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 the NASDAQ Global Market.
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 Companys latest Annual Report on
Form 10-K
for the fiscal year ended December 31, 2017. 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.
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.
New Accounting Pronouncements
Accounting Pronouncements Implemented
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
2014-09
(ASU
2014-09),
Revenue Recognition Revenue from Contracts with Customers 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. Additionally, the update provides presentation and disclosure requirements which are more detailed in regards to the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASU
2014-09
as at January 1, 2018 using the modified retrospective method. This update does not
change the timing of when the Company recognizes revenue as the majority of the Companys revenue arises from contracts with customers in which the sale of goods is the main performance obligation. The Companys revised revenue recognition
disclosure has been included in the Significant Accounting Policies and the Business Segment Information Note.
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 2017, the FASB issued Accounting Standards Update
2017-07
(ASU
2017-07),
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost which requires that an employer
report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the
income statement separately from the service cost component and outside a subtotal of income from operations. The Company adopted ASU
2017-07
as at January 1, 2018. For the three and nine month periods
ended September 30, 2018, $282 and $864 of the net benefit cost, respectively, has been recorded in other income (expenses) in the Interim Consolidated Statement of Operations. For the three and nine month periods ended September 30, 2017,
$373 and $1,109, respectively, has been reclassified from operating costs, excluding depreciation and amortization to other income (expenses) in the Interim Consolidated Statement of Operations.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible
low-taxed
income (GILTI) provisions of the Tax Cuts and Jobs Act (the Act). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of
foreign corporations. The Company has elected to treat any potential GILTI inclusions as a period cost.
Accounting Pronouncements Not Yet Implemented
In February 2016, the FASB issued Accounting Standards Update
2016-02,
Leases (ASU
2016-02)
which requires lessees to recognize virtually all of their leases on the balance sheet, by recording a
right-of-use
asset and liability. In July 2018 the FASB issued Accounting Standards Update
2018-10,
Codification Improvements to Topic 842, Leases as well as Accounting Standards Update
2018-11,
Leases: Targeted Improvements which further affect the guidance of ASU
2016-02.
These updates are effective for financial statements issued for fiscal years
beginning after December 15, 2018, with early adoption permitted at the beginning of an interim or annual reporting period. The Company will adopt these updates on January 1, 2019. Currently, the Company believes these updates will not
have a material impact on its consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update
2018-02,
Income Statement - Reporting Comprehensive Income which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act. This
update is effective for fiscal years beginning after December 15, 2018, and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income
tax rate in the Act is recognized. The Company believes this update will not have an impact on its consolidated financial statements.
In
June 2018, the FASB issued Accounting Standards Update
2018-07,
Compensation - Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting which both clarifies and modifies accounting
requirements relating to nonemployee share based payment transactions. The Company believes this update will not have an impact on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update
2018-13,
Fair Value Measurement (ASU
2018-13)
which both modifies and clarifies the disclosure requirements for fair value measurement. This update is effective for financial statements issued for fiscal years beginning after
December 15, 2019, with early adoption permitted. The Company is currently assessing the impact the adoption of ASU
2018-13
will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update
2018-14,
Compensation - Retirement
Benefits - Defined Benefit Plans - General (ASU
2018-14)
which both modifies and clarifies certain disclosure requirements for defined benefit pension and post-retirement plans. This update is
effective for financial statements issued for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact the adoption of ASU
2018-14
will
have on its consolidated financial statements.
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)
Significant Accounting Policies
Revenue Recognition
The Company
recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally this occurs with the transfer of control of the products sold. Transfer of control to the customer is based on the standardized shipping
terms in the contract as this determines when the Company has the right to payment, the customer has legal title to the asset and the customer has the risks of ownership. Payment terms are defined in the contract and payment is typically due within
three months after control has transferred to the customer. The contracts do not have a significant financing component.
The Company has
elected to exclude value added, sales and other taxes it collects concurrent with revenue-producing activities from revenues.
The Company
may arrange shipping and handling activities as part of the sale of its products. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of the product as a fulfillment cost rather
than as an additional promised service.
The following is a description of the principal activities from which the Company generates its
revenues. For a breakdown of revenues by product and geographic location see the Business Segment Information Note.
