UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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 |
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:
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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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
The Registrant had
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023
(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 |
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Nine Months Ended |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenues |
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$ |
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$ |
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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 (loss) |
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( |
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( |
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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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( |
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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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( |
) |
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( |
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Income (loss) before income taxes |
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( |
) |
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( |
) |
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Income tax recovery (provision) |
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( |
) |
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( |
) |
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( |
) |
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Net income (loss) |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
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Net income (loss) per common share |
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Basic |
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$ |
( |
) |
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$ |
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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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$ |
( |
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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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$ |
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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 |
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Nine Months Ended |
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2023 |
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2022 |
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2023 |
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2022 |
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Net income (loss) |
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$ |
( |
) |
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$ |
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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 |
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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 adjustments |
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( |
) |
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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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( |
) |
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( |
) |
Total comprehensive income (loss) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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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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September 30, |
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December 31, |
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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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Goodwill |
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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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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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(Note 17) |
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Subsequent events (Note 8, 11) |
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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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Number |
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Amount, |
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Additional |
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Retained |
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Accumulated |
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Total |
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Three Months Ended September 30: |
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Balance as of June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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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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— |
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Net loss |
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— |
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— |
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|
— |
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( |
) |
|
|
— |
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|
( |
) |
Dividends declared |
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— |
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— |
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— |
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|
( |
) |
|
|
— |
|
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|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
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|||||
|
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|
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|
||||||
Balance as of June 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Stock compensation expense |
|
|
— |
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|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
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||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
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||
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
|
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|
|
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||||||
Nine Months Ended September 30: |
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||||||
Balance as of December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
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|||||
Shares issued on grants of restricted shares |
|
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|
|
|
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( |
) |
|
|
— |
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— |
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|
— |
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||
Shares issued on grants of performance share units |
|
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|
|
|
|
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( |
) |
|
|
— |
|
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|
— |
|
|
|
— |
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||
Shares issued on grants of restricted 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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— |
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— |
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||
Net loss |
|
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— |
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— |
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|
|
— |
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|
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( |
) |
|
|
— |
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|
( |
) |
Dividends declared |
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— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
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|
( |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
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|
$ |
( |
) |
|
$ |
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|||||
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||||||
Balance as of December 31, 2021 |
|
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|
$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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|||||
Shares issued on grants of restricted shares |
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|
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|
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|
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( |
) |
|
|
— |
|
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— |
|
|
|
— |
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||
Shares issued on grants of performance share units |
|
|
|
|
|
|
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|
( |
) |
|
|
— |
|
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|
— |
|
|
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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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|
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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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— |
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— |
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Dividends declared |
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— |
|
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|
— |
|
|
|
— |
|
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|
( |
) |
|
|
— |
|
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|
( |
) |
Other comprehensive loss |
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— |
|
|
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— |
|
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|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
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 |
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Nine Months Ended |
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||||||||||
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|
2023 |
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2022 |
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2023 |
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2022 |
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Cash flows from (used in) operating activities |
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||||
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Adjustments to reconcile net income (loss) to cash flows from operating activities |
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Depreciation and amortization |
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Deferred income tax provision (recovery) |
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( |
) |
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Inventory impairment (recovery) |
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( |
) |
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Defined benefit pension plans and other post-retirement benefit plan expense |
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Stock compensation expense |
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Foreign exchange transaction gains |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
Other |
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( |
) |
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( |
) |
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( |
) |
|
Defined benefit pension plans and other post-retirement benefit plan contributions |
|
|
( |
) |
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( |
) |
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( |
) |
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( |
) |
Changes in working capital |
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||||
Accounts receivable |
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( |
) |
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( |
) |
||
Inventories |
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( |
) |
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( |
) |
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( |
) |
|
Accounts payable and accrued expenses |
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( |
) |
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( |
) |
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Other |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
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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( |
) |
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( |
) |
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( |
) |
Acquisition, net of cash acquired (Note 2) |
|
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( |
) |
|
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( |
) |
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( |
) |
|
Property insurance proceeds |
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Proceeds from government grants |
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||||
Purchase of term deposit |
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( |
) |
|||
Other |
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||||
Net cash from (used in) investing activities |
|
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( |
) |
|
|
( |
) |
|
|
( |
) |
