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). The Companys shares of common stock are quoted and listed for trading on both the NASDAQ Global Market and the Toronto Stock Exchange.
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 interim consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in
the Companys latest annual report on
Form 10-K
for the fiscal year ended December 31, 2015. In the opinion of the Company, the unaudited interim consolidated financial statements contained herein
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.
The Company has three pulp mills that are aggregated into one reportable business segment, market pulp. Accordingly, the results presented are
those of the reportable business segment.
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, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
New Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-9, Revenue Recognition Revenue from Contracts with Customers (ASU 2014-9) that requires companies to recognize revenue when a customer
obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods therein and
requires expanded disclosures. The Company is currently assessing the impact, if any, the adoption of ASU 2014-9 will have on its consolidated financial statements.
In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory
(ASU 2015-11) which requires that inventory within the scope of this update, including inventory stated at average cost, be measured at the lower of cost and net realizable value. This update is effective for financial statements issued
for fiscal years beginning after December 15, 2016, with early adoption permitted as of the beginning of an interim or annual reporting period. The adoption of this accounting guidance will not materially impact the Companys financial
position.
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-2, Leases (ASU
2016-2) which requires lessees to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and liability. This update is effective for financial statements issued for fiscal years beginning after
December 15, 2018, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of ASU 2016-2 will have on its 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 (continued)
In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update
2016-9, Improvements to Employee Share-Based Payment Accounting (ASU 2016-9) which simplifies several aspects of accounting for share-based payment transactions including income tax consequences, classification of awards as either
equity or liabilities, classification on the statement of cash flows and accounting for forfeitures. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016. The Company is currently assessing
the impact, if any, the adoption of ASU 2016-9 will have on its consolidated financial statements.
In August 2016, the Financial
Accounting Standards Board issued Accounting Standards Update 2016-15, Statement of Cash Flows (ASU 2016-15) which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.
This update is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact, if any, the adoption of ASU 2016-15 will have on its
consolidated financial statements.
Note 2. Inventories
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Raw materials
|
|
$ 58,203
|
|
$ 57,592
|
Finished goods
|
|
33,377
|
|
36,829
|
Spare parts and other
|
|
52,043
|
|
46,580
|
|
|
|
|
|
|
|
$ 143,623
|
|
$ 141,001
|
|
|
|
|
|
|
|
|
Note 3. Accounts Payable and Other
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Trade payables
|
|
$ 27,274
|
|
$ 20,637
|
Accrued expenses
|
|
53,849
|
|
55,648
|
Accrued interest payable
|
|
15,706
|
|
4,050
|
Interest rate derivative liability, current portion (Note 10)
|
|
9,028
|
|
10,380
|
Dividend payable (Note 7)
|
|
7,440
|
|
7,418
|
Other
|
|
4,896
|
|
5,317
|
|
|
|
|
|
|
|
$ 118,193
|
|
$ 103,450
|
|
|
|
|
|
|
|
|
Note 4. Debt
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
2019 Senior Notes, unsecured, $227,000 face value (a)
|
|
$ 223,835
|
|
$ 245,689
|
2022 Senior Notes, unsecured, $400,000 face value (a)
|
|
393,183
|
|
392,354
|
Revolving credit facilities
|
|
|
|
|
75.0 million (b)
|
|
|
|
|
C$40.0 million (c)
|
|
7,624
|
|
|
25.0 million (d)
|
|
|
|
|
5.0 million (e)
|
|
|
|
|
|
|
|
|
|
|
|
$ 624,642
|
|
$ 638,043
|
|
|
|
|
|
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 4. Debt (continued)
As at September 30, 2016, the maturities of the principal portion of debt are as
follows:
|
|
|
2016
|
|
$
|
2017
|
|
|
2018
|
|
|
2019
|
|
234,624
|
2020
|
|
|
Thereafter
|
|
400,000
|
|
|
|
|
|
$ 634,624
|
|
|
|
Certain of the Companys 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 at September 30, 2016, the Company is in compliance with the terms of its debt
agreements.
