MERCER INTERNATIONAL INC. - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No.: 000-51826

 

 

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Washington		47-0956945
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Suite 1120, 700 West Pender Street,

Vancouver, British Columbia, Canada, V6C 1G8

(Address of office)

(604) 684-1099

(Registrant’s 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  ☒    NO  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer		☒		Accelerated Filer		☐
Non-Accelerated Filer		☐		Smaller Reporting Company		☐
				Emerging Growth Company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $1.00 per share		MERC		NASDAQ Global Select Market

The Registrant had 65,651,056 shares of common stock outstanding as at May 1, 2019.    

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

FORM 10-Q

QUARTERLY REPORT - PAGE 2

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands of U.S. dollars, except per share data)

 

		Three Months Ended March 31,
		2019				2018
Revenues		$	483,950			$	367,903
Costs and expenses
Cost of sales, excluding depreciation and amortization			343,033				254,285
Cost of sales depreciation and amortization			30,136				23,209
Selling, general and administrative expenses			17,229				14,361
Operating income			93,552				76,048
Other income (expenses)
Interest expense			(18,551	)			(12,115	)
Loss on settlement of debt (Note 5(a))			—				(21,515	)
Legal cost award			—				(6,951	)
Other income (expenses)			1,039				(237	)
Total other expenses, net			(17,512	)			(40,818	)
Income before provision for income taxes			76,040				35,230
Provision for income taxes			(24,424	)			(9,581	)
Net income		$	51,616			$	25,649
Net income per common share
Basic		$	0.79			$	0.39
Diluted		$	0.78			$	0.39
Dividends declared per common share		$	0.125			$	0.125

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of U.S. dollars)

 

		Three Months Ended March 31,
		2019				2018
Net income		$	51,616			$	25,649
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustment			(3,851	)			16,285
Change in unrecognized losses and prior service costs related to defined benefit pension plans, net of taxes of $6 (2018 - $nil)			60				(154	)
Change in unrealized gains/losses on marketable securities, net of taxes of $nil in all periods			(21	)			1
Other comprehensive income (loss), net of taxes			(3,812	)			16,132
Total comprehensive income		$	47,804			$	41,781

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 BALANCE SHEETS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

		March 31,				December 31,
		2019				2018
ASSETS
Current assets
Cash and cash equivalents		$	233,234			$	240,491
Accounts receivable			308,573				252,692
Inventories			282,308				303,813
Prepaid expenses and other			19,636				13,703
Total current assets			843,751				810,699
Property, plant and equipment, net			1,021,957				1,029,257
Investment in joint ventures			56,049				62,574
Intangible assets, net			55,721				53,927
Operating lease right-of-use assets			14,581				—
Other long-term assets			19,985				17,904
Deferred income tax			1,351				1,374
Total assets		$	2,013,395			$	1,975,735
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and other		$	211,377			$	194,484
Pension and other post-retirement benefit obligations			879				904
Total current liabilities			212,256				195,388
Debt			1,007,774				1,041,389
Pension and other post-retirement benefit obligations			26,052				25,829
Finance lease liabilities			23,604				24,669
Operating lease liabilities			12,145				—
Other long-term liabilities			14,118				13,924
Deferred income tax			96,764				93,107
Total liabilities			1,392,713				1,394,306
Shareholders’ equity
Common shares $1 par value; 200,000,000 authorized; 65,651,000 issued and outstanding (2018 – 65,202,000)			65,620				65,171
Additional paid-in capital			341,644				342,438
Retained earnings			345,400				301,990
Accumulated other comprehensive loss			(131,982	)			(128,170	)
Total shareholders’ equity			620,682				581,429
Total liabilities and shareholders’ equity		$	2,013,395			$	1,975,735
Commitments and contingencies (Note 14)
Subsequent events (Note 8)

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 CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands of U.S. dollars)

 

		Common Shares
		Number (thousands of shares)				Amount, at Par Value				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Equity
Balance December 31, 2018			65,202			$	65,171			$	342,438			$	301,990			$	(128,170	)		$	581,429
Shares issued on grants of performance share units			449				449				(449	)			—				—				—
Stock compensation expense (recovery)			—				—				(345	)			—				—				(345	)
Net income			—				—				—				51,616				—				51,616
Dividends declared			—				—				—				(8,206	)			—				(8,206	)
Other comprehensive loss			—				—				—				—				(3,812	)			(3,812	)
Balance March 31, 2019			65,651			$	65,620			$	341,644			$	345,400			$	(131,982	)		$	620,682
Balance December 31, 2017			65,017			$	64,974			$	338,695			$	205,998			$	(59,001	)		$	550,666
Shares issued on grants of performance share units			153				153				(153	)			—				—				—
Stock compensation expense (recovery)			—				—				193				—				—				193
Net income			—				—				—				25,649				—				25,649
Dividends declared			—				—				—				(8,146	)			—				(8,146	)
Other comprehensive income			—				—				—				—				16,132				16,132
Balance March 31, 2018			65,170			$	65,127			$	338,735			$	223,501			$	(42,869	)		$	584,494

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 U.S. dollars)

 