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( |
) |
Cash flows from (used in) financing activities |
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|
|
||||
Proceeds from issuance of senior notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Proceeds from (repayment of) revolving credit facilities, net |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Dividend payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Payment of debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
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 (decrease) in cash and cash equivalents |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Supplemental cash flow disclosure: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash paid for interest |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cash paid for income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 consolidated balance sheet information as of December 31, 2022 was derived from the Company’s audited Consolidated Financial Statements, but does not contain all of the footnote disclosures from the annual Consolidated 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, 2022. 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, 2022 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 and discount rates associated with impairment testing for long-lived assets and goodwill, 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.
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. Acquisitions
2023 Asset Acquisition
Structurlam
On
The transaction is accounted for as an acquisition of a group of assets as management determined it does not qualify as an acquisition of a business under GAAP. Substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets, being the land, building and production equipment at the Conway Facility.
2022 Business Acquisition
Torgau
On
The Company’s allocation of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date was finalized during the nine month period ended September 30, 2023. The following table summarizes the purchase price allocation:
|
|
Purchase Price |
|
|
Cash |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventories |
|
|
|
|
Other current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Amortizable intangible assets (a) |
|
|
|
|
Goodwill (b) |
|
|
|
|
Other long-term assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable and other current liabilities |
|
|
( |
) |
Deferred income tax |
|
|
( |
) |
Other long-term liabilities |
|
|
( |
) |
Total liabilities assumed |
|
|
( |
) |
Net assets acquired |
|
$ |
|
|
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 3. Business Interruption Insurance
In 2021, the Rosenthal mill turbine was taken down to complete extensive repair work. In June 2023, the Company settled the business interruption portion of the insurance claim for €
In July 2022, a fire occurred in the woodyard of the Stendal mill. In September 2022, the Company received written confirmation from the insurance provider that the business interruption and property insurance claim related to the fire is covered. In the three and nine months ended September 30, 2023, the insurance provider paid nonrefundable business interruption insurance payments of €
The business interruption and property insurance proceeds for the three and nine months ended September 30, 2023 of €
Note 4. Inventories
Inventories as of September 30, 2023 and December 31, 2022, were comprised of the following:
|
|
September 30, |
|
|
December 31, |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Finished goods |
|
|
|
|
|
|
||
Spare parts and other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
For the three months ended September 30, 2023, the Company recorded a net inventory impairment recovery of $
Note 5. Property, Plant and Equipment, Net
As a result of the sustained decline in hardwood pulp prices for the Peace River mill in 2023, the Company performed an impairment test as of September 30, 2023 on the long-lived assets of the Peace River mill which had a carrying value of $
Note 6. Goodwill
|
|
September 30, |
|
|
December 31, |
|
||
Beginning of period balance |
|
$ |
|
|
$ |
|
||
Acquisition |
|
|
|
|
|
|
||
Purchase price allocation adjustment |
|
|
|
|
|
|
||
Impact of changes in foreign exchange rate |
|
|
|
|
|
|
||
End of period balance |
|
$ |
|
|
$ |
|
||
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 6. Goodwill (continued)
The Company tests goodwill for impairment annually on August 31 at the reporting unit level. Goodwill was assigned to the Torgau facility, the reporting unit which benefits from the synergies arising from the business combination. The annual impairment test was completed on August 31, 2023 and
Note 7. Accounts Payable and Other
Accounts payable and other as of September 30, 2023 and December 31, 2022, were comprised of the following:
|
|
September 30, |
|
|
December 31, |
|
||
Trade payables |
|
$ |
|
|
$ |
|
||
Accrued expenses |
|
|
|
|
|
|
||
Interest payable |
|
|
|
|
|
|
||
Income tax payable |
|
|
|
|
|
|
||
Payroll-related accruals |
|
|
|
|
|
|
||
Deposits for mass timber sales contracts |
|
|
|
|
|
|
||
Wastewater fee (a) |
|
|
|
|
|
|
||
Finance lease liability |
|
|
|
|
|
|
||
Operating lease liability |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Note 8. Debt
Debt as of September 30, 2023 and December 31, 2022, was comprised of the following:
|
|
Maturity |
|
September 30, |
|
|
December 31, |
|
||
Senior notes (a) |
|
|
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
— |
|
|||
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||
Credit arrangements |
|
|
|
|
|
|
|
|
||
€ |
|
|
|
|
|
|
|
|||
C$ |
|
|
|
|
|
|
|
|||
€ |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Finance lease liability |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Less: unamortized senior note issuance costs |
|
|
|
|
( |
) |
|
|
( |
) |
Less: finance lease liability due within one year |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
$ |
|
|
$ |
|
||
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 8. Debt (continued)
The maturities of the principal portion of the senior notes and credit arrangements as of September 30, 2023 were as follows:
|
|
Senior Notes and Credit Arrangements |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
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
The senior notes which mature on
2028 Senior Notes |
|
2029 Senior Notes |
||||
12 Month Period Beginning |
|
Percentage |
|
12 Month Period Beginning |
|
Percentage |
October 1, 2025 |
|
|
February 1, 2024 |
|
||
October 1, 2026 |
|
|
February 1, 2025 |
|
||
October 1, 2027 and thereafter |
|
|
February 1, 2026 and thereafter |
|
||
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 8. Debt (continued)
Note 9. 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 September 30, |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
|
|
Pension |
|
|
Other Post- |
|
|
Pension |
|
|
Other Post- |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net benefit costs (gains) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
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 9. Pension and Other Post-Retirement Benefit Obligations (continued)
|
|
Nine Months Ended September 30, |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
|
|
Pension |
|
|
Other Post- |
|
|
Pension |
|
|
Other Post- |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net benefit costs (gains) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
The components of the net benefit costs (gains) other than service cost are recorded in "Other income" in the Interim Consolidated Statements of Operations. The amortization of unrecognized items relates to actuarial losses (gains) 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 and nine months ended September 30, 2023, 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 and nine months ended September 30, 2023, the Company made contributions of $
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 10. Income Taxes
Differences between the U.S. Federal statutory and the Company's effective tax rates for the three and nine months ended September 30, 2023 and 2022, were as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
U.S. Federal statutory rate |
|
|
|
|
|
|
|
|
||||||||
Income tax recovery (provision) using U.S. Federal statutory rate on income (loss) before income taxes |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Tax differential on foreign income (loss) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
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 recovery (provision) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Comprised of: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current income tax recovery (provision) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Deferred income tax recovery (provision) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax recovery (provision) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Note 11. Shareholders' Equity
Dividends
During the nine months ended September 30, 2023, the Company's board of directors declared the following quarterly dividends:
Date Declared |
|
Dividend Per |
|
|
Amount |
|
||
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
||
On
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. Shareholders' Equity (continued)
Stock Based Compensation
The Company has a stock incentive plan which provides for stock options, restricted stock units (“RSUs”), deferred stock units (“DSUs”), 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 and nine months ended September 30, 2
In May 2023, the board of directors adopted the 2023 Non-Employee Director Compensation Plan which allows non-employee directors to elect on an annual basis to receive, in lieu of cash fees, either restricted stock or DSUs. The board of directors receive equity compensation of restricted stock unless they elect to receive DSUs. The non-employee directors may elect on an annual basis to receive DSUs which settle in cash (“Cash Only DSUs”). The DSUs are redeemable by the non-employee director at their option following their separation from the board of directors. The value of the Cash Only DSUs redeemed is the fair market value on the redemption date.
The Cash Only DSUs are accounted for as a liability and the other equity awards are accounted for as equity.
The following table summarizes PSU activity during the period:
|
|
|
|
|
|
Number of PSUs |
|
|
Outstanding as of January 1, 2023 |
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested and issued |
|
|
|
|
|
|
( |
) |
Forfeited |
|
|
|
|
|
|
( |
) |
Outstanding as of September 30, 2023 |
|
|
|
|
|
|
|
|
The following table summarizes restricted share, RSU and DSU activity during the period:
|
|
Equity Based Awards |
|
|
Liability Based Awards |
|
||||||||||
|
|
Number of Restricted Shares |
|
|
Number of RSUs |
|
|
Number of DSUs |
|
|
Number of DSUs |
|
||||
Outstanding as of January 1, 2023 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Granted |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Vested |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Outstanding as of September 30, 2023 |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
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 12. Net Income (Loss) Per Common Share
The reconciliation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2023 and 2022 was as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Diluted |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
PSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
DSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
The calculation of diluted net income (loss) per common share does not assume the exercise of any instruments that would have an anti-dilutive effect on net income (loss) per common share.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
PSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
DSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 13. Accumulated Other Comprehensive Loss
The change in the accumulated other comprehensive loss by component (net of tax) for the three and nine months ended September 30, 2023 and 2022 was as follows:
|
|
Foreign Currency Translation Adjustments |
|
|
Defined Benefit Pension and Other Post-Retirement Benefit Items |
|
|
Total |
|
|||
Three Months Ended September 30: |
|
|
|
|
|
|
|
|
|
|||
Balance as of June 30, 2023 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive loss before reclassifications |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Amounts reclassified |
|
|
|
|
|
|
|
|
|
|||
Other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance as of September 30, 2023 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Balance as of June 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Amounts reclassified |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance as of September 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30: |
|
|
|
|
|
|
|
|
|
|||
Balance as of December 31, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive loss before reclassifications |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Amounts reclassified |
|
|
|
|
|
|
|
|
|
|||
Other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance as of September 30, 2023 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Balance as of December 31, 2021 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive income (loss) before reclassifications |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Amounts reclassified |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance as of September 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Note 14. Related Party Transactions
FORM 10-Q
QUARTERLY REPORT - PAGE 17
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 15. Segment Information
The Company is managed based on the primary products it manufactures: pulp and solid wood. Accordingly, the Company's
None of the income or loss items following operating income (loss) in the Company's Interim Consolidated Statements of Operations are allocated to the segments, as those items are reviewed separately by management.
