Annual Statements Open main menu

MERCER INTERNATIONAL INC. - Quarter Report: 2023 September (Form 10-Q)

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 September 30, 2023

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

 

(I.R.S. Employer

of incorporation or organization)

 

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)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes NO

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes NO

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

 

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

The Registrant had 66,524,866 shares of common stock outstanding as of November 1, 2023.

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023

(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
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenues

 

$

470,821

 

 

$

532,814

 

 

$

1,523,350

 

 

$

1,697,881

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

403,267

 

 

 

367,710

 

 

 

1,430,805

 

 

 

1,187,476

 

Cost of sales depreciation and amortization

 

 

40,884

 

 

 

32,122

 

 

 

128,485

 

 

 

95,223

 

Selling, general and administrative expenses

 

 

30,096

 

 

 

24,259

 

 

 

96,439

 

 

 

70,077

 

Operating income (loss)

 

 

(3,426

)

 

 

108,723

 

 

 

(132,379

)

 

 

345,105

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(21,863

)

 

 

(17,935

)

 

 

(61,001

)

 

 

(52,731

)

Other income

 

 

3,317

 

 

 

7,252

 

 

 

9,689

 

 

 

24,297

 

Total other expenses, net

 

 

(18,546

)

 

 

(10,683

)

 

 

(51,312

)

 

 

(28,434

)

Income (loss) before income taxes

 

 

(21,972

)

 

 

98,040

 

 

 

(183,691

)

 

 

316,671

 

Income tax recovery (provision)

 

 

(3,984

)

 

 

(31,294

)

 

 

28,851

 

 

 

(89,656

)

Net income (loss)

 

$

(25,956

)

 

$

66,746

 

 

$

(154,840

)

 

$

227,015

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.39

)

 

$

1.01

 

 

$

(2.33

)

 

$

3.43

 

Diluted

 

$

(0.39

)

 

$

1.00

 

 

$

(2.33

)

 

$

3.41

 

Dividends declared per common share

 

$

0.075

 

 

$

0.075

 

 

$

0.225

 

 

$

0.225

 

 

 

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of U.S. dollars)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income (loss)

 

$

(25,956

)

 

$

66,746

 

 

$

(154,840

)

 

$

227,015

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) related to defined benefit pension plans

 

 

81

 

 

 

11

 

 

 

122

 

 

 

(224

)

Income tax recovery

 

 

 

 

 

 

 

 

 

 

 

62

 

Gain (loss) related to defined benefit pension plans, net of tax

 

 

81

 

 

 

11

 

 

 

122

 

 

 

(162

)

Foreign currency translation adjustments

 

 

(38,439

)

 

 

(94,781

)

 

 

(7,553

)

 

 

(189,323

)

Other comprehensive loss, net of taxes

 

 

(38,358

)

 

 

(94,770

)

 

 

(7,431

)

 

 

(189,485

)

Total comprehensive income (loss)

 

$

(64,314

)

 

$

(28,024

)

 

$

(162,271

)

 

$

37,530

 

 

 

See accompanying Notes to the Interim Consolidated Financial Statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 3


 

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

 

 

September 30,
2023

 

 

December 31,
2022

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

343,725

 

 

$

354,032

 

Accounts receivable, net

 

 

266,927

 

 

 

351,993

 

Inventories

 

 

422,151

 

 

 

450,470

 

Prepaid expenses and other

 

 

31,697

 

 

 

21,680

 

Total current assets

 

 

1,064,500

 

 

 

1,178,175

 

Property, plant and equipment, net

 

 

1,396,747

 

 

 

1,341,322

 

Investment in joint ventures

 

 

43,933

 

 

 

45,635

 

Amortizable intangible assets, net

 

 

50,322

 

 

 

61,497

 

Goodwill

 

 

33,921

 

 

 

30,937

 

Operating lease right-of-use assets

 

 

17,351

 

 

 

15,049

 

Pension asset

 

 

3,514

 

 

 

4,397

 

Other long-term assets

 

 

44,713

 

 

 

48,025

 

Total assets

 

$

2,655,001

 

 

$

2,725,037

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable and other

 

$

267,343

 

 

$

377,306

 

Pension and other post-retirement benefit obligations

 

 

523

 

 

 

755

 

Total current liabilities

 

 

267,866

 

 

 

378,061

 

Long-term debt

 

 

1,589,776

 

 

 

1,346,508

 

Pension and other post-retirement benefit obligations

 

 

10,768

 

 

 

12,178

 

Operating lease liabilities

 

 

11,593

 

 

 

9,475

 

Other long-term liabilities

 

 

14,158

 

 

 

14,072

 

Deferred income tax

 

 

95,388

 

 

 

125,959

 

Total liabilities

 

 

1,989,549

 

 

 

1,886,253

 

Shareholders’ equity

 

 

 

 

 

 

Common shares $1 par value; 200,000,000 authorized; 66,525,000 issued and outstanding (2022 – 66,167,000)

 

 

66,471

 

 

 

66,132

 

Additional paid-in capital

 

 

358,055

 

 

 

354,495

 

Retained earnings

 

 

428,319

 

 

 

598,119

 

Accumulated other comprehensive loss

 

 

(187,393

)

 

 

(179,962

)

Total shareholders’ equity

 

 

665,452

 

 

 

838,784

 

Total liabilities and shareholders’ equity

 

$

2,655,001

 

 

$

2,725,037

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

Subsequent events (Note 8, 11)

 

 

 

 

 

 

 

 

See accompanying Notes to the Interim Consolidated Financial Statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 4


 

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands of U.S. dollars)

 

 

 

Common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number
(thousands
of shares)

 

 

Amount,
at Par
Value

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total
Shareholders'
Equity

 

Three Months Ended September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2023

 

 

66,525

 

 

$

66,471

 

 

$

356,769

 

 

$

459,264

 

 

$

(149,035

)

 

$

733,469

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,286

 

 

 

 

 

 

 

 

 

1,286

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(25,956

)

 

 

 

 

 

(25,956

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(4,989

)

 

 

 

 

 

(4,989

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,358

)

 

 

(38,358

)

Balance as of September 30, 2023

 

 

66,525

 

 

$

66,471

 

 

$

358,055

 

 

$

428,319

 

 

$

(187,393

)

 

$

665,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2022

 

 

66,167

 

 

$

66,132

 

 

$

350,224

 

 

$

521,274

 

 

$

(185,508

)

 

$

752,122

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,214

 

 

 

 

 

 

 

 

 

1,214

 

Net income

 

 

 

 

 

 

 

 

 

 

 

66,746

 

 

 

 

 

 

66,746

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(4,963

)

 

 

 

 

 

(4,963

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(94,770

)

 

 

(94,770

)

Balance as of September 30, 2022

 

 

66,167

 

 

$

66,132

 

 

$

351,438

 

 

$

583,057

 

 

$

(280,278

)

 

$

720,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2022

 

 

66,167

 

 

$

66,132

 

 

$

354,495

 

 

$

598,119

 

 

$

(179,962

)

 

$

838,784

 

Shares issued on grants of restricted shares

 

 

54

 

 

 

35

 

 

 

(35

)

 

 

 

 

 

 

 

 

 

Shares issued on grants of performance share units

 

 

254

 

 

 

254

 

 

 

(254

)

 

 

 

 

 

 

 

 

 

Shares issued on grants of restricted share units

 

 

50

 

 

 

50

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

3,899

 

 

 

 

 

 

 

 

 

3,899

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(154,840

)

 

 

 

 

 

(154,840

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(14,960

)

 

 

 

 

 

(14,960

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,431

)

 

 

(7,431

)

Balance as of September 30, 2023

 

 

66,525

 

 

$

66,471

 

 

$

358,055

 

 

$

428,319

 

 

$

(187,393

)

 

$

665,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

 

66,037

 

 

$

65,988

 

 

$

347,902

 

 

$

370,927

 

 

$

(90,793

)

 

$

694,024

 

Shares issued on grants of restricted shares

 

 

35

 

 

 

49

 

 

 

(49

)

 

 

 

 

 

 

 

 

 

Shares issued on grants of performance share units

 

 

95

 

 

 

95

 

 

 

(95

)

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

3,680

 

 

 

 

 

 

 

 

 

3,680

 

Net income

 

 

 

 

 

 

 

 

 

 

 

227,015

 

 

 

 

 

 

227,015

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(14,885

)

 

 

 

 

 

(14,885

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(189,485

)

 

 

(189,485

)

Balance as of September 30, 2022

 

 

66,167

 

 

$

66,132

 

 

$

351,438

 

 

$

583,057

 

 

$

(280,278

)

 

$

720,349

 

 

 

See accompanying Notes to the Interim Consolidated Financial Statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 5


 

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands of U.S. dollars)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cash flows from (used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(25,956

)

 

$

66,746

 

 

$

(154,840

)

 

$

227,015

 

Adjustments to reconcile net income (loss) to cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

40,953

 

 

 

32,144

 

 

 

128,696

 

 

 

95,288

 

Deferred income tax provision (recovery)

 

 

9,520

 

 

 

620

 

 

 

(34,529

)

 

 

15,627

 

Inventory impairment (recovery)

 

 

(10,000

)

 

 

 

 

 

56,600

 

 

 

 

Defined benefit pension plans and other post-retirement benefit plan expense

 

 

621

 

 

 

424

 

 

 

1,518

 

 

 

1,301

 

Stock compensation expense

 

 

1,754

 

 

 

1,214

 

 

 

4,367

 

 

 

3,680

 

Foreign exchange transaction gains

 

 

(4,830

)

 

 

(11,283

)

 

 

(4,336

)

 

 

(24,702

)

Other

 

 

459

 

 

 

(3,726

)

 

 

(6,142

)

 

 

(4,497

)

Defined benefit pension plans and other post-retirement benefit plan contributions

 

 

(251

)

 

 

(511

)

 

 

(1,816

)

 

 

(2,905

)

Changes in working capital

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

65,592

 

 

 

(17,679

)

 

 

89,102

 

 

 

(4,297

)

Inventories

 

 

8,543

 

 

 

(8,803

)

 

 

(19,011

)

 

 

(23,870

)

Accounts payable and accrued expenses

 

 

(100,449

)

 

 

34,323

 

 

 

(107,630

)

 

 

37,569

 

Other

 

 

(11,290

)

 

 

(6,809

)

 

 

(12,265

)

 

 

(10,198

)

Net cash from (used in) operating activities

 

 

(25,334

)

 

 

86,660

 

 

 

(60,286

)

 

 

310,011

 

Cash flows from (used in) investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(37,391

)

 

 

(48,554

)

 

 

(110,302

)

 

 

(128,875

)

Acquisition, net of cash acquired (Note 2)

 

 

 

 

 

(257,367

)

 

 

(82,100

)

 

 

(257,367

)

Property insurance proceeds

 

 

2,727

 

 

 

1,164

 

 

 

5,437

 

 

 

7,574

 

Proceeds from government grants

 

 

4,642

 

 

 

 

 

 

4,642

 

 

 

1,067

 

Purchase of term deposit

 

 

 

 

 

 

 

 

 

 

 

(75,000

)

Other

 

 

716

 

 

 

405

 

 

 

2,641

 

 

 

972

 

Net cash from (used in) investing activities

 

 

(29,306

)

 

 

(304,352

)

 

 

(179,682

)

 

 

(451,629

)

Cash flows from (used in) financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of senior notes

 

 

200,000

 

 

 

 

 

 

200,000

 

 

 

 

Proceeds from (repayment of) revolving credit facilities, net

 

 

(3,129

)

 

 

99,065

 

 

 

51,278

 

 

 

116,503

 

Dividend payments

 

 

(4,989

)

 

 

(4,962

)

 

 

(9,971

)

 

 

(9,922

)

Payment of debt issuance costs

 

 

(4,552

)

 

 

(1,849

)

 

 

(4,552

)

 

 

(3,033

)

Payment of finance lease obligations

 

 

(2,058

)

 

 

(1,640

)

 

 

(5,845

)

 

 

(8,246

)

Other

 

 

(114

)

 

 

(27

)

 

 

(343

)

 

 

(593

)

Net cash from (used in) financing activities

 

 

185,158

 

 

 

90,587

 

 

 

230,567

 

 

 

94,709

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(131

)

 

 

(5,502

)

 

 

(906

)

 

 

(11,447

)

Net increase (decrease) in cash and cash equivalents

 

 

130,387

 

 

 

(132,607

)

 

 

(10,307

)

 

 

(58,356

)

Cash and cash equivalents, beginning of period

 

 

213,338

 

 

 

419,861

 

 

 

354,032

 

 

 

345,610

 

Cash and cash equivalents, end of period

 

$

343,725

 

 

$

287,254

 

 

$

343,725

 

 

$

287,254

 

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

40,045

 

 

$

32,107

 

 

$

76,906

 

 

$

65,344

 

Cash paid for income taxes

 

$

45,047

 

 

$

8,858

 

 

$

48,281

 

 

$

69,351

 

 

 

See accompanying Notes to the Interim Consolidated Financial Statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 6


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Note 1. The Company and Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The Interim Consolidated Financial Statements contained herein include the accounts of Mercer International Inc. ("Mercer Inc.") and all of its subsidiaries (collectively the "Company"). Mercer Inc. owns 100% of its subsidiaries with the exception of the 50% joint venture interest in the Cariboo mill with West Fraser Mills Ltd., which is accounted for using the equity method. The Company's shares of common stock are quoted and listed for trading on the NASDAQ Global Select 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 consolidated balance sheet information as of December 31, 2022 was derived from the Company’s audited Consolidated Financial Statements, but does not contain all of the footnote disclosures from the annual Consolidated 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, 2022. In the opinion of the Company, the unaudited Interim Consolidated Financial Statements contained herein have been prepared on a consistent basis 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, 2022 and contain all adjustments necessary for a fair statement of the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.

