UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FormFORM 10-K
x | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
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 incorporation or organization | IRS Employer Identification No. |
Suite 2840, 6501120, 700 West GeorgiaPender Street, Vancouver,
British Columbia, Canada, V6B 4N8
Address of Office
Registrant’s telephone number including area code:(604) 684-1099
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $1.00 | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o¨ Yes þx No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. o¨ Yes þx No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934during 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 þx No o¨
Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ox No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. xþ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, or a smaller reporting company.filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). o¨ Yes þx No
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2010,2011, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of the voting stock on the NASDAQ Global Market on such date, was approximately $145,474,274.
As of February 17, 2011,2012, the registrant had 44,524,80655,779,204 shares of common stock, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information that will be contained in the definitive proxy statement for the Registrant’s annual meeting to be held in 20102012 is incorporated by reference into Part III of thisForm 10-K.
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Our reporting currency and financial statements included in this report are in Euros, as a significant majority of our business transactions are originally denominated in Euros. We translate non-Euro denominated assets and liabilities at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period.
The following table sets out exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) for the conversion of Euros and Canadian dollars to U.S. dollars in effect at the end of the following periods, the average exchange rates during these periods (based on daily Noon Buying Rates) and the range of high and low exchange rates for these periods:
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(€/$) | ||||||||||||||||||||
End of period | 0.7536 | 0.6977 | 0.7184 | 0.6848 | 0.7577 | |||||||||||||||
High for period | 0.6879 | 0.6623 | 0.6246 | 0.6729 | 0.7504 | |||||||||||||||
Low for period | 0.8362 | 0.7970 | 0.8035 | 0.7750 | 0.8432 | |||||||||||||||
Average for period | 0.7541 | 0.7176 | 0.6826 | 0.7304 | 0.7969 | |||||||||||||||
(C$/$) | ||||||||||||||||||||
End of period | 1.0009 | 1.0461 | 1.2240 | 0.9881 | 1.1653 | |||||||||||||||
High for period | 0.9960 | 1.0289 | 0.9717 | 0.9168 | 1.0989 | |||||||||||||||
Low for period | 1.0776 | 1.2995 | 1.2971 | 1.1852 | 1.1726 | |||||||||||||||
Average for period | 1.0298 | 1.1412 | 1.0660 | 1.0740 | 1.1344 |
Years Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(€/$) | ||||||||||||||||||||
End of period | 0.7708 | 0.7536 | 0.6977 | 0.7184 | 0.6848 | |||||||||||||||
High for period | 0.6723 | 0.6879 | 0.6623 | 0.6246 | 0.6729 | |||||||||||||||
Low for period | 0.7736 | 0.8362 | 0.7970 | 0.8035 | 0.7750 | |||||||||||||||
Average for period | 0.7186 | 0.7541 | 0.7176 | 0.6826 | 0.7304 | |||||||||||||||
(C$/$) | ||||||||||||||||||||
End of period | 1.0168 | 1.0009 | 1.0461 | 1.2240 | 0.9881 | |||||||||||||||
High for period | 0.9448 | 0.9960 | 1.0289 | 0.9717 | 0.9168 | |||||||||||||||
Low for period | 1.0605 | 1.0776 | 1.2995 | 1.2971 | 1.1852 | |||||||||||||||
Average for period | 0.9887 | 1.0298 | 1.1412 | 1.0660 | 1.0740 |
On February 11, 2011,10, 2012, the date of the most recent weekly publication of the Noon Buying Rate before the filing of this annual report onForm 10-K, the Noon Buying Rate for the conversion of Euros and Canadian dollars to U.S. dollars was €0.7396€0.7583 per U.S. dollar and C$0.99001.0016 per U.S. dollar.
In addition, certain financial information relating to our Celgar mill included in this annual report onForm 10-K is stated in Canadian dollars while we report our financial results in Euros. The following table sets out exchange rates, based on the noon rate provided by the Bank of Canada (the “Daily Noon Rate”), for the conversion of Canadian dollars to Euros in effect at the end of the following periods, the average exchange rates during these periods (based on Daily Noon Rates) and the range of high and low exchange rates for these periods:
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(C$/€) | ||||||||||||||||||||
End of period | 1.3319 | 1.5000 | 1.7046 | 1.4428 | 1.5377 | |||||||||||||||
High for period | 1.2478 | 1.4936 | 1.4489 | 1.3448 | 1.3523 | |||||||||||||||
Low for period | 1.5067 | 1.6920 | 1.7316 | 1.5628 | 1.5377 | |||||||||||||||
Average for period | 1.3671 | 1.5851 | 1.5603 | 1.4690 | 1.4244 |
Years Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(C$/€) | ||||||||||||||||||||
End of period | 1.3193 | 1.3319 | 1.5000 | 1.7046 | 1.4428 | |||||||||||||||
High for period | 1.2847 | 1.2478 | 1.4936 | 1.4489 | 1.3448 | |||||||||||||||
Low for period | 1.4305 | 1.5067 | 1.6920 | 1.7316 | 1.5628 | |||||||||||||||
Average for period | 1.3761 | 1.3671 | 1.5851 | 1.5603 | 1.4690 |
On February 16, 2011,20, 2012, the Daily Noon Rate for the conversion of Canadian dollars to Euros was C$1.33491.3148 per Euro.
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ITEM 1. | BUSINESS |
In this document, please note the following:
references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries, unless the context clearly suggests otherwise, and references to “Mercer Inc.” mean Mercer International Inc. excluding its subsidiaries;
references to “ADMTs” mean air-dried metric tonnes;
references to “MW” mean megawatts and “MWh” mean megawatt hours;
information is provided as of December 31, 2011, unless otherwise stated or the context clearly suggests otherwise;
all references to monetary amounts are to “Euros”, the lawful currency adopted by most members of the European Union, unless otherwise stated; and
“€” refers to Euros; “$” refers to U.S. dollars; and “C$” refers to Canadian dollars.
General Mercer Inc. is a Washington corporation and our shares of common stock are quoted and listed for trading on the NASDAQ Global Market (MERC) and the Toronto Stock Exchange (MRI.U). We operate in the pulp business and are the largest publicly traded producer of market northern bleached softwood kraft, or “NBSK”, pulp in the world. We are the sole kraft pulpNBSK producer, and the only significant producer of pulp for resale, known as “market pulp”, in Germany, which is the largest pulp import market in Europe. Our operations are located in Eastern Germany and Western Canada. We currently employ approximately 1,0521,039 people at our German operations, 422439 people at our Celgar mill in Western Canada and 17 people at our office in Vancouver, British Columbia, Canada. We operate three NBSK pulp mills with a consolidated annual production capacity of approximately 1.5 million ADMTs:
• | Rosenthal | ||
• | Celgar | ||
• | Stendal |
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The following chart sets out our directly and indirectly owned principal operating subsidiaries, their jurisdictions of organization and their principal activities:
History and Development of Business
We acquired our initial pulp and paper operations in 1993. Subsequently, we disposed1994, with the acquisition of our paper operations to focus our business on our core pulp operations.
In September 2004, we completed construction of the Stendal mill at an aggregate cost of approximately €1.0 billion. The Stendal mill is one of the largest NBSK pulp mills in Europe. The Stendal mill was financed through a combination of government grants totaling approximately €275.0 million, low-cost, long-term project debt which is largely severally guaranteed by the federal government and a state government in Germany, and equity contributions.
We initially had a 63.6% ownership interest in Stendal and, over time, increased our interest to 74.9%.
We, Stendal and its noncontrolling shareholder are parties to a shareholders’ agreement dated August 26, 2002, as amended, to govern our respective interests in Stendal. The agreement contains terms and conditions customary for these types of agreements, including restrictions on transfers of share capital and shareholder loans other than to affiliates, rights of first refusal on share and shareholder loan transfers, pre-emptive rights and piggyback rights on dispositions of our interest. The shareholders are not obligated to fund any further equity capital contributions to the project. The shareholders’ agreement provides that Stendal’s managing directors are appointed by holders of a simple majority of its share capital. Further, shareholder decisions, other than those mandated by law or for the provision of financial assistance to a shareholder, are determined by a simple majority of Stendal’s share capital.
A significant portion of the capital investments at our German mills, including the construction of the Stendal mill, were financed through government grants. Since 1999, our German mills have benefited from an aggregate €384.7€384.9 million in government grants. These grants reduce the cost basis of the assets purchased when the grants are received and are not reported in our income.
In February 2005, we acquired the Celgar mill for $210.0 million, of which $170.0 million was paid in cash and $40.0 million was paid in our shares, plus $16.0 million for the defined working capital of the mill. The Celgar mill was completely rebuilt in the early 1990s through a C$850.0 million modernization and expansion project, which transformed it into a modern and competitive producer.
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Our competitive strengths include the following:
• | Modern and Competitive Mills.We operate three large, modern, competitive NBSK pulp mills that produce high quality NBSK pulp, which is a premium grade of kraft pulp. We believe the relative age, production capacity and operating features of our mills provide us with certain manufacturing cost and other advantages over many of our competitors including lower maintenance capital expenditures. | ||
• | Leading Market Position. Mercer is the largest publicly traded NBSK pulp producer in the world which provides us increased presence and better industry information in the markets in which we operate, and provides for close customer relationships with many large pulp consumers. | ||
• | Renewable Surplus Energy. Our modern mills generate electricity and steam in their boilers and are generally energy self-sufficient. Such energy is primarily produced from wood residuals which are a renewable carbon neutral source. All of our mills also generate surplus energy which we sell to third parties. Our Rosenthal and Stendal mills benefit from special tariffs under Germany’sRenewable Energy Resources Act, referred to as the “Renewable Energy Act”, which provides for premium pricing and has materially increased their revenues from sales of surplus power. Additionally, our Celgar mill completed the Celgar Energy Project at the end of September 2010 and is party to an electricity purchase agreement, referred to as the “Electricity Purchase Agreement” with the British Columbia Hydro and Power Authority, or “B.C. Hydro”, British Columbia’s primary public utility provider, for the sale of surplus power for ten years. The Celgar Energy Project | ||
• | Strategic Locations and Customer Service.We are the only significant producer of market pulp in Germany, which is the largest pulp import market in Europe. Due to the proximity of our German mills to most of our European customers, we benefit from lower transportation costs relative to our major competitors. Our Celgar mill, located in Western Canada, is well situated to serve Asian and North American customers. We primarily work directly with customers to capitalize on our geographic diversity, coordinate sales and enhance customer relationships. We believe our ability to deliver high quality pulp on a timely basis and our customer service makes us a preferred supplier for many customers. | ||
• | Advantageous Capital Investments and Financing.Our German mills are eligible to receive government grants in respect of qualifying capital investments. Over the last |
reduce the cost basis of the assets purchased when the grants are received and are not reported in our income. Additionally, during the last |
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• | Proximity of Abundant Fiber Supply.Although fiber is cyclical in both price and supply, there is a significant amount of high-quality fiber within a close radius of each of our mills. This fiber supply, combined with our purchasing power and our current ability to meaningfully switch between whole logs chipped at our mills and sawmill residual chips, enables us to enter into contracts and arrangements which have generally provided us with a competitive fiber supply. | ||
• | Experienced Management Team.Our directors and senior managers have extensive experience in the pulp and forestry industries. In particular, our Chief Executive Officer has over |
Our corporate strategy is to create shareholder value by focusing on the expansion of our asset and earnings base. Key features of our strategy include:
• | Focus on NBSK Market Pulp.We focus on NBSK pulp because it is a premium grade kraft pulp and generally obtains the highest price relative to other kraft pulps. Although demand is cyclical, between | ||
• | Maximizing Renewable Energy Realizations. We focus on the generation and sales of surplus renewable energy because there are minimal incremental costs associated with our energy production and thus our surplus electricity sales are highly profitable. In | ||
• | Enhancing Long-Term Sustainability/Growth. | ||
• | Operating and Maximizing Returns from our Modern, World-Class Mills.In order to keep our operating costs as low as possible, with a goal of generating positive cash flow in all market conditions, we operate large, modern pulp mills. We believe these production facilities provide us with the best platform to be an efficient and competitive producer of high-quality NBSK pulp without the need for significant sustaining capital. Our modern mills are also generally net exporters of renewable energy. We are constantly reviewing opportunities to enhance and maximize the usage of the strengths of our mills, including through increased energy generation, production of premium grades of pulp and other improvements, to capture the highest returns available. |
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General
Pulp is used in the production of paper, tissues and paper-related products. Pulp is generally classified according to fiber type, the process used in its production and the degree to which it is bleached. Kraft pulp is produced through a sulphate chemical process in which lignin, the component of wood which binds individual fibers, is dissolved in a chemical reaction. Chemically prepared pulp allows the wood’s fiber to retain its length and flexibility, resulting in stronger paper products. Kraft pulp can be bleached to increase its brightness. Kraft pulp is noted for its strength, brightness and absorption properties and is used to produce a variety of products, including lightweight publication grades of paper, tissues and paper-related products.
NBSK pulp, which is a bleached kraft pulp manufactured using species of northern softwood, is considered a premium grade because of its strength. It generally obtains the highest price relative to other kraft pulps. Southern bleached softwood kraft pulp is kraft pulp manufactured using southern softwood species and does not possess the strength found in NBSK pulp. NBSK pulp is the sole product of our mills.
