42	)

Balance at June 30, 2014		65.0		1		—			2,048		841			(64	)		2,826

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

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)


	For the six months ended
	June 30, 2014			June 30, 2013
	(Unaudited)
	$			$
Operating activities
Net earnings (loss)		79			(1	)
Adjustments to reconcile net earnings (loss) to cash flows from operating activities
Depreciation and amortization		195			188
Deferred income taxes and tax uncertainties		(6	)		—
Impairment and write-down of property, plant and equipment		—			15
Net gains on disposals of property, plant and equipment		—			(10	)
Stock-based compensation expense		3			3
Equity loss, net		—			1
Other		6			(2	)
Changes in assets and liabilities, excluding the effects of acquisition of businesses
Receivables		24			(30	)
Inventories		(18	)		(10	)
Prepaid expenses		(9	)		(7	)
Trade and other payables		(43	)		19
Income and other taxes		23			(9	)
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense		(6	)		26
Other assets and other liabilities		(3	)		—

Cash flows provided from operating activities		245			183

Investing activities
Additions to property, plant and equipment		(101	)		(118	)
Proceeds from disposals of property, plant and equipment		1			10
Acquisition of businesses, net of cash acquired		(546	)		(11	)
Investment in joint venture		—			(1	)

Cash flows used for investing activities		(646	)		(120	)

Financing activities
Dividend payments		(36	)		(31	)
Net change in bank indebtedness		—			(17	)
Change in revolving bank credit facility		(140	)		—
Proceeds from receivables securitization facilities		90			—
Payments on receivables securitization facilities		(84	)		—
Repayment of long-term debt		(3	)		(97	)
Stock repurchase		—			(147	)
Other		4			1

Cash flows used for financing activities		(169	)		(291	)

Net decrease in cash and cash equivalents		(570	)		(228	)
Impact of foreign exchange on cash		—			(1	)
Cash and cash equivalents at beginning of period		655			661

Cash and cash equivalents at end of period		85			432

Supplemental cash flow information
Net cash payments for:
Interest (including $2 million of tender offer premiums in 2013)		44			27
Income taxes paid (refund), net		19			(9	)

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	ACQUISITION OF BUSINESSES	11

NOTE 4	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	13

NOTE 5	EARNINGS (LOSS) PER COMMON SHARE	19

NOTE 6	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	20

NOTE 7	OTHER OPERATING LOSS, NET	22

NOTE 8	INCOME TAXES	23

NOTE 9	INVENTORIES	24

NOTE 10	GOODWILL	25

NOTE 11	INTANGIBLE ASSETS, NET	26

NOTE 12	CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT	27

NOTE 13	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	29

NOTE 14	SHAREHOLDERS’ EQUITY	31

NOTE 15	COMMITMENTS AND CONTINGENCIES	33

NOTE 16	SEGMENT DISCLOSURES	37

NOTE 17	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	39

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first six months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission. The December 31, 2013 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

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

FOREIGN CURRENCY MATTERS

In March 2013, the FASB issued ASU 2013-05, an update to Foreign Currency Matters, which indicates that a cumulative translation adjustment is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Thus, the entire amount of the cumulative translation adjustment associated with the foreign entity would be released when there has been (1) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity; (2) a loss of a controlling financial interest in an investment in a foreign entity; or (3) a step acquisition for a foreign entity. The update does not change the requirement to release a pro rata portion of the cumulative translation adjustment of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity.

The Company adopted the new requirement on January 1, 2014 with no impact on the company’s consolidated financial statements, as no triggering event occurred throughout the period.

INCOME TAXES

In July 2013, the FASB issued ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date.

The Company adopted the new requirement on January 1, 2014 with no material impact on the Company’s consolidated financial statements except for the change in presentation.

FUTURE ACCOUNTING CHANGES

DISCONTINUED OPERATIONS

In April 2014, the FASB issued ASU 2014-08, an update on Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the requirements for reporting discontinued operations and require additional disclosures for both disposal transactions that meet the criteria for a discontinued operation and disposals that do not meet these criteria. The objective of this update is to reach a greater convergence between the FASB’s and IASB’s reporting requirements for discontinued operations. The amendments are effective for interim and annual periods beginning after December 15, 2014 and will not have an impact on the Company’s consolidated financial statements unless a disposal transaction occurs after the effective date.

REVENUE FROM CONTRACTS WITH CUSTOMERS

In May 2014, the FASB issued ASU 2014-9, an update on revenue from contracts with customers. The core principal of this guideline is that an entity should recognize revenue, to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration for which the entity is entitled to, in exchange for those goods and services. Guidance in this section supersedes the revenue recognition requirements found in topic 605.

The amendment will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating these changes to determine whether they have an impact on the presentation of the consolidated financial statements. The Company does not expect these changes to have a material impact.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

STOCK COMPENSATION

In June 2014, the FASB issued ASU 2014-12, an update on stock compensation. The guideline requires performance targets, which affect vesting and can be achieved after the requisite service period, to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If achievement of the performance target becomes probable before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.

The amendments are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating these changes to determine whether they have an impact on the presentation of the Consolidated Balance Sheets and Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss). The Company does not expect these changes to have a material impact on the consolidated financial statements.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

ACQUISITION OF BUSINESSES

Acquisition of Laboratorios Indas

On January 2, 2014, Domtar Corporation completed the acquisition of 100% of the outstanding shares of Laboratorios Indas, S.A.U. (“Indas”) a branded incontinence products manufacturer and marketer in Spain. Indas has approximately 440 employees and operates two manufacturing facilities in Spain. The results of Indas’ operations have been included in the Personal Care reportable segment as of January 2, 2014. The purchase price was $546 million (€399 million) in cash, net of cash acquired of $46 million (€34 million). The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB Accounting Standards Codification.

The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which are based on information currently available. The fair value of all elements, including expected useful lives of tangible and intangibles assets are preliminary and remain to be finalized. The Company will complete the valuation of all assets and liabilities within the next six months.

The table below illustrates the preliminary purchase price allocation:


Fair value of net assets acquired at the date of acquisition
Receivables		101
Inventory		28
Income and other taxes receivable		3
Property, plant and equipment		72
Intangible assets
Customer relationships	142
Trade names	81
Catalog rights	29
		252
Goodwill (Note 10)		286
Deferred income tax assets		17

Total assets		759

Less: Liabilities
Trade and other payables		71
Income and other taxes payable		3
Long-term debt (including short-term portion)		42
Deferred income tax liabilities		96
Other liabilities and deferred credits		1

Total liabilities		213

Fair value of net assets acquired at the date of acquisition		546

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation of the business, the assembled workforce, the expected synergies and the expected future cash flows of the business. Disclosed goodwill is not deductible for tax purposes.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3: ACQUISITION OF BUSINESS (CONTINUED)

Xerox

On June 1, 2013, Domtar Corporation completed the acquisition of Xerox’s paper and print media product’s assets in the United States and Canada. The transaction includes a broad range of coated and uncoated papers and specialty print media including business forms, carbonless as well as wide-format paper formerly distributed by Xerox. The results of this business are presented in the Pulp and Paper reportable segment. The purchase price was $7 million in cash plus inventory on a dollar for dollar basis. The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB Accounting Standards Codification.

The total purchase price was allocated to tangible and intangible assets acquired based on the Company’s estimates of their fair value, which was based on information currently available. During the third quarter of 2013, the Company completed the evaluation of all assets and liabilities.

The table below illustrates the purchase price allocation:


Inventory		4
Intangible assets
Customer relationships ⁽¹⁾	1
License rights ⁽²⁾	6
		7

Total assets		11

Fair value of assets acquired at the date of acquisition		11

⁽¹⁾	The useful life of the Customer relationships acquired is 20 years.

⁽²⁾	Indefinite useful life.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

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, bank credit facility and long-term debt. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts.

CREDIT RISK

The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of June 30, 2014, one of Domtar’s Pulp and Paper segment customers located in the United States represented 10% ($69 million) (2013 – 12% ($73 million)) of the Company’s receivables.

The Company is also exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company minimizes 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. Additionally, the Company is exposed to credit risk in the event of non-performance by its insurers. The Company minimizes this exposure by doing business only with large reputable insurance companies.

COST RISK

Cash flow hedges:

The Company purchases natural gas at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas, the Company may utilize derivative financial instruments or physical purchases to fix the price of forecasted natural gas purchases. The Company formally documents the hedge relationships, including identification of the hedging instruments and the hedged items, the risk management objectives and strategies for undertaking the hedge transactions, and the methodologies used to assess effectiveness and measure ineffectiveness. Current contracts are used to hedge a portion of forecasted purchases over the next 42 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded net of taxes in Other comprehensive income (loss), and is recognized in Cost of sales in the period in which the hedged transaction occurs.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(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 June 30, 2014 to hedge forecasted purchases:


Commodity	Notional contractual quantity under derivative contracts				Notional contractual value under derivative contracts (in millions of dollars)		Percentage of forecasted purchases under derivative contracts for
							2014 ⁽²⁾			2015			2016			2017
Natural gas		20,400,000	MMBTU	⁽¹⁾	$	85		53	%		45	%		32	%		10	%

(1)	MMBTU: Millions of British thermal units

(2)	Represents the remaining six months of 2014

The natural gas derivative contracts were fully effective for accounting purposes as of June 30, 2014. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the three and six months ended June 30, 2014 resulting from hedge ineffectiveness (three and six months ended June 30, 2013 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States, Canada, Sweden, Spain and China. As a result, it is exposed to movements in foreign currency exchange rates in Canada, Europe and Asia. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. As a result, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and of European and Asian currencies relative to the U.S. dollar. The Company’s Swedish and Spanish subsidiaries are exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than its 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 instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates or to designate them as hedging instruments in order to hedge the subsidiary’s cash flow risk for purposes of the Consolidated Financial Statements.

The Company formally documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. Foreign exchange derivative contracts designated as cash flow hedges are used to hedge forecasted purchases in Canadian dollars by the Canadian subsidiary over the next 24 months. Foreign exchange derivative option contracts designated as cash flow hedges are used to hedge forecasted sales in British Pound Sterling and forecasted purchases in U.S. dollars by the Swedish and Spanish subsidiaries over the next 12 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded net of taxes in Other comprehensive income (loss) and is recognized in Cost of sales or in Sales in the period in which the hedged transaction occurs.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The following table presents the currency values under contracts pursuant to currency derivatives outstanding as of June 30, 2014 to hedge forecasted purchases and sales:


Contract		Notional contractual value		Percentage of forecasted net exposures under contracts for
				2014			2015
Currency derivatives purchased	CDN	$	490		53	%		31	%
	USD	$	45		68	%		36	%
	GBP	£	16		85	%		40	%

Currency derivatives sold	CDN	$	490		53	%		31	%
	USD	$	45		68	%		36	%
	GBP	£	16		85	%		40	%

The currency options and forwards are fully effective as at June 30, 2014. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the three and six months ended June 30, 2014 resulting from hedge ineffectiveness (2013 – nil).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(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 (c) below) at June 30, 2014 and December 31, 2013, 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, 2014		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 cash flow and net investment hedging instruments under the Derivatives and Hedging Topic of FASB ASC:
Asset derivatives
Currency derivatives		10		—		10		—	(a) Prepaid expenses
Natural gas swap contracts		3		—		3		—	(a) Prepaid expenses
Natural gas swap contracts		1		—		1		—	(a) Intangible assets and deferred charges

Total Assets		14		—		14		—

Liabilities derivatives
Currency derivatives		4		—		4		—	(a) Trade and other payables
Natural gas swap contracts		1		—		1		—	(a) Trade and other payables

Total Liabilities		5		—		5		—

Other Instruments:
Asset backed notes		7		—		6		1	(b) Other assets
Long-term debt		1,611		1,611		—		—	(c) Long-term debt

The cumulative gain recorded in Other comprehensive income (loss) relating to natural gas contracts of $3 million at June 30, 2014, will be recognized in Cost of sales upon maturity of the derivatives over the next 42 months at the then prevailing values, which may be different from those at June 30, 2014.