Pulp and Lumber Revenues
For European sales sent by truck or train from the mills directly to the customer, the contracted sales terms are such that control transfers
once the truck or train leaves the mill. For orders sent by ocean freighter, the contract terms state that control transfers at the time the product passes the ships rail. For North American sales shipped by truck or train, the contracts state that
control transfers once the truck or train has arrived at the customers specified location.
The transaction price is included in the
sales contract and is net of customer discounts, rebates and other selling concessions.
The Companys pulp sales are to tissue and
paper producers and the Companys lumber sales are to manufacturers and retailers. The Companys sales to Europe and North America are direct to the customer. The Companys pulp sales to overseas customers are primarily through third
party sales agents and the Companys lumber sales to overseas customers are either direct to the customer or through third party sales agents.
By-Product
Revenues
Energy sales are to utility companies in Canada and Germany. Sales of energy
are recognized as the electricity is consumed by the customer and is based on contractual usage rates and meter readings that measure electricity consumption.
Chemicals and wood residuals are sold into the European market direct to the customer and have shipping terms where control transfers once the
chemicals or wood residuals are loaded onto the truck at the mill.
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
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
98,623
|
|
|
$
|
49,137
|
|
Finished goods
|
|
|
63,054
|
|
|
|
58,364
|
|
Spare parts and other
|
|
|
68,107
|
|
|
|
69,100
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229,784
|
|
|
$
|
176,601
|
|
|
|
|
|
|
|
|
|
|
Note 3. Accounts Payable and Other
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Trade payables
|
|
$
|
46,529
|
|
|
$
|
36,151
|
|
Accrued expenses
|
|
|
81,502
|
|
|
|
67,528
|
|
Interest payable
|
|
|
9,025
|
|
|
|
10,093
|
|
Income tax payable
|
|
|
14,864
|
|
|
|
4,324
|
|
Legal cost award payable (Note 11(c))
|
|
|
6,951
|
|
|
|
|
|
Dividends payable
|
|
|
8,150
|
|
|
|
8,126
|
|
Other
|
|
|
6,763
|
|
|
|
7,335
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
173,784
|
|
|
$
|
133,557
|
|
|
|
|
|
|
|
|
|
|
Note 4. Debt
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
2022 Senior Notes, principal amount, $100,000 (a)
|
|
$
|
98,849
|
|
|
$
|
394,565
|
|
2024 Senior Notes, principal amount, $250,000 (a)
|
|
|
245,965
|
|
|
|
245,398
|
|
2026 Senior Notes, principal amount, $300,000 (a)
|
|
|
294,395
|
|
|
|
293,773
|
|
Revolving credit facilities
|
|
|
|
|
|
|
|
|
75.0 million (b)
|
|
|
|
|
|
|
|
|
C$40.0 million (c)
|
|
|
|
|
|
|
|
|
70.0 million (d)
|
|
|
42,252
|
|
|
|
25,185
|
|
5.0 million (e)
|
|
|
|
|
|
|
|
|
25.0 million (f)
|
|
|
15,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
696,519
|
|
|
$
|
958,921
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2018, the maturities of the principal portion of debt are as follows:
|
|
|
|
|
2018
|
|
$
|
|
|
2019
|
|
|
|
|
2020
|
|
|
15,058
|
|
2021
|
|
|
|
|
2022
|
|
|
142,252
|
|
Thereafter
|
|
|
550,000
|
|
|
|
|
|
|
|
|
$
|
707,310
|
|
|
|
|
|
|
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)
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, 2018, the Company is in compliance with the terms
of its debt agreements.
(a)
|
On December 20, 2017, the Company issued $300,000 in aggregate principal amount of 5.50% senior notes
which mature on January 15, 2026 (2026 Senior Notes). The 2026 Senior Notes were issued at a price of 100.00% of their principal amount. The net proceeds of the offering were $293,795, after deducting the underwriters discount
and offering expenses.
|
In January 2018, the Company used the net proceeds, together with cash on hand,
to redeem $300,000 in aggregate principal amount of 2022 Senior Notes (herein defined below). In connection with this redemption the Company recorded a loss on settlement of debt of $21,515 in the Interim Consolidated Statement of Operations. As at
December 31, 2017, the total cash used to redeem the 2022 Senior Notes was classified as restricted cash and the carrying value of the 2022 Senior Notes was classified as a current liability in the Consolidated Balance Sheet.