Information about certain segment data for the three and nine months ended September 30, 2023 and 2022, was as follows:
Three Months Ended September 30, 2023 |
|
Pulp |
|
|
Solid Wood |
|
|
Corporate |
|
|
Consolidated |
|
||||
Revenues from external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Manufactured products (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pallets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Biofuels (b) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by geographical markets (c) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
||||
China |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
FORM 10-Q
QUARTERLY REPORT - PAGE 18
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 15. Segment Information (continued)
Three Months Ended September 30, 2022 |
|
Pulp |
|
|
Solid Wood |
|
|
Corporate |
|
|
Consolidated |
|
||||
Revenues from external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Manufactured products (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by geographical markets (b) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
||||
China |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
FORM 10-Q
QUARTERLY REPORT - PAGE 19
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 15. Segment Information (continued)
Nine Months Ended September 30, 2023 |
|
Pulp |
|
|
Solid Wood |
|
|
Corporate |
|
|
Consolidated |
|
||||
Revenues from external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets (a) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Manufactured products (b) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pallets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Biofuels (c) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by geographical markets (d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
||||
China |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
FORM 10-Q
QUARTERLY REPORT - PAGE 20
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 15. Segment Information (continued)
Nine Months Ended September 30, 2022 |
|
Pulp |
|
|
Solid Wood |
|
|
Corporate |
|
|
Consolidated |
|
||||
Revenues from external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Depreciation and amortization |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Manufactured products (a) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Revenues by geographical markets (b) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
||||
China |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of December 31, 2022, 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 solid wood segment to the pulp segment for use in pulp production and from the sale of residual fuel from the pulp segment to the solid wood segment for use in energy production. For the three and nine months ended September 30, 2023, the pulp segment sold $
Note 16. 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.
|
|
Fair value measurements as of |
|
|||||||||||||
|
|
|
|
September 30, 2023 using: |
|
|
||||||||||
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Revolving credit facilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Senior notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
FORM 10-Q
QUARTERLY REPORT - PAGE 21
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 16. Financial Instruments and Fair Value Measurement (continued)
|
|
Fair value measurements as of |
|
|||||||||||||
|
|
|
|
December 31, 2022 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 September 30, 2023 or December 31, 2022. However, fair value disclosure is required. The carrying value of the Company's senior notes, net of unamortized note issuance costs, was $
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 its sales 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 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' production and other costs are adversely affected by inflation. 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 inflation. As of September 30, 2023, the Company has not had significant credit losses.
As of September 30, 2023, the carrying amount of cash and cash equivalents of $
FORM 10-Q
QUARTERLY REPORT - PAGE 22
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 17. Commitments and Contingencies
FORM 10-Q
QUARTERLY REPORT - PAGE 23
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 (loss) 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 (loss) 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 (loss), 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 (loss) or operating income (loss) 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 24
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 September 30, 2023, 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) “m3” means cubic meters; (vii) “NBSK” refers to northern bleached softwood kraft; (viii) “NBHK” refers to northern bleached hardwood kraft; (ix) “MW” refers to megawatts and “MWh” refers to megawatt hours; (x) “Mfbm” refers to thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (xi) 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 and nine months ended September 30, 2023 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, 2022 filed with the Securities and Exchange Commission, referred to as the “SEC”.
Results of Operations
General
On June 15, 2023, we acquired substantially all of the assets of Structurlam Mass Timber Corporation and its subsidiaries (“Structurlam”), including a mass timber production facility located in Conway, Arkansas and mass timber production facilities in British Columbia, Canada, for cash consideration of $82.1 million.
We have two reportable operating segments:
Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.
Commencing in the third quarter of 2022 and after our acquisition of the Torgau facility, we have included the mass timber results within our solid wood segment, which has been reflected retroactively. Previously they were included in our corporate and other segment.
Current Market Environment
In the third quarter of 2023, overall both pulp and lumber markets were generally weak. We saw modest pulp price improvements in China due to low customer inventory levels but prices in Europe and North America decreased compared to the second quarter of 2023 as a result of inflationary pressures negatively impacting demand. Our lumber sales realizations were flat compared to the second quarter of 2023 as higher realizations in North America were offset by lower realizations in Europe.
As we move into the fourth quarter, we currently expect modest improvements for pulp sales realizations as a result of increasing demand in China and reduced supply due to curtailments.
FORM 10-Q
QUARTERLY REPORT - PAGE 25
As of September 30, 2023, third party industry quoted NBSK list prices in Europe and North America were approximately $1,160 per ADMT and $1,270 per ADMT, respectively and NBSK net prices in China were approximately $715 per ADMT. Prices for China are net of discounts, allowances and rebates.
In our solid wood segment, we currently expect generally flat lumber prices in the fourth quarter due to high interest rates and we also currently expect continued growth in our mass timber operations.
Per unit fiber costs for the pulp segment decreased in the third quarter of 2023 compared to the second quarter of 2023 primarily due to realizing the benefits of the upgraded wood room at the Peace River mill and improved supply. For the fourth quarter of 2023, we currently expect a modest decrease to the per unit fiber costs for our pulp segment as a result of improved supply.