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

Use of Estimates

Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows and discount rates associated with impairment testing for long-lived assets and goodwill, 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.

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. Acquisitions

2023 Asset Acquisition

Structurlam

On June 15, 2023, the Company acquired substantially all of the assets of Structurlam Mass Timber Corporation and its subsidiaries (“Structurlam”), including a mass timber production facility located in Conway, Arkansas (the “Conway Facility”) and mass timber production facilities in British Columbia, Canada, for cash consideration of $82,100, net of a $2,400 break fee and expense reimbursement and including $1,000 of acquisition costs.

The transaction is accounted for as an acquisition of a group of assets as management determined it does not qualify as an acquisition of a business under GAAP. Substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets, being the land, building and production equipment at the Conway Facility.

2022 Business Acquisition

Torgau

On September 30, 2022, the Company acquired all of the issued and outstanding shares of Wood Holdco GmbH, which is the parent company of Holzindustrie Torgau KG ("Torgau") for consideration of €270.0 million ($263,196) cash. The acquisition results in 100% ownership of a timber processing and value-add pallet production facility in Torgau, Germany and a wood processing facility in Dahlen, Germany that produces garden products. The acquisition of Torgau expands the Company’s solid wood business and further diversifies the Company’s product offerings.

The Company’s allocation of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date was finalized during the nine month period ended September 30, 2023. The following table summarizes the purchase price allocation:

 

 

Purchase Price
Allocation

 

Cash

 

$

6,592

 

Accounts receivable

 

 

13,202

 

Inventories

 

 

50,900

 

Other current assets

 

 

2,548

 

Property, plant and equipment

 

 

205,450

 

Amortizable intangible assets (a)

 

 

25,141

 

Goodwill (b)

 

 

31,213

 

Other long-term assets

 

 

3,934

 

Total assets acquired

 

 

338,980

 

Accounts payable and other current liabilities

 

 

(43,905

)

Deferred income tax

 

 

(29,390

)

Other long-term liabilities

 

 

(2,489

)

Total liabilities assumed

 

 

(75,784

)

Net assets acquired

 

$

263,196

 

 

(a)
Amortizable intangible assets include an order backlog, which has an estimated fair value of $15,243 and was amortized on a straight-line basis over six months and an energy sales agreement, which has an estimated fair value of $9,898 and is being amortized on a straight-line basis over 12 years.
(b)
The goodwill is primarily for expected synergies from combining the operations of Torgau with the Company’s existing German operations. The goodwill is not deductible for tax purposes.

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 3. Business Interruption Insurance

In 2021, the Rosenthal mill turbine was taken down to complete extensive repair work. In June 2023, the Company settled the business interruption portion of the insurance claim for 15.2 million ($16,553).

In July 2022, a fire occurred in the woodyard of the Stendal mill. In September 2022, the Company received written confirmation from the insurance provider that the business interruption and property insurance claim related to the fire is covered. In the three and nine months ended September 30, 2023, the insurance provider paid nonrefundable business interruption insurance payments of 5.0 million ($5,455) and 14.5 million ($15,676), respectively, and property insurance payments of 2.5 million ($2,727) and 5.0 million ($5,437), respectively.

The business interruption and property insurance proceeds for the three and nine months ended September 30, 2023 of 7.5 million ($8,182) and 34.7 million ($37,666), respectively, were recorded in “Cost of sales, excluding depreciation and amortization” in the Interim Consolidated Statements of Operations.

Note 4. Inventories

Inventories as of September 30, 2023 and December 31, 2022, were comprised of the following:

 

 

September 30,
2023

 

 

December 31,
2022

 

Raw materials

 

$

147,658

 

 

$

160,442

 

Finished goods

 

 

137,062

 

 

 

158,082

 

Spare parts and other

 

 

137,431

 

 

 

131,946

 

 

 

$

422,151

 

 

$

450,470

 

 

For the three months ended September 30, 2023, the Company recorded a net inventory impairment recovery of $10,000 (2022 – $nil) related to the reversal of impairment charges taken earlier in the year as prices for pulp improved. For the nine months ended September 30, 2023, as a result of low pulp prices and high per unit fiber costs for the Canadian mills, the Company recorded net inventory impairment charges of $56,600 (2022 – $nil). The inventory impairment recovery and charges are recorded in "Cost of sales, excluding depreciation and amortization" in the Interim Consolidated Statements of Operations. As of September 30, 2023, $5,900 of the write-down was recorded against raw materials inventory and $3,500 was recorded against finished goods inventory. As of December 31, 2022, there were no inventory write-downs.

Note 5. Property, Plant and Equipment, Net

As a result of the sustained decline in hardwood pulp prices for the Peace River mill in 2023, the Company performed an impairment test as of September 30, 2023 on the long-lived assets of the Peace River mill which had a carrying value of $250,201. The Company compared the carrying values of the mill’s long-lived assets to its estimated future undiscounted cash flows. The carrying value of the mill's long-lived assets was less than the undiscounted cash flows and no impairment was recognized. An impairment assessment requires management to apply judgement in estimating the future cash flows. The significant estimates in the future cash flows include periods of operation, projections of product pricing, production levels, fiber and other production costs and maintenance spending.

Note 6. Goodwill

 

 

September 30,
2023

 

 

December 31,
2022

 

Beginning of period balance

 

$

30,937

 

 

$

 

Acquisition

 

 

 

 

 

28,274

 

Purchase price allocation adjustment

 

 

2,939

 

 

 

 

Impact of changes in foreign exchange rate

 

 

45

 

 

 

2,663

 

End of period balance

 

$

33,921

 

 

$

30,937

 

 

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 6. Goodwill (continued)

The Company tests goodwill for impairment annually on August 31 at the reporting unit level. Goodwill was assigned to the Torgau facility, the reporting unit which benefits from the synergies arising from the business combination. The annual impairment test was completed on August 31, 2023 and no impairment was identified.

 

Note 7. Accounts Payable and Other

 

Accounts payable and other as of September 30, 2023 and December 31, 2022, were comprised of the following:

 

 

 

September 30,
2023

 

 

December 31,
2022

 

Trade payables

 

$

61,425

 

 

$

92,848

 

Accrued expenses

 

 

82,193

 

 

 

96,979

 

Interest payable

 

 

12,226

 

 

 

26,756

 

Income tax payable

 

 

36,590

 

 

 

99,827

 

Payroll-related accruals

 

 

32,192

 

 

 

34,353

 

Deposits for mass timber sales contracts

 

 

2,445

 

 

 

 

Wastewater fee (a)

 

 

8,049

 

 

 

8,614

 

Finance lease liability

 

 

7,265

 

 

 

7,368

 

Operating lease liability

 

 

5,426

 

 

 

5,255

 

Other

 

 

19,532

 

 

 

5,306

 

 

 

$

267,343

 

 

$

377,306

 

 

(a)
The Company is required to pay certain fees based on wastewater emissions at its German mills. Accrued fees can be reduced upon the mills’ demonstration of reduced wastewater emissions.

Note 8. Debt

Debt as of September 30, 2023 and December 31, 2022, was comprised of the following:

 

 

Maturity

 

September 30,
2023

 

 

December 31,
2022

 

Senior notes (a)

 

 

 

 

 

 

 

 

5.500% senior notes

 

2026

 

$

300,000

 

 

$

300,000

 

12.875% senior notes

 

2028

 

 

200,000

 

 

 

 

5.125% senior notes

 

2029

 

 

875,000

 

 

 

875,000

 

 

 

 

 

 

 

 

 

 

Credit arrangements

 

 

 

 

 

 

 

 

370.1 million German joint revolving credit facility (b)

 

2027

 

 

146,197

 

 

 

109,326

 

C$160.0 million Canadian joint revolving credit facility (c)

 

2027

 

 

44,378

 

 

 

31,749

 

2.6 million demand loan (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease liability

 

 

 

 

47,170

 

 

 

51,129

 

 

 

 

 

 

1,612,745

 

 

 

1,367,204

 

Less: unamortized senior note issuance costs

 

 

 

 

(15,704

)

 

 

(13,328

)

Less: finance lease liability due within one year

 

 

 

 

(7,265

)

 

 

(7,368

)

 

 

 

 

$

1,589,776

 

 

$

1,346,508

 

 

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 8. Debt (continued)

 

The maturities of the principal portion of the senior notes and credit arrangements as of September 30, 2023 were as follows:

 

 

Senior Notes and Credit Arrangements

 

2023

 

$

 

2024

 

 

 

2025

 

 

 

2026

 

 

300,000

 

2027

 

 

190,575

 

Thereafter

 

 

1,075,000

 

 

 

$

1,565,575

 

 

Certain of the Company's debt instruments were issued under agreements which, among other things, may limit its ability and the ability of its subsidiaries to make certain payments, including dividends. These limitations are subject to specific exceptions. As of September 30, 2023, the Company was in compliance with the terms of its debt agreements.

 

(a)
In September 2023, the Company issued $200,000 in aggregate principal amount of 12.875% senior notes which mature on October 1, 2028 (the “2028 Senior Notes”). The net proceeds from the 2028 Senior Notes issuance was $195,668 after deducting the underwriter’s discount and offering expenses. The Company utilized $70,000 of the net proceeds to partially pay down borrowings under the Canadian revolving credit facility, of which approximately $38,787 was paid in September 2023 and $31,213 was paid in October 2023. The remaining proceeds were used for working capital and general corporate purposes.

The senior notes which mature on February 1, 2029 (the "2029 Senior Notes") and on January 15, 2026 (the “2026 Senior Notes” and collectively with the 2029 Senior Notes and 2028 Senior Notes, the “Senior Notes”), are general unsecured senior obligations of the Company. The Company may redeem all or a part of the Senior Notes upon not less than 10 days’ or more than 60 days’ notice at the redemption price plus accrued and unpaid interest to (but not including) the applicable redemption date. The 2026 Senior Notes redemption price is 100.000% of the principal amount. The following table presents the redemption prices (expressed as percentages of principal amount) and the redemption periods of the 2028 Senior Notes and the 2029 Senior Notes:

2028 Senior Notes

 

2029 Senior Notes

12 Month Period Beginning

 

Percentage

 

12 Month Period Beginning

 

Percentage

October 1, 2025

 

106.438%

 

February 1, 2024

 

102.563%

October 1, 2026

 

103.219%

 

February 1, 2025

 

101.281%

October 1, 2027 and thereafter

 

100.000%

 

February 1, 2026 and thereafter

 

100.000%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 8. Debt (continued)

 

(b)
In September 2023, the Company increased the borrowing capacity of the joint revolving credit facility for the German mills by €70.1 million to €370.1 million. The credit facility matures in September 2027. Borrowings under the facility are unsecured and bear interest at Euribor plus a variable margin ranging from 1.40% to 2.35% dependent on conditions including but not limited to a prescribed leverage ratio. The facility is sustainability linked whereby the interest rate margin is subject to upward or downward adjustments of up to 0.05% per annum if the Company achieves, or fails to achieve, certain specified sustainability targets. As of September 30, 2023, approximately 138.0 million ($146,197) of this facility was drawn and accruing interest at a rate of 5.096%, approximately 13.5 million ($14,315) was supporting bank guarantees and approximately 218.6 million ($231,599) was available.
(c)
A C$160.0 million joint revolving credit facility for the Celgar mill, Peace River mill and certain other Canadian subsidiaries that matures in January 2027. 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 1.20% to 1.45% per annum; (iii) dollar denominated base rate advances at the greater of the federal funds rate plus 0.50%, an Adjusted Term SOFR for a one month tenor plus 1.00% and the bank’s applicable reference rate for U.S. dollar loans; and (iv) dollar SOFR advances, which bear interest at Adjusted Term SOFR plus 1.20% to 1.45% per annum. As of September 30, 2023, approximately C$60.0 million ($44,378) of this facility was drawn and accruing interest at a rate of 6.696%, approximately C$1.3 million ($933) was supporting letters of credit and approximately C$98.7 million ($73,031) was available.
(d)
A €2.6 million demand loan for Rosenthal 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 of September 30, 2023, approximately 2.6 million ($2,703) of this facility was supporting bank guarantees and approximately $nil was available.

