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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File No.:
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction |
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(I.R.S. Employer |
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of incorporation or organization) |
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Identification No.) |
(Address of office)
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "non-accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
The Registrant had
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of U.S. dollars, except per share data)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Revenues |
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$ |
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$ |
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Costs and expenses |
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Cost of sales, excluding depreciation and amortization |
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Cost of sales depreciation and amortization |
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Selling, general and administrative expenses |
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Operating income |
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Other income (expenses) |
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Interest expense |
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( |
) |
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( |
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Loss on early extinguishment of debt |
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( |
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Other income |
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Total other expenses, net |
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( |
) |
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( |
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Income before income taxes |
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Income tax provision |
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( |
) |
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( |
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Net income |
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$ |
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$ |
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Net income per common share |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Dividends declared per common share |
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$ |
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$ |
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INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands of U.S. dollars)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Net income |
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$ |
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$ |
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Other comprehensive income (loss) |
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Gain (loss) related to defined benefit pension plans |
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( |
) |
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Income tax recovery (provision) |
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( |
) |
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Gain (loss) related to defined benefit pension plans, net of tax |
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( |
) |
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Foreign currency translation adjustment |
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( |
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( |
) |
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Other comprehensive loss, net of taxes |
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( |
) |
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( |
) |
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Total comprehensive income (loss) |
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$ |
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$ |
( |
) |
See accompanying Notes to the Interim Consolidated Financial Statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 3
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
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March 31, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other |
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Total current assets |
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Property, plant and equipment, net |
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Investment in joint ventures |
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Amortizable intangible assets, net |
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Operating lease right-of-use assets |
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Pension asset |
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Other long-term assets |
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Deferred income tax |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable and other |
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$ |
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$ |
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Pension and other post-retirement benefit obligations |
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Total current liabilities |
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Long-term debt |
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Pension and other post-retirement benefit obligations |
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Operating lease liabilities |
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Other long-term liabilities |
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Deferred income tax |
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Total liabilities |
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Shareholders’ equity |
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Common shares $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
) |
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( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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Commitments and contingencies (Note 13) |
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Subsequent event (Note 7) |
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See accompanying Notes to the Interim Consolidated Financial Statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands of U.S. dollars)
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Common shares |
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|||||
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Number (thousands of shares) |
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Amount, at Par Value |
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Additional Paid-in Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Total Shareholders' Equity |
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||||||
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Three Months Ended March 31: |
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Balance as of December 31, 2021 |
|
|
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|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Shares issued on grants of performance share units |
|
|
|
|
|
|
|
|
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( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
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|
Stock compensation expense |
|
|
— |
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|
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— |
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|
|
|
|
|
|
— |
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|
|
— |
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
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|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance as of March 31, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
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|
|
|
|
|
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|
Balance as of December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Shares issued on grants of performance share units |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Balance as of March 31, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
See accompanying Notes to the Interim Consolidated Financial Statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of U.S. dollars)
|
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Three Months Ended March 31, |
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|||||
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2022 |
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2021 |
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||
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Cash flows from (used in) operating activities |
|
|
|
|
|
|
|
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Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to cash flows from operating activities |
|
|
|
|
|
|
|
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Depreciation and amortization |
|
|
|
|
|
|
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Deferred income tax provision |
|
|
|
|
|
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Loss on early extinguishment of debt |
|
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Defined benefit pension plans and other post-retirement benefit plan expense |
|
|
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|
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Stock compensation expense |
|
|
|
|
|
|
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Foreign exchange transaction gains |
|
|
( |
) |
|
|
( |
) |
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Other |
|
|
( |
) |
|
|
( |
) |
|
Defined benefit pension plans and other post-retirement benefit plan contributions |
|
|
( |
) |
|
|
( |
) |
|
Changes in working capital |
|
|
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|
|
|
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|
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Accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
Inventories |
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|
( |
) |
|
|
( |
) |
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Accounts payable and accrued expenses |
|
|
( |
) |
|
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Other |
|
|
( |
) |
|
|
( |
) |
|
Net cash from (used in) operating activities |
|
|
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|
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|
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Cash flows from (used in) investing activities |
|
|
|
|
|
|
|
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Purchase of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
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Insurance proceeds |
|
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|
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Purchase of amortizable intangible assets |
|
|
( |
) |
|
|
( |
) |
|
Other |
|
|
|
|
|
|
( |
) |
|
Net cash from (used in) investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from (used in) financing activities |
|
|
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|
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Redemption of senior notes |
|
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|
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( |
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|
Proceeds from issuance of senior notes |
|
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Proceeds from (repayment of) revolving credit facilities, net |
|
|
|
|
|
|
( |
) |
|
Payment of debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from government grants |
|
|
|
|
|
|
|
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|
Payment of finance lease obligations |
|
|
( |
) |
|
|
( |
) |
|
Other |
|
|
( |
) |
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
|
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|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
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|
Cash and cash equivalents, end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental cash flow disclosure: |
|
|
|
|
|
|
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|
Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
|
|
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
Leased production and other equipment |
|
$ |
|
|
|
$ |
|
|
See accompanying Notes to the Interim Consolidated Financial Statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 1. The Company and Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
The Interim Consolidated Financial Statements contained herein include the accounts of Mercer International Inc. ("Mercer Inc.") and all of its subsidiaries (collectively the "Company"). Mercer Inc. owns
The Interim Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States ("GAAP"). The unaudited Interim Consolidated Financial Statements should be read together with the audited Consolidated Financial Statements and accompanying notes included in the Company's latest Annual Report on Form 10‑K for the fiscal year ended December 31, 2021. In the opinion of the Company, the unaudited Interim Consolidated Financial Statements contained herein have been prepared on a consistent basis with the audited Consolidated Financial Statements and accompanying notes included in the Company's latest Annual Report on Form 10‑K for the fiscal year ended December 31, 2021 and contain all adjustments necessary for a fair statement of the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.
In these Interim Consolidated Financial Statements, unless otherwise indicated, all amounts are expressed in United States dollars ("U.S. dollars" or "$"). The symbol "€" refers to euros and the symbol "C$" refers to Canadian dollars.
Use of Estimates
Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
Impact of the COVID-19 Pandemic
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. During the pandemic, there have been several "waves" or periods during which there has been a significant widespread increase in reported infections and the emergence and rapid spread of new variants of the COVID-19 virus. In response to such waves, various countries have from time to time re-imposed various restrictions on social, business, travel and other activities. Such economic disruption could have a material adverse effect on the Company’s business.
As of the date of issuance of these Interim Consolidated Financial Statements, the Company has not had significant downtime or closures at its mills or disruptions to raw material supplies or access to logistics networks due to the COVID-19 pandemic, but the extent to which the COVID-19 pandemic may materially impact the Company's future financial condition, liquidity, or results of operations remains uncertain.
