Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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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 March 31, 2010
OR
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o |
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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.: 000-51826
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
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Washington
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47-0956945 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
Suite 2840, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8
(Address of office)
(604) 684-1099
(Registrants telephone number, including area code)
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 þ NO o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period
that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer þ
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
The Registrant had 36,483,204 shares
of common stock outstanding as at May 3, 2010.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010
(Unaudited)
FORM 10-Q
QUARTERLY REPORT PAGE 2
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of Euros)
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March 31, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Current assets |
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Cash and cash equivalents (Note 11) |
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48,692 |
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51,291 |
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Receivables |
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90,391 |
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71,143 |
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Inventories (Note 4) |
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81,730 |
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72,629 |
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Prepaid expenses and other |
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7,568 |
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5,871 |
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Total current assets |
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228,381 |
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200,934 |
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Long-term assets |
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Property, plant and equipment |
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875,897 |
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868,558 |
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Deferred note issuance and other |
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7,813 |
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8,186 |
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Deferred income tax |
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3,698 |
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3,426 |
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Note receivable |
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2,698 |
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2,727 |
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890,106 |
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882,897 |
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Total assets |
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1,118,487 |
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1,083,831 |
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LIABILITIES |
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Current liabilities |
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Accounts payable and accrued expenses |
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105,380 |
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85,185 |
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Pension and other post-retirement benefit obligations (Note 7) |
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619 |
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567 |
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Debt (Note 5) |
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23,020 |
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16,032 |
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Total current liabilities |
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129,019 |
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101,784 |
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Long-term liabilities |
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Debt (Note 5) |
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810,366 |
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813,142 |
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Unrealized interest rate derivative losses (Notes 6 and 9) |
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59,418 |
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52,873 |
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Pension and other post-retirement benefit obligations (Note 7) |
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19,740 |
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17,902 |
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Capital leases and other |
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11,087 |
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12,157 |
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900,611 |
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896,074 |
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Total liabilities |
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1,029,630 |
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997,858 |
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EQUITY |
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Shareholders equity |
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Share capital (Note 8) |
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202,939 |
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202,844 |
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Paid-in capital |
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(5,625 |
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(6,082 |
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Retained earnings (deficit) |
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(104,781 |
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(97,235 |
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Accumulated other comprehensive income (loss) |
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30,967 |
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23,695 |
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Total shareholders equity |
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123,500 |
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123,222 |
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Noncontrolling interest (deficit) (Note 10) |
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(34,643 |
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(37,249 |
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Total equity |
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88,857 |
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85,973 |
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Total liabilities and equity |
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1,118,487 |
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1,083,831 |
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Commitments and contingencies (Note 11)
The accompanying notes are an integral part of these interim consolidated financial statements.
FORM 10-Q
QUARTERLY REPORT PAGE 3
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands of Euros, except per share data)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Revenues |
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Pulp |
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171,121 |
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129,033 |
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Energy |
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9,131 |
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10,539 |
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180,252 |
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139,572 |
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Costs and expenses |
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Operating costs |
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140,409 |
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131,997 |
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Operating depreciation and amortization |
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13,724 |
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13,401 |
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26,119 |
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(5,826 |
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Selling, general and administrative expenses |
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8,095 |
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7,145 |
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Sale of emission allowances |
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(558 |
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Operating income (loss) |
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18,024 |
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(12,413 |
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Other income (expense) |
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Interest expense |
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(16,423 |
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(16,549 |
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Investment income (loss) |
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94 |
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(3,202 |
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Foreign exchange gain (loss) on debt |
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(5,231 |
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(4,416 |
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Gain (loss) on extinguishment of convertible notes (Note 5) |
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(929 |
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Gain (loss) on derivative instruments (Note 6) |
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(6,546 |
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(15,013 |
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Total other income (expense) |
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(29,035 |
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(39,180 |
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Income (loss) before income taxes |
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(11,011 |
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(51,593 |
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Income tax benefit (provision) current |
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(204 |
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(49 |
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deferred |
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3,031 |
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Net income (loss) |
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(11,215 |
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(48,611 |
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Less: net loss (income) attributable to noncontrolling interest |
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3,669 |
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9,261 |
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Net income (loss) attributable to common shareholders |
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(7,546 |
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(39,350 |
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Retained earnings (deficit), beginning of period |
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(97,235 |
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(35,046 |
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Retained earnings (deficit), end of period |
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(104,781 |
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(74,396 |
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Net income (loss) per share attributable to common shareholders (Note 3): |
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Basic |
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(0.21 |
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(1.08 |
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Diluted |
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(0.21 |
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(1.08 |
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The accompanying notes are an integral part of these interim consolidated financial statements.
FORM 10-Q
QUARTERLY REPORT PAGE 4
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands of Euros)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Net income (loss) |
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(11,215 |
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(48,611 |
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Other comprehensive income (loss) |
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Foreign currency translation adjustment |
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7,632 |
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(5,369 |
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Pension income (expense) |
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(366 |
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(17 |
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Unrealized gains (losses) on securities arising during the period |
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6 |
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314 |
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Other comprehensive income (loss) |
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7,272 |
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(5,072 |
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Total comprehensive income (loss) |
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(3,943 |
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(53,683 |
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Comprehensive
loss (income) attributable to noncontrolling interest |
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3,669 |
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9,261 |
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Comprehensive income (loss) attributable to common shareholders |
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(274 |
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(44,422 |
) |
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The accompanying notes are an integral part of these interim consolidated financial statements.
FORM 10-Q
QUARTERLY REPORT PAGE 5
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of Euros)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Cash flows from (used in) operating activities |
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Net income (loss) attributable to common shareholders |
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(7,546 |
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(39,350 |
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Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activities |
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Loss (gain) on derivative instruments |
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6,546 |
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15,013 |
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Foreign exchange (gain) loss on debt |
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5,231 |
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4,416 |
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Loss (gain) on extinguishment of convertible notes |
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929 |
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Depreciation and amortization |
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13,821 |
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13,467 |
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Accretion (income) expense |
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431 |
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Noncontrolling interest |
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(3,669 |
) |
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(9,261 |
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Deferred income taxes |
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(3,031 |
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Stock compensation expense |
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506 |
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(33 |
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Pension and other post-retirement expense, net of funding |
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194 |
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(16 |
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Inventory provisions |
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4,587 |
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Other |
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1,003 |
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(2,900 |
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Changes in current assets and liabilities |
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Receivables |
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(17,144 |
) |
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19,981 |
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Inventories |
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(5,259 |
) |
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6,119 |
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Accounts payable and accrued expenses |
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7,955 |
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(7,221 |
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Other |
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(1,281 |
) |
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1,000 |
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Net cash from (used in) operating activities |
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1,717 |
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2,771 |
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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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(5,850 |
) |
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(7,706 |
) |
Proceeds on sale of property, plant and equipment |
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387 |
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129 |
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Cash, restricted |
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9,469 |
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Notes receivable |
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(84 |
) |
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121 |
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Net cash from (used in) investing activities |
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(5,547 |
) |
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2,013 |
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Cash flows from (used in) financing activities |
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Repayment of notes payable and debt |
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(8,250 |
) |
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(13,800 |
) |
Repayment of capital lease obligations |
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(1,004 |
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(682 |
) |
Proceeds from borrowings of notes payable and debt |
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10,000 |
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Proceeds from government grants |
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9,415 |
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Payment of deferred note issuance costs |
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(1,969 |
) |
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Net cash from (used in) financing activities |
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161 |
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(6,451 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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1,070 |
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|
451 |
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Net increase (decrease) in cash and cash equivalents |
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(2,599 |
) |
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|
(1,216 |
) |
Cash and cash equivalents, beginning of period |
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51,291 |
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|
42,452 |
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Cash and cash equivalents, end of period |
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48,692 |
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|
41,236 |
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|
The accompanying notes are an integral part of these interim consolidated financial statements.
FORM 10-Q
QUARTERLY REPORT PAGE 6
MERCER INTERNATIONAL INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(In thousands of Euros)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Supplemental disclosure of cash flow information |
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Cash paid (received) during the period for |
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Interest |
|
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14,429 |
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28,258 |
|
Income taxes |
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|
102 |
|
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|
29 |
|
Supplemental schedule of non-cash investing and financing activities |
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Acquisition of production and other equipment under capital lease
obligations |
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212 |
|
|
|
36 |
|
Increase (decrease) in accounts payable relating to investing activities |
|
|
(983 |
) |
|
|
461 |
|
The accompanying notes are an integral part of these interim consolidated financial statements.
FORM 10-Q
QUARTERLY REPORT PAGE 7
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies
Basis of Presentation
The interim consolidated financial statements contained herein include the accounts of Mercer
International Inc. (Mercer Inc.) and its wholly-owned and majority-owned 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 U.S. 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, 2009. In the opinion of the Company, the unaudited interim consolidated
financial statements contained herein contain all adjustments necessary to fairly present 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.
Certain prior year amounts in the interim consolidated financial statements have been reclassified
to conform to the current year presentation.
In these interim consolidated financial statements, unless otherwise indicated, all amounts are
expressed in Euros (). The term U.S. dollars and the symbol $ refer to United States
dollars. 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, doubtful accounts and reserves, depreciation and amortization, future cash
flows associated with impairment testing for long-lived assets, derivative financial instruments,
environmental conservation and legal liabilities, asset retirement obligations, pensions and
post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and
provisions. Actual results could differ from these estimates, and changes in these estimates are
recorded when known.
FORM 10-Q
QUARTERLY REPORT PAGE 8
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Recently Implemented Accounting Standards
This section highlights recently implemented accounting standards that had an impact on the
Companys financial statements.