		Three Months Ended March 31,
		2019				2018
Cash flows from (used in) operating activities
Net income		$	51,616			$	25,649
Adjustments to reconcile net income to cash flows from operating activities
Depreciation and amortization			30,247				23,319
Deferred income tax provision			3,639				4,812
Loss on settlement of debt			—				21,515
Defined benefit pension plans and other post-retirement benefit plan expense			856				439
Stock compensation expense (recovery)			(345	)			193
Other			441				820
Defined benefit pension plans and other post-retirement benefit plan contributions			(1,158	)			(45	)
Changes in working capital
Accounts receivable			(56,353	)			(5,132	)
Inventories			21,141				(6,822	)
Accounts payable and accrued expenses			(173	)			18,027
Other			(7,725	)			(6,398	)
Net cash from (used in) operating activities			42,186				76,377
Cash flows from (used in) investing activities
Purchase of property, plant and equipment			(19,389	)			(16,184	)
Purchase of intangible assets			(316	)			(167	)
Other			(261	)			—
Net cash from (used in) investing activities			(19,966	)			(16,351	)
Cash flows from (used in) financing activities
Redemption of senior notes			—				(317,439	)
Proceeds from (repayment of) revolving credit facilities, net			(33,672	)			20,071
Dividend payments			—				(8,127	)
Payment of debt issuance costs			(509	)			(1,390	)
Proceeds from government grants			6,320				—
Other			(862	)			(848	)
Net cash from (used in) financing activities			(28,723	)			(307,733	)
Effect of exchange rate changes on cash and cash equivalents			(754	)			535
Net decrease in cash and cash equivalents			(7,257	)			(247,172	)
Cash and cash equivalents, beginning of period			240,491				460,738
Cash and cash equivalents, end of period		$	233,234			$	213,566
Supplemental cash flow disclosure
Cash paid for interest		$	16,983			$	11,272
Cash paid for income taxes		$	23,613			$	1,478

The accompanying notes are an integral part of these interim consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 6

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

Note 1. The Company and Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The Interim Consolidated Financial Statements contained herein include the accounts of Mercer International Inc. (“Mercer Inc.”) and all of its subsidiaries (collectively the “Company”). The Company’s shares of common stock are quoted and listed for trading on the NASDAQ Global Market.

The Interim Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States (“GAAP”). The unaudited Interim Consolidated Financial Statements should be read together with the audited Consolidated Financial Statements and accompanying notes included in the Company’s latest Annual Report on Form 10-K for the fiscal year ended December 31, 2018. In the opinion of the Company, the unaudited Interim Consolidated Financial Statements contained herein contain all adjustments necessary for a fair statement of the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.

In these Interim Consolidated Financial Statements, unless otherwise indicated, all amounts are expressed in United States dollars (“U.S. dollars” or “$”). The symbol “€” refers to euros and the symbol “C$” refers to Canadian dollars.

Use of Estimates

Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

New Accounting Pronouncements

Accounting Pronouncements Implemented

In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) 2016-02, Leases, which requires lessees to recognize virtually all leases on the balance sheet, by recording a right-of-use asset and corresponding liability. Additionally, the update also requires additional disclosures in regards to the nature, timing and uncertainty of cash flows arising from leases. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Leases: Targeted Improvements. These updates are effective for financial statements issued for fiscal years beginning after December 15, 2018. The Company adopted these updates on January 1, 2019 using the modified retrospective method and used the effective date as the date of initial application. Consequently, financial information will not be updated before January 1, 2019. The new standard provides a number of optional practical expedients in transition and the Company elected to use all of them on adoption.

Adoption of the standard resulted in recognition of right-of-use assets and lease liabilities for operating leases of $14,581 as at March 31, 2019. The standard did not impact the Interim Consolidated Statements of Operations or the Interim Consolidated Statements of Cash Flows. The Company’s lease disclosure has been included in the Lease Commitments Note.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 7

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 2. Acquisition of Mercer Peace River (“MPR”)

On December 10, 2018, the Company acquired all of the issued and outstanding shares of MPR for cash consideration of $344,588, subject to certain customary working capital adjustments. The acquisition results in 100% ownership of a bleached kraft pulp mill in Peace River, Alberta, a 50% joint venture interest in the Cariboo Pulp and Paper Company (“CPP”), an NBSK pulp mill, in Quesnel, British Columbia, and a 50% interest in a logging and chipping operation for the areas underlying MPR’s forest management agreements and timber allocations. The acquisition of MPR expands the Company’s presence in Asia and adds northern bleached hardwood kraft to its product mix.

The following summarizes the Company’s allocation of the preliminary purchase price to the fair value of the assets acquired and liabilities assumed from MPR at the acquisition date:

 

		Purchase Price Allocation
Current assets		$	135,305
Property, plant and equipment			212,894
Investment in joint ventures			54,697
Amortizable intangible assets, timber cutting rights (a)			37,634
Other long-term assets			392
Total assets acquired			440,922
Current liabilities			35,578
Pension obligations			9,747
Deferred income tax			47,912
Other long-term liabilities			3,097
Total liabilities assumed			96,334
Net assets acquired		$	344,588

 

(a)	The timber cutting rights are being amortized on a straight line basis over 30 years. The fair value of the timber cutting rights was determined through the market approach utilizing comparable market data. The values were then discounted at a rate of 12% for 30 years to arrive at the fair value.

The purchase price allocation was based on a preliminary valuation and may be revised as a result of additional information obtained regarding the assets acquired and liabilities assumed, and revisions of provisional estimates of fair value, including, but not limited to, the completion of valuations related to property, plant and equipment and the identification of intangible assets. During the three month period ended March 31, 2019 immaterial adjustments were made to the purchase price allocation to reflect the most current valuations of the assets. The purchase price will be finalized during the 12-month measurement period following the acquisition date.