The Company’s future results of operations and liquidity, however, could be adversely impacted by economic factors arising from the pandemic that affect our business and customers. For instance, we may experience delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 2. Inventories
Inventories as of March 31, 2022 and December 31, 2021, were comprised of the following:
|
|
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March 31, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Spare parts and other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Note 3. Accounts Payable and Other
Accounts payable and other as of March 31, 2022 and December 31, 2021, was comprised of the following:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Trade payables |
|
$ |
|
|
|
$ |
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
Interest payable |
|
|
|
|
|
|
|
|
|
Income tax payable |
|
|
|
|
|
|
|
|
|
Payroll-related accruals |
|
|
|
|
|
|
|
|
|
Wastewater fee (a) |
|
|
|
|
|
|
|
|
|
Finance lease liability |
|
|
|
|
|
|
|
|
|
Operating lease liability |
|
|
|
|
|
|
|
|
|
Government grants (b) |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(a) |
The Company is required to pay certain fees based on wastewater emissions at its German mills. Accrued fees can be reduced upon the mills’ demonstration of reduced wastewater emissions. |
|
(b) |
The Canadian mills have a liability for unspent government grants which are required to be used to partially finance greenhouse gas emission reduction and innovation capital projects. The grants are recorded in “Cash and cash equivalents” in the Interim Consolidated Balance Sheets, however, they are considered restricted as they are repayable if the mills do not spend the funds on approved projects. |
FORM 10-Q
QUARTERLY REPORT - PAGE 8
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 4. Debt
Debt as of March 31, 2022 and December 31, 2021, was comprised of the following:
|
|
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
Maturity |
|
2022 |
|
|
2021 |
|
||
|
Senior notes (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit arrangements |
|
|
|
|
|
|
|
|
|
|
|
€ |
|
|
|
|
|
|
|
|
|
|
|
C$ |
|
|
|
|
|
|
|
|
|
|
|
C$ |
|
|
|
|
|
|
|
|
|
|
|
C$ |
|
|
|
|
|
|
|
|
|
|
|
€ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized senior note issuance costs |
|
|
|
|
( |
) |
|
|
( |
) |
|
Less: finance lease liability due within one year |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
The maturities of the principal portion of the senior notes and credit arrangements as of March 31, 2022 were as follows:
|
|
|
Senior Notes and Credit Arrangements |
|
|
|
2022 |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
Certain of the Company's debt instruments were issued under agreements which, among other things, may limit its ability and the ability of its subsidiaries to make certain payments, including dividends. These limitations are subject to specific exceptions. As of March 31, 2022, the Company was in compliance with the terms of its debt agreements.
|
(a) |
In January 2021, the Company issued $ |
The 2029 Senior Notes and the senior notes which mature on
FORM 10-Q
QUARTERLY REPORT - PAGE 9
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 4. Debt (continued)
The following table presents the redemption prices (expressed as percentages of principal amount) and the redemption periods of the outstanding Senior Notes:
|
2026 Senior Notes |
|
2029 Senior Notes |
||||
|
12 Month Period Beginning |
|
Percentage |
|
12 Month Period Beginning |
|
Percentage |
|
January 15, 2022 |
|
|
|
February 1, 2024 |
|
|
|
January 15, 2023 and thereafter |
|
|
|
February 1, 2025 |
|
|
|
|
|
|
|
February 1, 2026 and thereafter |
|
|
|
(b) |
A € |
|
(c) |
A C$ |
The facility replaced the Peace River and Celgar C$
|
(d) |
A € |
FORM 10-Q
QUARTERLY REPORT - PAGE 10
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 5. Pension and Other Post-Retirement Benefit Obligations
Defined Benefit Plans
Pension benefits are based on employees' earnings and years of service. The defined benefit plans are funded by contributions from the Company based on actuarial estimates and statutory requirements.
|
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
|
Pension |
|
|
Other Post- Retirement Benefits |
|
|
Pension |
|
|
Other Post- Retirement Benefits |
|
||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Amortization of unrecognized items |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net benefit costs |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
The components of the net benefit costs other than service cost are recorded in "Other income" in the Interim Consolidated Statements of Operations. The amortization of unrecognized items relates to net actuarial losses and prior service costs.
Defined Contribution Plan
Effective December 31, 2008, the defined benefit plans at the Celgar mill were closed to new members and the service accrual ceased. Effective January 1, 2009, the members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan. During the three month period ended March 31, 2022, the Company made contributions of $
Multiemployer Plan
The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three month period ended March 31, 2022, the Company made contributions of $
FORM 10-Q
QUARTERLY REPORT - PAGE 11
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 6. Income Taxes
Differences between the U.S. Federal statutory and the Company's effective tax rates for the three month periods ended March 31, 2022 and 2021, were as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
U.S. Federal statutory rate |
|
|
|
|
|
|
||
|
U.S. Federal statutory rate on income before income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
Tax differential on foreign income |
|
|
( |
) |
|
|
( |
) |
|
Effect of foreign earnings (a) |
|
|
( |
) |
|
|
( |
) |
|
Valuation allowance (b) |
|
|
|
|
|
|
( |
) |
|
Foreign exchange on settlement of debt |
|
|
|
|
|
|
— |
|
|
Tax benefit of partnership structure |
|
|
|
|
|
|
|
|
|
Non-taxable foreign subsidies |
|
|
|
|
|
|
|
|
|
True-up of prior year taxes |
|
|
|
|
|
|
|
|
|
Annual effective tax rate adjustment |
|
|
— |
|
|
|
|
|
|
Other, net |
|
|
( |
) |
|
|
( |
) |
|
Income tax provision |
|
$ |
( |
) |
|
$ |
( |
) |
|
Comprised of: |
|
|
|
|
|
|
|
|
|
Current income tax provision |
|
$ |
( |
) |
|
$ |
( |
) |
|
Deferred income tax provision |
|
|
( |
) |
|
|
( |
) |
|
Income tax provision |
|
$ |
( |
) |
|
$ |
( |
) |
|
(a) |
Primarily relates to the impact of the global intangible low-taxed income provision in the Tax Cuts and Jobs Act of 2017. |
|
(b) |
Primarily relates to taxable losses and denied interest expense. |
Note 7. Shareholders' Equity
Dividends
On February 17, 2022, the Company's board of directors declared a quarterly dividend of $
On April 28, 2022, the Company's board of directors declared a quarterly dividend of $
Stock Based Compensation
The Company has a stock incentive plan which provides for options, restricted stock rights, restricted shares, performance shares, performance share units ("PSUs") and stock appreciation rights to be awarded to employees, consultants and non-employee directors. During the three month period ended March 31, 2022, there were
FORM 10-Q
QUARTERLY REPORT - PAGE 12
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 7. Shareholders' Equity (continued)
PSUs
PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally
The following table summarizes PSU activity during the period:
|
|
|
Number of PSUs |
|
|
|
Outstanding as of January 1, 2022 |
|
|
|
|
|
Granted |
|
|
|
|
|
Vested and issued |
|
|
( |
) |
|
Forfeited |
|
|
( |
) |
|
Outstanding as of March 31, 2022 |
|
|
|
|
Restricted Shares
Restricted shares generally vest at the end of
Note 8. Net Income Per Common Share
The reconciliation of basic and diluted net income per common share for the three month periods ended March 31, 2022 and 2021 was as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Net income |
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic (a) |
|
|
|
|
|
|
|
|
|
Effect of dilutive instruments: |
|
|
|
|
|
|
|
|
|
PSUs |
|
|
|
|
|
|
|
|
|
Restricted shares |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
(a) |
For the three month period ended March 31, 2022, the weighted average number of common shares outstanding excludes |
The calculation of diluted net income per common share does not assume the exercise of any instruments that would have an anti-dilutive effect on net income per common share. For the three month periods ended March 31, 2022 and 2021 there were no anti-dilutive instruments.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 9. Accumulated Other Comprehensive Loss
The change in the accumulated other comprehensive loss by component (net of tax) for the three month periods ended March 31, 2022 and 2021 was as follows:
