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, 2021
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 66,037,552 shares of common stock outstanding as of October 27, 2021.
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)
QUARTERLY REPORT - PAGE 2
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share data)
Three Months Ended
September 30,
Nine Months Ended
2021
2020
Revenues
$
469,746
333,151
1,284,298
1,024,945
Costs and expenses
Cost of sales, excluding depreciation and amortization
302,221
272,165
910,244
832,554
Cost of sales depreciation and amortization
34,294
31,862
97,175
94,952
Selling, general and administrative expenses
19,476
15,388
60,259
49,326
Operating income
113,755
13,736
216,620
48,113
Other income (expenses)
Interest expense
(16,882
)
(19,864
(53,031
(60,056
Loss on early extinguishment of debt
—
(30,368
Other income
4,735
11,898
9,118
12,136
Total other expenses, net
(12,147
(7,966
(74,281
(47,920
Income before income taxes
101,608
5,770
142,339
193
Income tax recovery (provision)
(32,490
1,775
(45,873
(4,451
Net income (loss)
69,118
7,545
96,466
(4,258
Net income (loss) per common share
Basic
1.05
0.11
1.46
(0.06
Diluted
1.04
Dividends declared per common share
0.0650
0.1950
0.2675
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
Other comprehensive income (loss)
Change in unrecognized losses and prior service costs related to defined benefit pension plans
(19
8
984
31
Income tax provision
(681
Change in unrecognized losses and prior service costs related to defined benefit pension plans, net of tax
303
Foreign currency translation adjustment
(42,110
52,280
(59,676
21,488
Other comprehensive income (loss), net of taxes
(42,129
52,288
(59,373
21,519
Total comprehensive income
26,989
59,833
37,093
17,261
See accompanying Notes to the Interim Consolidated Financial Statements.
QUARTERLY REPORT - PAGE 3
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data)
December 31,
ASSETS
Current assets
Cash and cash equivalents
338,730
361,098
Accounts receivable, net
253,731
227,055
Inventories
345,107
271,696
Prepaid expenses and other
14,708
15,003
Total current assets
952,276
874,852
Property, plant and equipment, net
1,141,303
1,109,740
Investment in joint ventures
43,341
46,429
Amortizable intangible assets, net
48,955
51,571
Operating lease right-of-use assets
10,474
13,251
Other long-term assets
34,243
31,928
Deferred income tax
1,161
1,355
Total assets
2,231,753
2,129,126
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and other
255,571
210,994
Pension and other post-retirement benefit obligations
920
802
Total current liabilities
256,491
211,796
Debt
1,162,377
1,145,294
29,938
31,810
Finance lease liabilities
55,201
41,329
Operating lease liabilities
7,257
9,933
Other long-term liabilities
11,192
10,909
81,461
77,028
Total liabilities
1,603,917
1,528,099
Shareholders’ equity
Common shares $1 par value; 200,000,000 authorized; 66,037,000 issued and outstanding (2020 – 65,868,000)
65,988
65,800
Additional paid-in capital
348,098
345,696
Retained earnings
300,698
217,106
Accumulated other comprehensive loss
(86,948
(27,575
Total shareholders’ equity
627,836
601,027
Total liabilities and shareholders’ equity
Commitments and contingencies (Note 14)
Subsequent event (Note 8)
QUARTERLY REPORT - PAGE 4
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
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, 2021
66,037
347,093
235,872
(44,819
604,134
Stock compensation expense
1,005
Net income
Dividends declared
(4,292
Other comprehensive loss
Balance as of September 30, 2021
Balance as of June 30, 2020
65,868
344,688
231,101
(147,329
494,260
895
(4,281
Other comprehensive income
Balance as of September 30, 2020
345,583
234,365
(95,041
550,707
Nine Months Ended September 30:
Balance as of December 31, 2020
Shares issued on grants of restricted shares
49
68
(68
Shares issued on grants of performance share units
120
(120
2,590
(12,874
Balance as of December 31, 2019
65,629
65,598
344,994
256,371
(116,560
550,403
(31
195
(195
815
Net loss
(17,610
Repurchase of common shares
(24
(138
(162
QUARTERLY REPORT - PAGE 5
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from (used in) operating activities
Adjustments to reconcile net income (loss) to cash flows from operating activities
Depreciation and amortization
34,315
31,884
97,237
95,031
Deferred income tax provision (recovery)
5,005
(4,255
7,485
(10,330
Inventory impairment
8,000
25,998
30,368
Defined benefit pension plans and other post-retirement benefit plan expense
879
769
2,654
2,270
Gain on sale of investments
(15,443
Foreign exchange transaction losses (gains)
(5,721
3,384
(12,361
4,120
(844
(1,801
(1,104
(2,993
Defined benefit pension plans and other post-retirement benefit plan contributions
(1,065
(783
(3,190
(2,495
Changes in working capital
Accounts receivable
(31,441
17,226
(27,500
11,238
(39,512
(8,031
(82,275
(20,443
Accounts payable and accrued expenses
12,180
(4,219
46,783
(54,000
(3,775
(6,683
(5,569
(6,759
Net cash from (used in) operating activities
40,144
28,488
151,584
22,751
Cash flows from (used in) investing activities
Purchase of property, plant and equipment
(38,306
(14,639
(125,692
(59,201
Acquisition of Mercer Mass Timber (Note 2)
(51,258
Insurance proceeds
1,530
21,578
Purchase of amortizable intangible assets
(460
(30
(1,669
(557
Purchase of investments
(9,370
Proceeds from sale of investments
21,540
2,873
396
2,764
1,243
Net cash from (used in) investing activities
(85,621
7,267
(154,277
(46,345
Cash flows from (used in) financing activities
Redemption of senior notes
(824,557
Proceeds from issuance of senior notes
875,000
Proceeds from (repayment of) revolving credit facilities, net
3,967
8,750
(53,145
34,359
Dividend payments
(4,293
(4,282
(8,582
(13,329
Payment of note issuance costs
(69
(14,483
Proceeds from government grants
361
8,893
299
(2,254
(302
(2,165
(2,729
Net cash from (used in) financing activities
(2,288
4,166
(19,039
18,438
Effect of exchange rate changes on cash and cash equivalents
1,961
2,325
(636
(349
Net increase (decrease) in cash and cash equivalents
(45,804
42,246
(22,368
(5,505
Cash and cash equivalents, beginning of period
384,534
303,334
351,085
Cash and cash equivalents, end of period
345,580
Supplemental cash flow disclosure:
Cash paid for interest
32,095
38,029
72,205
76,257
Cash paid for income taxes
9,039
2,916
14,174
17,797
Supplemental schedule of non-cash investing and financing activities:
Leased production equipment
2,215
510
25,394
11,206
QUARTERLY REPORT - PAGE 6
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States ("GAAP"). The unaudited Interim Consolidated Financial Statements should be read together with the audited Consolidated Financial Statements and accompanying notes included in the Company's latest Annual Report on Form 10‑K for the fiscal year ended December 31, 2020. 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, 2020 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 associated with impairment testing for long-lived assets, the allocation of the purchase price for a group of assets or a business 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.