The cumulative gain recorded in Other comprehensive income (loss) relating to currency options hedging forcasted purchases of $6 million at June 30, 2014, will be recognized in Cost of sales upon maturity of the derivatives over the next 21 months at the then prevailing values, which may be different from those at June 30, 2014.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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


Fair Value of financial instruments at:	December 31, 2013		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 cash flow hedging instruments under the Derivatives and Hedging Topic of FASB ASC:
Asset derivatives
Currency derivatives		3		—		3		—	(a) Prepaid expenses
Natural gas swap contracts		2		—		2		—	(a) Prepaid expenses
Natural gas swap contracts		1		—		1		—	(a) Intangible assets and deferred charges

Total Assets		6		—		6		—

Liabilities derivatives
Currency derivatives		10		—		10		—	(a) Trade and other payables
Natural gas swap contracts		1		—		1		—	(a) Other liabilities and deferred credits

Total Liabilities		11		—		11		—

Other Instruments:
Asset backed notes		6		—		5		1	(b) Other assets
Long-term debt		1,620		1,620		—		—	(c) Long-term debt

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

–

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

–

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

(b)

Asset Backed Notes (“ABN”) are reported at fair value utilizing Level 2 or Level 3 inputs. Fair value of ABN reported under Level 2 is based on current market quotes. Fair value of ABN reported under Level 3 is based on the value of the collateral investments held in the conduit issuer, reduced by the negative value of credit default derivatives, with an additional discount applied for illiquidity.

(c)

Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. In accordance with US GAAP, the Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at June 30, 2014 and December 31, 2013. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $1,417 million and $1,514 million at June 30, 2014 and December 31, 2013, respectively.

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

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

The following table reconciles the beginning and ending balances of ABN measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the reported periods:

ASSET BACKED NOTES


Balance at December 31, 2013			1
Net unrealized gains included in earnings (a)			—
Transfer out of Level 3 (b)			—

Balance at June 30, 2014			1

(a)	Earnings effect is primarily included in Other operating loss, net in the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

(b)	Transfers out of Level 3 are considered to occur at the end of the period.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

EARNINGS (LOSS) PER COMMON SHARE

On April 30, 2014, the Company’s Board of Directors approved a 2-for-1 split of its common stock to be effected through a stock dividend. Shareholders of record on June 10, 2014 were entitled to receive one additional share for every share they owned on that date.

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


	For the three months ended					For the six months ended
	June 30, 2014		June 30, 2013			June 30, 2014		June 30, 2013
Net earnings (loss)	$	40	$	(46	)	$	79	$	(1	)
Weighted average number of common and exchangeable shares outstanding (millions)		65.0		66.9			64.9		68.2
Effect of dilutive securities (millions)		0.1		—			0.1		—

Weighted average number of diluted common and exchangeable shares outstanding (millions)		65.1		66.9			65.0		68.2

Basic net earnings (loss) per common share (in dollars)	$	0.62	$	(0.69	)	$	1.22	$	(0.01	)

Diluted net earnings (loss) per common share (in dollars)	$	0.61	$	(0.69	)	$	1.22	$	(0.01	)

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 (loss) per common share because to do so would have been anti-dilutive:


	For the three months ended				For the six months ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Restricted stock units		—		141,632		—		141,632
Performance share units		—		42,378		—		42,378
Options		366,274		100,552		337,272		145,160

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(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 multi-employer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and six months ended June 30, 2014, the related pension expense was $7 million and $15 million, respectively (2013 - $8 million and $16 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after June 1, 2000 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. Most unionized employees in the U.S. and all U.S. non-hourly employees 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, 2014					June 30, 2014
	Pension plans			Other post-retirement benefit plans		Pension plans			Other post-retirement benefit plans
	$			$		$			$
Service cost		9			—		18			1
Interest expense		20			2		40			3
Expected return on plan assets		(26	)		—		(52	)		—
Amortization of net actuarial loss		3			—		5			—
Amortization of prior year service costs		—			—		1			—

Net periodic benefit cost		6			2		12			4

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

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, 2013					June 30, 2013
	Pension plans			Other post-retirement benefit plans		Pension plans			Other post-retirement benefit plans
	$			$		$			$
Service cost		11			—		22			1
Interest expense		18			1		37			2
Expected return on plan assets		(24	)		—		(48	)		—
Amortization of net actuarial loss		7			1		14			1
Settlement loss (a)		13			—		13			—
Amortization of prior year service costs		1			—		1			—

Net periodic benefit cost		26			2		39			4

(a)

The settlement loss of $13 million in the pension plans for the three and six months ended June 30, 2013 is related to the previously closed Big River and Dryden mills for $6 million and $7 million, respectively (see Note 12 “Closure and restructuring costs and liability and impairment and write-down of property, plant and equipment”).

The Company contributed $9 million and $19 million for the three and six months ended June 30, 2014, respectively (2013—$7 million and $14 million, respectively) to the pension plans. The Company also contributed $3 million and $3 million for the three and six months ended June 30, 2014, respectively (2013 -$2 million and $3 million, respectively) to the other post-retirement benefit plans.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

OTHER OPERATING LOSS, NET

Other operating loss, 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, net includes the following:


	Three months ended					Six months ended
	June 30, 2014		June 30, 2013			June 30, 2014			June 30, 2013
	$		$			$			$
Reversal of alternative fuel tax credits (Note 8)		—		—			—			26
Gain on sale of property, plant and equipment ⁽¹⁾		—		—			—			(10	)
Environmental provision		—		1			—			2
Foreign exchange loss (gain)		2		(1	)		(1	)		(2	)
Weston litigation ⁽²⁾		—		49			—			49
Other		—		—			1			2

Other operating loss, net		2		49			—			67

⁽¹⁾

On March 22, 2013, the Company sold the building, remaining equipment and related land of the closed pulp and paper mill in Port Edwards, Wisconsin and recorded a gain on the sale of approximately $10 million. The transaction included specific machinery, equipment, furniture, parts, supplies, tools, real estate, land improvements, and other fixed or tangible assets. The assets were sold “as is” for proceeds of approximately $9 million and the environmental provision of $3 million related to these assets was contractually passed on to the buyer and released from the Company’s liabilities. The net book value of the assets sold was approximately $2 million.

⁽²⁾	On June 24, 2013, the parties agreed to settle the Weston litigation for a payment by Domtar to Weston of $49 million (CDN $50 million).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

INCOME TAXES

For the second quarter of 2014, the Company’s income tax expense amounted to $13 million, consisting of a current tax expense of $19 million and a deferred tax benefit of $6 million. This compares to an income tax benefit of $5 million in the second quarter of 2013, consisting of a current income tax benefit of $4 million and a deferred income tax benefit of $1 million. The Company made income tax payments, net of refunds, of $20 million during the second quarter of 2014 and the effective tax rate was 25% compared to an effective tax rate of 10% in the second quarter of 2013. The effective tax rate for the second quarter of 2013 was impacted by the George Weston Limited litigation settlement payment made during the quarter of $49 million (CDN $50 million). Approximately $38 million (CDN $39 million) of this payment was non-deductible for income tax purposes.

For the first half of 2014, the Company’s income tax expense amounted to $28 million, consisting of a current tax expense of $34 million and a deferred tax benefit of $6 million. This compares to an income tax benefit of $27 million in the first half of 2013, consisting of a current income tax benefit of $27 million and a deferred income tax benefit of nil. The Company made income tax payments, net of refunds, of $19 million during the first half of 2014 and the effective tax rate was 26% compared to an effective tax rate of 100% in the first half of 2013. The effective tax rate for the first half of 2013 was impacted by the conversion of $26 million of Alternative Fuel Tax Credits (“AFTC”) from the 2009 tax year into $55 million of Cellulosic Biofuel Producer Credits (“CBPC”) ($33 million benefit after-tax) as well as a reduction of unrecognized tax benefits of $8 million previously associated with AFTC from 2009 that were converted into CBPC in the first half of 2013. These tax benefits were partially offset by the $49 million (CDN $50 million) litigation settlement payment due to $38 million (CDN $39 million) being non-deductible for income tax purposes.

As of June 30, 2014, the Company has gross unrecognized tax benefits and interest of $198 million and related deferred tax assets of $20 million associated with the AFTC claimed on the 2009 tax return. The recognition of these benefits, $178 million net of deferred taxes, would impact the effective tax rate. During the second quarter of 2012, the Internal Revenue Service (“IRS”) began an audit of the Company’s 2009 U.S. income tax return and in the third quarter of 2013 expanded the audit period to include the tax returns for the 2010 and 2011 tax years. The completion of the audit by the IRS or the issuance of authoritative guidance could result in the release of the provision or settlement of the liability in cash of some or all of these previously unrecognized tax benefits. The Company reasonably expects the audit to be settled within the next twelve months which could result in a significant change to the amount of unrecognized tax benefits. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9.

INVENTORIES

The following table presents the components of inventories:


	June 30, 2014		December 31, 2013
	$		$
Work in process and finished goods		406		386
Raw materials		122		102
Operating and maintenance supplies		200		197

		728		685

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

GOODWILL

The carrying value and any changes in the carrying value of goodwill are as follows:


	June 30, 2014
	$
Balance at December 31, 2013		369
Acquisition of Laboratorios Indas		286

Balance at end of period		655

The goodwill at June 30, 2014 is entirely related to the Personal Care segment. (See Note 3 “Acquisition of businesses” for further information on the increase in 2014).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

INTANGIBLE ASSETS, NET

The following table presents the components of intangible assets, net:


	Estimated useful lives (in years)		June 30, 2014							December 31, 2013
			Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
			$		$			$		$		$			$
Intangible assets subject to amortization
Water rights		40		8		(1	)		7		8		(1	)		7
Customer relationships ⁽¹⁾		10 - 40		399		(24	)		375		256		(14	)		242
Technology		7 - 20		8		(2	)		6		8		(1	)		7
Non-Compete		9		1		—			1		1		—			1
License rights		12		29		(2	)		27		29		(1	)		28

				445		(29	)		416		302		(17	)		285
Intangible assets not subject to amortization
Trade names ⁽¹⁾				197		—			197		116		—			116
License rights				6		—			6		6		—			6
Catalog rights ⁽¹⁾				29		—			29		—		—			—

Total				677		(29	)		648		424		(17	)		407

Amortization expense related to intangible assets for the three and six months ended June 30, 2014 was $6 million and $11 million, respectively (2013 – $2 million and $4 million, respectively).

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


	2014		2015		2016		2017		2018
	$		$		$		$		$
Amortization expense related to intangible assets		21		21		21		21		21

⁽¹⁾	Increase relates to the acquisition of Laboratorios Indas on January 2, 2014.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12.

CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT

The Company regularly reviews its overall production capacity with the objective of aligning its production capacity with anticipated long-term demand, which in some cases could result in closure or impairment costs being recorded in earnings.

In relation to the withdrawal from one of the Company’s multiemployer pension plans in 2011, the Company recorded an additional charge to earnings of $1 million due to a revision in estimated withdrawal liability during the first quarter of 2013. During the second quarter of 2013, the Company decided to withdraw from another of its multiemployer pension plans and recorded a withdrawal liability and a charge to earnings of $3 million. At June 30, 2014, the current accrual balance is $62 million. While this is the Company’s best estimate of the ultimate cost of the withdrawal from these plans at June 30, 2014, additional withdrawal liabilities may be incurred based on the final fund assessment expected to occur in the third quarter of 2014. Further, the Company remains liable for potential additional withdrawal liabilities to the fund in the event of a mass withdrawal, as defined by statute, occurring anytime within the next two years.

During the second quarter of 2013, the Company also incurred pension settlement losses in the amount of $13 million related to the previously closed Big River sawmill and Dryden paper mill for $6 million and $7 million, respectively.

Ariva U.S.

On July 31, 2013, the Company completed the sale of its Ariva U.S. which had approximately 400 employees in the United States. As a result of this agreement, during the second quarter of 2013, the Company recorded a $5 million impairment of property, plant and equipment at its Ariva U.S. location, in Impairment and write-down of property, plant and equipment on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

Kamloops, British Columbia pulp facility

On December 13, 2012, the Company announced the permanent shut down of one pulp machine at its Kamloops, British Columbia mill. This decision resulted in a permanent curtailment of Domtar’s annual pulp production by approximately 120,000 air dried metric tons of sawdust softwood pulp and affected approximately 125 employees.

As a result, the Company recognized, under Impairment and write-down of property plant and equipment, $10 million of accelerated depreciation in the first quarter of 2013. The pulp machine ceased production in March 2013. Further, during the first quarter of 2013 the Company reversed $1 million of severance and termination costs. During the second quarter of 2013, the Company reversed an additional $1 million of severance and termination costs, reversed $1 million of inventory obsolescence, and incurred $2 million of other costs.