|
|
|
Foreign Currency Translation Adjustment |
|
|
Defined Benefit Pension and Other Post- Retirement Benefit Items |
|
|
Total |
|
|||
|
Balance as of December 31, 2021 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive loss, net of taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance as of March 31, 2022 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
Foreign Currency Translation Adjustment |
|
|
Defined Benefit Pension and Other Post- Retirement Benefit Items |
|
|
Total |
|
|||
|
Balance as of December 31, 2020 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive income (loss), net of taxes |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balance as of March 31, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Note 10. Related Party Transactions
The Company enters into related party transactions with its joint ventures. For the three month period ended March 31, 2022, pulp purchases from the Company's
Note 11. Segment Information
The Company is managed based on the primary products it manufactures: pulp and wood products. Accordingly, the Company's
None of the income or loss items following operating income in the Company's Interim Consolidated Statements of Operations are allocated to the segments, as those items are reviewed separately by management.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 11. Segment Information (continued)
Information about certain segment data for the three month periods ended March 31, 2022 and 2021, was as follows:
|
Three Months Ended March 31, 2022 |
|
Pulp |
|
|
Wood Products |
|
|
Corporate and Other |
|
|
Consolidated |
|
||||
|
Revenues from external customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Operating income (loss) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Total assets (a) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by geographical markets (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(a) |
Total assets for the pulp segment includes the Company's $ |
|
(b) |
Sales are attributed to countries based on the ship-to location provided by the customer. |
|
Three Months Ended March 31, 2021 |
|
Pulp |
|
|
Wood Products |
|
|
Corporate and Other |
|
|
Consolidated |
|
||||
|
Revenues from external customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Operating income (loss) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by geographical markets (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(a) |
Sales are attributed to countries based on the ship-to location provided by the customer. |
FORM 10-Q
QUARTERLY REPORT - PAGE 15
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 11. Segment Information (continued)
As of December 31, 2021, the Company had total assets of $
Revenues between segments are accounted for at prices that approximate fair value. These include revenues from the sale of residual fiber from the wood products segment to the pulp segment for use in the pulp production process and from the sale of residual fuel from the pulp segment to the wood products segment for use in energy production. For the three month period ended March 31, 2022, the pulp segment sold $nil of residual fuel to the wood products segment (2021 – $
Note 12. Financial Instruments and Fair Value Measurement
Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and other approximates their fair value.
The estimated fair values of the Company's outstanding debt under the fair value hierarchy as of March 31, 2022 and December 31, 2021 were as follows:
|
|
|
Fair value measurements as of March 31, 2022 using: |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Revolving credit facilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Senior notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Fair value measurements as of December 31, 2021 using: |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Revolving credit facilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Senior notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The carrying value of the revolving credit facilities classified as Level 2 approximates the fair value as the variable interest rates reflect current interest rates for financial instruments with similar characteristics and maturities.
The fair value of the senior notes classified as Level 2 was determined using quoted prices in a dealer market, or using recent market transactions. The Company's senior notes are not carried at fair value in the Interim Consolidated Balance Sheets as of March 31, 2022 or December 31, 2021. However, fair value disclosure is required. The carrying value of the Company's senior notes, net of unamortized note issuance costs, was $
FORM 10-Q
QUARTERLY REPORT - PAGE 16
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 12. Financial Instruments and Fair Value Measurement (continued)
Credit Risk
The Company’s credit risk is primarily attributable to cash held in bank accounts and accounts receivable. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company’s credit risk associated with the sale of pulp, lumber and other wood residuals is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping the product. The Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. Concentrations of credit risk on the sale of pulp, lumber and other wood residuals are with customers and agents based primarily in Germany, China and the U.S.
The Company’s exposure to credit losses may increase if its customers are adversely affected by the COVID-19 pandemic. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables if the cash flows of the Company’s customers are adversely impacted by the COVID-19 pandemic. As of March 31, 2022, the Company has not had significant credit losses due to the COVID-19 pandemic.
The carrying amount of cash and cash equivalents of $
Note 13. Commitments and Contingencies
|
(a) |
The Company is involved in legal actions and claims arising in the ordinary course of business. While the outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claims which are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. |
|
(b) |
The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout older facilities. The Company’s obligation for the proper removal and disposal of asbestos products from the Company’s mills is a conditional asset retirement obligation. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value. |
|
(c) |
In 2021, the European Commission opened a cartel investigation into the wood pulp sector in Europe to investigate if there was an infringement of European Union competition law. In October 2021, the Commission conducted inspections of major European pulp producers including the Company’s German operations. The Company is cooperating with the investigation. As the matter is currently in the investigation stage, the Company cannot predict the timing of the same and what further actions, if any, the European Commission may pursue or what the outcome of any such actions may be. |
FORM 10-Q
QUARTERLY REPORT - PAGE 17
NON-GAAP FINANCIAL MEASURES
This quarterly report on Form 10-Q contains “non-GAAP financial measures”, that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with the generally accepted accounting principles in the United States, referred to as “GAAP”. Specifically, we make use of the non-GAAP measure “Operating EBITDA”.
Operating EBITDA is defined as operating income plus depreciation and amortization and non-recurring capital asset impairment charges. We use Operating EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs, and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Operating EBITDA does not reflect the impact of a number of items that affect our net income, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income or operating income as a measure of performance, or as an alternative to net cash from (used in) operating activities as a measure of liquidity. Operating EBITDA is an internal measure and therefore may not be comparable to other companies.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (v) the impact of non-recurring impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of March 31, 2022, unless otherwise stated; (iv) our reporting currency is dollars and references to “€” mean euros and “C$” mean Canadian dollars; (v) “ADMTs” refers to air-dried metric tonnes; (vi) “NBSK” refers to northern bleached softwood kraft; (vii) “NBHK” refers to northern bleached hardwood kraft; (viii) “MW” refers to megawatts and “MWh” refers to megawatt hours; (ix) “Mfbm” refers to thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (x) our lumber metrics are converted from cubic meters to Mfbm using a conversion ratio of 1.6 cubic meters to one Mfbm, which is the ratio commonly used in the industry.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figure.