Per unit fiber costs for our solid wood segment decreased in the third quarter of 2023 compared to the second quarter of 2023 due to the increased supply of beetle damaged wood in Germany. For the fourth quarter of 2023, we currently expect modestly lower per unit fiber costs as a result of the continued availability of beetle damaged wood.
Summary Financial Highlights
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
|
|
(in thousands, other than per share amounts) |
|
|
|||||||||||||
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp segment revenues |
|
$ |
348,853 |
|
|
$ |
456,657 |
|
|
$ |
1,151,948 |
|
|
$ |
1,402,892 |
|
|
Solid wood segment revenues |
|
|
119,547 |
|
|
|
74,266 |
|
|
|
366,611 |
|
|
|
290,048 |
|
|
Corporate and other revenues |
|
|
2,421 |
|
|
|
1,891 |
|
|
|
4,791 |
|
|
|
4,941 |
|
|
Total revenues |
|
$ |
470,821 |
|
|
$ |
532,814 |
|
|
$ |
1,523,350 |
|
|
$ |
1,697,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp segment operating income (loss) |
|
$ |
21,181 |
|
|
$ |
109,985 |
|
|
$ |
(49,507 |
) |
|
$ |
271,692 |
|
|
Solid wood segment operating income (loss) |
|
|
(19,690 |
) |
|
|
2,896 |
|
|
|
(69,252 |
) |
|
|
84,923 |
|
|
Corporate and other operating loss |
|
|
(4,917 |
) |
|
|
(4,158 |
) |
|
|
(13,620 |
) |
|
|
(11,510 |
) |
|
Total operating income (loss) |
|
$ |
(3,426 |
) |
|
$ |
108,723 |
|
|
$ |
(132,379 |
) |
|
$ |
345,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp segment depreciation and amortization |
|
$ |
28,186 |
|
|
$ |
28,174 |
|
|
$ |
83,368 |
|
|
$ |
82,859 |
|
|
Solid wood segment depreciation and amortization |
|
|
12,517 |
|
|
|
3,733 |
|
|
|
44,541 |
|
|
|
11,719 |
|
|
Corporate and other depreciation and amortization |
|
|
250 |
|
|
|
237 |
|
|
|
787 |
|
|
|
710 |
|
|
Total depreciation and amortization |
|
$ |
40,953 |
|
|
$ |
32,144 |
|
|
$ |
128,696 |
|
|
$ |
95,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating EBITDA (1) |
|
$ |
37,527 |
|
|
$ |
140,867 |
|
|
$ |
(3,683 |
) |
|
$ |
440,393 |
|
|
Income tax recovery (provision) |
|
$ |
(3,984 |
) |
|
$ |
(31,294 |
) |
|
$ |
28,851 |
|
|
$ |
(89,656 |
) |
|
Net income (loss) |
|
$ |
(25,956 |
) |
|
$ |
66,746 |
|
|
$ |
(154,840 |
) |
|
$ |
227,015 |
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
(0.39 |
) |
|
$ |
1.01 |
|
|
$ |
(2.33 |
) |
|
$ |
3.43 |
|
|
Diluted |
|
$ |
(0.39 |
) |
|
$ |
1.00 |
|
|
$ |
(2.33 |
) |
|
$ |
3.41 |
|
|
Common shares outstanding at period end |
|
|
66,525 |
|
|
|
66,167 |
|
|
|
66,525 |
|
|
|
66,167 |
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
|
|
(in thousands) |
|
|
|||||||||||||
Net income (loss) |
|
$ |
(25,956 |
) |
|
$ |
66,746 |
|
|
$ |
(154,840 |
) |
|
$ |
227,015 |
|
|
Income tax provision (recovery) |
|
|
3,984 |
|
|
|
31,294 |
|
|
|
(28,851 |
) |
|
|
89,656 |
|
|
Interest expense |
|
|
21,863 |
|
|
|
17,935 |
|
|
|
61,001 |
|
|
|
52,731 |
|
|
Other income |
|
|
(3,317 |
) |
|
|
(7,252 |
) |
|
|
(9,689 |
) |
|
|
(24,297 |
) |
|
Operating income (loss) |
|
|
(3,426 |
) |
|
|
108,723 |
|
|
|
(132,379 |
) |
|
|
345,105 |
|
|
Add: Depreciation and amortization |
|
|
40,953 |
|
|
|
32,144 |
|
|
|
128,696 |
|
|
|
95,288 |
|
|
Operating EBITDA |
|
$ |
37,527 |
|
|
$ |
140,867 |
|
|
$ |
(3,683 |
) |
|
$ |
440,393 |
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 26
Selected Production, Sales and Other Data
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
||||
Pulp Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Pulp production ('000 ADMTs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
NBSK |
|
|
397.5 |
|
|
|
362.9 |
|
|
|
1,278.2 |
|
|
|
1,216.7 |
|
|
NBHK |
|
|
82.5 |
|
|
|
82.1 |
|
|
|
179.7 |
|
|
|
190.4 |
|
|
Annual maintenance downtime ('000 ADMTs) |
|
|
13.3 |
|
|
|
17.3 |
|
|
|
51.2 |
|
|
|
71.5 |
|
|
Annual maintenance downtime (days) |
|
|
13 |
|
|
|
17 |
|
|
|
48 |
|
|
|
60 |
|
|
Pulp sales ('000 ADMTs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
NBSK |
|
|
425.1 |
|
|
|
356.6 |
|
|
|
1,277.2 |
|
|
|
1,267.4 |
|
|
NBHK |
|
|
62.1 |
|
|
|
69.3 |
|
|
|
182.8 |
|
|
|
185.0 |
|
|
Average NBSK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Europe |
|
|
1,160 |
|
|
|
1,500 |
|
|
|
1,261 |
|
|
|
1,422 |
|
|
China |
|
|
680 |
|
|
|
969 |
|
|
|
746 |
|
|
|
959 |
|
|
North America |
|
|
1,293 |
|
|
|
1,800 |
|
|
|
1,493 |
|
|
|
1,690 |
|
|
Average NBHK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
China |
|
|
530 |
|
|
|
855 |
|
|
|
574 |
|
|
|
779 |
|
|
North America |
|
|
1,023 |
|
|
|
1,620 |
|
|
|
1,274 |
|
|
|
1,483 |
|
|
Average pulp sales realizations ($/ADMT)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
NBSK |
|
|
666 |
|
|
|
911 |
|
|
|
735 |
|
|
|
865 |
|
|
NBHK |
|
|
530 |
|
|
|
990 |
|
|
|
642 |
|
|
|
858 |
|
|
Energy production ('000 MWh)(3) |
|
|
524.4 |
|
|
|
484.2 |
|
|
|
1,597.4 |
|
|
|
1,512.4 |
|
|
Energy sales ('000 MWh)(3) |
|
|
214.8 |
|
|
|
174.3 |
|
|
|
619.4 |
|
|
|
568.3 |
|
|
Average energy sales realizations ($/MWh)(3) |
|
|
108 |
|
|
|
339 |
|
|
|
112 |
|
|
|
233 |
|
|
Solid Wood Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Production (MMfbm) |
|
|
94.4 |
|
|
|
97.1 |
|
|
|
350.7 |
|
|
|
324.8 |
|
|
Sales (MMfbm) |
|
|
114.7 |
|
|
|
89.8 |
|
|
|
388.4 |
|
|
|
310.7 |
|
|
Average sales realizations ($/Mfbm) |
|
|
443 |
|
|
|
605 |
|
|
|
438 |
|
|
|
782 |
|
|
Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Production and sales ('000 MWh) |
|
|
39.0 |
|
|
|
20.6 |
|
|
|
121.4 |
|
|
|
70.6 |
|
|
Average sales realizations ($/MWh) |
|
|
140 |
|
|
|
394 |
|
|
|
136 |
|
|
|
260 |
|
|
Manufactured products(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Production ('000 m3) |
|
|
10.9 |
|
|
|
15.0 |
|
|
|
14.9 |
|
|
|
28.0 |
|
|
Sales ('000 m3) |
|
|
11.0 |
|
|
|
10.5 |
|
|
|
21.4 |
|
|
|
22.7 |
|
|
Average sales realizations ($/m3) |
|
|
1,752 |
|
|
|
677 |
|
|
|
1,672 |
|
|
|
756 |
|
|
Pallets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Production ('000 units) |
|
|
2,895.1 |
|
|
|
— |
|
|
|
8,522.5 |
|
|
|
— |
|
|
Sales ('000 units) |
|
|
2,765.3 |
|
|
|
— |
|
|
|
8,590.4 |
|
|
|
— |
|
|
Average sales realizations ($/unit) |
|
|
10 |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
Biofuels(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Production ('000 tonnes) |
|
|
52.1 |
|
|
|
— |
|
|
|
128.3 |
|
|
|
— |
|
|
Sales ('000 tonnes) |
|
|
38.7 |
|
|
|
— |
|
|
|
105.0 |
|
|
|
— |
|
|
Average realizations ($/tonne) |
|
|
294 |
|
|
|
— |
|
|
|
284 |
|
|
|
— |
|
|
Average Spot Currency Exchange Rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ / €(6) |
|
|
1.0884 |
|
|
|
1.0066 |
|
|
|
1.0835 |
|
|
|
1.0636 |
|
|
$ / C$(6) |
|
|
0.7458 |
|
|
|
0.7659 |
|
|
|
0.7433 |
|
|
|
0.7796 |
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 27
Consolidated – Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Total revenues in the third quarter of 2023 decreased by approximately 12% to $470.8 million from $532.8 million in the same quarter of 2022 primarily due to lower pulp, energy and lumber sales realizations partially offset by higher sales volumes, the inclusion of Torgau and higher manufactured product sales realizations.
Costs and expenses in the third quarter of 2023 increased by approximately 12% to $474.2 million from $424.1 million in the third quarter of 2022 primarily due to the inclusion of Torgau and higher sales volumes partially offset by lower per unit fiber, freight and other production costs. In the third quarter of 2023, we received an aggregate of $8.2 million of insurance proceeds relating to the fire last year at our Stendal mill compared to $3.1 million of insurance proceeds in the comparative quarter.