The selling price of kraft pulp depends in part on the fiber used in the production process. There are two primary species of wood used as fiber: softwood and hardwood. Softwood species generally have long, flexible fibers which add strength to paper while fibers from species of hardwood contain shorter fibers which lend bulk and opacity. Generally, prices for softwood pulp are higher than for hardwood pulp. Most uses of market kraft pulp, including fine printing papers, coated and uncoated magazine papers and various tissue products, utilize a mix of softwood and hardwood grades to optimize production and product qualities. In recent years, production of hardwood pulp, based on fast growing plantation fiber primarily from Asia and South America, has increased much more rapidly than that of softwood grades that have longer growth cycles. As a result of the growth in supply and lower costs, kraft pulp customers have substituted some of the pulp content in their products to hardwood pulp. Counteracting customers’ increased proportionate usage of hardwood pulp has been the requirement for strength characteristics in finished goods. Paper and tissue makers focus on higher machine speeds and lower basis weights for publishing papers which also require the strength characteristics of softwood pulp. We believe that the ability of kraft pulp users to continue to further substitute hardwood for softwood pulp is limited by such requirements.
Kraft pulp can be made in different grades, with varying technical specifications, for different end uses. High-quality kraft pulp is valued for its reinforcing role in mechanical printing papers, while other grades of kraft pulp are used to produce lower priced grades of paper, including tissues and paper-related products.
Markets
We believe that over 125 million ADMTs of kraft pulp are converted annually into printing and writing papers, tissues, carton boards and other white grades of paper and paperboard around the world. We also believe that approximately one third of this pulp is sold on the open market as market pulp, while the remainder is produced for internal purposes by integrated paper and paperboard manufacturers.
Demand for kraft pulp is cyclical in nature and is generally related to global and regional levels of economic activity. In 2008, overall global demand for all kraft pulp types, including softwood, was negatively impacted by the weak global economic conditions and global financial and credit turmoil the world began to experience in the second half of that year and which continued into the first half of 2009. Significant producer shutdowns and curtailments, along with strong demand from China, resulted in an improved supply-demand balance and improved prices in the second half of 2009 through 2010.
Between 19982000 and 20082010 worldwide demand for softwood market pulp grew at an average rate of approximately 2.3%1.6% annually. Demand for softwood market pulp was negatively impacted by weak global economic conditions in 2009. However, the supply/demand balance for softwood market pulp improved in 2010, primarily due to strong demand in China, the residual effects of the Chilean earthquake that affected mills in that region and the net closure of approximately 3.4 million tonnes of production capacity globally.globally since 2006. Since 2007, demand for softwood market pulp has grown in the emerging markets of Asia, Eastern Europe and Latin America. China in particular has experienced substantial growth and its demand for softwood market pulp grew by approximately 13.6%15.9% per annum between 20042000 and 2009.2010. China now accounts for approximately 22%20% of global softwood market
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A measure of demand for kraft pulp is the ratio obtained by dividing the worldwide demand of kraft pulp by the worldwide capacity for the production of kraft pulp, or the “demand/capacity ratio”. An increase in this ratio generally occurs when there is an increase in global and regional levels of economic activity. An increase in this ratio generally indicates greater demand as consumption increases, which often results in rising kraft pulp prices, and a reduction of inventories by producers and buyers. As prices continue to rise, producers continue to run at higher operating rates. However, an adverse change in global and regional levels of economic activity generally negatively affects demand for kraft pulp, often leading buyers to reduce their purchases and relying on existing pulp inventories. As a result, producers run at lower operating rates by taking downtime to limit thebuild-up of their own inventories. The demand/capacity ratio for softwood kraft pulp was approximately 92% in 2011, approximately 93% in 2010 and approximately 91% in 2009 and approximately 89% in 2008.
A significant factor affecting our market is the amount of closures of old, high-cost capacity. In the four-year period from 2006 to 2009, we estimate approximately 5.3 million tonnes of predominantly NBSK capacity was indefinitely closed. In connection with the recent recovery of pulp prices,Such closures have been partially offset by approximately 1.9 million tonnes restarted in late 2009 and 2010. The net effect of these closures and restarts is an estimated 3.4 million tonnes of capacity removed from the market. We are aware of only one planned NBSK plant expansion worldwide in the next few years, which weyears. We believe that the absence of other plant expansions is due in part to fiber supply constraints and high capital costs.
Competition
Pulp markets are large and highly competitive. Producers ranging from small independent manufacturers to large integrated companies produce pulp worldwide. Our pulp and customer services compete with similar products manufactured and distributed by others. While many factors influence our competitive position, particularly in weak economic times, a key factor is price. Other factors include service, quality and convenience of location. Some of our competitors are larger than we are in certain markets and have substantially greater financial resources. These resources may afford those competitors more purchasing power, increased financial flexibility, more capital resources for expansion and improvement and enable them to compete more effectively. Our key NBSK pulp competitors are principally located in Northern Europe and Canada.
NBSK Pulp Pricing
Pulp prices are highly cyclical. Global economic conditions, changes in production capacity, inventory levels, and currency exchange rates are the primary factors affecting NBSK pulp list prices. The average annual European list prices for NBSK pulp since 2000 have ranged from a low of approximately $447 per ADMT to a high of $980$1,030 per ADMT.
Starting in 2006, pulp prices increased steadily from approximately $600 per ADMT in Europe to $870 per ADMT at the end of 2007. These price increases resulted from the closure of several pulp mills, particularly in North America, which reduced NBSK capacity by approximately 1.3 million ADMTs and better demand and the general weakness of the U.S. dollar against the Euro and the Canadian dollar.
In the second half of 2008, list prices for NBSK pulp decreased markedly due to weak global economic conditions. As a result, list prices for NBSK pulp in Europe decreased from $900 per ADMT in mid-2008 to $635 per ADMT at the end of the year. Such price weakness continued into early 2009 as list prices in Europe fell to approximately $575 per ADMT. Commencing in mid-2009, pulp markets began to strengthen which led to improved prices. Strong demand from China, capacity closures and historically low global inventories for bleached softwood kraft pulp helped support upward price momentum. During the second half of 2009, several price increases raised European list prices by a total of $170 per ADMT to $800 per ADMT by year end. Such price increases were partially offset by the continued weakening of the U.S. dollar versus the Euro and Canadian dollar during the period. In December 2009, list prices for pulp were approximately $800 per ADMT in Europe, $830 per ADMT in North America and $700 per ADMT in China. In 2010, several increases lifted prices to record levels in the middle of the year and at the end of 2010 list prices were near historic highs of $950, $960 and $840 per ADMT
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A producer’s net sales realizations are list prices, net of customer discounts, commissions and other selling concessions. While there are differences between NBSK list prices in Europe, North America and Asia, European prices are generally regarded as the global benchmark and pricing in other regions tends to follow European trends. The nature of the pricing structure in Asia is different in that, while quoted list prices tend to be lower than Europe, customer discounts and commissions tend to be lower resulting in net sales realizations that are generally similar to other markets.
The majority of market NBSK pulp is produced and sold by Canadian and Scandinavian producers, while the price of NBSK pulp is generally quoted in U.S. dollars. As a result, NBSK pricing is affected by fluctuations in the currency exchange rates for the U.S. dollar versus the Canadian dollar, the Euro and local currencies. NBSK pulp price increases during 2006, 2007 and the first half of 2008 were in large part offset by the weakening of the U.S. dollar. Similarly, the strengthening of the U.S. dollar against the Canadian dollar and the Euro towards the end of 2008 helped slightlypartially offset pulp price decreases caused by the deterioration in global economic conditions. The overall strengthening of the U.S. dollar against the Euro in 2010, and in particular in the first half of 2010, improved the operating margins of our German mills.
The following chart sets out the changes in list prices for NBSK pulp in Europe, as stated in U.S. dollars, Canadian dollars and Euros for the periods indicated.
Source: Pulp & Paper Week and €
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The following diagram provides a simplified description of the kraft pulp manufacturing process at our pulp mills:
In order to transform wood chips into kraft pulp, wood chips undergo a multi-step process involving the following principal stages: chip screening, digesting, pulp washing, screening, bleaching and drying.
In the initial processing stage, wood chips are screened to remove oversized chips and sawdust and are conveyed to a pressurized digester where they are heated and cooked with chemicals. This occurs in a continuous process at the Celgar and Rosenthal mills and in a batch process at the Stendal mill. This process softens and eventually dissolves the phenolic material called lignin that binds the fibers to each other in the wood.
Cooked pulp flows out of the digester and is washed and screened to remove most of the residual spent chemicals called black liquor, and partially cooked wood chips. The pulp then undergoes a series of bleaching stages where the brightness of the pulp is gradually increased. Finally, the bleached pulp is sent to the pulp machine where it is dried to achieve a dryness level of more than 90%. The pulp is then ready to be baled for shipment to customers.
A significant feature of kraft pulping technology is the recovery system, whereby chemicals used in the cooking process are captured and extracted for re-use, which reduces chemical costs and improves environmental performance. During the cooking stage, dissolved organic wood materials and used chemicals, collectively known as black liquor, are extracted from the digester. After undergoing an evaporation process, black liquor is burned in a recovery boiler. The chemical compounds of the black liquor are collected from the recovery boiler and are reconstituted into cooking chemicals used in the digesting stage through additional processing in the recausticizing plant.
The heat produced by the recovery boiler is used to generate high-pressure steam. Additional steam is generated by a power boiler through the combustion of biomass consisting of bark and other wood residuesresiduals from sawmills and our woodrooms and residue generated by the effluent treatment system. Additionally, during times of
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We manufacture and sell NBSK pulp produced from wood chips and pulp logs. The kraft pulp produced at the Rosenthal mill is a long-fibered softwood pulp produced by a sulphate cooking process and manufactured primarily from wood chips and pulp logs. A number of factors beyond economic supply and demand have an impact on the market for chemical pulp, including requirements for pulp bleached without any chlorine compounds or without the use of chlorine gas. The Rosenthal mill has the capability of producing both “totally chlorine free” and “elemental chlorine free” pulp. Totally chlorine free pulp is bleached to a high brightness using oxygen, ozone and hydrogen peroxide as bleaching agents, whereas elemental chlorine free pulp is produced by substituting chlorine dioxide for chlorine gas in the bleaching process. This substitution virtually eliminates complex chloro-organic compounds from mill effluent. Kraft pulp is valued for its reinforcing role in mechanical printing papers and is sought after by producers of paper for the publishing industry, primarily for magazines and advertising materials. Kraft pulp is also an important ingredient for tissue manufacturing, and tissue demand tends to increase with living standards in developing countries. Kraft pulp produced for reinforcement fibers is considered the highest grade of kraft pulp and generally obtains the highest price. The Rosenthal mill produces pulp for reinforcement fibers to the specifications of certain of our customers. We believe that a number of our customers consider us their supplier of choice. The kraft pulp produced at the Stendal mill is of a slightly different grade than the pulp produced at the Rosenthal mill as the mix of softwood fiber used is slightly different. This results in a complementary product more suitable for different end uses. The Stendal mill is capable of producing both totally chlorine free and elemental chlorine free pulp. The Celgar mill produces high-quality kraft pulp that is made from a unique blend of slow growing/long-fiber Western Canadian tree species. It is used in the manufacture of high-quality paper and tissue products. We believe the Celgar mill’s pulp is known for its excellent product characteristics, including tensile strength, wet strength and brightness. The Celgar mill is a long-established supplier to paper producers in Asia.
Climate change concerns have caused a proliferation of renewable or “green” energy legislation, incentives and commercialization in both Europe and, increasingly, in North America. This has generated an increase in demand and legislated requirements for “carbon neutral” sources of energy supply. Our pulp mills are large scale bio-refineries that produce both pulp and surplus “carbon neutral” or “green” energy. As part of the pulp production process our mills generate “green” energy using carbon-neutral biofuels such as black liquor and wood waste. Through the incineration of biofuels in the recovery and power boilers, our mills produce sufficient steam to cover all of our steam requirements and Our surplus energy sales provide our mills with a new stable revenue source unrelated to pulp prices. We believe that this revenue source from power sales gives our mills a competitive advantage over other older mills which do not have the equipment or capacity to produce and/or sell surplus power in a meaningful amount. In generallyallows us to produce surplus energy which we sell to third party utilities.20102011 and 2009,2010, we sold 520,005652,113 MWh and 478,674520,005 MWh of surplus energy, respectively, and recorded revenues of €44.2€58.0 million and €42.5€44.2 million, respectively, from such energy sales. Since our energy production is a by-product of our pulp production process, there are minimal incremental costs and our surplus energy sales are13
Mercer Electricity Generation and Exports
Since January 2009, our Rosenthal and Stendal mills have participated in a program established pursuant to the Renewable Energy Act. The Renewable Energy Act, in existence since 2000, requires that public electric utilities give priority to electricity produced from renewable energy resources by independent power producers and pay a fixed tariff for a period of 20 years. Previously, this legislation was only applicable to installations with a capacity of 20MW or less, effectively excluding our Rosenthal and Stendal mills. Subsequent amendments to the Renewable Energy Act have removed this restriction. Under the program, our German mills now sell their surplus energy to the local electricity grid at the rates stipulated by the Renewable Energy Act for biomass energy.