In January 2010, the Company adopted Accounting Standards Update (ASU) 2010-06, which amends
Accounting Standards Codification 820 (ASC 820), Fair Value Measurements and Disclosures. This
new accounting guidance requires expanded fair value measurement disclosures in quarterly and
annual financial statements. The new guidance clarifies existing disclosure requirements for the
Level 2 and 3 fair value measurement. Additionally, the new guidance also requires details of
significant transfers of assets between Level 1 and Level 2 fair value measurement categories,
including the reasons for such transfers, as well as gross presentation of activity within the
Level 3 fair value measurement category. This guidance is effective for the Company on January 1,
2010, except for the gross presentation of Level 3 activity, which is effective January 1, 2011.
The adoption of this new accounting guidance did not impact the results of operations or the
financial position of the Company.
Note 2. Stock-Based Compensation
The Company had a non-qualified stock option plan which provides for options to be granted to
officers and employees to acquire a maximum of 3,600,000 common shares including options for
130,000 shares to directors who are not officers or employees. This plan expired in 2008 but
unexercised options that were previously granted under this plan remain outstanding. The Company
also has a stock incentive plan which provides for options, stock appreciation rights, restricted
stock and performance stock to be awarded to employees and outside directors to a maximum of
1,000,000 common shares.
Performance Stock
Grants of performance stock comprise rights to receive stock at a future date that are contingent
on the Company and the grantee achieving certain performance objectives.
During the three months ended March 31, 2010, potential stock based performance awards totaled
578,165, which vest on December 31, 2010 (2009 530,623). Expense (income) recognized for the
three month periods ended March 31, 2010 and 2009 was 503 and (59), respectively.
The fair value of performance stock is determined based upon the number of shares awarded and the
quoted price of the Companys stock. Performance stock generally cliff vest three years from the
award date. On February 11, 2010, the Company awarded 13,000 performance stock to two employees.
As of March 31, 2010, no performance stock had vested (2009 nil). During the three month periods
ended March 31, 2010 and 2009, no performance stock were cancelled.
FORM 10-Q
QUARTERLY REPORT PAGE 9
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 2. Stock-Based Compensation (continued)
Restricted Stock
The fair value of restricted stock is determined based upon the number of shares granted and the
quoted price of the Companys stock on the date of grant. Restricted stock generally vests over one
year. Expense is recognized on a straight-line basis over the vesting period. Expense recognized
for the three month periods ended March 31, 2010 and 2009 was 3 and 26, respectively.
As at March 31, 2010, the total remaining unrecognized compensation cost related to restricted
stock amounted to approximately 4 (2009 20), which will be amortized over their remaining
vesting period.
During the three month period ended March 31, 2010, no restricted stock awards were granted (2009 -
nil). There were no restricted stock awards cancelled during the three month period ended March 31,
2010 (2009 nil). As at March 31, 2010, 21,000 restricted stock awards remain unvested.
Stock Options
During the three month periods ended March 31, 2010 and 2009, no options were exercised, cancelled
or granted and 738,334 options expired in 2010.
Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders basic and diluted |
|
|
(7,546 |
) |
|
|
(39,350 |
) |
|
|
|
|
|
|
|
Net income (loss) per share attributable to common shareholders: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
(0.21 |
) |
|
|
(1.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic (1) |
|
|
36,320,190 |
|
|
|
36,285,027 |
|
Effect of dilutive instruments: |
|
|
|
|
|
|
|
|
Performance rights |
|
|
|
|
|
|
|
|
Stock options and awards |
|
|
|
|
|
|
|
|
Convertible notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
36,320,190 |
|
|
|
36,285,027 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The basic weighted average number of shares excludes performance and restricted stock
which have been issued, but have not vested as at March 31, 2010 and 2009. |
FORM 10-Q
QUARTERLY REPORT PAGE 10
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 3. Net Income (Loss) Per Share Attributable to Common Shareholders (continued)
The calculation of diluted net income (loss) per share attributable to common shareholders does not
assume the exercise of stock options and awards or the conversion of convertible notes that would
have an anti-dilutive effect on earnings per share.
Stock options and awards excluded from the calculation of diluted income (loss) per share
attributable to common shareholders because they are anti-dilutive represented 190,000 shares for
the three month period ended March 31, 2010 (2009 928,334).
Restricted stock excluded from the calculation of diluted income (loss) per share attributable to
common shareholders because they are anti-dilutive represented 21,000 shares for the three month
period ended March 31, 2010 (2009 21,000).
Shares associated with the convertible notes excluded from the calculation of diluted income (loss)
per share attributable to common shareholders because they are anti-dilutive represented 20,227,893
shares for the three month period ended March 31, 2010 (2009 8,678,065).
Performance stock excluded from the calculation of diluted income (loss) per share attributable to
common shareholders because they are anti-dilutive represented 375,586 shares for the three month
period ended March 31, 2010 (2009 348,648).
Note 4. Inventories
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
|
31,108 |
|
|
|
24,888 |
|
Finished goods |
|
|
25,023 |
|
|
|
24,198 |
|
Work in process and other |
|
|
25,599 |
|
|
|
23,543 |
|
|
|
|
|
|
|
|
|
|
|
81,730 |
|
|
|
72,629 |
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT PAGE 11
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 5. Debt
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Note payable to bank, included in a
total loan credit facility of
827,950 to finance the construction
related to the Stendal mill (a) |
|
|
506,323 |
|
|
|
514,574 |
|
Senior notes due February 2013,
interest at 9.25% accrued and
payable semi-annually, unsecured (b) |
|
|
229,188 |
|
|
|
216,299 |
|
Subordinated convertible notes due
October 2010, interest at 8.5%
accrued and payable semi-annually
(c) |
|
|
1,682 |
|
|
|
16,749 |
|
Subordinated convertible notes due
January 2012, interest at 8.5%
accrued and payable semi-annually
(d) |
|
|
45,166 |
|
|
|
26,160 |
|
Credit agreement with a lender with
respect to a revolving credit
facility of C$40 million (e) |
|
|
17,471 |
|
|
|
16,000 |
|
Loan payable to the noncontrolling
shareholder of the Stendal mill (f) |
|
|
30,045 |
|
|
|
35,881 |
|
Credit agreement with a bank with
respect to a revolving credit
facility of 25,000 (g) |
|
|
|
|
|
|
|
|
Investment loan agreement with a
lender with respect to the wash
press project at the Rosenthal mill
of 4,351 (h) |
|
|
3,511 |
|
|
|
3,511 |
|
Credit agreement with a bank with
respect to a revolving credit
facility of 3,500 (i) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833,386 |
|
|
|
829,174 |
|
Less: current portion |
|
|
(23,020 |
) |
|
|
(16,032 |
) |
|
|
|
|
|
|
|
Debt, less current portion |
|
|
810,366 |
|
|
|
813,142 |
|
|
|
|
|
|
|
|
The Company made scheduled principal repayments under these facilities of 8,250 during the three
months ended March 31, 2010 (2009 13,800). As of March 31, 2010, the principal maturities of
debt are as follows:
|
|
|
|
|
Matures |
|
Amount |
|
|
|
|
|
|
2010 |
|
|
7,893 |
|
2011 |
|
|
24,255 |
|
2012 |
|
|
70,837 |
|
2013(1) |
|
|
287,450 |
|
2014 |
|
|
40,000 |
|
Thereafter |
|
|
402,951 |
|
|
|
|
|
|
|
|
833,386 |
|
|
|
|
|
|
|
|
(1) |
|
Includes revolving credit facility principal amounts totalling 17,471. |
FORM 10-Q
QUARTERLY REPORT PAGE 12
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 5. Debt (continued)
Certain of the Companys debt agreements were issued under an indenture which, among other things,
restricts its ability and the ability of its restricted subsidiaries to make certain payments.
These limitations are subject to other important qualifications and exceptions. As at March 31,
2010, the Company was in compliance with the terms of the indenture.
(a) |
|
Note payable to bank, included in a total loan facility of 827,950 to finance the
construction related to the Stendal mill (Stendal Loan Facility), interest at rates varying
from Euribor plus 0.90% to Euribor plus 1.85% (rates on amounts of borrowing at March 31, 2010
range from 1.85% to 2.44%), principal due in required installments beginning September 30,
2006 until September 30, 2017, collateralized by the assets of the Stendal mill, with 48% and
32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt,
respectively, of up to 468,823 of outstanding principal, subject to a debt service reserve
account required to pay amounts due in the following twelve months under the terms of the
Stendal Loan Facility; payment of dividends is only permitted if certain cash flow
requirements are met. |
On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan
Facility. The amendment deferred approximately 164,000 of scheduled principal payments until
the maturity date, September 30, 2017, including approximately 20,000, 26,000, 21,000 of
scheduled principal payments that were originally due in 2009, 2010, and 2011, respectively.
The amendment also provided for a 100% cash sweep, referred to as the Cash Sweep, of any cash,
in excess of a 15,000 working capital reserve, held by Stendal which will be used first to fund
the debt service reserve account to a level sufficient to service the amounts due and payable
under the Stendal Loan Facility during the then following 12 months, or Fully Funded, and
second to prepay the deferred principal amounts.
(b) |
|
In February 2005, the Company issued $310 million of senior notes due February 2013, which
bear interest at 9.25% accrued and payable semi-annually, and are unsecured. The Company may
redeem all or a part of the notes at redemption prices (expressed as a percentage of principal
amount) equal to 102.31% for the twelve month period beginning on February 15, 2010, and
100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid
interest. |
FORM 10-Q
QUARTERLY REPORT PAGE 13
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 5. Debt (continued)
(c) |
|
As at March 31, 2010, the Subordinated Convertible Notes due October 2010 had approximately
$2.3 million of principal outstanding. The Subordinated Convertible Notes due October 2010,
bear interest at 8.5% accrued and payable semi-annually, are convertible at any time by the
holder into common shares of the Company at $7.75 per share and are unsecured. The Company
may redeem for cash all or a portion of these notes at any time at 100% of the principal
amount of the notes plus accrued and unpaid interest up to the redemption date. See Note 5(d). |
(d) |
|
On December 10, 2009, the Company exchanged approximately $43.3 million of Subordinated
Convertible Notes due October 2010 through private exchange agreements with the holders
thereof for approximately $43.8 million of Subordinated Convertible Notes due January 2012.