On February 3, 2017, the Company issued $225,000 in aggregate principal amount of 6.50% senior notes which mature on
February 1, 2024 (2024 Senior Notes) and on March 16, 2017, the Company issued an additional $25,000 in aggregate principal amount of its 2024 Senior Notes. The 2024 Senior Notes were issued at a price of 100.00% of their
principal amount. The net proceeds of the offerings were $244,711, after deducting the underwriters discount and offering expenses. The net proceeds from the 2024 Senior Notes, together with cash on hand, were used to redeem $227,000 of
remaining aggregate principal amount of outstanding senior notes due 2019, to finance the acquisition of a German sawmill and
bio-mass
power plant near Friesau Germany (the Friesau Facility) and
for general working capital purposes. In connection with the redemption the Company recorded a loss on settlement of debt of $10,696 in the Interim Consolidated Statement of Operations.
On November 26, 2014, the Company issued $400,000 in aggregate principal amount of 7.75% senior notes which mature on
December 1, 2022 (2022 Senior Notes and collectively with the 2024 Senior Notes and 2026 Senior Notes, the 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.
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 Company may redeem all or a part of the 2026 Senior Notes, upon not less
than 10 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 Company may
redeem all or a part of the 2024 Senior Notes or 2022 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 2026 Senior Notes redemption prices are equal to 102.750% for the twelve month period beginning on January 15, 2021, 101.375% for the twelve month period beginning on
January 15, 2022, and 100.000% beginning on January 15, 2023 and at any time thereafter. The 2024 Senior Notes redemption prices are equal to 103.250% for the twelve month period beginning on February 1, 2020, 101.625% for the twelve
month period beginning on February 1, 2021, and 100.000% beginning on February 1, 2022 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 100.000% beginning on December 1, 2020 and at any time thereafter.
(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, 2018, approximately 0.1 million ($151) of this facility was supporting
bank guarantees leaving approximately 74.9 million ($86,669) available.
|
(c)
|
A C$40.0 million revolving credit facility at the Celgar mill that matures in July 2023. Borrowings
under the facility are collateralized by the mills inventory, accounts receivable, general intangibles and capital assets and are restricted by a borrowing base calculated on the mills inventory and accounts receivable. When the
borrowing capacity is less than 25% of the total facility the Canadian dollar denominated amounts bear interest at bankers acceptance plus 1.50% or Canadian prime and the U.S. dollar denominated amounts bear interest at LIBOR plus 1.50% or U.S.
base. When the borrowing capacity is greater than or equal to 25% of the total facility, the respective bankers acceptance or LIBOR margins are reduced by 0.25% and the Canadian Prime or U.S. base margins are reduced by 0.125%. As at
September 30, 2018, approximately C$1.7 million ($1,312) was supporting letters of credit and approximately C$38.3 million ($29,587) was available.
|
(d)
|
A 70.0 million joint revolving credit facility that matures in April 2022. The Rosenthal mill has
full access to the available amount under the facility and the Companys wholly owned subsidiary, Mercer Timber Products GmbH has access to a maximum of 45.0 million. Borrowings under the facility are collateralized by the
borrowers inventory and accounts receivable and bear interest at Euribor plus 2.95%. As at September 30, 2018, approximately 36.5 million ($42,252) of this facility was drawn and accruing interest at a rate of 2.95% and
approximately 11.4 million ($13,210) of this facility was supporting bank guarantees leaving approximately 22.1 million ($25,570) 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, 2018 approximately 2.6 million ($2,954) of this facility was
supporting bank guarantees leaving approximately 2.4 million ($2,834) available.
|
(f)
|
A 25.0 million revolving credit facility for the Companys wholly owned German subsidiary,
Mercer Holz GmbH (Mercer Holz), that matures in February 2020. Borrowings under this facility bear interest at Euribor plus 3.30% and are secured by Mercer Holzs inventory and accounts receivable. As at September 30, 2018,
approximately 13.0 million ($15,058) of this facility was drawn and accruing interest at a rate of 3.30% and approximately 0.3 million ($370) of this facility was supporting bank guarantees leaving approximately
11.7 million ($13,512) available.