Since 2005, our German mills have also benefited from the sale of emission allowances under the European Union Carbon Emissions Trading Scheme, referred to as “EU ETS”. However, our eligibility for special tariffs under the Renewable Energy Act has reduced the amount of emissions allowances granted to our German mills under the EU ETS.
In January 2012, we announced Project Blue Mill which is designed to increase the Stendal mill’s annual pulp production by 30,000 ADMTs and initially produce an additional 109,000 MW of surplus renewable energy. Project Blue Mill is eligible for €12.0 million of non-refundable government grants and the Stendal mill has secured a new €17.0 million five-year amortizing secured term debt facility, of which 80% will be government guaranteed. The balance of Project Blue Mill will be funded through operating cash flow of the Stendal mill and up to an aggregate of €6.5 million in pro rata shareholder loans from Mercer Inc. and its noncontrolling shareholder.
Celgar Mill
In mid-2008September 2010, we commencedcompleted the Celgar Energy Project at the Celgar mill, to increase the mill’s production of “green” energy and optimize its power generation capacity. The project included the installation of a 48 MW condensing turbine, which brought the mill’s installed generating capacity up to 100 MW, and upgrades to the mill’s bark boiler and steam consuming facilities. In January 2009 theThe Celgar mill finalized thehas an Electricity Purchase Agreement with B.C. Hydro for the sale of power generated from the Celgar Energy Project.such project. Under the Electricity Purchase Agreement, the Celgar mill is setagreed to supply a minimum of approximately 238,000 MWh of surplus electrical energy annually to the utility over a ten-year term.
We completedfinanced the Celgar Energy Project at the end of September 2010, largely with funding from the GTP. In early October 2009, we received notification from Natural Resources Canada, or “NRCan”, of the Celgar mill’s original allocation of approximately C$57.7 million in credits under the GTP. Subsequently, inIn November 2009, we entered into a non-repayable contribution agreement, referred to as the “Contribution Agreement”, with NRCan whereby NRCan agreed to provideprovided us with approximately C$40.0 million in grants (of our allocated C$57.7 million) towards certain
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In 2011, we produced and sold roughly 140,069 MWh of December 31, 2010, we had received a total of C$36.6 million from NRCan. We are due to receive an additional C$10.2 million in 2011 to cover costs incurred in connection with the completion of the Celgar Energy Project. We intend to use the remaining funds from our initial allocation for additional qualifying capital projectssurplus renewable electricity at our Celgar mill.
and/or sell surplus power in a meaningful amount.
Our major costs of production are labor, fiber, energy and chemicals. Fiber comprised of wood chips and pulp logs is our most significant operating expense. Given the significance of fiber to our total operating expenses and our limited ability to control its costs, compared with our other operating costs, volatility in fiber costs can materially affect our margins and results of operations.
Labor
Our labor costs tend to be generally steady, with small overall increases due to inflation in wages and health care costs. Over the last three years, we have been able to generally offset such increases by increasing our efficiencies and production and streamlining operations.
Fiber
Our mills are situated in regions which generally provide a relatively stable supply of fiber. The fiber consumed by our mills consists of wood chips produced by sawmills as a by-product of the sawmilling process and pulp logs. Wood chips are small pieces of wood used to make pulp and are either wood residuals from the sawmilling process or logs or pulp logs chipped especially for this purpose. Pulp logs consist of lower quality logs not used in the production of lumber. Wood chips and pulp logs are cyclical in both price and supply.
Generally, the cost of wood chips and pulp logs are primarily affected by the supply and demand for lumber. Additionally, regional factors such as harvesting levels and weather conditions can also have a material effect on the supply, demand and price for fiber.
In Germany, since 2006, the price and supply of wood chips has been affected by increasing demand from alternative or renewable energy producers and government initiatives for carbon neutral energy. Declining energy prices and weakening economies in the first half of 2009 tempered the increased demand for wood chips that resulted from initiatives by European governments to promote the use of wood as a carbon neutral energy. Over the long-term, we expect this non-traditional demand for fiber is expectedto continue to increase.
In April 2008, the Russian government raised tariffs on the export of sawmill and pulp wood to 25% from the 20% in effect since July 2007.. A further increase to 80%, was initially scheduled for January 1, 2009 has beenbut was officially deferred twice and it is generally believed that Russia’s export tariff will remainremained unchanged at 25% in 2011. SinceIn early 2012, Russia agreed to enter the additional tariff increase would likely reduceWorld Trade Organization, or “WTO”. It is currently expected that Russia will formally enter the export of Russian wood to Europe,WTO in particular to Scandinavian producers who import a significant amount of their wood from Russia, the European Union (especially Finland) has been pressuring Russia to roll backJune 2012 and will lower its export duty. In connection with these negotiations, Russia signed an agreement with the European Uniontariffs to between 13% and 15% which we believe will eventually lower Russian log export duties.
Offsetting some of the increases in demand for wood fiber have been initiatives in which we and other producers are participating to increase harvest levels in Germany, particularly from small private forest owners. We
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We believe we are the largest consumer of wood chips and pulp logs in Germany and often provide the best, long-term economic outlet for the sale of wood chips in Eastern Germany. We coordinate the wood procurement activities for our German mills to reduce overall personnel and administrative costs, provide greater purchasing power and coordinate buying and trading activities. This coordination and integration of fiber flows also allows us to optimize transportation costs, and the species and fiber mix for both mills.
In 2010,2011, the Rosenthal mill consumed approximately 1.71.8 million cubic meters of fiber. Approximately 65%70% of such consumption was in the form of sawmill wood chips and approximately 35%30% was in the form of pulp logs. The wood chips for the Rosenthal mill are sourced from approximately 2931 sawmills located primarily in the states of Bavaria, Baden-Württemberg and Thüringia and are within a 300 kilometer radius of the Rosenthal mill.
Within this radius, the Rosenthal mill is the largest consumer of wood chips. Given its location and size, the Rosenthal mill is often the best economic outlet for the sale of wood chips in the area. Approximately 74%73% of the fiber consumed by the Rosenthal mill is spruce and the remainder is pine. While fiber costs and supply are subject to cyclical changes largely in the sawmill industry, we expect that we will be able to continue to obtain an adequate supply of fiber on reasonably satisfactory terms for the Rosenthal mill due to its location and our long-term relationships with suppliers. We have not historically experienced any significant fiber supply interruptions at the Rosenthal mill.
Wood chips for the Rosenthal mill are normally sourced from sawmills under one year or quarterly supply contracts with fixed volumes, which provide for price adjustments. Substantially all of our chip supply is sourced from suppliers with which we have a long-standing relationship. We generally enter into annual contracts with such suppliers. Pulp logs are sourced from the state forest agencies in Thüringia, Saxony and Bavaria on a contract basis and partly from private holders on the same basis as wood chips. Like the wood chip supply arrangements, these contracts tend to be of less than one-year terms with quarterly adjustments for market pricing. We organize the harvesting of pulp logs sourced from the state agencies in Thüringia, Saxony and Bavaria after discussions with the agencies regarding the quantities of pulp logs that we require.
In 2010,2011, the Stendal mill consumed approximately 3.13.2 million cubic meters of fiber. Approximately 19%25% of such fiber was in the form of sawmill wood chips and approximately 81%75% in the form of pulp logs. The core wood supply region for the Stendal mill includes most of the Northern part of Germany within an approximate 300 kilometer radius of the mill. We also purchase wood chips from Southwestern and Southern Germany. The fiber base in the wood supply area for the Stendal mill consisted of approximately 66%68% pine and 34%32% spruce and other species in 2010.2011. The Stendal mill has sufficient chipping capacity to fully operate solely using pulp logs, if required. We source pulp logs partly from private forest holders and partly from state forest agencies in Thüringia, Saxony-Anhalt, Mecklenburg-Western Pomerania, Saxony, Lower Saxony, North Rhine-Westphalia, Hesse and Brandenburg.
In 2010,2011, the Celgar mill consumed approximately 2.72.6 million cubic meters of fiber. Approximately 61% of such fiber was in the form of sawmill wood chips and the remaining 39% came from pulp logs processed through its woodroom or chipped by a third party. The source of fiber at the mill is characterized by a mixture of species (whitewoods and cedar) and the mill sources fiber from a number of Canadian and U.S. suppliers.
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The Celgar mill has access to over 35 different suppliers from Canada and the U.S., representing approximately 75% of its total annual fiber requirements. The Celgar mill’s woodroom supplied the remaining 25% of the mill’s fiber costs.
To secure the volume of pulp logs required by theits woodroom, the Celgar mill has entered into annual pulp log supply agreements with a number of different suppliers, many of whom are also contract chip suppliers to the mill. All of the pulp log agreements can be terminated by either party for any reason, upon seven days’ written notice.
On the fiber demand side, increased competition for fiber from the growing renewable or “green” energy sector in British Columbia in the second half of 2011 led to moderately higher fiber costs. Although not nearly as advanced as Europe, British Columbia’s growing green energy sector is expected to continue to create additional competition for fiber over time.
Energy
Our energy is primarily generated from renewable carbon neutral sources, such as black liquor and wood waste. Our mills produce all of our steam requirements and generally generate excess energy which we sell to third party utilities. In 2010,2011, we generated 1,444,0651,640,439 MWh and we sold 520,005652,113 MWh of surplus energy. See also “—Generation and Sales of ‘Green’ Energy at our Mills”. We utilize fossil fuels, such as natural gas, in limited circumstances includingprimarily in our lime kilns and we use a limited amount forstart-up and shutdown operations. Additionally, from time to time, mill process disruptions occur and we consume small quantities of purchased electricity and fossil fuels to maintain operations. As a result, all of our mills are subject to fluctuations in the prices for fossil fuels.
Chemicals
Our mills use certain chemicals which are generally available from several suppliers and sourcing is primarily based upon pricing and location. Although chemical prices have risen slightly over the last three years, we have been able to reduce our costs through improved efficiencies and capital expenditures.
Consolidated cash production costs per tonneADMT for our pulp mills are set out in the following table for the periods indicated: Years Ended December 31, 2010 2009 2008 (per ADMT) Fiber € 256 € 207 € 247 Labor 42 37 36 Chemicals 41 43 44 Energy 17 13 21 Other 54 42 43 Total cash production costs(1) € 410 € 342 € 391
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(per ADMT) | ||||||||||||
Cash Production Costs | ||||||||||||
Fiber | € | 275 | € | 256 | € | 207 | ||||||
Labor | 43 | 42 | 37 | |||||||||
Chemicals | 46 | 41 | 43 | |||||||||
Energy | 13 | 17 | 13 | |||||||||
Other | 56 | 54 | 42 | |||||||||
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Total cash production costs(1) | € | 433 | € | 410 | € | 342 | ||||||
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(1) | Cost of production per ADMT produced excluding depreciation. |
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The distribution of our consolidated pulp sales revenues by geographic area are set out in the following table for the periods indicated:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Revenues by Geographic Area | ||||||||||||
Germany | € | 278,348 | € | 154,323 | € | 198,340 | ||||||
China | 196,022 | 146,613 | 131,412 | |||||||||
Italy | 56,301 | 44,616 | 56,487 | |||||||||
Other European Union countries(1) | 182,246 | 107,276 | 133,621 | |||||||||
Other Asia | 37,561 | 38,946 | 65,192 | |||||||||
North America | 92,628 | 68,213 | 78,718 | |||||||||
Other countries | 1,503 | 8,312 | 17,146 | |||||||||
Total(2) | € | 844,609 | € | 568,299 | € | 680,916 | ||||||
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in thousands) | ||||||||||||
Revenues by Geographic Area | ||||||||||||
Germany | € | 256,563 | € | 278,348 | € | 154,323 | ||||||
China | 234,654 | 196,022 | 146,613 | |||||||||
Italy | 51,509 | 56,301 | 44,616 | |||||||||
Other European Union countries(1) | 175,937 | 182,246 | 107,276 | |||||||||
Other Asia | 30,872 | 37,561 | 38,946 | |||||||||
North America | 69,345 | 92,628 | 68,213 | |||||||||
Other countries | 823 | 1,503 | 8,312 | |||||||||
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Total(2) | € | 819,703 | € | 844,609 | € | 568,299 | ||||||
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(1) | Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission. |
(2) | Excluding intercompany sales and third party transportation revenues. |
The following charts illustrate the geographic distribution of our consolidated pulp revenues for the periods indicated:
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Year Ended December 31, 2011 | Year Ended December 31, 2010 | Year Ended December 31, 2009 | ||
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(1) | Includes new entrant countries to the European Union from their time of admission. |
Our global sales and marketing group is responsible for conducting all sales and marketing of the pulp produced at our mills and currently has approximately 1819 employees engaged full time in such activities. The global sales and marketing group handles sales to over 200180 customers. We coordinate and integrate the sales and marketing activities of our German mills to realize on a number of synergies between them. These include reduced overall administrative and personnel costs and coordinated selling, marketing and transportation activities. We also coordinate sales from the Celgar mill with our German mills on a global basis, thereby providing our larger customers with seamless service across all major geographies. In marketing our pulp, we seek to establish long-term relationships by providing a competitively priced, high-quality, consistent product and excellent service. In accordance with customary practice, we maintain long-standing relationships with our customers pursuant to which we periodically reach agreements on specific volumes and prices.