Impact of the COVID-19 Pandemic
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. COVID-19 infections and health risks, including from variants, continue.
The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers.
As of the date of issuance of these Interim Consolidated Financial Statements, the Company has not had significant credit losses, downtime or closures at its mills or disruptions to raw material supplies or access to logistics networks due to the COVID-19 pandemic, but the extent to which the COVID-19 pandemic may materially impact the Company's future financial condition, liquidity, or results of operations remains uncertain.
QUARTERLY REPORT - PAGE 7
Note 2. Asset Acquisition
Mercer Mass Timber
On August 5, 2021, the Company acquired a cross-laminated timber facility for $51,258 cash, including $1,258 of acquisition costs. The acquired facility is called Mercer Mass Timber LLC (“MMT”).
MMT 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 purchase price was allocated to the land, building and production equipment acquired.
Note 3. Inventories
Inventories as of September 30, 2021 and December 31, 2020, were comprised of the following:
Raw materials
107,681
74,526
Finished goods
129,627
88,256
Spare parts and other
107,799
108,914
Note 4. Accounts Payable and Other
Accounts payable and other as of September 30, 2021 and December 31, 2020, was comprised of the following:
Trade payables
48,104
42,730
Accrued expenses
129,893
90,875
Interest payable
11,180
33,241
Income tax payable
36,676
23,256
Government grants (a)
7,260
7,161
3,369
22,458
10,362
(a)
The Canadian mills have a liability for unspent government grants which are required to be used to partially finance greenhouse gas emission reduction and innovation capital projects. The grants are recorded in “Cash and cash equivalents” in the Interim Consolidated Balance Sheets, however, they are considered to be restricted as they are repayable if the mills do not spend the funds on approved projects.
QUARTERLY REPORT - PAGE 8
Note 5. Debt
Debt as of September 30, 2021 and December 31, 2020, was comprised of the following:
Maturity
Senior notes (a)
5.500% senior notes
2026
300,000
5.125% senior notes
2029
6.500% senior notes
2024
250,000
7.375% senior notes
2025
550,000
Credit arrangements
€200 million joint revolving credit facility (b)
2023
C$60 million revolving credit facility (c)
3,924
21,992
C$60 million revolving credit facility (d)
32,988
€2.6 million demand loan (e)
1,178,924
1,154,980
Less: unamortized premium and issuance costs, net
(16,547
(9,686
The maturities of the principal portion of debt as of September 30, 2021 were as follows:
2022
Thereafter
1,175,000
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, 2021, the Company was in compliance with the terms of its debt agreements.
In January 2021, the Company issued $875,000 in aggregate principal amount of 5.125% senior notes which mature on February 1, 2029 (the “2029 Senior Notes”). The net proceeds from the 2029 Senior Notes issuance were $860,517 after deducting the underwriter’s discount and offering expenses. The net proceeds were used to redeem the outstanding senior notes which were to mature in 2024 and 2025 and for general corporate purposes. In connection with the redemption, the Company recorded a loss on early extinguishment of debt of $30,368 in the Interim Consolidated Statements of Operations.
The 2029 Senior Notes and the senior notes which mature on January 15, 2026 (the “2026 Senior Notes” and collectively with the 2029 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.
QUARTERLY REPORT - PAGE 9
Note 5. Debt (continued)
The following table presents the redemption prices (expressed as percentages of principal amount) and the redemption periods of the Senior Notes:
2026 Senior Notes
2029 Senior Notes
12 Month Period Beginning
Percentage
January 15, 2021
102.750%
February 1, 2024
102.563%
January 15, 2022
101.375%
February 1, 2025
101.281%
January 15, 2023 and thereafter
100.000%
February 1, 2026 and thereafter
(b)
A €200.0 million joint revolving credit facility with all of the Company's German mills that matures in December 2023. Borrowings under the facility are unsecured and bear interest at Euribor plus a variable margin ranging from 1.05% to 2.00% dependent on conditions including but not limited to a prescribed leverage ratio. As of September 30, 2021, approximately €10.8 million ($12,519) of this facility was supporting bank guarantees and approximately €189.2 million ($219,061) was available.
(c)
A C$60.0 million revolving credit facility for Peace River that matures in February 2024. The facility is available by way of: (i) Canadian dollar denominated advances, which bear interest at a designated prime rate per annum; (ii) banker's acceptance equivalent loans, which bear interest at the applicable Canadian dollar banker's acceptance plus 1.25% to 1.50% per annum; (iii) dollar denominated base rate advances at the greater of the federal funds rate plus 0.50%, a designated LIBOR rate plus 1.00% and the bank's applicable reference rate for U.S. dollar loans; and (iv) dollar LIBOR advances, which bear interest at LIBOR plus 1.25% to 1.50% per annum. Borrowings under the facility are collateralized by, among other things, the mill's inventories and accounts receivable. As of September 30, 2021, approximately C$5.0 million ($3,924) of this facility was drawn and accruing interest at a rate of 2.45%, approximately C$0.9 million ($718) was supporting letters of credit and approximately C$54.1 million ($42,450) was available.
(d)
A C$60.0 million revolving credit facility for Celgar that matures in July 2023. Borrowings under the facility are collateralized by the mill's inventories, accounts receivable, general intangibles and capital assets and are restricted by a borrowing base calculated on the mill's inventories and accounts receivable. The facility is available by way of: (i) Canadian and U.S. dollar denominated advances, which bear interest at a designated prime rate less 0.125% to plus 0.125% per annum; (ii) banker's acceptance equivalent loans, which bear interest at the applicable Canadian dollar banker's acceptance plus 1.25% to 1.625% per annum; and (iii) dollar LIBOR advances, which bear interest at LIBOR plus 1.25% to 1.625% per annum. As of September 30, 2021, approximately C$0.5 million ($354) was supporting letters of credit and approximately C$59.5 million ($46,738) was available.
(e)
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, 2021, approximately €2.6 million ($2,955) of this facility was supporting bank guarantees and approximately $nil was available.
QUARTERLY REPORT - PAGE 10
Note 6. 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 month periods ended September 30, 2021 and 2020 were as follows:
Three Months Ended September 30,
Pension
Other Post-
Retirement
Benefits
Service cost
981
76
857
65
Interest cost
876
98
848
97
Expected return on plan assets
(1,123
(1,106
Amortization of unrecognized items
168
(197
232
(224
Net benefit costs
902
(23
831
(62
Nine Months Ended September 30,
2,962
228
2,530
192
2,647
294
2,502
286
(3,392
(3,271
509
(594
693
(662
2,726
(72
2,454
(184
The components of the net benefit costs other than service cost are recorded in "Other income" in the Interim Consolidated Statements of Operations. The amortization of unrecognized items relates to net actuarial losses and prior service costs.