On January 22, 2010, through an exchange offer, the Company exchanged a further $21.7 million
of Subordinated Convertible Notes due October 2010 for approximately $22.0 million of the
Companys Subordinated Convertible Notes due January 2012. The Company recognized both
exchange transactions of the Subordinated Convertible Notes as extinguishments of debt in
accordance with ASC Topic 470, Debt, because the fair value of the embedded conversion option
changed by more than 10% in both transactions. As a result, for the year ended December 31,
2009, the Company accounted for the December 10, 2009 exchange as a debt extinguishment and
recognized a gain of 4,447 in the Consolidated Statement of Operations. For the three months
ended March 31, 2010, the Company recognized a loss of 929 as a result of the January 22,
2010 exchange. The gain and loss, which were determined using fair market values prevailing at
the time of the transactions, will both be accreted to income through to January 2012 through
interest expense yielding an effective interest rate of approximately 13% on the December 10,
2009 exchange and 3% on the January 22, 2010 exchange. |
The Subordinated Convertible Notes due January 2012 bear interest at 8.5%, accrued and payable
semi-annually, are convertible at anytime by the holder into common shares of the Company at
$3.30 per share and are unsecured. The Company may redeem for cash all or a portion of the notes
at anytime at 100% of the principal amount of the notes plus accrued interest up to the
redemption date. During the three months ended March 31, 2010, $129,027 of Subordinated
Convertible Notes due January 2012 were converted into 39,097 shares.
FORM 10-Q
QUARTERLY REPORT PAGE 14
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 5. Debt (continued)
(e) |
|
Credit agreement with respect to a revolving credit facility of C$40 million for the Celgar
mill. The credit agreement matures May 2013. Borrowings under the credit agreement are
collateralized by the mills inventory and receivables and are restricted by a borrowing base
calculated on the mills inventory and receivables. Canadian dollar denominated amounts bear
interest at bankers acceptance plus 3.75% or Canadian prime plus 2.00%. U.S. dollar
denominated amounts bear interest at LIBOR plus 3.75% or U.S. base plus 2.00%. As at March
31, 2010, this facility was partially drawn at C$24.0 million and was accruing interest at a
rate of approximately 4.19%. |
(f) |
|
Loans payable to the noncontrolling shareholder of the Stendal mill bear interest at 7%,
which is accrued semi-annually. The loan payable is unsecured, subordinated to all
liabilities of the Stendal mill, and is due in 2017. The balance includes principal and
accrued interest. See Note 10 Noncontrolling Interest. |
(g) |
|
A 25,000 working capital facility at the Rosenthal mill that matures in December 2012.
Borrowings under the facility are collateralized by the mills inventory and receivables and
bear interest at approximately Euribor plus 3.50%. As at March 31, 2010, this facility was
undrawn. |
(h) |
|
On August 19, 2009 the Company finalized an investment loan agreement with a lender relating
to the new wash press at the Rosenthal mill. The four-year amortizing investment loan was
completed with a total facility of 4,351 bearing interest at the rate of Euribor plus 2.75%.
Borrowings under this agreement are secured by the new wash press equipment. As at March 31,
2010, this facility was drawn by 3,511 and was accruing interest at a rate of 3.71%. |
(i) |
|
On February 8, 2010 the Rosenthal mill finalized a credit agreement with a lender for a
3,500 facility maturing in December 2012. Borrowings under the facility will bear interest at
the rate of the 3-month Euribor plus 3.5% and are secured by certain land at our Rosenthal
mill. As at March 31, 2010, this facility was undrawn. |
Note 6. 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. Currently, the primary risk managed using derivative instruments is interest
rate risk.
FORM 10-Q
QUARTERLY REPORT PAGE 15
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 6. Derivative Transactions (continued)
During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection
with the Stendal Loan Facility with respect to an aggregate maximum principal amount of
approximately 612,600 of the total indebtedness under the Stendal Loan Facility. Under the
interest rate swaps, the Company pays a fixed rate and receives a floating rate with the interest
payments being calculated on a notional amount. Currently, the contracts have an aggregate notional
amount of 486,073 at a fixed interest rate of 5.28% and they mature October 2017 (generally
matching the maturity of the Stendal Loan Facility). The Company substantially converted the
Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby
reducing interest rate uncertainty.
The Company recognized an unrealized loss of 6,546 with respect to these interest rate swaps for
the three months ended March 31, 2010 (2009 15,013), in the Gain (loss) on derivative
instruments line in the Interim Consolidated Statement of Operations and Interim Consolidated
Statement of Cash Flows. Derivative instruments are required to be measured at their fair value.
Accordingly, the fair value of the interest rate swap is presented in Unrealized interest rate
derivative losses within the long-term liabilities section in the Interim Consolidated Balance
Sheets, which currently amounts to a cumulative unrealized loss of 59,418 (2009 52,873).
The interest rate derivative contracts are with the same banks that hold the Stendal Loan Facility
and the Company does not anticipate non-performance by the banks.
Note 7. Pension and Other Post-Retirement Benefit Obligations
Included in pension and other post-retirement benefit obligations are amounts related to the
Companys Celgar and German mills. The largest component of this obligation is with respect to the
Celgar mill which maintains defined benefit pension and post-retirement benefit plans for certain
employees (Celgar Plans).
Pension benefits are based on employees earnings and years of service. The Celgar Plans are funded
by contributions from the Company based on actuarial estimates and statutory requirements. Pension
contributions for the three month period ended March 31, 2010 totaled 156 (2009 347).
The Company anticipates based on actuarial estimates that it will make contributions to the defined
benefit pension plan of approximately 303 in 2010.
FORM 10-Q
QUARTERLY REPORT PAGE 16
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 7. Pension and Other Post-Retirement Benefit Obligations (continued)
Effective December 31, 2008, the defined benefit plan was 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Post- |
|
|
|
|
|
|
Post- |
|
|
|
Pension |
|
|
Retirement |
|
|
Pension |
|
|
Retirement |
|
|
|
Benefits |
|
|
Benefits |
|
|
Benefits |
|
|
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
|
19 |
|
|
|
93 |
|
|
|
14 |
|
|
|
83 |
|
Interest cost |
|
|
397 |
|
|
|
183 |
|
|
|
370 |
|
|
|
199 |
|
Expected return on plan assets |
|
|
(371 |
) |
|
|
|
|
|
|
(311 |
) |
|
|
|
|
Recognized net loss (gain) |
|
|
104 |
|
|
|
(74 |
) |
|
|
34 |
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
|
149 |
|
|
|
202 |
|
|
|
107 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Share Capital
Common shares
The Company has authorized 200,000,000 common shares (2009 200,000,000) with a par value of $1
per share.
During the quarter ended March 31, 2010, 39,097 shares were issued as a result of certain holders
of the Companys Subordinated Convertible Notes due January 2012 exercising their conversion
option. See Note 5(d) Debt.
As at March 31, 2010 and December 31, 2009, the Company had 36,483,204 and 36,443,487 common shares
issued and outstanding, respectively.
Preferred shares
The Company has authorized 50,000,000 preferred shares (2009 50,000,000) with $1 par value
issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred
shares may be issued in one or more series and with such designations and preferences for each
series as shall be stated in the resolutions providing for the designation and issue of each such
series adopted by the Board of Directors of the Company. The Board of Directors is authorized by
the Companys articles of incorporation to determine the voting, dividend, redemption and
liquidation preferences pertaining to each such series. As at March 31, 2010, no preferred shares
had been issued by the Company.
FORM 10-Q
QUARTERLY REPORT PAGE 17
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 9. Financial Instruments
The fair value of financial instruments at March 31, 2010 and December 31, 2009 is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
48,692 |
|
|
|
48,692 |
|
|
|
51,291 |
|
|
|
51,291 |
|
Investments |
|
|
142 |
|
|
|
142 |
|
|
|
135 |
|
|
|
135 |
|
Receivables |
|
|
90,391 |
|
|
|
90,391 |
|
|
|
71,143 |
|
|
|
71,143 |
|
Notes receivable |
|
|
4,044 |
|
|
|
4,044 |
|
|
|
3,819 |
|
|
|
3,819 |
|
Accounts payable and accrued expenses |
|
|
105,380 |
|
|
|
105,380 |
|
|
|
85,185 |
|
|
|
85,185 |
|
Debt |
|
|
833,386 |
|
|
|
838,190 |
|
|
|
829,174 |
|
|
|
769,207 |
|
Interest rate derivative contracts liability |
|
|
59,418 |
|
|
|
59,418 |
|
|
|
52,873 |
|
|
|
52,873 |
|
The carrying value of cash and cash equivalents and accounts payable and accrued expenses
approximates the fair value due to the immediate or short-term maturity of these financial
instruments. The carrying value of receivables approximates the fair value due to their short-term
nature and historical collectability. The fair value of notes receivable was estimated using
discounted cash flows at prevailing market rates. The fair value of debt reflects recent market
transactions and discounted cash flow estimates. The fair value of the interest rate derivatives is
based on observable inputs including applicable yield curves.
The fair value methodologies and, as a result, the fair value of the Companys investments and
derivative instruments are determined based on the fair value hierarchy provided in ASC 820. The
fair value hierarchy per ASC 820 is as follows:
Level 1 Valuations based on quoted prices in active markets for identical assets and liabilities.
Level 2 Valuations based on observable inputs in active markets for similar assets and
liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates.
Level 3 Valuations based on significant unobservable inputs that are supported by little or no
market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.
The Company classified its investments within Level 1 of the valuation hierarchy where quoted
prices are available in an active market. Level 1 investments include exchange-traded equities.
FORM 10-Q
QUARTERLY REPORT PAGE 18
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 9. Financial Instruments (continued)
The Companys derivatives are classified within Level 2 of the valuation hierarchy, as they are
traded on the over-the-counter market and are valued using internal models that use as their basis
readily observable market inputs, such as forward interest rates.