|
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
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 benefit costs relating to the Celgar Defined Benefit Plans for the three and nine month periods ended
September 30, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
Service cost
|
|
$
|
26
|
|
|
$
|
115
|
|
|
$
|
25
|
|
|
$
|
151
|
|
Interest cost
|
|
|
312
|
|
|
|
175
|
|
|
|
346
|
|
|
|
245
|
|
Expected return on plan assets
|
|
|
(380
|
)
|
|
|
|
|
|
|
(520
|
)
|
|
|
|
|
Amortization of unrecognized items
|
|
|
226
|
|
|
|
(51
|
)
|
|
|
265
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
184
|
|
|
$
|
239
|
|
|
$
|
116
|
|
|
$
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
Service cost
|
|
$
|
78
|
|
|
$
|
352
|
|
|
$
|
71
|
|
|
$
|
435
|
|
Interest cost
|
|
|
952
|
|
|
|
535
|
|
|
|
998
|
|
|
|
706
|
|
Expected return on plan assets
|
|
|
(1,157
|
)
|
|
|
|
|
|
|
(1,499
|
)
|
|
|
|
|
Amortization of unrecognized items
|
|
|
690
|
|
|
|
(156
|
)
|
|
|
792
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
563
|
|
|
$
|
731
|
|
|
$
|
362
|
|
|
$
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018, the Company made contributions of $215 and $650, respectively (2017 $213 and $672), 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. During the three and nine month periods
ended September 30, 2018, the Company made contributions of $529 and $1,674, respectively (2017 $493 and $1,539), to this plan.
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
The income tax provision attributable to income before provision for income taxes in the Interim Consolidated Statements of Operations differs
from the amounts computed by applying the U.S. federal statutory income tax rate of 21% (2017 - 35%) for the three and nine month periods ended September 30, 2018 and 2017 as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
U.S. federal statutory rate
|
|
|
21%
|
|
|
|
35%
|
|
|
|
21%
|
|
|
|
35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal statutory rate on income before provision for income taxes
|
|
$
|
(10,785
|
)
|
|
$
|
(9,722
|
)
|
|
$
|
(23,479
|
)
|
|
$
|
(17,732
|
)
|
Tax differential on foreign income
|
|
|
(4,265
|
)
|
|
|
2,701
|
|
|
|
(11,493
|
)
|
|
|
5,668
|
|
Effect of foreign earnings
|
|
|
(19,983
|
)
|
|
|
|
|
|
|
(28,440
|
)
|
|
|
|
|
Change in undistributed earnings
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
(5,915
|
)
|
Valuation allowance
|
|
|
23,492
|
|
|
|
(1,823
|
)
|
|
|
45,510
|
|
|
|
(11,177
|
)
|
Tax benefit of partnership structure
|
|
|
965
|
|
|
|
1,246
|
|
|
|
3,242
|
|
|
|
3,692
|
|
Non-taxable
foreign subsidies
|
|
|
716
|
|
|
|
608
|
|
|
|
2,204
|
|
|
|
1,717
|
|
True-up
of prior year taxes
|
|
|
109
|
|
|
|
(169
|
)
|
|
|
(14,384
|
)
|
|
|
(279
|
)
|
Foreign exchange on valuation allowance
|
|
|
(30
|
)
|
|
|
1,241
|
|
|
|
(704
|
)
|
|
|
2,404
|
|
Foreign exchange on settlement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550
|
|
Other
|
|
|
(401
|
)
|
|
|
(264
|
)
|
|
|
(680
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,182
|
)
|
|
$
|
(6,632
|
)
|
|
$
|
(28,224
|
)
|
|
$
|
(21,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision
|
|
$
|
(8,868
|
)
|
|
$
|
(2,448
|
)
|
|
$
|
(20,894
|
)
|
|
$
|
(9,308
|
)
|
Deferred income tax provision
|
|
|
(1,314
|
)
|
|
|
(4,184
|
)
|
|
|
(7,330
|
)
|
|
|
(12,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,182
|
)
|
|
$
|
(6,632
|
)
|
|
$
|
(28,224
|
)
|
|
$
|
(21,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Act enacted on December 22, 2017 resulted in substantial changes including reducing the U.S. federal
corporate income tax rate from 35% to 21% and requiring companies to pay a
one-time
transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Company applied the
guidance in Staff Accounting Bulletin No. 118 and at December 31, 2017 calculated its best estimate of the impact of the Act in its year end income tax provision. Subsequent to the completion and filing of the 2017 tax return in the third
quarter of 2018 it was determined that no significant measurement period adjustments to the provisional estimates recorded at December 31, 2017 were necessary.