Other Costs

For the three and six months ended June 30, 2014, the Company also incurred other costs related to previous and ongoing closures which includes nil and $1 million of severance and termination costs, respectively (2013 – $2 million and $2 million, respectively).

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)

The following tables provide the components of closure and restructuring costs by segment:


	Three months ended June 30, 2014								Three months ended June 30, 2013
	Pulp and Paper		Personal Care		Corporate		Total		Pulp and Paper			Personal Care		Corporate		Total
	$		$		$		$		$			$		$		$
Severance and termination costs		—		—		—		—		(1	)		2		—		1
Inventory obsolescence		—		—		—		—		(1	)		—		—		(1	)
Pension settlement and withdrawal liability		—		—		—		—		10			—		6		16
Other		—		—		—		—		2			—		—		2

Closure and restructuring costs		—		—		—		—		10			2		6		18


	Six months ended June 30, 2014								Six months ended June 30, 2013
	Pulp and Paper		Personal Care		Corporate		Total		Pulp and Paper			Personal Care		Corporate		Total
	$		$		$		$		$			$		$		$
Severance and termination costs		—		1		—		1		(2	)		2		—		—
Inventory obsolescence		—		—		—		—		(1	)		—		—		(1	)
Pension settlement and withdrawal liability		—		—		—		—		11			—		6		17
Other		—		—		—		—		2			—		—		2

Closure and restructuring costs		—		1		—		1		10			2		6		18

The following table provides the activity in the closure and restructuring liability:


	June 30, 2014
	$
Balance at December 31, 2013		3
Additions		1
Acquisition of business		1
Payments		(2	)

Balance at end of period		3

The above provision is comprised of severance and termination costs of $2 million in the Pulp and Paper segment and $1 million in the Personal Care segment.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13.

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component ⁽¹⁾ for the periods ended June 30, 2014 and 2013:


	Net derivative gains (losses) on cash flow hedges			Pension items ⁽²⁾			Post-retirement benefit items ⁽²⁾			Foreign currency items			Total
Balance at December 31, 2013		—			(210	)		(7	)		152			(65	)

Natural gas swap contracts		4			N/A			N/A			N/A			4
Currency options		1			N/A			N/A			N/A			1
Foreign currency items		N/A			N/A			N/A			(12	)		(12	)

Other comprehensive (loss) income before reclassifications		5			—			—			(12	)		(7	)

Amounts reclassified from accumulated other comprehensive loss		3			5			—			—			8


Net current period other comprehensive income (loss)		8			5			—			(12	)		1

Balance at June 30, 2014		8			(205	)		(7	)		140			(64	)

Balance at December 31, 2012		5			(326	)		(15	)		208			(128	)

Natural gas swap contracts		(1	)		N/A			N/A			N/A			(1	)
Currency options		(7	)		N/A			N/A			N/A			(7	)
Net investment hedge		—			N/A			N/A			N/A			—
Foreign currency items		N/A			N/A			N/A			(60	)		(60	)

Other comprehensive (loss) income before reclassifications		(8	)		—			—			(60	)		(68	)

Amounts reclassified from accumulated other comprehensive loss		1			21			—			—			22

Net current period other comprehensive (loss) income		(7	)		21			—			(60	)		(46	)

Balance at June 30, 2013		(2	)		(305	)		(15	)		148			(174	)

⁽¹⁾	All amounts are after tax. Amount in parenthesis indicate losses.

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

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

The following tables present reclassifications out of Accumulated other comprehensive loss:


Details of Accumulated other comprehensive loss components	Amount reclassified from Accumulated other comprehensive loss						Affected line item in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss)
	For the three months ended
	June 30, 2014			June 30, 2013
Net derivative gains (losses) on cash flow hedges
Natural gas swap contracts		(1	)		—		Cost of Sales
Currency options		3			—		Cost of Sales

Total before tax		2			—
Tax benefit		(1	)		—		Income tax benefit

Net of tax		1			—


Amortization of defined benefit pension items
Amortization of net actuarial loss and prior year service cost		3			22		(a)
Tax benefit		—			(6	)	Income tax benefit

Net of tax		3			16


Details of Accumulated other comprehensive loss components	Amount reclassified from Accumulated other comprehensive loss						Affected line item in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss)
	For the six months ended
	June 30, 2014			June 30, 2013
Net derivative gains (losses) on cash flow hedges
Natural gas swap contracts		(3	)		2		Cost of Sales
Currency options		9			—		Cost of Sales

Total before tax		6			2
Tax benefit		(3	)		(1	)	Income tax benefit

Net of tax		3			1


Amortization of defined benefit pension items
Amortization of net actuarial loss and prior year service cost		6			29		(a)
Tax benefit		(1	)		(8	)	Income tax benefit

Net of tax		5			21

(a)	These amounts are included in the computation of net periodic benefit cost. Refer to Note 6 “Pension plans and other post-retirement benefit plans” for additional details.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14.

SHAREHOLDERS’ EQUITY

On February 18, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.275 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. Total dividends of approximately $18 million were paid on April 15, 2014 to shareholders of record on March 14, 2014.

On April 30, 2014, the Company’s Board of Directors approved a 2-for-1 split of its common stock to be effected through a stock dividend. Shareholders of record on June 10, 2014 received one additional share for every share they owned on that date. As a result of the stock split, total shares of the Company’s common stock outstanding increased from approximately 32.5 million to 65 million.

In addition, the Company’s Board of Directors approved an increase in the quarterly dividend on its common stock on a post-split basis, from $0.275 to $0.375 per share. This is equivalent to, on a pre-split basis, an increase of $0.20 per share (36%) per quarter. Total dividends of approximately $24 million were paid on July 15, 2014 to shareholders of record on July 2, 2014.

On July 30, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.375 per share to be paid to holders of the Company’s common stock. This dividend is to be paid on October 15, 2014, to shareholders of record on October 2, 2014.

STOCK REPURCHASE PROGRAM

In 2010, the Company’s Board of Directors authorized a stock repurchase program (“the Program”) of up to $1 billion of Domtar Corporation’s common stock. 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 in the United States. 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, from time to time, in part to reduce the dilutive effects of stock options, awards, and to improve shareholders’ returns.

The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company enteres 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 requires the Company to make up-front payments to the counterparty financial institutions which results 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 half of 2014, the Company did not repurchase any shares under the Program.

During the first half of 2013, the Company repurchased 3,952,952 shares at an average price of $37.13 for a total cost of $147 million.

Since the inception of the Program, the Company repurchased 22,341,012 shares at an average price of $39.24 for a total cost of $877 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. SHAREHOLDERS’S EQUITY (CONTINUED)

Domtar Canada Paper Inc. Exchangeable Shares

Upon the consummation of a series of transactions whereby the Fine Paper Business of Weyerhaeuser Company was transferred to the Company and it acquired Domtar Inc. on March 7, 2007 (the “Transaction”), Domtar Inc. shareholders had the option to receive either common stock of the Company or shares of Domtar (Canada) Paper Inc. that were exchangeable for common stock of the Company. The exchangeable shares of Domtar (Canada) Paper Inc. were intended to be substantially the economic equivalent to shares of the Company’s common stock. These shareholders could exchange the exchangeable shares for shares of Domtar Corporation common stock on a one-for-one basis at any time.

On June 2, 2014 (the “Redemption Date”) Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation, redeemed all of its outstanding exchangeable shares from the holders thereof. On the Redemption Date, holders of exchangeable shares received, in exchange for each exchangeable share, one share of common stock of Domtar Corporation (plus cash in the amount of all declared and unpaid dividends, if any, provided that the record date for the payment of such dividends was prior to the Redemption Date).

As a result of the redemption of exchangeable shares, the Company reclassified $32 million from Exchangeable shares to Additional paid-in capital.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15.

COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities.

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against the Company and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. Beyond the filing of preliminary pleadings, no steps have been taken by the parties in this action. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and the Company (“responsible persons”) in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The relevant government authorities selected a remediation approach on July 15, 2011, and on January 8, 2013, the same authorities decided that each responsible persons’ implementation plan is satisfactory and that the responsible persons should decide which plan is to be used. Most of the remaining appeals that were to be heard before the Board were abandoned by the parties during the course of the Board proceedings which were held in the fall of 2013. Seaspan and Domtar have selected a remedial plan and have applied to the Vancouver Fraser Port Authority for permitting approval. The Company has recorded an environmental reserve to address its estimated exposure. The possible loss in excess of the reserve is not considered to be material for this matter.

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


	June 30, 2014
	$
Balance at beginning of period		67
Additions		1
Environmental spending		(4	)

Balance at end of period		64

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws. The EPA and/or various state agencies have notified the Company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of operating sites due to possible soil, sediment or groundwater contamination. The investigation and remediation process is lengthy and subject to the uncertainties of changes in legal requirements, technological developments and, if and when applicable, the allocation of liability among potentially responsible parties.

Climate change regulation

In response to the Kyoto Protocol, which calls for reductions of certain emissions that may contribute to increases in atmospheric greenhouse gas (“GHG”) concentrations, various international, national and local laws have been proposed or implemented focusing on reducing GHG emissions. These actual or proposed laws do or may apply in the jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.

In the United States, Congress has considered legislation to reduce emissions of GHGs. Although the legislation has not passed, it appears that the federal government will continue to consider methods to reduce GHG emissions from public utilities and certain other emitters. The U.S. Environmental Protection Agency (“EPA”) has adopted and implemented GHG permitting requirements for certain new sources and modifications of existing industrial facilities and has proposed GHG performance standards for newly constructed, reconstructed and modified electric utilities under the existing Clean Air Act. The EPA has also relied on the existing Clean Air Act to propose a “Clean Power Plan” that would establish emission guidelines for existing electric utilities and require states to develop plans for reducing GHG emissions by making significant changes to the energy resources utilized within the state. The EPA is also developing a biogenic carbon accounting framework to account for carbon dioxide emissions from biomass fuels for Clean Air Act permitting purposes. The EPA also references this framework in the proposals addressing GHG performance standards for the electric utilities. Furthermore, several states are already regulating GHG emissions from public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs or renewable energy requirements.

The U.S. Supreme Court held on June 23, 2014 that the EPA had exceeded its statutory authority in establishing its GHG permitting program. Specifically, the Court determined that the EPA could not impose GHG permitting requirements on a source unless that source had already triggered permitting requirements for other non-GHG pollutants. However, for sources already subject to permitting, the Court held that the Clean Air Act did not preclude the EPA from requiring those sources to install “best available control technology” for GHGs.

Passage of GHG legislation by Congress or individual states, or the adoption of regulations by the EPA or analogous state agencies, that restrict emissions of GHGs in areas in which the Company conducts business could have a variety of impacts upon the Company, including requiring it to implement GHG reduction programs or to pay taxes or other fees with respect to its GHG emissions. This, in turn, will increase the Company’s operating costs and capital spending. The Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

The Government of Canada has committed to reducing greenhouse gases by 17 percent from 2005 levels by 2020. A sector by sector approach is being used to set performance standards to reduce greenhouse gases. On September 5, 2012 final regulations were published for the coal-fired electrical generators which are scheduled to become effective July 1, 2015. Performance standards for industrial sectors will also be developed. The pulp and paper sector is currently undergoing review. The Company does not expect the performance standards to be disproportionately affected by these future measures compared with other pulp and paper producers in Canada.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The province of Quebec initiated a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec have been promulgated and were effective January 1, 2013. The Company does not expect the cost of compliance will have a material impact on the Company’s financial position, results of operations or cash flows. British Columbia imposed a carbon tax in 2008, which applies to the purchase of fossil fuels within the province. There are currently no other federal or provincial statutory or regulatory obligations that affect the emission of GHGs for the Company’s pulp and paper operations elsewhere in Canada. The Province of Ontario is reviewing a potential regulatory program for GHG emission reductions that may include a cap-and-trade component.

While it is likely that there will be increased regulation relating to GHG emissions in the future, at this time it is not possible to estimate either a timetable for the promulgation or implementation of any new regulations or the Company’s cost of compliance to said regulations. The impact could, however, be material.

Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”)

On December 2, 2011, the EPA proposed a new set of standards related to emissions from boilers and process heaters included in some of the Company’s manufacturing processes. These standards are generally referred to as Boiler MACT and seek to require reductions in the emission of certain hazardous air pollutants or surrogates of hazardous air pollutants. The EPA announced the final rule on December 20, 2012 and it was subsequently published in the Federal Register on January 31, 2013 for major sources. The Company is developing plans to bring facilities affected by the Boiler MACT rule into compliance by the January 2016 regulatory deadline for major sources. The Company expects that the capital cost required to comply with the Boiler MACT rules is between $20 million and $30 million. The Company is currently assessing the associated increase in operating costs as well as alternate compliance strategies.