Note 9. Pension and Other Post-Retirement Benefit Obligations

Defined Benefit Plans

Pension benefits are based on employees' earnings and years of service. The defined benefit plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. The components of the net benefit costs for the Celgar and Peace River defined benefit plans, in aggregate for the three and nine months ended September 30, 2023 and 2022 were as follows:

 

 

Three Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

Pension

 

 

Other Post-
Retirement
Benefits

 

 

Pension

 

 

Other Post-
Retirement
Benefits

 

Service cost

 

$

603

 

 

$

29

 

 

$

885

 

 

$

47

 

Interest cost

 

 

1,175

 

 

 

124

 

 

 

936

 

 

 

102

 

Expected return on plan assets

 

 

(1,391

)

 

 

 

 

 

(1,445

)

 

 

 

Amortization of unrecognized items

 

 

324

 

 

 

(243

)

 

 

72

 

 

 

(173

)

Net benefit costs (gains)

 

$

711

 

 

$

(90

)

 

$

448

 

 

$

(24

)

 

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 9. Pension and Other Post-Retirement Benefit Obligations (continued)

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

Pension

 

 

Other Post-
Retirement
Benefits

 

 

Pension

 

 

Other Post-
Retirement
Benefits

 

Service cost

 

$

1,803

 

 

$

88

 

 

$

2,703

 

 

$

145

 

Interest cost

 

 

3,515

 

 

 

372

 

 

 

2,858

 

 

 

312

 

Expected return on plan assets

 

 

(4,382

)

 

 

 

 

 

(4,381

)

 

 

 

Amortization of unrecognized items

 

 

848

 

 

 

(726

)

 

 

191

 

 

 

(527

)

Net benefit costs (gains)

 

$

1,784

 

 

$

(266

)

 

$

1,371

 

 

$

(70

)

The components of the net benefit costs (gains) other than service cost are recorded in "Other income" in the Interim Consolidated Statements of Operations. The amortization of unrecognized items relates to actuarial losses (gains) and prior service costs.

Defined Contribution Plan

Effective December 31, 2008, the defined benefit plans at the Celgar mill were closed to new members and the service accrual ceased. Effective January 1, 2009, the members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan. During the three and nine months ended September 30, 2023, the Company made contributions of $772 and $1,105, respectively, to this plan (2022 – $405 and $1,066).

Multiemployer Plan

The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three and nine months ended September 30, 2023, the Company made contributions of $807 and $1,721, respectively, to this plan (2022 – $175 and $1,824).

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 10. Income Taxes

Differences between the U.S. Federal statutory and the Company's effective tax rates for the three and nine months ended September 30, 2023 and 2022, were as follows:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

U.S. Federal statutory rate

 

21%

 

 

21%

 

 

21%

 

 

21%

 

Income tax recovery (provision) using U.S. Federal statutory rate on income (loss) before income taxes

 

$

4,616

 

 

$

(20,566

)

 

$

38,575

 

 

$

(66,481

)

Tax differential on foreign income (loss)

 

 

1,394

 

 

 

(7,911

)

 

 

7,669

 

 

 

(27,961

)

Effect of foreign earnings (a)

 

 

 

 

 

(1,274

)

 

 

 

 

 

(3,377

)

Valuation allowance (b)

 

 

(8,223

)

 

 

695

 

 

 

(22,342

)

 

 

1,143

 

Foreign exchange on settlement of debt

 

 

 

 

 

(30

)

 

 

 

 

 

2,994

 

Tax benefit of partnership structure

 

 

783

 

 

 

783

 

 

 

2,349

 

 

 

2,349

 

Non-taxable foreign subsidies

 

 

600

 

 

 

703

 

 

 

2,644

 

 

 

2,064

 

True-up of prior year taxes

 

 

(7,200

)

 

 

(2,059

)

 

 

(2,723

)

 

 

(465

)

Annual effective tax rate adjustment

 

 

4,000

 

 

 

(3,000

)

 

 

 

 

 

2,000

 

Other, net

 

 

46

 

 

 

1,365

 

 

 

2,679

 

 

 

(1,922

)

Income tax recovery (provision)

 

$

(3,984

)

 

$

(31,294

)

 

$

28,851

 

 

$

(89,656

)

Comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

Current income tax recovery (provision)

 

$

5,536

 

 

$

(30,674

)

 

$

(5,678

)

 

$

(74,029

)

Deferred income tax recovery (provision)

 

 

(9,520

)

 

 

(620

)

 

 

34,529

 

 

 

(15,627

)

Income tax recovery (provision)

 

$

(3,984

)

 

$

(31,294

)

 

$

28,851

 

 

$

(89,656

)

 

(a)
Primarily relates to the impact of the global intangible low-taxed income provision in the Tax Cuts and Jobs Act of 2017.
(b)
Primarily relates to taxable losses and denied interest expense.

Note 11. Shareholders' Equity

Dividends

During the nine months ended September 30, 2023, the Company's board of directors declared the following quarterly dividends:

Date Declared

 

Dividend Per
Common Share

 

 

Amount

 

February 16, 2023

 

$

0.075

 

 

$

4,982

 

May 4, 2023

 

 

0.075

 

 

 

4,989

 

August 3, 2023

 

 

0.075

 

 

 

4,989

 

 

$

0.225

 

 

$

14,960

 

On November 2, 2023, the Company's board of directors declared a quarterly dividend of $0.075 per common share. Payment of the dividend will be made on December 28, 2023 to all shareholders of record on December 20, 2023. Future dividends are subject to approval by the board of directors and may be adjusted as business and industry conditions warrant.

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 11. Shareholders' Equity (continued)

Stock Based Compensation

The Company has a stock incentive plan which provides for stock options, restricted stock units (“RSUs”), deferred stock units (“DSUs”), 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 and nine months ended September 30, 2023, there were no issued and outstanding stock options, performance shares or stock appreciation rights. As of September 30, 2023, after factoring in all allocated shares, there remain approximately 2.2 million common shares available for grant.

In May 2023, the board of directors adopted the 2023 Non-Employee Director Compensation Plan which allows non-employee directors to elect on an annual basis to receive, in lieu of cash fees, either restricted stock or DSUs. The board of directors receive equity compensation of restricted stock unless they elect to receive DSUs. The non-employee directors may elect on an annual basis to receive DSUs which settle in cash (“Cash Only DSUs”). The DSUs are redeemable by the non-employee director at their option following their separation from the board of directors. The value of the Cash Only DSUs redeemed is the fair market value on the redemption date.

The Cash Only DSUs are accounted for as a liability and the other equity awards are accounted for as equity.

The following table summarizes PSU activity during the period:

 

 

 

 

 

 

Number of PSUs

 

Outstanding as of January 1, 2023

 

 

 

 

 

 

3,484,154

 

Granted

 

 

 

 

 

 

1,599,778

 

Vested and issued

 

 

 

 

 

 

(253,508

)

Forfeited

 

 

 

 

 

 

(1,149,127

)

Outstanding as of September 30, 2023

 

 

 

 

 

 

3,681,297

 

 

The following table summarizes restricted share, RSU and DSU activity during the period:

 

 

 

Equity Based Awards

 

 

Liability Based Awards

 

 

 

Number of Restricted Shares

 

 

Number of RSUs

 

 

Number of DSUs

 

 

Number of DSUs

 

Outstanding as of January 1, 2023

 

 

34,699

 

 

 

50,000

 

 

 

11,554

 

 

 

 

Granted

 

 

54,227

 

 

 

 

 

 

28,107

 

 

 

91,663

 

Vested

 

 

(34,699

)

 

 

(50,000

)

 

 

(12,070

)

 

 

(31,986

)

Outstanding as of September 30, 2023

 

 

54,227

 

 

 

 

 

 

27,591

 

 

 

59,677

 

 

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 12. Net Income (Loss) Per Common Share

The reconciliation of basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2023 and 2022 was as follows:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(25,956

)

 

$

66,746

 

 

$

(154,840

)

 

$

227,015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.39

)

 

$

1.01

 

 

$

(2.33

)

 

$

3.43

 

Diluted

 

$

(0.39

)

 

$

1.00

 

 

$

(2.33

)

 

$

3.41

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (a)

 

 

66,470,639

 

 

 

66,132,492

 

 

 

66,385,886

 

 

 

66,089,104

 

Effect of dilutive instruments:

 

 

 

 

 

 

 

 

 

 

 

 

PSUs

 

 

 

 

 

432,142

 

 

 

 

 

 

415,818

 

Restricted shares

 

 

 

 

 

5,254

 

 

 

 

 

 

19,689

 

RSUs

 

 

 

 

 

12,971

 

 

 

 

 

 

8,060

 

DSUs

 

 

 

 

 

6,115

 

 

 

 

 

 

2,038

 

Diluted

 

 

66,470,639

 

 

 

66,588,974

 

 

 

66,385,886

 

 

 

66,534,709

 

 

(a)
For the three and nine months ended September 30, 2023, the weighted average number of common shares outstanding excludes 54,227 restricted shares which have been granted, but have not vested as of September 30, 2023 (2022 – 34,699 restricted shares).

The calculation of diluted net income (loss) per common share does not assume the exercise of any instruments that would have an anti-dilutive effect on net income (loss) per common share. Instruments excluded from the calculation of net income (loss) per common share because they were anti-dilutive for the three and nine months ended September 30, 2023 and 2022 were as follows:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

PSUs

 

 

3,681,297

 

 

 

 

 

 

3,681,297

 

 

 

 

Restricted shares

 

 

54,227

 

 

 

 

 

 

54,227

 

 

 

 

DSUs

 

 

44,155

 

 

 

 

 

 

44,155

 

 

 

 

 

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 13. Accumulated Other Comprehensive Loss

The change in the accumulated other comprehensive loss by component (net of tax) for the three and nine months ended September 30, 2023 and 2022 was as follows:

 

 

Foreign Currency Translation Adjustments

 

 

Defined Benefit Pension and Other Post-Retirement Benefit Items

 

 

Total

 

Three Months Ended September 30:

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2023

 

$

(164,199

)

 

$

15,164

 

 

$

(149,035

)

Other comprehensive loss before reclassifications

 

 

(38,439

)

 

 

 

 

 

(38,439

)

Amounts reclassified

 

 

 

 

 

81

 

 

 

81

 

Other comprehensive income (loss)

 

 

(38,439

)

 

 

81

 

 

 

(38,358

)

Balance as of September 30, 2023

 

$

(202,638

)

 

$

15,245

 

 

$

(187,393

)

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2022

 

$

(192,059

)

 

$

6,551

 

 

$

(185,508

)

Other comprehensive income (loss) before reclassifications

 

 

(94,781

)

 

 

112

 

 

 

(94,669

)

Amounts reclassified

 

 

 

 

 

(101

)

 

 

(101

)

Other comprehensive income (loss)

 

 

(94,781

)

 

 

11

 

 

 

(94,770

)

Balance as of September 30, 2022

 

$

(286,840

)

 

$

6,562

 

 

$

(280,278

)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2022

 

$

(195,085

)

 

$

15,123

 

 

$

(179,962

)

Other comprehensive loss before reclassifications

 

 

(7,553

)

 

 

 

 

 

(7,553

)

Amounts reclassified

 

 

 

 

 

122

 

 

 

122

 

Other comprehensive income (loss)

 

 

(7,553

)

 

 

122

 

 

 

(7,431

)

Balance as of September 30, 2023

 

$

(202,638

)

 

$

15,245

 

 

$

(187,393

)

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

$

(97,517

)

 

$

6,724

 

 

$

(90,793

)

Other comprehensive income (loss) before reclassifications

 

 

(189,323

)

 

 

174

 

 

 

(189,149

)

Amounts reclassified

 

 

 

 

 

(336

)

 

 

(336

)

Other comprehensive loss

 

 

(189,323

)

 

 

(162

)

 

 

(189,485

)

Balance as of September 30, 2022

 

$

(286,840

)

 

$

6,562

 

 

$

(280,278

)

 

Note 14. Related Party Transactions

The Company enters into related party transactions with its joint ventures. For the three and nine months ended September 30, 2023, pulp purchases from the Company's 50% owned Cariboo mill, which are transacted at the Cariboo mill's cost, were $24,016 and $73,411, respectively, (2022 – $28,550 and $79,817) and as of September 30, 2023, the Company had a payable balance to the Cariboo mill of $2,810 (December 31, 2022 – payable of $4,409). For the three and nine months ended September 30, 2023, services from the Company's 50% owned logging and chipping operation, which are transacted at arm's length negotiated prices, were $729 and $9,168, respectively (2022 – $3,092 and $10,348), and as of September 30, 2023, the Company had a receivable balance from the operation of $2,595 (December 31, 2022 – receivable of $522).