(a)
|
On November 26, 2014, the Company issued $650,000 of senior notes consisting of $250,000 in aggregate
principal amount of 7.00% senior notes which mature on December 1, 2019 (2019 Senior Notes) and $400,000 in aggregate principal amount of 7.75% senior notes which mature on December 1, 2022 (2022 Senior Notes and
collectively with the 2019 Senior Notes, the Senior Notes). The Senior Notes were issued at a price of 100% of their principal amount. Upon their issuance the Senior Notes were recorded at $635,949 which included debt issuance costs of
$14,051. These costs were proportionally allocated to the 2019 Senior Notes and the 2022 Senior Notes.
|
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 Companys subsidiaries.
The Company may redeem all or a part of the Senior Notes, upon not less than 30 days or more than 60 days notice,
at the redemption prices (expressed as percentages of principal amount) discussed below, plus accrued and unpaid interest to (but not including) the applicable redemption date. The 2019 Senior Notes redemption prices are equal to 103.50% for the
twelve month period beginning on December 1, 2016, 101.75% for the twelve month period beginning on December 1, 2017, and 100.00% beginning on December 1, 2018 and at any time thereafter. The 2022 Senior Notes redemption prices are
equal to 105.813% for the twelve month period beginning on December 1, 2017, 103.875% for the twelve month period beginning on December 1, 2018, 101.938% for the twelve month period beginning on December 1, 2019, and 100.00% beginning
on December 1, 2020 and at any time thereafter.
In March 2016, the Company purchased $23,000 in aggregate principal
amount of its 2019 Senior Notes. In connection with this purchase the Company recorded a loss on extinguishment of debt of $454 in other expenses in the Interim Consolidated Statement of Operations which included the write-off of certain unamortized
debt issuance costs.
(b)
|
A 75.0 million revolving credit facility at the Stendal mill that matures in October 2019. Borrowings
under the facility are collateralized by the mills inventory and accounts receivable and bear interest at Euribor plus 3.50%. As at September 30, 2016, approximately 75.0 million ($84,285) was available.
|
(c)
|
A C$40.0 million revolving credit facility at the Celgar mill that matures in May 2019. Borrowings under the
facility are collateralized by the mills inventory and accounts receivable and are restricted by a borrowing base calculated on the mills inventory and accounts receivable. Canadian dollar denominated amounts bear interest at bankers
acceptance plus 1.50% or Canadian prime. U.S. dollar denominated amounts bear interest at LIBOR plus 1.50% or U.S. base. As at September 30, 2016, approximately C$10.0 million ($7,624) was drawn and accruing interest at a rate of 2.38%,
approximately C$1.7 million ($1,295) was supporting letters of credit and approximately C$28.3 million ($21,576) was available.
|
FORM 10-Q
QUARTERLY REPORT - PAGE 8
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 4. Debt (continued)
(d)
|
A 25.0 million revolving credit facility at the Rosenthal mill that matures in October 2019. Borrowings
under the facility are collateralized by the mills inventory and accounts receivable and bear interest at Euribor plus 2.95%. As at September 30, 2016, approximately 3.1 million ($3,440) of this facility was supporting bank
guarantees leaving approximately 21.9 million ($24,655) available.
|
(e)
|
A 5.0 million revolving credit facility at the Rosenthal mill that matures in December 2018. Borrowings
under this facility bear interest at the rate of the three-month Euribor plus 2.50% and are secured by certain land at the Rosenthal mill. As at September 30, 2016, approximately 3.2 million ($3,577) of this facility was supporting bank
guarantees leaving approximately 1.8 million ($2,042) available.
|
Note 5. Pension and Other Post-Retirement Benefit Obligations
Defined Benefit Plans
Included in pension and other post-retirement benefit obligations are amounts related to the Companys Celgar and Rosenthal mills. The
largest component of these obligations is with respect to the Celgar mill which maintains a defined benefit pension plan and other post-retirement benefit plans for certain employees (the Celgar Defined Benefit Plans).
Pension benefits are based on employees earnings and years of service. The Celgar Defined Benefit Plans are funded by contributions from
the Company based on actuarial estimates and statutory requirements.