Our pulp sales are on customary industry terms. At December 31, 2010,2011, we had no material payment delinquencies. In 2009 and 2008,2011, no single customer accounted for more than 10% of our pulp sales. In 2010, one customer which purchased for several of its mills accounted for 15%11% of pulp sales and, in 2009, no single customer accounted for more than 10% of our pulp sales. We don’t believe our pulp sales are dependent upon the activities of any single customer.
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The Celgar mill’s pulp is transported to customers by rail, truck and ocean carrier using third party warehouses to ensure timely delivery. The majority of Celgar’s pulp for overseas markets is initially delivered primarily by rail to the Port of Vancouver for shipment overseas by ocean carrier. Based in Western Canada, the Celgar mill is well positioned to service Asian customers. The majority of the Celgar mill’s pulp for domestic markets is shipped by rail to third party warehouses in the U.S. or directly to the customer.
Approximately 55%58%, 51%55% and 47%51% of our consolidated sales were to tissue and specialty paper product manufacturers for the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively. The balance of our sales for such periods was to other paper product manufacturers. Sales to tissue and specialty paper product manufacturers are a key focus for us, as they generally are not as sensitive to cyclical declines in demand caused by downturns in economic activity.
In Total capital expenditures at the Rosenthal mill in 2011, 2010 and 2009 Our Stendal mill’s total capital expenditures in 2011, 2010 and 2009 In January 2012, Mercer announced Project Blue Mill which is intended to increase production and efficiency at the Stendal mill through debottlenecking initiatives including the installation of an additional 40 MW steam turbine. Project Blue Mill is estimated to require approximately €40.0 million in capital expenditures over about 21 months, which will be primarily funded through €12.0 million of non-refundable German government grants and a new €17.0 million five-year amortizing secured term facility, of which 80% will be government guaranteed. The balance of Project Blue Mill will be funded through operating cash flow of the Stendal mill and up to an aggregate of €6.5 million in pro rata shareholder loans from Mercer Inc. and Stendal’s noncontrolling shareholder. Project Blue Mill is currently designed to be completed and start to generate power resources in or about September 2013. Certain of our capital investment programs in Germany were partially financed through government grants made available by German federal and state governments. Under legislation adopted by the federal and certain state governments of Germany, government grants are provided to qualifying businesses operating in Eastern Germany to finance capital investments. The grants are made to encourage investment and job creation. Currently, grants are available for up to 15% of the cost of qualified investments. Previously, government grants were available for up to 35% of the cost of qualified investments, such as for the construction of our Stendal mill. These grants at the 35% of cost level required that at least one permanent job be created for each €0.5 million of capital investment eligible for such grants and that such jobs be maintained for a period of five years from the completion of the capital investment project. Generally, government grants are not repayable by a recipient unless it fails to complete the proposed capital investment or, if applicable, fails to create or maintain the requisite amount of jobs. In the case of such failure, the government is entitled to revoke the grants and seek repayment unless such failure resulted from material unforeseen market developments beyond the control of the recipient, wherein the government may refrain from reclaiming previous grants. Pursuant to such legislation in effect at the time, the Stendal mill received approximately €278.0 million of government grants. We believe that we are in compliance in all material respects with all of the terms and conditions governing the government grants we have received in Germany.2010,2011, we continued with our capital investment programs designed to increase pulp and green energy production capacity and improve efficiency and environmental performance at our mills. The improvements made at our mills over the past seveneight years have reduced operating costs and increased the competitive position of our facilities.and 2008 were €13.7 million, €4.0 million €9.1 million and €8.7€9.1 million, respectively. Capital investments at the Rosenthal mill in 2011, primarily related to the installation of a new chipper and upgrades to the recovery process, while in 2010 and 2009 capital expenditures related mainly to the upgrade of a bleaching line and a washer project, which helped offset three years of wastewater fees that would otherwise be payable.and 2008 were €8.3 million, €3.6 million €2.0 million and €4.9€2.0 million, respectively. Capital investments at the Stendal mill in 2011 and 2010 related mainly to relatively small projects designed to improve safety and environmental performance as well as improve the overall efficiency of the mill.19
As at December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Properties, gross amount including government grants less amortization | € | 1,144,759 | € | 1,152,288 | € | 1,171,891 | ||||||
Less: government grants less amortization | 297,992 | 283,730 | 290,187 | |||||||||
Properties, net (as shown on consolidated balance sheets) | € | 846,767 | € | 868,558 | € | 881,704 | ||||||
As at December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in thousands) | ||||||||||||
Property, plant and equipment, gross amount less amortization | € | 1,112,639 | € | 1,144,759 | € | 1,152,288 | ||||||
Less: government grants less amortization | 291,665 | 297,992 | 283,730 | |||||||||
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Property, plant and equipment, net (as shown on the Consolidated Balance Sheets) | € | 820,974 | € | 846,767 | € | 868,558 | ||||||
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Qualifying capital investments at industrial facilities in Germany that reduce effluent discharges offset wastewater fees that would otherwise be required to be paid. For more information about our environmental capital expenditures, see “—Environmental”.
Total capital expenditures at the Celgar mill in 2011, 2010 and 2009 and 2008 were €15.7 million, €30.6 million €17.8 million and €12.1€17.8 million, respectively. In 2010,2011, capital expenditures related primarily to a project to improve the Celgar Energy Project. mill’s fiber line and oxygen delignification process, referred to as the “Oxygen Delignification Project”, and a project to recover/recycle chemicals from the mill’s effluent, referred to as the “GAP Project”.
We implementedcompleted the Celgar Energy Project in 2010 as part of our continued focus on energy production and sales and to increase the mill’s production of “green” energy and optimize its power generation capacity. The project was designed as a high return capital project at a cost of approximately C$64.964.7 million (€48.749.0 million). It included the installation of a second turbine generator with a design capacity of 48 MW.
In October 2009, as part of the GTP, the Canadian government through NRCan agreed to provide approximately C$57.7 million in credits towards the capital costs associated with the Celgar mill, including the Celgar Energy Project. Such credits reduced the cost basis of the assets purchased and were not recorded in our income. The majority of the remaining credits not used for the Celgar Energy Project will beare available for use by the Celgar mill on other qualifying projects until March 31, 2012. To be eligible for GTP credits, projects must meet certain energy efficiency or environmental improvement requirements. Specifically, we have applied to NRCan to utilize approximately C$9.710.9 million of our allocated GTP funding towards improving our fiber linethe Oxygen Delignification Project and oxygen delignification processseveral small projects at our Celgar mill. Once completed,As at December 31, 2011, we believe that this project, referredhad spent approximately C$8.6 million to complete the Oxygen Delignification Project. In 2011, as part of the “Oxygen Delignification Project”, should generate a high return forNRCan Transformative Technologies Program, we received C$1.6 million from NRCan which was utilized towards the mill while reducing Celgar’s chemicalGAP Project. As at December 31, 2011, we had spent approximately C$2.7 million on the GAP Project and energy costs through decreased consumption.
The Celgar Energy Project increased the mill’s installed generating capacity to 100 MW, and upgraded the mill’s bark boiler and steam facilities. In January 2009, the Celgar mill finalized the Electricity Purchase Agreement under which it will sell electrical energy generated by the Celgar Energy Project to B.C. Hydro.
Excluding costs for projects financed through government grants, under the GTP, capital expenditures for all of our mills in 20112012 are expected to be approximately €24.1€40.8 million, comprised of Project Blue Mill at our Stendal mill and an array of small projects.
Our operations are subject to a wide range of environmental laws and regulations, dealing primarily with water, air and land pollution control. We devote significant management and financial resources to comply with all applicable environmental laws and regulations. Our total capital expenditures on environmental projects at our mills were approximately We believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in substantial compliance with the requirements of all applicable environmental laws and regulations and our respective operating permits. Under German state environmental rules relating to effluent discharges, industrial users are required to pay wastewater fees based upon the amount of their effluent discharge. These rules also provide that an industrial user which undertakes environmental capital expenditures and lowers certain effluent discharges to prescribed levels may offset the amount of these expenditures against the wastewater fees that they would otherwise be required to pay. We estimate that the aggregate wastewater fees we saved in €2.5€7.1 million in 20102011 (€9.52.5 million in 2009)2010). The Oxygen Delignification Project is intended to generate environmental improvements by reducing the organic and chemical loading on the effluent treatment system.20102011 as a result of environmental capital20
Environmental compliance is a priority for our operations. To ensure compliance with environmental laws and regulations, we regularly monitor emissions at our mills and periodically perform environmental audits of operational sites and procedures both with our internal personnel and outside consultants. These audits identify opportunities for improvement and allow us to take proactive measures at the mills as considered appropriate.
The Rosenthal mill has a relatively modern biological wastewater treatment and oxygen bleaching facility. We have significantly reduced our levels of absorbable organic halogen discharge at the Rosenthal mill and we believe the Rosenthal mill’s absorbable organic halogen and chemical oxygen demand discharges are in compliance with the standards currently mandated by the German government.
The Stendal mill, which commenced operations in September 2004, has been in substantial compliance with applicable environmental laws, regulations and permits. Management believes that, as the Stendal mill is astate-of-the-art facility, it will be able to continue to operate in compliance with the applicable environmental requirements.
The Celgar mill has been in substantial compliance with applicable environmental laws, regulations and permits.
In November 2008, the Celgar mill suffered a spill of diluted weak black liquor into the nearby Columbia River. The spill was promptly reported by the mill to authorities and remediated. An environmental impact report prepared by independent consultants engaged by the mill concluded that the environmental impact of the spill was minimal. The spill was also investigated by federal and provincial environmental authorities and, in January 2009, the Celgar mill received a government directive requiring it to take a number of measures relating to the retention capacity of spill ponds. These measures have now beenwere completed to the satisfaction of the overseeing environmental authorities. However, in September 2009, the Celgar mill received a summons in connection with this spill for charges under the CanadianFisheries Actand the British ColumbiaEnvironmental Management Act, primarily relating to alleged effluent exceedances under the Celgar mill’s discharge permit. See “Legal Proceedings”.
The Celgar mill operates two landfills, a newly commissioned site and an older site. The Celgar mill intends to decommission the oldolder landfill and is developing a closure plan and reviewing such plan with the CanadianBritish Columbia Ministry of Environment, or “MOE”. However, the MOE, in conjunction with the provincial pulp and paper industry, is in the process of developingSince a standard for landfill closures. In addition, the portion of the older landfill owned by an adjacent sawmill continues to be active. Accordingly,active, the mill has not been able to move forward with the closure. We currently believe we mayexpect to receive provincial regulatory approval for suchour closure plan for our older landfill in 20112012 and intend to commence closure activities based on a timetable agreed to by both Celgar and the MOE. We currently estimate theThe cost of closing the landfill atis expected to be approximately €2.1 million but, since the closure program for the old landfill has not been finalized or approved, there can be no assurance that the decommissioning of the old landfill will not exceed such cost estimate.
Future regulations or permits may place lower limits on allowable types of emissions, including air, water, waste and hazardous materials, and may increase the financial consequences of maintaining compliance with environmental laws and regulations or conducting remediation. Our ongoing monitoring and policies have enabled us to develop and implement effective measures to maintain emissions in substantial compliance with environmental laws and regulations to date in a cost-effective manner. However, there can be no assurances that this will be the case in the future.
There are numerous differing scientific studies and opinions relating to the severity, extent and speed at which climate change is or may be Currently, thereoccurring around the world.occurring. As a result, we are currently unable to identify and predict all of the specific consequences of climate change on our business and operations.21
The focus on climate change has generated a substantial increase in demand and in legislative requirements for “carbon neutral” or “green” energy in both Europe and, increasingly, in North America. Pulp mills consume wood residue, being wood chips and pulp logs, as the base raw material for itstheir production process. Wood chips are residue left over from lumber production and pulp logs are generally lower quality logs left over from logging that are unsuitable for the production of lumber.
As part of their production process, our mills take wood residue and process it through a digester where cellulose is separated from the wood to be used in pulp production and the remaining residue, called “black liquor”, is used for green energy production. As a result of their use of wood residue and because our mills generate combined heat and power, they are efficient producers of energy. This energy is carbon neutral and produced from a renewable source. Our relatively modern mills generate a substantial amount of energy that is surplus to their requirements.
These factors, along with governmental initiatives in respect of renewable or green energy legislation, have provided business opportunities for us to enhance our generation and sales of green energy and to participate in the sale of emission allowances under the EU ETS.
Currently, we are exploring other initiatives to enhance our generation and sales of surplus green energy. Other potential opportunities that may result from climate change include:
the expansion of softwood forests and increased growth rates for such forests;
more intensive forestry practices and timber salvaging versus harvesting standing timber;
greater demand for sustainable energy and cellulosic biomass fuels; and
additional governmental incentives and/or legislative requirements to enhance biomass energy production.
At this time, we cannot predict which, if any, of these potential opportunities will be available to or realized by us or their economic effect on our business.
While all of the specific consequences to our business from climate controlchange are not yet predictable, the most visible potential negative consequence is that the focus on renewable energy will continue to create greater demand for the wood residuals or fiber that is consumed by our mills as part of their production process.
In Germany since 2006, the price and supply of wood residuals have been affected by an increasing demand from alternative or renewable energy producers and governmental initiatives for carbon neutral energy. Over the long term, this non-traditional demand for fiber is expected to increase in Europe. Additionally, the growing interest and focus in British Columbia for renewable green energy is also expected to create additional competition for such fiber in that region over time. Such additional demand for wood residuals may increase the competition and prices for wood residuals over time. See “—Operating Costs — Costs—Fiber”.