The valuation techniques used by the Company are based upon observable inputs. Observable inputs
reflect market data obtained from independent sources. In addition, the Company considered the
risk of non-performance of the obligor, which in some cases reflects the Companys own credit risk,
in determining the fair value of the derivative instruments. The counterparty to our interest rate
swap derivative is a multi-national financial institution.
The following table presents a summary of the Companys outstanding financial instruments and their
estimated fair values under the hierarchy defined in ASC 820:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at March 31, 2010 using: |
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
|
|
|
|
active markets for |
|
|
Significant other |
|
|
Significant |
|
|
|
|
|
|
identical assets |
|
|
observable inputs |
|
|
unobservable inputs |
|
|
|
|
Description |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (a) |
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
swaps |
|
|
|
|
|
|
59,418 |
|
|
|
|
|
|
|
59,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Based on observable market data. |
|
(b) |
|
Based on observable inputs for the liability (yield curves observable at specific intervals). |
Note 10. Noncontrolling Interest
During the quarter, the noncontrolling interest holder agreed to convert certain interest claims
totaling 6,275 borne from shareholder loans into a capital contribution. As a result of this
conversion, the Company reduced the amount owing to the noncontrolling shareholder and decreased
the noncontrolling shareholders share of losses.
FORM 10-Q
QUARTERLY REPORT PAGE 19
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 11. Commitments and Contingencies
As part of the Companys Green Energy project (the Green Energy Project) for the Celgar mill,
during 2009 and 2010 the Company entered into a number of contracts for the purchase of a new 48
megawatt condensing turbine-generator set, as well as other related equipment commitments. As at
March 31, 2010, the value of the project remaining to be completed is approximately 18.6
(C$25.5 million), a majority of which is due to be paid within the next year and is being funded by
the Canadian Federal Governments Pulp and Paper Green Transformation Program (the Program).
Pursuant to a contribution agreement finalized in November 2009, the Program will provide
approximately C$40.0 million to complete the Green Energy Project. The Company is also eligible
for an additional C$17.7 million under the Program for future qualifying projects.
Included in cash and cash equivalents is approximately C$11.4 million that was provided as part of
the Program and is expected to be spent on the Green Energy Project, currently underway at the
Celgar mill, during the second quarter of 2010.
The Company is involved in a property transfer tax dispute with respect to the Celgar mill and
certain other legal actions and claims arising in the ordinary course of business. While the
outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of
management that the outcome of any such claim which is 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.
FORM 10-Q
QUARTERLY REPORT PAGE 20
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 12. Restricted Group Supplemental Disclosure
The terms of the indenture governing our 9.25% senior unsecured notes require that we provide the
results of operations and financial condition of Mercer International Inc. and our restricted
subsidiaries under the indenture, collectively referred to as the Restricted Group. As at and
during the three months ended March 31, 2010 and 2009, the Restricted Group was comprised of Mercer
International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The
Restricted Group excludes the Stendal mill.
Combined Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Restricted |
|
|
Unrestricted |
|
|
|
|
|
|
Consolidated |
|
|
|
Group |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Group |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
26,083 |
|
|
|
22,609 |
|
|
|
|
|
|
|
48,692 |
|
Receivables |
|
|
53,074 |
|
|
|
37,317 |
|
|
|
|
|
|
|
90,391 |
|
Inventories |
|
|
56,932 |
|
|
|
24,798 |
|
|
|
|
|
|
|
81,730 |
|
Prepaid expenses and other |
|
|
3,872 |
|
|
|
3,696 |
|
|
|
|
|
|
|
7,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
139,961 |
|
|
|
88,420 |
|
|
|
|
|
|
|
228,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
375,279 |
|
|
|
500,618 |
|
|
|
|
|
|
|
875,897 |
|
Deferred note issuance and other |
|
|
3,170 |
|
|
|
4,643 |
|
|
|
|
|
|
|
7,813 |
|
Deferred income tax |
|
|
3,698 |
|
|
|
|
|
|
|
|
|
|
|
3,698 |
|
Due from unrestricted group |
|
|
71,487 |
|
|
|
|
|
|
|
(71,487 |
) |
|
|
|
|
Note receivable |
|
|
2,698 |
|
|
|
|
|
|
|
|
|
|
|
2,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
596,293 |
|
|
|
593,681 |
|
|
|
(71,487 |
) |
|
|
1,118,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
60,456 |
|
|
|
44,924 |
|
|
|
|
|
|
|
105,380 |
|
Pension and other post-retirement benefit
obligations |
|
|
619 |
|
|
|
|
|
|
|
|
|
|
|
619 |
|
Debt |
|
|
2,770 |
|
|
|
20,250 |
|
|
|
|
|
|
|
23,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
63,845 |
|
|
|
65,174 |
|
|
|
|
|
|
|
129,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
294,248 |
|
|
|
516,118 |
|
|
|
|
|
|
|
810,366 |
|
Due to restricted group |
|
|
|
|
|
|
71,487 |
|
|
|
(71,487 |
) |
|
|
|
|
Unrealized interest rate derivative losses |
|
|
|
|
|
|
59,418 |
|
|
|
|
|
|
|
59,418 |
|
Pension and other post-retirement benefit obligations |
|
|
19,740 |
|
|
|
|
|
|
|
|
|
|
|
19,740 |
|
Capital leases and other |
|
|
6,718 |
|
|
|
4,369 |
|
|
|
|
|
|
|
11,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
384,551 |
|
|
|
716,566 |
|
|
|
(71,487 |
) |
|
|
1,029,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
211,742 |
|
|
|
(88,242 |
) |
|
|
|
|
|
|
123,500 |
|
Noncontrolling interest (deficit) |
|
|
|
|
|
|
(34,643 |
) |
|
|
|
|
|
|
(34,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
596,293 |
|
|
|
593,681 |
|
|
|
(71,487 |
) |
|
|
1,118,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT PAGE 21
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 12. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Restricted |
|
|
Unrestricted |
|
|
|
|
|
|
Consolidated |
|
|
|
Group |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Group |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
20,635 |
|
|
|
30,656 |
|
|
|
|
|
|
|
51,291 |
|
Receivables |
|
|
34,588 |
|
|
|
36,555 |
|
|
|
|
|
|
|
71,143 |
|
Inventories |
|
|
52,897 |
|
|
|
19,732 |
|
|
|
|
|
|
|
72,629 |
|
Prepaid expenses and other |
|
|
3,452 |
|
|
|
2,419 |
|
|
|
|
|
|
|
5,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
111,572 |
|
|
|
89,362 |
|
|
|
|
|
|
|
200,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
362,311 |
|
|
|
506,247 |
|
|
|
|
|
|
|
868,558 |
|
Deferred note issuance and other |
|
|
3,388 |
|
|
|
4,798 |
|
|
|
|
|
|
|
8,186 |
|
Deferred income tax |
|
|
3,426 |
|
|
|
|
|
|
|
|
|
|
|
3,426 |
|
Due from unrestricted group |
|
|
72,553 |
|
|
|
|
|
|
|
(72,553 |
) |
|
|
|
|
Note receivable |
|
|
2,727 |
|
|
|
|
|
|
|
|
|
|
|
2,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
555,977 |
|
|
|
600,407 |
|
|
|
(72,553 |
) |
|
|
1,083,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
51,875 |
|
|
|
33,310 |
|
|
|
|
|
|
|
85,185 |
|
Pension and other post-retirement
benefit obligations |
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
567 |
|
Debt |
|
|
2,115 |
|
|
|
13,917 |
|
|
|
|
|
|
|
16,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
54,557 |
|
|
|
47,227 |
|
|
|
|
|
|
|
101,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
276,604 |
|
|
|
536,538 |
|
|
|
|
|
|
|
813,142 |
|
Due to restricted group |
|
|
|
|
|
|
72,553 |
|
|
|
(72,553 |
) |
|
|
|
|
Unrealized interest rate derivative losses |
|
|
|
|
|
|
52,873 |
|
|
|
|
|
|
|
52,873 |
|
Pension and other post-retirement benefit
obligations |
|
|
17,902 |
|
|
|
|
|
|
|
|
|
|
|
17,902 |
|
Capital leases and other |
|
|
6,667 |
|
|
|
5,490 |
|
|
|
|
|
|
|
12,157 |
|
Deferred income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
355,730 |
|
|
|
714,681 |
|
|
|
(72,553 |
) |
|
|
997,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
200,247 |
|
|
|
(77,025 |
) |
|
|
|
|
|
|
123,222 |
|
Noncontrolling interest (deficit) |
|
|
|
|
|
|
(37,249 |
) |
|
|
|
|
|
|
(37,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
555,977 |
|
|
|
600,407 |
|
|
|
(72,553 |
) |
|
|
1,083,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT PAGE 22
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 12. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Restricted |
|
|
Unrestricted |
|
|
|
|
|
|
Consolidated |
|
|
|
Group |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp |
|
|
106,417 |
|
|
|
64,704 |
|
|
|
|
|
|
|
171,121 |
|
Energy |
|
|
3,375 |
|
|
|
5,756 |
|
|
|
|
|
|
|
9,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,792 |
|
|
|
70,460 |
|
|
|
|
|
|
|
180,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs |
|
|
81,665 |
|
|
|
58,744 |
|
|
|
|
|
|
|
140,409 |
|
Operating depreciation and amortization |