The EPA has agreed to reconsider a limited number of issues in the most recent Boiler MACT rule, and elements of the EPA’s rule have been legally challenged. Since the consequences of these activities cannot be predicted, adjustments to compliance plans may be needed to accommodate any changes to the final rule.

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at June 30, 2014, 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.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At June 30, 2014, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At June 30, 2014 the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16.

SEGMENT DISCLOSURES

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

•

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

•

Personal Care Segment – consists of the manufacturing, marketing and distribution of adult incontinence products, absorbent hygiene products and infant diapers.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. SEGMENT DISCLOSURES (CONTINUED)

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


	For the three months ended						For the six months ended
SEGMENT DATA	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
	$			$			$			$
Sales
Pulp and Paper		1,160			1,208			2,328			2,446
Personal Care		234			108			467			219

Total for reportable segments		1,394			1,316			2,795			2,665
Intersegment sales - Pulp and Paper		(9	)		(4	)		(16	)		(8	)

Consolidated sales		1,385			1,312			2,779			2,657

Depreciation and amortization and impairment and write-down of property, plant and equipment
Pulp and Paper		79			87			162			176
Personal Care		17			6			33			12

Total for reportable segments		96			93			195			188
Impairment and write-down of property, plant and equipment - Pulp and paper		—			5			—			15

Consolidated depreciation and amortization and impairment and write-down of property, plant and equipment		96			98			195			203

Operating income (loss)
Pulp and Paper		69			16			138			54
Personal Care		14			10			29			23
Corporate		(4	)		(56	)		(9	)		(58	)

Consolidated operating income (loss)		79			(30	)		158			19
Interest expense, net		26			21			51			46

Earnings (loss) before income taxes and equity loss		53			(51	)		107			(27	)
Income tax expense (benefit)		13			(5	)		28			(27	)
Equity loss, net of taxes		—			—			—			1

Net earnings (loss)		40			(46	)		79			(1	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17.

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 Paper Company, LLC, a 100% owned subsidiary of the Company and the successor to the Weyerhaeuser Fine Paper Business U.S. Operations, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Ariva Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings, LLC, Domtar A.W. LLC (and subsidiary), Domtar AI Inc., Attends Healthcare Inc., and EAM Corporation, all 100% owned subsidiaries of the Company (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt will not be guaranteed by certain of Domtar’s own 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and its foreign subsidiaries, including Attends Healthcare Limited, Domtar Inc. and Laboratorios Indas. S.A.U., (collectively the “Non-Guarantor Subsidiaries”). The 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, 2014 and December 31, 2013 and the Statements of Earnings (Loss) and Comprehensive Income (Loss) and Cash Flows for the three and six months ended June 30, 2014 and June 30, 2013, and the Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013 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.

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME	For the three months ended June 30, 2014
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$		$			$			$
Sales		—			1,091		570			(276	)		1,385
Operating expenses
Cost of sales, excluding depreciation and amortization		—			916		468			(276	)		1,108
Depreciation and amortization		—			65		31			—			96
Selling, general and administrative		5			42		53			—			100
Other operating loss, net		—			2		—			—			2

		5			1,025		552			(276	)		1,306

Operating (loss) income		(5	)		66		18			—			79
Interest expense (income), net		25			7		(6	)		—			26

(Loss) earnings before income taxes and equity loss		(30	)		59		24			—			53
Income tax (benefit) expense		(7	)		15		5			—			13
Equity loss, net of taxes		—			—		—			—			—
Share in earnings of equity accounted investees		63			19		—			(82	)		—

Net earnings		40			63		19			(82	)		40
Other comprehensive income		—			9		27			—			36

Comprehensive income		40			72		46			(82	)		76

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME	For the six months ended June 30, 2014
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$		$			$			$
Sales		—			2,200		1,124			(545	)		2,779
Operating expenses
Cost of sales, excluding depreciation and amortization		—			1,849		907			(545	)		2,211
Depreciation and amortization		—			133		62			—			195
Selling, general and administrative		18			115		81			—			214
Closure and restructuring costs		—			1		—			—			1
Other operating (loss) income, net		—			1		(1	)		—			—

		18			2,099		1,049			(545	)		2,621

Operating (loss) income		(18	)		101		75			—			158
Interest expense (income), net		50			12		(11	)		—			51

(Loss) earnings before income taxes and equity loss		(68	)		89		86			—			107
Income tax (benefit) expense		(17	)		23		22			—			28
Equity loss, net of taxes		—			—		—			—			—
Share in earnings of equity accounted investees		130			64		—			(194	)		—

Net earnings		79			130		64			(194	)		79
Other comprehensive income (loss)		1			8		(8	)		—			1

Comprehensive income		80			138		56			(194	)		80

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING STATEMENT OF LOSS AND COMPREHENSIVE LOSS	For the three months ended June 30, 2013
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Sales		—			1,081			492			(261	)		1,312
Operating expenses
Cost of sales, excluding depreciation and amortization		—			909			434			(261	)		1,082
Depreciation and amortization		—			67			26			—			93
Selling, general and administrative		7			62			26			—			95
Impairment and write-down of property, plant and equipment		—			5			—			—			5
Closure and restructuring costs		—			5			13			—			18
Other operating loss, net		—			2			47			—			49

		7			1,050			546			(261	)		1,342

Operating (loss) income		(7	)		31			(54	)		—			(30	)
Interest expense (income), net		22			5			(6	)		—			21

(Loss) earnings before income taxes and equity loss		(29	)		26			(48	)		—			(51	)
Income tax (benefit) expense		(7	)		8			(6	)		—			(5	)
Equity loss, net of taxes		—			—			—			—			—
Share in earnings of equity accounted investees		(24	)		(42	)		—			66			—

Net loss		(46	)		(24	)		(42	)		66			(46	)
Other comprehensive loss		(3	)		(4	)		(19	)		—			(26	)

Comprehensive loss		(49	)		(28	)		(61	)		66			(72	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING STATEMENT OF (LOSS) EARNINGS AND COMPREHENSIVE (LOSS) INCOME	For the six months ended June 30, 2013
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Sales		—			2,188			984			(515	)		2,657
Operating expenses
Cost of sales, excluding depreciation and amortization		—			1,851			828			(515	)		2,164
Depreciation and amortization		—			135			53			—			188
Selling, general and administrative		13			135			38			—			186
Impairment and write-down of property, plant and equipment		—			5			10			—			15
Closure and restructuring costs		—			6			12			—			18
Other operating loss, net		—			20			47			—			67

		13			2,152			988			(515	)		2,638

Operating (loss) income		(13	)		36			(4	)		—			19
Interest expense (income), net		49			9			(12	)		—			46

(Loss) earnings before income taxes and equity loss		(62	)		27			8			—			(27	)
Income tax (benefit) expense		(16	)		(25	)		14			—			(27	)
Equity loss, net of taxes		—			—			1			—			1
Share in earnings of equity accounted investees		45			(7	)		—			(38	)		—

Net (loss) earnings		(1	)		45			(7	)		(38	)		(1	)
Other comprehensive income (loss)		1			(4	)		(43	)		—			(46	)

Comprehensive income (loss)		—			41			(50	)		(38	)		(47	)

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING BALANCE SHEET	June 30, 2014
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$		$			$			$			$
Assets
Current assets
Cash and cash equivalents		6		6			73			—			85
Receivables		—		348			327			—			675
Inventories		—		503			225			—			728
Prepaid expenses		14		10			13			—			37
Income and other taxes receivable		85		—			12			(43	)		54
Intercompany accounts		773		4,297			17			(5,087	)		—
Deferred income taxes		—		25			21			—			46

Total current assets		878		5,189			688			(5,130	)		1,625
Property, plant and equipment, at cost		—		6,036			2,996			—			9,032
Accumulated depreciation		—		(3,863	)		(1,903	)		—			(5,766	)

Net property, plant and equipment		—		2,173			1,093			—			3,266
Goodwill		—		296			359			—			655
Intangible assets, net of amortization		—		268			380			—			648
Investments in affiliates		7,824		2,192			—			(10,016	)		—
Intercompany advances		6		79			328			(413	)		—
Other assets		26		11			152			(44	)		145

Total assets		8,734		10,208			3,000			(15,603	)		6,339

Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness		—		6			9			—			15
Trade and other payables		58		380			264			—			702
Intercompany accounts		4,295		697			95			(5,087	)		—
Income and other taxes payable		3		54			18			(43	)		32
Long-term debt due within one year		—		2			5			—			7

Total current liabilities		4,356		1,139			391			(5,130	)		756
Long-term debt		1,354		3			53			—			1,410
Intercompany long-term loans		185		228			—			(413	)		—
Deferred income taxes and other		—		874			168			(44	)		998
Other liabilities and deferred credits		13		140			196			—			349
Shareholders’ equity		2,826		7,824			2,192			(10,016	)		2,826

Total liabilities and shareholders’ equity		8,734		10,208			3,000			(15,603	)		6,339

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING BALANCE SHEET	December 31, 2013
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$		$			$			$			$
Assets
Current assets
Cash and cash equivalents		439		22			194			—			655
Receivables		—		402			199			—			601
Inventories		—		480			205			—			685
Prepaid expenses		7		7			9			—			23
Income and other taxes receivable		47		1			13			—			61
Intercompany accounts		590		3,951			28			(4,569	)		—
Deferred income taxes		—		31			21			—			52

Total current assets		1,083		4,894			669			(4,569	)		2,077
Property, plant and equipment, at cost		—		5,968			2,915			—			8,883
Accumulated depreciation		—		(3,734	)		(1,860	)		—			(5,594	)

Net property, plant and equipment		—		2,234			1,055			—			3,289
Goodwill		—		296			73			—			369
Intangible assets, net of amortization		—		273			134			—			407
Investments in affiliates		7,650		2,097			—			(9,747	)		—
Intercompany long-term advances		6		79			654			(739	)		—
Other assets		28		12			112			(16	)		136

Total assets		8,767		9,885			2,697			(15,071	)		6,278

Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness		1		13			1			—			15
Trade and other payables		49		422			202			—			673
Intercompany accounts		3,941		537			91			(4,569	)		—
Income and other taxes payable		—		12			5			—			17
Long-term debt due within one year		—		3			1			—			4

Total current liabilities		3,991		987			300			(4,569	)		709
Long-term debt		1,494		4			12			—			1,510
Intercompany long-term loans		527		212			—			(739	)		—
Deferred income taxes and other		—		891			44			(12	)		923
Other liabilities and deferred credits		17		141			200			(4	)		354
Shareholders’ equity		2,738		7,650			2,141			(9,747	)		2,782

Total liabilities and shareholders’ equity		8,767		9,885			2,697			(15,071	)		6,278

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	For the six months ended June 30, 2014
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		79			130			64			(194	)		79
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings		19			(113	)		66			194			166

Cash flows provided from operating activities		98			17			130			—			245

Investing activities
Additions to property, plant and equipment		—			(71	)		(30	)		—			(101	)
Proceeds from disposals of property, plant and equipment		—			—			1			—			1
Acquisitions of business, net of cash acquired		—			—			(546	)		—			(546	)

Cash flows used for investing activities		—			(71	)		(575	)		—			(646	)

Financing activities
Dividend payments		(36	)		—			—			—			(36	)
Net change in bank indebtedness		(1	)		(7	)		8			—			—
Change in revolving bank credit facility		(140	)		—			—			—			(140	)
Repayment of long-term debt		—			(2	)		(1	)		—			(3	)
Proceeds from receivable securitization facilities		—			—			90			—			90
Payments on receivable securitization facilities		—			—			(84	)					(84	)
Increase in long-term advances to related parties		—			47			310			(357	)		—
Decrease in long-term advances to related parties		(357	)		—			—			357			—
Other		3			—			1			—			4

Cash flows (used for) provided from financing activities		(531	)		38			324			—			(169	)

Net decrease in cash and cash equivalents		(433	)		(16	)		(121	)		—			(570	)
Cash and cash equivalents at beginning of period		439			22			194			—			655

Cash and cash equivalents at end of period		6			6			73			—			85

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)


	For the six months ended June 30, 2013
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net (loss) earnings		(1	)		45			(7	)		(38	)		(1	)
Changes in operating and intercompany assets and liabilities and non-cash items, included in net (loss) earnings		179			(27	)		(6	)		38			184

Cash flows provided from (used for) operating activities		178			18			(13	)		—			183

Investing activities
Additions to property, plant and equipment		—			(75	)		(43	)		—			(118	)
Proceeds from disposals of property, plant and equipment		—			10			—			—			10
Acquisitions of businesses, net of cash acquired		—			(7	)		(4	)		—			(11	)
Investment in joint venture		—			—			(1	)		—			(1	)

Cash flows used for investing activities		—			(72	)		(48	)		—			(120	)

Financing activities
Dividend payments		(31	)		—			—			—			(31	)
Net change in bank indebtedness		—			(17	)		—			—			(17	)
Repayment of long-term debt		(71	)		(25	)		(1	)		—			(97	)
Stock repurchase		(147	)		—			—			—			(147	)
Increase in long-term advances to related parties		24			26			—			(50	)		—
Decrease in long-term advances to related parties		—			—			(50	)		50			—
Other		3			(2	)		—			—			1

Cash flows used for financing activities		(222	)		(18	)		(51	)		—			(291	)

Net decrease in cash and cash equivalents		(44	)		(72	)		(112	)		—			(228	)
Impact of foreign exchange on cash		—			—			(1	)		—			(1	)
Cash and cash equivalents at beginning of period		275			72			314			—			661

Cash and cash equivalents at end of period		231			—			201			—			432

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 consolidated financial statements and notes thereto included in the Quarterly Report. The 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, 2013, filed with the Securities and Exchange Commission (“SEC”) on February 24, 2014. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers to Domtar Corporation and its subsidiaries, as well as its investments. 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 (“GAAP”).