Governmental action or legislation may also have an important effect on the demand and prices for wood residuals. As governments pursue green energy initiatives, they risk creating incentives and demand for wood residuals from renewable energy producers that “cannibalizes” or adversely affects existing traditional users, such as lumber and pulp and paper producers. We are activelycontinually engaged in continuing dialogue with government to educate and try to ensure potential initiatives recognize the traditional and continuing role of our mills in the overall usage of forestry resources and the economies of local communities.
Other potential negative consequences from climate change over time that may affect our business include:
a greater susceptibility of northern softwood forest to disease, fire and insect infestation; | ||
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the loss of water transportation for logs and our finished goods inventories due to lower water levels;
decreases in quantity and quality of processed water for our mill operations;
the loss of northern softwood boreal forests in areas in sufficient proximity to our mills to competitively acquire fiber; and
lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals.
We currently employ approximately Rosenthal, which employs approximately workers. In December Stendal and its subsidiaries employ approximately We consider the relationships with our employees to be good. Although no assurances can be provided, we have not had any significant work stoppages at any of our German operations and we would therefore expect to enter into labor agreements with our pulp workers in Germany without any significant work stoppages at our German mills. We negotiated a four-year collective agreement, effective May 1, 2008, with our hourly workers at the Celgar mill to replace the collective agreement which expired on April 30, 2008. The agreement provided for a retroactive wage increase of 2.0% for 2008, a wage increase of 2.5% in each of 2009 and 2010 and a wage increase of 3.0% in 2011.1,4911,495 people. We have approximately 1,0521,039 employees working in our German operations, including our transportation and sales subsidiaries. In addition, there are approximately 17 people working at the office we maintain in Vancouver, British Columbia, Canada. Celgar currently employs approximately 422439 people in its operations, the vast majority of which are unionized.445444 people, is bound by collective agreements negotiated with Industriegewerkschaft Bergbau, Chemie, Energie, or “IGBCE”, a national union that represents pulp and paper2010,2011, we successfully negotiated a new agreement with IGBCE substantially upon the same terms as the previous labor contract. The new collective agreement providesprovided for a one-time payment of €200 per employee, an approximately 3.5%3.0% wage increase in 20112012 and expires at the end of November 2011.601589 people. In 2011, Stendal has not yet entered into anya seven-year collective agreementsagreement with IGBCE although it may do soeffective July 2011. Since, prior to entering into this collective agreement, Stendal’s employees had relatively lower wages compared to their peers at other German pulp mills, this agreement provides for an approximately 5.5% wage increase in the future.
We consider the relationships with our employees at our Celgar mill to be good. Although no assurances can be provided, we have not had any significant work stoppages at our Celgar mill and we would therefore expect to enter into further labor agreements with our Celgar mill’s employees without any significant work stoppages.
The following summaries of certain material provisions of: (i) our In November 2010, we issued $300.0 million in aggregate principal amount of 9.5% Senior Notes due 2017, referred to as the 2017 Senior Notes; (ii) our 2013 Senior Notes; (iii) our 2012 Convertible Notes; (iv) the Stendal Loan Facility; (v)(iii) our new €17.0 million amortizing term facility at our Stendal mill; (iv) the working capital facilities and investment loan associated with our Rosenthal mill; and (vi)(v) the Celgar Working Capital Facility, as such terms are referred to below, are not complete and these provisions, including definitions of certain terms, are qualified by reference to the applicable documents and the applicable amendments to such documents on file with the U.S. Securities and Exchange Commission, referred to as the “SEC”.2017 Senior Notes“2017 Senior“Senior Notes” to principally refinance our 20139.25% Senior Notes (as defined below)due 2013, referred to as the “2013 Senior Notes”. The 2017 Senior Notes bear interest at a rate of 9.5% per annum, payable semi-annually in arrears on December 1 and June 1, commencing June 1, 2011. The 2017 Senior Notes mature on December 1, 2017. The 2017 Senior Notes are our senior unsecured obligations and, accordingly, rank junior in right of payment to all existing and future secured indebtedness and all indebtedness and liabilities of our subsidiaries, equal in right of payment with all of our existing and future unsecured senior indebtedness including the 2013 Senior Notes, and senior in right of payment to the 2012 Convertible Notes (as defined below) as well as any future subordinated indebtedness. The 2017 Senior Notes were issued under an indenture which, among other things, restricts our ability and the ability of our restricted subsidiaries under the indenture to: (i) incur additional indebtedness or issue preferred stock; (ii) pay dividends or make other distributions to our stockholders; (iii) purchase or redeem capital stock or subordinated indebtedness; (iv) make investments; (v) create liens and enter into sale and lease back transactions; (vi) incur restrictions on the23
In order to take into account the nature of the non-recourse “project financing” of the loan facility for our Stendal mill and to enhance our financing flexibility, the indenture governing our 2017 Senior Notes provides for a “Restricted Group” and an “unrestricted group”. The terms of the indenture are applicable to the Restricted Group and are generally not applicable to the unrestricted group. Currently, the Restricted Group is comprised of Mercer Inc., the Rosenthal and Celgar mills and certain holding subsidiaries. The Restricted Group excludes our Stendal mill. The working capital facilities at our Rosenthal and Celgar mills and our convertible notes and, previously, our 2013 Senior Notes are obligations of the Restricted Group. The Stendal Loan Facility is an obligation of our unrestricted group.
In February 2005, we issued $310.0 million in principal amountthe third quarter of 9.25% Senior Notes due 2013, referred to as the “2013 Senior Notes”. The 2013 Senior Notes bore interest at the rate of 9.25% per annum and were to mature on February 15, 2013. The indenture governing our 2013 Senior Notes provided for a similar “Restricted Group” and an “unrestricted group” as prescribed in the 2017 Senior Note indenture.
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In August 2002, Stendal entered into a senior €828.0 million project finance facility, referred to as the “Stendal Loan Facility”. The Stendal Loan Facility was comprised of several tranches which covered, among other things, project construction and development costs, financing andstart-up costs and working capital, as well as the financing of the debt service reserve account, or “DSRA”, approved cost overruns and a revolving loan facility that covered time lags for receipt of grant funding and value-added tax refunds, which has been repaid. The DSRA is an account maintained to hold and, if needed, pay up to one year’s principal and interest due under the facility as partial security for the lenders. Other than the revolving working capital tranche, no further advances are currently available under the Stendal Loan Facility.
Pursuant to the Stendal Loan Facility, interest accrues at variable rates between Euribor plus 0.90% and Euribor plus 1.85%1.69% per year. The facility provides for Stendal to manage its risk exposure to interest rate risk, currency risk and pulp price risk by way of interest rate swaps, Euro and U.S. dollar swaps and pulp hedging transactions, subject to certain controls, including certain maximum notional and at-risk amounts. Pursuant to the terms of the facility, in 2002 Stendal entered into interest rate swap agreements in respect of borrowings to fix most of the interest costs under the Stendal Loan Facility at a rate of 5.28% plus an applicable margin, until final payment in October 2017.
Pursuant to the terms of the Stendal Loan Facility, Stendal reduced the aggregate advances outstanding to €531.1 million at the end of 2008 from a maximum original amount of €638.0 million. The tranches are generally repayable in installments and mature between the fifth and 15th anniversary of the first advance under the Stendal Loan Facility.
In February 2009, we completed an agreement with Stendal’s lending syndicate to amend the Stendal Loan Facility, referred to as the “Amendment”. Pursuant to the Amendment, Stendal’s obligation to repay €164.0 million of scheduled principal payments, referred to as the “Deferred Amount”, is deferred until maturity of the facility in September 2017. Until the Deferred Amount is repaid in full, Stendal may not make distributions, in the form of interest and capital payments on shareholder debt or dividends on equity invested, to its shareholders, including us. The Amendment also provides for a 100% cash sweep, referred to as the “Cash Sweep”, of any excess cash of Stendal which will be used first to fund the DSRA to a level sufficient to service the amounts due and payable under the Stendal Loan Facility during the then following 12 months, or “Fully Funded”, and second to prepay the Deferred Amount. Not included in the Cash Sweep is an amount of €15.0 million which Stendal is permitted to retain for working capital purposes. The DSRA balance as at December 31, 20102011 was approximately €7.0€31.8 million.
The Amendment implemented a permitted leverage ratio of total debt under the Stendal Loan Facility to EBITDA, or “Senior Debt/EBITDA Cover Ratio”, to be effective from December 31, 2009 and to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. Subsequently, Stendal’s lending syndicate waived compliance with the permitted leverage ratio for the year ended December 31, 2009. The Amendment also
revises the Stendal Loan Facility’s annual debt service cover ratio, or “Annual Debt Ratio”, requirement to be at least 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x from January 1, 2014 until Maturity.
The Amendment includes the following as events of default:
• | if scheduled debt service for two consecutive half-year periods is partially or wholly financed by drawings from the DSRA and as a result the DSRA is less than 331/3% Fully Funded; | ||
if the DSRA is fully drawn and Stendal exercises its current 6-month principal payment deferral right in respect of the next repayment date; and
failure to meet the Senior Debt/EBITDA Cover Ratio or Annual Debt Ratio as set out above.
The Amendment provides that Stendal and its shareholders may, once per fiscal year, cure a deficiency in each of the Annual Debt Ratio or the Senior Debt/EBITDA Cover Ratio by way of a capital contribution or fully subordinated shareholder loan to Stendal in the amount necessary to cure such deficiency and thereby prevent the occurrence of an event of default. Our ability to fund this cure is substantially limited by the terms of the 2013 Senior Notes and the 2017 Senior Notes.
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The tranches under the Stendal Loan Facility are severally guaranteed by German federal and state governments in respect of an aggregate of 80% of the principal amount of these tranches. Under the guarantees, the German federal and state governments that provide the guarantees are responsible for the performance of our payment obligations for the guaranteed amounts. Such governmental guarantees permit the Stendal Loan Facility to benefit from lower interest costs and other credit terms than would otherwise be available.unavailable. The Stendal Loan Facility is secured by substantially all of the assets of Stendal.
As at December 31, 2010,2011, the principal amount outstanding under the Stendal Loan Facility was €500.7€477.5 million.
In connection with the Stendal Loan Facility, we entered into a shareholders’ undertaking agreement, referred to as the “Undertaking”, dated August 26, 2002, as amended, with Stendal’s then minority shareholders and the lenders in order to finance the shareholders’ contribution to the Stendal mill. Under the terms of the Undertaking, we have agreed, for as long as Stendal has any liability under the Stendal Loan Facility, to retain control over at least 51% of the voting shares of Stendal.
Project Blue Mill Facility
In January 2012, our Stendal mill entered into a new €17.0 million amortizing term facility, referred to as the “Blue Mill Facility”, to finance Project Blue Mill. The Blue Mill Facility, 80% of which is guaranteed by the State of Saxony-Anhalt, bears interest at a rate of Euribor plus 3.5% per annum and is scheduled to mature in September 2017. The Blue Mill Facility’s annual debt service cover ratio and permitted ratio of total debt to EBITDA are identical to the Annual Debt Ratio and the Senior Debt/EBITDA Cover Ratio in the Stendal Loan Facility (including cure provisions). The Blue Mill Facility will be repaid in nine half-yearly installments, together with accrued interest commencing September 30, 2013 and will be non-recourse to Mercer Inc.
Rosenthal Loan Facilities
In August 2009, Rosenthal refinanced its then current revolving working capital facility with a new €25.0 million facility, referred to as the “Rosenthal Loan Facility”. The Rosenthal Loan Facility consists of a revolving credit facility which may be utilized by way of cash advances or advances by way of letter of credit or bank guarantees. The facility matures in December 2012. The interest payable on cash advances is Euribor plus 3.5%, plus certain other costs incurred by the lenders in connection with the facility. Each cash advance is to be repaid on the last day of the respective interest period and in full on the termination date and each advance by way of a letter of credit or bank guarantee shall be repaid on the applicable expiry date of such letter of credit or bank guarantee. An interest period for cash advances shall be one, three or six months or any other period as Rosenthal and the lenders may determine. There is also a 1.1% per annum commitment fee on the unused and uncancelled amount of the revolving facility which is payable semi-annually in arrears. This facility is secured by a first ranking security interest on the inventories, receivables and accounts of Rosenthal. It also provides Rosenthal with a hedging facility relating to the hedging of the interest, currency and pulp prices as they affect Rosenthal pursuant to a strategy agreed to by Rosenthal and the lender from time to time.
In August 2009, we also finalized a €4.4 million investment loan agreement, referred to as the “Investment Loan Agreement”, with a lender, relating to the new wash press at our Rosenthal mill. The four-year amortizing investment loan bears interest at the rate of Euribor plus 2.75%. Borrowings under this agreement are secured by the new wash press equipment.
In the first quarter of 2010, we entered into an additional €3.5 million revolving credit facility for our Rosenthal mill which bears interest at the rate of Euribor plus 3.5%. As of December 31, 2010,2011, the total amount of funds available under the working capital facilities associated with the Rosenthal mill is €26.4 million.