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 15. Segment Information

The Company is managed based on the primary products it manufactures: pulp and solid wood. Accordingly, the Company's four pulp mills and its 50% interest in the Cariboo pulp mill are aggregated into the pulp segment. The Friesau sawmill, the Torgau facility and the mass timber facilities are aggregated into the solid wood segment. Commencing in the third quarter of 2022, after our acquisition of the Torgau facility, the Company reorganized its operating and management structure which included having the chief operating decision maker review the mass timber results with the results of the Friesau sawmill and Torgau facility. This classification of the mass timber results within the solid wood segment has been reflected retrospectively. Previously they were included in our corporate and other segment. The Company's sandalwood business is included in corporate and other as it does not meet the criteria to be reported as a separate reportable segment.

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

 

Information about certain segment data for the three and nine months ended September 30, 2023 and 2022, was as follows:

Three Months Ended September 30, 2023

 

Pulp

 

 

Solid Wood

 

 

Corporate
and Other

 

 

Consolidated

 

Revenues from external customers

 

$

348,853

 

 

$

119,547

 

 

$

2,421

 

 

$

470,821

 

Operating income (loss)

 

$

21,181

 

 

$

(19,690

)

 

$

(4,917

)

 

$

(3,426

)

Depreciation and amortization

 

$

28,186

 

 

$

12,517

 

 

$

250

 

 

$

40,953

 

Revenues by major products

 

 

 

 

 

 

 

 

 

 

 

 

Pulp

 

$

318,102

 

 

$

 

 

$

 

 

$

318,102

 

Lumber

 

 

 

 

 

50,815

 

 

 

 

 

 

50,815

 

Energy and chemicals

 

 

30,751

 

 

 

5,468

 

 

 

2,421

 

 

 

38,640

 

Manufactured products (a)

 

 

 

 

 

20,850

 

 

 

 

 

 

20,850

 

Pallets

 

 

 

 

 

28,807

 

 

 

 

 

 

28,807

 

Biofuels (b)

 

 

 

 

 

11,387

 

 

 

 

 

 

11,387

 

Wood residuals

 

 

 

 

 

2,220

 

 

 

 

 

 

2,220

 

Total revenues

 

$

348,853

 

 

$

119,547

 

 

$

2,421

 

 

$

470,821

 

Revenues by geographical markets (c)

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

26,836

 

 

$

48,300

 

 

$

336

 

 

$

75,472

 

Foreign countries

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

 

87,993

 

 

 

52,838

 

 

 

179

 

 

 

141,010

 

China

 

 

128,335

 

 

 

400

 

 

 

 

 

 

128,735

 

Other countries

 

 

105,689

 

 

 

18,009

 

 

 

1,906

 

 

 

125,604

 

 

 

 

322,017

 

 

 

71,247

 

 

 

2,085

 

 

 

395,349

 

Total revenues

 

$

348,853

 

 

$

119,547

 

 

$

2,421

 

 

$

470,821

 

(a)
Manufactured products primarily includes cross-laminated timber, glulam and finger joint lumber.
(b)
Biofuels includes pellets and briquettes.
(c)
Sales are attributed to countries based on the ship-to location provided by the customer.

 

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 15. Segment Information (continued)

Three Months Ended September 30, 2022

 

Pulp

 

 

Solid Wood

 

 

Corporate
 and Other

 

 

Consolidated

 

Revenues from external customers

 

$

456,657

 

 

$

74,266

 

 

$

1,891

 

 

$

532,814

 

Operating income (loss)

 

$

109,985

 

 

$

2,896

 

 

$

(4,158

)

 

$

108,723

 

Depreciation and amortization

 

$

28,174

 

 

$

3,733

 

 

$

237

 

 

$

32,144

 

Revenues by major products

 

 

 

 

 

 

 

 

 

 

 

 

Pulp

 

$

395,459

 

 

$

 

 

$

 

 

$

395,459

 

Lumber

 

 

 

 

 

54,327

 

 

 

 

 

 

54,327

 

Energy and chemicals

 

 

61,198

 

 

 

8,111

 

 

 

1,891

 

 

 

71,200

 

Manufactured products (a)

 

 

 

 

 

7,117

 

 

 

 

 

 

7,117

 

Wood residuals

 

 

 

 

 

4,711

 

 

 

 

 

 

4,711

 

Total revenues

 

$

456,657

 

 

$

74,266

 

 

$

1,891

 

 

$

532,814

 

Revenues by geographical markets (b)

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

70,029

 

 

$

36,702

 

 

$

577

 

 

$

107,308

 

Foreign countries

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

 

142,607

 

 

 

21,265

 

 

 

 

 

 

163,872

 

China

 

 

102,158

 

 

 

277

 

 

 

 

 

 

102,435

 

Other countries

 

 

141,863

 

 

 

16,022

 

 

 

1,314

 

 

 

159,199

 

 

 

 

386,628

 

 

 

37,564

 

 

 

1,314

 

 

 

425,506

 

Total revenues

 

$

456,657

 

 

$

74,266

 

 

$

1,891

 

 

$

532,814

 

 

(a)
Manufactured products primarily includes finger joint lumber.
(b)
Sales are attributed to countries based on the ship-to location provided by the customer.

 

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 15. Segment Information (continued)

Nine Months Ended September 30, 2023

 

Pulp

 

 

Solid Wood

 

 

Corporate
and Other

 

 

Consolidated

 

Revenues from external customers

 

$

1,151,948

 

 

$

366,611

 

 

$

4,791

 

 

$

1,523,350

 

Operating loss

 

$

(49,507

)

 

$

(69,252

)

 

$

(13,620

)

 

$

(132,379

)

Depreciation and amortization

 

$

83,368

 

 

$

44,541

 

 

$

787

 

 

$

128,696

 

Total assets (a)

 

$

1,658,870

 

 

$

655,452

 

 

$

340,679

 

 

$

2,655,001

 

Revenues by major products

 

 

 

 

 

 

 

 

 

 

 

 

Pulp

 

$

1,061,933

 

 

$

 

 

$

 

 

$

1,061,933

 

Lumber

 

 

 

 

 

170,118

 

 

 

 

 

 

170,118

 

Energy and chemicals

 

 

90,015

 

 

 

16,523

 

 

 

4,791

 

 

 

111,329

 

Manufactured products (b)

 

 

 

 

 

42,643

 

 

 

 

 

 

42,643

 

Pallets

 

 

 

 

 

97,657

 

 

 

 

 

 

97,657

 

Biofuels (c)

 

 

 

 

 

29,764

 

 

 

 

 

 

29,764

 

Wood residuals

 

 

 

 

 

9,906

 

 

 

 

 

 

9,906

 

Total revenues

 

$

1,151,948

 

 

$

366,611

 

 

$

4,791

 

 

$

1,523,350

 

Revenues by geographical markets (d)

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

99,478

 

 

$

131,520

 

 

$

910

 

 

$

231,908

 

Foreign countries

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

 

271,682

 

 

 

177,122

 

 

 

409

 

 

 

449,213

 

China

 

 

399,527

 

 

 

2,404

 

 

 

 

 

 

401,931

 

Other countries

 

 

381,261

 

 

 

55,565

 

 

 

3,472

 

 

 

440,298

 

 

 

 

1,052,470

 

 

 

235,091

 

 

 

3,881

 

 

 

1,291,442

 

Total revenues

 

$

1,151,948

 

 

$

366,611

 

 

$

4,791

 

 

$

1,523,350

 

(a)
Total assets for the pulp segment includes the Company's $43,933 investment in joint ventures, primarily for the Cariboo mill. Total assets for the solid wood segment includes $33,921 of goodwill from the acquisition of Torgau.
(b)
Manufactured products primarily includes cross-laminated timber, glulam and finger joint lumber.
(c)
Biofuels includes pellets and briquettes.
(d)
Sales are attributed to countries based on the ship-to location provided by the customer.

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 20


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Note 15. Segment Information (continued)

Nine Months Ended September 30, 2022

 

Pulp

 

 

Solid Wood

 

 

Corporate
 and Other

 

 

Consolidated

 

Revenues from external customers

 

$

1,402,892

 

 

$

290,048

 

 

$

4,941

 

 

$

1,697,881

 

Operating income (loss)

 

$

271,692

 

 

$

84,923

 

 

$

(11,510

)

 

$

345,105

 

Depreciation and amortization

 

$

82,859

 

 

$

11,719

 

 

$

710

 

 

$

95,288

 

Revenues by major products

 

 

 

 

 

 

 

 

 

 

 

 

Pulp

 

$

1,260,949

 

 

$

 

 

$

 

 

$

1,260,949

 

Lumber

 

 

 

 

 

242,961

 

 

 

 

 

 

242,961

 

Energy and chemicals

 

 

141,943

 

 

 

18,343

 

 

 

4,941

 

 

 

165,227

 

Manufactured products (a)

 

 

 

 

 

17,176

 

 

 

 

 

 

17,176

 

Wood residuals

 

 

 

 

 

11,568

 

 

 

 

 

 

11,568

 

Total revenues

 

$

1,402,892

 

 

$

290,048

 

 

$

4,941

 

 

$

1,697,881

 

Revenues by geographical markets (b)

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

177,144

 

 

$

157,169

 

 

$

1,023

 

 

$

335,336

 

Foreign countries

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

 

429,269

 

 

 

67,684

 

 

 

 

 

 

496,953

 

China

 

 

342,513

 

 

 

629

 

 

 

 

 

 

343,142

 

Other countries

 

 

453,966

 

 

 

64,566

 

 

 

3,918

 

 

 

522,450

 

 

 

 

1,225,748

 

 

 

132,879

 

 

 

3,918

 

 

 

1,362,545

 

Total revenues

 

$

1,402,892

 

 

$

290,048

 

 

$

4,941

 

 

$

1,697,881

 

(a)
Manufactured products primarily includes finger joint lumber.
(b)
Sales are attributed to countries based on the ship-to location provided by the customer.

As of December 31, 2022, the Company had total assets of $1,768,628 in the pulp segment, $613,171 in the solid wood segment and $343,238 in corporate and other. Total assets for the pulp segment includes the Company's $45,635 investment in joint ventures, primarily for the Cariboo mill. Total assets for the solid wood segment includes $30,937 of goodwill from the acquisition of Torgau.

Revenues between segments are accounted for at prices that approximate fair value. These include revenues from the sale of residual fiber from the solid wood segment to the pulp segment for use in pulp production and from the sale of residual fuel from the pulp segment to the solid wood segment for use in energy production. For the three and nine months ended September 30, 2023, the pulp segment sold $221 and $765, respectively, of residual fuel to the solid wood segment (2022 – $nil) and the solid wood segment sold $10,267 and $32,408, respectively, of residual fiber to the pulp segment (2022 – $7,370 and $20,571).

Note 16. Financial Instruments and Fair Value Measurement

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and other approximates their fair value. The estimated fair values of the Company's outstanding debt under the fair value hierarchy as of September 30, 2023 and December 31, 2022 were as follows:

 

 

Fair value measurements as of

 

 

 

 

 

September 30, 2023 using:

 

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Revolving credit facilities

 

$

 

 

$

190,575

 

 

$

 

 

$

190,575

 

Senior notes

 

 

 

 

 

1,173,914

 

 

 

 

 

 

1,173,914

 

 

 

$

 

 

$

1,364,489

 

 

$

 

 

$

1,364,489

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 21


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Note 16. Financial Instruments and Fair Value Measurement (continued)

 

 

 

Fair value measurements as of

 

 

 

 

 

December 31, 2022 using:

 

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Revolving credit facilities

 

$

 

 

$

141,075

 

 

$

 

 

$

141,075

 

Senior notes

 

 

 

 

 

1,015,633

 

 

 

 

 

 

1,015,633

 

 

 

$

 

 

$

1,156,708

 

 

$

 

 

$

1,156,708

 

The carrying value of the revolving credit facilities classified as Level 2 approximates the fair value as the variable interest rates reflect current interest rates for financial instruments with similar characteristics and maturities.