|
|
7,213 |
|
|
|
6,511 |
|
|
|
|
|
|
|
13,724 |
|
Selling, general and administrative expenses and other |
|
|
4,841 |
|
|
|
3,254 |
|
|
|
|
|
|
|
8,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,719 |
|
|
|
68,509 |
|
|
|
|
|
|
|
162,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
16,073 |
|
|
|
1,951 |
|
|
|
|
|
|
|
18,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(7,320 |
) |
|
|
(10,264 |
) |
|
|
1,161 |
|
|
|
(16,423 |
) |
Investment income (loss) |
|
|
1,239 |
|
|
|
16 |
|
|
|
(1,161 |
) |
|
|
94 |
|
Foreign exchange gain (loss) on debt |
|
|
(5,231 |
) |
|
|
|
|
|
|
|
|
|
|
(5,231 |
) |
Gain (loss) on extinguishment of convertible notes |
|
|
(929 |
) |
|
|
|
|
|
|
|
|
|
|
(929 |
) |
Gain (loss) on derivative instruments |
|
|
|
|
|
|
(6,546 |
) |
|
|
|
|
|
|
(6,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(12,241 |
) |
|
|
(16,794 |
) |
|
|
|
|
|
|
(29,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
3,832 |
|
|
|
(14,843 |
) |
|
|
|
|
|
|
(11,011 |
) |
Income tax benefit (provision) |
|
|
(161 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
(204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3,671 |
|
|
|
(14,886 |
) |
|
|
|
|
|
|
(11,215 |
) |
Less: net
loss (income) loss attributable to
noncontrolling interest |
|
|
|
|
|
|
3,669 |
|
|
|
|
|
|
|
3,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
|
3,671 |
|
|
|
(11,217 |
) |
|
|
|
|
|
|
(7,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Restricted |
|
|
Unrestricted |
|
|
|
|
|
|
Consolidated |
|
|
|
Group |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp |
|
|
75,016 |
|
|
|
54,017 |
|
|
|
|
|
|
|
129,033 |
|
Energy |
|
|
4,016 |
|
|
|
6,523 |
|
|
|
|
|
|
|
10,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,032 |
|
|
|
60,540 |
|
|
|
|
|
|
|
139,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs |
|
|
74,435 |
|
|
|
57,562 |
|
|
|
|
|
|
|
131,997 |
|
Operating depreciation and amortization |
|
|
6,704 |
|
|
|
6,697 |
|
|
|
|
|
|
|
13,401 |
|
Selling, general and administrative expenses and other |
|
|
3,303 |
|
|
|
3,284 |
|
|
|
|
|
|
|
6,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,442 |
|
|
|
67,543 |
|
|
|
|
|
|
|
151,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(5,410 |
) |
|
|
(7,003 |
) |
|
|
|
|
|
|
(12,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(7,302 |
) |
|
|
(10,356 |
) |
|
|
1,109 |
|
|
|
(16,549 |
) |
Investment income (loss) |
|
|
916 |
|
|
|
(3,009 |
) |
|
|
(1,109 |
) |
|
|
(3,202 |
) |
Foreign exchange gain (loss) on debt |
|
|
(4,416 |
) |
|
|
|
|
|
|
|
|
|
|
(4,416 |
) |
Gain (loss) on derivative instruments |
|
|
|
|
|
|
(15,013 |
) |
|
|
|
|
|
|
(15,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(10,802 |
) |
|
|
(28,378 |
) |
|
|
|
|
|
|
(39,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(16,212 |
) |
|
|
(35,381 |
) |
|
|
|
|
|
|
(51,593 |
) |
Income tax benefit (provision) |
|
|
208 |
|
|
|
2,774 |
|
|
|
|
|
|
|
2,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(16,004 |
) |
|
|
(32,607 |
) |
|
|
|
|
|
|
(48,611 |
) |
Less: net
loss (income) loss attributable to
noncontrolling interest |
|
|
|
|
|
|
9,261 |
|
|
|
|
|
|
|
9,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
|
(16,004 |
) |
|
|
(23,346 |
) |
|
|
|
|
|
|
(39,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT PAGE 23
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 12. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Restricted |
|
|
Unrestricted |
|
|
Consolidated |
|
|
|
Group |
|
|
Group |
|
|
Group |
|
Cash flows from (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
|
3,671 |
|
|
|
(11,217 |
) |
|
|
(7,546 |
) |
Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on derivative instruments |
|
|
|
|
|
|
6,546 |
|
|
|
6,546 |
|
Foreign exchange (gain) loss on debt |
|
|
5,231 |
|
|
|
|
|
|
|
5,231 |
|
Loss (gain) on extinguishment of convertible notes |
|
|
929 |
|
|
|
|
|
|
|
929 |
|
Depreciation and amortization |
|
|
7,310 |
|
|
|
6,511 |
|
|
|
13,821 |
|
Accretion (income) expense |
|
|
431 |
|
|
|
|
|
|
|
431 |
|
Noncontrolling interest |
|
|
|
|
|
|
(3,669 |
) |
|
|
(3,669 |
) |
Stock compensation expense |
|
|
506 |
|
|
|
|
|
|
|
506 |
|
Pension and other post-retirement expense, net of funding |
|
|
194 |
|
|
|
|
|
|
|
194 |
|
Other |
|
|
388 |
|
|
|
615 |
|
|
|
1,003 |
|
Changes in current assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(16,382 |
) |
|
|
(762 |
) |
|
|
(17,144 |
) |
Inventories |
|
|
(193 |
) |
|
|
(5,066 |
) |
|
|
(5,259 |
) |
Accounts payable and accrued expenses |
|
|
(2,845 |
) |
|
|
10,800 |
|
|
|
7,955 |
|
Other(1) |
|
|
1,062 |
|
|
|
(2,343 |
) |
|
|
(1,281 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities |
|
|
302 |
|
|
|
1,415 |
|
|
|
1,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(4,927 |
) |
|
|
(923 |
) |
|
|
(5,850 |
) |
Proceeds on sale of property, plant and equipment |
|
|
54 |
|
|
|
333 |
|
|
|
387 |
|
Note receivable |
|
|
(84 |
) |
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities |
|
|
(4,957 |
) |
|
|
(590 |
) |
|
|
(5,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable and debt |
|
|
|
|
|
|
(8,250 |
) |
|
|
(8,250 |
) |
Repayment of capital lease obligations |
|
|
(382 |
) |
|
|
(622 |
) |
|
|
(1,004 |
) |
Proceeds from government investment grants |
|
|
9,415 |
|
|
|
|
|
|
|
9,415 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
9,033 |
|
|
|
(8,872 |
) |
|
|
161 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
1,070 |
|
|
|
|
|
|
|
1,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
5,448 |
|
|
|
(8,047 |
) |
|
|
(2,599 |
) |
Cash and cash equivalents, beginning of period |
|
|
20,635 |
|
|
|
30,656 |
|
|
|
51,291 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
|
26,083 |
|
|
|
22,609 |
|
|
|
48,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes intercompany working capital related transactions. |
FORM 10-Q
QUARTERLY REPORT PAGE 24
MERCER INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands of Euros, except per share data)
Note 12. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Restricted |
|
|
Unrestricted |
|
|
Consolidated |
|
|
|
Group |
|
|
Group |
|
|
Group |
|
Cash flows from (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
|
(16,004 |
) |
|
|
(23,346 |
) |
|
|
(39,350 |
) |
Adjustments to reconcile net income (loss) attributable to
common shareholders to cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on derivative instruments |
|
|
|
|
|
|
15,013 |
|
|
|
15,013 |
|
Foreign exchange (gain) loss on debt |
|
|
4,416 |
|
|
|
|
|
|
|
4,416 |
|
Depreciation and amortization |
|
|
6,770 |
|
|
|
6,697 |
|
|
|
13,467 |
|
Noncontrolling interest |
|
|
|
|
|
|
(9,261 |
) |
|
|
(9,261 |
) |
Deferred income taxes |
|
|
(226 |
) |
|
|
(2,805 |
) |
|
|
(3,031 |
) |
Stock compensation expense |
|
|
(33 |
) |
|
|
|
|
|
|
(33 |
) |
Pension and other post-retirement expense, net of funding |
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
Inventory provisions |
|
|
3,233 |
|
|
|
1,354 |
|
|
|
4,587 |
|
Other |
|
|
(21 |
) |
|
|
(2,879 |
) |
|
|
(2,900 |
) |
Changes in current assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
15,753 |
|
|
|
4,228 |
|
|
|
19,981 |
|
Inventories |
|
|
1,599 |
|
|
|
4,520 |
|
|
|
6,119 |
|
Accounts payable and accrued expenses |
|
|
394 |
|
|
|
(7,615 |
) |
|
|
(7,221 |
) |
Other(1) |
|
|
(11,115 |
) |
|
|
12,115 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities |
|
|
4,750 |
|
|
|
(1,979 |
) |
|
|
2,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(7,175 |
) |
|
|
(531 |
) |
|
|
(7,706 |
) |
Proceeds on sale of property, plant and equipment |
|
|
52 |
|
|
|
77 |
|
|
|
129 |
|
Cash, restricted |
|
|
|
|
|
|
9,469 |
|
|
|
9,469 |
|
Note receivable |
|
|
121 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities |
|
|
(7,002 |
) |
|
|
9,015 |
|
|
|
2,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable and debt |
|
|
(5,550 |
) |
|
|
(8,250 |
) |
|
|
(13,800 |
) |
Repayment of capital lease obligations |
|
|
(143 |
) |
|
|
(539 |
) |
|
|
(682 |
) |
Proceeds from borrowings of notes payable and debt |
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
Payment of deferred note issuance costs |
|
|
|
|
|
|
(1,969 |
) |
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
4,307 |
|
|
|
(10,758 |
) |
|
|
(6,451 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
451 |
|
|
|
|
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,506 |
|
|
|
(3,722 |
) |
|
|
(1,216 |
) |
Cash and cash equivalents, beginning of period |
|
|
26,176 |
|
|
|
16,276 |
|
|
|
42,452 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
|
28,682 |
|
|
|
12,554 |
|
|
|
41,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes intercompany working capital related transactions. |
FORM 10-Q
QUARTERLY REPORT PAGE 25
ITEM 2. MANAGEMENTS 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, 2010, unless otherwise stated; (iv) all references to monetary amounts are to Euros,
the lawful currency adopted by most members of the European Union, unless otherwise stated; (v)
refers to Euros, $ refers to U.S. dollars and C$ refers to Canadian dollars; and (vi) ADMTs
refers to air-dried metric tonnes.