Note 3. Inventories

 

		March 31, 2019				December 31, 2018
Raw materials		$	89,126			$	103,983
Finished goods			103,370				114,304
Spare parts and other			89,812				85,526
		$	282,308			$	303,813

 

FORM 10-Q

QUARTERLY REPORT - PAGE 8

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 4. Accounts Payable and Other

 

		March 31,				December 31,
		2019				2018
Trade payables		$	39,579			$	36,333
Accrued expenses			106,103				95,936
Interest payable			17,170				16,861
Income tax payable			28,799				29,818
Legal cost award payable			—				6,951
Dividends payable			8,206				—
Other			11,520				8,585
		$	211,377			$	194,484

Note 5. Debt

 

		March 31,				December 31,
		2019				2018
2022 Senior Notes, principal amount, $100,000 (a)		$	98,987			$	98,918
2024 Senior Notes, principal amount, $250,000 (a)			246,344				246,154
2025 Senior Notes, principal amount, $350,000 (a)			342,969				342,761
2026 Senior Notes, principal amount, $300,000 (a)			294,779				294,588
Credit arrangements
€200 million joint revolving credit facility (b)			—				58,968
C$60 million revolving credit facility (c)			24,695
C$40 million revolving credit facility (d)			—				—
€2.6 million demand loan (e)			—				—
		$	1,007,774			$	1,041,389

As at March 31, 2019, the maturities of the principal portion of debt were as follows:

 

2019				$	—
2020					—
2021					—
2022					100,000
2023					—
Thereafter					924,695
				$	1,024,695

 

FORM 10-Q

QUARTERLY REPORT - PAGE 9

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 5. Debt (continued)

 

Certain of the Company’s debt instruments were issued under agreements which, among other things, may limit the ability to make certain payments, including dividends. These limitations are subject to specific exceptions. As at March 31, 2019, the Company was in compliance with the terms of its debt agreements.

 

(a)

In 2018, the Company issued $350,000 in aggregate principal amount of 7.375% senior notes which mature on January 15, 2025 (“2025 Senior Notes”). The 2025 Senior Notes were issued at a price of 100% of their principal amount. The net proceeds of the offerings were $342,682 after deducting the underwriter’s discount and offering expenses. The net proceeds, together with cash on hand, were used to finance the acquisition of MPR.

In 2017, the Company issued $300,000 in aggregate principal amount of 5.50% senior notes which mature on January 15, 2026 (“2026 Senior Notes”). The 2026 Senior Notes were issued at a price of 100% of their principal amount. The net proceeds of the offering were $293,795, after deducting the underwriter’s discount and offering expenses.

In 2018, the Company used the net proceeds of the 2026 Senior Notes, together with cash on hand, to purchase $300,000 in aggregate principal amount of 2022 Senior Notes (herein defined below). In connection with this redemption the Company recorded a loss on settlement of debt of $21,515 in the Interim Consolidated Statement of Operations.

In 2017, the Company issued $250,000 in aggregate principal amount of 6.50% senior notes which mature on February 1, 2024 (“2024 Senior Notes”). The 2024 Senior Notes were issued at a price of 100% of their principal amount. The net proceeds of the offerings were $244,711, after deducting the underwriter’s discount and offering expenses. The net proceeds, together with cash on hand, were used to redeem $227,000 of remaining aggregate principal amount of outstanding senior notes due 2019, to finance the acquisition of the Friesau sawmill and for general working capital purposes.

In 2014, the Company issued $400,000 in aggregate principal amount of 7.75% senior notes which mature on December 1, 2022 (“2022 Senior Notes” and collectively with the 2024 Senior Notes, 2025 Senior Notes and 2026 Senior Notes, the “Senior Notes”).

The Senior Notes are general unsecured senior obligations of the Company. They rank equal in right of payment with all existing and future unsecured senior indebtedness of the Company and are senior in right of payment to any current or future subordinated indebtedness of the Company. The Senior Notes are effectively junior in right of payment to all existing and future secured indebtedness, to the extent of the assets securing such indebtedness, and all indebtedness and liabilities of the Company’s subsidiaries.

The Company may redeem all or a part of the 2025 Senior Notes or 2026 Senior Notes, upon not less than 10 days’ or more than 60 days’ notice and the Company may redeem all or a part of the 2024 Senior Notes or 2022 Senior Notes, upon not less than 30 days’ or more than 60 days’ notice at the redemption price plus accrued and unpaid interest to (but not including) the applicable redemption date.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 10

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 5. Debt (continued)

 

The following table presents the redemption prices (expressed as percentages of principal amount) and the redemption periods:

 

2022 Senior Notes						2024 Senior Notes						2025 Senior Notes						2026 Senior Notes
12 Month Period Beginning		Percentage				12 Month Period Beginning		Percentage				12 Month Period Beginning		Percentage				12 Month Period Beginning		Percentage
December 1, 2018			103.875	%		February 1, 2020			103.250	%		January 15, 2021			103.688	%		January 15, 2021			102.750	%
December 1, 2019			101.938	%		February 1, 2021			101.625	%		January 15, 2022			101.844	%		January 15, 2022			101.375	%
December 1, 2020 and thereafter			100.000	%		February 1, 2022 and thereafter			100.000	%		January 15, 2023 and thereafter			100.000	%		January 15, 2023 and thereafter			100.000	%

 

(b)

A €200.0 million joint revolving credit facility with all of the Company’s German mills that matures in December 2023. Borrowings under the facility are unsecured and bear interest at Euribor plus a variable margin ranging from 1.05% to 2.00% dependent on conditions including but not limited to a prescribed leverage ratio. As at March 31, 2019, approximately €11.6 million ($13,057) of this facility was supporting bank guarantees leaving approximately €188.4 million ($211,643) available.

 

(c)

In 2019, MPR entered into a C$60.0 million revolving credit facility that matures in February 2024. The facility is available by way of: (i) Canadian denominated advances, which bear interest at a designated prime rate per annum; (ii) banker’s acceptance equivalent loans, which bear interest at the applicable Canadian dollar banker’s acceptance plus 1.25% to 1.50% per annum; (iii) dollar denominated base rate advances at the greater of the federal funds rate plus 0.50%, a designated LIBOR rate plus 1.00% and the bank’s applicable reference rate for U.S. dollar loans; and (iv) dollar LIBOR advances, which bear interest at LIBOR plus 1.25% to 1.50% per annum. The facility is secured by, among other things, the mill’s inventories and receivables. As at March 31, 2019, approximately C$33.0 million ($24,695) of this facility was drawn and accruing interest at a rate of 3.23% and approximately C$0.9 million ($657) was supporting letters of credit leaving approximately C$26.1 million ($19,548) available.