Defined Contribution Plan
Effective December 31, 2008, the defined benefit plans at the Celgar mill were closed to new members. In addition, the related defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the three and nine month periods ended September 30, 2021, the Company made contributions of $226 and $921, respectively to this plan (2020 – $320 and $791).
Multiemployer Plan
The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three and nine month periods ended September 30, 2021, the Company made contributions of $625 and $1,949, respectively to this plan (2020 – $475 and $1,481).
QUARTERLY REPORT - PAGE 11
Note 7. Income Taxes
Differences between the U.S. Federal statutory and the Company's effective tax rates for the three and nine month periods ended September 30, 2021 and 2020, were as follows:
U.S. Federal statutory rate
21%
U.S. Federal statutory rate on income before income taxes
(21,337
(1,212
(29,891
(41
Tax differential on foreign income
(7,309
611
(16,689
(1,270
Effect of foreign earnings (a)
1,965
468
(4,655
(2,402
Valuation allowance (b)
(1,073
(919
(12,025
(4,084
Tax benefit of partnership structure
783
935
2,349
2,805
Non-taxable foreign subsidies
733
734
2,224
2,098
True-up of prior year taxes
2,294
(1,996
5,418
(2,150
Annual effective tax rate adjustment
(9,000
9,000
Other, net
454
3,154
(1,604
593
Comprised of:
Current income tax provision
(27,485
(2,480
(38,388
(14,781
Deferred income tax recovery (provision)
(5,005
4,255
(7,485
10,330
Primarily due to the impact of the global intangible low-taxed income provision in the Tax Cuts and Jobs Act of 2017.
For the three and nine month periods ended September 30, 2021, the valuation allowance primarily relates to taxable losses and denied interest expense.
Note 8. Shareholders' Equity
Dividends
The Company's board of directors declared quarterly dividends during the nine month period ended September 30, 2021 as follows:
Date Declared
Dividend Per
Common Share
Amount
February 16, 2021
0.065
4,289
April 29, 2021
4,293
July 29, 2021
4,292
0.195
12,874
On October 28, 2021, the Company's board of directors declared a quarterly dividend of $0.065 per common share. Payment of the dividend will be made on December 30, 2021 to all shareholders of record on December 22, 2021. Future dividends are subject to approval by the board of directors and may be adjusted as business and industry conditions warrant.
QUARTERLY REPORT - PAGE 12
Note 8. Shareholders' Equity (continued)
Stock Based Compensation
The Company has a stock incentive plan which provides for options, restricted stock rights, restricted shares, performance shares, performance share units ("PSUs") and stock appreciation rights to be awarded to employees, consultants and non-employee directors. During the three and nine month periods ended September 30, 2021, there were no issued and outstanding options, restricted stock rights, performance shares or stock appreciation rights. As of September 30, 2021, after factoring in all allocated shares, there remain approximately 1.2 million common shares available for grant.
PSUs
PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally three years. For the three and nine month periods ended September 30, 2021, the Company recognized an expense of $823 and $2,118, respectively related to PSUs (2020 – $757 and $444).
PSU activity during the nine month period ended September 30, 2021 was as follows:
Number of PSUs
Outstanding as of January 1, 2021
2,364,848
Granted
1,007,912
Vested and issued
(120,271
Forfeited
(498,017
Outstanding as of September 30, 2021
2,754,472
Restricted Shares
Restricted shares generally vest at the end of one year. For the three and nine month periods ended September 30, 2021, the Company recognized an expense of $182 and $472, respectively related to restricted shares (2020 – $138 and $371). As of September 30, 2021, the total remaining unrecognized compensation cost related to restricted shares amounted to approximately $487 which will be amortized over the remaining vesting periods.
Restricted share activity during the nine month period ended September 30, 2021 was as follows:
Number of
Restricted
Shares
68,140
49,195
Vested
(68,140
QUARTERLY REPORT - PAGE 13
Note 9. Net Income (Loss) Per Common Share
The reconciliation of basic and diluted net income (loss) per common share for the three and nine month periods ended September 30, 2021 and 2020 was as follows:
Basic and diluted
Weighted average number of common shares outstanding:
Basic (a)
65,988,357
65,799,946
65,929,712
65,757,921
Effect of dilutive instruments:
317,674
79,489
318,404
Restricted shares
11,413
31,561
66,306,031
65,890,848
66,279,677
For the three and nine month periods ended September 30, 2021, the basic weighted average number of common shares outstanding excludes 49,195 restricted shares which have been issued, but have not vested as of September 30, 2021 (2020 – 68,140 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 month periods ended September 30, 2021 and 2020 were as follows:
2,391,082
Note 10. Accumulated Other Comprehensive Loss
The change in the accumulated other comprehensive loss by component (net of tax) for the nine month period ended September 30, 2021 was as follows:
Foreign
Currency
Translation
Adjustment
Defined Benefit
Pension and
Benefit Items
Balance as of January 1, 2021
(19,578
(7,997
Other comprehensive income (loss) before reclassifications
388
(59,288
Amounts reclassified
(85
(79,254
(7,694
QUARTERLY REPORT - PAGE 14
Note 11. Related Party Transactions
The Company enters into related party transactions with its joint ventures. For the three and nine month periods ended September 30, 2021, pulp purchases from the Company's 50% owned Cariboo mill, which are transacted at the Cariboo mill's cost, were $21,136 and $69,331, respectively (2020 – $20,717 and $54,253) and as of September 30, 2021 the Company had a receivable balance from the Cariboo mill of $3,079 (December 31, 2020 – $3,518). For the three and nine month periods ended September 30, 2021, services from the Company's 50% owned logging and chipping operation, which are transacted at arm's length negotiated prices, were $2,646 and $7,880, respectively (2020 – $3,265 and $11,543) and as of September 30, 2021 the Company had a payable balance to the operation of $2,351 (December 31, 2020 – $1,953).
Note 12. Segment Information
The Company is managed based on the primary products it manufactures: pulp and wood products. Accordingly, the Company's four pulp mills and its 50% interest in the Cariboo mill are aggregated into the pulp segment, and the Friesau sawmill is a separate reportable segment, wood products. The Company's sandalwood business and MMT are included in Corporate and Other as they do not meet the criteria to be reported as separate reportable segments.