In the third quarter of 2023, cost of sales depreciation and amortization increased by approximately 27% to $40.9 million from $32.1 million in the same quarter of 2022 primarily caused by the inclusion of Torgau.
Selling, general and administrative expenses increased by approximately 24% to $30.1 million in the third quarter of 2023 from $24.3 million in the same quarter of 2022 primarily because of the inclusion of Torgau.
In the third quarter of 2023, operating loss was $3.4 million compared to operating income of $108.7 million in the same quarter of 2022 primarily due to lower pulp, energy and lumber sales realizations partially offset by lower per unit fiber and other production costs, higher sales volumes and the receipt of insurance proceeds.
Interest expense in the third quarter of 2023 increased to $21.9 million from $17.9 million in the same quarter of 2022 caused by higher borrowings on our revolving credit facilities and higher interest rates.
In the third quarter of 2023, other income was $3.3 million compared to $7.3 million in the same quarter of 2022. Other income in the third quarter of 2023 primarily consisted of interest earned on cash and in the third quarter of 2022 other income primarily consisted of foreign exchange gains on dollar denominated cash held at our operations, as the dollar strengthened in the quarter.
During the third quarter of 2023, we had an income tax provision of $4.0 million on a loss before income taxes as we do not recognize a tax recovery for certain entities for which we do not currently expect to realize a tax benefit. In the comparative quarter of 2022, we had an income tax provision of $31.3 million or an effective tax rate of 32%.
For the third quarter of 2023, net loss was $26.0 million, or $0.39 per share, compared to net income of $66.7 million, or $1.01 per basic share and $1.00 per diluted share in the same quarter of the prior year.
In the third quarter of 2023, Operating EBITDA was $37.5 million compared to $140.9 million in the same quarter of 2022 primarily due to lower pulp, energy and lumber sales realizations partially offset by lower per unit fiber, freight and other production costs and higher sales volumes.
Operating Results by Business Segment
None of the income or loss items following operating income (loss) 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 September 30, 2023 Compared to Three Months Ended September 30, 2022
Selected Financial Information
|
|
Three Months Ended September 30, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Pulp revenues |
|
$ |
318,102 |
|
|
$ |
395,459 |
|
|
Energy and chemical revenues |
|
$ |
30,751 |
|
|
$ |
61,198 |
|
|
Depreciation and amortization |
|
$ |
28,186 |
|
|
$ |
28,174 |
|
|
Operating income |
|
$ |
21,181 |
|
|
$ |
109,985 |
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 28
Our pulp segment revenues decreased by approximately 24% to $348.9 million from $456.7 million in the same quarter of 2022 primarily because of the overall weak pulp market and lower energy revenues.
Pulp revenues in the third quarter of 2023 decreased by approximately 20% to $318.1 million from $395.5 million in the same quarter of 2022 due to lower sales realizations only partially offset by higher sales volumes.
Energy and chemical revenues decreased by approximately 50% to $30.8 million in the third quarter of 2023 from $61.2 million in the same quarter of 2022 as a result of lower energy sales realizations partially offset by higher sales volumes.
Total pulp production increased by approximately 8% to 479,924 ADMTs in the third quarter of 2023 from 444,970 ADMTs in the same quarter of 2022 primarily due to overall stable production at all of our mills and higher production at the Stendal mill compared to the same quarter of 2022 because of a fire which occurred in July 2022.
In the third quarter of 2023, our pulp mills had 39 days of downtime (approximately 48,400 ADMTs) which included 13 days for annual maintenance downtime and 26 days for market curtailment at the Celgar mill. In the comparative quarter of 2022, our pulp mills had 17 days of annual maintenance downtime (approximately 17,300 ADMTs).
In the fourth quarter of 2023, at our pulp mills we currently expect a total of 29 days for annual maintenance downtime (approximately 41,200 ADMTs).
We estimate that annual maintenance downtime in the third quarter of 2023 adversely impacted our operating income by approximately $12.2 million, comprised of approximately $9.4 million in direct out-of-pocket expenses and the balance in reduced production.
Total pulp sales volumes increased by approximately 14% to 487,199 ADMTs in the third quarter of 2023 from 425,854 ADMTs in the same quarter of 2022 primarily because of higher production and the timing of sales.
In the third quarter of 2023, third party industry quoted average list prices for NBSK pulp decreased in Europe and North America and net prices decreased in China from the same quarter of 2022. Average third party industry quoted list prices for NBSK pulp in Europe and North America were approximately $1,160 per ADMT and $1,293 per ADMT, respectively, in the third quarter of 2023 compared to approximately $1,500 per ADMT and $1,800 per ADMT, respectively, in the same quarter of 2022. Average third party industry quoted NBSK net prices in China were approximately $680 per ADMT in the third quarter of 2023 compared to approximately $969 per ADMT in the same quarter of 2022. 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 decreased by approximately 27% to $666 per ADMT in the third quarter of 2023 from approximately $911 per ADMT in the same quarter of 2022. In the third quarter of 2023, our average NBHK pulp sales realizations decreased by approximately 46% compared to the same quarter of 2022.
In the third quarter of 2023 compared to the same quarter of 2022, primarily as a result of the effect of the weakening dollar on our euro denominated costs and expenses, we had a negative impact of approximately $17.7 million in operating income due to foreign exchange.
Costs and expenses in the third quarter of 2023 decreased by approximately 5% to $327.9 million from $346.7 million in the third quarter of 2022 primarily due to lower per unit fiber, freight and other production costs and the receipt of insurance proceeds in 2023 partially offset by a higher sales volume.
In the third quarter of 2023 per unit fiber costs decreased by approximately 12% from the same quarter of 2022 due to the sale and revaluation in the current quarter of inventory for which we took an impairment charge in the prior quarter. After giving effect to such impairment, per unit fiber costs increased as a result of strong demand in the mills' fiber baskets and lower wood chip availability for our Celgar mill because of regional sawmill curtailments. We currently expect per unit fiber costs to decrease in the fourth quarter of 2023 driven by improved supply.
Transportation costs decreased by approximately 20% to $34.3 million in the third quarter of 2023 from $42.7 million in the same quarter of 2022 driven by lower freight rates.
FORM 10-Q
QUARTERLY REPORT - PAGE 29
In the third quarter of 2023, depreciation and amortization was flat at $28.2 million compared to the same quarter of 2022.
In the third quarter of 2023, pulp segment operating income was $21.2 million compared to $110.0 million in the same quarter of 2022 primarily as a result of lower pulp and energy sales realizations and the negative impact of a weaker dollar partially offset by lower per unit fiber, freight and other production costs, higher sales volumes and the receipt of insurance proceeds of $8.2 million.
Solid Wood Segment – Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Selected Financial Information
|
|
Three Months Ended September 30, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Lumber revenues |
|
$ |
50,815 |
|
|
$ |
54,327 |
|
|
Energy revenues |
|
$ |
5,468 |
|
|
$ |
8,111 |
|
|
Manufactured products revenues(1) |
|
$ |
20,850 |
|
|
$ |
7,117 |
|
|
Pallet revenues |
|
$ |
28,807 |
|
|
$ |
— |
|
|
Biofuels revenues(2) |
|
$ |
11,387 |
|
|
$ |
— |
|
|
Wood residuals revenues |
|
$ |
2,220 |
|
|
$ |
4,711 |
|
|
Depreciation and amortization |
|
$ |
12,517 |
|
|
$ |
3,733 |
|
|
Operating income (loss) |
|
$ |
(19,690 |
) |
|
$ |
2,896 |
|
|
In the third quarter of 2023, solid wood segment revenues increased by approximately 61% to $119.5 million from $74.3 million in the same quarter of 2022 primarily as a result of the inclusion of Torgau and the ramping up of our mass timber operations partially offset by lower lumber and energy revenues.