The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2022 should be read in conjunction with our Interim Consolidated Financial Statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission, referred to as the “SEC”.
Results of Operations
General
We have two reportable operating segments:
|
|
• |
Pulp – consists of the manufacture, sale and distribution of pulp, electricity and other by-products at our pulp mills. |
|
|
• |
Wood Products – consists of the manufacture, sale and distribution of lumber, electricity and other wood residuals at the Friesau sawmill. |
Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.
Current Market Environment
In the first quarter of 2022, we achieved record quarterly pulp, lumber and energy revenues. Pulp and lumber revenues were driven by low customer inventory levels and restricted supply caused by global logistics issues. Our energy revenues benefitted from both strong demand and higher prices for energy in Germany where first quarter 2022 prices were more than double those of the comparable quarter of 2021. While some of our German mills have the right to sell surplus energy at stipulated prices, they may also elect to sell their surplus energy at applicable market rates if circumstances so warrant.
As we move into the second quarter, we currently expect some continued upward pricing pressure on pulp prices as a result of current supply-demand dynamics. While lumber prices in the United States have declined in the last few weeks, we generally expect them to remain at historically strong levels into the summer. Further, we currently expect strong energy demand and prices in Germany to continue in the second quarter of 2022.
As of March 31, 2022, third party industry quoted NBSK list prices in Europe and North America were approximately $1,345 per ADMT and $1,615 per ADMT, respectively and NBSK net prices in China were approximately $985 per ADMT. Prices for China are net of discounts, allowances and rebates.
Partially offsetting the higher revenues was the negative impact of inflationary pressures and global supply chain challenges that increased our costs for fiber, energy and chemicals and negatively impacted production and sales
FORM 10-Q
QUARTERLY REPORT - PAGE 19
volumes in the first quarter of 2022. Such supply chain challenges resulted in our Canadian mills' being forced to temporarily slow production in the first quarter of 2022 and utilize higher cost trucking transportation as the railways work to address their backlogs.
We anticipate that the inflationary pressures and global supply chain challenges we experienced in the first quarter of 2022 will continue to impact our business in the second quarter of 2022.
COVID-19 Pandemic
While many countries globally have eased pandemic restrictions and the global roll-out of vaccines continues, health and infection risks from COVID-19, including from variants, continue. Consequently, we will maintain our measures and procedures put in place to protect our people and allow us to operate our business safely and efficiently. We will continue to monitor our operations and guidance from governmental and health organizations to ensure we take appropriate and necessary actions to protect our people.
Summary Financial Highlights
|
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
|
2022 |
|
|
2021 |
|
|
||
|
|
(in thousands, other than per share amounts) |
|
|
||||||
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
Pulp segment revenues |
|
$ |
485,931 |
|
|
$ |
339,756 |
|
|
|
Wood products segment revenues |
|
|
101,033 |
|
|
|
70,987 |
|
|
|
Corporate and other revenues |
|
|
5,777 |
|
|
|
1,977 |
|
|
|
Total revenues |
|
$ |
592,741 |
|
|
$ |
412,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp segment operating income |
|
$ |
86,236 |
|
|
$ |
25,296 |
|
|
|
Wood products segment operating income |
|
|
40,479 |
|
|
|
27,977 |
|
|
|
Corporate and other operating loss |
|
|
(4,364 |
) |
|
|
(2,244 |
) |
|
|
Total operating income |
|
$ |
122,351 |
|
|
$ |
51,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp segment depreciation and amortization |
|
$ |
27,684 |
|
|
$ |
27,046 |
|
|
|
Wood products segment depreciation and amortization |
|
|
3,637 |
|
|
|
3,723 |
|
|
|
Corporate and other depreciation and amortization |
|
|
795 |
|
|
|
198 |
|
|
|
Total depreciation and amortization |
|
$ |
32,116 |
|
|
$ |
30,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating EBITDA(1) |
|
$ |
154,467 |
|
|
$ |
81,996 |
|
|
|
Loss on early extinguishment of debt |
|
$ |
— |
|
|
$ |
(30,368 |
) |
(2) |
|
Income tax provision |
|
$ |
(24,236 |
) |
|
$ |
(2,698 |
) |
|
|
Net income |
|
$ |
88,897 |
|
|
$ |
5,933 |
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.35 |
|
|
$ |
0.09 |
|
|
|
Diluted |
|
$ |
1.34 |
|
|
$ |
0.09 |
|
|
|
Common shares outstanding at period end |
|
|
66,132 |
|
|
|
65,988 |
|
|
|
(1) |
The following table provides a reconciliation of net income to operating income and Operating EBITDA for the periods indicated: |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
(in thousands) |
|
||||||
|
Net income |
|
$ |
88,897 |
|
|
$ |
5,933 |
|
|
Income tax provision |
|
|
24,236 |
|
|
|
2,698 |
|
|
Interest expense |
|
|
17,464 |
|
|
|
19,019 |
|
|
Loss on early extinguishment of debt |
|
|
— |
|
|
|
30,368 |
|
|
Other income |
|
|
(8,246 |
) |
|
|
(6,989 |
) |
|
Operating income |
|
|
122,351 |
|
|
|
51,029 |
|
|
Add: Depreciation and amortization |
|
|
32,116 |
|
|
|
30,967 |
|
|
Operating EBITDA |
|
$ |
154,467 |
|
|
$ |
81,996 |
|
|
(2) |
Redemption of 6.5% senior notes due 2024 (the “2024 Senior Notes”) and 7.375% senior notes due 2025 (the “2025 Senior Notes”). |
FORM 10-Q
QUARTERLY REPORT - PAGE 20
Selected Production, Sales and Other Data
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Pulp Segment |
|
|
|
|
|
|
|
|
|
Pulp production ('000 ADMTs) |
|
|
|
|
|
|
|
|
|
NBSK |
|
|
435.5 |
|
|
|
396.9 |
|
|
NBHK |
|
|
56.8 |
|
|
|
81.6 |
|
|
Annual maintenance downtime ('000 ADMTs) |
|
|
— |
|
|
|
37.8 |
|
|
Annual maintenance downtime (days) |
|
|
— |
|
|
|
27 |
|
|
Pulp sales ('000 ADMTs) |
|
|
|
|
|
|
|
|
|
NBSK |
|
|
505.1 |
|
|
|
418.6 |
|
|
NBHK |
|
|
49.9 |
|
|
|
69.0 |
|
|
Average NBSK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
|
|
Europe |
|
|
1,330 |
|
|
|
1,037 |
|
|
China |
|
|
899 |
|
|
|
883 |
|
|
North America |
|
|
1,527 |
|
|
|
1,302 |
|
|
Average NBHK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
|
|
China |
|
|
668 |
|
|
|
692 |
|
|
North America |
|
|
1,312 |
|
|
|
1,020 |
|
|
Average pulp sales realizations ($/ADMT)(2) |
|
|
|
|
|
|
|
|
|
NBSK |
|
|
812 |
|
|
|
668 |
|
|
NBHK |
|
|
695 |
|
|
|
520 |
|
|
Energy production ('000 MWh)(3) |
|
|
531.5 |
|
|
|
519.1 |
|
|
Energy sales ('000 MWh)(3) |
|
|
194.7 |
|
|
|
201.1 |
|
|
Average energy sales realizations ($/MWh)(3) |
|
|
186 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
Wood Products Segment |
|
|
|
|
|
|
|
|
|
Lumber production (MMfbm) |
|
|
115.6 |
|
|
|
117.8 |
|
|
Lumber sales (MMfbm) |
|
|
109.9 |
|
|
|
108.2 |
|
|
Average lumber sales realizations ($/Mfbm) |
|
|
840 |
|
|
|
622 |
|
|
Energy production and sales ('000 MWh) |
|
|
24.5 |
|
|
|
16.4 |
|
|
Average energy sales realizations ($/MWh) |
|
|
211 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
Average Spot Currency Exchange Rates |
|
|
|
|
|
|
|
|
|
$ / €(4) |
|
|
1.1216 |
|
|
|
1.2045 |
|
|
$ / C$(4) |
|
|
0.7897 |
|
|
|
0.7902 |
|
|
(1) |
Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates. |
|
(2) |
Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates. |
|
(3) |
Does not include our 50% joint venture interest in the Cariboo mill, which is accounted for using the equity method. |
|
(4) |
Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period. |
Consolidated – Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Total revenues in the first quarter of 2022 increased by approximately 44% to a record $592.7 million from $412.7 million in the same quarter of 2021 primarily due to higher sales realizations, pulp sales volumes and energy sales.