None of the income or loss items following operating income 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 month periods ended September 30, 2021 and 2020, was as follows:
Three Months Ended September 30, 2021
Pulp
Wood
Products
Corporate
and Other
Consolidated
Revenues from external customers
396,743
70,723
2,280
Operating income (loss)
99,918
18,299
(4,462
29,982
3,675
658
Revenues by major products
374,287
Lumber
67,605
Energy and chemicals
22,456
1,801
26,537
Wood residuals
1,317
Total revenues
Revenues by geographical markets (a)
U.S.
48,627
26,812
975
76,414
Germany
125,149
18,726
143,875
China
100,174
412
100,586
Other countries
122,793
24,773
1,305
148,871
Sales are attributed to countries based on the ship-to location provided by the customer.
QUARTERLY REPORT - PAGE 15
Note 12. Segment Information (continued)
Three Months Ended September 30, 2020
274,916
57,053
1,182
3,753
11,963
(1,980
28,251
3,446
187
253,056
53,612
21,860
2,226
25,268
1,215
29,295
31,466
540
61,301
79,535
11,744
91,279
83,554
82,532
13,843
642
97,017
Nine Months Ended September 30, 2021
1,046,748
232,149
5,401
138,552
88,590
(10,522
84,995
11,146
1,096
Total assets (a)
1,765,620
249,380
216,753
989,060
221,201
57,688
6,607
69,696
4,341
Revenues by geographical markets (b)
128,905
125,514
2,281
256,700
318,781
48,265
367,046
263,717
1,258
264,975
335,345
57,112
3,120
395,577
Total assets for the pulp segment includes the Company's $43,341 investment in joint ventures, primarily for the Cariboo mill.
QUARTERLY REPORT - PAGE 16
Nine Months Ended September 30, 2020
876,567
144,558
3,820
33,302
21,845
(7,034
85,841
8,627
563
808,923
132,209
67,644
7,486
78,950
4,863
102,813
66,710
1,701
171,224
246,775
38,941
285,716
247,916
279,063
38,907
2,119
320,089
As of December 31, 2020, the Company had total assets of $1,740,233 in the pulp segment, $112,267 in the wood products segment and $276,626 in corporate and other. Total assets for the pulp segment includes the Company's $46,429 investment in joint ventures, primarily for the Cariboo mill.
Revenues between segments are accounted for at prices that approximate fair value. These include revenues from the sale of residual fiber from the wood products segment to the pulp segment for use in the pulp production process and from the sale of residual fuel from the pulp segment to the wood products segment for use in energy production. For the three and nine month periods ended September 30, 2021, the pulp segment sold $88 and $239, respectively of residual fuel to the wood products segment (2020 – $42 and $388) and the wood products segment sold $2,536 and $8,369, respectively of residual fiber to the pulp segment (2020 – $2,246 and $9,676).
QUARTERLY REPORT - PAGE 17
Note 13. 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, 2021 and December 31, 2020 were as follows:
Fair value measurements as of
September 30, 2021 using:
Description
Level 1
Level 2
Level 3
Revolving credit facilities
Senior notes
1,199,969
1,203,893
December 31, 2020 using:
54,980
1,131,229
1,186,209
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, 2021 or December 31, 2020. However, fair value disclosure is required. The carrying value of the Company's senior notes, net of note issuance costs and premium is $1,158,453 as of September 30, 2021 (December 31, 2020 – $1,090,314).
Credit Risk
The Company’s credit risk is primarily attributable to cash held in bank accounts and accounts receivable. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company’s credit risk associated with the sale of pulp, lumber and other wood residuals is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping the product. The Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. Concentrations of credit risk on the sale of pulp, lumber and other wood residuals are with customers and agents based primarily in Germany, China and the U.S.
The Company’s exposure to credit losses may increase if its customers are adversely affected by the COVID-19 pandemic. 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 the COVID-19 pandemic. As of September 30, 2021, the Company has not had significant credit losses due to the COVID-19 pandemic.
The carrying amount of cash and cash equivalents of $338,730 and accounts receivable of $253,731 recorded in the Interim Consolidated Balance Sheet, net of any allowances for losses, represents the Company’s maximum exposure to credit risk.
QUARTERLY REPORT - PAGE 18
Note 14. Commitments and Contingencies
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.
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.
QUARTERLY REPORT - PAGE 19
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 plus depreciation and amortization and non-recurring capital asset impairment charges. We use Operating EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs, and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or operating income 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.
QUARTERLY REPORT - PAGE 20
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, 2021, unless otherwise stated; (iv) our reporting currency is dollars and references to “€” mean euros and “C$” mean Canadian dollars; (v) “ADMTs” refers to air-dried metric tonnes; (vi) “NBSK” refers to northern bleached softwood kraft; (vii) “NBHK” refers to northern bleached hardwood kraft; (viii) “MW” refers to megawatts and “MWh” refers to megawatt hours; (ix) “Mfbm” refers to thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (x) our lumber metrics are converted from cubic meters to Mfbm using a conversion ratio of 1.6 cubic meters to one Mfbm, which is the ratio commonly used in the industry.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figure.
The following discussion and analysis of our results of operations and financial condition for the three and nine months ended September 30, 2021 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, 2020 filed with the Securities and Exchange Commission, referred to as the “SEC”.
Results of Operations
General
We have two reportable operating segments:
•
Pulp – consists of the manufacture, sale and distribution of pulp, electricity and other by-products at our pulp mills.
Wood Products – consists of the manufacture, sale and distribution of lumber, electricity and other wood residuals at our Friesau sawmill.
Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.
In August 2021, we acquired a cross-laminated timber (“CLT”) facility located in Spokane Washington for approximately $51.3 million. Its results are included and reported with Corporate and Other as it does not meet the criteria to be reported as a separate reportable segment.
Current Market Environment
As of September 30, 2021, third party industry quoted NBSK list prices in Europe and North America were approximately $1,345 per ADMT and $1,515 per ADMT, respectively and NBSK net prices in China were approximately $805 per ADMT. Prices for China are net of discounts, allowances and rebates.
Looking ahead to the fourth quarter, we currently expect generally steady NBSK pulp demand in Europe but a weakening market in China. For hardwood pulp, we currently expect negative pricing pressure due to the incremental supply expected to come on-line in the latter part of the fourth quarter.
With respect to our solid wood segment, we currently expect lumber demand in the fourth quarter to remain steady in all markets, with continued modest price improvements in the U.S. market and downward price pressure in the European market.
QUARTERLY REPORT - PAGE 21
COVID-19 Pandemic
While the global roll-out of vaccines is ongoing, COVID-19 infections and health risks, including from variants, continue especially in unvaccinated populations. Consequently, we will maintain our measures and procedures put in place to protect our people and allow us to operate our business safely and efficiently. We are constantly monitoring our operations and guidance from governmental and health organizations to ensure we take appropriate and necessary actions to protect our people. To date we have not had any downtime at our mills or material disruptions to raw material supplies or access to logistics networks due to the COVID-19 pandemic.