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. Net Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
41,176
|
|
|
$
|
21,143
|
|
|
$
|
83,580
|
|
|
$
|
28,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.63
|
|
|
$
|
0.33
|
|
|
$
|
1.28
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.63
|
|
|
$
|
0.32
|
|
|
$
|
1.27
|
|
|
$
|
0.44
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
|
65,170,531
|
|
|
|
64,973,653
|
|
|
|
65,120,976
|
|
|
|
64,896,511
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Share Units (PSUs)
|
|
|
639,998
|
|
|
|
412,995
|
|
|
|
550,983
|
|
|
|
429,801
|
|
Restricted shares
|
|
|
7,510
|
|
|
|
7,268
|
|
|
|
20,328
|
|
|
|
17,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
65,818,039
|
|
|
|
65,393,916
|
|
|
|
65,692,287
|
|
|
|
65,343,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the three and nine month periods ended September 30, 2018, the basic weighted average number of common
shares outstanding excludes 31,130 restricted shares which have been issued, but have not vested as at September 30, 2018 (2017 43,635 restricted shares).
|
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 month periods ended September 30, 2018 and 2017.
Note 8. Shareholders Equity
Dividends
During the nine month period ended September 30, 2018, the Companys Board of Directors declared the following quarterly dividends:
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Dividend Per
Common Share
|
|
Amount
|
February 15, 2018
|
|
$
|
0.125
|
|
|
$
|
8,147
|
|
May 3, 2018
|
|
|
0.125
|
|
|
|
8,150
|
|
July 26, 2018
|
|
|
0.125
|
|
|
|
8,150
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.375
|
|
|
$
|
24,447
|
|
|
|
|
|
|
|
|
|
|
In October 2018, the Companys Board of Directors declared a quarterly dividend of $0.125 per common
share. Payment of the dividend will be made on December 20, 2018 to all shareholders of record on December 13, 2018. 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 which provides for options, restricted stock rights, restricted shares, performance
shares, PSUs and stock appreciation rights to be awarded to employees, consultants and
non-employee
directors. During the nine month period ended September 30, 2018, there were no issued and outstanding
options, restricted stock rights, performance shares or stock appreciation rights. As at September 30, 2018, after factoring in all allocated shares, there remain approximately 2.8 million common shares available for grant.
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. Shareholders Equity (continued)
PSUs
PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain
performance objectives. The performance objective period is generally three years. For the three and nine month periods ended September 30, 2018, the Company recognized an expense of $840 and $2,534, respectively related to PSUs
(2017 $646 and $1,201).
The following table summarizes PSU activity during the period:
|
|
|
|
|
|
|
Number of
PSUs
|
Outstanding as at January 1, 2018
|
|
|
1,867,158
|
|
Granted
|
|
|
652,548
|
|
Vested and issued
|
|
|
(153,243
|
)
|
Forfeited
|
|
|
(330,455
|
)
|
|
|
|
|
|
Outstanding as at September 30, 2018
|
|
|
2,036,008
|
|
|
|
|
|
|
Restricted Shares
Restricted shares generally vest at the end of one year. Expense recognized for the three and nine month periods ended September 30, 2018
was $130 and $388 (2017 $128 and $324). As at September 30, 2018, the total remaining unrecognized compensation cost related to restricted shares amounted to approximately $347 which will be amortized over the remaining vesting periods.