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 volume are based on the three-month and six-month periods ended June 30, 2014 and 2013. The three-month and six-month periods are also referred to as the first and second quarters of 2014 and 2013 (or Q1 2014, Q1 2013, Q2 2014 and Q2 2013), and the first half of 2014 and 2013, respectively. Reference to notes refers to footnotes to the consolidated financial statements found in Item 1 of this form 10-Q.

The MD&A is organized in the following sections:

•

Overview

•

Summary of Q2 2014 and first half of 2014 results

•

Consolidated Results of Operations and Segment Review

•

Outlook

•

Liquidity and Capital Resources

•

Accounting Changes Implemented and Critical Accounting Policies

OVERVIEW

We operate in two reportable segments as described below. 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 and specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.

Personal Care : Our Personal Care segment consists of the manufacturing, marketing and distribution of adult incontinence products, absorbent hygiene products and infant diapers.

We continue to focus on sustaining profitable growth through high performance in our Pulp and Paper business as well as continued growth in our Personal Care division through organic growth and acquisitions.

SUMMARY OF Q2 2014 RESULTS

•

Net earnings of $40 million and operating income of $79 million in the second quarter of 2014

•

Lack-of-order downtime totaling 51,000 tons of paper

•

Higher maintenance expense when compared to Q1 2014

•

Recovery from extreme cold weather and related issues which negatively impacted our results in Q1 2014

•

Higher average selling prices in pulp and paper as a result of the implementation of our announced price increases

•

Mark-to-market adjustments on some stock-based compensation positively impacted our results

•

Lower volume of paper when compared to Q1 2014

•

2-for-1 split of our common stock increasing our common stock outstanding from 32.5 million shares to 65 million shares

SUMMARY OF 2014 FIRST HALF RESULTS

•

Net earnings of $79 million and operating income of $158 million in the first half of 2014

•

Higher average selling prices in pulp and paper as a result of the implementation of our announced price increases

•

Inclusion of a full six months of results of Laboratorios Indas (“Indas”) following its acquisition on January 2, 2014 and Associated Hygienic Products LLC (“AHP”) following its acquisition on July 1, 2013

•

Higher input costs mainly due to issues related to extreme cold weather in Q1 2014 and paper downtime in Q2 2014

•

Favorable foreign exchange positively impacted our results

•

Lower maintenance expense

•

Lower volume of paper and pulp

•

Higher acquisition related expenses

•

Mark-to-market adjustments on some stock-based compensation negatively impacted our results

•

Cash flows provided from operating activities of $245 million in the first half of 2014 which includes cash received of $34 million from the Spanish government related to past-due receivables of Indas


	Three months ended					Variance					Six months ended					Variance
FINANCIAL HIGHLIGHTS	June 30, 2014		June 30, 2013			$		%			June 30, 2014		June 30, 2013			$		%
*(In millions of dollars, unless otherwise noted)*
Sales	$	1,385	$	1,312		$	73		6	%	$	2,779	$	2,657		$	122		5	%

Operating income (loss)		79		(30	)		109		363	%		158		19			139		732	%

Net earnings (loss)		40		(46	)		86		187	%		79		(1	)		80

Net earnings (loss) per common share (in dollars) ¹ :
Basic	$	0.62	$	(0.69	)	$	1.31				$	1.22	$	(0.01	)	$	1.23
Diluted	$	0.61	$	(0.69	)	$	1.30				$	1.22	$	(0.01	)	$	1.23


	At June 30, 2014		At December 31, 2013
Total assets	$	6,339	$	6,278
Total long-term debt, including current portion	$	1,417	$	1,514

¹	See Note 5 for more information on the calculation of net earnings per common share.

CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW


Analysis of Net Sales
By Business Segment	Three months ended						Variance						Six months ended						Variance
	June 30, 2014			June 30, 2013			$			%			June 30, 2014			June 30, 2013			$			%
Pulp and Paper	$	1,160		$	1,208			(48	)		-4	%	$	2,328		$	2,446			(118	)		-5	%
Personal Care		234			108			126			117	%		467			219			248			113	%

Total for reportable segments		1,394			1,316			78			6	%		2,795			2,665			130			5	%
Intersegment sales - Pulp and Paper		(9	)		(4	)		(5	)					(16	)		(8	)		(8	)

Consolidated		1,385			1,312			73			6	%		2,779			2,657			122			5	%

Shipments
Paper - manufactured (in thousands of ST)		779			801			(22	)		-3	%		1,583			1,629			(46	)		-3	%
Communication Papers		647			676			(29	)		-4	%		1,325			1,382			(57	)		-4	%
Specialty and Packaging		132			125			7			6	%		258			247			11			4	%
Paper - sourced from third parties (in thousands of ST)		42			85			(43	)		-51	%		92			168			(76	)		-45	%
Paper (in thousands of ST) - total		821			886			(65	)		-7	%		1,675			1,797			(122	)		-7	%
Pulp (in thousands of ADMT)		354			356			(2	)		-1	%		682			738			(56	)		-8	%


Sales analysis
	Q2 2014 vs. Q2 2013 % Change in Net Sales due to												Q2 2014 YTD vs. Q2 2013 YTD % Change in Net Sales due to
	Net Price			Volume/ Mix			Acquisition/ Divestiture			Total			Net Price			Volume/ Mix			Acquisition/ Divestiture			Total
Pulp and Paper		4	%		-3	%		-5	% ^(a)		-4	%		4	%		-4	%		-5	% ^(a)		-5	%
Personal Care		0	%		5	%		112	% ^(b)		117	%		0	%		2	%		111	% ^(b)		113	%
Consolidated sales		3	%		-1	%		4	%		6	%		3	%		-2	%		4	%		5	%

Commentary:

(a)	Sale of Ariva U.S. business on July 31, 2013.

(b)	Acquisition of AHP on July 1, 2013 and Indas on January 2, 2014.

Commentary – Second quarter of 2014 compared to second quarter of 2013

Consolidated Sales

Sales for the second quarter of 2014 amounted to $1,385 million, an increase of $73 million, or approximately 6%, from sales in the second quarter of 2013. Net prices were up mostly due to an increase in our net average selling price for pulp by approximately 8% and paper by approximately 3%. Sales were also impacted by the inclusion of sales from our newly acquired Indas and AHP businesses. These increases to sales were partially offset by the impact of the disposition of our Ariva U.S. business in the third quarter of 2013 ($65 million).

Commentary – First half of 2014 compared to first half of 2013

Consolidated Sales

Sales for the first half of 2014 amounted to $2,779 million, an increase of $122 million, or approximately 5%, from sales in the first half of 2013. Net prices were up mostly due to an increase in our net average selling price for pulp by approximately 10% and paper by approximately 2%. Sales were also impacted by the inclusion of sales from our acquired Indas and AHP businesses. These increases to sales were partially offset by the impact of the disposition of our Ariva U.S. business in the third quarter of 2013 ($130 million), a decrease in our pulp sales volume mostly as a result of the permanent shut down of a pulp line at our Kamloops mill in March 2013 and extreme cold weather in Q1 2014 and a decrease in demand for our paper.


Analysis of Operating Income
By Business Segment	Three months ended						Variance					Six months ended						Variance
	June 30, 2014			June 30, 2013			$		%			June 30, 2014			June 30, 2013			$		%
Operating income (loss)
Pulp and Paper		69			16			53		331	%		138			54			84		156	%
Personal Care		14			10			4		40	%		29			23			6		26	%
Corporate		(4	)		(56	)		52					(9	)		(58	)		49

Consolidated operating income (loss)		79			(30	)		109		363	%		158			19			139		732	%

Q2 2014 vs. Q2 2013


	$ Change in Segmented Operating income due to
	Volume/ Mix			Net Price		Input Costs ^(a)			Operating ^(b) expenses			Currency		Acquisition/ Divestiture		Depreciation/ impairment ^(c)			Restructuring ^(d)		Other Income/ expense ^(e)			Total
Pulp and Paper		(18	)		40		(11	)		—			18		3		13			10		(2	)		53
Personal Care		—			—		(2	)		(6	)		1		11		(2	)		2		—			4
Corporate		—			—		—			(2	)		—		—		—			6		48			52

Consolidated operating income		(18	)		40		(13	)		(8	)		19		14		11			18		46			109

(a)	Includes raw materials (fiber and chemicals) and energy expenses.

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

(c)	Includes an impairment charge to property, plant and equipment related to our sold Ariva U.S. business in Q2 2013 ($5 million).

(d)

Includes restructuring charges related to pension expense at our Dryden mill ($7 million) and closed Big River sawmill ($6 million) and pension withdrawals at Indianapolis ($3 million) in Q2 2013. In addition, we incurred restructuring charges in our U.S. operations, in our Personal Care segment ($2M) in Q2 2013.

(e)	Includes the settlement of litigation with George Weston Limited for $49 million.

Q2 2014 YTD vs. Q2 2013 YTD


	$ Change in Segmented Operating income due to
	Volume/ Mix			Net Price		Input Costs ^(a)			Operating expenses ^(b)			Currency		Acquisition/ Divestiture		Depreciation/ impairment ^(c)			Restructuring ^(d)		Other Income/ expense ^(e)		Total
Pulp and Paper		(26	)		81		(38	)		(14	)		21		5		28			10		17		84
Personal Care		(3	)		—		(3	)		(9	)		2		20		(3	)		2		—		6
Corporate		—			—		—			(7	)		—		—		—			6		50		49

Consolidated operating income		(29	)		81		(41	)		(30	)		23		25		25			18		67		139

(a)	Includes raw materials (fiber and chemicals) and energy expenses.

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

(c)	Impairment charges of $10 million related to Kamloops mill in Q1 2013 and impairment charges to property, plant and equipment related to our sold Ariva U.S. business in Q2 2013 ($5 million).

(d)	Includes restructuring charges related to pension expense at our Dryden mill ($7 million) and closed Big River sawmill ($6 million) and pension withdrawals at Indianapolis ($3 million) in Q2 2013. In addition, we incurred restructuring charges in our Personal Care segment ($2 million) in Q2 2013.

(e)

Includes the settlement of litigation with George Weston Limited ($49 million) in Q2 2013 and charges related to the conversion of Alternative Fuel Tax Credits (“AFTC”) ($26 million) to Cellulosic Biofuel Producer Credit (“CBPC”) in Q1 2013, partially offset by the gain on sale of Port Edwards assets ($10 million) in Q1 2013.

Commentary – Second quarter of 2014 compared to second quarter of 2013

Consolidated

Operating Income – Refer to segment analysis

Interest Expense, net

We incurred $26 million of net interest expense in the second quarter of 2014, an increase of $5 million compared to net interest expense of $21 million in the second quarter of 2013. Higher interest expense in the second quarter of 2014 was due to the issuance of $250 million 6.75% Notes due 2044 in November 2013 to partially fund the Indas acquisition.