Summary Financial Highlights
(in thousands, other than per share amounts)
Statement of Operations Data
Pulp segment revenues
Wood products segment revenues
Corporate and other revenues
Pulp segment operating income
Wood products segment operating income
Corporate and other operating loss
Total operating income
Pulp segment depreciation and amortization
Wood products segment depreciation and amortization
Corporate and other depreciation and amortization
Total depreciation and amortization
Operating EBITDA(1)
148,070
45,620
313,857
143,144
(2)
Common shares outstanding at period end
(1)
The following table provides a reconciliation of net income (loss) to operating income and Operating EBITDA for the periods indicated:
(in thousands)
Income tax provision (recovery)
32,490
(1,775
45,873
4,451
16,882
19,864
53,031
60,056
(4,735
(11,898
(9,118
(12,136
Add: Depreciation and amortization
Operating EBITDA
Redemption of 6.5% senior notes due 2024 (the “2024 Senior Notes”) and 7.375% senior notes due 2025 (the “2025 Senior Notes”).
QUARTERLY REPORT - PAGE 22
Selected Production, Sales and Other Data
Pulp Segment
Pulp production ('000 ADMTs)
NBSK
443.0
400.2
1,195.0
1,279.1
NBHK
57.8
79.8
143.9
247.6
Annual maintenance downtime ('000 ADMTs)
42.8
15.0
253.7
28.6
Annual maintenance downtime (days)
44
10
188
27
Pulp sales ('000 ADMTs)
402.2
369.9
1,151.3
1,230.8
45.7
100.1
145.1
235.4
Average NBSK pulp prices ($/ADMT)(1)
Europe
1,345
840
1,223
841
832
572
892
North America
1,542
1,133
1,481
1,139
Average NBHK pulp prices ($/ADMT)(1)
623
443
694
456
1,320
868
1,212
885
Average pulp sales realizations ($/ADMT)(2)
847
562
777
565
684
424
604
451
Energy production ('000 MWh)(3)
464.5
529.2
1,345.6
1,670.5
Energy sales ('000 MWh)(3)
185.8
215.5
517.8
669.3
Average energy sales realizations ($/MWh)(3)
114
96
101
92
Wood Products Segment
Lumber production (MMfbm)
102.1
96.8
336.6
326.6
Lumber sales (MMfbm)
97.7
118.5
315.3
345.2
Average lumber sales realizations ($/Mfbm)
692
453
702
383
Energy production and sales ('000 MWh)
14.1
17.8
51.4
63.3
Average energy sales realizations ($/MWh)
128
125
118
Average Spot Currency Exchange Rates
$ / €(4)
1.1784
1.1698
1.1958
1.1248
$ / C$(4)
0.7937
0.7508
0.7996
0.7388
Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates.
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)
Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.
Consolidated – Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Total revenues for the three months ended September 30, 2021 increased by approximately 41% to $469.7 million from $333.2 million in the same quarter of 2020 primarily due to higher pulp and lumber sales realizations partially offset by lower sales volumes.
Costs and expenses in the current quarter increased by approximately 11% to $356.0 million from $319.4 million in the third quarter of 2020 primarily due to higher energy, maintenance and per unit fiber costs partially offset by lower pulp and lumber sales volumes.
QUARTERLY REPORT - PAGE 23
In the third quarter of 2021, cost of sales depreciation and amortization increased to $34.3 million from $31.9 million in the same quarter of 2020 primarily due to the completion of capital projects and the negative impact of a weaker dollar on our Canadian dollar and euro denominated depreciation expense.
Selling, general and administrative expenses increased to $19.5 million in the third quarter of 2021 from $15.4 million in the same quarter of 2020.
In the third quarter of 2021, our operating income increased to a record $113.8 million from $13.7 million in the same quarter of 2020 primarily due to higher pulp and lumber sales realizations partially offset by higher energy, maintenance and per unit fiber costs.
Interest expense in the current quarter decreased to $16.9 million from $19.9 million in the same quarter of 2020 primarily as a result of a lower weighted average interest rate.
In the third quarter of 2021, other income decreased to $4.7 million from $11.9 million in the same quarter of 2020. Other income in the current quarter is primarily related to foreign exchange gains on U.S. dollar denominated cash balances. Other income in the same quarter of the prior year includes $15.4 million realized gains on the sale of investments.
During the third quarter of 2021, the provision for income taxes was $32.5 million or an effective tax rate of approximately 32%. In the comparative quarter of 2020, we had a recovery for income taxes of $1.8 million primarily due to the income tax recoveries for our Canadian operations only partially offset by the tax provision for our German operations.
For the third quarter of 2021, our net income was $69.1 million, or $1.05 per basic share and $1.04 per diluted share compared to $7.5 million, or $0.11 per share, in the same quarter of 2020.
In the third quarter of 2021, Operating EBITDA increased to a record $148.1 million from $45.6 million in the same quarter of 2020 primarily due to higher pulp and lumber sales realizations partially offset by certain higher costs.
Operating Results by Business Segment
None of the income or loss items following operating income 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, 2021 Compared to Three Months Ended September 30, 2020
Selected Financial Information
Pulp revenues
Energy and chemical revenues
Pulp revenues in the third quarter of 2021 increased by approximately 48% to $374.3 million from $253.1 million in the same quarter of 2020 due to higher sales realizations partially offset by lower sales volumes due to delays in certain product shipments.
Energy and chemical revenues increased by approximately 3% to $22.5 million in the third quarter of 2021 from $21.9 million in the same quarter of 2020 primarily due to a higher realized sales price partially offset by a lower sales volume primarily at the Rosenthal mill. During the current quarter, we benefitted from higher sales for some of our energy on the spot market. Our Rosenthal mill’s turbine was taken down in the third quarter of 2021 to complete extensive repair work which will continue into the first quarter of 2022 and has resulted in the mill purchasing replacement energy.
QUARTERLY REPORT - PAGE 24
Total pulp production increased by approximately 4% to 500,866 ADMTs in the current quarter from 479,993 ADMTs in the same quarter of 2020 primarily due to higher production at the Celgar mill. In the current quarter of 2021, our pulp mills had 44 days of maintenance downtime (approximately 42,800 ADMTs) including our 50% owned Cariboo mill. In the comparative quarter of 2020, our pulp mills had ten days of annual maintenance downtime (approximately 15,000 ADMTs) and our Celgar mill had 30 days of market related downtime.
We estimate that annual maintenance downtime in the current quarter adversely impacted our operating income by approximately $14.9 million, comprised of approximately $8.6 million in direct out-of-pocket expenses and the balance in reduced production.
In the fourth quarter of 2021, our pulp mills currently have no planned annual maintenance downtime.
Total pulp sales volumes decreased by approximately 5% to 447,960 ADMTs in the current quarter from 469,998 ADMTs in the same quarter of 2020 primarily due to delays in certain shipments.
