UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File No.:
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction |
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(I.R.S. Employer |
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of incorporation or organization) |
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Identification No.) |
(Address of office)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation 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). YES ☒ NO ☐
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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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
The Registrant had
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of U.S. dollars, except per share data)
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Three Months Ended March 31, |
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2020 |
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2019 |
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Revenues |
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$ |
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$ |
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Costs and expenses |
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Cost of sales, excluding depreciation and amortization |
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Cost of sales depreciation and amortization |
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Selling, general and administrative expenses |
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Operating income |
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Other income (expenses) |
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Interest expense |
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Other income (expenses) |
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Total other expenses, net |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income (loss) |
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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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Diluted |
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$ |
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$ |
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Dividends declared per common share |
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$ |
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$ |
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INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands of U.S. dollars)
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Three Months Ended March 31, |
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2020 |
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2019 |
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Net income (loss) |
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$ |
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$ |
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Other comprehensive income (loss), net of taxes |
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Foreign currency translation adjustment |
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Change in unrecognized losses and prior service costs related to defined benefit pension plans, net of tax of $nil (2019 - $ |
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Other comprehensive loss, net of taxes |
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( |
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Total comprehensive income (loss) |
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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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March 31, |
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December 31, |
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2020 |
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2019 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other |
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Total current assets |
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Property, plant and equipment, net |
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Investment in joint ventures |
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Amortizable intangible assets, net |
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Operating lease right-of-use assets |
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Other long-term assets |
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Deferred income tax |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable and other |
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$ |
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$ |
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Pension and other post-retirement benefit obligations |
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Total current liabilities |
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Debt |
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Pension and other post-retirement benefit obligations |
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Finance lease liabilities |
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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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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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Commitments and contingencies (Note 13) |
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Subsequent events (Note 7,14) |
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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 (thousands of shares) |
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Amount, at Par Value |
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Additional Paid -in Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Total Shareholders' Equity |
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Three Months Ended March 31: |
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Balance as of December 31, 2019 |
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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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— |
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Stock compensation recovery |
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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 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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( |
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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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— |
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( |
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Repurchase of common 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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( |
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Other comprehensive 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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( |
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Balance as of March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Balance as of December 31, 2018 |
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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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— |
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Stock compensation recovery |
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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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( |
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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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— |
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— |
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( |
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( |
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Balance as of March 31, 2019 |
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$ |
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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 5
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of U.S. dollars)
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Three Months Ended March 31, |
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2020 |
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2019 |
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Cash flows from (used in) operating activities |
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Net income (loss) |
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$ |
( |
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$ |
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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 (benefit) |
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( |
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Inventory impairment |
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Defined benefit pension plans and other post-retirement benefit plan expense |
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Stock compensation recovery |
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( |
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( |
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Foreign exchange transaction gains |
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( |
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( |
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Other |
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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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( |
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Inventories |
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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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Net cash from (used in) operating activities |
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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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Purchase of amortizable intangible assets |
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( |
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( |
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Other |
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( |
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Net cash from (used in) investing activities |
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( |
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( |
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Cash flows from (used in) financing activities |
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Proceeds from (repayment of) revolving credit facilities, net |
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( |
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Dividend payments |
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( |
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Repurchase of common shares |
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( |
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Payment of debt issuance costs |
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( |
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Proceeds from government grants |
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Other |
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( |
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( |
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Net cash from (used in) financing activities |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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( |
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Net decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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Supplemental cash flow disclosure |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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Supplemental schedule of non-cash investing and financing activities: |
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Leased production equipment |
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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 6
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 1. The Company and Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
The Interim Consolidated Financial Statements contained herein include the accounts of Mercer International Inc. ("Mercer Inc.") and all of its subsidiaries (collectively the "Company"). Mercer Inc. owns
The Interim Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States ("GAAP"). The unaudited Interim Consolidated Financial Statements should be read together with the audited Consolidated Financial Statements and accompanying notes included in the Company's latest Annual Report on Form 10‑K for the fiscal year ended December 31, 2019. In the opinion of the Company, the unaudited Interim Consolidated Financial Statements contained herein have been prepared on a consistent basis (except for the change in policy referred to below) 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, 2019 and contain all adjustments necessary for a fair statement of the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.
In these Interim Consolidated Financial Statements, unless otherwise indicated, all amounts are expressed in United States dollars ("U.S. dollars" or "$"). The symbol "€" refers to euros and the symbol "C$" refers to Canadian dollars.
Use of Estimates
Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
Impact of COVID-19 Pandemic
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption could have a material adverse effect on our business.
The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. As of the date of issuance of these Interim Consolidated Financial Statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.
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 1. The Company and Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment method with a method that reflects expected credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which provides entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. These updates were effective for financial statements issued after December 15, 2019. The Company adopted these updates on January 1, 2020 using the modified-retrospective approach. The adoption of these updates did not have an impact on the Interim Consolidated Financial Statements as the Company’s credit risk associated with its sales is currently managed through the purchase of credit insurance, letters of credit and setting credit limits prior to the sale. The Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality.
The Company’s exposure to credit losses may increase if its customers are adversely affected by the COVID-19 pandemic. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables if the cash flows of the Company’s customers are adversely impacted by the COVID-19 pandemic.
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. This update is effective for financial statements issued for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this update but believes it will not have a significant impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.