Results of Operations
General
We operate three
northern bleached softwood kraft (NBSK) pulp mills through our wholly owned
subsidiaries, Rosenthal and Celgar, and
our 74.9% owned subsidiary, Stendal, which have a consolidated annual production capacity of
approximately 1.5 million ADMTs.
The following discussion and analysis of our results of operations and financial condition for the
three months ended March 31, 2010 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, 2009 filed with
the Securities and Exchange Commission (SEC).
Current Market Environment
As global economies have increasingly shown signs of recovery, global pulp markets have continued
to strengthen. Pulp prices have dramatically increased as worldwide demand has outstripped fiber
supply in many regions, including Europe.
FORM 10-Q
QUARTERLY REPORT PAGE 26
First Quarter Operational Snapshot
Selected production, sales and exchange rate data for the three months ended March 31, 2010 and
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Pulp Production (000 ADMTs) |
|
|
329.5 |
|
|
|
345.6 |
|
Scheduled Production Downtime (000 ADMTs) |
|
|
18.2 |
|
|
|
|
|
Pulp Sales (000 ADMTs) |
|
|
332.9 |
|
|
|
336.7 |
|
Pulp Revenues (in millions) |
|
|
171.1 |
|
|
|
129.0 |
|
|
|
|
|
|
|
|
|
|
NBSK pulp list prices in Europe ($/ADMT) |
|
$ |
860 |
|
|
$ |
585 |
|
NBSK pulp list prices (/ADMT) |
|
|
621 |
|
|
|
449 |
|
Average pulp sales realizations (/ADMT)(1) |
|
|
507 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
Energy Production (000 MWh) |
|
|
337.7 |
|
|
|
356.3 |
|
Energy Sales (000 MWh) |
|
|
107.1 |
|
|
|
112.2 |
|
Energy Revenue (in millions) |
|
|
9.1 |
|
|
|
10.5 |
|
Average energy sales realizations (/MWh) |
|
|
85 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
Average Spot Currency Exchange Rates |
|
|
|
|
|
|
|
|
/ $(2) |
|
|
0.7230 |
|
|
|
0.7676 |
|
C$ / $(2) |
|
|
1.0413 |
|
|
|
1.2448 |
|
C$ / (3) |
|
|
1.4406 |
|
|
|
1.6217 |
|
|
|
|
(1) |
|
Sales realizations after discounts. Incorporates the effect of pulp price variations
occurring between the order and shipment dates. |
|
(2) |
|
Average Federal Reserve Bank of New York noon spot rate over the reporting period. |
|
(3) |
|
Average Bank of Canada noon spot rates over the reporting period. |
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Pulp revenues for the three months ended March 31, 2010 increased by approximately 32.6% to 171.1
million from 129.0 million in the comparative quarter of 2009, primarily due to significantly
higher pulp prices. Revenues from the sale of excess energy decreased by approximately 13.3% in the
first quarter to 9.1 million from 10.5 million in the same quarter last year, primarily due to
the absence of a one-time grid access fee rebate received in 2009.
Pulp sales volume decreased marginally to 332,869 ADMTs in the current quarter from 336,659 ADMTs
in the comparative period of 2009. In the first quarter of 2010, average pulp sales realizations
increased by approximately 34.5% to 507 per ADMT from 377 per ADMT in the same period last year,
primarily due to significantly higher pulp prices.
Pulp prices in the first quarter of 2010 were higher than in the same period last year due to a
strengthening in global pulp markets. List prices for NBSK pulp in Europe were approximately 621
($860) per ADMT in the current quarter compared to approximately 449 ($585) per ADMT in the first
quarter of 2009 and 558 ($800) at the end of 2009.
Pulp production decreased to 329,455 ADMTs in the current quarter from 345,620 ADMTs in the same
quarter of 2009, primarily due to 10 days of scheduled maintenance downtime at our Stendal mill and
production curtailments of approximately 17,000 tonnes at our German mills caused by limited fiber
supply availability in early 2010. We have 12 days (approximately 17,000 tonnes) of scheduled
maintenance downtime planned for our Celgar mill in the second quarter of 2010.
FORM 10-Q
QUARTERLY REPORT PAGE 27
During the first quarter of 2010, our pulp inventories increased marginally to 25.0 million from
24.2 million at the end of the prior quarter. Our raw material inventories increased to 31.1
million in the current quarter from 24.9 million at the end of the fourth quarter of 2009 as a
result of higher fiber costs in Germany and seasonal restocking at our Celgar mill.
Costs and expenses in the first quarter of 2010 increased to 162.2 million from 152.0 million in
the comparative period of 2009, primarily due to higher fiber costs in Germany, and the costs
associated with annual maintenance at the Stendal mill.
In the first quarter of 2010, operating depreciation and amortization increased slightly to 13.7
million from 13.4 million in the same quarter last year.
Overall, our fiber costs increased by approximately 6.0% in the first quarter of 2010 from the same
period in 2009. At our Celgar mill, fiber costs were lower as the mill benefited from an increase
in the residual supply of fiber and the corresponding decrease in fiber from third party field
chippers. We currently expect fiber costs at our Celgar mill to decrease slightly in the
short-term, primarily due to the increased availability of residual woodchips. Fiber costs at our
German mills were higher due to the impact of reduced harvesting rates and increased demand from
the European board industry. As we move into the second quarter of the year, we expect further
upward pressure in pricing for our German mills due to increasing production in the European board
industry, but also expect harvesting levels to increase, which should cause pricing to level off
thereafter.
For the first quarter of 2010, we recorded operating income of 18.0 million compared to an
operating loss of 12.4 million in the comparative quarter of 2009, primarily due to higher pulp
price realizations.
Interest expense in the first quarter of 2010 decreased marginally to 16.4 million from 16.5
million in the comparative quarter of 2009, due to lower debt levels being partially offset by
accretion expense related to the exchange of our convertible notes.
Our Stendal mill recorded an unrealized loss of 6.5 million on the mark to market of its interest
rate derivatives at the end of the current quarter, compared to an unrealized loss of 15.0 million
in the same period last year.
In the first quarter of 2010, we recorded a foreign exchange loss of 5.2 million on our foreign
currency denominated debt compared to a loss of 4.4 million in the same period of 2009.
In the first quarter of 2010, we completed an exchange (the Exchange) of approximately 15.4
million ($21.7 million) in aggregate principal amount of our 8.5% Convertible Senior Subordinated
Notes due 2010 (the 2010 Convertible Notes) for new 8.5% Convertible Senior Subordinated Notes
due 2012 (the 2012 Convertible Notes). We recorded a loss of approximately 0.9 million on the
extinguishment of the 2010 Convertible Notes.
In the first quarter of 2010, the noncontrolling shareholders interest in the Stendal mills loss
was 3.7 million, compared to 9.3 million of loss in the same quarter last year.
We reported a net loss attributable to common shareholders for the first quarter of 2010 of 7.5
million, or 0.21 per basic and diluted share, which included aggregate non-cash, unrealized losses
of 11.8 million on the Stendal interest derivatives and foreign exchange loss on our debt.
In the first quarter of 2009, net loss attributable to common shareholders was 39.4 million, or
1.08 per basic and diluted share.
FORM 10-Q
QUARTERLY REPORT PAGE 28
Operating EBITDA in the first quarter of 2010 was 31.8 million compared to Operating EBITDA of
23.5 million in the prior quarter and 1.1 million in the first quarter of 2009. Operating EBITDA
is defined as operating income (loss) plus depreciation and amortization and non-recurring capital
asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own
operating results, and as a benchmark relative to its competitors. Management considers 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 an actual cash cost, and
depreciation expense varies widely from company to company in a manner that management considers
largely independent of the underlying cost efficiency of their 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)
attributable to common shareholders, including financing costs and the effect of derivative
instruments. Operating EBITDA is not a measure of financial performance under the accounting
principles generally accepted in the United States of America (GAAP), and should not be
considered as an alternative to net income (loss) or income (loss) from operations as a measure of
performance, nor as an alternative to net cash from operating activities as a measure of liquidity.
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)
noncontrolling interests on our Stendal mill operations; (v) the impact of realized or marked to
market changes in our derivative positions, which can be substantial; and (vi) the impact of
impairment charges against our investments or assets. Because of these limitations, Operating
EBITDA should only be considered as a supplemental operational 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. See the Statement of Cash Flows set out in our interim consolidated financial statements
included herein. 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 operational performance and relying primarily on our GAAP financial statements.
FORM 10-Q
QUARTERLY REPORT PAGE 29
The following table provides a reconciliation of net income (loss) attributable to common
shareholders to operating income (loss) and Operating EBITDA for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Net income (loss) attributable to common shareholders |
|
|
(7,546 |
) |
|
|
(39,350 |
) |
Net income (loss) attributable to noncontrolling interest |
|
|
(3,669 |
) |
|
|
(9,261 |
) |
Income taxes (benefits) |
|
|
204 |
|
|
|
(2,982 |
) |
Interest expense |
|
|
16,423 |
|
|
|
16,549 |
|
Investment (income) loss |
|
|
(94 |
) |
|
|
3,202 |
|
Foreign exchange (gain) loss on debt |
|
|
5,231 |
|
|
|
4,416 |
|
Loss on extinguishment of convertible notes |
|
|
929 |
|
|
|
|
|
Loss (gain) on derivative instruments |
|
|
6,546 |
|
|
|
15,013 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
18,024 |
|
|
|
(12,413 |
) |
Add: Depreciation and amortization |
|
|
13,821 |
|
|
|
13,467 |
|
|
|
|
|
|
|
|
Operating EBITDA |
|
|
31,845 |
|
|
|
1,054 |
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
The following table is a summary of selected financial information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
As at |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Financial Position |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
48,692 |
|
|
|
51,291 |
|
Working capital |
|
|
99,362 |
|
|
|
99,150 |
|
Property, plant and equipment |
|
|
875,897 |
|
|
|
868,558 |
|
Total assets |
|
|
1,118,487 |
|
|
|
1,083,831 |
|
Long-term liabilities |
|
|
900,611 |
|
|
|
896,074 |
|
Total equity |
|
|
88,857 |
|
|
|
85,973 |
|
Sources and Uses of Funds
Our principal sources of funds are cash flows from operations, cash on hand and the revolving
working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of funds
consist of operating expenditures, payments of principal and interest on the project loan facility
relating to our Stendal mill (Stendal Loan Facility), capital expenditures and interest payments
on our outstanding 9.25% senior notes (Senior Notes) and the 2012 Convertible Notes.