The fair value of the senior notes classified as Level 2 was determined using quoted prices in a dealer market, or using recent market transactions. The Company's senior notes are not carried at fair value in the Interim Consolidated Balance Sheets as of September 30, 2023 or December 31, 2022. However, fair value disclosure is required. The carrying value of the Company's senior notes, net of unamortized note issuance costs, was $1,359,296 as of September 30, 2023 (December 31, 2022 – $1,161,672).

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 its sales is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping the product. The Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. Concentrations of credit risk are with customers and agents based primarily in Germany, China and the U.S.

The Company’s exposure to credit losses may increase if its customers' production and other costs are adversely affected by inflation. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables if the cash flows of the Company’s customers are adversely impacted by inflation. As of September 30, 2023, the Company has not had significant credit losses.

As of September 30, 2023, the carrying amount of cash and cash equivalents of $343,725 and accounts receivable of $266,927 recorded in the Interim Consolidated Balance Sheet, net of any allowances for losses, represent the Company’s maximum exposure to credit risk.

FORM 10-Q

QUARTERLY REPORT - PAGE 22


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Note 17. 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 23


 

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 (loss) 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 operating income (loss) as a measure of performance, or as an alternative to net cash from (used in) 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 24


 

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 September 30, 2023, 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) “m3” means cubic meters; (vii) “NBSK” refers to northern bleached softwood kraft; (viii) “NBHK” refers to northern bleached hardwood kraft; (ix) “MW” refers to megawatts and “MWh” refers to megawatt hours; (x) “Mfbm” refers to thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (xi) 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 and nine months ended September 30, 2023 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, 2022 filed with the Securities and Exchange Commission, referred to as the “SEC”.

Results of Operations

General

On June 15, 2023, we acquired substantially all of the assets of Structurlam Mass Timber Corporation and its subsidiaries (“Structurlam”), including a mass timber production facility located in Conway, Arkansas and mass timber production facilities in British Columbia, Canada, for cash consideration of $82.1 million.

We have two reportable operating segments:

Pulp – consists of the manufacture, sale and distribution of pulp, electricity and chemicals at our pulp mills.
Solid Wood – consists of the manufacture, sale and distribution of lumber, manufactured products (including cross-laminated timber, referred to as “CLT”, glulam and finger joint lumber), wood pallets, electricity, biofuels and wood residuals at our sawmills and other facilities in Germany and our mass timber facilities in North America which include the recently acquired U.S. and Canadian facilities from the Structurlam group of companies.

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

Commencing in the third quarter of 2022 and after our acquisition of the Torgau facility, we have included the mass timber results within our solid wood segment, which has been reflected retroactively. Previously they were included in our corporate and other segment.

Current Market Environment

In the third quarter of 2023, overall both pulp and lumber markets were generally weak. We saw modest pulp price improvements in China due to low customer inventory levels but prices in Europe and North America decreased compared to the second quarter of 2023 as a result of inflationary pressures negatively impacting demand. Our lumber sales realizations were flat compared to the second quarter of 2023 as higher realizations in North America were offset by lower realizations in Europe.

As we move into the fourth quarter, we currently expect modest improvements for pulp sales realizations as a result of increasing demand in China and reduced supply due to curtailments.

FORM 10-Q

QUARTERLY REPORT - PAGE 25


 

As of September 30, 2023, third party industry quoted NBSK list prices in Europe and North America were approximately $1,160 per ADMT and $1,270 per ADMT, respectively and NBSK net prices in China were approximately $715 per ADMT. Prices for China are net of discounts, allowances and rebates.

In our solid wood segment, we currently expect generally flat lumber prices in the fourth quarter due to high interest rates and we also currently expect continued growth in our mass timber operations.

Per unit fiber costs for the pulp segment decreased in the third quarter of 2023 compared to the second quarter of 2023 primarily due to realizing the benefits of the upgraded wood room at the Peace River mill and improved supply. For the fourth quarter of 2023, we currently expect a modest decrease to the per unit fiber costs for our pulp segment as a result of improved supply.

Per unit fiber costs for our solid wood segment decreased in the third quarter of 2023 compared to the second quarter of 2023 due to the increased supply of beetle damaged wood in Germany. For the fourth quarter of 2023, we currently expect modestly lower per unit fiber costs as a result of the continued availability of beetle damaged wood.

Summary Financial Highlights

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

(in thousands, other than per share amounts)

 

 

Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp segment revenues

 

$

348,853

 

 

$

456,657

 

 

$

1,151,948

 

 

$

1,402,892

 

 

Solid wood segment revenues

 

 

119,547

 

 

 

74,266

 

 

 

366,611

 

 

 

290,048

 

 

Corporate and other revenues

 

 

2,421

 

 

 

1,891

 

 

 

4,791

 

 

 

4,941

 

 

Total revenues

 

$

470,821

 

 

$

532,814

 

 

$

1,523,350

 

 

$

1,697,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp segment operating income (loss)

 

$

21,181

 

 

$

109,985

 

 

$

(49,507

)

 

$

271,692

 

 

Solid wood segment operating income (loss)

 

 

(19,690

)

 

 

2,896

 

 

 

(69,252

)

 

 

84,923

 

 

Corporate and other operating loss

 

 

(4,917

)

 

 

(4,158

)

 

 

(13,620

)

 

 

(11,510

)

 

Total operating income (loss)

 

$

(3,426

)

 

$

108,723

 

 

$

(132,379

)

 

$

345,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp segment depreciation and amortization

 

$

28,186

 

 

$

28,174

 

 

$

83,368

 

 

$

82,859

 

 

Solid wood segment depreciation and amortization

 

 

12,517

 

 

 

3,733

 

 

 

44,541

 

 

 

11,719

 

 

Corporate and other depreciation and amortization

 

 

250

 

 

 

237

 

 

 

787

 

 

 

710

 

 

Total depreciation and amortization

 

$

40,953

 

 

$

32,144

 

 

$

128,696

 

 

$

95,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating EBITDA (1)

 

$

37,527

 

 

$

140,867

 

 

$

(3,683

)

 

$

440,393

 

 

Income tax recovery (provision)

 

$

(3,984

)

 

$

(31,294

)

 

$

28,851

 

 

$

(89,656

)

 

Net income (loss)

 

$

(25,956

)

 

$

66,746

 

 

$

(154,840

)

 

$

227,015

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.39

)

 

$

1.01

 

 

$

(2.33

)

 

$

3.43

 

 

Diluted

 

$

(0.39

)

 

$

1.00

 

 

$

(2.33

)

 

$

3.41

 

 

Common shares outstanding at period end

 

 

66,525

 

 

 

66,167

 

 

 

66,525

 

 

 

66,167

 

 

 

 

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

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Net income (loss)

 

$

(25,956

)

 

$

66,746

 

 

$

(154,840

)

 

$

227,015

 

 

Income tax provision (recovery)

 

 

3,984

 

 

 

31,294

 

 

 

(28,851

)

 

 

89,656

 

 

Interest expense

 

 

21,863

 

 

 

17,935

 

 

 

61,001

 

 

 

52,731

 

 

Other income

 

 

(3,317

)

 

 

(7,252

)

 

 

(9,689

)

 

 

(24,297

)

 

Operating income (loss)

 

 

(3,426

)

 

 

108,723

 

 

 

(132,379

)

 

 

345,105

 

 

Add: Depreciation and amortization

 

 

40,953

 

 

 

32,144

 

 

 

128,696

 

 

 

95,288

 

 

Operating EBITDA

 

$

37,527

 

 

$

140,867

 

 

$

(3,683

)

 

$

440,393

 

 

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 26


 

Selected Production, Sales and Other Data

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

Pulp Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp production ('000 ADMTs)

 

 

 

 

 

 

 

 

 

 

 

 

 

NBSK

 

 

397.5

 

 

 

362.9

 

 

 

1,278.2

 

 

 

1,216.7

 

 

NBHK

 

 

82.5

 

 

 

82.1

 

 

 

179.7

 

 

 

190.4

 

 

Annual maintenance downtime ('000 ADMTs)

 

 

13.3

 

 

 

17.3

 

 

 

51.2

 

 

 

71.5

 

 

Annual maintenance downtime (days)

 

 

13

 

 

 

17

 

 

 

48

 

 

 

60

 

 

Pulp sales ('000 ADMTs)

 

 

 

 

 

 

 

 

 

 

 

 

 

NBSK

 

 

425.1

 

 

 

356.6

 

 

 

1,277.2

 

 

 

1,267.4

 

 

NBHK

 

 

62.1

 

 

 

69.3

 

 

 

182.8

 

 

 

185.0

 

 

Average NBSK pulp prices ($/ADMT)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

 

1,160

 

 

 

1,500

 

 

 

1,261

 

 

 

1,422

 

 

China

 

 

680

 

 

 

969

 

 

 

746

 

 

 

959

 

 

North America

 

 

1,293

 

 

 

1,800

 

 

 

1,493

 

 

 

1,690

 

 

Average NBHK pulp prices ($/ADMT)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

China

 

 

530

 

 

 

855

 

 

 

574

 

 

 

779

 

 

North America

 

 

1,023

 

 

 

1,620

 

 

 

1,274

 

 

 

1,483

 

 

Average pulp sales realizations ($/ADMT)(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

NBSK

 

 

666

 

 

 

911

 

 

 

735

 

 

 

865

 

 

NBHK

 

 

530

 

 

 

990

 

 

 

642

 

 

 

858

 

 

Energy production ('000 MWh)(3)

 

 

524.4

 

 

 

484.2

 

 

 

1,597.4

 

 

 

1,512.4

 

 

Energy sales ('000 MWh)(3)

 

 

214.8

 

 

 

174.3

 

 

 

619.4

 

 

 

568.3

 

 

Average energy sales realizations ($/MWh)(3)

 

 

108

 

 

 

339

 

 

 

112

 

 

 

233

 

 

Solid Wood Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Lumber

 

 

 

 

 

 

 

 

 

 

 

 

 

Production (MMfbm)

 

 

94.4

 

 

 

97.1

 

 

 

350.7

 

 

 

324.8

 

 

Sales (MMfbm)

 

 

114.7

 

 

 

89.8

 

 

 

388.4

 

 

 

310.7

 

 

Average sales realizations ($/Mfbm)

 

 

443

 

 

 

605

 

 

 

438

 

 

 

782

 

 

Energy

 

 

 

 

 

 

 

 

 

 

 

 

 

Production and sales ('000 MWh)

 

 

39.0

 

 

 

20.6

 

 

 

121.4

 

 

 

70.6

 

 

Average sales realizations ($/MWh)

 

 

140

 

 

 

394

 

 

 

136

 

 

 

260

 

 

Manufactured products(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Production ('000 m3)

 

 

10.9

 

 

 

15.0

 

 

 

14.9

 

 

 

28.0

 

 

Sales ('000 m3)

 

 

11.0

 

 

 

10.5

 

 

 

21.4

 

 

 

22.7

 

 

Average sales realizations ($/m3)

 

 

1,752

 

 

 

677

 

 

 

1,672

 

 

 

756

 

 

Pallets

 

 

 

 

 

 

 

 

 

 

 

 

 

Production ('000 units)

 

 

2,895.1

 

 

 

 

 

 

8,522.5

 

 

 

 

 

Sales ('000 units)

 

 

2,765.3

 

 

 

 

 

 

8,590.4

 

 

 

 

 

Average sales realizations ($/unit)

 

 

10

 

 

 

 

 

 

11

 

 

 

 

 

Biofuels(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

Production ('000 tonnes)

 

 

52.1

 

 

 

 

 

 

128.3

 

 

 

 

 

Sales ('000 tonnes)

 

 

38.7

 

 

 

 

 

 

105.0

 

 

 

 

 

Average realizations ($/tonne)

 

 

294

 

 

 

 

 

 

284

 

 

 

 

 

Average Spot Currency Exchange Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

$ / €(6)

 

 

1.0884

 

 

 

1.0066

 

 

 

1.0835

 

 

 

1.0636

 

 

$ / C$(6)

 

 

0.7458

 

 

 

0.7659

 

 

 

0.7433

 

 

 

0.7796

 

 

 

(1)
Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates.
(2)
Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates.
(3)
Does not include our 50% joint venture interest in the Cariboo mill, which is accounted for using the equity method.
(4)
Manufactured products primarily includes CLT, glulam, and finger joint lumber.
(5)
Biofuels includes pellets and briquettes.
(6)
Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.