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 2. Inventories
Inventories as of March 31, 2020 and December 31, 2019, were comprised of the following:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Spare parts and other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
For the three months ended March 31, 2020, as a result of low pulp prices and high fiber costs for the Canadian mills, the Company recorded inventory impairment charges of $
Note 3. Accounts Payable and Other
Accounts payable and other as of March 31, 2020 and December 31, 2019, was comprised of the following:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Trade payables |
|
$ |
|
|
|
$ |
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
Interest payable |
|
|
|
|
|
|
|
|
|
Income tax payable |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Note 4. Debt
Debt as of March 31, 2020 and December 31, 2019, was comprised of the following:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
2024 Senior Notes, principal amount $ |
|
$ |
|
|
|
$ |
|
|
|
2025 Senior Notes, principal amount $ |
|
|
|
|
|
|
|
|
|
2026 Senior Notes, principal amount $ |
|
|
|
|
|
|
|
|
|
Credit arrangements |
|
|
|
|
|
|
|
|
|
€ |
|
|
|
|
|
|
|
|
|
C$ |
|
|
|
|
|
|
|
|
|
C$ |
|
|
|
|
|
|
|
|
|
€ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 9
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of U.S. dollars, except share and per share data)
Note 4. Debt (continued)
The maturities of the principal portion of debt as of March 31, 2020 were as follows:
|
2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
Certain of the Company’s debt instruments were issued under agreements which, among other things, may limit its ability and the ability of its subsidiaries to make certain payments, including dividends. These limitations are subject to specific exceptions. As of March 31, 2020, the Company was in compliance with the terms of its debt agreements.
|
(a) |
In 2018, the Company issued $ |
In October 2019, the Company issued an additional $
In 2017, the Company issued $
In 2017, the Company issued $
The Senior Notes are general unsecured senior obligations of the Company. They rank equal in right of payment with all existing and future unsecured senior indebtedness of the Company and are senior in right of payment to any current or future subordinated indebtedness of the Company. The Senior Notes are effectively junior in right of payment to all existing and future secured indebtedness, to the extent of the assets securing such indebtedness, and all indebtedness and liabilities of the Company’s subsidiaries.
The Company may redeem all or a part of the 2025 Senior Notes or 2026 Senior Notes, upon not less than
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 4. Debt (continued)
The following table presents the redemption prices (expressed as percentages of principal amount) and the redemption periods of the outstanding Senior Notes:
|
2024 Senior Notes |
|
|
2025 Senior Notes |
|
|
2026 Senior Notes |
|
|||||||||
|
12 Month Period Beginning |
|
Percentage |
|
|
12 Month Period Beginning |
|
Percentage |
|
|
12 Month Period Beginning |
|
Percentage |
|
|||
|
February 1, 2020 |
|
|
|
% |
|
January 15, 2021 |
|
|
|
% |
|
January 15, 2021 |
|
|
|
% |
|
February 1, 2021 |
|
|
|
% |
|
January 15, 2022 |
|
|
|
% |
|
January 15, 2022 |
|
|
|
% |
|
February 1, 2022 and thereafter |
|
|
|
% |
|
January 15, 2023 and thereafter |
|
|
|
% |
|
January 15, 2023 and thereafter |
|
|
|
% |
|
(b) |
A € |
|
(c) |
A C$ |
|
(d) |
A C$ |
|
(e) |
A € |
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 5. Pension and Other Post-Retirement Benefit Obligations
Defined Benefit Plans
Pension benefits are based on employees' earnings and years of service. The defined benefit plans are funded by contributions from the Company based on actuarial estimates and statutory requirements.
|
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
|
2020 |
|
|
2019 |
|
||||||||||
|
|
|
Pension |
|
|
Other Post- Retirement Benefits |
|
|
Pension |
|
|
Other Post- Retirement Benefits |
|
||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Amortization of unrecognized items |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net benefit costs |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
The components of the net benefit costs other than service cost are recorded in “Other income (expenses)” in the Interim Consolidated Statements of Operations. The amortization of unrecognized items relates to net actuarial losses and prior service costs.
Defined Contribution Plan
Effective December 31, 2008, the defined benefit plans at the Celgar mill were closed to new members. In addition, the related defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the three month period ended March 31, 2020, the Company made contributions of $
Multiemployer Plan
The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three month period ended March 31, 2020, the Company made contributions of $
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 6. Income Taxes
Differences between the U.S. Federal statutory and the Company's effective rates for the three month periods ended March 31, 2020 and 2019, were as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
U.S. Federal statutory rate |
|
|
|
|
|
|
||
|
U.S. Federal statutory rate on income before provision for income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
Tax differential on foreign income |
|
|
( |
) |
|
|
( |
) |
|
Effect of foreign earnings (a) |
|
|
( |
) |
|
|
( |
) |
|
Valuation allowance |
|
|
|
|
|
|
|
|
|
Tax benefit of partnership structure |
|
|
|
|
|
|
|
|
|
Non-taxable foreign subsidies |
|
|
|
|
|
|
|
|
|
True-up of prior year taxes |
|
|
( |
) |
|
|
|
|
|
Other |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Comprised of: |
|
|
|
|
|
|
|
|
|
Current income tax provision |
|
$ |
( |
) |
|
$ |
( |
) |
|
Deferred income tax benefit (provision) |
|
|
|
|
|
|
( |
) |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
(a) |
Primarily due to the impact of the global intangible low-taxed income provision in the Tax Cuts and Jobs Act of 2017. |
Note 7. Shareholders' Equity
Dividends
In February 2020, the Company's board of directors declared a quarterly dividend of $
In April 2020, the Company's board of directors declared a quarterly dividend of $
Share Repurchase Program
In May 2019, the Company’s board of directors authorized a common stock repurchase program under which the Company may repurchase up to $
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 7. Shareholders' Equity (continued)
Stock Based Compensation
In June 2010, the Company adopted a stock incentive plan which provides for options, restricted stock rights, restricted shares, performance shares, performance share units ("PSUs") and stock appreciation rights to be awarded to employees, consultants and non-employee directors. During the three month period ended March 31, 2020, there were
PSUs
PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally
The following table summarizes PSU activity during the period:
|
|
|
Number of PSUs |
|
|
|
Outstanding as of January 1, 2020 |
|
|
|
|
|
Granted |
|
|
|
|
|
Vested and issued |
|
|
( |
) |
|
Forfeited |
|
|
( |
) |
|
Outstanding as of March 31, 2020 |
|
|
|
|
Restricted Shares
Restricted shares generally vest at the end of
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 8. Net Income (Loss) Per Common Share
The reconciliation of basic and diluted net income (loss) per common share for the three month periods ended March 31, 2020 and 2019 was as follows:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
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 |
|
|
— |
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
(a) |
For the three month period ended March 31, 2020, the basic weighted average number of common shares outstanding excludes |
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 March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
PSUs |
|
|
|
|
|
|
— |
|
|
Restricted shares |
|
|
|
|
|
|
— |
|
Note 9. Accumulated Other Comprehensive Loss
The change in the accumulated other comprehensive loss by component (net of tax) for the three month period ended March 31, 2020 was as follows:
|
|
|
Foreign Currency Translation Adjustment |
|
|
Defined Benefit Pension and Other Post- Retirement Benefit Items |
|
|
Total |
|
|||
|
Balance as of January 1, 2020 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive loss before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balance as of March 31, 2020 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
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 10. Related Party Transactions
The Company enters into related party transactions with its joint ventures. For the three month period ended March 31, 2020, pulp purchases from the Company’s
Note 11. Business Segment Information
The Company is managed based on the primary products it manufactures: pulp and wood products. Accordingly, the Company's
None of the income or loss items following operating income in the Company's Interim Consolidated Statements of Operations are allocated to the segments, as those items are reviewed separately by management.