In the last quarter of 2009, our Celgar mill was allocated approximately C$57.7 million in credits
under the Canadian governments Pulp and Paper Green Transformation Program (the GTP). The GTPs
objective is to improve the environmental performance of Canadas pulp and paper industry by
funding, by way of government grants, approved capital projects with environmental benefits, such
as investments in energy efficiency. Subsequently, in November 2009, we entered into a
non-repayable contribution agreement with the Department of Natural Resources Canada (NRCan)
whereby NRCan agreed to provide approximately C$40.0 million (29.1 million) in grants towards
certain costs associated with our green energy project at our Celgar mill (the Celgar Energy
Project). In December 2009, we received an initial grant of C$12.9 million from NRCan and an
additional grant of C$13.9 million during the first quarter of 2010 which have been or will be used
to pay outstanding Celgar Energy Project costs. Currently, our Celgar mill has approximately C$11.4
million of grant monies that we expect to be spent in the second quarter.
FORM 10-Q
QUARTERLY REPORT PAGE 30
In the first quarter of 2010, capital expenditures related to the Celgar Energy Project totaled
approximately 4.9 million (C$7.0 million) and we expect the remaining costs for the project to be
approximately 18.6 million (C$25.5 million) substantially all of which will be financed through
the C$40.0 million grant from the Canadian federal government under the GTP.
As at March 31, 2010, our cash and cash equivalents were approximately 48.7 million, compared to
approximately 51.3 million at the end of 2009 and we had working capital of approximately 99.4
million compared to approximately 99.2 million at the end of 2009.
Debt Covenants
Our long-term obligations contain various financial tests and covenants customary to these types of
arrangements.
As at March 31, 2010, we were in full compliance with all of the covenants of our indebtedness.
Cash Flow Analysis
Cash Flows from Operating Activities. We operate in a cyclical industry and our operating cash
flows vary accordingly. Our principal operating cash expenditures are for labor, fiber, chemicals
and debt service.
Working capital levels fluctuate throughout the year and are affected by maintenance downtime,
changing sales patterns, seasonality and the timing of receivables and the payment of payables and
expenses.
Operating activities provided cash of 1.7 million and 2.8 million in the three months ended
March 31, 2010 and 2009, respectively, primarily as a result of increased operating income being
offset by working capital movements. An increase in receivables used cash of 17.1 million in the
first three months of 2010, compared to a decrease in receivables providing cash of 20.0 million
in the first three months of 2009. An increase in inventories used cash of 5.3 million in the
first three months of 2010, compared to a decrease in inventories providing cash of 6.1 million in
the first three months of 2009. An increase in accounts payable and accrued expenses provided cash
of 8.0 million in the first three months of 2010, compared to a decrease in accounts payable and
accrued expenses using cash of 7.2 million in the first three months of 2009.
Cash Flows from Investing Activities. Investing activities in the first three months of 2010
used cash of 5.5 million, compared to providing cash of 2.0 million in the same period of 2009.
Capital expenditures in the first three months of 2010 used cash of 5.9 million compared to 7.7
million in the same period of 2009.
Cash Flows from Financing Activities. In the first three months of 2010, financing activities
provided cash of 0.2 million, compared to using cash of 6.5 million in the same period last year.
Repayment of indebtedness and leases used cash of 9.3 million and 14.5 million in the three
months ended March 31, 2010 and 2009, respectively. The three months ended March 31, 2010 also
included government grants for our Celgar Energy Project, which provided cash of 9.4 million.
FORM 10-Q
QUARTERLY REPORT PAGE 31
Capital Resources
Other than commitments totaling approximately 18.6 million relating to the Celgar Energy Project
to be completed in 2010, we have no material commitments to acquire assets or operating businesses.
We expect the remaining costs to complete the Celgar Energy Project to be funded from government
funding credits under the GTP.
Future Liquidity
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 pricing and
foreign exchange rates, we believe that cash flow from operations and available cash, together with
available borrowings will be adequate to meet our liquidity needs in the next 12 months.
Contractual Obligations and Commitments
There were no material changes outside the ordinary course to any of our contractual obligations
during the first quarter of 2010.
Foreign Currency
Our reporting currency is the Euro as the majority of our business transactions are denominated in
Euros. However, we hold certain assets and liabilities in U.S. dollars and Canadian dollars.
Accordingly, our consolidated financial results are subject to foreign currency exchange rate
fluctuations.
We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the
balance sheet date. Unrealized gains or losses from these translations are recorded in our
consolidated statement of comprehensive income and impact on shareholders equity on the balance
sheet but do not affect our net earnings.
In the three months ended March 31, 2010, accumulated other comprehensive income increased by 7.3
million to 31.0 million, primarily due to the foreign exchange translation.
Based upon the exchange rate at March 31, 2010, the U.S. dollar weakened by approximately 2.0% in
value against the Euro since March 31, 2009. See Quantitative and Qualitative Disclosures about
Market Risk.
Results of Operations of the Restricted Group under our Senior Note Indenture
The indenture governing our Senior Notes requires that we also provide a discussion in annual and
quarterly reports we file with the SEC under Managements Discussion and Analysis of Financial
Condition and Results of Operations of the results of operations and financial condition of Mercer
Inc. and our restricted subsidiaries under the indenture, referred to as the Restricted Group.
The Restricted Group is comprised of Mercer Inc., our Rosenthal and Celgar mills and certain
holding subsidiaries. The Restricted Group excludes our Stendal mill.
FORM 10-Q
QUARTERLY REPORT PAGE 32
The following is a discussion of the results of operations and financial condition of the
Restricted Group. For further information regarding the Restricted Group including, without
limitation, a
reconciliation to our consolidated results of operations, see Note 12 of our interim consolidated
financial statements included herein.
Restricted Group Results Three Months Ended March 31, 2010 Compared to Three Months Ended March
31, 2009
Pulp revenues for the Restricted Group for the three months ended March 31, 2010 increased by
approximately 41.9% to 106.4 million from 75.0 million in the comparative period of 2009,
primarily due to higher pulp prices. Revenues from the sale of excess energy decreased by
approximately 15.0% in the current quarter to 3.4 million from 4.0 million in the same period
last year, primarily due to the absence of a one-time grid access fee rebate received in 2009.
Pulp prices were higher in the first quarter of 2010 than in the same period last year due to
continued strengthening in global pulp markets. List prices for NBSK pulp in Europe were
approximately 621 ($860) per ADMT in the current quarter compared to approximately 449 ($585) per
ADMT in the first quarter of 2009.
Pulp sales volume of the Restricted Group increased to 207,431 ADMTs in the first quarter of 2010
from 193,791 ADMTs in the comparative period of 2009. In the first quarter of 2010, average pulp
sales realizations for the Restricted Group increased by approximately 32.6% to 513 per ADMT from
387 per ADMT in the same period last year.
Pulp production for the Restricted Group increased to 210,336 ADMTs in the first quarter of 2010
from 199,429 ADMTs in the same period of 2009, primarily as a result of increased mill reliability.
We have 12 days (approximately 17,000 tonnes) of scheduled maintenance downtime planned for our
Celgar mill in the second quarter of 2010.
Costs and expenses for the Restricted Group in the first quarter of 2010 increased to 93.7 million
from 84.4 million in the comparative period of 2009.
Pulp inventories for the Restricted Group increased to 18.0 million from 15.9 million at the end
of the prior quarter, primarily as a result of seasonal restocking at our Celgar mill and rising
fiber costs in Germany.
In the first quarter of 2010, operating depreciation and amortization for the Restricted Group
increased to 7.2 million from 6.7 million in the same period last year.
Overall, fiber costs of the Restricted Group in the first quarter of 2010 were largely unchanged
compared to the same period of 2009 due to increased German fiber prices being offset by lower
fiber costs at our Celgar mill.
In the first quarter of 2010, the Restricted Group reported operating income of 16.1 million
compared to an operating loss of 5.4 million in the first quarter of 2009, primarily due to higher
pulp revenues resulting from improved pulp prices.
Interest expense of 7.3 million for the Restricted Group in the first quarter of 2010 remained
relatively consistent with the same quarter last year, with lower debt levels being offset by
accretion expense related to the exchange of our convertible notes.
FORM 10-Q
QUARTERLY REPORT PAGE 33
In the first quarter of 2010, the Restricted Group recorded a loss on foreign currency denominated
debt of 5.2 million, compared to a loss of 4.4 million in the comparative quarter of 2009.
During the first quarter of 2010, in connection with the Exchange, the Restricted Group recorded a
loss of approximately 0.9 million on the extinguishment of the 2010 Convertible Notes.
The Restricted Group reported net income attributable to common shareholders for the first quarter
of 2010 of 3.7 million compared to a net loss attributable to common shareholders of 16.0 million
in the same period last year.