In the first quarter of 2022, our energy and chemical revenues increased by 76% to $46.2 million from $26.3 million in the same quarter of 2021 primarily as a result of higher energy prices in Germany, which were more than double those in the same quarter of 2021.
Costs and expenses in the first quarter of 2022 increased by approximately 30% to $470.4 million from $361.7 million in the first quarter of 2021 primarily due to higher per unit fiber costs, pulp sales volumes and energy, freight and chemical costs partially offset by lower maintenance costs.
In the first quarter of 2022, cost of sales depreciation and amortization increased to $32.1 million from $30.9 million in the same quarter of 2021 due to the completion of capital projects.
FORM 10-Q
QUARTERLY REPORT - PAGE 21
Selling, general and administrative expenses increased to $22.2 million in the first quarter of 2022 from $20.5 million in the same quarter of 2021 primarily due to higher employee compensation.
In the first quarter of 2022, our operating income increased to $122.4 million from $51.0 million in the same quarter of 2021 primarily due to higher sales realizations and pulp sales volumes and lower maintenance costs partially offset by higher per unit fiber costs and higher energy, freight and chemical costs.
In January 2021, we refinanced (the “Refinancing”) a significant portion of our debt by issuing $875.0 million of 5.125% senior notes due 2029 (the “2029 Senior Notes”) and using the proceeds to redeem and/or repurchase all of our 6.5% 2024 Senior Notes and our 7.375% 2025 Senior Notes at a cost including premium of $824.6 million (the “Redemption”). We recorded a loss on such Redemption of $30.4 million (being $0.46 per share).
Interest expense in the first quarter of 2022 decreased to $17.5 million from $19.0 million in the same quarter of 2021 primarily as a result of a lower interest rate for our 2029 Senior Notes.
In the first quarter of 2022, other income increased to $8.2 million from $7.0 million in the same quarter of 2021 primarily due to foreign exchange on the translation of intercompany loans.
During the first quarter of 2022, we had an income tax provision of $24.2 million or an effective tax rate of 21% due to taxable income in entities that have a full valuation allowance against their loss carryforwards. In the comparative quarter of 2021, we had an income tax provision of $2.7 million or an effective tax rate of 31%.
For the first quarter of 2022, our net income was $88.9 million, or $1.35 per basic share and $1.34 per diluted share, compared to net income of $5.9 million, or $0.09 per share, after giving effect to the loss on the Redemption of $30.4 million, in the same quarter of 2021.
In the first quarter of 2022, Operating EBITDA increased by approximately 88% to $154.5 million from $82.0 million in the same quarter of 2021 primarily due to higher sales realizations and pulp sales volumes and lower maintenance costs partially offset by higher per unit fiber costs and other production costs.
Operating Results by Business Segment
None of the income or loss items following operating income in our Interim Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management.
Pulp Segment – Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Selected Financial Information
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Pulp revenues |
|
$ |
446,911 |
|
|
$ |
317,582 |
|
|
Energy and chemical revenues |
|
$ |
39,020 |
|
|
$ |
22,174 |
|
|
Depreciation and amortization |
|
$ |
27,684 |
|
|
$ |
27,046 |
|
|
Operating income |
|
$ |
86,236 |
|
|
$ |
25,296 |
|
Pulp revenues in the first quarter of 2022 increased by approximately 41% to a record $446.9 million from $317.6 million in the same quarter of 2021 due to higher sales realizations and sales volumes.
Energy and chemical revenues increased by approximately 76% to a record $39.0 million in the first quarter of 2022 from $22.2 million in the same quarter of 2021 primarily due to higher sales realizations. During the current quarter of 2022, we benefitted from strong energy demand and higher energy prices in Germany.
Total pulp production increased by approximately 3% to 492,288 ADMTs in the first quarter of 2022 from 478,499 ADMTs in the same quarter of 2021 primarily due to lower annual maintenance downtime partially offset by lower
FORM 10-Q
QUARTERLY REPORT - PAGE 22
production at our Canadian mills as they slowed production as a result of railcar shortages disrupting shipping pulp from the mills. In the first quarter of 2022, we had no annual maintenance downtime. In the comparative quarter of 2021, we had annual maintenance downtime at our Celgar mill of 27 days (approximately 37,800 ADMTs).
In the second quarter of 2022, our pulp mills currently have 39 days of planned annual maintenance downtime (approximately 51,000 ADMTs).
Total pulp sales volumes increased by approximately 14% to 555,035 ADMTs in the first quarter of 2022 from 487,678 ADMTs in the same quarter of 2021 primarily due to the timing of shipments and higher production.
In the first quarter of 2022, third party industry quoted average list prices for NBSK pulp increased from the same quarter of 2021 primarily as a result of low customer inventory levels and global logistics issues restricting supply.