 

(d)

A C$40.0 million revolving credit facility at the Celgar mill that matures in July 2023. Borrowings under the facility are collateralized by the mill’s inventory, accounts receivable, general intangibles and capital assets and are restricted by a borrowing base calculated on the mill’s inventory and accounts receivable. When the borrowing capacity is less than 25% of the total facility the Canadian dollar denominated amounts bear interest at bankers acceptance plus 1.50% or Canadian prime and the U.S. dollar denominated amounts bear interest at LIBOR plus 1.50% or U.S. base. When the borrowing capacity is greater than or equal to 25% of the total facility, the respective bankers acceptance or LIBOR margins are reduced by 0.25% and the Canadian Prime or U.S. base margins are reduced by 0.125%. As at March 31, 2019, approximately C$1.7 million ($1,271) was supporting letters of credit leaving approximately C$38.3 million ($28,662) available.

 

(e)

A €2.6 million demand loan at the Rosenthal mill that does not have a maturity date. Borrowings under this facility are unsecured and bear interest at the rate of the three-month Euribor plus 2.50%. As at March 31, 2019, approximately €2.6 million ($2,867) of this facility was supporting bank guarantees leaving approximately $nil available.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 11

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 6. Pension and Other Post-Retirement Benefit Obligations

Defined Benefit Plans

Included in pension and other post-retirement benefit obligations are amounts related to Celgar and from the date of acquisition MPR.

Pension benefits are based on employees’ earnings and years of service. The defined benefit plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. The components of the net benefit costs for the three month periods ended March 31, 2019 and 2018 were as follows:

 

		Three Months Ended March 31,
		2019								2018
		Pension				Other Post- Retirement Benefits				Pension				Other Post- Retirement Benefits
Service cost		$	716			$	68			$	26			$	120
Interest cost			877				137				323				182
Expected return on plan assets			(1,002	)			—				(393	)			—
Amortization of unrecognized items			215				(155	)			234				(53	)
Net benefit costs		$	806			$	50			$	190			$	249

Defined Contribution Plans

Effective December 31, 2008, the defined benefit plans at the Celgar mill were closed to new members. In addition, the related defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. MPR also has defined contribution plans available to most of its employees. During the three month period ended March 31, 2019, the Company made contributions of $448 (2018 – $218).

Multiemployer Plan

The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. Contributions during the three month period ended March 31, 2019 totaled $323 (2018 – $487).

 

FORM 10-Q

QUARTERLY REPORT - PAGE 12

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 7. Income Taxes

Differences between the U.S. Federal statutory and the Company’s effective rates for the three months ended March 31, 2019 and 2018, were as follows:

 

		Three Months Ended March 31,
		2019				2018
U.S. Federal statutory rate			21%				21%
U.S. Federal statutory rate on income before provision for income taxes		$	(15,968	)		$	(7,398	)
Tax differential on foreign income			(5,916	)			(4,589	)
Effect of foreign earnings(1)			(11,887	)			(2,717	)
Valuation allowance			8,341				18,245
Adjustment to uncertain tax position			—				(16,677	)
Tax benefit of partnership structure			958				897
Non-taxable foreign subsidies			368				756
True-up of prior year taxes			1,275				2,610
Other			(1,595	)			(708	)
		$	(24,424	)		$	(9,581	)
Comprised of:
Current income tax provision		$	(20,785	)		$	(4,769	)
Deferred income tax provision			(3,639	)			(4,812	)
		$	(24,424	)		$	(9,581	)

 

(1)	Includes the impact of the global intangible low-taxed income provision in the Tax Cuts and Jobs Act of 2017.

Note 8. Shareholders’ Equity

Dividends

In February 2019, the Company’s board of directors declared a quarterly dividend of $0.125 per common share. Payment of the dividend was made on April 3, 2019 to all shareholders of record on March 27, 2019.

In May 2019, the Company’s board of directors declared a quarterly dividend of $0.1375 per common share. Payment of the dividend will be made on July 3, 2019 to all shareholders of record on June 24, 2019. Future dividends are subject to approval by the board of directors and may be adjusted as business and industry conditions warrant.

Common Stock Repurchase Program

In May 2019, the Company’s board of directors authorized a common stock repurchase program under which the Company may repurchase up to $50,000 of its shares over the next 12 months.

Stock Based Compensation

The Company has a stock incentive plan which provides for options, restricted stock rights, restricted shares, performance shares, performance share units (“PSUs”) and stock appreciation rights to be awarded to employees, consultants and non-employee directors. During the three month period ended March 31, 2019, there were no issued and outstanding options, restricted stock rights, performance shares or stock appreciation rights. As at March 31, 2019, after factoring in all allocated shares, there remain approximately 2.6 million common shares available for grant.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 13

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 8. Shareholders’ Equity (continued)

 

PSUs

PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally three years. For the three month period ended March 31, 2019, the Company recognized a recovery of $475 related to PSUs (2018 expense – $64).

The following table summarizes PSU activity during the period:

 

				Number of PSUs
Outstanding as at January 1, 2019					2,036,008
Granted					641,206
Vested and issued					(449,395	)
Forfeited					(462,843	)
Outstanding as at March 31, 2019					1,764,976

Restricted Shares

Restricted shares generally vest at the end of one year. Expense recognized for the three month period ended March 31, 2019 was $130 (2018 – $129). As at March 31, 2019, the total remaining unrecognized compensation cost related to restricted shares amounted to approximately $87 which will be amortized over the remaining vesting periods.

Note 9. Net Income Per Common Share

 

		Three Months Ended March 31,
		2019				2018
Net income
Basic and diluted		$	51,616			$	25,649
Net income per common share
Basic		$	0.79			$	0.39
Diluted		$	0.78			$	0.39
Weighted average number of common shares outstanding:
Basic(1)			65,400,222				65,050,275
Effect of dilutive shares:
PSUs			490,814				492,031
Restricted shares			20,102				32,515
Diluted			65,911,138				65,574,821

 

(1)	For the three month period ended March 31, 2019, the basic weighted average number of common shares outstanding excludes 31,130 restricted shares which have been issued, but have not vested as at March 31, 2019 (2018 – 43,635 restricted shares).