In the current quarter of 2021, prices for NBSK pulp increased from the same quarter of 2020 largely as a result of strong demand and low customer inventory levels. In the current quarter, average list prices for NBSK pulp in Europe and North America were approximately $1,345 per ADMT and $1,542 per ADMT, respectively, compared to approximately $840 per ADMT and $1,133 per ADMT, respectively, in the same quarter of 2020. Average NBSK net prices in China were approximately $832 per ADMT in the current quarter compared to approximately $572 per ADMT in the same quarter of 2020.
Average NBSK pulp sales realizations increased by approximately 51% to $847 per ADMT in the third quarter of 2021 from approximately $562 per ADMT in the same quarter of 2020.
In the current quarter of 2021, primarily as a result of the effect of the weaker dollar on our Canadian dollar and euro denominated costs and expenses, we had a negative impact of approximately $2.7 million in operating income due to foreign exchange compared to the same quarter of 2020.
Costs and expenses in the current quarter increased by approximately 9% to $296.9 million from $271.2 million in the third quarter of 2020 due to higher energy and maintenance costs partially offset by lower pulp sales volumes.
On average, in the current quarter overall per unit fiber costs were flat when compared to the same quarter of 2020. In the current quarter, per unit fiber costs for our German mills declined due to the availability of beetle damaged wood. For our Canadian mills, per unit fiber costs increased due to the higher usage of more expensive softwood chips. In the fourth quarter of 2021, we currently expect per unit fiber costs for our pulp mills to increase due to lower wood chip availability.
Transportation costs for our pulp segment were generally flat at $33.4 million in the current quarter from $32.6 million in the same quarter of 2020 despite the negative impact of a weaker dollar on freight costs and higher freight rates.
In the third quarter of 2021, depreciation and amortization increased to $30.0 million from $28.3 million in the same quarter of 2020 due to the completion of capital projects and the negative impact of a weaker dollar.
In the third quarter of 2021, pulp segment operating income increased to a record $99.9 million from $3.8 million in the same quarter of 2020 as higher pulp sales realizations were only partially offset by higher energy and maintenance costs.
QUARTERLY REPORT - PAGE 25
Wood Products Segment – Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Lumber revenues
Energy revenues
Wood residual revenues
In the third quarter of 2021, lumber revenues increased by approximately 26% to $67.6 million from $53.6 million in the same quarter of 2020 due to higher sales realizations partially offset by lower sales volumes. Early in the third quarter of 2021, the U.S. market was historically strong but prices declined sharply later in the quarter. The European market was generally strong through the quarter. The U.S. market accounted for approximately 40% of our lumber revenues and approximately 39% of our lumber sales volumes. The majority of our remaining sales were to Europe.
Energy and wood residual revenues in the third quarter of 2021 decreased by approximately 9% to $3.1 million from $3.4 million in the same quarter of 2020 primarily due to lower energy production.
Lumber production increased by approximately 5% to 102.1 MMfbm in the current quarter of 2021 from 96.8 MMfbm in the same quarter of 2020 primarily due to capital improvements.
Lumber sales volumes decreased by approximately 18% to 97.7 MMfbm in the current quarter of 2021 from 118.5 MMfbm in the same quarter of 2020 primarily due to shipping delays.
Average lumber sales realizations increased by approximately 53% to $692 per Mfbm in the third quarter of 2021 from approximately $453 per Mfbm in the same quarter of 2020 primarily due to higher pricing in both the U.S. and European markets. U.S. lumber pricing increased due to strong housing demand early in the quarter. European lumber pricing increased due to steady demand and reduced supply as producers shifted product to the U.S. market.
Fiber costs were approximately 75% of our lumber cash production costs in the current quarter. In the comparative quarter of 2020, per unit fiber costs were low as a result of a large supply of beetle damaged wood. As producers have been working through such wood, more green wood is being harvested. As a result of utilizing more green wood and continuing strong sawlog demand, current quarter per unit fiber costs increased by approximately 74% from the same quarter of 2020. We currently expect modestly increasing per unit fiber costs in the fourth quarter of 2021.
In the third quarter of 2021, depreciation and amortization increased to $3.7 million from $3.4 million in the same quarter of 2020 primarily due to the completion of capital projects.
Transportation costs for our wood products segment were flat at $7.9 million in the current quarter from $8.0 million in the same quarter of 2020 primarily as a result of lower sales volumes generally being offset by higher freight costs.
In the third quarter of 2021, our wood products segment operating income increased by approximately 53% to $18.3 million from $12.0 million in the same quarter of 2020 primarily due to a higher lumber realized sales price partially offset by higher per unit fiber costs.
QUARTERLY REPORT - PAGE 26
Consolidated – Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Total revenues for the nine months ended September 30, 2021 increased by approximately 25% to $1,284.3 million from $1,024.9 million in the nine months ended September 30, 2020 primarily due to higher pulp and lumber sales realizations partially offset by lower pulp, energy and lumber sales volumes.
Costs and expenses in the nine months ended September 30, 2021 increased by approximately 9% to $1,067.7 million from $976.8 million in the nine months ended September 30, 2020 primarily due to higher maintenance and energy costs and the negative impact of a weaker dollar on our Canadian dollar and euro denominated costs and expenses partially offset by lower sales volumes and per unit fiber costs.
In the nine months ended September 30, 2021, cost of sales depreciation and amortization increased to $97.2 million from $95.0 million in the same period of 2020 due to the completion of capital projects.
Selling, general and administrative expenses increased by approximately 22% to $60.3 million in the nine months ended September 30, 2021 from $49.3 million in the same period of 2020 primarily due to higher employee compensation and the negative impact of a weaker dollar.
In the nine months ended September 30, 2021, operating income increased to $216.6 million from $48.1 million in the same period of 2020 primarily due to higher pulp and lumber sales realizations and lower per unit fiber costs partially offset by higher maintenance and energy costs, the negative impact of a weaker dollar and lower sales volumes.
In January 2021, we refinanced (the “Refinancing”) a significant portion of our debt by issuing $875.0 million of 5.125% senior notes due 2029 (the “2029 Senior Notes”) and used the proceeds to redeem and/or repurchase all of our 6.5% 2024 Senior Notes and 7.375% 2025 Senior Notes at a cost including premium of $824.6 million (the “Redemption”). We recorded a loss on such Redemption of $30.4 million ($0.46 per share). The Refinancing reduced our annual interest expense going forward by approximately $12 million.
Interest expense in the nine months ended September 30, 2021 decreased to $53.0 million from $60.1 million in the same period of 2020 primarily as a result of a lower interest rate for our 2029 Senior Notes.