The following table summarizes restricted share activity during the period:
|
|
|
|
|
|
|
Number of
Restricted
Shares
|
Outstanding as at January 1, 2018
|
|
|
43,635
|
|
Granted
|
|
|
31,130
|
|
Vested
|
|
|
(43,635
|
)
|
|
|
|
|
|
Outstanding as at September 30, 2018
|
|
|
31,130
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Defined Benefit
Pension and
Other Post-
Retirement
Benefit Items
|
|
Unrealized
Gains / Losses
on Marketable
Securities
|
|
Total
|
Balance as at January 1, 2018
|
|
$
|
(50,083
|
)
|
|
$
|
(8,900
|
)
|
|
$
|
(18
|
)
|
|
$
|
(59,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(41,503
|
)
|
|
|
(1,836
|
)
|
|
|
26
|
|
|
|
(43,313
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(41,503
|
)
|
|
|
(1,302
|
)
|
|
|
26
|
|
|
|
(42,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at September 30, 2018
|
|
$
|
(91,586
|
)
|
|
$
|
(10,202
|
)
|
|
$
|
8
|
|
|
$
|
(101,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 9. Business Segment Information
The Company is managed based on the primary products it manufactures: pulp and wood products. Accordingly, the Companys three pulp mills
are aggregated into the pulp business segment and the Friesau Facility from its acquisition date of April 12, 2017 is a separate reportable business segment, wood products.
None of the income or loss items following operating income in the Companys Interim Consolidated Statement of Operations are allocated
to the segments, since those items are reviewed separately by management.
The following tables shows information by reportable business
segments for the three and nine month periods ended September 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Pulp
|
|
Wood
Products
|
|
Corporate and
Other
|
|
Consolidated
|
Revenues from external customers
|
|
$
|
292,969
|
|
|
$
|
38,089
|
|
|
$
|
|
|
|
$
|
331,058
|
|
Operating income (loss)
|
|
$
|
68,794
|
|
|
$
|
(1,770
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
63,346
|
|
Depreciation and amortization
|
|
$
|
20,802
|
|
|
$
|
2,395
|
|
|
$
|
113
|
|
|
$
|
23,310
|
|
Revenues by major products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
|
|
$
|
274,970
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
274,970
|
|
Lumber
|
|
|
|
|
|
|
34,270
|
|
|
|
|
|
|
|
34,270
|
|
Energy and chemicals
|
|
|
17,999
|
|
|
|
1,978
|
|
|
|
|
|
|
|
19,977
|
|
Wood residuals
|
|
|
|
|
|
|
1,841
|
|
|
|
|
|
|
|
1,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
292,969
|
|
|
$
|
38,089
|
|
|
$
|
|
|
|
$
|
331,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographical markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
7,148
|
|
|
$
|
10,857
|
|
|
$
|
|
|
|
$
|
18,005
|
|
Germany
|
|
|
132,233
|
|
|
|
14,771
|
|
|
|
|
|
|
|
147,004
|
|
China
|
|
|
44,981
|
|
|
|
|
|
|
|
|
|
|
|
44,981
|
|
Other countries
|
|
|
108,607
|
|
|
|
12,461
|
|
|
|
|
|
|
|
121,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
292,969
|
|
|
$
|
38,089
|
|
|
$
|
|
|
|
$
|
331,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Pulp
|
|
Wood
Products
|
|
Corporate and
Other
|
|
Consolidated
|
Revenues from external customers
|
|
$
|
272,358
|
|
|
$
|
33,140
|
|
|
$
|
|
|
|
$
|
305,498
|
|
Operating income (loss)
|
|
$
|
40,982
|
|
|
$
|
2,983
|
|
|
$
|
(2,303
|
)
|
|
$
|
41,662
|
|
Depreciation and amortization
|
|
$
|
21,149
|
|
|
$
|
1,419
|
|
|
$
|
105
|
|
|
$
|
22,673
|
|
Revenues by major products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
|
|
$
|
247,314
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
247,314
|
|
Lumber
|
|
|
|
|
|
|
27,851
|
|
|
|
|
|
|
|
27,851
|
|
Energy and chemicals
|
|
|
25,044
|
|
|
|
3,116
|
|
|
|
|
|
|
|
28,160
|
|
Wood residuals
|
|
|
|
|
|
|
2,173
|
|
|
|
|
|
|
|
2,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
272,358
|
|
|
$
|
33,140
|
|
|
$
|
|
|
|
$
|
305,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographical markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
12,276
|
|
|
$
|
3,458
|
|
|
$
|
|
|
|
$
|
15,734
|
|
Germany
|
|
|
112,267
|
|
|
|
18,676
|
|
|
|
|
|
|
|
130,943
|
|
China
|
|
|
60,604
|
|
|
|
|
|
|
|
|
|
|
|
60,604
|
|
Other countries
|
|
|
87,211
|
|
|
|
11,006
|
|
|
|
|
|
|
|
98,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
272,358
|
|
|
$
|
33,140
|
|
|
$
|
|
|
|
$
|
305,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 9. Business Segment Information (continued)
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|
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|