The calculation of diluted net income per common share does not assume the exercise of any instruments that would have an anti-dilutive effect on net income per common share. There were no anti-dilutive instruments for the three month periods ended March 31, 2019 and 2018.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 14

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 10. Accumulated Other Comprehensive Loss

The change in the accumulated other comprehensive loss by component (net of tax) was as follows:

 

		Foreign Currency Translation Adjustment				Defined Benefit Pension and Other Post- Retirement Benefit Items				Unrealized Gains / Losses on Marketable Securities				Total
Balance as at January 1, 2019		$	(127,003	)		$	(1,170	)		$	3			$	(128,170	)
Other comprehensive loss before reclassifications			(3,851	)			—				(21	)			(3,872	)
Amounts reclassified from accumulated other comprehensive loss			—				60				—				60
Other comprehensive income (loss)			(3,851	)			60				(21	)			(3,812	)
Balance as at March 31, 2019		$	(130,854	)		$	(1,110	)		$	(18	)		$	(131,982	)

Note 11. Business Segment Information

The Company is managed based on the primary products it manufactures: pulp and wood products. Accordingly, the Company’s four pulp mills and its 50% interest in the CPP mill are aggregated into the pulp business segment, and the Friesau sawmill is a separate reportable business segment, wood products. The Company’s sandalwood business is included in Corporate and Other as it does not meet the criteria to be reported as a separate segment.

None of the income or loss items following operating income in the Company’s Interim Consolidated Statement of Operations are allocated to the segments, as those items are reviewed separately by management.

Information about certain segment data for the three month periods ended March 31, 2019 and 2018, was as follows:

 

Three Months Ended March 31, 2019		Pulp				Wood Products				Corporate and Other				Consolidated
Revenues from external customers		$	436,474			$	44,439			$	3,037			$	483,950
Operating income (loss)		$	93,520			$	1,620			$	(1,588	)		$	93,552
Depreciation and amortization		$	28,023			$	1,911			$	313			$	30,247
Total assets(1)		$	1,782,453			$	81,397			$	149,545			$	2,013,395
Revenues by major products
Pulp		$	413,313			$	—			$	—			$	413,313
Lumber			—				39,163				—				39,163
Energy and chemicals			23,161				2,666				3,037				28,864
Wood residuals			—				2,610				—				2,610
Total revenues		$	436,474			$	44,439			$	3,037			$	483,950
Revenues by geographical markets
U.S.		$	54,568			$	13,292			$	—			$	67,860
Germany			132,189				14,916				—				147,105
China			115,319				—				—				115,319
Other countries			134,398				16,231				3,037				153,666
Total revenues		$	436,474			$	44,439			$	3,037			$	483,950

 

(1)	Total assets for the pulp segment includes the Company’s $56,049 investment in joint ventures, primarily for the CPP mill.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 15

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 11. Business Segment Information (continued)

 

 

Three Months Ended March 31, 2018		Pulp				Wood Products				Corporate and Other				Consolidated
Revenues from external customers		$	314,235			$	53,668			$	—			$	367,903
Operating income (loss)		$	74,054			$	2,982			$	(988	)		$	76,048
Depreciation and amortization		$	21,523			$	1,686			$	110			$	23,319
Revenues by major products
Pulp		$	290,551			$	—			$	—			$	290,551
Lumber			—				48,168				—				48,168
Energy and chemicals			23,684				2,781				—				26,465
Wood residuals			—				2,719				—				2,719
Total revenues		$	314,235			$	53,668			$	—			$	367,903
Revenues by geographical markets
U.S.		$	5,650			$	16,405			$	—			$	22,055
Germany			124,738				21,766				—				146,504
China			84,481				—				—				84,481
Other countries			99,366				15,497				—				114,863
Total revenues		$	314,235			$	53,668			$	—			$	367,903

As at December 31, 2018, the Company had total assets of $1,698,071 in the pulp segment, $131,754 in the wood products segment and $145,910 in corporate and other.

Revenues between segments are accounted for at prices that approximate fair value. These include revenues from the sale of residual fiber from the wood products segment to the pulp segment for use in the pulp production process and from the sale of residual fuel from the pulp segment to the wood products segment for use in energy production. For the three month period ended March 31, 2019, the pulp segment sold $256 of residual fuel to the wood products segment (2018 – $354) and the wood products segment sold $5,407 of residual fiber to the pulp segment (2018 – $4,949).

The Company purchases and sells pulp produced by the 50% owned CPP mill. The pulp purchases are transacted at the CPP mill’s cost. For the three month period ended March 31, 2019, the Company purchased $24,633 of pulp (2018—$nil) and as at March 31, 2019 had a balance owing to the CPP mill of $2,653 (December 31, 2018—$1,347). The Company also purchases fiber from its 50% owned logging operation. For the three month period ended March 31, 2019, the Company purchased $5,794 of fiber (2018—$nil) and as at March 31, 2019 had a balance owing to the logging operation of $2,884 (December 31, 2018—$2,343).

Note 12. Financial Instruments and Fair Value Measurement

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and other approximates their fair value.