FORM 10-Q

QUARTERLY REPORT - PAGE 27


 

Consolidated – Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Total revenues in the third quarter of 2023 decreased by approximately 12% to $470.8 million from $532.8 million in the same quarter of 2022 primarily due to lower pulp, energy and lumber sales realizations partially offset by higher sales volumes, the inclusion of Torgau and higher manufactured product sales realizations.

Costs and expenses in the third quarter of 2023 increased by approximately 12% to $474.2 million from $424.1 million in the third quarter of 2022 primarily due to the inclusion of Torgau and higher sales volumes partially offset by lower per unit fiber, freight and other production costs. In the third quarter of 2023, we received an aggregate of $8.2 million of insurance proceeds relating to the fire last year at our Stendal mill compared to $3.1 million of insurance proceeds in the comparative quarter.

In the third quarter of 2023, cost of sales depreciation and amortization increased by approximately 27% to $40.9 million from $32.1 million in the same quarter of 2022 primarily caused by the inclusion of Torgau.

Selling, general and administrative expenses increased by approximately 24% to $30.1 million in the third quarter of 2023 from $24.3 million in the same quarter of 2022 primarily because of the inclusion of Torgau.

In the third quarter of 2023, operating loss was $3.4 million compared to operating income of $108.7 million in the same quarter of 2022 primarily due to lower pulp, energy and lumber sales realizations partially offset by lower per unit fiber and other production costs, higher sales volumes and the receipt of insurance proceeds.

Interest expense in the third quarter of 2023 increased to $21.9 million from $17.9 million in the same quarter of 2022 caused by higher borrowings on our revolving credit facilities and higher interest rates.

In the third quarter of 2023, other income was $3.3 million compared to $7.3 million in the same quarter of 2022. Other income in the third quarter of 2023 primarily consisted of interest earned on cash and in the third quarter of 2022 other income primarily consisted of foreign exchange gains on dollar denominated cash held at our operations, as the dollar strengthened in the quarter.

During the third quarter of 2023, we had an income tax provision of $4.0 million on a loss before income taxes as we do not recognize a tax recovery for certain entities for which we do not currently expect to realize a tax benefit. In the comparative quarter of 2022, we had an income tax provision of $31.3 million or an effective tax rate of 32%.

For the third quarter of 2023, net loss was $26.0 million, or $0.39 per share, compared to net income of $66.7 million, or $1.01 per basic share and $1.00 per diluted share in the same quarter of the prior year.

In the third quarter of 2023, Operating EBITDA was $37.5 million compared to $140.9 million in the same quarter of 2022 primarily due to lower pulp, energy and lumber sales realizations partially offset by lower per unit fiber, freight and other production costs and higher sales volumes.

Operating Results by Business Segment

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

Pulp Segment – Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Selected Financial Information

 

 

Three Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Pulp revenues

 

$

318,102

 

 

$

395,459

 

 

Energy and chemical revenues

 

$

30,751

 

 

$

61,198

 

 

Depreciation and amortization

 

$

28,186

 

 

$

28,174

 

 

Operating income

 

$

21,181

 

 

$

109,985

 

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 28


 

Our pulp segment revenues decreased by approximately 24% to $348.9 million from $456.7 million in the same quarter of 2022 primarily because of the overall weak pulp market and lower energy revenues.

Pulp revenues in the third quarter of 2023 decreased by approximately 20% to $318.1 million from $395.5 million in the same quarter of 2022 due to lower sales realizations only partially offset by higher sales volumes.

Energy and chemical revenues decreased by approximately 50% to $30.8 million in the third quarter of 2023 from $61.2 million in the same quarter of 2022 as a result of lower energy sales realizations partially offset by higher sales volumes.

Total pulp production increased by approximately 8% to 479,924 ADMTs in the third quarter of 2023 from 444,970 ADMTs in the same quarter of 2022 primarily due to overall stable production at all of our mills and higher production at the Stendal mill compared to the same quarter of 2022 because of a fire which occurred in July 2022.

In the third quarter of 2023, our pulp mills had 39 days of downtime (approximately 48,400 ADMTs) which included 13 days for annual maintenance downtime and 26 days for market curtailment at the Celgar mill. In the comparative quarter of 2022, our pulp mills had 17 days of annual maintenance downtime (approximately 17,300 ADMTs).

In the fourth quarter of 2023, at our pulp mills we currently expect a total of 29 days for annual maintenance downtime (approximately 41,200 ADMTs).

We estimate that annual maintenance downtime in the third quarter of 2023 adversely impacted our operating income by approximately $12.2 million, comprised of approximately $9.4 million in direct out-of-pocket expenses and the balance in reduced production.

Total pulp sales volumes increased by approximately 14% to 487,199 ADMTs in the third quarter of 2023 from 425,854 ADMTs in the same quarter of 2022 primarily because of higher production and the timing of sales.

In the third quarter of 2023, third party industry quoted average list prices for NBSK pulp decreased in Europe and North America and net prices decreased in China from the same quarter of 2022. Average third party industry quoted list prices for NBSK pulp in Europe and North America were approximately $1,160 per ADMT and $1,293 per ADMT, respectively, in the third quarter of 2023 compared to approximately $1,500 per ADMT and $1,800 per ADMT, respectively, in the same quarter of 2022. Average third party industry quoted NBSK net prices in China were approximately $680 per ADMT in the third quarter of 2023 compared to approximately $969 per ADMT in the same quarter of 2022. Prices quoted for China are net of discounts, allowances and rebates whereas quoted prices for Europe and North America are before applicable discounts, allowances and rebates.

Our average NBSK pulp sales realizations decreased by approximately 27% to $666 per ADMT in the third quarter of 2023 from approximately $911 per ADMT in the same quarter of 2022. In the third quarter of 2023, our average NBHK pulp sales realizations decreased by approximately 46% compared to the same quarter of 2022.

In the third quarter of 2023 compared to the same quarter of 2022, primarily as a result of the effect of the weakening dollar on our euro denominated costs and expenses, we had a negative impact of approximately $17.7 million in operating income due to foreign exchange.

Costs and expenses in the third quarter of 2023 decreased by approximately 5% to $327.9 million from $346.7 million in the third quarter of 2022 primarily due to lower per unit fiber, freight and other production costs and the receipt of insurance proceeds in 2023 partially offset by a higher sales volume.

In the third quarter of 2023 per unit fiber costs decreased by approximately 12% from the same quarter of 2022 due to the sale and revaluation in the current quarter of inventory for which we took an impairment charge in the prior quarter. After giving effect to such impairment, per unit fiber costs increased as a result of strong demand in the mills' fiber baskets and lower wood chip availability for our Celgar mill because of regional sawmill curtailments. We currently expect per unit fiber costs to decrease in the fourth quarter of 2023 driven by improved supply.

Transportation costs decreased by approximately 20% to $34.3 million in the third quarter of 2023 from $42.7 million in the same quarter of 2022 driven by lower freight rates.

FORM 10-Q

QUARTERLY REPORT - PAGE 29


 

In the third quarter of 2023, depreciation and amortization was flat at $28.2 million compared to the same quarter of 2022.

In the third quarter of 2023, pulp segment operating income was $21.2 million compared to $110.0 million in the same quarter of 2022 primarily as a result of lower pulp and energy sales realizations and the negative impact of a weaker dollar partially offset by lower per unit fiber, freight and other production costs, higher sales volumes and the receipt of insurance proceeds of $8.2 million.

Solid Wood Segment – Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Selected Financial Information

 

 

Three Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Lumber revenues

 

$

50,815

 

 

$

54,327

 

 

Energy revenues

 

$

5,468

 

 

$

8,111

 

 

Manufactured products revenues(1)

 

$

20,850

 

 

$

7,117

 

 

Pallet revenues

 

$

28,807

 

 

$

 

 

Biofuels revenues(2)

 

$

11,387

 

 

$

 

 

Wood residuals revenues

 

$

2,220

 

 

$

4,711

 

 

Depreciation and amortization

 

$

12,517

 

 

$

3,733

 

 

Operating income (loss)

 

$

(19,690

)

 

$

2,896

 

 

 

(1)
Manufactured products primarily includes CLT, glulam, and finger joint lumber.
(2)
Biofuels includes pellets and briquettes.

In the third quarter of 2023, solid wood segment revenues increased by approximately 61% to $119.5 million from $74.3 million in the same quarter of 2022 primarily as a result of the inclusion of Torgau and the ramping up of our mass timber operations partially offset by lower lumber and energy revenues.

In the third quarter of 2023, lumber revenues decreased by approximately 6% to $50.8 million from $54.3 million in the same quarter of 2022 due to lower sales realizations partially offset by higher sales volumes. In the third quarter of 2023, both U.S. and European realized lumber prices were lower because of decreased demand as a result of higher interest rates and an uncertain economic outlook compared to the same quarter of 2022. The U.S. market accounted for approximately 57% of our lumber revenues and approximately 49% of our lumber sales volumes in the third quarter of 2023. The majority of the balance of our lumber sales were to Europe.

In the third quarter of 2023, our mass timber operations continued the ramp up of their operations and manufactured products revenue increased to $20.9 million from $7.1 million in the comparative quarter of 2022 as a result of both higher sales volumes and realizations.

Energy and wood residuals revenues in the third quarter of 2023 decreased by approximately 40% to $7.7 million from $12.8 million in the same quarter of 2022 primarily caused by lower sales realizations.

Pallet revenues of $28.8 million and biofuels revenues of $11.4 million in the third quarter of 2023 are from the inclusion of Torgau.

In the third quarter of 2023, lumber production modestly decreased to 94.4 MMfbm from 97.1 MMfbm in the same quarter of 2022 as a result of maintenance downtime and the overall weak lumber market, partially offset by the inclusion of Torgau.

Lumber sales volumes increased by approximately 28% to 114.7 MMfbm in the third quarter of 2023 from 89.8 MMfbm in the same quarter of 2022 primarily due to the timing of sales.

Average lumber sales realizations decreased by approximately 27% to $443 per Mfbm in the third quarter of 2023 from approximately $605 per Mfbm in the same quarter of 2022 as a result of lower demand in both the U.S. and

FORM 10-Q

QUARTERLY REPORT - PAGE 30


 

European markets.

Manufactured products sales realizations increased to $1,752 per m3 in the third quarter of 2023 from $677 per m3 in the third quarter of 2022 as a result of higher CLT sales volumes.

Fiber costs were approximately 70% of our lumber cash production costs in the third quarter of 2023. In the third quarter of 2023, per unit fiber costs for lumber production modestly decreased compared to the same quarter of 2022 due to an increased supply of beetle damaged wood. We currently expect modestly lower per unit fiber costs in the fourth quarter of 2023 as a result of continuing availability of beetle damaged wood.

In the third quarter of 2023, depreciation and amortization increased to $12.5 million compared to $3.7 million in the same quarter of 2022 primarily due to the inclusion of Torgau.

Transportation costs in the third quarter of 2023 increased by approximately 46% to $13.9 million from $9.5 million in the same quarter of 2022 primarily as a result of a higher sales volume.

In the third quarter of 2023, operating loss was $19.7 million compared to operating income of $2.9 million in the same quarter of 2022 primarily due to lower lumber and energy sales realizations partially offset by higher manufactured products sales realizations.

Consolidated ‑ Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Total revenues for the nine months ended September 30, 2023 decreased by approximately 10% to $1,523.4 million from $1,697.9 million in the same period of 2022 primarily due to lower pulp, lumber and energy sales realizations partially offset by the inclusion of Torgau and higher sales volumes.

Costs and expenses in the nine months ended September 30, 2023 increased by approximately 22% to $1,655.7 million from $1,352.8 million in the same period of 2022 primarily caused by the inclusion of Torgau, higher per unit fiber costs, which includes the net inventory impairment charges at our Canadian pulp mills of $56.6 million, higher sales volumes and higher chemical costs. These increases were partially offset by the receipt of $37.7 million of insurance proceeds.

In the nine months ended September 30, 2023, cost of sales depreciation and amortization increased to $128.5 million from $95.2 million in the same period of 2022 primarily due to the inclusion of Torgau.

Selling, general and administrative expenses increased by approximately 38% to $96.4 million in the nine months ended September 30, 2023 from $70.1 million in the nine months ended September 30, 2022 primarily because of the inclusion of Torgau.