The components of the net periodic benefit costs relating to the
Celgar Defined Benefit Plans for the three and nine month periods ended September 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
Service cost
|
|
$ 23
|
|
$ 122
|
|
$ 29
|
|
$ 194
|
Interest cost
|
|
259
|
|
240
|
|
304
|
|
233
|
Expected return on plan assets
|
|
(489)
|
|
|
|
(500)
|
|
|
Amortization of unrecognized items
|
|
335
|
|
(44)
|
|
271
|
|
2
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ 128
|
|
$ 318
|
|
$ 104
|
|
$ 429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
Service cost
|
|
$ 68
|
|
$ 363
|
|
$ 92
|
|
$ 607
|
Interest cost
|
|
756
|
|
711
|
|
1,028
|
|
731
|
Expected return on plan assets
|
|
(1,448)
|
|
|
|
(1,563)
|
|
|
Amortization of unrecognized items
|
|
1,002
|
|
(132)
|
|
726
|
|
6
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ 378
|
|
$ 942
|
|
$ 283
|
|
$ 1,344
|
|
|
|
|
|
|
|
|
|
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 5. Pension and Other Post-Retirement Benefit Obligations (continued)
Defined Contribution Plan
Effective December 31, 2008, the Celgar Defined Benefit Plans were closed to new members. In addition, the 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 and nine month periods ended
September 30, 2016, the Company made contributions of $200 and $509, respectively (2015 $173 and $521), to this plan.
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. Contributions during the three
and nine month periods ended September 30, 2016 totaled $384 and $1,167, respectively (2015 $399 and $1,249).
Note 6. Income Taxes
The income tax provision attributable to income before provision for income taxes in the Interim Consolidated Statement of Operations
differs from the amounts computed by applying the U.S. Federal statutory income tax rate of 35% for the three and nine month periods ended September 30, 2016 and 2015 as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
U.S. Federal statutory rate
|
|
35%
|
|
35%
|
|
35%
|
|
35%
|
|
|
|
|
|
|
|
|
|
U.S. Federal statutory rate on income before income taxes
|
|
$ (5,962)
|
|
$ (10,619)
|
|
$ (12,472)
|
|
$ (26,452)
|
Tax differential on foreign income
|
|
1,719
|
|
2,706
|
|
3,353
|
|
6,631
|
Effect of foreign earnings
|
|
1,750
|
|
|
|
(1,750)
|
|
(5,290)
|
Valuation allowance
|
|
(4,134)
|
|
(2,884)
|
|
(13,876)
|
|
(9,285)
|
Tax benefit of partnership structure
|
|
1,304
|
|
1,313
|
|
3,867
|
|
3,905
|
Non-taxable foreign subsidies
|
|
575
|
|
573
|
|
1,693
|
|
1,718
|
True-up of prior year taxes
|
|
(78)
|
|
1,421
|
|
(138)
|
|
6,024
|
Other
|
|
(283)
|
|
911
|
|
142
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
$ (5,109)
|
|
$ (6,579)
|
|
$ (19,181)
|
|
$ (21,771)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
Current
|
|
$ (1,766)
|
|
$ (2,789)
|
|
$ (6,891)
|
|
$ (9,290)
|
Deferred
|
|
(3,343)
|
|
(3,790)
|
|
(12,290)
|
|
(12,481)
|
|
|
|
|
|
|
|
|
|
|
|
$ (5,109)
|
|
$ (6,579)
|
|
$ (19,181)
|
|
$ (21,771)
|
|
|
|
|
|
|
|
|
|
For the three and nine month periods ended September 30, 2016, the Company recorded an increase in its
valuation allowance of $4,134 and $13,876 respectively (2015 $2,884 and $9,285), related to its U.S. and Canadian entities where a full valuation allowance was recognized against net deferred income tax assets.
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 7. Shareholders Equity
Dividends
During the nine month
period ended September 30, 2016, the Companys Board of Directors declared the following quarterly dividends:
|
|
|
|
|
Date Declared
|
|
Dividend Per Common Share
|
|
Amount
|
February 11, 2016
|
|
$
0.115
|
|
$
7,435
|
April 28, 2016
|
|
0.115
|
|
7,440
|
July 28, 2016
|
|
0.115
|
|
7,440
|
|
|
|
|
|
|
|
$
0.345
|
|
$
22,315
|
|
|
|
|
|
Dividends are paid in the quarter subsequent to the quarter in which they were declared.