Information about certain segment data for the three month periods ended March 31, 2020 and 2019, was as follows:
|
Three Months Ended March 31, 2020 |
|
Pulp |
|
|
Wood Products |
|
|
Corporate and Other |
|
|
Consolidated |
|
||||
|
Revenues from external customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Operating income (loss) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Total assets (a) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by geographical markets (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(a) |
Total assets for the pulp segment includes the Company's $ |
|
(b) |
Sales are attributed to countries based on the ship-to location provided by the customer. |
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 11. Business Segment Information (continued)
|
Three Months Ended March 31, 2019 |
|
Pulp |
|
|
Wood Products |
|
|
Corporate and Other |
|
|
Consolidated |
|
||||
|
Revenues from external customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Operating income (loss) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by major products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Lumber |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy and chemicals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood residuals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Revenues by geographical markets (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Germany |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(a) |
Sales are attributed to countries based on the ship-to location provided by the customer. |
As of December 31, 2019, the Company had total assets of $
Revenues between segments are accounted for at prices that approximate fair value. These include revenues from the sale of residual fiber from the wood products segment to the pulp segment for use in the pulp production process and from the sale of residual fuel from the pulp segment to the wood products segment for use in energy production. For the three month period ended March 31, 2020, the pulp segment sold $
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 12. Financial Instruments and Fair Value Measurement
Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and other approximates their fair value.
The estimated fair values of the Company’s outstanding debt under the fair value hierarchy as of March 31, 2020 and December 31, 2019 were as follows:
|
|
|
Fair value measurements as of March 31, 2020 using: |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Revolving credit facilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Senior Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Fair value measurements as of December 31, 2019 using: |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
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 on the Interim Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. However, fair value disclosure is required. The carrying value of the Company’s Senior Notes, net of note issuance costs and premium is $
Credit Risk
The Company's credit risk is primarily attributable to cash held in bank accounts and accounts receivable. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company's credit risk associated with the sale of pulp, lumber and other wood residuals is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping the product. The Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. Concentrations of credit risk on the sale of pulp, lumber and other wood residuals are with customers and agents based primarily in Germany, China, the U.S. and Italy.
The Company’s exposure to credit losses may increase if its customers are adversely affected by the COVID-19 pandemic. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables if the cash flows of the Company’s customers are adversely impacted by the COVID-19 pandemic.
The carrying amount of cash and cash equivalents of $
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 13. Commitments and Contingencies
|
(a) |
The Company is involved in legal actions and claims arising in the ordinary course of business. While the outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claims which are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. |
|
(b) |
The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout older facilities. The Company's obligation for the proper removal and disposal of asbestos products from the Company's mills is a conditional asset retirement obligation. As a result of the longevity of the Company's mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value. |
Note 14. Subsequent Event
On April 20, 2020, the Company’s
FORM 10-Q
QUARTERLY REPORT - PAGE 19
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 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 income (loss) from operations as a measure of performance, or as an alternative to net cash from 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 20
|
ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
In this document: (i) unless the context otherwise requires, references to "we", "our", "us", the "Company" or "Mercer" mean Mercer International Inc. and its subsidiaries; (ii) references to "Mercer Inc." mean the Company excluding its subsidiaries; (iii) information is provided as of March 31, 2020, unless otherwise stated; (iv) our reporting currency is dollars and references to "€" mean euros and "C$" mean Canadian dollars; (v) "ADMTs" refers to air-dried metric tonnes; (vi) "NBSK" refers to northern bleached softwood kraft; (vii) "NBHK" refers to northern bleached hardwood kraft; (viii) "MW" refers to megawatts and "MWh" refers to megawatt hours; (ix) "Mfbm" refers to thousand board feet of lumber and "MMfbm" mean million board feet of lumber; and (x) our lumber metrics are converted from cubic meters to Mfbm using a conversion ratio of 1.6 cubic meters to one Mfbm, which is the ratio commonly used in the industry.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figure.
The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2020 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, 2019 filed with the Securities and Exchange Commission, referred to as the "SEC".
Results of Operations
General
We have two reportable operating segments:
|
|
• |
Pulp – consists of the manufacture, sale and distribution of pulp, electricity and other by-products at our pulp mills. |
|
|
• |
Wood Products – consists of the manufacture, sale and distribution of lumber, electricity and other wood residuals at the Friesau sawmill. |
Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.
Current Market Environment
The current COVID-19 pandemic has resulted in significant widespread global infections and fatalities. It has also materially adversely affected global economic activity, caused significant market volatility and resulted in numerous governments declaring emergencies and implementing measures, such as travel bans, quarantines, business closures, shelter-in-place and other restrictions. See "Part II. Other Information - Item 1A. Risk Factors - The COVID-19 pandemic could materially adversely affect our business, financial position and results of operations".
Our products are an important constituent of many pandemic related high demand goods such as tissue and cleaning products and certain personal protective equipment. Accordingly, we have implemented a number of new and important health and safety measures at our operations both to protect our employees and to allow our mills to operate responsibly and efficiently. We are constantly monitoring our operations and guidance from governmental and health organizations to ensure we take appropriate and necessary actions to protect our people.