The carrying value of the revolving credit facilities classified as Level 2 approximates their fair value as the variable interest rates reflect current interest rates for financial instruments with similar characteristics and maturities. The fair value of the Senior Notes classified as Level 2 was determined using quoted prices in a dealer market, or using recent market transactions.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 16

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 12. Financial Instruments and Fair Value Measurement (continued)

 

The following tables present a summary of the Company’s outstanding financial instruments and their estimated fair values under the fair value hierarchy:

 

		Fair value measurements as at March 31, 2019 using:
Description		Level 1				Level 2				Level 3				Total
Revolving credit facility		$	—			$	24,695			$	—			$	24,695
Senior notes			—				1,021,125				—				1,021,125
		$	—			$	1,045,820			$	—			$	1,045,820
		Fair value measurements as at December 31, 2018 using:
Description		Level 1				Level 2				Level 3				Total
Revolving credit facility		$	—			$	58,968			$	—			$	58,968
Senior notes			—				965,000				—				965,000
		$	—			$	1,023,968			$	—			$	1,023,968

Credit Risk

The Company’s credit risk is primarily attributable to cash held in bank accounts and accounts receivable. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company’s credit risk associated with the sale of pulp, lumber and other wood residuals is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping the product. Concentrations of credit risk on the sale of pulp, lumber and other wood residuals are with customers and agents based primarily in Germany, China and Italy.

The carrying amount of cash and cash equivalents of $233,234 and accounts receivable of $308,573 recorded in the Interim Consolidated Balance Sheet, net of any allowances for losses, represents the Company’s maximum exposure to credit risk.

Note 13. Lease Commitments

The Company has finance leases primarily for rail cars and production equipment. The rail cars primarily have a remaining lease term of nine years with annual renewal options thereafter. The production equipment has a remaining lease term of eight years. The Company has operating leases primarily for land to support the sandalwood tree plantations and for offices. The land leases have remaining terms of six to 13 years with options to renew for up to six years. The office leases have remaining terms of four to eight years with options to renew primarily for an additional five years. A majority of the operating leases are subject to annual changes to the Consumer Price Index (“CPI”). Changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. A 100-basis-point increase in CPI would not have a material impact on lease costs.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 17

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 13. Lease Commitments (continued)

 

The components of lease expense were as follows:

 

		Three Months Ended March 31,
		2019				2018
Lease cost:
Operating lease cost		$	932			$	850
Finance lease cost:
Amortization of right-of-use assets			881				853
Interest on lease liabilities			366				234
Total lease cost		$	2,179			$	1,937

Supplemental cash flow information related to leases were as follows:

 

		Three Months Ended March 31,
		2019				2018
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	932			$	850
Operating cash flows from finance leases		$	366			$	234
Financing cash flows from finance leases		$	862			$	848

Other information related to leases is as follows:

 

		Three Months Ended March 31,
		2019				2018
Weighted average remaining lease term:
Operating leases			7 years				5 years
Finance leases			9 years				10 years
Weighted average discount rate:
Operating leases			6	%
Finance leases			5	%			5	%

The discount rates used to calculate the present value of the minimum lease payments is the incremental borrowing rate that the subsidiary entering into the lease would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 18

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 13. Lease Commitments (continued)

 

Supplemental balance sheet information related to leases were as follows:

 

		March 31, 2019				December 31, 2018
Operating Leases
Operating lease right-of-use assets		$	14,581
Other current liabilities		$	2,436
Operating lease liabilities			12,145
Total operating lease liabilities		$	14,581
Finance Leases
Property and equipment, gross		$	43,625			$	44,756
Accumulated depreciation			(16,223	)			(15,963	)
Property and equipment, net		$	27,402			$	28,793
Other current liabilities		$	4,597			$	4,911
Finance lease liabilities			23,604				24,669
Total finance lease liabilities		$	28,201			$	29,580

As at March 31, 2019, maturities of lease liabilities were as follows:

 

		Finance Leases				Operating Leases
2019		$	4,943			$	2,683
2020			3,512				3,197
2021			3,383				2,919
2022			3,216				2,734
2023			3,346				2,054
Thereafter			16,707				4,777
Total lease payments			35,107				18,364
Less: imputed interest			(6,906	)			(3,783	)
Total lease liability		$	28,201			$	14,581

As at March 31, 2019, the Company has additional finance leases for rail cars that have not yet commenced. The leases have a term of 12 years with annual renewal options thereafter. The total payments over the term of the leases will be approximately $19,600. The leases will commence in 2019.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 19

MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 14. Commitments and Contingencies

 

(a)

The Company is involved in legal actions and claims arising in the ordinary course of business. While the outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claims which are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

 

(b)

The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout older facilities. The Company’s obligation for the proper removal and disposal of asbestos products from the Company’s mills is a conditional asset retirement obligation. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 20

NON-GAAP FINANCIAL MEASURES

This quarterly report on Form 10-Q contains “non-GAAP financial measures”, that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with the generally accepted accounting principles in the United States, referred to as “GAAP”. Specifically, we make use of the non-GAAP measure “Operating EBITDA”.

Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. We use Operating EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs, and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, or as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA is an internal measure and therefore may not be comparable to other companies.

Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (v) the impact of non-recurring impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 21

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of March 31, 2019, unless otherwise stated; (iv) our reporting currency is dollars and references to “€” mean euros and “C$” mean Canadian dollars; (v) “ADMTs” refers to air-dried metric tonnes; (vi) “NBSK” refers to northern bleached softwood kraft; (vii) “NBHK” refers to northern bleached hardwood kraft; (viii) “MW” refers to megawatts and “MWh” refers to megawatt hours; (ix) “Mfbm” refers to thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (x) our lumber metrics are converted from cubic meters to Mfbm using a conversion ratio of 1.6 cubic meters to one Mfbm, which is the ratio commonly used in the industry.

Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figure.

The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2019 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, 2018 filed with the Securities and Exchange Commission, referred to as the “SEC”.

Results of Operations

General

We have two reportable operating segments:

 

•

Pulp – consists of the manufacture, sale and distribution of pulp, electricity and other by-products at our pulp mills.

 

•

Wood Products – consists of the manufacture, sale and distribution of lumber, electricity and other wood residuals at the Friesau sawmill.

Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.