In the third quarter of 2023, lumber revenues decreased by approximately 6% to $50.8 million from $54.3 million in the same quarter of 2022 due to lower sales realizations partially offset by higher sales volumes. In the third quarter of 2023, both U.S. and European realized lumber prices were lower because of decreased demand as a result of higher interest rates and an uncertain economic outlook compared to the same quarter of 2022. The U.S. market accounted for approximately 57% of our lumber revenues and approximately 49% of our lumber sales volumes in the third quarter of 2023. The majority of the balance of our lumber sales were to Europe.
In the third quarter of 2023, our mass timber operations continued the ramp up of their operations and manufactured products revenue increased to $20.9 million from $7.1 million in the comparative quarter of 2022 as a result of both higher sales volumes and realizations.
Energy and wood residuals revenues in the third quarter of 2023 decreased by approximately 40% to $7.7 million from $12.8 million in the same quarter of 2022 primarily caused by lower sales realizations.
Pallet revenues of $28.8 million and biofuels revenues of $11.4 million in the third quarter of 2023 are from the inclusion of Torgau.
In the third quarter of 2023, lumber production modestly decreased to 94.4 MMfbm from 97.1 MMfbm in the same quarter of 2022 as a result of maintenance downtime and the overall weak lumber market, partially offset by the inclusion of Torgau.
Lumber sales volumes increased by approximately 28% to 114.7 MMfbm in the third quarter of 2023 from 89.8 MMfbm in the same quarter of 2022 primarily due to the timing of sales.
Average lumber sales realizations decreased by approximately 27% to $443 per Mfbm in the third quarter of 2023 from approximately $605 per Mfbm in the same quarter of 2022 as a result of lower demand in both the U.S. and
FORM 10-Q
QUARTERLY REPORT - PAGE 30
European markets.
Manufactured products sales realizations increased to $1,752 per m3 in the third quarter of 2023 from $677 per m3 in the third quarter of 2022 as a result of higher CLT sales volumes.
Fiber costs were approximately 70% of our lumber cash production costs in the third quarter of 2023. In the third quarter of 2023, per unit fiber costs for lumber production modestly decreased compared to the same quarter of 2022 due to an increased supply of beetle damaged wood. We currently expect modestly lower per unit fiber costs in the fourth quarter of 2023 as a result of continuing availability of beetle damaged wood.
In the third quarter of 2023, depreciation and amortization increased to $12.5 million compared to $3.7 million in the same quarter of 2022 primarily due to the inclusion of Torgau.
Transportation costs in the third quarter of 2023 increased by approximately 46% to $13.9 million from $9.5 million in the same quarter of 2022 primarily as a result of a higher sales volume.
In the third quarter of 2023, operating loss was $19.7 million compared to operating income of $2.9 million in the same quarter of 2022 primarily due to lower lumber and energy sales realizations partially offset by higher manufactured products sales realizations.
Consolidated ‑ Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Total revenues for the nine months ended September 30, 2023 decreased by approximately 10% to $1,523.4 million from $1,697.9 million in the same period of 2022 primarily due to lower pulp, lumber and energy sales realizations partially offset by the inclusion of Torgau and higher sales volumes.
Costs and expenses in the nine months ended September 30, 2023 increased by approximately 22% to $1,655.7 million from $1,352.8 million in the same period of 2022 primarily caused by the inclusion of Torgau, higher per unit fiber costs, which includes the net inventory impairment charges at our Canadian pulp mills of $56.6 million, higher sales volumes and higher chemical costs. These increases were partially offset by the receipt of $37.7 million of insurance proceeds.
In the nine months ended September 30, 2023, cost of sales depreciation and amortization increased to $128.5 million from $95.2 million in the same period of 2022 primarily due to the inclusion of Torgau.
Selling, general and administrative expenses increased by approximately 38% to $96.4 million in the nine months ended September 30, 2023 from $70.1 million in the nine months ended September 30, 2022 primarily because of the inclusion of Torgau.
In the nine months ended September 30, 2023, our operating loss was $132.4 million compared to operating income of $345.1 million in the same period of 2022 primarily due to lower pulp, lumber and energy sales realizations, higher per unit fiber costs, which includes the net inventory impairment charges at our Canadian pulp mills, and higher chemical costs partially offset by insurance proceeds received in the nine months ended September 30, 2023 and higher sales volumes.
Interest expense in the nine months ended September 30, 2023 increased by approximately 16% to $61.0 million from $52.7 million in the same period of 2022 primarily caused by higher borrowings on our revolving credit facilities and higher interest rates.
In the nine months ended September 30, 2023, other income decreased to $9.7 million from $24.3 million in the same period of 2022. Other income in the nine months ended September 30, 2023 primarily consisted of interest earned on cash and in the nine months ended September 30, 2022 primarily consisted of foreign exchange gains on dollar denominated cash held at our operations, as the dollar strengthened in 2022.
During the nine months ended September 30, 2023, we had an income tax recovery of $28.9 million or an effective tax rate of 16% as we do not recognize a tax recovery for certain entities for which we do not currently expect to realize a tax benefit. In the same period of 2022, the provision for income taxes was $89.7 million or an effective tax
FORM 10-Q
QUARTERLY REPORT - PAGE 31
rate of 28%.
In the nine months ended September 30, 2023, Operating EBITDA was negative $3.7 million compared to a positive $440.4 million in the same period of 2022 primarily due to lower pulp, lumber and energy sales realizations, higher per unit fiber costs which includes the net inventory impairment charges at our Canadian pulp mills, and higher chemical costs, partially offset by insurance proceeds received and higher sales volumes.
Operating Results by Business Segment
None of the income or loss items following operating income (loss) in our Interim Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management.
Pulp Segment ‑ Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Selected Financial Information
|
|
Nine Months Ended September 30, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Pulp revenues |
|
$ |
1,061,933 |
|
|
$ |
1,260,949 |
|
|
Energy and chemical revenues |
|
$ |
90,015 |
|
|
$ |
141,943 |
|
|
Depreciation and amortization |
|
$ |
83,368 |
|
|
$ |
82,859 |
|
|
Operating income (loss) |
|
$ |
(49,507 |
) |
|
$ |
271,692 |
|
|
In the nine months ended September 30, 2023, pulp segment revenues decreased by approximately 18% to $1,151.9 million from $1,402.9 million reflecting the overall weak pulp market and lower energy revenues.
Pulp revenues in the nine months ended September 30, 2023 decreased by approximately 16% to $1,061.9 million from $1,260.9 million in the same period of 2022 primarily due to lower sales realizations.
Energy and chemical revenues decreased by approximately 37% to $90.0 million in the nine months ended September 30, 2023 from $141.9 million in the same period of 2022 primarily due to lower energy sales realizations partially offset by higher sales volumes.
Pulp production was modestly higher at 1,457,911 ADMTs in the nine months ended September 30, 2023 compared with 1,407,103 ADMTs in the same period of 2022 primarily due to stable production. In the nine months ended September 30, 2023, our pulp mills had 109 days of downtime (approximately 120,900 ADMTs) which included a total of 48 days of annual maintenance downtime and 61 days for market curtailment at the Peace River, Cariboo and Celgar mills. In the nine months ended September 30, 2022, our pulp mills had 66 days of downtime (approximately 79,900 ADMTs) comprised of 60 days of annual maintenance downtime and an additional six days at our Celgar mill caused by slower than planned start up.