During the first quarter of 2020, pulp prices modestly increased from the fourth quarter of 2019 as a result of steady demand. Overall in the current quarter, our average NBSK pulp sales realizations declined by about 3% from the fourth quarter of 2019, as the modest price improvements were staggered and will not be fully implemented until the second quarter of 2020.
FORM 10-Q
QUARTERLY REPORT - PAGE 21
At the end of the current quarter, NBSK list prices in Europe and North America were approximately $840 per ADMT and $1,135 per ADMT, respectively. Commencing in 2020 only net prices (which are net of discounts, allowances and rebates) are published for China. At the end of the current quarter, NBSK net prices in China were approximately $580 per ADMT. NBHK list prices in North America were approximately $890 per ADMT and NBHK net prices in China were approximately $455 per ADMT.
Although there is a great deal of global business uncertainty resulting from the COVID-19 pandemic and its effect and societal responses are evolving and can change quickly, in the second quarter we are currently expecting to see steady pulp demand from tissue and hygiene producers but a weakening in demand from our printing and writing paper producers.
On the pulp supply side, in the upcoming quarter, we are currently expecting certain mills to curtail production as a result of fiber shortages resulting from sawmill downtime. Further, some pulp mills have announced some sporadic production curtailments resulting from COVID-19. Additionally, various pulp mills globally have delayed their annual maintenance schedules as a result of the current pandemic. This is expected to curtail production in the later part of the year or early part of next year.
In the second quarter of 2020, our pulp mills have six days of scheduled maintenance downtime, or approximately 9,700 ADMTs. However, these shuts may be deferred if there is a lack of contractor availability as a result of the current pandemic. Our Peace River mill is also currently scheduled to have five days of annual maintenance downtime in the fourth quarter of 2020.
In the first quarter of 2020, lumber markets overall were stable and lumber sales realizations were flat from the fourth quarter of 2019 as strong demand and higher pricing in the U.S. market offset lower lumber sales realizations in the European market resulting from the supply of lumber processed from beetle damaged wood. We currently expect weakening lumber markets and lower sales price realizations in the second quarter of 2020 due to a drop in housing starts and business slowdowns and disruptions resulting from the COVID-19 pandemic in our major markets.
FORM 10-Q
QUARTERLY REPORT - PAGE 22
Summary Financial Highlights
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands, other than per share amounts) |
|
|||||
|
Statement of Operations Data |
|
|
|
|
|
|
|
|
|
Pulp segment revenues |
|
$ |
303,605 |
|
|
$ |
436,474 |
|
|
Wood products segment revenues |
|
|
45,778 |
|
|
|
44,439 |
|
|
Corporate and other revenues |
|
|
1,216 |
|
|
|
3,037 |
|
|
Total revenues |
|
$ |
350,599 |
|
|
$ |
483,950 |
|
|
|
|
|
|
|
|
|
|
|
|
Pulp segment operating income |
|
$ |
21,439 |
|
|
$ |
93,520 |
|
|
Wood products segment operating income |
|
|
5,555 |
|
|
|
1,620 |
|
|
Corporate and other operating loss |
|
|
(2,932 |
) |
|
|
(1,588 |
) |
|
Total operating income |
|
$ |
24,062 |
|
|
$ |
93,552 |
|
|
|
|
|
|
|
|
|
|
|
|
Pulp segment depreciation and amortization |
|
$ |
30,371 |
|
|
$ |
28,023 |
|
|
Wood products segment depreciation and amortization |
|
|
2,377 |
|
|
|
1,911 |
|
|
Corporate and other depreciation and amortization |
|
|
198 |
|
|
|
313 |
|
|
Total depreciation and amortization |
|
$ |
32,946 |
|
|
$ |
30,247 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating EBITDA(1) |
|
$ |
57,008 |
|
|
$ |
123,799 |
|
|
Provision for income taxes |
|
$ |
(5,344 |
) |
|
$ |
(24,424 |
) |
|
Net income (loss) |
|
$ |
(3,392 |
) |
|
$ |
51,616 |
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.05 |
) |
|
$ |
0.79 |
|
|
Diluted |
|
$ |
(0.05 |
) |
|
$ |
0.78 |
|
|
Common shares outstanding at period end |
|
|
65,800 |
|
|
|
65,651 |
|
|
(1) |
The following table provides a reconciliation of net income (loss) to operating income and Operating EBITDA for the periods indicated: |
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Net income (loss) |
|
$ |
(3,392 |
) |
|
$ |
51,616 |
|
|
Provision for income taxes |
|
|
5,344 |
|
|
|
24,424 |
|
|
Interest expense |
|
|
20,084 |
|
|
|
18,551 |
|
|
Other (income) expenses |
|
|
2,026 |
|
|
|
(1,039 |
) |
|
Operating income |
|
|
24,062 |
|
|
|
93,552 |
|
|
Add: Depreciation and amortization |
|
|
32,946 |
|
|
|
30,247 |
|
|
Operating EBITDA |
|
$ |
57,008 |
|
|
$ |
123,799 |
|
FORM 10-Q
QUARTERLY REPORT - PAGE 23
Selected Production, Sales and Other Data
|
|
|
Three Months Ended March 31, |
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
||
|
Pulp Segment |
|
|
|
|
|
|
|
|
|
|
Pulp production ('000 ADMTs) |
|
|
|
|
|
|
|
|
|
|
NBSK |
|
|
455.2 |
|
|
|
460.6 |
|
|
|
NBHK |
|
|
78.9 |
|
|
|
78.6 |
|
|
|
Annual maintenance downtime ('000 ADMTs) |
|
|
2.3 |
|
|
|
— |
|
|
|
Annual maintenance downtime (days) |
|
|
2 |
|
|
|
— |
|
|
|
Pulp sales ('000 ADMTs) |
|
|
|
|
|
|
|
|
|
|
NBSK |
|
|
438.3 |
|
|
|
466.9 |
|
|
|
NBHK |
|
|
66.0 |
|
|
|
87.8 |
|
|
|
Average NBSK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
833 |
|
|
|
1,105 |
|
|
|
China |
|
|
573 |
|
|
|
700 |
|
|
|
North America |
|
|
1,127 |
|
|
|
1,380 |
|
|
|
Average NBHK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
|
|
|
China |
|
|
460 |
|
|
|
695 |
|
|
|
North America |
|
|
890 |
|
|
|
1,180 |
|
|
|
Average pulp sales realizations ($/ADMT)(2) |
|
|
|
|
|
|
|
|
|
|
NBSK |
|
|
561 |
|
|
|
757 |
|
|
|
NBHK |
|
|
468 |
|
|
|
656 |
|
|
|
Energy production ('000 MWh)(3) |
|
|
578.4 |