On December 10, 2018 we acquired Mercer Peace River Pulp Ltd. (“MPR”) which operates the Peace River mill in Alberta and has a 50% joint venture interest in the Cariboo mill in British Columbia. The Peace River mill is a swing mill that produces both NBSK and NBHK.

Current Market Environment

In the first quarter of 2019, pulp prices declined from the fourth quarter of 2018 due to lower overall demand in China and a buildup in pulp producer inventories. In China, demand from tissue producers was steady but there was a decline in demand from paper and packaging producers.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 22

Overall, our average NBSK pulp sales realizations were approximately 9% lower in the first quarter of 2019 compared to the fourth quarter of 2018.

At the end of the current quarter, NBSK list prices in Europe, China and North America were approximately $1,070, $730 and $1,355 per ADMT, respectively and NBHK list prices in China and North America were approximately $700 and $1,160 per ADMT, respectively.

Our integration of MPR is proceeding well and according to plan.

In the second quarter of 2019, our 50% joint venture Cariboo mill has 12 days of scheduled maintenance downtime (which will reduce our production by approximately 5,800 ADMTs).

We currently expect pulp markets to moderately strengthen with improving pricing in the second half of the year. We believe that, in the second quarter of 2019, pulp producer inventories will decline due to continued steady demand in Europe and North America, moderately higher demand from paper producers in China and scheduled producer downtime. At the end of March 2019, world NBSK producer inventories were about 37 days’ supply.

In the first quarter of 2019, U.S. lumber markets modestly recovered due to increased demand after strong declines in the second half of 2018. In the first quarter of 2019, European lumber pricing declined due to the continuation of beetle and storm damaged wood entering the market which obtains lower prices.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 23

Summary Financial Highlights

 

		Three Months Ended March 31,
		2019				2018
		(in thousands, other than per share amounts)
Statement of Operations Data
Pulp segment revenues		$	436,474			$	314,235
Wood products segment revenues			44,439				53,668
Corporate and other revenues			3,037				—
Total revenues		$	483,950			$	367,903
Pulp segment operating income		$	93,520			$	74,054
Wood products segment operating income			1,620				2,982
Corporate and other operating loss			(1,588	)			(988	)
Total operating income		$	93,552			$	76,048
Pulp segment depreciation and amortization		$	28,023			$	21,523
Wood products segment depreciation and amortization			1,911				1,686
Corporate and other depreciation and amortization			313				110
Total depreciation and amortization		$	30,247			$	23,319
Operating EBITDA(1)		$	123,799			$	99,367
Loss on settlement of debt		$	—			$	(21,515	)(2)
Legal cost award		$	—			$	(6,951	)
Provision for income taxes		$	(24,424	)		$	(9,581	)
Net income		$	51,616			$	25,649
Net income per common share
Basic		$	0.79			$	0.39
Diluted		$	0.78			$	0.39
Common shares outstanding at period end			65,651				65,171

 

(1)	The following table provides a reconciliation of net income to operating income and Operating EBITDA for the periods indicated:

 

		Three Months Ended March 31,
		2019				2018
		(in thousands)
Net income		$	51,616			$	25,649
Provision for income taxes			24,424				9,581
Interest expense			18,551				12,115
Loss on settlement of debt			—				21,515
Legal cost award			—				6,951
Other (income) expenses			(1,039	)			237
Operating income			93,552				76,048
Add: Depreciation and amortization			30,247				23,319
Operating EBITDA		$	123,799			$	99,367

 

(2)	Redemption of 7.75% senior notes due 2022, referred to as the “2022 Senior Notes”.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 24

Selected Production, Sales and Other Data

 

		Three Months Ended March 31,
		2019				2018
Pulp Segment
Pulp production (‘000 ADMTs)
NBSK			460.6				364.5
NBHK			78.6
Annual maintenance downtime (‘000 ADMTs)			—				—
Annual maintenance downtime (days)			—				—
Pulp sales (‘000 ADMTs)
NBSK			466.9				367.1
NBHK			87.8
Average NBSK pulp list prices ($/ADMT) (1)
Europe			1,105				1,097
China			710				910
North America			1,380				1,233
Average NBHK pulp list prices ($/ADMT)(1)
China			687				798
North America			1,180				1,077
Average pulp sales realizations ($/ADMT)(2)
NBSK			757				783
NBHK			656
Energy production (‘000 MWh)			560.5	(3)			438.0
Energy sales (‘000 MWh)			211.8	(3)			175.7
Average energy sales realizations ($/MWh)			94				107
Wood Products Segment
Lumber production (MMfbm)			110.7				102.7
Lumber sales (MMfbm)			109.2				115.1
Average lumber sales realizations ($/Mfbm)			359				418
Energy production and sales (‘000 MWh)			22.4				20.6
Average energy sales realizations ($/MWh)			119				135
Average Spot Currency Exchange Rates
$ / €(4)			1.1354				1.2289
$ / C$(4)			0.7521				0.7904

 

(1)	Source: RISI pricing report.

(2)	Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3)	Excludes energy production and sales relating to our 50% joint venture interest in the Cariboo mill, which is accounted for as an equity investment.

(4)	Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 25

Consolidated - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Total revenues for the three months ended March 31, 2019 increased by approximately 32% to $484.0 million from $367.9 million in the same quarter of 2018 primarily due to the inclusion of the results of MPR and higher pulp sales volumes partially offset by lower product sales realizations.

Costs and expenses in the current quarter increased by approximately 34% to $390.4 million from $291.9 million in the first quarter of 2018 primarily due to the inclusion of MPR and higher pulp sales volumes partially offset by the positive impact of a stronger dollar on our euro denominated costs.

In the first quarter of 2019, cost of sales depreciation and amortization increased to $30.1 million from $23.2 million in the same quarter of 2018.

Selling, general and administrative expenses increased to $17.2 million in the first quarter of 2019 from $14.4 million in the same quarter of 2018 primarily due to the inclusion of MPR.