Celgar Working Capital Facility
In November 2009, Celgar amended and restated its C$40.0 million revolving working capital credit facility, referred to as the “Celgar Working Capital Facility”. The Celgar Working Capital Facility matures in May 2013 and is available by way of: (i) Canadian and U.S. denominated advances which bear interest at a designated prime rate plus 2.0% for Canadian advances and at a designated base rate plus 2.0% per annum for U.S. advances; (ii) banker’s acceptance equivalent loans which bear interest at the applicable Canadian dollar bankers’ acceptance rate plus 3.75% per
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As at December 31, 2010,2011, C$20.038.3 million of funds had been drawn and approximately C$17.9 million remainedwere available under the Celgar Working Capital Facility.
We make available free of charge on or through our website atwww.mercerint.com annual reports onForm 10-K, quarterly reports onForm 10-Q and current reports onForm 8-K, and all amendments to these reports, as soon as reasonably practicable after we file these materials with the SEC. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC maintains an internet site atwww.sec.gov that also contains our current and periodic reports, including our proxy and information statements.
ITEM 1A. | RISK FACTORS |
The statements in this “Risk Factors” section describe material risks to our business and should be considered carefully. You should review carefully the risk factors listed below, as well as those factors listed in other documents we file with the SEC. In addition, these statements constitute our cautionary statements under thePrivate Securities Litigation Reform Act of 1995. Our disclosure and analysis in this annual report onForm 10-K and in our annual report to shareholders contain some forward-looking statements that set forth anticipated results based on management’s current plans and assumptions.
There are a number of important 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:
the highly cyclical nature of our business; | ||
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a weak global economy could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;
cyclical fluctuations in the price and supply of our raw materials could adversely affect our business;
we operate in highly competitive markets;
we are exposed to currency exchange rate and interest rate fluctuations;
increases in our capital expenditures or maintenance costs could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations;
we use derivatives to manage certain risks which has caused significant fluctuations in our operating results;
we are subject to extensive environmental regulation and we could have environmental liabilities at our facilities;
our business is subject to risks associated with climate change and social government responses thereto;
Project Blue Mill might not generate the results we expect;
we are subject to risks related to our employees;
we rely on German federal and state government grants and guarantees;
risks relating to our participation in the EU ETS, and the application of Germany’s Renewable Energy Act;
we are dependent on key personnel;
we may experience material disruptions to our production;
we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters;
our insurance coverage may not be adequate; and
we rely on third parties for transportation services.
From time to time, we also provide forward-looking statements in other materials we release as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts.
Statements in the future tense, and all statements accompanied by terms such as “may”, “will”, “believe”, “project”, “expect”, “estimate”, “assume”, “intend”, “anticipate”, “plan”, and variations thereof and similar terms are intended to be forward-looking statements as defined by federal securities law. You can find examples of these statements throughout this annual report onForm 10-K, including in the description of business in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. While these forward-looking statements reflect our best estimates when made, the following risk factors could cause actual results to differ materially from estimates or projections.
We intend that all forward-looking statements we make will be subject to safe harbor protection of the federal securities laws pursuant to Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”) and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).
You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. As noted above, these forward-looking statements speak only as of the date when they are made. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those statements. Moreover, in the future, we may make forward-looking statements that involve the risk factors and other matters described in this document as well as other risk factors subsequently identified.
Our business is highly cyclical in nature.
The pulp business is highly cyclical in nature and markets for our principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. Pulp markets are highly competitive and are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro-economic conditions and levels of industry capacity.
Industry capacity can fluctuate as changing industry conditions can influence producers to idle production 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.
Demand for pulp has historically been determined primarily by the level of economic growth and has been closely tied to overall business activity. From 2006 to mid-2008, pulp prices steadily improved. However, athe global economic crisis in the latter half of 2008 resulted in a sharp decline of pulp prices from a high of €900 per ADMT to €635 per ADMT at the end of 2008. Pulp prices began to increase in the second half of 2009 and continued to increase to record levels through June of 2010, before declining slightly in the fourth quarter of 2010. Although we
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Prices for pulp are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the price for pulp, 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.
Our level of indebtedness could negatively impact our financial condition and results of operations.
As of December 31, 2010,2011, we had approximately €821.9€734.1 million of indebtedness outstanding, of which €500.7€477.5 million relates to the Stendal Loan Facility. We may also incur additional indebtedness in the future. Our high debt levels may have important consequences for us, including, but not limited to the following:
our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favorable to us or at all;
a significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes;
increasing our vulnerability to current and future adverse economic and industry conditions;
a substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations;
our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general;
causing us to offer debt or equity securities on terms that may not be favorable to us or our shareholders;
limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; and
our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness.
The indenture governing our 2017 Senior Notes and our bank credit facilities contain restrictive covenants which impose operating and other restrictions on us and our subsidiaries. These restrictions will affect, and in many respects will limit or prohibit, our ability to, among other things, incur or guarantee additional indebtedness or enter into sale/leaseback transactions, pay dividends or make distributions on capital stock or redeem or repurchase capital stock, make investments or acquisitions, create liens and enter into mergers, consolidations or transactions with affiliates. The terms of our indebtedness also restrict our ability to sell certain assets, apply the proceeds of such sales and reinvest in our business.
Failure to comply with the covenants in the indenturesindenture relating to our 2017 Senior Notes or in our bank credit facilities could result in events of default and could have a material adverse effect on our liquidity, results of operations and financial condition.
Our ability to repay or refinance our indebtedness will depend on our future financial and operating performance. Our performance, in turn, will be subject to prevailing economic and competitive conditions, as well as financial, business, legislative, regulatory, industry and other factors, many of which are beyond our control. Our ability to meet our future debt service and other obligations, in particular the Stendal Loan Facility, may depend
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A weakening of the global economy could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources.
Global financial markets experienced extreme and unprecedented disruption in the second half of 2008, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit
availability, rating downgrades of certain investments and declining valuations of others. Although financial markets have stabilized and the modest global economic recovery which emerged in the second half of 2009 haslargely continued through 2010,2011, the overall state of the global economy remains generally weak and we remain subject to a number of risks associated with these adverse economic conditions. Price appreciation in 2010 and the first half of 2011 has been due in significant part to demand from China and other Asian countries, and any reduction in demand in these locations could exacerbate the impact of economic weakness elsewhere.
Principally, as pulp demand has historically been determined by the level of economic growth and business activity, demand and prices for our product have historically decreased substantially during economic slowdowns. Additionally, restricted credit availability restrains our customers’ ability or willingness to purchase our products resulting in lower revenues. Restricted credit availability also can restrict us in the way we operate our business, our level of inventories and the amount of capital expenditures we may undertake. Depending on their severity and duration, the effects and consequences of a global economic downturn could have a material adverse effect on our liquidity and capital resources, including our ability to raise capital, if needed, and otherwise negatively impact our business and financial results.
In a weak pulp price and demand environment, there can be no assurance that we will be able to generate sufficient cash flows to service, repay or refinance debt.
Our main raw material is fiber in the form of wood chips and pulp logs. Such fiber is cyclical in terms of both price and supply. The cost of wood chips and pulp logs is primarily affected by the supply and demand for lumber. Demand for these raw materials is generally determined by the volume of pulp and paper products produced globally and regionally. Since 2006, generally higher energy prices, a focus on, and governmental initiatives related to, “green” or renewable energy have led to an increase in renewable energy projects in Europe, including Germany. Demand for wood residuals from such energy producers, combined with lower harvesting rates, has generally put upward pressure on prices for wood residuals such as wood chips in Germany and its neighboring countries. This has resulted in higher fiber costs for our German mills and such trend could continue to put further upward pressure on wood chip prices.
Similarly, North American sawmill activity declined significantly during the recession, reducing the supply of chips and availability of pulp logs to our Celgar mill. Additionally, North American energy producers are exploring the viability of renewable energy initiatives and governmental initiatives in this field are increasing, all of which could lead to higher demand for sawmill residual fiber, including chips. The cyclical nature of pricing for these raw materials represents a potential risk to our profit margins if pulp producers are unable to pass along price increases to their customers or we cannot offset such costs through higher prices for our surplus energy.
We do not own any timberlands or have any long-term governmental timber concessions nor doand we currently have anyfew long-term fiber contracts at our German operations. Raw materials are available from a number of suppliers and we
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We operate in highly competitive markets.
We sell our pulp globally, with a large percentage sold in Europe, North America and Asia. The markets for pulp are highly competitive. A number of other global companies compete in each of these markets and no company holds a dominant position. Our pulp is considered a commodity because many companies produce similar and largely standardized products. As a result, the primary basis for competition in our markets has been price. Many of our competitors have greater resources and lower leverage than we do and may be able to adapt more quickly to industry or market changes or devote greater resources to the sale of products than we can. There can be no assurance that we will continue to be competitive in the future. The global pulp market has historically been characterized by considerable swings in prices which have and will result in variability in our earnings. Prices are typically denominated in U.S. dollars.
We are exposed to currency exchange rate and interest rate fluctuations.
The majority of our sales are in products quoted in U.S. dollars while most of our operating costs and expenses, other than those of the Celgar mill, are incurred in Euros. In addition, all of the products sold by the Celgar mill are quoted in U.S. dollars and the Celgar mill costs are primarily incurred in Canadian dollars. Our results of operations and financial condition are reported in Euros. As a result, our revenues are adversely affected by a decrease in the value of the U.S. dollar relative to the Euro and to the Canadian dollar. Such shifts in currencies relative to the Euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In 2002, Stendal entered intovariable-to-fixed interest rate swaps to fix interest payments under the Stendal mill financing facility, which has kept Stendal from benefiting from the general decline in interest rates that ensued. These derivatives are marked to market at the end of each reporting period and all unrealized gains and losses are recognized as earnings or losses for the relevant reporting periods.
Increases in our capital expenditures or maintenance costs could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations.
Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and comply with environmental laws. Our annual capital expenditures may vary due to fluctuations in requirements for maintenance, business capital, expansion and as a result of changes to environmental regulations that require capital expenditures to bring our operations into compliance with such regulations. In addition, our senior management and board of directors may approve projects in the future that will require significant capital expenditures. Increased capital expenditures could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations. Further, while we regularly perform maintenance on our manufacturing equipment, key pieces of equipment in our various production processes may still need to be repaired or replaced. If we do not have sufficient funds or such repairs or replacements are delayed, the costs of
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We use derivatives to manage certain risk which has caused significant fluctuations in our operating results.
We use derivative instruments to limit our exposure to interest rate fluctuations. Concurrently with entering into the Stendal financing, Stendal entered intovariable-to-fixed rate interest swaps for the full term of our Stendal Loan Facility to manage its interest rate risk exposure with respect to the full principal amount of this facility. Because we effectively fixed the rate on our Stendal Loan Facility, the value of our derivative position moves inversely to interest rates.
We record unrealized gains or losses on our derivative instruments when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. These unrealized and
realized gains and losses can materially impact our operating results for any reporting period. For example, our operating results for 20102011 included an unrealized net gainsloss of €1.9€1.4 million on our interest rate derivatives.derivative, while our operating results for 2010 included an unrealized net gain of €1.9 million. For 2009, and 2008, our operating results included an unrealized net lossesloss of €5.8 million and €25.2 million, respectively, on our interest rate derivatives.
If any of the variety of instruments and strategies we utilize are not effective, we may incur losses which may have a materially adverse effect on our business, financial condition, results of operations and cash flow. Further, we may in the future use derivative instruments to manage pulp price risks. The purpose of our derivative activity may also be considered speculative in nature; we do not use these instruments with respect to any pre-set percentage of revenues or other formula, but either to augment our potential gains or reduce our potential losses depending on our perception of future economic events and developments.
We are subject to extensive environmental regulation and we could have environmental liabilities at our facilities.
Our operations are subject to numerous environmental laws as well as permits, guidelines and policies. These laws, permits, guidelines and policies govern, among other things:
unlawful discharges to land, air, water and sewers;
waste collection, storage, transportation and disposal;
hazardous waste;
dangerous goods and hazardous materials and the collection, storage, transportation and disposal of such substances;
the clean-up of unlawful discharges;
land use planning;
municipal zoning; and
employee health and safety.
In addition, as a result of our operations, we may be subject to remediation, clean up or other administrative orders or amendments to our operating permits, and we may be involved from time to time in administrative and judicial proceedings or inquiries. Future orders, proceedings or inquiries could have a material adverse effect on our business, financial condition and results of operations. Environmental laws and land use laws and regulations are constantly changing. New regulations or the increased enforcement of existing laws could have a material adverse effect on our business and financial condition. In addition, compliance with regulatory requirements is expensive, at times requiring the replacement, enhancement or modification of equipment, facilities or operations. There can be no assurance that we will be able to maintain our profitability by offsetting any increased costs of complying with future regulatory requirements.
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non-compliance with environmental laws by prior owners. Because of the limited availability of insurance coverage for environmental liability, any substantial liability for environmental damage could materially adversely affect our results of operations and financial condition.
Enactment of new environmental laws or regulations or changes in existing laws or regulations might require significant capital expenditures. We may be unable to generate sufficient funds or access other sources of capital to fund unforeseen environmental liabilities or expenditures.
The Celgar Energy Project may not generate the results or benefits we expect.
Currently, there are differing scientific studies and opinions relating to the severity, extent and speed at which climate change is or may be occurring around the world. As a result, we are currently unable to identify and predict all of the specific consequences of climate change on our business and operations.