|
|
|
560.5 |
|
|
|
Energy sales ('000 MWh)(3) |
|
|
231.7 |
|
|
|
211.8 |
|
|
|
Average energy sales realizations ($/MWh)(3) |
|
|
95 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood Products Segment |
|
|
|
|
|
|
|
|
|
|
Lumber production (MMfbm) |
|
|
116.4 |
|
|
|
110.7 |
|
|
|
Lumber sales (MMfbm) |
|
|
117.7 |
|
|
|
109.2 |
|
|
|
Average lumber sales realizations ($/Mfbm) |
|
|
348 |
|
|
|
359 |
|
|
|
Energy production and sales ('000 MWh) |
|
|
22.8 |
|
|
|
22.4 |
|
|
|
Average energy sales realizations ($/MWh) |
|
|
116 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Spot Currency Exchange Rates |
|
|
|
|
|
|
|
|
|
|
$ / €(4) |
|
|
1.1022 |
|
|
|
1.1354 |
|
|
|
$ / C$(4) |
|
|
0.7438 |
|
|
|
0.7521 |
|
|
|
(1) |
Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates. Effective January 2020, the RISI pricing report does not provide list prices for China. |
|
(2) |
Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates. |
|
(3) |
Does not include our 50% joint venture interest in the Cariboo mill, which is accounted for using the equity method. |
|
(4) |
Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period. |
Consolidated ‑ Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Total revenues for the three months ended March 31, 2020 decreased by approximately 28% to $350.6 million from $484.0 million in the same quarter of 2019 primarily due to lower sales realizations and lower pulp sales volumes.
Costs and expenses in the current quarter decreased by approximately 16% to $326.5 million from $390.4 million in the first quarter of 2019 primarily due to lower pulp sales volume, lower per unit fiber costs and the positive impact of a stronger dollar against the Canadian dollar and euro primarily on the dollar denominated cash and receivables held at our operations.
In the first quarter of 2020, cost of sales depreciation and amortization increased to $32.9 million from $30.1 million in the same quarter of 2019.
FORM 10-Q
QUARTERLY REPORT - PAGE 24
Selling, general and administrative expenses increased to $17.6 million in the first quarter of 2020 from $17.2 million in the same quarter of 2019.
In the first quarter of 2020, our operating income decreased by approximately 74% to $24.1 million from $93.6 million in the same quarter of 2019 primarily due to lower pulp sales realizations partially offset by lower per unit fiber costs.
Interest expense in the current quarter increased to $20.1 million from $18.6 million in the same quarter of 2019 primarily as a result of the net issuance in October 2019 of an additional $100.0 million of our senior notes.
During the first quarter of 2020, the provision for income taxes was $5.3 million primarily due to income before tax for our German entities only partially offset by tax recoveries for our Canadian entities. In the comparative quarter of 2019, the provision for income taxes was $24.4 million due to higher income.
For the first quarter of 2020, our net loss was $3.4 million, or $0.05 per share compared to net income of $51.6 million, or $0.79 per basic share and $0.78 per diluted share, in the same quarter of 2019.
In the first quarter of 2020, Operating EBITDA decreased by approximately 54% to $57.0 million from $123.8 million in the same quarter of 2019 primarily due to lower pulp sales realizations partially offset by lower per unit fiber costs and the positive impact of a stronger dollar versus the euro and Canadian dollar.
Operating Results by Business Segment
None of the income or loss items following operating income in our Interim Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management.
Pulp Segment ‑ Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Selected Financial Information
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Pulp revenues |
|
$ |
278,948 |
|
|
$ |
413,313 |
|
|
Energy and chemical revenues |
|
$ |
24,657 |
|
|
$ |
23,161 |
|
|
Depreciation and amortization |
|
$ |
30,371 |
|
|
$ |
28,023 |
|
|
Operating income |
|
$ |
21,439 |
|
|
$ |
93,520 |
|
Pulp revenues in the first quarter of 2020 decreased by approximately 33% to $278.9 million from $413.3 million in the same quarter of 2019 due to lower sales realizations and sales volumes.
Energy and chemical revenues increased by approximately 6% to $24.7 million in the first quarter of 2020 from $23.2 million in the same quarter of 2019 due to higher production at our Celgar mill.
NBSK pulp production modestly declined to 455,192 ADMTs in the current quarter from 460,613 ADMTs in the same quarter of 2019 primarily due to two days of annual maintenance downtime (approximately 2,300 ADMTs) in the current quarter and no downtime in the same quarter of 2019.
We estimate that annual maintenance downtime in the current quarter adversely impacted our operating income by approximately $1.0 million.
In the second quarter of 2020, our pulp mills have six days of annual maintenance downtime or approximately 9,700 ADMTs.
FORM 10-Q
QUARTERLY REPORT - PAGE 25
NBSK pulp sales volumes decreased by approximately 6% to 438,326 ADMTs in the current quarter from 466,893 ADMTs in the same quarter of 2019 primarily due to logistics issues early in the current quarter related to closures, restrictions and other effects related to the COVID-19 pandemic.
In the current quarter of 2020, prices for NBSK pulp decreased from the same quarter of 2019, largely as a result of high producer inventory levels and market uncertainty as COVID-19 spread through China. Average list prices for NBSK pulp in Europe and North America were approximately $833 per ADMT and $1,127 per ADMT, respectively in the first quarter of 2020 compared to approximately $1,105 per ADMT and $1,380 per ADMT, respectively, in the same quarter of 2019. NBSK net prices in China were approximately $573 per ADMT in the current quarter compared to approximately $700 per ADMT in the same quarter of 2019.