Income Taxes

For the second quarter of 2014, our income tax expense amounted to $13 million, consisting of a current tax expense of $19 million and a deferred tax benefit of $6 million. This compares to an income tax benefit of $5 million in the second quarter of 2013, consisting of a current income tax benefit of $4 million and a deferred income tax benefit of $1 million. We made income tax payments, net of refunds, of $20 million during the second quarter of 2014 and our effective tax rate was 25% compared to an effective tax rate of 10% in the second quarter of 2013. The effective tax rate for the second quarter of 2013 was impacted by the George Weston Limited litigation settlement payment made during the quarter of $49 million (CDN $50 million). Approximately $38 million (CDN $39 million) of this payment was non-deductible for income tax purposes.

Commentary – First half of 2014 compared to first half of 2013

Consolidated

Operating Income – Refer to segment analysis

Interest Expense, net

We incurred $51 million of net interest expense in the first half of 2014, an increase of $5 million when compared to net interest expense of $46 million in the first half of 2013. Higher interest expense in the first half of 2014 was due to the issuance of $250 million 6.75% Notes due 2044 in November 2013 to partially fund the Indas acquisition. This was partially offset by lower interest expense due to the redemption of our outstanding 5.375% Notes due 2013, for par value of $71 million including the premium paid on this debt redemption in the first quarter of 2013 of $3 million.

Income Taxes

For the first half of 2014, our income tax expense amounted to $28 million, consisting of a current tax expense of $34 million and a deferred tax benefit of $6 million. This compares to an income tax benefit of $27 million in the first half of 2013, consisting of a current income tax benefit of $27 million and a deferred income tax benefit of nil. We made income tax payments, net of refunds, of $19 million during the first half of 2014 and our effective tax rate was 26% compared to an effective tax rate of 100% in the first half of 2013. The effective tax rate for the first half of 2013 was impacted by the conversion of $26 million of AFTC from the 2009 tax year into $55 million of CBPC ($33 million benefit after-tax) as well as a reduction of unrecognized tax benefits of $8 million previously associated with AFTC from 2009 that were converted into CBPC in the first half of 2013. These tax benefits were partially offset by the $49 million (CDN $50 million) litigation settlement payment due to $38 million (CDN $39 million) being non-deductible for income tax purposes.

Alternative Fuel Tax Credit and Cellulosic Biofuel Producer Credit

As of June 30, 2014, we have gross unrecognized tax benefits and interest of $198 million and related deferred tax assets of $20 million associated with the AFTC claimed on our 2009 tax return. The recognition of these benefits, $178 million net of deferred taxes, would impact the effective tax rate. During the second quarter of 2012, the IRS began an audit of our 2009 U.S. income tax return and in the third quarter of 2013 expanded the audit period to include the tax returns for the 2010 and 2011 tax years. The completion of the audit by the IRS or the issuance of authoritative guidance could result in the release of the provision or settlement of the liability in cash of some or all of these previously unrecognized tax benefits. We reasonably expect the audit to be settled within the next twelve months which could result in a significant change to the amount of unrecognized tax benefits. However, audit outcomes and the timing of audit settlements are subject to significant uncertainty.

OUTLOOK

Our paper volumes are expected to decline with market demand while global softwood pulp markets are expected to remain balanced. Domtar will continue to closely monitor its inventory levels and balance its production with its customers’ demand. The ramp-up of the new production lines are expected to positively impact the Personal Care business results towards the end of the year. Input costs are expected to stay relatively stable for the second half of 2014.

PULP AND PAPER

Operating Income

Operating income in our Pulp and Paper segment amounted to $69 million in the second quarter of 2014, an increase of $53 million, when compared to operating income of $16 million in the second quarter of 2013. Overall, our operating results improved when compared to the second quarter of 2013, primarily due to:

•

Higher average selling prices for pulp and paper as described above

•

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program

•

Lower maintenance costs ($6 million) as a result of timing of expenses

•

Lower chemical costs ($7 million)

•

Lower depreciation charges ($8 million) due to certain assets reaching the end of their useful lives

•

Restructuring charges related to the pension plan at our Dryden mill ($7 million) and pension withdrawals at Indianapolis ($3 million) in Q2 2013

•

Impairment charges to property, plant and equipment related to our sold Ariva U.S. business in Q2 2013 ($5 million)

•

Mark-to-market adjustments on some stock-based compensation positively impacted our results

This increase was partially offset by:

•

Higher costs of fiber ($14 million)

•

Higher costs of energy ($4 million)

•

Lower volume of paper

Operating income in our Pulp and Paper segment amounted to $138 million in the first half of 2014, an increase of $84 million, when compared to operating income of $54 million in the first half of 2013. Overall, our operating results improved when compared to the first half of 2013, primarily due to:

•

Higher average selling prices for pulp and paper as described above

•

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program

•

The conversion of AFTC ($26 million) into CBPC in the first quarter of 2013 which negatively impacted operating income in the first quarter of 2013 (refer to Note 8 “Income Taxes”)

•

Lower maintenance costs ($14 million) as a result of timing of expenses

•

Lower cost of chemicals ($14 million) mainly due to the stabilization of starch prices in 2014

•

Lower depreciation charges ($14 million) due to certain assets reaching their useful lives

•

Impairment of property, plant and equipment ($10 million) relating to our Kamloops mill in the first quarter of 2013

•

Restructuring charges related to the pension plan at our Dryden mill ($7 million) and pension withdrawals at Indianapolis ($3 million) in Q2 2013

•

Impairment charges to property, plant and equipment related to our sold Ariva U.S. business in Q2 2013 ($5 million)

This increase was partially offset by:

•

Higher costs of fiber ($31 million, mostly as a result of extreme cold weather driving up prices)

•

Higher costs of energy ($21 million, due primarily to increased pricing)

•

Lower volume of pulp and paper

•

Negative impact of lower pulp and paper production volume

•

Higher freight costs ($7 million), due in part to increased pricing as a result of rail and truck transportation issues in Canada

•

Mark-to-market adjustments on some stock-based compensation negatively impacted our results

•

The gain on sale of Port Edwards assets in the first quarter of 2013 ($10 million)

PERSONAL CARE

Operating Income

Operating income increased by 40% or $4 million compared to the second quarter of 2013, primarily due to:

•

Impact of the acquisition of Indas

•

Positive impact of foreign currency denominated expenses, net of our hedging program

•

Closure and restructuring costs of $2 million in Q2 2013 related to the streamlining of our U.S. and European operations (refer to Note 12 “Closure and restructuring costs and liability and impairment and write-down of property, plant and equipment”)

These increases were partially offset by the following:

•

Higher wages and variable compensation

•

Increased depreciation charges mainly due to capital expansion

•

Unfavorable pricing in nonwovens, pulp and other input materials

•

Increased materials usage

•

Increased manufacturing costs mostly due to preparation of launching new production lines

Operating income increased by 26% or $6 million compared to the first half of 2013, primarily due to:

•

Impact of the acquisition of Indas

•

Positive impact of foreign currency denominated expenses, net of our hedging program

•

Closure and restructuring costs of $2 million in Q2 2013 related to the streamlining of our U.S. and European operations compared to closure and restructuring costs of $1 million in Q1 2014 (refer to Note 12 “Closure and restructuring costs and liability and impairment and write-down of property, plant and equipment”)

These increases were partially offset by the following:

•

Higher wages and variable compensation

•

Increased depreciation charges mainly due to capital expansion

•

Unfavorable pricing in nonwovens, pulp and other input materials

•

Increased materials usage

•

Increased manufacturing costs mostly due to preparation of launching new production lines

•

Negative impact of the sale of finished goods inventory that had been marked to fair value at the time of the acquisition of Indas ($3 million)

STOCK-BASED COMPENSATION EXPENSE

For the second quarter of 2014, a recovery of $4 million was recognized in our results of operations for stock-based compensation for all outstanding awards as a result of the mark-to-market impact related to the liability awards while in the first half of 2014, compensation expense of $4 million was incurred. This compares to nil and nil in the second quarter of 2013 and the first half of 2013. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES

Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt. 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 credit facility, of which $580 million is currently undrawn and available, or through our receivables securitization facility, of which $57 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 and to refinance our indebtedness, including debt we could incur under the credit and receivable securitization facilities and outstanding Domtar Corporation notes, and for ongoing operating costs including pension contributions, working capital and capital expenditures 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, as well as terms of any future indebtedness, impose, or may impose, various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

Operating Activities

Cash flows provided from operating activities totaled $245 million in the first half of 2014, a $62 million increase compared to cash flows provided from operating activities of $183 million in the first half of 2013. This increase in cash flows provided from operating activities is primarily due to increased profitability in the first half of 2014 when compared to the first half of 2013 ($80 million). We experienced a decrease in working capital requirements in the first half of 2014, in part due to cash received of $34 million due to the impact of the Spanish government supplier payment plan on past due receivables. In the first half of 2013, our cash flows were negatively impacted by a litigation settlement with George Weston Limited for $49 million (CDN $50 million) and the conversion of AFTC into CBPC ($26 million) in the first half of 2013.

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

Investing Activities

Cash flows used for investing activities in the first half of 2014 amounted to $646 million, a $526 million increase compared to cash flows used for investing activities of $120 million in the first half of 2013.

The use of cash in the first half of 2014 was attributable to the acquisition of Indas of $546 million (€399 million) and additions to property, plant and equipment of $101 million, offset by proceeds from disposals of property, plant and equipment of $1million.

The use of cash in the first half of 2013 was attributable to additions to property, plant and equipment of $118 million and the acquisition of Xerox’s paper and print media products assets of $11 million. In addition, we invested $1 million in our joint venture in the first half of 2013. The use of cash was partially offset by the proceeds from the disposal of Port Edwards assets of $9 million.

Our annual capital expenditures are expected to be approximately between $290 million and $310 million or between 75% and 80% of our expected depreciation expense for 2014.

Financing Activities

Cash flows used for financing activities totaled $169 million in the first half of 2014 compared to cash flows used for financing activities of $291 million in the first half of 2013.

The use of cash in the first half of 2014 was primarily the result of a net repayment of our revolving bank credit facility and other borrowings ($134 million) and dividend payments ($36 million). In addition, we repaid $3 million of capital leases relating to land and buildings in the first half of 2014.

The use of cash in the first half of 2013 was mainly due to the repurchase of shares of our common stock for a total cost of $147 million and the redemption of 5.375% Notes due 2013 in the first quarter of 2013 for $71 million, including premiums paid of $2 million and additional charges of $1 million. In addition, we made dividend payments of $31 million and repaid $26 million of capital leases relating to land and buildings in the first half of 2013.

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $1,347 million as of June 30, 2014 compared to $874 million as of December 31, 2013. The increase in net indebtedness is primarily due to a reduction of cash and cash equivalents as a result of the acquisition of Indas ($546 million).

Bank Facility

On June 15, 2012, we entered into a $600 million amended and restated Credit Agreement, among us, certain subsidiary borrowers, certain subsidiary guarantors and the lenders, that matures on June 15, 2017. This amended credit facility was scheduled to mature June 23, 2015. The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility), which may be borrowed in U.S. Dollars, Canadian Dollars (in an amount up to the Canadian Dollar equivalent of $150 million) and Euros (in an amount up to the Euro equivalent of $200 million). Borrowings may be made by us, by our U.S. subsidiary Domtar Paper Company, LLC, by our Canadian subsidiary Domtar Inc. and by any additional borrower designated by us in accordance with the Credit Agreement. We may increase the maximum aggregate amount of availability under the revolving Credit Agreement by up to $400 million, and the Borrowers may extend the final maturity of the Credit Agreement by one year, subject to the agreement of lenders participating in such increase or extension, as applicable.

Borrowings under the Credit Agreement bears interest at a rate dependent on our credit ratings at the time of such borrowing and are calculated at the Borrowers’ option according to a base rate, prime rate, LIBO rate, EURIBO rate or the Canadian bankers’ acceptance rate plus an applicable margin, as the case may be. In addition, we pay facility fees quarterly at rates dependent on our credit ratings.