Average third party industry quoted list prices for NBSK pulp in Europe and North America were approximately $1,330 per ADMT and $1,527 per ADMT, respectively in the first quarter of 2022 compared to approximately $1,037 per ADMT and $1,302 per ADMT, respectively, in the same quarter of 2021. Average third party industry quoted NBSK net prices in China were approximately $899 per ADMT in the first quarter of 2022 compared to approximately $883 per ADMT in the same quarter of 2021.
Prices quoted for China are net of discounts, allowances and rebates whereas quoted prices for Europe and North America are before applicable discounts, allowances and rebates.
Our average NBSK pulp sales realizations increased by approximately 22% to $812 per ADMT in the first quarter of 2022 from approximately $668 per ADMT in the same quarter of 2021.
In the first quarter of 2022 compared to the same quarter of 2021, primarily as a result of the effect of the stronger dollar on our euro denominated costs and expenses, we had a positive impact of approximately $9.5 million in operating income due to foreign exchange.
Costs and expenses in the first quarter of 2022 increased by approximately 27% to $399.7 million from $314.6 million in the first quarter of 2021 primarily due to higher pulp sales volumes, per unit fiber costs and energy, chemical and freight costs partially offset by lower maintenance costs.
In the first quarter of 2022 per unit fiber costs increased by approximately 25% from the same quarter of 2021 due to higher per unit fiber costs for all of our mills. Per unit fiber costs for our German mills increased due to strong demand and reduced availability of lower cost beetle damaged wood. For our Canadian mills, per unit fiber costs increased due to strong demand in the mills' fiber baskets. We currently expect per unit fiber costs will increase in the second quarter of 2022 due to continued strong demand.
Transportation costs increased by approximately 32% to $47.9 million in the first quarter of 2022 from $36.2 million in the same quarter of 2021 primarily as a result of increased use of higher cost trucking and higher freight rates and sales volumes.
In the first quarter of 2022, depreciation and amortization increased to $27.7 million from $27.0 million in the same quarter of 2021 due to the completion of capital projects.
In the first quarter of 2022, pulp segment operating income increased to $86.2 million from $25.3 million in the same quarter of 2021 as higher sales realizations and lower maintenance costs were partially offset by higher per unit fiber costs and other production costs.
FORM 10-Q
QUARTERLY REPORT - PAGE 23
Wood Products Segment – Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Selected Financial Information
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Lumber revenues |
|
$ |
92,366 |
|
|
$ |
67,311 |
|
|
Energy revenues |
|
$ |
5,177 |
|
|
$ |
2,114 |
|
|
Wood residual revenues |
|
$ |
3,490 |
|
|
$ |
1,562 |
|
|
Depreciation and amortization |
|
$ |
3,637 |
|
|
$ |
3,723 |
|
|
Operating income |
|
$ |
40,479 |
|
|
$ |
27,977 |
|
In the first quarter of 2022, lumber revenues increased by approximately 37% to a record $92.4 million from $67.3 million in the same quarter of 2021 primarily due to higher sales realizations. In the first quarter of 2022, both European and U.S. demand was strong. The U.S. market accounted for approximately 59% of our lumber revenues and 42% of our lumber sales volumes. The majority of the balance of our lumber sales were to Europe.
Energy and wood residual revenues in the first quarter of 2022 increased to a record $8.7 million from $3.7 million in the same quarter of 2021 primarily due to higher sales realizations. Increased energy sales in the current quarter were driven by strong demand and higher energy prices in Germany.
Lumber production modestly decreased to 115.6 MMfbm in the first quarter of 2022 from 117.8 MMfbm in the same quarter of 2021.
Lumber sales volumes modestly increased to 109.9 MMfbm in the first quarter of 2022 from 108.2 MMfbm in the same quarter of 2021.
Average lumber sales realizations increased by approximately 35% to $840 per Mfbm in the first quarter of 2022 from approximately $622 per Mfbm in the same quarter of 2021 primarily due to higher pricing in both the European and U.S. markets. U.S. lumber pricing increased due to strong demand from the housing and renovation markets. European lumber pricing increased due to steady demand with limited supply.
Fiber costs were approximately 80% of our lumber cash production costs in the first quarter of 2022. In the comparative quarter of 2021, per unit fiber costs were lower as a result of a large supply of beetle damaged wood. As producers have worked through such wood, more green wood is being harvested. In the first quarter of 2022 per unit fiber costs increased by approximately 56% from the same quarter of 2021 as a result of using more green wood and continued strong demand for sawlogs. We currently expect modestly higher per unit fiber costs in the second quarter of 2022.
In the first quarter of 2022, depreciation and amortization was flat at $3.6 million compared to $3.7 million in the same quarter of 2021.
Transportation costs in the first quarter of 2022 increased by approximately 39% to $11.0 million from $7.9 million in the same quarter of 2021 primarily due to higher freight rates.
In the first quarter of 2022, our wood products segment had operating income of $40.5 million compared to $28.0 million in the same quarter of 2021 primarily due to a higher sales realizations partially offset by higher per unit fiber costs.
FORM 10-Q
QUARTERLY REPORT - PAGE 24
Liquidity and Capital Resources
Summary of Cash Flows
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Net cash from operating activities |
|
$ |
68,810 |
|
|
$ |
30,288 |
|
|
Net cash used in investing activities |
|
|
(26,790 |
) |
|
|
(26,297 |
) |
|
Net cash from financing activities |
|
|
24,609 |
|
|
|
31,412 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(1,534 |
) |
|
|
(1,418 |
) |
|
Net increase in cash and cash equivalents |
|
$ |
65,095 |
|
|
$ |
33,985 |
|
We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for fiber, labor and chemicals. Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and sales and the payment of payables and expenses.
Cash Flows from Operating Activities. Cash provided by operating activities was $68.8 million in the three months ended March 31, 2022 compared to $30.3 million in the comparative period of 2021. An increase in accounts receivable used cash of $52.1 million in the first quarter of 2022 compared to $12.4 million in the same quarter of 2021. An increase in inventories used cash of $1.7 million in the three months ended March 31, 2022 compared to $20.8 million in the same period of 2021. A decrease in accounts payable and accrued expenses used cash of $0.6 million in the three months ended March 31, 2022 compared to an increase in accounts payable and accrued expenses providing cash of $4.4 million in the same period of 2021.
Cash Flows from Investing Activities. Investing activities in the three months ended March 31, 2022 used cash of $26.8 million primarily related to capital expenditures of $33.3 million. In the first quarter of 2022, capital expenditures primarily related to upgrades to the woodrooms at our Canadian mills and optimization projects at our German mills. In the three months ended March 31, 2022, we received the final payment of $6.4 million of insurance proceeds for our property damage claim related to the Peace River recovery boiler. In the three months ended March 31, 2021, investing activities used cash of $26.3 million primarily related to capital expenditures of $25.3 million.