|
|
|
|
|
|
|
|
|
|
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Nine Months Ended September 30, 2018
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|
Pulp
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|
Wood
Products
|
|
Corporate and
Other
|
|
Consolidated
|
Revenues from external customers
|
|
$
|
898,836
|
|
|
$
|
146,657
|
|
|
$
|
|
|
|
$
|
1,045,493
|
|
Operating income (loss)
|
|
$
|
179,824
|
|
|
$
|
5,534
|
|
|
$
|
(8,488
|
)
|
|
$
|
176,870
|
|
Depreciation and amortization
|
|
$
|
63,452
|
|
|
$
|
5,860
|
|
|
$
|
331
|
|
|
$
|
69,643
|
|
Total assets
|
|
$
|
1,343,035
|
|
|
$
|
133,215
|
|
|
$
|
65,046
|
|
|
$
|
1,541,296
|
|
Revenues by major products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
|
|
$
|
845,460
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
845,460
|
|
Lumber
|
|
|
|
|
|
|
131,429
|
|
|
|
|
|
|
|
131,429
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|
Energy and chemicals
|
|
|
53,376
|
|
|
|
8,014
|
|
|
|
|
|
|
|
61,390
|
|
Wood residuals
|
|
|
|
|
|
|
7,214
|
|
|
|
|
|
|
|
7,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
898,836
|
|
|
$
|
146,657
|
|
|
$
|
|
|
|
$
|
1,045,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographical markets
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
18,451
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|
|
$
|
42,511
|
|
|
$
|
|
|
|
$
|
60,962
|
|
Germany
|
|
|
373,176
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|
|
|
58,631
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|
|
|
|
|
|
|
431,807
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|
China
|
|
|
204,818
|
|
|
|
|
|
|
|
|
|
|
|
204,818
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|
Other countries
|
|
|
302,391
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|
|
|
45,515
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|
|
|
|
|
|
|
347,906
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
898,836
|
|
|
$
|
146,657
|
|
|
$
|
|
|
|
$
|
1,045,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Pulp
|
|
Wood
Products
|
|
Corporate and
Other
|
|
Consolidated
|
Revenues from external customers
|
|
$
|
781,028
|
|
|
$
|
50,431
|
|
|
$
|
|
|
|
$
|
831,459
|
|
Operating income (loss)
|
|
$
|
104,411
|
|
|
$
|
3,064
|
|
|
$
|
(5,604
|
)
|
|
$
|
101,871
|
|
Depreciation and amortization
|
|
$
|
59,652
|
|
|
$
|
2,553
|
|
|
$
|
314
|
|
|
$
|
62,519
|
|
Revenues by major products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp
|
|
$
|
712,810
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
712,810
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|
Lumber
|
|
|
|
|
|
|
41,444
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|
|
|
|
|
|
|
41,444
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|
Energy and chemicals
|
|
|
68,218
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|
|
|
5,761
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|
|
|
|
|
|
|
73,979
|
|
Wood residuals
|
|
|
|
|
|
|
3,226
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|
|
|
|
|
|
|
3,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
781,028
|
|
|
$
|
50,431
|
|
|
$
|
|
|
|
$
|
831,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographical markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
23,394
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|
|
$
|
3,458
|
|
|
$
|
|
|
|
$
|
26,852
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|
Germany
|
|
|
313,730
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|
|
|
30,312
|
|
|
|
|
|
|
|
344,042
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|
China
|
|
|
194,280
|
|
|
|
|
|
|
|
|
|
|
|
194,280
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|
Other countries
|
|
|
249,624
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|
|
|
16,661
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|
|
|
|
|
|
|
266,285
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
781,028
|
|
|
$
|
50,431
|
|
|
$
|
|
|
|
$
|
831,459
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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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
and nine month periods ended September 30, 2018, the pulp segment sold $163 and $1,073, respectively of residual fuel to the wood products segment (2017 - $1,056 and $1,056) and the wood products segment sold $3,764 and $13,809, respectively of
residual fiber to the pulp segment (2017 - $5,753 and $8,739).