The Credit Agreement contains customary covenants, 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. At June 30, 2014, we were in compliance with our covenants, and borrowing under the Credit Agreement amounted to $20 million (June 30, 2013 – nil). At June 30, 2014, we had no outstanding letters of credit under this credit facility (June 30, 2013 – $11 million). We had $580 million available under our contractually committed credit facility at June 30, 2014.

Receivables Securitization

We have a $150 million receivables securitization facility that matures in March 2016, with a current utilization limit for borrowings or letters of credit of $144 million at June 30, 2014.

At June 30, 2014, we had $40 million of borrowings and $47 million of letters of credit under the program (June 30, 2013 – nil and $37 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 facility or the failure by Domtar to repay or satisfy material obligations. At June 30, 2014, we had $57 million available under the accounts receivable securitization facility. In addition, one of our subsidiaries has a securitization facility under which, at June 30, 2014, borrowings amounted to $4 million.

Domtar Canada Paper Inc. Exchangeable Shares

Upon the consummation of a series of transactions whereby the Fine Paper Business of Weyerhaeuser Company was transferred to us and we acquired Domtar Inc. on March 7, 2007, Domtar Inc. shareholders had the option to receive either common stock of the Company or shares of Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation, that were exchangeable for common stock of the Company. The exchangeable shares of Domtar (Canada) Paper Inc. were intended to be substantially the economic equivalent to shares of the Company’s common stock and the shareholders were able to exchange the exchangeable shares for shares of Domtar Corporation common stock on a one-for-one basis at any time.

As a result of the redemption of exchangeable shares, the Company reclassified $32 million from Exchangeable shares to Additional paid-in capital.

Common Stock

On April 30, 2014, our Board of Directors approved a 2-for-1 split of our common stock to be effected through a stock dividend. Shareholders of record on June 10, 2014 were entitled to receive one additional share for every share they owned on that date. As a result of the stock split, total shares of our common stock outstanding increased from approximately 32.5 million to 65 million.

In addition, our Board of Directors approved an increase in the quarterly dividend on our common stock on a post-split basis, from $0.275 to $0.375 per share. This is equivalent to, on a pre-split basis, an increase of $0.20 per share per quarter (or 36%). Total dividends of approximately $24 million were paid on July 15, 2014 to shareholders of record on July 2, 2014.

On July 30, 2014, our Board of Directors approved a quarterly dividend of $0.375 per share to be paid to holders of our common stock. This dividend is to be paid on October 15, 2014, to shareholders of record on October 2, 2014.

OFF BALANCE SHEET ARRANGEMENTS

In the normal course of business, we finance certain of our activities off balance sheet through operating leases.

GUARANTEES

Indemnifications

In the normal course of business, we offer indemnifications relating to the sale of our businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At June 30, 2014, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans

We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At June 30, 2014, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.

ACCOUNTING CHANGES IMPLEMENTED

Foreign Currency Matters

In March 2013, the FASB issued ASU 2013-05, an update to Foreign Currency Matters, which indicates that a cumulative translation adjustment is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Thus, the entire amount of the cumulative translation adjustment associated with the foreign entity would be released when there has been (1) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity; (2) a loss of a controlling financial interest in an investment in a foreign entity; or (3) a step acquisition for a foreign entity. The update does not change the requirement to release a pro-rata portion of the cumulative translation adjustment of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity.

We adopted the new requirement on January 1, 2014 with no impact on our consolidated financial statements, as no triggering event occurred throughout the period.

Income Taxes

We adopted the new requirement on January 1, 2014 with no material impact on our consolidated financial statements except for the change in presentation.

FUTURE ACCOUNTING CHANGES

Discontinued Operations

In April 2014, the FASB issued ASU 2014-08, an update on Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the requirements for reporting discontinued operations and require additional disclosures for both disposal transactions that meet the criteria for a discontinued operation and disposals that do not meet these criteria. The objective of this update is to reach a greater convergence between the FASB’s and IASB’s reporting requirements for discontinued operations. The amendments are effective for interim and annual periods beginning after December 15, 2014 and will not have an impact on our consolidated financial statements unless a disposal transaction occurs after the effective date.

Revenue From Contracts With Customers

In May 2014, the FASB issued ASU 2014-9, an update on revenue from contracts with customers. The core principal in this guideline is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity is entitled to, in exchange for those goods and services. Guidance in this section supersedes the revenue recognition requirements found in topic 605.

The amendment will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently evaluating these changes to determine whether they have an impact on the presentation of our consolidated financial statements. We do not expect these changes to have a material impact.

Stock Compensation

In June 2014, the FASB issued ASU 2014-12, an update on stock compensation. The guideline requires performance targets, which affect vesting and that can be achieved after the requisite service period, to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.

The amendments are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating these changes to determine whether they have an impact on the presentation of the Consolidated Balance Sheets and Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss). We do not expect these changes to have a material impact on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect our results of operations and financial position. On an ongoing basis, management reviews its estimates, including those related to environmental matters and other asset retirement obligations, useful lives, impairment of property, plant and equipment, impairment of intangibles, impairment of goodwill, impairment of indefinite-lived intangible assets, pension plans and other post-retirement benefit plans, income taxes and closure and restructuring costs based on currently available information. Actual results could differ from those estimates.

Critical accounting policies reflect matters that contain a significant level of management estimates about future events, reflect the most complex and subjective judgments, and are subject to a fair degree of measurement uncertainty. There has not been any material change to our policies since December 31, 2013. For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2013.

FORWARD-LOOKING STATEMENTS

The information included in this Quarterly Report on Form 10-Q may contain forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate”, “believe”, “expect”, “intend”, “aim”, “target”, “plan”, “continue”, “estimate”, “project”, “may”, “will”, “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:

•

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

•

our ability to implement our business diversification initiatives, including strategic acquisitions;

•

product selling prices;

•

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

•

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

•

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

•

the level of competition from domestic and foreign producers;

•

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

•

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

•

transportation costs;

•

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

•

legal proceedings;

•

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

•

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

•

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

•

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

•

the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2013.

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 assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2013. There has not been any material change in our exposure to market risk since December 31, 2013. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 4 “Derivatives and Hedging Activities and Fair Value Measurement,” to the financial statements in this Quarterly Report on Form 10-Q.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of June 30, 2014, 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, 2014, our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting

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

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 15 “Commitments and Contingencies” for discussion regarding legal proceedings.

There have been no material developments in legal proceedings. For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our 2013 Form 10-K.

ITEM 1A.

RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2013, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There were no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There was no stock repurchase activity under our stock repurchase program (the “Program”) during the three-month period ended June 30, 2014. The Program was approved by the Board of Directors in May 2010 and amended in May 2011 and December 2011. We currently have $121 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 stock options, awards, and the employee stock purchase plan and to improve shareholders’ returns. 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. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS



Exhibit 10.1		Employment agreement of Mr. Michael D. Garcia*

Exhibit 12.1		Computation of Ratio of Earnings to Fixed Charges

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

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

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

Exhibit 32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS		XBRL Instance Document

Exhibit 101.SCH		XBRL Taxonomy Extension Schema

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase

Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase

*	Indicates management contract or compensatory arrangement

SIGNATURE

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


						DOMTAR CORPORATION

						Date: August 1, 2014

						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

Exhibit 10.1

Domtar Corporation

Head Office

395 de Maisonneuve Blvd. West

Montreal, QC H3A 1L6

Operations Center

100 Kingsley Park Dr.

Fort Mill, SC 29715-6476


January 27, 2014

Mr. Michael D. Garcia

6A Els Street

Pretoria, South Africa

Dear Mike,

On behalf of the Management Committee, it is my pleasure to confirm our offer of employment with Domtar Corporation and its subsidiaries and affiliates (collectively the “Company” or “Domtar”) as President, Pulp and Paper.

This offer letter sets forth the terms of our offer and describes your compensation and benefits package. All compensation payments set forth herein and during your employment will be subject to any necessary withholdings and authorized and/or required deductions.

1. Position and Duties . As President, Pulp and Paper, you will be a member of the Management Committee, reporting directly to me, and will be responsible for setting the strategic direction of Domtar’s Pulp and Paper business as well as evaluating and developing leadership talent supportive of Domtar’s corporate Vision, Mission and Values. More specifically you will have responsibility for Domtar’s Pulp and Paper business:

•

Profit and Loss

•

Safety

•

Development of the annual operating plan and strategic plan

•

Product development and innovation

•

Customer and market development and relationship management

•

Commercial and sales operations

•

Operational oversight for all manufacturing locations

•

Leadership of the business team

2. Location . Your office will be located in Fort Mill, SC, USA. However, given the breadth of your responsibilities, frequent travel to other locations will be required to properly fulfill your responsibilities.

3. Salary . Your annual base salary will be US$625,000, payable in accordance with Domtar’s normal payroll practices.

4. Annual Incentive Bonus . While you are employed you will be eligible to participate in the Domtar Corporation Annual Incentive Plan or any successor plan. Your target annual bonus opportunity under the Annual Incentive Plan for fiscal year 2014 will be 89% of the base salary earned in such position. Actual bonus payments will be determined based on performance results (personal and corporate) versus the applicable performance criteria established by the Board of Directors of the Company, and are contingent upon your continued employment through the bonus payment date. Any annual bonus with respect to a particular year will be payable promptly following the receipt of Domtar’s audited financial statements for such year and in any event within two and a half months of the end of such year.

5. Long-Term Incentive Awards . You will be eligible to participate in the Domtar Corporation Omnibus Incentive Plan in 2014 at a level equivalent to 140% of your base salary.

6. Additional Award . To compensate for long term incentive payments and other compensation from your current employer which you will forfeit by reason of accepting employment with the Company and to induce you to accept employment under the terms and conditions of this offer letter, you will receive a one-time Restricted Share Unit (“RSU”) award under the Domtar Corporate Omnibus Incentive Plan with an aggregate Grant Date fair value of US$840,000. Such grant will be made as soon as practically feasible after your Start Date, as defined on the signature page of this offer. The award will be subject to the terms and provisions of the Domtar Corporation Omnibus Incentive Plan and a RSU Agreement, and will cliff vest in its entirety on the third anniversary of the Grant Date. In the event that your departure will not result in your forfeiting long term incentive payments and other compensation from your current employer, you agree and accept that you will not receive from the Company any additional award contemplated under this Section 6.

7. Employee Benefits . While employed by Domtar, you will be eligible to participate in the employee benefit plans and programs generally available to employees in your position, subject to the terms and conditions of such plans and programs. Detailed information about the benefit plans and about our human resources policies and programs will be provided to you separately. You will be entitled to four (4) weeks annual paid vacation.

You hereby acknowledge that the benefits described in this Section and in Sections 4 and 5 may be subject to change from time to time, except with respect to target bonus opportunity and equity grant levels for fiscal year 2014.

8. Relocation. You will relocate from Pretoria, South Africa to the Charlotte, North Carolina, USA area within 90 days of your Start Date . At such time, you will be eligible for reimbursement of the expenses you will incur in connection with such relocation pursuant to Domtar’s U.S. Relocation Policy, relevant portions of which is attached to this offer letter for your reference. After your Start Date, the Company will reimburse your reasonable temporary accommodation expenses in Charlotte, NC for a maximum period of three (3) months. Until cars can be purchased, the Company will cover the rental costs for two (2) cars with GPS upon arrival in Charlotte for a maximum period of one (1) month. A one-time settlement allowance of US$80,000, less statutory withholdings, will be paid to you in a lump sum shortly after your Start Date.

9. Termination of Employment . Upon an involuntary termination of your employment by Domtar for reasons other than cause or a breach by you of the terms and conditions of this letter (including but not limited to any breach by you of any representation or warranty made by you in this letter), subject to your execution within 30 days after your termination of a general release in a form provided by the Company, you will be eligible to receive severance in accordance with Domtar’s Severance Program for Management Committee Members, a copy of which is attached to this offer letter for your reference. Severance will be payable in a lump sum within 90 days after your termination of employment (but in no event later than March 15 ^th of the calendar year after the year of your Separation from Service (as such term is defined in Section 409A of the US Internal Revenue Code and the applicable regulations and guidance (“Section 409A”)).

Severance provided under this Section 9 includes any pay in lieu of notice and severance pay required by law and is in lieu of and not in addition to any severance payable under any applicable Domtar severance policy.