Other income in the nine months ended September 30, 2021 was $9.1 million compared to $12.1 million in the same period of 2020. Other income in the nine months ended September 30, 2021 was primarily due to foreign exchange gains on U.S. dollar denominated cash balances. Other income in the nine months ended September 30, 2020 was primarily due to $15.4 million of realized gains on the sale of investments.
In the nine months ended September 30, 2021, the provision for income taxes was $45.9 million or an effective tax rate of approximately 32%. In the nine months ended September 30, 2020, the provision for income taxes was $4.5 million primarily due to the tax provision for our German operations being partially offset by tax recoveries for our Canadian operations.
For the nine months ended September 30, 2021, our net income was $96.5 million, or $1.46 per share compared to a net loss of $4.3 million, or $0.06 per share, in the same period of 2020.
In the nine months ended September 30, 2021, Operating EBITDA increased to $313.9 million from $143.1 million in the same period of 2020 primarily due to higher pulp and lumber sales realizations and lower per unit fiber costs partially offset by higher maintenance and energy costs, the negative impact of a weaker dollar and lower sales volumes.
QUARTERLY REPORT - PAGE 27
Pulp Segment – Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Pulp revenues in the nine months ended September 30, 2021 increased by approximately 22% to $989.1 million from $808.9 million in the same period of 2020 due to higher sales realizations partially offset by lower sales volumes.
Energy and chemical revenues decreased by approximately 15% to $57.7 million in the nine months ended September 30, 2021 from $67.6 million in the same period of 2020 primarily due to lower energy production as a result of annual maintenance downtime and required work and repairs on our Rosenthal mill's turbine.
Total pulp production declined by approximately 12% to 1,338,918 ADMTs in the nine months ended September 30, 2021 from 1,526,717 ADMTs in the same period of 2020. In the current period, our pulp mills had 188 days of annual maintenance downtime (approximately 253,700 ADMTs) including our 50% owned Cariboo mill. Approximately 88 days of such downtime was at our Peace River mill and primarily related to boiler work which was deferred from last year. In the nine months ended September 30, 2021, we received insurance proceeds of $21.6 million in connection with the costs of the Peace River mill boiler work and an initial payment of $4.2 million for our business interruption insurance claims. We currently expect our remaining business interruption insurance claim to be in excess of $15 million.
We estimate that annual maintenance downtime in the nine months ended September 30, 2021 adversely impacted our operating income by approximately $125.3 million, comprised of approximately $75.4 million in direct out-of-pocket expenses and the balance in reduced production (exclusive of business interruption insurance proceeds).
Total pulp sales volumes decreased by approximately 12% to 1,296,406 ADMTs in the nine months ended September 30, 2021 from 1,466,263 ADMTs in the same period of 2020 primarily due to lower production.
In the nine months ended September 30, 2021, prices for NBSK pulp increased from the same period of 2020, largely as a result of strong demand and low customer inventory levels. In the current period, average list prices for NBSK pulp in Europe and North America were approximately $1,223 per ADMT and $1,481 per ADMT, compared to approximately $841 per ADMT and $1,139 per ADMT, respectively, in the nine months ended September 30, 2020. In the current period, average NBSK net prices in China were approximately $892 per ADMT compared to approximately $572 per ADMT in the nine months ended September 30, 2020.
Average NBSK pulp sales realizations increased by approximately 38% to $777 per ADMT in the nine months ended September 30, 2021 from approximately $565 per ADMT in the same period of 2020.
In the nine months ended September 30, 2021, primarily as a result of the effect of the weakening dollar on our Canadian dollar and euro denominated costs and expenses, we had a negative impact of approximately $57.4 million in operating income due to foreign exchange compared to the same period of 2020.
Costs and expenses in the nine months ended September 30, 2021 increased by approximately 8% to $908.4 million from $843.7 million in the nine months ended September 30, 2020 primarily due to higher maintenance and energy costs and the negative impact of a weaker dollar partially offset by lower pulp sales volumes and per unit fiber costs.
On average, in the nine months ended September 30, 2021 overall per unit fiber costs decreased by approximately 4% from the same period of 2020. In the nine months ended September 30, 2021, per unit fiber costs for our German
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mills declined due to the continued availability of beetle damaged wood. For our Canadian mills, per unit fiber costs were flat compared to the same period of 2020.
Transportation costs for our pulp segment decreased to $94.5 million in the nine months ended September 30, 2021 from $102.8 million in the same period of 2020 primarily as a result of lower sales volumes.
In the nine months ended September 30, 2021, depreciation and amortization decreased to $85.0 million from $85.8 million in the same period of 2020.
In the nine months ended September 30, 2021, pulp segment operating income increased to $138.6 million from $33.3 million in the same period of 2020 as higher pulp sales realizations and lower per unit fiber costs were only partially offset by higher maintenance and energy costs, the negative impact of a weaker dollar and lower pulp and energy sales volumes.
Wood Products Segment – Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
In the nine months ended September 30, 2021, lumber revenues increased by approximately 67% to $221.2 million from $132.2 million in the same period of 2020 primarily due to a higher realized sales price partially offset by a lower sales volume. Overall, in the nine months ended September 30, 2021, U.S. markets were strong with approximately 57% of our lumber revenues and 41% of sales volumes to such market. The majority of the balance of our lumber sales were to Europe.
Energy and wood residual revenues decreased by approximately 11% to $10.9 million in the nine months ended September 30, 2021 from $12.3 million in the same period of 2020 primarily due to lower sales realizations for wood residuals.
Lumber production increased by approximately 3% to 336.6 MMfbm in the nine months ended September 30, 2021 from 326.6 MMfbm in the same period of 2020 primarily due to capital improvements.
Lumber sales volumes decreased by approximately 9% to 315.3 MMfbm in the nine months ended September 30, 2021 from 345.2 MMfbm in the same period of 2020 primarily due to shipping delays.
Average lumber sales realizations increased to $702 per Mfbm in the nine months ended September 30, 2021 from approximately $383 per Mfbm in the same period of 2020 primarily due to higher pricing in the U.S. and European markets. U.S. lumber pricing increased due to strong housing and home improvement demand. European lumber pricing increased due to steady demand and reduced supply as producers shifted product to the U.S. market.
Fiber costs were approximately 75% of our lumber cash production costs in the nine months ended September 30, 2021. In the comparative period of 2020, per unit fiber costs were very low as a result of a large supply of beetle damaged wood. As producers have been working through such wood, more green wood is being harvested. In the nine months ended September 30, 2021 per unit fiber costs increased by approximately 34% from the same period of 2020 as a result of using more green wood, continued strong demand for sawlogs and the negative impact of a weaker dollar on our euro denominated fiber costs.
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Transportation costs for our wood products segment in the nine months ended September 30, 2021 increased by approximately 9% to $24.0 million from $22.0 million in the same period of 2020 primarily due to higher freight rates and the negative impact of a weaker dollar being only partially offset by lower sales volumes.