In October 2016, the Companys Board of Directors declared a quarterly dividend of $0.115 per common share. Payment of the dividend will
be made on January 4, 2017 to all shareholders of record on December 22, 2016. Future dividends are subject to approval by the Board of Directors and may be adjusted as business and industry conditions warrant.
Stock Based Compensation
In June
2010, the Company adopted a stock incentive plan (the 2010 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 nine months ended September 30, 2016, there were no issued and outstanding stock options, restricted stock rights, performance shares or stock appreciation rights. As at
September 30, 2016, after factoring in all allocated shares, there remain approximately 1,013,112 common shares available for grant.
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 three years.
For the three and nine month periods ended
September 30, 2016, the Company recognized an expense of $882 and $2,268, respectively, related to PSUs (2015 $262 and $1,359).
The following table summarizes PSU activity during the period:
|
|
|
|
|
Number of PSUs
|
Outstanding at January 1, 2016
|
|
1,255,919
|
Granted
|
|
997,863
|
Vested and issued
|
|
(154,242)
|
|
|
|
Outstanding at September 30, 2016
|
|
2,099,540
|
|
|
|
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 7. Shareholders Equity (continued)
Restricted Shares
Restricted shares generally vest at the end of one year; however, 200,000 restricted shares granted during the year ended December 31,
2011 vested in equal amounts over a five-year period commencing in 2012.
For the three and nine month periods ended September 30,
2016, the Company recognized an expense of $90 and $359, respectively, related to restricted shares (2015 $165 and $426). As at September 30, 2016, the total remaining unrecognized compensation cost related to restricted shares amounted
to approximately $243 which will be amortized over the remaining vesting periods.
The following table summarizes restricted share
activity during the period:
|
|
|
|
|
Number of
Restricted Shares
|
Outstanding at January 1, 2016
|
|
78,000
|
Granted
|
|
38,000
|
Vested and issued
|
|
(78,000)
|
|
|
|
Outstanding at September 30, 2016
|
|
38,000
|
|
|
|
Retained Earnings
The following table summarizes the changes in retained earnings during the period:
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
Retained earnings at January 1, 2016
|
|
$ 160,880
|
Net income
|
|
16,454
|
Cash dividends declared ($0.345 per common share)
|
|
(22,315)
|
|
|
|
Retained earnings at September 30, 2016
|
|
$ 155,019
|
|
|
|
Note 8. Net Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ 11,926
|
|
$ 23,760
|
|
$ 16,454
|
|
$ 53,806
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ 0.18
|
|
$ 0.37
|
|
$ 0.25
|
|
$ 0.84
|
Diluted
|
|
$ 0.18
|
|
$ 0.37
|
|
$ 0.25
|
|
$ 0.83
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
64,656,138
|
|
64,423,896
|
|
64,623,215
|
|
64,365,962
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
PSUs
|
|
495,663
|
|
330,353
|
|
397,447
|
|
333,937
|
Restricted shares
|
|
3,353
|
|
36,260
|
|
20,359
|
|
59,911
|
Stock options
|
|
|
|
|
|
|
|
5,136
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
65,155,154
|
|
64,790,509
|
|
65,041,021
|
|
64,764,946
|
|
|
|
|
|
|
|
|
|
(1)
|
For the three and nine month periods ended September 30, 2016, the basic weighted average number of common
shares outstanding excludes 38,000 restricted shares which have been issued, but have not vested as at September 30, 2016 (2015 78,000 restricted shares).
|
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 8. Net Income Per Common Share (continued)
The calculation of diluted net income per common share does not assume the exercise of any
instruments that would have an anti-dilutive effect on net income per common share. There were no anti-dilutive instruments for the three and nine months ended September 30, 2016 and 2015.