We estimate that annual maintenance downtime in the nine months ended September 30, 2023 adversely impacted our operating loss by approximately $38.6 million, comprised of approximately $31.0 million in direct out-of-pocket expenses and the balance in reduced production.
Pulp sales volumes remained generally flat at 1,460,050 ADMTs in the nine months ended September 30, 2023 from 1,452,426 ADMTs in the same period of 2022.
In the nine months ended September 30, 2023, prices for NBSK pulp decreased from the same period of 2022, largely as a result of weaker demand. Average list prices for NBSK pulp in Europe and North America were approximately $1,261 per ADMT and $1,493 per ADMT, respectively in the nine months ended September 30, 2023 compared to approximately $1,422 per ADMT and $1,690 per ADMT, respectively, in the same period of 2022. Average NBSK net prices in China were approximately $746 per ADMT in the nine months ended September 30, 2023 compared to approximately $959 per ADMT in the nine months ended September 30, 2022.
Average NBSK pulp sales realizations decreased by approximately 15% to $735 per ADMT in the nine months ended
FORM 10-Q
QUARTERLY REPORT - PAGE 32
September 30, 2023 from approximately $865 per ADMT in the same period of 2022. In the nine months ended September 30, 2023, average NBHK pulp sales realizations decreased by approximately 25% from the same period of 2022.
In the nine months ended September 30, 2023, we had a positive impact of approximately $2.0 million in operating loss due to foreign exchange.
In the nine months ended September 30, 2023, we recorded net inventory impairment charges at our Canadian pulp mills of $56.6 million.
Costs and expenses in the nine months ended September 30, 2023 increased by approximately 6% to $1,202.2 million from $1,131.2 million in the nine months ended September 30, 2022 primarily due to higher per unit fiber, which includes the net inventory impairment at our Canadian mills, and chemical costs partially offset by the receipt of $37.7 million of insurance proceeds in the nine months ended September 30, 2023, relating to the 2021 turbine downtime at the Rosenthal mill and the July 2022 fire at the Stendal mill, and lower energy and freight costs.
On average, in the nine months ended September 30, 2023 overall per unit fiber costs increased by approximately 25% from the same period of 2022 due to higher per unit fiber costs for all of our mills. Our German mills had higher per unit fiber costs as a result of strong demand from other wood consumers such as heating pellet manufacturers in response to energy shortages caused by the war in Ukraine. For our Canadian pulp mills, per unit fiber costs increased as a result of strong demand in the mills' fiber baskets and for our Celgar mill a decrease in the availability of wood chips because of regional sawmill curtailments.
Transportation costs for our pulp segment decreased by approximately 12% to $118.0 million in the nine months ended September 30, 2023 from $133.8 million in the same period of 2022 driven by lower freight rates.
In the nine months ended September 30, 2023, depreciation and amortization remained relatively flat at $83.4 million from $82.9 million in the same period of 2022.
In the nine months ended September 30, 2023, the pulp segment had an operating loss of $49.5 million from operating income of $271.7 million in the same period of 2022 primarily as a result of lower pulp and energy sales realizations, higher per unit fiber costs, which includes the net inventory impairment at our Canadian pulp mills, partially offset by the receipt of insurance proceeds and lower energy and freight costs.
Solid Wood Segment ‑ Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
Selected Financial Information
|
|
Nine Months Ended September 30, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Lumber revenues |
|
$ |
170,118 |
|
|
$ |
242,961 |
|
|
Energy revenues |
|
$ |
16,523 |
|
|
$ |
18,343 |
|
|
Manufactured products revenues(1) |
|
$ |
42,643 |
|
|
$ |
17,176 |
|
|
Pallet revenues |
|
$ |
97,657 |
|
|
$ |
— |
|
|
Biofuels revenues(2) |
|
$ |
29,764 |
|
|
$ |
— |
|
|
Wood residuals revenues |
|
$ |
9,906 |
|
|
$ |
11,568 |
|
|
Depreciation and amortization |
|
$ |
44,541 |
|
|
$ |
11,719 |
|
|
Operating income (loss) |
|
$ |
(69,252 |
) |
|
$ |
84,923 |
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 33
In the nine months ended September 30, 2023, solid wood segment revenues increased by approximately 26% to $366.6 million from $290.0 million in the same period of 2022 primarily because of the inclusion of Torgau and the ramping up of our mass timber operations partially offset by a decline in lumber revenues.
In the nine months ended September 30, 2023, lumber revenues decreased by approximately 30% to $170.1 million from $243.0 million in the same period of 2022 primarily caused by lower sales realizations partially offset by higher sales volumes. In the nine months ended September 30, 2023, both U.S. and European realized lumber prices were lower because of decreased demand as a result of higher interest rates and an uncertain economic outlook compared to the same period of 2022. The U.S. market accounted for approximately 56% of our lumber revenues and approximately 51% of our lumber sales volumes in the nine months ended September 30, 2023. The majority of the balance of our lumber sales were to Europe.
Energy and wood residuals revenues decreased by approximately 12% to $26.4 million in the nine months ended September 30, 2023 from $29.9 million in the same period of 2022 as a result of lower energy sales realizations.
In the nine months ended September 30, 2023, our mass timber business continued to ramp up operations and manufactured products revenues more than doubled to $42.6 million from $17.2 million in the same period of 2022.
Pallet revenues of $97.7 million and biofuels revenues of $29.8 million in the nine months ended September 30, 2023 are from the inclusion of Torgau.
Lumber production increased by approximately 8% to 350.7 MMfbm in the nine months ended September 30, 2023 from 324.8 MMfbm in the same period of 2022 as a result of the inclusion of Torgau and the upgrades at the Friesau mill.
Lumber sales volumes increased by approximately 25% to 388.4 MMfbm in the nine months ended September 30, 2023 from 310.7 MMfbm in the same period of 2022 primarily because of higher production and the timing of sales.
Average lumber sales realizations decreased by approximately 44% to $438 per Mfbm in the nine months ended September 30, 2023 from approximately $782 per Mfbm in the same period of 2022 caused by lower demand in both the U.S. and European markets. Demand was negatively impacted by rising interest rates, inflationary pressures and an uncertain economic outlook.
Manufactured products sales realizations increased to $1,672 per m3 in the nine months ended September 30, 2023 from $756 per m3 in the same period of 2022 as a result of higher CLT sales volumes.
Fiber costs were approximately 75% of our lumber cash production costs in the nine months ended September 30, 2023. In the nine months ended September 30, 2023, per unit fiber costs for lumber production increased compared to the same period of 2022, due to strong fiber demand in Germany.
In the nine months ended September 30, 2023, depreciation and amortization increased to $44.5 million from $11.7 million in the same period of 2022 primarily because of the inclusion of Torgau. Torgau’s amortization included $8.3 million for the order backlog intangible asset acquired, which is now fully amortized.
Transportation costs for our solid wood segment in the nine months ended September 30, 2023 increased by approximately 44% to $48.0 million from $33.4 million in the same period of 2022 primarily due to the inclusion of Torgau and higher lumber sales volumes.