Cash Flows from Financing Activities. In the three months ended March 31, 2022, financing activities provided cash of $24.6 million. In the first quarter of 2022, we borrowed $30.5 million under our revolving credit facilities. In the three months ended March 31, 2022, we received $1.1 million in government grants to partially finance innovation and greenhouse gas emission reduction capital projects at our Canadian mills. In the three months ended March 31, 2021, financing activities provided cash of $31.4 million primarily from the net proceeds of the Refinancing after giving effect to the Redemption. In the first quarter of 2021, we paid note issuance costs of $14.4 million related to the issuance of the 2029 Senior Notes and repaid $15.1 million of borrowings under our revolving credit facilities. In the three months ended March 31, 2021, we received $8.5 million in government grants to partially finance innovation and greenhouse gas emission reduction capital projects at our Canadian mills.
FORM 10-Q
QUARTERLY REPORT - PAGE 25
Balance Sheet Data
The following table is a summary of selected financial information as of the dates indicated:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Cash and cash equivalents |
|
$ |
410,705 |
|
|
$ |
345,610 |
|
|
Working capital |
|
$ |
888,201 |
|
|
$ |
781,181 |
|
|
Total assets |
|
$ |
2,456,944 |
|
|
$ |
2,351,232 |
|
|
Long-term liabilities |
|
$ |
1,407,426 |
|
|
$ |
1,374,084 |
|
|
Total shareholders' equity |
|
$ |
768,334 |
|
|
$ |
694,024 |
|
Sources and Uses of Funds
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand. Our principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our senior notes.
The following table sets out our total capital expenditures and interest expense for the periods indicated:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Capital expenditures |
|
$ |
33,293 |
|
|
$ |
25,262 |
|
|
Cash paid for interest expense(1) |
|
$ |
32,073 |
|
|
$ |
39,026 |
|
|
Interest expense(2) |
|
$ |
17,464 |
|
|
$ |
19,019 |
|
|
(1) |
Amounts differ from interest expense, which includes non-cash items. See supplemental disclosure of cash flow information from our Interim Consolidated Statements of Cash Flows included in this report. |
|
(2) |
Interest on our senior notes due 2026 is paid semi-annually in January and July of each year. Interest on our 2029 Senior Notes is paid semi-annually in February and August of each year, commencing August 2021. |
As of March 31, 2022, we had cash and cash equivalents of $410.7 million and approximately $281.0 million available under our revolving credit facilities and as a result aggregate liquidity of about $691.7 million.
We currently consider the majority of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income tax has been provided on such earnings. However, if we were required to repatriate funds to the United States, we believe that we currently could repatriate the majority thereof without incurring any material amount of taxes as a result of our shareholder advances and U.S. tax reform. However, it is currently not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. Substantially all of our undistributed earnings are held by our foreign subsidiaries outside of the United States.
Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp and lumber pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facilities, will be adequate to finance the capital requirements for our business including the payment of our quarterly dividend during the next 12 months.
FORM 10-Q
QUARTERLY REPORT - PAGE 26
In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
Debt Covenants
Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. See our annual report on Form 10-K for the fiscal year ended December 31, 2021.
As of March 31, 2022, we were in full compliance with all of the covenants of our indebtedness.
Off-Balance Sheet Arrangements
As of March 31, 2022, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).
Contractual Obligations and Commitments
There were no material changes outside the ordinary course to any of our material contractual obligations during the three months ended March 31, 2022.
Foreign Currency
As a majority of our assets, liabilities and expenditures are held or denominated in euros or Canadian dollars, our consolidated financial results are subject to foreign currency exchange rate fluctuations.
We translate foreign denominated assets and liabilities into dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in other comprehensive loss and do not affect our net earnings.
As a result of the strengthening of the dollar versus the euro as of March 31, 2022, we recorded a net non-cash decrease of $10.5 million in the carrying value of our net assets, consisting primarily of our fixed assets denominated in euros. This non-cash decrease does not affect our net income, Operating EBITDA or cash but is reflected in our other comprehensive loss and as a decrease to our total equity. As a result, our accumulated other comprehensive loss increased to $101.4 million.
Based upon the exchange rate as of March 31, 2022, the dollar has strengthened by approximately 2% against the euro and has weakened by approximately 1% against the Canadian dollar since December 31, 2021. See "Quantitative and Qualitative Disclosures about Market Risk".
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of the recording of assets, liabilities, revenues, and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increases, these judgments become even more subjective and complex.
Our significant accounting policies are disclosed in Note 1 to our audited annual financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2021. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for, among other things, pension and other post-retirement benefit
FORM 10-Q
QUARTERLY REPORT - PAGE 27
obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
We have identified certain accounting policies that are the most important to the portrayal of our current financial condition and results of operations.
For information about both our significant and critical accounting policies, see our annual report on Form 10-K for the fiscal year ended December 31, 2021.
Cautionary Statement Regarding Forward-Looking Information
The statements in this report that are not reported financial results or other historical information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.
Generally, forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", or words of similar meaning, or future or conditional verbs, such as "will", "should", "could", or "may", although not all forward-looking statements contain these identifying words. Forward-looking statements are based on expectations, forecasts and assumptions by our management and involve a number of risks, uncertainties and other factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, the following:
Risks Related to our Business
|
|
• |
The ongoing COVID-19 pandemic could materially adversely affect our business, financial position and results of operations; |
|
|
• |
our business is highly cyclical in nature; |
|
|
• |
cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business; |
|
|
• |
we face intense competition in the forest products industry; |
|
|
• |
our business is subject to risks associated with climate change and social and government responses thereto; |
|
|
• |
if we are unable to offer products certified to globally recognized forestry management and chain of custody standards or meet customers’ product specifications, it could adversely affect our ability to compete; |
|
|
• |
our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements; |
|
|
• |
trends in non-print media and changes in consumer habits regarding the use of paper have and are expected to continue to adversely affect the demand for market pulp; |
|
|
• |
fluctuations in prices and demand for lumber could adversely affect our business; |
FORM 10-Q
QUARTERLY REPORT - PAGE 28
|
|
• |
our wood products segment lumber products are vulnerable to declines in demand due to competing technologies or materials; |
|
|
• |
we have limited control over the operations of the Cariboo mill; |
|
|
• |
we may experience material disruptions to our production; |
|
|
• |
future acquisitions may result in additional risks and uncertainties in our business; |
|
|
• |
we are subject to risks related to our employees; |
|
|
• |
we are dependent on key personnel; |
|
|
• |
if our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations; |
|
|
• |
our insurance coverage may not be adequate; |
|
|
• |
we rely on third parties for transportation services; |
|
|
• |
failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business; |
Risks Related to our Debt
|
|
• |
our level of indebtedness could negatively impact our financial condition, results of operations and liquidity; |
|
|
• |
changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities; |
|
|
• |
we are exposed to interest rate fluctuations; |
Risks Related to Macro-economic Conditions
|
|
• |
a weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources; |
|
|
• |
we are exposed to currency exchange rate fluctuations; |
|
|
• |
political uncertainty, an increase in trade protectionism or geo-political conflict could have a material adverse effect on global macro-economic activities and trade and adversely affect our business, results of operations and financial condition; |
|
|
• |
we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a new pandemic, terrorist attacks or natural disasters; |
Legal and Regulatory Risks
|
|
• |
we are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations; |
|
|
• |
we participate in German statutory energy programs; |
FORM 10-Q
QUARTERLY REPORT - PAGE 29
|
|
• |
our international sales and operations are subject to applicable laws relating to trade, export controls, foreign corrupt practices and competition laws, the violation of which could adversely affect our operation; |
Risks Related to Ownership of our Shares
|
|
• |
the price of our common stock may be volatile; and |
|
|
• |
a small number of our shareholders could significantly influence our business. |
Given these uncertainties, you should not place undue reliance on our forward-looking statements. The foregoing review of important factors is not exhaustive or necessarily in order of importance and should be read in conjunction with the risks and assumptions including those set forth under "Part II. Other Information – Item 1A. Risk Factors" and in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the fiscal year ended December 31, 2021. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.