Average NBSK pulp sales realizations decreased by approximately 26% to $561 per ADMT in the first quarter of 2020 from approximately $757 per ADMT in the same quarter of 2019.
Certain of our Canadian mills recorded a non-cash write down of our inventory carrying values of $5.7 million as a result of lower pulp sales realizations and high fiber costs.
In the current quarter of 2020 as a result of the effect of the strengthening dollar against the Canadian dollar and euro primarily on the dollar denominated cash and receivables held at our mills, we recorded a positive impact of approximately $17.1 million in operating income due to foreign exchange compared to the same quarter of 2019.
Costs and expenses in the current quarter decreased by approximately 18% to $282.3 million from $343.2 million in the first quarter of 2019 primarily due to lower pulp sales volumes, the positive impact of a stronger dollar and lower per unit fiber costs.
In the first quarter of 2020, depreciation and amortization increased to $30.4 million from $28.0 million in the same quarter of 2019.
On average, in the current quarter overall per unit fiber costs decreased by approximately 12% from the same quarter of 2019 primarily due to lower per unit fiber costs for our German mills. In the current quarter, per unit fiber costs for our German mills declined due to the continued availability of beetle damaged wood. For our Canadian mills, per unit fiber costs were flat but at historically high levels due to strong demand for fiber in the mills’ fiber procurement areas. We currently expect stable per unit fiber costs in the second quarter of 2020.
Transportation costs for our pulp segment decreased to $35.6 million in the current quarter from $37.9 million in the same quarter of 2019 primarily as a result of lower sales volumes.
In the first quarter of 2020, pulp segment operating income decreased to $21.4 million from $93.5 million in the same quarter of 2019 as lower pulp sales realizations were only partially offset by the positive impact of a stronger dollar and lower per unit fiber costs.
Wood Products Segment ‑ Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Selected Financial Information
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Lumber revenues |
|
$ |
40,986 |
|
|
$ |
39,163 |
|
|
Energy revenues |
|
$ |
2,631 |
|
|
$ |
2,666 |
|
|
Wood residual revenues |
|
$ |
2,161 |
|
|
$ |
2,610 |
|
|
Depreciation and amortization |
|
$ |
2,377 |
|
|
$ |
1,911 |
|
|
Operating income |
|
$ |
5,555 |
|
|
$ |
1,620 |
|
FORM 10-Q
QUARTERLY REPORT - PAGE 26
In the first quarter of 2020, lumber revenues increased 5% to $41.0 million from $39.2 million in the same quarter of 2019 due to higher sales volumes partially offset by lower sales realizations. In the current quarter approximately 31% of sales volumes were in the U.S. market and the majority of remaining sales were to Europe.
Energy and wood residual revenues decreased 9% to $4.8 million in the first quarter of 2020 from $5.3 million in the same quarter of 2019 primarily due to lower sales realizations for wood residuals.
Lumber production increased by approximately 5% to a record 116.4 MMfbm in the current quarter of 2020 from 110.7 MMfbm in the same quarter of 2019 primarily due to capital improvements.
Average lumber sales realizations decreased by approximately 3% to $348 per Mfbm in the first quarter of 2020 from approximately $359 per Mfbm in the same quarter of 2019 primarily due to lower pricing in Europe partially offset by higher pricing in the U.S. market. European lumber pricing declined due to an increase in the supply of lumber processed from beetle damaged wood which generally obtains lower prices. U.S. lumber pricing increased due to strong demand during the current quarter.
Fiber costs were approximately 70% of our lumber cash production costs in the current quarter. In the current quarter per unit fiber costs decreased by approximately 25% from the same quarter of 2019 primarily due to the availability of lower cost beetle damaged wood. We currently expect stable per unit fiber costs in the second quarter of 2020 because of the continuing availability of beetle damaged wood.
In the first quarter of 2020, lumber segment depreciation and amortization increased to $2.4 million from $1.9 million in the same quarter of 2019 primarily due to the completion of capital projects.
Transportation costs for our wood products segment in the first quarter of 2020 increased by approximately 10% to $6.8 million from $6.2 million in the same quarter of 2019 due to higher lumber sales volumes.
In the first quarter of 2020, our wood products segment had record operating income of $5.6 million compared to $1.6 million in the same quarter of 2019 primarily due to record production and lower per unit fiber costs.
Liquidity and Capital Resources
Summary of Cash Flows
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Net cash from (used in) operating activities |
|
$ |
(69,842 |
) |
|
$ |
42,186 |
|
|
Net cash used in investing activities |
|
|
(23,405 |
) |
|
|
(19,966 |
) |
|
Net cash from (used in) financing activities |
|
|
32,250 |
|
|
|
(28,723 |
) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,562 |
) |
|
|
(754 |
) |
|
Net decrease in cash and cash equivalents |
|
$ |
(64,559 |
) |
|
$ |
(7,257 |
) |
We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for fiber, labor and chemicals. Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and sales and the payment of payables and expenses.
Cash Flows from Operating Activities. Cash used in operating activities was $69.8 million in the three months ended March 31, 2020 compared to cash provided by operating activities of $42.2 million in the comparative period of 2019. An increase in accounts receivable used cash of $20.9 million in the three months ended March 31, 2020 compared to $56.4 million in the same period of 2019. An increase in inventories used cash of $18.1 million in the three months ended March 31, 2020 compared to a decrease in inventories providing cash of $21.1 million in the same period of 2019. A decrease in accounts payable and accrued expenses used cash of $57.7 million in the three months ended March 31, 2020 compared to $0.2 million in the same period of 2019.
FORM 10-Q
QUARTERLY REPORT - PAGE 27
Cash Flows from Investing Activities. Investing activities in the three months ended March 31, 2020 used cash of $23.4 million primarily related to capital expenditures of $23.0 million. In the three months ended March 31, 2020, capital expenditures included the planer line replacement project and other upgrades at our Friesau sawmill, additional land for fiber storage at the Stendal mill and optimization projects at the Celgar mill. In the three months ended March 31, 2019, investing activities used cash of $20.0 million primarily related to capital expenditures of $19.4 million. In the three months ended March 31, 2019, capital expenditures included the planer line replacement project at our Friesau sawmill, wastewater improvement projects at our German pulp mills and large maintenance projects at our Celgar mill.