In the first quarter of 2010, the Restricted Group reported Operating EBITDA of 23.4 million
compared to Operating EBITDA of 1.4 million in the comparative quarter of 2009 and Operating
EBITDA of 7.8 million in the fourth quarter of 2009. Operating EBITDA is defined as operating
income (loss) plus depreciation and amortization and non-recurring capital asset impairment
charges. 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. See
the discussion of our results for the three months ended March 31, 2010 for additional information
relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net income (loss) attributable to common
shareholders to operating income (loss) and Operating EBITDA for the Restricted Group for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Restricted Group(1) |
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
|
3,671 |
|
|
|
(16,004 |
) |
Income taxes (benefits) |
|
|
161 |
|
|
|
(208 |
) |
Interest expense |
|
|
7,320 |
|
|
|
7,302 |
|
Investment (income) loss |
|
|
(1,239 |
) |
|
|
(916 |
) |
Foreign exchange (gain) loss on debt |
|
|
5,231 |
|
|
|
4,416 |
|
Loss on extinguishment of convertible notes |
|
|
929 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
16,073 |
|
|
|
(5,410 |
) |
Add: Depreciation and amortization |
|
|
7,310 |
|
|
|
6,770 |
|
|
|
|
|
|
|
|
Operating EBITDA(1) |
|
|
23,383 |
|
|
|
1,360 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 12 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results. |
FORM 10-Q
QUARTERLY REPORT PAGE 34
Liquidity and Capital Resources of the Restricted Group
The following table is a summary of selected financial information for the Restricted Group for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
As at |
|
|
As at |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Restricted Group Financial Position(1) |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
26,083 |
|
|
|
20,635 |
|
Working capital |
|
|
76,116 |
|
|
|
57,015 |
|
Property, plant and equipment |
|
|
375,279 |
|
|
|
362,311 |
|
Total assets |
|
|
596,293 |
|
|
|
555,977 |
|
Long-term liabilities |
|
|
320,706 |
|
|
|
301,173 |
|
Total equity |
|
|
211,742 |
|
|
|
200,247 |
|
|
|
|
(1) |
|
See Note 12 of the interim consolidated financial statements included elsewhere herein for a
reconciliation to our consolidated results. |
At March 31, 2010, the Restricted Group had cash and cash equivalents of approximately
26.1 million, compared to approximately 20.6 million at the end of 2009 and had working capital
of approximately 76.1 million compared to working capital of approximately 57.0 million at the
end of 2009. The increase in working capital was primarily due to the impact of higher sales
realizations on accounts receivable in 2010.
We currently expect the Restricted Group to meet its interest and debt service obligations and meet
the working and maintenance capital requirements for its operations for the next 12 months with
cash flow from operations, cash on hand and available borrowings.
Credit Ratings
Standard & Poors Rating Services (S&P) and Moodys Investors Service, Inc. (Moodys) base
their assessment of our credit risk on the business and financial profile of the Restricted Group
only. Factors that may affect our credit rating include changes in our operating performance and
liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing
costs and access to capital markets.
In 2009, we were subject to several rating actions by Moodys and S&P. In February 2009, S&P
lowered our credit rating to B- with negative implications, citing the pulp market environment and
potential liquidity issues. In June 2009, Moodys downgraded our Probability of Default Rating
(PDR) and Corporate Family Rating (CFR) to Caa1 from B2.
Certain corporate restructurings, including some exchange offers, can affect credit ratings. In
December 2009, immediately following the completion of the exchange offer for our 2010 Convertible Notes, S&P initially lowered the Restricted Groups credit rating to
SD. Subsequently, on December 15, 2009, S&P raised the Restricted Groups credit rating to CCC+
with a negative outlook, citing the reduction in debt maturing in 2010. In January 2010, S&P
confirmed the CCC+ rating but changed their outlook to positive, citing improved liquidity but
maintaining concern for pulp market volatility.
FORM 10-Q
QUARTERLY REPORT PAGE 35
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 disclosure. 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 increase, these judgments become even
more subjective and complex.
Our significant accounting policies are disclosed in Note 1 to our annual report on Form 10-K for
the fiscal year ended December 31, 2009. 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 the accounting for pensions and post-retirement
benefits, provisions for bad debt and doubtful accounts, derivative instruments, impairment of
long-lived assets, deferred taxes, inventory provisions and environmental conservation and legal
liabilities. Actual results could differ from these estimates.
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, 2009.
New Accounting Standards
See Note 1 to the Companys interim consolidated financial statements included in Item 1.
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. These statements appear in a number of different places
in this report and can be identified by words such as estimates, projects, expects,
intends, believes, plans, or their negatives or other comparable words. Also look for
discussions of strategy that involve risks and uncertainties. Forward-looking statements include
statements regarding:
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demand and prices for our products; |
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our level of indebtedness; |
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raw material costs and supply; |
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energy prices, sales and our initiatives to enhance sales of surplus energy; |
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foreign exchange rates particularly the U.S. dollar and Canadian dollar; and |
FORM 10-Q
QUARTERLY REPORT PAGE 36
You are cautioned that any such forward-looking statements are not guarantees and may involve risks
and uncertainties. Our actual results may differ materially from those in the forward-looking
statements due to risks facing us or due to actual facts differing from the assumptions underlying
our estimates. Some of these risks and assumptions include those set forth 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, 2009. 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 business is highly cyclical in nature and markets for our principal products are
characterized by periods of supply and demand imbalance, which in turn affects product prices. Pulp
markets are highly competitive and 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.
Industry capacity can fluctuate as changing industry conditions can influence producers to idle
production or permanently close machines or entire mills. In addition, to avoid substantial cash
costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even
a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our
products can also result from producers introducing new capacity in response to favorable pricing
trends.
Demand for pulp has historically been determined by the level of economic growth and has been
closely tied to overall business activity. From 2006 to mid-2008, pulp prices steadily improved.
However, in the latter half of 2008, a global economic crisis resulted in a sharp decline of pulp
prices from a high of $900 per ADMT to $635 per ADMT at the end of 2008. Beginning in the second
quarter of 2009 prices began to improve, rising from a low of $575 per ADMT in March 2009 to $890
per ADMT at the end of the current quarter. As the global economic situation continues to improve,
pulp prices will also likely continue to recover and experience further upward momentum.
Nonetheless, there may be renewed price deterioration in the future.
Prices for pulp 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 price for pulp, such pulp 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 could be materially adversely affected.
FORM 10-Q
QUARTERLY REPORT PAGE 37
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 and pulp logs. Fiber costs are primarily affected by the supply of, and demand for,
lumber which is highly cyclical in nature and can vary significantly by location. Production costs
also depend on the total volume of production. Lower operating rates and production efficiencies
during periods of cyclically low demand result in higher average production costs and lower
margins.
Currency
The majority of our sales are in products quoted in U.S. dollars while most of our operating costs
and expenses, other than those of the Celgar mill, are incurred in Euros. In addition, all of the
products sold by the Celgar mill are quoted in U.S. dollars and the Celgar mill costs are primarily
incurred in Canadian dollars. Our results of operations and financial condition are reported in
Euros. As a result, our revenues are adversely affected by a decrease in the value of the U.S.
dollar relative to the Euro and to the Canadian dollar. Such shifts in currencies 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. Conversely, an increase in the U.S. dollar versus the Euro and
the Canadian dollar positively impacts our revenues by increasing our operating margins and cash
flow.
FORM 10-Q
QUARTERLY REPORT PAGE 38
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 rate between the Euro and the U.S. dollar and the Canadian dollar versus
the U.S. dollar and the Euro. 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 use of derivatives. We use derivatives to reduce
or limit our exposure to interest rate and currency risks. We may in the future use derivatives to
reduce or limit our exposure to fluctuations in pulp prices. We also use derivatives to reduce our
potential losses or to augment our potential gains, depending on our managements perception of
future economic events and developments. These types of derivatives are generally highly
speculative in nature. They are also very volatile as they are highly leveraged given that margin
requirements are relatively low in proportion to notional amounts.
Many of our strategies, including the use of derivatives, and the types of derivatives selected by
us, are based on historical trading patterns and correlations and our managements expectations of
future events. However, these strategies may not be effective in all market environments or against
all types of risks. Unexpected market developments may affect our risk management strategies during
this time, and unanticipated developments could impact our risk management strategies in the
future. If any of the variety of instruments and strategies we utilize are not effective, we may
incur significant losses.
All of our derivatives are marked to market at the end of each reporting period, and all unrealized
gains and losses are recognized in earnings for a reporting period. We determine market valuations
based primarily upon observable inputs including applicable yield curves.
During the first three months of 2010, we recorded an unrealized loss of 6.5 million on our
outstanding interest rate derivatives compared to an unrealized loss of 15.0 million in the
comparative period of 2009.
We are also subject to some energy price risk, primarily for the electricity that our operations
purchase.
FORM 10-Q
QUARTERLY REPORT PAGE 39
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 (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 40
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our wholly owned subsidiary,
Zellstoff Celgar Limited (Celgar), reached an agreement with the City
of Castlegar British Columbia (the City), in regard to our previously disclosed dispute over the
Citys 2009 property tax rate bylaw. In accordance with such agreement, Celgar agreed to pay the
remaining balance of its 2009 taxes owing to the City, including penalties and interest, and in
return the City agreed to moderately reduce Celgars property taxes annually from 2010 to 2012,
with additional moderate reductions possible between 2013 and 2015.
We are subject to routine litigation incidental to our business, including those described in our
latest annual report on Form 10-K for the fiscal year ended December 31, 2009. We do not believe
that the outcome of such litigation will have a material adverse effect on our business or
financial condition.
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our latest
annual report on Form 10-K for the fiscal year ended December 31, 2009.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit |
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No. |
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Description |
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31.1 |
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Section 302 Certification of Chief Executive Officer |
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31.2 |
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Section 302 Certification of Chief Financial Officer |
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32.1 |
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Section 906 Certification of Chief Executive Officer |
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32.2 |
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Section 906 Certification of Chief Financial Officer |
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In accordance with Release 33-8212 of the Commission, these Certifications: (i) are
furnished to the Commission 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 Companys 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 41
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
David M. Gandossi
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Secretary and Chief Financial Officer |
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Date: May 4, 2010
FORM 10-Q
QUARTERLY REPORT PAGE 42