To date, the potentialand/or perceived effects of climate change and social and government responses to it have created both opportunities, such as enhanced sales of surplus “green” energy, and risks for our business.
While all of the specific consequences from climate change are not yet predictable, we are subject to risks that government and social focus on and demand for “carbon neutral” or “green” energy will create greater demand for the wood residuals or fiber that is consumed by our pulp mills as part of their production process. In addition, governmental initiatives or legislation may also increase both the demand and prices for wood residuals. As governments pursue green energy initiatives, they may implement financial, tax, pricing or other legislated incentives for renewable energy producers that “cannibalize” or materially adversely affect fiber supplies for existing traditional users, such as lumber and pulp and paper producers.
Such additional demand for wood residualsand/or governmental initiatives may materially increase the competition and prices for wood residuals over time. This could increase our fiber costsand/or restrict our ability to acquire fiber at competitive prices or at all during times of shortages. If our fiber costs increase and we cannot pass on these costs to our customers or offset them through higher prices for our sales of surplus energy, it will negatively affect our operating margins, results of operations and financial position. If we cannot obtain the fiber required to operate our mills, we may have to curtailand/or shut down production. This could have a material adverse effect on operations, financial results and financial position.
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a greater susceptibility of northern softwood forest to disease, fire and insect infestation, which could diminish fiber availability;
the disruption of transportation systems and power supply lines due to more severe storms;
the loss of water transportation for logs and our finished goods inventories due to lower water levels;
decreases in quantity and quality of processed water for our mill operations;
the loss of northern softwood boreal forests in areas in sufficient proximity to our mills to competitively acquire fiber; and
lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals.
The occurrence of some or all of these events could have a material adverse effect on our operationsand/or financial results.
Project Blue Mill may not generate the results or benefits we expect.
Project Blue Mill is subject to customary risks and uncertainties inherent for large capital projects which could result in the project not completing on schedule or as budgeted. The Stendal mill could experience
operating difficulties or delays during the start-up period when the new 40 MW turbine is being ramped up. Project Blue Mill may not increase the Stendal mill’s pulp production and energy generating capacity to the levels we had planned. Cost overruns, equipment breakdowns or failures to perform to design specifications could have a material adverse effect on our Stendal mill’s results of operations and financial performance.
We are subject to risks related to our employees.
The majority of our employees are unionized and we have collective agreements in place with our employees at all of our Rosenthal and Celgar mills. In September 2008, we negotiated a four-year collective agreement, effective May 1, 2008, with the hourly workers at our Celgar mill and, in December 2010, we entered into our current collective agreement with our Rosenthal employees. In the futureJuly 2011, we may enterentered into a collective agreement with our pulp workers at the Stendal mill. Although we have not experienced any work stoppages in the past, there can be no assurance that we will be able to negotiate acceptable collective agreements or other satisfactory arrangements with our employees upon the expiration of our collective agreements or in conjunction with the establishment of a new agreement or arrangement with our pulp workers at the Stendal mill.agreements. This could result in a strike or work stoppage by the affected workers. The registration or renewal of the collective agreements or the outcome of our wage negotiations could result in higher wages or benefits paid to union members. Accordingly, we could experience a significant disruption of our operations or higher on-going labor costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flow.
We rely on government grants and guarantees and participate in European statutory programs.
We currently benefit from a subsidized capital expenditure program and lower cost of financing as a result of German federal and state government grants and guarantees at our Stendal mill. Should either the German federal or state governments be prohibited from honoring legislative grants and guarantees at Stendal, or should we be required to repay any such legislative grants, this may have a material adverse effect on our business, financial condition, results of operations and cash flow.
Since 2005, our German mills have benefitted from sales of emission allowances under the EU Emissions Trading Scheme. As a result of our Rosenthal and Stendal mills’ eligibility for special tariffs under the Renewable Energy Act, the amount of emissions allowances granted to our German mills under the EU ETS has been reduced. Additionally, all such German legislation is subject to amendment or change which could adversely affect the eligibility of our Rosenthal and Stendal mills to participate in this statutory programand/or the tariffs paid thereunder. As a result we cannot predict with any certainty the amount of future sales of surplus energy we may be able to generate.
We are dependent on key personnel.
Our future success depends, to a large extent, on the efforts and abilities of our executive and senior mill operating officers. Such officers are industry professionals many of whom have operated through multiple business cycles. Our officers play an integral role in, among other things:
sales and marketing; | ||
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identifying capital projects which provide a high rate of return; and
prioritizing expenditures and maintaining employee relations.
The loss of one or more of our officers could make us less competitive in these areas which could materially adversely affect our business, financial condition, results of operations and cash flows. We do not maintain any key person life insurance for any of our executive or senior mill operating officers.
We may experience material disruptions to our production.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our pulp and energy salesand/or negatively impact our results of operations. Any of our mills could cease operations unexpectedly due to a number of events, including:
unscheduled maintenance outages;
prolonged power failures;
equipment failure;
design error or employee or contractor error;
chemical spill or release;
explosion of a boiler;
disruptions in the transportation infrastructure, including roads, bridges, railway tracks, tunnels, canals and ports;
fires, floods, earthquakes or other natural catastrophes;
prolonged supply disruption of major inputs;
labor difficulties; and
other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our productsand/or require us to make unplanned capital expenditures. If any of our facilities were to incur significant downtime, our ability to meet our production capacity targets and satisfy customer requirements would be impaired and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks or natural disasters, could create economic and financial disruptions, could lead to operational difficulties (including travel limitations) that could impair our ability to manage or operate our business and adversely affect our results of operations.
Our insurance coverage may not be adequate.
We have obtained insurance coverage that we believe would ordinarily be maintained by an operator of facilities similar to our mills. Our insurance is subject to various limits and exclusions. Damage or destruction to our facilities could result in claims that are excluded by, or exceed the limits of, our insurance coverage. Additionally, the weak global and financial markets have also reduced the availability and extent of credit insurance for our customers. If we cannot obtain adequate credit insurance for our customers, we may be forced to amend or curtail our planned operations which could negatively impact our sales revenues, results of operations and financial position.
We rely on third parties for transportation services.
Our business primarily relies upon third parties for the transportation of pulp to our customers, as well as for the delivery of our raw materials to our mills. Our pulp and raw materials are principally transported by truck,
barge, rail and sea-going vessels, all of which are highly regulated. Increases in transportation rates can also materially adversely affect our results of operations.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
ITEM 2. | PROPERTIES |
We lease offices in Vancouver, British Columbia, Seattle, Washington, and Berlin, Germany. We own the Rosenthal and Celgar mills and the underlying property. The Stendal mill is situated on property owned by Stendal, our 74.9% owned subsidiary.
The Rosenthal mill is situated on a 220 acre site near the town of Blankenstein in the state of Thüringia, approximately 300 kilometers south of Berlin. The Saale river flows through the site of the mill. In late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp. It is a single line mill with a current annual production capacity of approximately 330,000345,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the mill include:
an approximately 315,000 square feet fiber storage area;
barking and chipping facilities for pulp logs;
an approximately 300,000 square feet roundwood yard;
a fiber line, which includes a Kamyr continuous digester and bleaching facilities;
a pulp machine, which includes a dryer, a cutter and a baling line;
an approximately 63,000 square feet finished goods storage area;
a chemical recovery system, which includes a recovery boiler, evaporation plant and recausticizing plant;
a fresh water plant;
a wastewater treatment plant; and
a power station with a turbine capable of producing 57 MW of electric power from steam produced by the recovery boiler and the power boiler.
The Stendal mill is situated on a 200 acre site owned by Stendal that is part of a larger 1,250 acre industrial park near the town of Stendal in the state of Saxony-Anhalt, approximately 300 kilometers north of the Rosenthal mill and 130 kilometers west of Berlin. The mill is adjacent to the Elbe river and has access to harbor facilities for water transportation. The mill is a single line mill with a current annual design production capacity of approximately 645,000 ADMTs of kraft pulp. The Stendal mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly being generated is sold to the regional power grid. The facilities at the mill include:
an approximately 920,000 square feet fiber storage area; | ||
36
debarking and chipping facilities for pulp logs;
a fiber line, which includes ten Superbatch digesters and bleaching facilities;
a pulp machine, which includes a dryer, a cutter and a baling line;
an approximately 108,000 square feet finished goods storage area;
a recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln;
a fresh water plant;
a wastewater treatment plant; and
a power station with a turbine capable of producing approximately 100 MW of electric power from steam produced by the recovery boiler and a power boiler.
The Celgar mill is situated on a 400 acre site near the city of Castlegar, British Columbia. The mill is located on the south bank of the Columbia River, approximately 600 kilometers east of the port city of Vancouver, British Columbia, and approximately 32 kilometers north of the Canada-U.S. border. The city of Seattle, Washington is approximately 650 kilometers southwest of Castlegar. It is a single line mill with a current annual production capacity of approximately 520,000 ADMTs of kraft pulp. Internal power generating capacity will, with certain capital improvements that are currently being constructed, enableresulting from the completion of the Celgar Energy Project in 2010 enables the Celgar mill to be self-sufficient in electrical power and to sell surplus electricity. The facilities at the Celgar mill include:
chip storage facilities consisting of four vertical silos and an asphalt surfaced yard with a capacity of 200,000 cubic meters of chips;
a woodroom containing debarking and chipping equipment for pulp logs;
a fiber line, which includes a dual vessel hydraulic digester, pressure knotting and screening, single stage oxygen delignification and a four stage bleach plant;
two pulp machines, which each include a dryer, a cutter and a baling line;
a chemical recovery system, which includes a recovery boiler, evaporation plant, recausticizing area and effluent treatment system; and
two turbines and generators capable of producing approximately 48 MW and 52 MW, respectively, of electric power from steam produced by a recovery boiler and power boiler.
At the end of 2010,2011, substantially all of the assets relating to the Stendal mill were pledged to secure the Stendal Loan Facility. The working capital loan facilities established for the Rosenthal and Celgar mills are secured by first charges against the inventories and receivables at the respective mills.
The following table sets out our pulp production capacity and actual production sales volumes and revenues by mill for the periods indicated:
Annual | ||||||||||||||||
Production | Years Ended December 31, | |||||||||||||||
Capacity(1) | 2010 | 2009 | 2008 | |||||||||||||
(ADMTs) | ||||||||||||||||
Pulp Production by Mill: | ||||||||||||||||
Rosenthal | 330,000 | 324,194 | 310,244 | 328,693 | ||||||||||||
Celgar | 520,000 | 502,107 | 466,855 | 485,893 | ||||||||||||
Stendal | 645,000 | 599,985 | 620,342 | 610,401 | ||||||||||||
Total pulp production | 1,495,000 | 1,426,286 | 1,397,441 | 1,424,987 | ||||||||||||
Annual Production Capacity(1) | Years Ended December 31, | |||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||
(ADMTs) | ||||||||||||||||
Pulp Production by Mill: | ||||||||||||||||
Rosenthal | 345,000 | 344,389 | 324,194 | 310,244 | ||||||||||||
Celgar | 520,000 | 488,007 | 502,107 | 466,855 | ||||||||||||
Stendal | 645,000 | 621,281 | 599,985 | 620,342 | ||||||||||||
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Total pulp production | 1,510,000 | 1,453,677 | 1,426,286 | 1,397,441 | ||||||||||||
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(1) | Capacity is the rated capacity of the plants for the year ended December 31, |
ITEM 3. | LEGAL PROCEEDINGS |
In October 2005, our wholly-owned subsidiary, Zellstoff Celgar Limited, received a re-assessment for real property transfer tax payable in British Columbia, Canada, in the amount of approximately €3.0 million (C$4.5 million) in connection with the acquisition of the Celgar mill. We are currently contesting the re-assessment and we currently expect the Supreme Court of British Columbia to hold a hearing on this matter sometime in 2011.2012. The reassessment has been fully paid and the amount, if any, that may be payablereimbursed to us in connection with this matter remains uncertain.
In September 2009, the Celgar mill received a summons for charges under theCanadianFisheries Act and the British ColumbiaEnvironmental Management Act in connection with a November 2008 spill of diluted weak black liquor and diluted weak black liquor foam into the nearby Columbia River. The charges relate primarily to exceedances of allowable limits under the Celgar mill’s effluent discharge permit and spill pond maintenance requirements. We currently anticipate the Provincial Court of British Columbia to hold a hearingrule on this matter some time in 2011.2012. Although we cannot assess with any certainty the potential liability for damages, if any, that may result from these
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In September of 2010, the Celgar mill received a letter from the Upper Columbia River Natural Resources Trustee Council, an organization consisting of aboriginal groups and US government representatives (the “Council”), alleging that, based on their preliminary assessment (the “Preliminary Assessment”), between 1961 to 1993, the Celgar mill had discharged chlorinated organic compounds into the Columbia River. The Preliminary Assessment was conducted to evaluate the need to conduct a formal natural resource damage assessment under the U.S.Comprehensive Environmental Response, Compensation and Liability Act(“CERCLA”). Although we did not acquire the Celgar mill until 2005, and the Celgar mill’s alleged discharges occurred prior to our acquisition of the mill, the Council determined to proceed with a formal natural resource damage assessment under the CERCLA. Although at this time it is unclear as to whether any harm was caused by these alleged discharges and, in any event, we do not believe we are liable, due to the preliminary nature of the assessment, we cannot at this time quantify the costs, if any, associated with this matter.