Note 9. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Unrecognized
Losses and Prior
Service
Costs
Related to
Defined Benefit
Plan
|
|
Unrealized
Gains (Losses)
on Marketable
Securities
|
|
Total
|
Balance at January 1, 2016
|
|
$ (156,223)
|
|
$ (15,338)
|
|
$ (13)
|
|
$ (171,574)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
38,710
|
|
|
|
(4)
|
|
38,706
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
870
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes
|
|
38,710
|
|
870
|
|
(4)
|
|
39,576
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$ (117,513)
|
|
$ (14,468)
|
|
$ (17)
|
|
$ (131,998)
|
|
|
|
|
|
|
|
|
|
Note 10. Derivative Transactions
The Company is exposed to certain market risks relating to its ongoing business. The Company seeks to manage these risks through internal risk
management policies as well as, from time to time, the use of derivatives. The derivatives are measured at fair value with changes in fair value immediately recognized in other expenses in the Interim Consolidated Statement of Operations.
Interest Rate Swaps
During 2002,
the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately 612.6 million of the principal amount of the indebtedness under the Stendal
mills senior project finance facility, which was settled in November 2014. Under the remaining interest rate swaps, the Company pays a fixed rate and receives a floating rate with the derivative payments being calculated on a notional amount.
As at September 30, 2016, the contract has a fair value of 10.7 million ($11,985; 2015 $16,913) of which 8.0 million ($9,028; 2015 $10,380) is classified as current within accounts payable and other and 2.7
million ($2,957; 2015 $6,533) is classified as a long-term liability in the Interim Consolidated Balance Sheet. The contract has an aggregate notional amount of 161.0 million, a fixed interest rate of 5.28% and matures in October 2017.
The Company has pledged as collateral cash in the amount of 67% of the fair value of the interest rate swaps up to 8.5 million to
the derivative counterparty. The calculation to determine the collateral is performed semi-annually, with the final calculation in October 2017. As at September 30, 2016, the collateral was 7.1 million ($7,979; 2015 $9,230). This
cash has been classified as restricted cash in the Interim Consolidated Balance Sheet.
During the three and nine month periods ended
September 30, 2016 the Company recorded a gain on the interest rate swaps of $13 and a loss of $252, respectively (2015 loss of $342 and $699), in other expenses in the Interim Statement of Operations.
The counterparty to the interest rate swaps is a bank that is a member of a banking syndicate that holds the Stendal 75.0 million
revolving credit facility and the Company does not anticipate non-performance by the bank.
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 11. Fair Value Measurement and Disclosure
Due to their short-term maturity, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable
and other approximates their fair value.
The fair value of the interest rate derivative liability classified as Level 2 is determined
using a discounted cash flow model that uses as its basis readily observable market inputs, such as forward interest rates and yield curves observable at specified intervals. The observable inputs reflect market data obtained from independent
sources, including the Euribor rate provided by the counterparty to the interest rate derivative.
The fair value of the Senior Notes
classified as Level 2 is determined using quoted prices in a dealer market, or using recent market transactions. The fair value of the revolving credit facilities classified as Level 2 reflects recent market transactions.
The following tables present a summary of the Companys outstanding financial instruments and their estimated fair values under the fair
value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as at September 30, 2016 using:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate derivative liability
|
|
$
|
|
$ 11,985
|
|
$
|
|
$ 11,985
|
Debt
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
|
|
658,161
|
|
|
|
658,161
|
Revolving credit facilities
|
|
|
|
7,624
|
|
|
|
7,624
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
$ 677,770
|
|
$
|
|
$ 677,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as at December 31, 2015 using:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate derivative liability
|
|
$
|
|
$ 16,913
|
|
$
|
|
$ 16,913
|
Debt
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
|
|
654,625
|
|
|
|
654,625
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
$ 671,538
|
|
$
|
|
$ 671,538
|
|
|
|
|
|
|
|
|
|
Note 12. 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)
|
In 2012, as a result of a regular tax field audit for the Stendal mill, German public authorities commenced a
preliminary investigation into past managers of the mill relating to whether certain settlement amounts received by the Stendal mill in 2007, 2010 and 2011 from the main contractor under the contract for the construction of the Stendal mill should
have reduced the assessment base for the original investment subsidies granted to the mill by German public authorities. In March 2016, the German public authorities closed its investigation of the past managers of the mill, with no action taken
against them or the Company.
|
(c)
|
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 Companys obligation for the proper removal and disposal of asbestos products from the Companys mills is a conditional asset retirement obligation. As a result of the
longevity of the Companys 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.
|
FORM 10-Q
QUARTERLY REPORT - PAGE 14
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 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 15