Notwithstanding anything else contained in this offer letter to the contrary, if you are a “specified employee” within the meaning of any Company specified employee policy in effect at the time of your Separation from Service or, if no such policy is then in effect, Section 409A, any payment required to be made to you hereunder upon or following the date of your Separation from Service shall be delayed until after the six month anniversary of your Separation from Service to the extent necessary to comply with, and avoid imposition on you of any tax penalty imposed under, Section 409A. Should payments be delayed in accordance with the preceding sentence, the accumulated payment that would have been made but for the period of the delay shall be paid in a single lump sum during the 10 day period following the six month anniversary of the date of your Separation from Service.

10. Conditions . Your employment is subject to and contingent upon satisfactory completion of all pre-employment and post-employment processing, including, but not limited to, background screening involving review of criminal records, the verification of work history, education and references, as well as all applicable U.S. immigration requirements prior to the Start Date. Your employment is conditioned upon your agreement to the non-competition and non-solicitation provisions as set forth herein. Your employment is further conditioned upon your agreement to sign the Company’s form of Confidential Information and Intellectual Property Agreement.

11. Representations and Warranties . You represent and warrant that (1) you will not possess as of your Start Date and during your employment with Domtar, any material, tangible, confidential or proprietary information, including documents, files, disks, or other materials, belonging to your former employer or its affiliates; (2) as of your Start Date, you have not solicited any employees of your former employer or its affiliates to change their association with your former employer or its affiliates; (3) as of your Start Date, you are not subject to any ongoing non-competition agreement or similar restrictive covenants with any of your former employers or their affiliates; (4) all representations and warranties made by you in the course of your application to Domtar are true and correct and you have not made any material misrepresentation or omission in the course of your application to Domtar regarding employment or your ability to perform the position offered; and (5) no representations were made to you concerning this offer or the terms or conditions of your anticipated employment except as expressly set out in this letter.

12. Non-Competition . While you are employed, and during the period commencing on the date of your Separation from Service and ending 24 months thereafter (such period, the “Restriction Period”), you agree that you shall not, directly or indirectly, engage in business with, serve as an agent or consultant to, become a general partner, member, principal, stockholder, equity holder (other than a holder of less than 2% of the outstanding voting shares of any publicly held entity) of, or become employed in a management position by, any person, firm, corporation, or other entity that competes with the Business (as hereinafter defined) of the Company in North America or any other location or market in which the Company conducts its Business or markets its products, except where (i) the business of such person, firm or other entity that competes with the business of the Company is negligible or incidental to the primary business of such firm such that less than 10% of the consolidated revenues of such person, firm or other entity comes from the competing business, (ii) your interest or association with such person, firm, corporation, or other entity does not and will not in any way relate to the business of the Company, or the duties you performed on behalf of the Company, and (iii) prior to your commencing any such employment, you certify in writing to the Company that the position satisfies the requirements of clauses (i) and (ii) above and that you have informed such entity of the restrictions on your activities contained in this offer letter. Whether any such person, firm or entity competes with the Business of the Company shall be determined in good faith by the Company. For purposes of this offer letter, “Business” shall mean the Pulp and Paper segment of the Company as described in the Company’s most recent annual report on Form 10-K during your employment or at the time of your Separation from Service, as applicable, or other similar report under the Company’s securities law or stock exchange requirements at such time.

13. Non-Solicitation of Employees . During the Restriction Period, you agree that you shall not, directly or indirectly, for your own account or for the account of any other person or entity with which you are or shall become associated in any capacity, (i) solicit for employment, employ or otherwise interfere with the relationship of the Company with any person who at any time during the twelve (12) months preceding such solicitation, employment or interference, is or was employed by or otherwise engaged to perform services for the Company, other than any such solicitation or employment during your employment with the Company on behalf of the Company, or (ii) induce any employee of the Company who is a member of management to engage in any activity which you are prohibited from engaging in under any of Sections 12 to 15 inclusive to terminate his or her employment with the Company. For purposes of this Section 13, the placement of “help wanted” advertisements, postings on internet job sites and searches by employment search companies which are not specifically targeting employees of the Company shall not result in a violation of this Section 13.

14. Non-Solicitation of Customers . During the Restriction Period, you shall not, directly or indirectly, (a) induce or attempt to induce any customer, distributor, supplier, or other business relation of the Pulp and Paper segment of the Company to cease doing business with, or reduce the amount of business conducted with, the Pulp and Paper segment of the Company; or (b) solicit or otherwise attempt to establish for yourself or any other person, firm, or entity anywhere in North America, or in any other location or market in which the Company conducts the Business or markets its products, (i) any business relationship of a nature that is competitive with the Business, or (ii) any business relationship of a nature that is competitive with the relationship of any Affiliate of the Company, with any person, firm, or corporation which was a customer, client, or distributor of any Affiliate of the Company during the period during which you are employed or during the twelve-month period preceding the date of your Separation from Service (and whom you came into contact with or had knowledge of as a result of your employment with the Company), other than any such solicitation for the benefit of the Company during your employment with the Company.

15. Confidential Information . During your employment with the Company and at all times thereafter, except as required pursuant to your good faith exercise of your duties under Section 1 of this offer letter, you will not, except with the express consent of Domtar’s President and CEO or his authorized representative, disclose any Confidential Information of Domtar, as defined below, to any third person or party unless such Confidential Information has been previously disclosed to the public or is in the public domain (other than by reason of your breach of this offer letter).

16. Return of Property . In the event of the termination of your employment for any reason, you shall deliver to Domtar all of its property and non-personal documents and data of any nature and in whatever medium (and any and all copies thereof) pertaining to your employment with Domtar, and you shall not take with you any such property, documents or data of any description or any reproduction thereof, or any documents containing or pertaining to any Confidential Information.

17. Miscellaneous . You agree that you will abide by and adhere to all laws and rules and regulations of the various regulatory and/or self-regulatory organizations of which Domtar or any of its Affiliates are members, as well as all internal rules, regulations, policies and codes of conduct that Domtar has established.

Employment with Domtar is at-will. Accordingly, this letter shall not be construed as a contract for employment for any period of time. Domtar reserves the right to terminate your employment at any time for any reason whatsoever and with or without notice; likewise, you are free to terminate your employment at any time for any reason whatsoever and with or without notice. The terms of this letter may not be amended unless such amendment is agreed to in writing and signed by you and two authorized officers of Domtar.

This letter contains the entire understanding and agreement between the parties concerning the subject matter hereof, and supersedes all prior agreements, understandings, discussions, negotiations, and undertakings, whether written or oral, between the parties with respect thereof. No waiver by either party of any breach by the other party of any condition or provision contained in this letter to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by an authorized officer of Domtar.

This offer letter shall be governed, construed and enforced in accordance with the laws of the State of South Carolina and the federal laws of the United States of America without regard to any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this letter to the substantive law of another jurisdiction. In the event that any provision or portion of this letter shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this letter shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. You may not assign this letter; however, Domtar may assign this letter to any of its Affiliates or successors.

18. Confidentiality . You agree to keep the terms of this letter strictly confidential in whole and in part, and further agree not to disclose the terms of this letter to any person or entity except as permitted by law or legal process, and except for disclosure to your attorneys, accountants and/or immediate family, provided that those individuals are advised of the confidential nature of such disclosure. You may also disclose to a prospective or subsequent employer the terms of the restrictive covenants set forth in Sections 12 through 15. Notwithstanding the foregoing, if you disclose the contents of this letter other than as permitted by this paragraph without prior authorization, Domtar reserves the right to rescind all of the terms of this letter and subject you to disciplinary action, including termination of your employment for cause.

19. Definitions.

(a) “Affiliate” means any entity with whom the Company would be considered a single employer under Sections 414(b) or 414(c) of the Code except that, in making such determination, “at least fifty (50) percent” will be substituted for “at least eighty (80) percent” each place it appears therein.

(b) “Code” means the U.S. Internal Revenue Code of 1986, as amended (the “Code”).

(c) “Confidential Information” means any information about the Company or any Affiliate and their employees, customers and/or suppliers which is not generally known outside of the Company or any Affiliate, which you learn of in connection with your employment with the Company or any Affiliate, and which would be useful to competitors or the disclosure of which would be damaging to the Company or the Affiliate. Confidential Information may include, but is not necessarily limited to: (A) business and employment policies, marketing methods and the targets of those methods, finances, business plans, promotional materials and price lists; (B) the Company’s or any Affiliate’s manufacturing techniques; (C) the terms upon which the Company or any Affiliate obtains products from their suppliers and sells services and products to customers; (D) the nature, origin, composition and development of the Company’s or the Affiliate’s services and products; (E) the manner in which the Company or any Affiliate provides products and services to their customers, and (F) Trade Secrets, as defined below. Confidential Information does not include information that (A) has been voluntarily disclosed to the public by the Company or any Affiliate, except where such public disclosure has been made by you without authorization from the Company or the Affiliate; (B) has been independently developed and disclosed by others; or (C) which has otherwise entered the public domain through lawful means.

(d) “Trade Secrets” means the trade secrets of the Company or any Affiliate as defined under applicable law.

20. Severability . The parties further agree that each paragraph of this Agreement and each covenant, promise, and provision within each paragraph is severable from the remainder of the Agreement. Accordingly, the parties agree that if in any judicial proceeding a court shall determine that any paragraph or any covenant, promise, or provision contained in any paragraph, or part thereof, is unenforceable, it shall be deemed to be severed, and the remainder of the Agreement shall be enforced according to its terms and to the fullest extent permitted by law.

21. Remedies and Enforcement . You acknowledge and agree that a breach of the provisions of Sections 12 through 15 of this Agreement by you will cause serious and irreparable damage to the Company that will be difficult to quantify and for which monetary damages alone will not be adequate. Accordingly, you agree that if the Company should bring an action to enforce its rights under Sections 12 through 15 of this Agreement and if the Company establishes that you breached any of your obligations under this Agreement, the Company shall be entitled to temporary and/or permanent injunctive relief without the need for posting a bond as well as reasonable costs and attorneys’ fees incurred by the Company in bringing and prosecuting any action for breach. Further, you waive the defense in any judicial proceeding that there is an adequate remedy at law for any such breach.

We are pleased by the prospect of your joining Domtar and look forward to the opportunity to work with you. Please sign below to signify your acceptance of our offer of employment and its terms. Should you have any questions with regard to any of the items indicated above, please let me know.

Sincerely,

(s) John D. Williams

John D. Williams

President and Chief Executive Officer

AGREED AND ACCEPTED:

I HAVE READ THE ABOVE TERMS AND ACCEPT THE OFFER OF EMPLOYMENT FROM THE COMPANY, AS STATED. I FURTHER UNDERSTAND AND AGREE THAT I WILL COMPLY WITH ALL OF THE CONDITIONS OF EMPLOYMENT AS SET FORTH HEREIN, INCLUDING BUT NOT LIMITED TO THE CONDITIONS PRECEDENT TO EMPLOYMENT AND THE POST-TERMINATION RESTRICTIONS SET FORTH HEREIN.

I request that my first day of employment be 1 May, 2014 (the “Start Date”)



(s) Michael D. Garcia				31 January, 2014
Michael D. Garcia				Date

Exhibit 12.1

Domtar Corporation

Computation of ratio of earnings to fixed charges

(In millions of dollars, unless otherwise noted)


	Three months ended					Six months ended
	June 30, 2014		June 30, 2013			June 30, 2014		June 30, 2013
	$		$			$		$

Available earnings:
Earnings (loss) before income taxes and equity earnings		53		(51	)		107		(27	)
Add fixed charges:
Interest expense incurred		25		20			49		42
Amortization of debt expense and discount		1		1			2		2
Interest portion of rental expense ⁽¹⁾		3		2			5		5

Total earnings (loss) as defined		82		(28	)		163		22

Fixed charges:
Interest expense incurred		25		20			49		42
Amortization of debt expense and discount		1		1			2		2
Interest portion of rental expense ⁽¹⁾		3		2			5		5

Total fixed charges		29		23			56		49
Ratio of earnings to fixed charges		2.8					2.9		0.4
Deficiency in the coverage of earnings to fixed charges				51.0

⁽¹⁾	Interest portion of rental expense is calculated based on the proportion deemed representation of the interest component (i.e 1/3 of rental expense).

Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John D. Williams, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Domtar Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2014

/s/ John D. Williams

John D. Williams

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel Buron, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Domtar Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2014

/s/ Daniel Buron

Daniel Buron

Senior Vice-President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies that to his knowledge, the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014 (the “Form 10-Q”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John D. Williams

John D. Williams

President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

/s/ Daniel Buron

Daniel Buron

Senior Vice-President and Chief Financial Officer