Cash Flows from Financing Activities. In the three months ended March 31, 2020, financing activities provided cash of $32.3 million primarily from $51.3 million of borrowings under our revolving credit facilities. In the three months ended March 31, 2020 we paid dividends of $9.0 million. In the three months ended March 31, 2019, financing activities used cash of $28.7 million primarily to repay $33.7 million of revolving credit facilities. In the three months ended March 31, 2019, we received $6.3 million of government grants to finance greenhouse gas reduction capital projects at the Peace River mill.
Balance Sheet Data
The following table is a summary of selected financial information as at the dates indicated:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Cash and cash equivalents |
|
$ |
286,526 |
|
|
$ |
351,085 |
|
|
Working capital |
|
$ |
603,410 |
|
|
$ |
588,385 |
|
|
Total assets |
|
$ |
1,951,989 |
|
|
$ |
2,065,720 |
|
|
Long-term liabilities |
|
$ |
1,304,078 |
|
|
$ |
1,259,005 |
|
|
Total equity |
|
$ |
462,768 |
|
|
$ |
550,403 |
|
Sources and Uses of Funds
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand. Our principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our senior notes.
The following table sets out our total capital expenditures and interest expense for the periods indicated:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Capital expenditures |
|
$ |
23,018 |
|
|
$ |
19,389 |
|
|
Cash paid for interest expense(1) |
|
$ |
37,278 |
|
|
$ |
16,983 |
|
|
Interest expense(2) |
|
$ |
20,084 |
|
|
$ |
18,551 |
|
|
(1) |
Amounts differ from interest expense which includes non-cash items. See supplemental disclosure of cash flow information from our Interim Consolidated Statements of Cash Flows included in this report. |
|
(2) |
Interest on our senior notes due 2022 was paid semi-annually in June and December of each year. In October 2019, we redeemed the remaining $100.0 million of our senior notes due 2022. Interest on our senior notes due 2024 is paid semi-annually in February and August of each year. Interest on our senior notes due 2025 and on our senior notes due 2026 is paid semi-annually in January and July of each year, commencing in July 2019 for our senior notes due 2025. |
FORM 10-Q
QUARTERLY REPORT - PAGE 28
As a result of the global and financial uncertainty resulting from the COVID-19 pandemic, we are working to lower our costs and working capital usage and conservatively managing liquidity. As a result, we have reduced our planned 2020 capital expenditures, excluding amounts being financed by government grants and expected insurance proceeds, to about $90 million and reduced our quarterly dividend to $0.065 per share.
As at March 31, 2020 our cash and cash equivalents were $286.5 million compared to $351.1 million at the end of 2019. As at March 31, 2020, we had approximately $229.9 million available under our revolving credit facilities. As of March 31, 2020, our cash and cash equivalents and availability under our revolving credit facilities provide liquidity of about $516.5 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.
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, 2019.
As at March 31, 2020, we were in full compliance with all of the covenants of our indebtedness.
Off-Balance Sheet Arrangements
At March 31, 2020, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).
Contractual Obligations and Commitments
There were no material changes outside the ordinary course to any of our material contractual obligations during the three months ended March 31, 2020.
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 income (loss) and do not affect our net earnings.
FORM 10-Q
QUARTERLY REPORT - PAGE 29
As a result of the strengthening of the dollar versus the Canadian dollar and euro as at March 31, 2020, we recorded a non-cash decrease of $75.0 million in the carrying value of our net assets, consisting primarily of our fixed assets denominated in Canadian dollars and euros. This non-cash decrease does not affect our net income (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 $191.5 million.
Based upon the exchange rate as at March 31, 2020, the dollar has strengthened by approximately 8% against the Canadian dollar and 2% against the euro since December 31, 2019. See "Quantitative and Qualitative Disclosures about Market Risk".
Credit Rating 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".
Moody's rating on our Senior Notes is Ba3 and its outlook is stable. In April 2020, S&P reduced its rating on our Senior Notes to B+ from BB- and its outlook to negative from stable. Its recovery rating remained unchanged at "3". 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.
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, 2019. 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, 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, 2019.
FORM 10-Q
QUARTERLY REPORT - PAGE 30
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:
|
|
• |
our business is highly cyclical in nature; |
|
|
• |
a weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources; |
|
|
• |
the COVID-19 pandemic could materially adversely affect our business, financial position and results of operations; |
|
|
• |
our level of indebtedness could negatively impact our financial condition, results of operations and liquidity; |
|
|
• |
cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business; |
|
|
• |
we face intense competition in our markets; |
|
|
• |
we are exposed to currency exchange rate fluctuations; |
|
|
• |
political uncertainty and an increase in trade protectionism could have a material adverse effect on global macro-economic activities and trade and adversely affect our business, results of operations and financial condition; |
|
|
• |
we are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations; |
|
|
• |
our business is subject to risks associated with climate change and social and government responses thereto; |
|
|
• |
our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements; |
|
|
• |
future acquisitions may result in additional risks and uncertainties in our business; |
|
|
• |
we have limited control over the operations of the Cariboo mill; |
|
|
• |
fluctuations in prices and demand for lumber could adversely affect our business; |
|
|
• |
adverse housing market conditions may increase the credit risk from customers of our wood products segment; |
|
|
• |
our wood products segment lumber products are vulnerable to declines in demand due to competing technologies or materials; |
|
|
• |
changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities; |
FORM 10-Q
QUARTERLY REPORT - PAGE 31
|
|
• |
we sell surplus energy pursuant to statutory energy programs in Germany and electricity purchase agreements with a utility in Western Canada; |
|
|
• |
we may experience material disruptions to our production; |
|
|
• |
we are subject to risks related to our employees; |
|
|
• |
we are dependent on key personnel; |
|
|
• |
if our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations; |
|
|
• |
we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters; |
|
|
• |
our insurance coverage may not be adequate; |
|
|
• |
we rely on third parties for transportation services; |
|
|
• |
we periodically use derivatives to manage certain risks which could cause significant fluctuations in our operating results; |
|
|
• |
failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business; |
|
|
• |
the price of our common stock may be volatile; |
|
|
• |
a small number of our shareholders could significantly influence our business; |
|
|
• |
our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations; and |
|
|
• |
we are exposed to interest rate fluctuations. |
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, 2019. 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
FORM 10-Q
QUARTERLY REPORT - PAGE 32
favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their pulp production on the market, if market conditions, prices and trends warrant such actions.