Cyclical Nature of Business
Revenues
The pulp and lumber businesses are highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn can materially affect prices. Pulp and lumber markets are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro-economic conditions and levels of industry capacity. Pulp and lumber are commodities that are generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.
Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their pulp production on the market, if market conditions, prices and trends warrant such actions.
Demand for each of pulp and lumber has historically been determined primarily by general global macro-economic conditions and has been closely tied to overall business activity. Pulp prices have been and are likely to continue to be volatile and can fluctuate widely over time. The third party industry quoted average European list prices for NBSK pulp between 2012 and 2022 have fluctuated between a low of $760 per ADMT in 2012 to a high of $1,345 per ADMT in 2021. In the same period, third party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $700 per ADMT in 2012 to a high of $1,390 per ADMT in 2022.
Our mills and operations voluntarily subject themselves to third-party certification as to compliance with internationally recognized, sustainable management standards because end use paper and lumber customers have shown an increased interest in understanding the origin of products they purchase. Demand for our products could be adversely affected if we, or our suppliers, are unable to achieve compliance, or are perceived by the public as failing to comply, with these standards or if our customers require compliance with alternate standards for which our operations are not certified.
A pulp producer's actual sales price realizations are net of customer discounts, rebates and other selling concessions.
FORM 10-Q
QUARTERLY REPORT - PAGE 30
Accordingly, prices for pulp and lumber are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the prices for pulp and lumber, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations and cash flows could be materially adversely affected.
Costs
Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips, pulp logs and sawlogs. Wood chip, pulp log and sawlog costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber prices could affect producer profit margins if they are unable to pass along price increases to pulp and lumber customers or purchasers of surplus energy.
Currency
We have manufacturing operations in Germany and Canada. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Canadian mills in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such declines in the dollar relative to the euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rates between the dollar and the euro and Canadian dollar. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the periodic use of derivatives.
For additional information, please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our annual report on Form 10-K for the fiscal year ended December 31, 2021.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, referred to as the "Exchange Act"), as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
FORM 10-Q
QUARTERLY REPORT - PAGE 31
It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness and there can be no assurance that any design will succeed in achieving its stated goals.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORM 10-Q
QUARTERLY REPORT - PAGE 32
PART II. OTHER INFORMATION
|
ITEM 1. |
LEGAL PROCEEDINGS |
We are subject to routine litigation incidental to our business, including that which is described in our latest annual report on Form 10-K for the fiscal year ended December 31, 2021. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
|
ITEM 1A. |
RISK FACTORS |
Other than as set out below, there have been no material changes to the factors disclosed in Item 1A. Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2021.
Our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by Russia’s invasion of Ukraine.
The global economy has been negatively impacted by increasing tension, uncertainty and tragedy resulting from Russia's invasion of Ukraine. The adverse and uncertain economic conditions resulting therefrom has and may further negatively impact global demand, cause supply chain disruptions and increase costs for transportation, energy and other raw materials. Furthermore, governments in the United States, the European Union, the United Kingdom, Canada and others have imposed financial and economic sanctions on certain industry segments and various parties in Russia. We are monitoring the conflict including the potential impact of financial and economic sanctions on the global economy and particularly the economies of Europe. Increased trade barriers, sanctions and other restrictions on global or regional trade could adversely affect our business, financial condition and results of operations. Although we have no operations in Russia or Ukraine, the destabilizing effects of Russia’s invasion of Ukraine could have other adverse effects on our business. Further escalation of geopolitical tensions related to this military conflict and/or its expansion could result in loss of property, expropriation, cyberattacks, supply disruptions, plant closures and an inability to obtain key supplies and materials, as well as adversely affect both our and our customers' supply chains and logistics, particularly in Europe.
In many cases, both our German operations and those of European customers depend on the availability of natural gas for use in their manufacturing operations. A very significant proportion of Germany's natural gas supply originates from Russia. Material disruptions of natural gas supply to Europe and in particular Germany, whether from sanctions, counter-measures by Russia, other restrictions, damage to infrastructure and logistics or otherwise from the destabilizing effects of military conflict could materially and adversely impact European and global natural gas and oil markets. Material disruptions to the natural gas supply of Germany could adversely affect its availability to industry and our ability to operate our German pulp and lumber mills in the ordinary course which could adversely affect our business, results of operations and financial condition.
In addition, the effects of such military conflict could heighten and increase many of the other risks described in Part I, Item 1A. "Risk Factors" in our Form 10-K.
|
ITEM 2. |
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
|
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
|
ITEM 4. |
MINE SAFETY DISCLOSURES |
None.
|
ITEM 5. |
OTHER INFORMATION |
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 33
|
ITEM 6. |
EXHIBITS |
|
Exhibit No. |
|
Description |
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
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32.1* |
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32.2* |
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101 |
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The following financial information from the Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2022 of Mercer International Inc., formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Interim Consolidated Statements of Operations; (ii) Interim Consolidated Statements of Comprehensive Income (Loss); (iii) Interim Consolidated Balance Sheets; (iv) Interim Consolidated Statements of Changes in Shareholders' Equity; (v) Interim Consolidated Statements of Cash Flows; and (vi) Notes to the Interim Consolidated Financial Statements. |
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104 |
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The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 has been formatted in Inline XBRL. |
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* |
In accordance with Release No. 33-8212 of the SEC, these Certifications: (i) are "furnished" to the SEC and are not "filed" for the purposes of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company's registration statements filed under the Securities Act of 1933, as amended, for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein. |
FORM 10-Q
QUARTERLY REPORT - PAGE 34
SIGNATURES
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, thereunto duly authorized.
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MERCER INTERNATIONAL INC. |
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By: |
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/s/ David M. Gandossi |
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David M. Gandossi |
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Chief Executive Officer and President |
Date: April 28, 2022
FORM 10-Q
QUARTERLY REPORT - PAGE 35