As at December 31, 2017, the Company had total assets of $1,253,545
in the pulp segment, $116,320 in the wood products segment and $354,845 in corporate and other.
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 10. Financial Instruments and Fair Value Measurement
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 senior notes classified as Level 2 was determined using quoted prices
in a dealer market, or using 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as at September 30, 2018 using:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Revolving credit facilities
|
|
$
|
|
|
|
$
|
57,310
|
|
|
$
|
|
|
|
$
|
57,310
|
|
Senior notes
|
|
|
|
|
|
|
653,656
|
|
|
|
|
|
|
|
653,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
710,966
|
|
|
$
|
|
|
|
$
|
710,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as at December 31, 2017 using:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Revolving credit facilities
|
|
$
|
|
|
|
$
|
25,185
|
|
|
$
|
|
|
|
$
|
25,185
|
|
Senior notes
|
|
|
|
|
|
|
989,125
|
|
|
|
|
|
|
|
989,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,014,310
|
|
|
$
|
|
|
|
$
|
1,014,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Credit Risk
The Companys 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 Companys 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. Concentrations of credit risk on the sale of pulp, lumber and other wood residuals are with customers and agents based primarily in Germany, China and Italy.
The carrying amount of cash and cash equivalents of $242,185 and accounts receivable of $193,648 recorded in the Interim Consolidated Balance
Sheet, net of any allowances for losses, represents the Companys maximum exposure to credit risk.
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 11. Commitments and Contingencies
(a)
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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.
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(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 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.
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(c)
|
In March 2018, the Company announced it had received the decision of the tribunal in respect of its
previously initiated claim in January 2012 against the Government of Canada under the North American Free Trade Agreement (NAFTA). The basis of the claim was that the Celgar mill had received discriminatory treatment regarding its
ability to purchase and sell energy compared to other pulp mills and entities that generate and sell electricity within the Province of British Columbia. The tribunal ruled that there was no violation of NAFTA and as is customary in these matters,
the tribunal awarded costs to the Government of Canada of approximately $6,951.
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Note 12. Subsequent Events
Santanol Group (Santanol)
On October 18, 2018, the Company acquired Santanol for approximately $33,000 cash. Santanol owns and leases existing Indian sandalwood
plantations and a processing extraction plant in Australia. The acquisition presents the opportunity to expand the Companys operations to include plantation harvesting as well as production of solid wood chemical extractives. The Company is in
the process of evaluating the business combination accounting considerations, including the initial purchase price allocation.
Daishowa-Marubeni
International Ltd. (DMI)
On October 3, 2018, the Company announced that it has entered into an agreement (the
Purchase Agreement) to acquire all of the issued and outstanding shares of DMI for consideration of $359,200 cash, which includes a minimum working capital of $85,700 (the Transaction). The acquisition would result in 100%
ownership of a bleached kraft pulp mill in Peace River, Alberta as well as 50% joint venture interest in a bleached kraft pulp mill in Quesnel, British Columbia. The acquisition would expand the Companys presence in Asia and add northern
bleached hardwood kraft to its product mix. The acquisition is subject to certain customary closing conditions. The Company currently expects the acquisition to close in the fourth quarter of 2018.
Pursuant to the Purchase Agreement, the completion of the Transaction is subject to customary closing conditions, including the receipt of
requisite regulatory anti-trust approvals. The Company and the vendors may each terminate the agreement if closing of the Transaction does not occur as of the date that is within 120 days of the Purchase Agreement unless such date is extended in
certain circumstances as provided in the Purchase Agreement.
FORM 10-Q
QUARTERLY REPORT - PAGE 19
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 12. Subsequent Events (continued)
In connection with entering into the Purchase Agreement, on October 3, 2018, the Company
accepted and entered into a Commitment Letter by and among the Company, Credit Suisse Loan Funding LLC and Credit Suisse AG (the Commitment Letter) dated September 30, 2018, pursuant to which Credit Suisse AG has agreed to provide
the Company with a senior unsecured bridge facility in the principal amount of up to $350,000 in order to finance the purchase price under the Transaction. The facility is anticipated to be replaced or refinanced by the Company as provided in the
Commitment Letter.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
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 21