Demand for each of pulp and lumber has historically been determined primarily by general global macro-economic conditions and has been closely tied to overall business activity. Pulp prices have been and are likely to continue to be volatile and can fluctuate widely over time. Between 2010 and 2019, European list prices for NBSK pulp have fluctuated between a low of approximately $760 per ADMT in 2012 to a high of $1,230 per ADMT in 2018. In the same period, the average North American NBHK price has fluctuated between a low of $700 per ADMT in 2012 to a high of $1,235 per ADMT in 2018.
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 and Canada. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Canadian mills in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such declines in the dollar relative to the euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
FORM 10-Q
QUARTERLY REPORT - PAGE 33
|
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, 2019.
FORM 10-Q
QUARTERLY REPORT - PAGE 34
|
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.
FORM 10-Q
QUARTERLY REPORT - PAGE 35
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, 2019. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
|
ITEM 1A. |
RISK FACTORS |
Other than as set out below, there have been no material changes to the factors disclosed in Item 1A. Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2019.
The COVID-19 pandemic could materially adversely affect our business, financial position and results of operations.
The outbreak of COVID-19 in China in December 2019 and the subsequent spread of the virus globally through the first quarter of 2020 has resulted in significant and widespread infections and fatalities. In March 2020, the World Health Organization declared the spread of the COVID-19 virus a pandemic. The rapid spread of the virus has resulted in various federal, state and provincial governments declaring emergency measures and the implementation of numerous measures to attempt to contain the virus, including travel bans and restrictions, quarantines, business closures, shelter in place orders and other shutdowns and restrictions.
The impact of the pandemic and the global response thereto has, among other things, significantly disrupted global economic activity, negatively impacted gross domestic product and caused significant volatility in financial markets, with various countries already reporting significant declines in gross domestic product and business activity and material increases in unemployment. While various countries, including the United States, Germany, Canada and China have implemented stimulus packages and other fiscal measures to attempt to reduce the impact of the pandemic on their economies, the impact of the pandemic on global economic activity and markets both in the short and longer term is uncertain at this time.
As demand for our products has principally historically been determined by general global macro-economic activities, demand and prices for our products have historically decreased substantially during economic slowdowns. A significant economic downturn may adversely affect our sales and profitability and may also adversely affect our customers and suppliers. Additionally, significant disruptions and volatility in financial markets could have a negative impact on our ability to access capital in the future.
Our products are an important constituent of many pandemic related high demand goods such as tissue and cleaning products and certain personal protective equipment. However, our mills could experience disruptions, downtime and closures in the future as a result of changes to existing government response measures, outbreaks of the virus among our employees or operations or disruptions to raw material supplies or access to logistics networks.
The magnitude and duration of the disruption and resulting decline in business activity resulting from the COVID-19 pandemic is currently uncertain. The extent to which the COVID-19 pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including:
|
|
• |
the duration and scope of the pandemic; |
|
|
• |
governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; |
|
|
• |
the impact of the pandemic on economic activity and actions taken in response; |
|
|
• |
the effect on our customers’ demand for pulp and wood products; |
FORM 10-Q
QUARTERLY REPORT - PAGE 36
|
|
• |
our vendors' ability to supply us with raw materials; |
|
|
• |
the availability of logistics networks and our ability to ship our products to customers; |
|
|
• |
the ability of our customers to pay for our products; and |
|
|
• |
any closures of our and our customers’ facilities and offices. |
The effect of the pandemic, including remote working arrangements for employees, may also increase the risk of cyberattacks on, and other material breaches of, our and our third party service providers' information technology systems.
Any of these events could cause or contribute to the risks and uncertainties enumerated in our annual report on Form 10-K for the year ended December 31, 2019 and could materially adversely affect our business, financial position and results of operations.
|
ITEM 2. |
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In May 2019, our board of directors authorized a common stock repurchase program under which we may purchase up to $50 million of our shares until May 2020. Repurchases may be made from time to time under the program through open market or in privately negotiated transactions, through block trades or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Exchange Act. The repurchase program is subject to market conditions, applicable legal requirements and other factors. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or terminated at any time.
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Period |
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Total Number of Shares Purchased |
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Average Price Paid Per Share |
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Total Number of Shares Purchased as Part of a Publicly Announced Program |
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Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program |
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March 1 - March 31, 2020 |
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23,584 |
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$ |
6.84 |
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23,584 |
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$ |
49,084,880 |
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. |
MINE SAFETY DISCLOSURES |
None.
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ITEM 5. |
OTHER INFORMATION |
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 37
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ITEM 6. |
EXHIBITS |
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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 March 31, 2020 of Mercer International Inc., formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Interim Consolidated Statements of Operations; (ii) Interim Consolidated Statements of Comprehensive Income (Loss); (iii) Interim Consolidated Balance Sheets; (iv) Interim Consolidated Statements of Changes in Shareholders' Equity; (v) Interim Consolidated Statements of Cash Flows; and (vi) Notes to the Interim Consolidated Financial Statements. |
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104 |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, has been formatted in Inline XBRL. |
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* |
In accordance with Release No. 33-8212 of the SEC, these Certifications: (i) are "furnished" to the SEC and are not "filed" for the purposes of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company's registration statements filed under the Securities Act of 1933, as amended, for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein. |
FORM 10-Q
QUARTERLY REPORT - PAGE 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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MERCER INTERNATIONAL INC. |
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By: |
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/s/ David M. Gandossi |
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David M. Gandossi |
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Chief Executive Officer and President |
Date: April 30, 2020
FORM 10-Q
QUARTERLY REPORT - PAGE 39