In the nine months ended September 30, 2023, our operating loss was $132.4 million compared to operating income of $345.1 million in the same period of 2022 primarily due to lower pulp, lumber and energy sales realizations, higher per unit fiber costs, which includes the net inventory impairment charges at our Canadian pulp mills, and higher chemical costs partially offset by insurance proceeds received in the nine months ended September 30, 2023 and higher sales volumes.

Interest expense in the nine months ended September 30, 2023 increased by approximately 16% to $61.0 million from $52.7 million in the same period of 2022 primarily caused by higher borrowings on our revolving credit facilities and higher interest rates.

In the nine months ended September 30, 2023, other income decreased to $9.7 million from $24.3 million in the same period of 2022. Other income in the nine months ended September 30, 2023 primarily consisted of interest earned on cash and in the nine months ended September 30, 2022 primarily consisted of foreign exchange gains on dollar denominated cash held at our operations, as the dollar strengthened in 2022.

During the nine months ended September 30, 2023, we had an income tax recovery of $28.9 million or an effective tax rate of 16% as we do not recognize a tax recovery for certain entities for which we do not currently expect to realize a tax benefit. In the same period of 2022, the provision for income taxes was $89.7 million or an effective tax

FORM 10-Q

QUARTERLY REPORT - PAGE 31


 

rate of 28%.

In the nine months ended September 30, 2023, Operating EBITDA was negative $3.7 million compared to a positive $440.4 million in the same period of 2022 primarily due to lower pulp, lumber and energy sales realizations, higher per unit fiber costs which includes the net inventory impairment charges at our Canadian pulp mills, and higher chemical costs, partially offset by insurance proceeds received and higher sales volumes.

Operating Results by Business Segment

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

Pulp Segment ‑ Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Selected Financial Information

 

 

Nine Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Pulp revenues

 

$

1,061,933

 

 

$

1,260,949

 

 

Energy and chemical revenues

 

$

90,015

 

 

$

141,943

 

 

Depreciation and amortization

 

$

83,368

 

 

$

82,859

 

 

Operating income (loss)

 

$

(49,507

)

 

$

271,692

 

 

In the nine months ended September 30, 2023, pulp segment revenues decreased by approximately 18% to $1,151.9 million from $1,402.9 million reflecting the overall weak pulp market and lower energy revenues.

Pulp revenues in the nine months ended September 30, 2023 decreased by approximately 16% to $1,061.9 million from $1,260.9 million in the same period of 2022 primarily due to lower sales realizations.

Energy and chemical revenues decreased by approximately 37% to $90.0 million in the nine months ended September 30, 2023 from $141.9 million in the same period of 2022 primarily due to lower energy sales realizations partially offset by higher sales volumes.

Pulp production was modestly higher at 1,457,911 ADMTs in the nine months ended September 30, 2023 compared with 1,407,103 ADMTs in the same period of 2022 primarily due to stable production. In the nine months ended September 30, 2023, our pulp mills had 109 days of downtime (approximately 120,900 ADMTs) which included a total of 48 days of annual maintenance downtime and 61 days for market curtailment at the Peace River, Cariboo and Celgar mills. In the nine months ended September 30, 2022, our pulp mills had 66 days of downtime (approximately 79,900 ADMTs) comprised of 60 days of annual maintenance downtime and an additional six days at our Celgar mill caused by slower than planned start up.

We estimate that annual maintenance downtime in the nine months ended September 30, 2023 adversely impacted our operating loss by approximately $38.6 million, comprised of approximately $31.0 million in direct out-of-pocket expenses and the balance in reduced production.

 

Pulp sales volumes remained generally flat at 1,460,050 ADMTs in the nine months ended September 30, 2023 from 1,452,426 ADMTs in the same period of 2022.

In the nine months ended September 30, 2023, prices for NBSK pulp decreased from the same period of 2022, largely as a result of weaker demand. Average list prices for NBSK pulp in Europe and North America were approximately $1,261 per ADMT and $1,493 per ADMT, respectively in the nine months ended September 30, 2023 compared to approximately $1,422 per ADMT and $1,690 per ADMT, respectively, in the same period of 2022. Average NBSK net prices in China were approximately $746 per ADMT in the nine months ended September 30, 2023 compared to approximately $959 per ADMT in the nine months ended September 30, 2022.

Average NBSK pulp sales realizations decreased by approximately 15% to $735 per ADMT in the nine months ended

FORM 10-Q

QUARTERLY REPORT - PAGE 32


 

September 30, 2023 from approximately $865 per ADMT in the same period of 2022. In the nine months ended September 30, 2023, average NBHK pulp sales realizations decreased by approximately 25% from the same period of 2022.

In the nine months ended September 30, 2023, we had a positive impact of approximately $2.0 million in operating loss due to foreign exchange.

In the nine months ended September 30, 2023, we recorded net inventory impairment charges at our Canadian pulp mills of $56.6 million.

Costs and expenses in the nine months ended September 30, 2023 increased by approximately 6% to $1,202.2 million from $1,131.2 million in the nine months ended September 30, 2022 primarily due to higher per unit fiber, which includes the net inventory impairment at our Canadian mills, and chemical costs partially offset by the receipt of $37.7 million of insurance proceeds in the nine months ended September 30, 2023, relating to the 2021 turbine downtime at the Rosenthal mill and the July 2022 fire at the Stendal mill, and lower energy and freight costs.

On average, in the nine months ended September 30, 2023 overall per unit fiber costs increased by approximately 25% from the same period of 2022 due to higher per unit fiber costs for all of our mills. Our German mills had higher per unit fiber costs as a result of strong demand from other wood consumers such as heating pellet manufacturers in response to energy shortages caused by the war in Ukraine. For our Canadian pulp mills, per unit fiber costs increased as a result of strong demand in the mills' fiber baskets and for our Celgar mill a decrease in the availability of wood chips because of regional sawmill curtailments.

Transportation costs for our pulp segment decreased by approximately 12% to $118.0 million in the nine months ended September 30, 2023 from $133.8 million in the same period of 2022 driven by lower freight rates.

In the nine months ended September 30, 2023, depreciation and amortization remained relatively flat at $83.4 million from $82.9 million in the same period of 2022.

In the nine months ended September 30, 2023, the pulp segment had an operating loss of $49.5 million from operating income of $271.7 million in the same period of 2022 primarily as a result of lower pulp and energy sales realizations, higher per unit fiber costs, which includes the net inventory impairment at our Canadian pulp mills, partially offset by the receipt of insurance proceeds and lower energy and freight costs.

Solid Wood Segment ‑ Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Selected Financial Information

 

 

Nine Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Lumber revenues

 

$

170,118

 

 

$

242,961

 

 

Energy revenues

 

$

16,523

 

 

$

18,343

 

 

Manufactured products revenues(1)

 

$

42,643

 

 

$

17,176

 

 

Pallet revenues

 

$

97,657

 

 

$

 

 

Biofuels revenues(2)

 

$

29,764

 

 

$

 

 

Wood residuals revenues

 

$

9,906

 

 

$

11,568

 

 

Depreciation and amortization

 

$

44,541

 

 

$

11,719

 

 

Operating income (loss)

 

$

(69,252

)

 

$

84,923

 

 

 

(1)
Manufactured products primarily includes CLT, glulam and finger joint lumber.
(2)
Biofuels includes pellets and briquettes.

FORM 10-Q

QUARTERLY REPORT - PAGE 33


 

In the nine months ended September 30, 2023, solid wood segment revenues increased by approximately 26% to $366.6 million from $290.0 million in the same period of 2022 primarily because of the inclusion of Torgau and the ramping up of our mass timber operations partially offset by a decline in lumber revenues.

 

In the nine months ended September 30, 2023, lumber revenues decreased by approximately 30% to $170.1 million from $243.0 million in the same period of 2022 primarily caused by lower sales realizations partially offset by higher sales volumes. In the nine months ended September 30, 2023, both U.S. and European realized lumber prices were lower because of decreased demand as a result of higher interest rates and an uncertain economic outlook compared to the same period of 2022. The U.S. market accounted for approximately 56% of our lumber revenues and approximately 51% of our lumber sales volumes in the nine months ended September 30, 2023. The majority of the balance of our lumber sales were to Europe.

Energy and wood residuals revenues decreased by approximately 12% to $26.4 million in the nine months ended September 30, 2023 from $29.9 million in the same period of 2022 as a result of lower energy sales realizations.

In the nine months ended September 30, 2023, our mass timber business continued to ramp up operations and manufactured products revenues more than doubled to $42.6 million from $17.2 million in the same period of 2022.

Pallet revenues of $97.7 million and biofuels revenues of $29.8 million in the nine months ended September 30, 2023 are from the inclusion of Torgau.

Lumber production increased by approximately 8% to 350.7 MMfbm in the nine months ended September 30, 2023 from 324.8 MMfbm in the same period of 2022 as a result of the inclusion of Torgau and the upgrades at the Friesau mill.

Lumber sales volumes increased by approximately 25% to 388.4 MMfbm in the nine months ended September 30, 2023 from 310.7 MMfbm in the same period of 2022 primarily because of higher production and the timing of sales.

Average lumber sales realizations decreased by approximately 44% to $438 per Mfbm in the nine months ended September 30, 2023 from approximately $782 per Mfbm in the same period of 2022 caused by lower demand in both the U.S. and European markets. Demand was negatively impacted by rising interest rates, inflationary pressures and an uncertain economic outlook.

Manufactured products sales realizations increased to $1,672 per m3 in the nine months ended September 30, 2023 from $756 per m3 in the same period of 2022 as a result of higher CLT sales volumes.

Fiber costs were approximately 75% of our lumber cash production costs in the nine months ended September 30, 2023. In the nine months ended September 30, 2023, per unit fiber costs for lumber production increased compared to the same period of 2022, due to strong fiber demand in Germany.

In the nine months ended September 30, 2023, depreciation and amortization increased to $44.5 million from $11.7 million in the same period of 2022 primarily because of the inclusion of Torgau. Torgau’s amortization included $8.3 million for the order backlog intangible asset acquired, which is now fully amortized.

Transportation costs for our solid wood segment in the nine months ended September 30, 2023 increased by approximately 44% to $48.0 million from $33.4 million in the same period of 2022 primarily due to the inclusion of Torgau and higher lumber sales volumes.

In the nine months ended September 30, 2023, operating loss was $69.3 million compared to operating income of $84.9 million in the same period of 2022 primarily because of lower sales realizations.

FORM 10-Q

QUARTERLY REPORT - PAGE 34


 

Liquidity and Capital Resources

Summary of Cash Flows

 

 

Nine Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Net cash from (used in) operating activities

 

$

(60,286

)

 

$

310,011

 

 

Net cash used in investing activities

 

 

(179,682

)

 

 

(451,629

)

 

Net cash from financing activities

 

 

230,567

 

 

 

94,709

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(906

)

 

 

(11,447

)

 

Net decrease in cash and cash equivalents

 

$

(10,307

)

 

$

(58,356

)

 

We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for fiber, labor and chemicals. Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and sales and the payment of payables and expenses.

Cash Flows from (used in) Operating Activities. Cash used in operating activities was $60.3 million in the nine months ended September 30, 2023 compared to cash provided of $310.0 million in the comparative period of 2022. A decrease in accounts receivable provided cash of $89.1 million in the nine months ended September 30, 2023 and an increase in accounts receivable used cash of $4.3 million in the same period of 2022. In the nine months ended September 30, 2023, adjusting for net inventory impairments of $56.6 million, an increase in inventories used cash of $19.0 million and $23.9 million in the same period of 2022. A decrease in accounts payable and accrued expenses used cash of $107.6 million in the nine months ended September 30, 2023 and an increase in accounts payable and accrued expenses provided cash of $37.6 million in the same period of 2022.

Cash Flows from (used in) Investing Activities. Investing activities in the nine months ended September 30, 2023 used cash of $179.7 million primarily related to capital expenditures of $110.3 million and acquisition costs of $82.1 million for mass timber assets in the United States and Canada. In the nine months ended September 30, 2023, capital expenditures primarily related to costs to complete the Rosenthal lignin plant, upgrades to the wood rooms at our Canadian mills and maintenance and optimization projects at our German mills. In the nine months ended September 30, 2023, we received $5.4 million of insurance proceeds for our property damage claim related to the fire in 2022 at our Stendal mill and we received $4.6 million of government grants for the Peace River wood room project. Investing activities in the nine months ended September 30, 2022 used cash of $451.6 million primarily related to the acquisition of Torgau for $257.4 million, capital expenditures of $128.9 million and our transferring of $75.0 million into a six month term deposit. In the nine months ended September 30, 2022, we received insurance proceeds of $7.6 million comprised of the initial payment of $1.2 million for our property damage claim related to the Stendal fire and the balance related to the final payment for our property damage claim related to the Peace River recovery boiler.