In the nine months ended September 30, 2021, depreciation and amortization increased to $11.1 million from $8.6 million in the same period of 2020 primarily due to the completion of capital projects.
In the nine months ended September 30, 2021, our wood products segment had operating income of $88.6 million compared to $21.8 million in the same period of 2020 primarily due to a higher lumber realized sales price partially offset by higher per unit fiber costs.
Liquidity and Capital Resources
Summary of Cash Flows
Net cash from operating activities
Net cash used in investing activities
Net decrease in cash and cash equivalents
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 Operating Activities. Cash provided by operating activities was $151.6 million in the nine months ended September 30, 2021 compared to $22.8 million in the comparative period of 2020. An increase in accounts receivable used cash of $27.5 million in the current period compared to decrease in accounts receivable providing cash of $11.2 million in the same period of 2020. An increase in inventories used cash of $82.3 million in the nine months ended September 30, 2021 compared to $20.4 million in the same period of 2020. An increase in accounts payable and accrued expenses provided cash of $46.8 million in the current period compared to a decrease in accounts payable and accrued expenses using cash of $54.0 million in the same period of 2020.
Cash Flows from Investing Activities. Investing activities in the nine months ended September 30, 2021 used cash of $154.3 million comprised primarily of capital expenditures of $125.7 million and $51.3 million for the acquisition of our CLT facility in Spokane. Capital expenditures related primarily to the Peace River recovery boiler rebuild, which was financed with insurance proceeds of $21.6 million, capacity expansion projects at the Stendal mill, upgrades to the woodrooms at our Canadian pulp mills and the substantial completion of the Phase II expansion and optimization project at our Friesau sawmill. In the nine months ended September 30, 2020, investing activities used cash of $46.3 million primarily related to capital expenditures of $59.2 million and $9.4 million for other investments partially offset by proceeds of $21.5 million from the sale of such investments.
Cash Flows from Financing Activities. In the nine months ended September 30, 2021, financing activities used cash of $19.0 million. In the current period, we repaid $53.1 million of our credit facilities, received net proceeds from the Refinancing after giving effect to the Redemption of $50.4 million, paid note issuance costs of $14.5 million in respect of the 2029 Senior Notes and paid $8.6 million of dividends. In the nine months ended September 30, 2021, we received $8.9 million in government grants to partially finance innovation and greenhouse gas emission reduction capital projects at our Canadian mills. In the nine months ended September 30, 2020, financing activities provided cash of $18.4 million primarily from $34.4 million of borrowings under our revolving credit facilities. In the nine months ended September 30, 2020 we paid dividends of $13.3 million and used $0.2 million to repurchase common shares.
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Balance Sheet Data
The following table is a summary of selected financial information as of the dates indicated:
Working capital
695,785
663,056
Long-term liabilities
1,347,426
1,316,303
Total shareholders' equity
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:
Capital expenditures
125,692
59,201
Cash paid for interest expense(2)
Interest expense(3)
Includes expenditures for the recovery boiler rebuild at the Peace River mill which is financed with insurance proceeds of $21.6 million.
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.
Interest on our 2024 Senior Notes was paid semi-annually in February and August of each year and interest on our 2025 Senior Notes was paid semi-annually in January and July of each year. In January 2021, we redeemed our 2024 Senior Notes and 2025 Senior Notes. Interest on our senior notes due 2026 is paid semi-annually in January and July of each year. Interest on our 2029 Senior Notes is paid semi-annually in February and August of each year, commencing August 2021.
As of September 30, 2021, we had cash and cash equivalents of $338.7 million and approximately $308.2 million available under our revolving credit facilities providing us with aggregate liquidity of about $646.9 million.
In 2021, we have continued to implement capital projects designed to deliver high returns and help us achieve our ESG objectives. These included the expansion of our Stendal mill's pulp and green energy production capacity and new woodroom projects at our Celgar and Peace River mills. Currently we expect our 2021 capital expenditures will be approximately $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.
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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.
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, 2020.
As of September 30, 2021, we were in full compliance with all of the covenants of our indebtedness.
Off-Balance Sheet Arrangements
As of September 30, 2021, 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, 2021.
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 income (loss) and do not affect our net earnings.
As a result of the strengthening of the dollar versus the euro as of September 30, 2021, we recorded a non-cash decrease of $59.7 million in the carrying value of our net assets, consisting primarily of our fixed assets denominated in euros. This non-cash decrease does not affect our net income (loss), Operating EBITDA or cash but is reflected in our other comprehensive income (loss) and as a decrease to our total equity. As a result, our accumulated other comprehensive loss increased to $86.9 million.
Based upon the exchange rate as of September 30, 2021, the dollar has strengthened by approximately 6% against the euro and was flat against the Canadian dollar since December 31, 2020. See "Quantitative and Qualitative Disclosures about Market Risk".
Credit Rating 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 June 2021, S&P revised its outlook to stable from negative and confirmed its rating on our senior Notes is B+. Its recovery rating remained unchanged at “3”. 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.
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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.
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, 2020. 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, the allocation of the purchase price for a group of assets or a business 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, 2020.
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
the COVID-19 pandemic could materially adversely affect our business, financial position and results of operations;
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;
we face intense competition in our markets;
our business is subject to risks associated with climate change and social and government responses thereto;
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our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements;
we have limited control over the operations of the Cariboo mill;
fluctuations in prices and demand for lumber could adversely affect our business;
adverse housing market conditions may increase the credit risk from customers of our wood products segment;
our wood products segment lumber products are vulnerable to declines in demand due to competing technologies or materials;
we may experience material disruptions to our production;
future 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;
we periodically use derivatives to manage certain risks which could cause significant fluctuations in our operating results;
failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business;
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;
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political uncertainty and an increase in trade protectionism 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 pandemic, terrorist attacks or natural disasters;
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 participate in German statutory energy programs;
our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, 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, 2020. 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
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.
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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 prices have been and are likely to continue to be volatile and can fluctuate widely over time. Between 2011 and 2021, European list prices for NBSK pulp have fluctuated between a low of approximately $760 per ADMT in 2012 to a high of $1,345 per ADMT in 2021. In the same period, the average North American NBHK price has fluctuated between a low of $700 per ADMT in 2012 to a high of $1,350 per ADMT in 2021.
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.
We have manufacturing operations in Germany and Canada. 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.
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, 2020.
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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.
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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, 2020. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
The European Union has opened a cartel investigation into the wood pulp sector and on October 12, 2021 conducted inspections of major European pulp producers including our German operations. We are cooperating with the investigation.
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, 2020.
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
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ITEM 6.
EXHIBITS
Exhibit No.
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
The following financial information from the Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2021 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; (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, 2021 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.
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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.
By:
/s/ David M. Gandossi
David M. Gandossi
Chief Executive Officer and President
Date: October 28, 2021
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