In the nine months ended September 30, 2023, operating loss was $69.3 million compared to operating income of $84.9 million in the same period of 2022 primarily because of lower sales realizations.
FORM 10-Q
QUARTERLY REPORT - PAGE 34
Liquidity and Capital Resources
Summary of Cash Flows
|
|
Nine Months Ended September 30, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Net cash from (used in) operating activities |
|
$ |
(60,286 |
) |
|
$ |
310,011 |
|
|
Net cash used in investing activities |
|
|
(179,682 |
) |
|
|
(451,629 |
) |
|
Net cash from financing activities |
|
|
230,567 |
|
|
|
94,709 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(906 |
) |
|
|
(11,447 |
) |
|
Net decrease in cash and cash equivalents |
|
$ |
(10,307 |
) |
|
$ |
(58,356 |
) |
|
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 (used in) Operating Activities. Cash used in operating activities was $60.3 million in the nine months ended September 30, 2023 compared to cash provided of $310.0 million in the comparative period of 2022. A decrease in accounts receivable provided cash of $89.1 million in the nine months ended September 30, 2023 and an increase in accounts receivable used cash of $4.3 million in the same period of 2022. In the nine months ended September 30, 2023, adjusting for net inventory impairments of $56.6 million, an increase in inventories used cash of $19.0 million and $23.9 million in the same period of 2022. A decrease in accounts payable and accrued expenses used cash of $107.6 million in the nine months ended September 30, 2023 and an increase in accounts payable and accrued expenses provided cash of $37.6 million in the same period of 2022.
Cash Flows from (used in) Investing Activities. Investing activities in the nine months ended September 30, 2023 used cash of $179.7 million primarily related to capital expenditures of $110.3 million and acquisition costs of $82.1 million for mass timber assets in the United States and Canada. In the nine months ended September 30, 2023, capital expenditures primarily related to costs to complete the Rosenthal lignin plant, upgrades to the wood rooms at our Canadian mills and maintenance and optimization projects at our German mills. In the nine months ended September 30, 2023, we received $5.4 million of insurance proceeds for our property damage claim related to the fire in 2022 at our Stendal mill and we received $4.6 million of government grants for the Peace River wood room project. Investing activities in the nine months ended September 30, 2022 used cash of $451.6 million primarily related to the acquisition of Torgau for $257.4 million, capital expenditures of $128.9 million and our transferring of $75.0 million into a six month term deposit. In the nine months ended September 30, 2022, we received insurance proceeds of $7.6 million comprised of the initial payment of $1.2 million for our property damage claim related to the Stendal fire and the balance related to the final payment for our property damage claim related to the Peace River recovery boiler.
Cash Flows from (used in) Financing Activities. In the nine months ended September 30, 2023, financing activities provided cash of $230.6 million primarily from the proceeds of the issuance of $200.0 million of senior notes due 2028 and borrowing approximately $51.3 million under our revolving credit facilities. In the nine months ended September 30, 2023, we paid dividends of $10.0 million and incurred aggregate debt issuance costs of $4.6 million related to the issuance of the senior notes and to increase the maximum borrowing capacity under our German revolving credit facility by €70.1 million. In the nine months ended September 30, 2022, financing activities provided cash of $94.7 million. In such period we borrowed $116.5 million under our revolving credit facilities. In the nine months ended September 30, 2022, we paid dividends of $9.9 million and incurred aggregate debt issuance costs of $3.0 million for the amended €300.0 million German revolving credit facility and C$160.0 million Canadian revolving credit facility.
FORM 10-Q
QUARTERLY REPORT - PAGE 35
Balance Sheet Data
The following table is a summary of selected financial information as of the dates indicated:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Cash and cash equivalents |
|
$ |
343,725 |
|
|
$ |
354,032 |
|
Working capital |
|
$ |
796,634 |
|
|
$ |
800,114 |
|
Total assets |
|
$ |
2,655,001 |
|
|
$ |
2,725,037 |
|
Long-term liabilities |
|
$ |
1,721,683 |
|
|
$ |
1,508,192 |
|
Total shareholders' equity |
|
$ |
665,452 |
|
|
$ |
838,784 |
|
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:
|
|
Nine Months Ended September 30, |
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
|
|
(in thousands) |
|
|
|||||
Capital expenditures |
|
$ |
110,302 |
|
|
$ |
128,875 |
|
|
Cash paid for interest expense(1) |
|
$ |
76,906 |
|
|
$ |
65,344 |
|
|
Interest expense(2) |
|
$ |
61,001 |
|
|
$ |
52,731 |
|
|
As of September 30, 2023, we had cash and cash equivalents of $343.7 million and approximately $304.7 million available under our revolving credit facilities and as a result aggregate liquidity of about $648.4 million.
We have reduced our planned capital expenditures for fiscal 2023 and expect them to be between $130 to $150 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.
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.
FORM 10-Q
QUARTERLY REPORT - PAGE 36
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, 2022.
As of September 30, 2023, we were in full compliance with all of the covenants of our indebtedness.
Off-Balance Sheet Arrangements
As of September 30, 2023, 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 nine months ended September 30, 2023.
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 September 30, 2023, we recorded a non-cash decrease of $7.6 million in the carrying value of our net assets denominated in euros, consisting primarily of our property, plant and equipment. This non-cash decrease does not affect our net loss, 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 $187.4 million.
Based upon the exchange rate as of September 30, 2023, the dollar has strengthened by approximately 1% against the euro and was flat against the Canadian dollar since December 31, 2022. See "Quantitative and Qualitative Disclosures about Market Risk".
Credit Ratings of Senior Notes
We and our senior notes are rated by Standard & Poor's Rating Services, referred to as "S&P", and Moody's Investors Service, Inc., referred to as "Moody's". In September 2023, S&P lowered its outlook to negative from stable and downgraded its rating on our senior notes to B from B+. Its recovery rating decreased to “4” from “3”. Moody’s lowered its outlook to negative from stable and downgraded its rating on our senior notes to B2 from Ba3.
Credit ratings are not recommendations to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.
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.
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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, 2022. 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 obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets and goodwill, 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, 2022.
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
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Risks Related to our Debt
Risks Related to Macro-economic Conditions
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Legal and Regulatory Risks
Risks Related to Ownership of our Shares
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, 2022. 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 and lumber 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 2013 and 2023 have fluctuated between a low of $790 per ADMT in 2016 to a high of $1,500 per ADMT in 2022. In the same period, third party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $770 per ADMT in 2013 to a high of $1,620 per ADMT in 2022.
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As a key construction material, the pricing and demand for lumber is also significantly influenced by the number of housing starts, especially in the United States. In the U.S., third party industry quoted monthly average western spruce/pine/fir (WSPF) 2 x 4 #2&Btr prices between 2013 and 2023 have fluctuated between a low of $245 per Mfbm in 2015 to a high of $1,604 per Mfbm in 2021. Similarly, the demand for CLT is primarily driven by the wood construction market and increased government policies focused on a low-carbon economy.
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. 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, Canada and the United States. 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.
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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, 2022.
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.
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.
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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, 2022. 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
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, 2022.
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.
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ITEM 6. EXHIBITS
Exhibit No. |
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Description |
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31.1 |
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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 September 30, 2023 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 September 30, 2023 has been formatted in Inline XBRL. |
* 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.
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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/ Juan Carlos Bueno |
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Juan Carlos Bueno |
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Chief Executive Officer |
Date: November 2, 2023
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