Cash Flows from (used in) Financing Activities. In the nine months ended September 30, 2023, financing activities provided cash of $230.6 million primarily from the proceeds of the issuance of $200.0 million of senior notes due 2028 and borrowing approximately $51.3 million under our revolving credit facilities. In the nine months ended September 30, 2023, we paid dividends of $10.0 million and incurred aggregate debt issuance costs of $4.6 million related to the issuance of the senior notes and to increase the maximum borrowing capacity under our German revolving credit facility by €70.1 million. In the nine months ended September 30, 2022, financing activities provided cash of $94.7 million. In such period we borrowed $116.5 million under our revolving credit facilities. In the nine months ended September 30, 2022, we paid dividends of $9.9 million and incurred aggregate debt issuance costs of $3.0 million for the amended €300.0 million German revolving credit facility and C$160.0 million Canadian revolving credit facility.

FORM 10-Q

QUARTERLY REPORT - PAGE 35


 

Balance Sheet Data

The following table is a summary of selected financial information as of the dates indicated:

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

343,725

 

 

$

354,032

 

Working capital

 

$

796,634

 

 

$

800,114

 

Total assets

 

$

2,655,001

 

 

$

2,725,037

 

Long-term liabilities

 

$

1,721,683

 

 

$

1,508,192

 

Total shareholders' equity

 

$

665,452

 

 

$

838,784

 

Sources and Uses of Funds

Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand. Our principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our senior notes.

The following table sets out our total capital expenditures and interest expense for the periods indicated:

 

 

Nine Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

 

 

(in thousands)

 

 

Capital expenditures

 

$

110,302

 

 

$

128,875

 

 

Cash paid for interest expense(1)

 

$

76,906

 

 

$

65,344

 

 

Interest expense(2)

 

$

61,001

 

 

$

52,731

 

 

 

(1)
Amounts differ from interest expense, which includes non-cash items. See supplemental disclosure of cash flow information from our Interim Consolidated Statements of Cash Flows included in this report.
(2)
Interest on our senior notes due 2026 is paid semi-annually in January and July of each year. Interest on our senior notes due 2029 is paid semi-annually in February and August of each year. Interest on our senior notes due 2028 is paid semi-annually in April and October of each year.

As of September 30, 2023, we had cash and cash equivalents of $343.7 million and approximately $304.7 million available under our revolving credit facilities and as a result aggregate liquidity of about $648.4 million.

We have reduced our planned capital expenditures for fiscal 2023 and expect them to be between $130 to $150 million.

We currently consider the majority of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income tax has been provided on such earnings. However, if we were required to repatriate funds to the United States, we believe that we currently could repatriate the majority thereof without incurring any material amount of taxes as a result of our shareholder advances and U.S. tax reform. However, it is currently not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. Substantially all of our undistributed earnings are held by our foreign subsidiaries outside of the United States.

Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp and lumber pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facilities, will be adequate to finance the capital requirements for our business including the payment of our quarterly dividend during the next 12 months.

In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.

FORM 10-Q

QUARTERLY REPORT - PAGE 36


 

Debt Covenants

Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. See our annual report on Form 10-K for the fiscal year ended December 31, 2022.

As of September 30, 2023, we were in full compliance with all of the covenants of our indebtedness.

Off-Balance Sheet Arrangements

As of September 30, 2023, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Contractual Obligations and Commitments

There were no material changes outside the ordinary course to any of our material contractual obligations during the nine months ended September 30, 2023.

Foreign Currency

As a majority of our assets, liabilities and expenditures are held or denominated in euros or Canadian dollars, our consolidated financial results are subject to foreign currency exchange rate fluctuations.

We translate foreign denominated assets and liabilities into dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in other comprehensive loss and do not affect our net earnings.

As a result of the strengthening of the dollar versus the euro as of September 30, 2023, we recorded a non-cash decrease of $7.6 million in the carrying value of our net assets denominated in euros, consisting primarily of our property, plant and equipment. This non-cash decrease does not affect our net loss, Operating EBITDA or cash but is reflected in our other comprehensive loss and as a decrease to our total equity. As a result, our accumulated other comprehensive loss increased to $187.4 million.

Based upon the exchange rate as of September 30, 2023, the dollar has strengthened by approximately 1% against the euro and was flat against the Canadian dollar since December 31, 2022. See "Quantitative and Qualitative Disclosures about Market Risk".

Credit Ratings of Senior Notes

 

We and our senior notes are rated by Standard & Poor's Rating Services, referred to as "S&P", and Moody's Investors Service, Inc., referred to as "Moody's". In September 2023, S&P lowered its outlook to negative from stable and downgraded its rating on our senior notes to B from B+. Its recovery rating decreased to “4” from “3”. Moody’s lowered its outlook to negative from stable and downgraded its rating on our senior notes to B2 from Ba3.

 

Credit ratings are not recommendations to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of the recording of assets, liabilities, revenues, and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increases, these judgments become even more subjective and complex.

FORM 10-Q

QUARTERLY REPORT - PAGE 37


 

Our significant accounting policies are disclosed in Note 1 to our audited annual financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2022. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets and goodwill, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

We have identified certain accounting policies that are the most important to the portrayal of our current financial condition and results of operations.

For information about both our significant and critical accounting policies, see our annual report on Form 10-K for the fiscal year ended December 31, 2022.

Cautionary Statement Regarding Forward-Looking Information

The statements in this report that are not reported financial results or other historical information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

Generally, forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", or words of similar meaning, or future or conditional verbs, such as "will", "should", "could", or "may", although not all forward-looking statements contain these identifying words. Forward-looking statements are based on expectations, forecasts and assumptions by our management and involve a number of risks, uncertainties and other factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, the following:

Risks Related to our Business

Our business is highly cyclical in nature;
cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business;
our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by Russia's invasion of Ukraine;
inflation or a sustained increase in our key production and other costs would lead to higher manufacturing costs which could reduce our margins;
the ongoing COVID-19 pandemic could materially adversely affect our business, financial position and results of operations;
we face intense competition in the forest products industry;
our business is subject to risks associated with climate change and social and government responses thereto;
if we are unable to offer products certified to globally recognized forestry management and chain of custody standards or meet customers’ product specifications, it could adversely affect our ability to compete;
our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements;

FORM 10-Q

QUARTERLY REPORT - PAGE 38


 

trends in non-print media and changes in consumer habits regarding the use of paper have and are expected to continue to adversely affect the demand for market pulp;
fluctuations in prices and demand for lumber could adversely affect our business;
our solid wood segment lumber products are vulnerable to declines in demand due to competing technologies or materials;
we may experience material disruptions to our production;
acquisitions may result in additional risks and uncertainties in our business;
we are subject to risks related to our employees;
we are dependent on key personnel;
if our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations;
our insurance coverage may not be adequate;
we rely on third parties for transportation services;
failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business;
we have limited control over the operations of the Cariboo mill;

Risks Related to our Debt

our level of indebtedness could negatively impact our financial condition, results of operations and liquidity;
changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities;
we are exposed to interest rate fluctuations;

Risks Related to Macro-economic Conditions

a weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;
we are exposed to currency exchange rate fluctuations;
globally, central banks have raised interest rates in response to high inflation rates which could dampen macroeconomic conditions and business activity which could reduce demand for our products;
political uncertainty, an increase in trade protectionism or geo-political conflict could have a material adverse effect on global macro-economic activities and trade and adversely affect our business, results of operations and financial condition;
we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a new pandemic, terrorist attacks or natural disasters;

FORM 10-Q

QUARTERLY REPORT - PAGE 39


 

Legal and Regulatory Risks

we are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations;
we sell surplus green energy in Germany and are subject to changing energy legislation in response to high prices and energy shortages resulting from the war in Ukraine;
our international sales and operations are subject to applicable laws relating to trade, export controls, foreign corrupt practices and competition laws, the violation of which could adversely affect our operations;

Risks Related to Ownership of our Shares

the price of our common stock may be volatile; and
a small number of our shareholders could significantly influence our business.

Given these uncertainties, you should not place undue reliance on our forward-looking statements. The foregoing review of important factors is not exhaustive or necessarily in order of importance and should be read in conjunction with the risks and assumptions including those set forth under "Part II. Other Information – Item 1A. Risk Factors" and in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the fiscal year ended December 31, 2022. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.

Cyclical Nature of Business

Revenues

The pulp and lumber businesses are highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn can materially affect prices. Pulp and lumber markets are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro-economic conditions and levels of industry capacity. Pulp and lumber are commodities that are generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.

Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their pulp production on the market, if market conditions, prices and trends warrant such actions.

Demand for each of pulp and lumber has historically been determined primarily by general global macro-economic conditions and has been closely tied to overall business activity. Pulp and lumber prices have been and are likely to continue to be volatile and can fluctuate widely over time.

The third party industry quoted average European list prices for NBSK pulp between 2013 and 2023 have fluctuated between a low of $790 per ADMT in 2016 to a high of $1,500 per ADMT in 2022. In the same period, third party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $770 per ADMT in 2013 to a high of $1,620 per ADMT in 2022.

FORM 10-Q

QUARTERLY REPORT - PAGE 40


 

As a key construction material, the pricing and demand for lumber is also significantly influenced by the number of housing starts, especially in the United States. In the U.S., third party industry quoted monthly average western spruce/pine/fir (WSPF) 2 x 4 #2&Btr prices between 2013 and 2023 have fluctuated between a low of $245 per Mfbm in 2015 to a high of $1,604 per Mfbm in 2021. Similarly, the demand for CLT is primarily driven by the wood construction market and increased government policies focused on a low-carbon economy.

Our mills and operations voluntarily subject themselves to third-party certification as to compliance with internationally recognized, sustainable management standards because end use paper and lumber customers have shown an increased interest in understanding the origin of products they purchase. Demand for our products could be adversely affected if we, or our suppliers, are unable to achieve compliance, or are perceived by the public as failing to comply, with these standards or if our customers require compliance with alternate standards for which our operations are not certified.

A pulp producer's actual sales price realizations are net of customer discounts, rebates and other selling concessions. Accordingly, prices for pulp and lumber are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the prices for pulp and lumber, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations and cash flows could be materially adversely affected.

Costs

Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips, pulp logs and sawlogs. Wood chip, pulp log and sawlog costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber prices could affect producer profit margins if they are unable to pass along price increases to pulp and lumber customers or purchasers of surplus energy.

Currency

We have manufacturing operations in Germany, Canada and the United States. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Canadian mills in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such declines in the dollar relative to the euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

FORM 10-Q

QUARTERLY REPORT - PAGE 41


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rates between the dollar and the euro and Canadian dollar. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the periodic use of derivatives.

For additional information, please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our annual report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, referred to as the "Exchange Act"), as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness and there can be no assurance that any design will succeed in achieving its stated goals.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORM 10-Q

QUARTERLY REPORT - PAGE 42


 

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to routine litigation incidental to our business, including that which is described in our latest annual report on Form 10-K for the fiscal year ended December 31, 2022. 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 annual report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

FORM 10-Q

QUARTERLY REPORT - PAGE 43


 

ITEM 6. EXHIBITS

 

Exhibit No.

 

Description

 

 

 

31.1

 

Section 302 Certification of Chief Executive Officer

 

 

 

31.2

 

Section 302 Certification of Chief Financial Officer

 

 

 

32.1*

 

Section 906 Certification of Chief Executive Officer

 

 

 

32.2*

 

Section 906 Certification of Chief Financial Officer

 

 

 

101

 

The following financial information from the Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2023 of Mercer International Inc., formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Interim Consolidated Statements of Operations; (ii) Interim Consolidated Statements of Comprehensive Income (Loss); (iii) Interim Consolidated Balance Sheets; (iv) Interim Consolidated Statements of Changes in Shareholders' Equity; (v) Interim Consolidated Statements of Cash Flows; and (vi) Notes to the Interim Consolidated Financial Statements.

 

 

 

104

 

The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 has been formatted in Inline XBRL.

 

* In accordance with Release No. 33-8212 of the SEC, these Certifications: (i) are "furnished" to the SEC and are not "filed" for the purposes of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company's registration statements filed under the Securities Act of 1933, as amended, for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 44


 

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.

 

 

MERCER INTERNATIONAL INC.

 

 

 

 

 

By:

 

/s/ Juan Carlos Bueno

 

 

 

Juan Carlos Bueno

 

 

 

Chief Executive Officer

 

Date: November 2, 2023

FORM 10-Q

QUARTERLY REPORT - PAGE 45