In the first quarter of 2019, our operating income increased by approximately 23% to $93.6 million from $76.0 million in the same quarter of 2018 due to the inclusion of MPR, the net positive impact of a stronger dollar and higher pulp sales volumes.

In the first quarter of 2018, we redeemed $300.0 million of our 2022 Senior Notes at a cost, including premium, of $317.4 million and recorded a loss on such redemption of $21.5 million (being $0.33 per share).

Interest expense in the current quarter increased to $18.6 million from $12.1 million in the same quarter of 2018 primarily as a result of the issuance in December 2018 of $350.0 million of our 7.375% senior notes due in 2025 (“2025 Senior Notes”) to finance the acquisition of MPR.

In the first quarter of 2018, we recognized an expense of $7.0 million, or $0.11 per share, in connection with the legal cost award against us in our prior claim under the North American Free Trade Agreement.

During the first quarter of 2019, income tax expense increased to $24.4 million from $9.6 million in the same quarter of 2018 due to higher income.

For the first quarter of 2019, our net income increased to $51.6 million, or $0.79 per basic share and $0.78 per diluted share, from $25.6 million, or $0.39 per share, in the same quarter of 2018.

In the first quarter of 2019, Operating EBITDA increased by approximately 25% to $123.8 million from $99.4 million in the same quarter of 2018 primarily due to the inclusion of MPR and the positive impact of a stronger dollar and higher pulp sales volumes partially offset by lower product sales realizations.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 26

Operating Results by Business Segment

None of the income or loss items following operating income in our Interim Consolidated Statement of Operations are allocated to our segments, since those items are reviewed separately by management.

Pulp Segment - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Selected Financial Information

 

		Three Months Ended March 31,
		2019				2018
		(in thousands)
Pulp revenues		$	413,313			$	290,551
Energy and chemical revenues		$	23,161			$	23,684
Depreciation and amortization		$	28,023			$	21,523
Operating income		$	93,520			$	74,054

Pulp revenues in the first quarter of 2019 increased by approximately 42% to $413.3 million from $290.6 million in the same quarter of 2018 due to the inclusion of MPR and higher sales volumes partially offset by lower sales realizations.

Energy and chemical revenues decreased by approximately 2% to $23.2 million in the first quarter of 2019 from $23.7 million in the same quarter of 2018 primarily due to lower chemical yields from processing storm and beetle damaged wood and the negative impact of a stronger dollar on our euro denominated sales partially offset by higher energy sales volumes.

NBSK pulp production increased by approximately 26% to 460,613 ADMTs in the current quarter from 364,486 ADMTs in the same quarter of 2018, primarily due to strong overall operating performance and the inclusion of MPR.

NBSK pulp sales volumes increased by approximately 27% to 466,893 ADMTs in the current quarter from 367,074 ADMTs in the same quarter of 2018. In the current quarter, we also sold 87,848 ADMTs of NBHK pulp.

In the current quarter of 2019 list prices for NBSK pulp in Europe and North America increased from the same quarter of 2018 largely as a result of overall steady demand. In China list prices for NBSK pulp decreased from the same quarter of 2018 as a result of reduced overall demand. Average list prices for NBSK pulp in Europe were approximately $1,105 per ADMT in the first quarter of 2019 compared to approximately $1,097 per ADMT in the same quarter of 2018. Average list prices for NBSK pulp in China and North America were approximately $710 per ADMT and $1,380 per ADMT, respectively, in the current quarter compared to approximately $910 per ADMT and $1,233 per ADMT, respectively, in the same quarter of 2018.

Average NBSK pulp sales realizations decreased by approximately 3% to $757 per ADMT in the first quarter of 2019 from approximately $783 per ADMT in the same quarter of 2018 due to lower prices in China. The NBHK pulp sales realizations in the current quarter were $656 per ADMT.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 27

The stronger dollar versus the euro in the current quarter compared to the same quarter of the prior year decreased the dollar cost of our euro denominated costs and expenses and contributed to a positive foreign exchange impact of approximately $15.3 million on operating income.

Costs and expenses for our pulp segment in the current quarter increased by approximately 43% to $343.2 million from $240.5 million in the first quarter of 2018 primarily due to the inclusion of MPR and higher pulp sales volumes partially offset by the positive impact of a stronger dollar on our euro denominated costs.

In the first quarter of 2019, pulp segment depreciation and amortization increased to $28.0 million from $21.5 million in the same quarter of 2018.

On average, in the current quarter overall per unit fiber costs decreased by about 6% from the same quarter of 2018 due to the positive impact of a stronger dollar on our euro and Canadian dollar denominated fiber costs. In the current quarter, the fiber market for our German mills was stable due to the continued availability of storm and beetle damaged wood. For our Canadian mills, per unit fiber costs remained high due to continued strong demand for fiber in Celgar’s fiber procurement area. We currently expect generally lower per unit fiber costs in the second quarter of 2019.

Transportation costs for our pulp segment increased by approximately 90% to $37.9 million in the current quarter from $19.9 million primarily as a result of the inclusion of MPR.

In the first quarter of 2019, pulp segment operating income increased by approximately 26% to $93.5 million from $74.1 million in the same quarter of 2018 primarily due to the positive impact of a stronger dollar, the inclusion of MPR and higher pulp sales volumes partially offset by lower product sales realizations.

Wood Products Segment - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Selected Financial Information

 

		Three Months Ended March 31,
		2019				2018
		(in thousands)
Lumber revenues		$	39,163			$	48,168
Energy revenues		$	2,666			$	2,781
Wood residual revenues		$	2,610			$	2,719
Depreciation and amortization		$	1,911			$	1,686
Operating income		$	1,620			$	2,982

In the first quarter of 2019 lumber revenues decreased by approximately 19% to $39.2 million from $48.2 million primarily due to lower sales realizations and volumes. In the current quarter approximately 28% of sales volumes were in the U.S. market and the majority of remaining sales were to Europe.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 28