In January 2012, the Company served a Notice of Intent to Submit a Claim to Arbitration on the Government of Canada for breaches by it of its obligations under the North American Free Trade Agreement (“NAFTA”). The Company’s NAFTA claim relates to its investments in the Celgar mill and arises from the treatment of the Celgar mill’s energy generation assets and operations by the Province of British Columbia, primarily through the actions of B.C. Hydro, a provincially owned and controlled enterprise, and the British Columbia Utilities Commission, a provincial government regulatory agency. The Company’s claim is against the Government of Canada, rather than the Province of British Columbia as, under NAFTA, the Canadian federal government is responsible for the actions of its provinces. Our NAFTA claim alleges that our Celgar mill has received unfair and discriminatory treatment regarding the mill’s ability to purchase and sell energy compared to other pulp mills and entities that generate and sell electricity within the Province of British Columbia. Under our NAFTA claim, we will be seeking approximately C$250 million in damages consisting of past losses of approximately C$19.0 million per year accruing since 2008 and the net present value of projected losses arising from the ongoing application of current provincial policies. Our NAFTA claim is being instituted under Chapter 11 of NAFTA, is expected to be filed in 2012 and will be heard by a tribunal to be appointed in accordance with Article 1123 of NAFTA.
We are also subject to routine litigation incidental to our business. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
ITEM 4. |
Not applicable.
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
(a)Market Information.Our shares are quoted for trading on the NASDAQ Global Market under the symbol “MERC” and listed in U.S. dollars on the Toronto Stock Exchange under the symbol “MRI.U”. The following table sets forth the high and low sale prices of our shares on the NASDAQ Global Market for each quarter in the two year period ended December 31, 2010:
Fiscal Quarter Ended | High | Low | ||||||
2010 | ||||||||
March 31 | $ | 5.87 | $ | 2.68 | ||||
June 30 | 6.08 | 3.98 | ||||||
September 30 | 5.58 | 3.97 | ||||||
December 31 | 7.95 | 4.93 | ||||||
2009 | ||||||||
March 31 | $ | 2.24 | $ | 0.25 | ||||
June 30 | 1.24 | 0.51 | ||||||
September 30 | 4.37 | 0.50 | ||||||
December 31 | 3.68 | 1.73 |
Fiscal Quarter Ended | High | Low | ||||||
2011 | ||||||||
March 31 | $ | 14.05 | $ | 7.66 | ||||
June 30 | 14.88 | 10.08 | ||||||
September 30 | 11.25 | 6.80 | ||||||
December 31 | 7.46 | 5.34 | ||||||
2010 | ||||||||
March 31 | $ | 5.87 | $ | 2.68 | ||||
June 30 | 6.08 | 3.98 | ||||||
September 30 | 5.58 | 3.97 | ||||||
December 31 | 7.95 | 4.93 |
(b)Shareholder Information.As at February 15, 2011,17, 2012, there were approximately 368328 holders of record of our shares and a total of 44,524,80655,779,204 shares were outstanding.
(c)Dividend Information. The declaration and payment of dividends is at the discretion of our board of directors. Our board of directors has not declared or paid any dividends on our shares in the past two years and does not anticipate declaring or paying dividends in the foreseeable future.
(d)Equity Compensation Plans. The following table sets forth information as at December 31, 20102011 regarding our equity compensation plans approved by our shareholders. 2,543,8541,947,586 of our shares may be issued pursuant to options, stock appreciation rights, restricted stock, restricted stock rights, performance shares and performance units under our 2010 Stock Incentive Plan, which replaced our 2004 Stock Incentive Plan. Our Amended and Restated 1992 Non-Qualified Stock Option Plan expired in 2008.
Number of Shares to be | Weighted-average | Number of Shares | ||||||||||
Issued Upon Exercise | Exercise Price of | Available for Future | ||||||||||
of Outstanding Options | Outstanding Options | Issuance Under Plan | ||||||||||
2010 Stock Incentive Plan | — | $ | — | 2,000,000 | ||||||||
2004 Stock Incentive Plan | 30,000 | (1) | $ | 7.25 | 543,854 | (2) | ||||||
Amended and Restated 1992 Non-Qualified Stock Option Plan | 160,000 | $ | 6.50 | — | (3) |
Number of Shares to be Issued Upon Exercise of Outstanding Options | Weighted-average Exercise Price of Outstanding Options | Number of Shares Available for Future Issuance Under Plan | ||||||||||
2010 Stock Incentive Plan | — | $ | — | 1,947,586 | (1) | |||||||
2004 Stock Incentive Plan | 30,000 | (2) | $ | 7.30 | — | (3) | ||||||
Amended and Restated 1992 Non-Qualified Stock Option Plan | 145,000 | (4) | $ | 6.35 | — | (5) |
(1) | In February 2011, the Company awarded under the 2010 Stock Incentive Plan, 812,575 performance share units which may vest and become issuable into a maximum of 812,575 shares of our common stock only upon the attainment of designated performance objectives over a three year performance period that commenced on January 1, 2011 and will end on December 31, 2013. 50% of these performance share units are scheduled to vest on January 1, 2014, 25% are scheduled to vest on January 1, 2015 and the remaining 25% are scheduled to vest on January 1, 2016. The Company also issued 238,000 shares of restricted stock under the 2010 Stock Incentive Plan, of which 38,000 vest in 2012 and the remaining 200,000 vest in equal amounts over a five-year period between 2012 and 2016. |
(2) | The terms of the 2004 Stock Incentive Plan will govern all prior awards granted under such plan until such awards have been cancelled or forfeited or exercised in accordance with the terms thereof. |
(4) | Our 1992 Amended and Restated Stock Option Plan expired in 2008 but an aggregate of |
(5) | The plan has expired. |
In June 2010, we adopted our 2010 Stock Incentive Plan, referred to as the “2010 Plan”, which provides for options, restricted stock rights, restricted stock, performance shares, performance share units and stock appreciation rights to be awarded to employees, consultants and non-employee directors. The 2010 Plan replaced the Company’s 2004 Stock Incentive Plan, referred to as the “2004 Plan”. However, the terms of the 2004 Plan will govern prior awards until all awards granted under the 2004 Plan have been exercised, forfeited, cancelled, expired, or otherwise terminated in accordance with the terms of such plan. The Company may grant up to a maximum of 2,000,000
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We do not have any equity compensation plans that have not been approved by shareholders.
(e)Exchange Offer. In late December 2009, we commenced a tender offer, referred to as the “Exchange Offer”, to exchange up to $23.6 million aggregate principal amountIssuer Purchases of our then outstanding 2010 Convertible Notes in exchange for an amount of our 2012 Convertible Notes equal to the principal amount of the 2010 Convertible Notes tendered, plus accrued and unpaid interest equaling approximately $12.75 per $1,000 principal amount of 2010 Convertible Notes tendered in the Exchange Offer. As a result of the Exchange Offer, which expired in January 2010, $21.7 million in aggregate principal amount of our 2010 Convertible Notes was tendered in exchange for $22.0 million in aggregate principal amount of our 2012 Convertible Notes. The 2012 Convertible Notes issued in accordance with the terms of the Exchange Agreements are convertible into shares of the Company’s common stock at a conversion price of $3.30 per share, (equal to a conversion rate of approximately 303 shares per $1,000 principal amount of 2012 Convertible Notes), subject to certain adjustments. Since participation in the Exchange Offer was limited to existing holders of the 2010 Convertible Notes and no commission or other remuneration was paid or given directly or indirectly for soliciting the 2010 Convertible Notes tendered in the Exchange Offer, the 2012 Convertible Notes issued as part of the Exchange Offer were exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
(a) | (b) | (c) | (d) | |||||||||||||
Period | Total Number of shares (or units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
August 1, 2011 to August 31, 2011 | 869,990 | $ | 8.37 | 869,990 | $ | 17,717,346 | ||||||||||
September 1, 2011 to September 30, 2011 | 393,411 | $ | 8.49 | 1,263,401 | $ | 14,377,254 | ||||||||||
October 1, 2011 to October 31, 2011 | — | — | 1,263,401 | $ | 14,377,254 | |||||||||||
November 1, 2011 to November 30, 2011 | — | — | 1,263,401 | $ | 14,377,254 | |||||||||||
December 1, 2011 to December 31, 2011 | — | — | 1,263,401 | $ | 14,377,254 |
(f)Performance Graph.The following graph shows a five-year comparison of cumulative total shareholder return, calculated on an assumed dividend reinvested basis, for our common stock, the NASDAQ Stock Market Index (the “NASDAQ Index”) and Standard Industrial Classification, or “SIC”, Code Index (SIC Code 2611 —- pulp mills) (the “Industry Index”). The graph assumes $100 was invested in each of our common stock, the NASDAQ Index and the Industry Index on December 31, 2005.2006. Data points on the graph are annual.
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Mercer International Inc. | 100.00 | 151.02 | 99.62 | 24.43 | 39.44 | 98.60 | ||||||||||||||||||
SIC Code Index | 100.00 | 155.34 | 190.41 | 31.47 | 30.53 | 59.83 | ||||||||||||||||||
NASDAQ Stock Market Index | 100.00 | 110.25 | 121.88 | 73.10 | 106.22 | 125.36 |
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2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||
Mercer International Inc. | 100.00 | 66.13 | 16.21 | 26.18 | 65.45 | 51.52 | ||||||||||||||||||
SIC Code Index | 100.00 | 87.18 | 25.36 | 68.02 | 147.21 | 236.17 | ||||||||||||||||||
NASDAQ Stock Market Index | 100.00 | 110.65 | 66.42 | 96.54 | 114.06 | 113.16 |
ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected historical financial and operating data as at and for the periods indicated. The following selected financial data is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements and related notes contained in this annual report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The following selected financial data excludes the results of operations of our paper operations which were sold in 2006 and are accounted for as discontinued operations. Previously reported data and the financial statements and related notes included herein have been reclassified to conform to the current presentation.
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007(1) | 2006(1) | ||||||||||||||||
(Euro in thousands, other than per share and per ADMT amounts) | ||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Pulp | € | 856,311 | € | 577,298 | € | 689,320 | € | 704,391 | € | 623,977 | ||||||||||
Energy | € | 44,225 | € | 42,501 | € | 30,971 | € | 22,904 | € | 20,922 | ||||||||||
€ | 900,536 | € | 619,799 | € | 720,291 | € | 727,295 | € | 644,899 | |||||||||||
Costs and expenses | € | 732,793 | € | 632,598 | € | 706,962 | € | 657,709 | € | 552,395 | ||||||||||
Operating income (loss) | € | 167,743 | € | (12,799 | ) | € | 13,329 | € | 69,586 | € | 92,504 | |||||||||
Gain (loss) on derivative instruments | € | 1,899 | € | (5,760 | ) | € | (25,228 | ) | € | 20,357 | € | 105,848 | ||||||||
Interest expense | € | 67,621 | € | 64,770 | € | 65,756 | € | 71,400 | € | 91,931 | ||||||||||
Investment income (loss) | € | 468 | € | (1,804 | ) | € | (1,174 | ) | € | 4,453 | € | 6,090 | ||||||||
Income (loss) from continuing operations after income taxes(2) | € | 94,748 | € | (72,125 | ) | € | (85,540 | ) | € | 23,640 | € | 70,313 | ||||||||
Net income (loss) per share attributable to common shareholders from continuing operations | ||||||||||||||||||||
Basic | € | 2.24 | € | (1.71 | ) | € | (2.00 | ) | € | 0.62 | € | 2.08 | ||||||||
Diluted | € | 1.56 | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | € | 1.72 | ||||||||
Weighted average shares outstanding (in thousands) | ||||||||||||||||||||
Basic | 38,591 | 36,297 | 36,285 | 36,081 | 33,336 | |||||||||||||||
Diluted | 56,731 | 36,297 | 36,285 | 45,303 | 43,084 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Current assets | € | 356,880 | € | 200,934 | € | 258,901 | € | 290,259 | € | 221,800 | ||||||||||
Current liabilities | € | 125,197 | € | 101,784 | € | 104,527 | € | 121,516 | € | 120,002 | ||||||||||
Working capital | € | 231,683 | € | 99,150 | € | 154,374 | € | 168,743 | € | 101,798 | ||||||||||
Total assets | € | 1,216,075 | € | 1,083,831 | € | 1,151,600 | € | 1,272,393 | € | 1,284,089 | ||||||||||
Long-term liabilities | € | 877,315 | € | 896,074 | € | 914,970 | € | 895,262 | € | 967,583 | ||||||||||
Total equity | € | 213,563 | € | 85,973 | € | 132,103 | € | 255,615 | € | 196,504 | ||||||||||
Other Data | ||||||||||||||||||||
Pulp sales volume (ADMTs) | 1,428,638 | 1,445,461 | 1,423,300 | 1,352,590 | 1,326,355 | |||||||||||||||
Pulp production (ADMTs) | 1,426,286 | 1,397,441 | 1,424,987 | 1,404,673 | 1,302,260 | |||||||||||||||
Average pulp price realized (per ADMT)(3) | € | 591 | € | 393 | € | 478 | € | 516 | € | 465 |
Years Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007(1) | ||||||||||||||||
(Euro in thousands, other than per share and per ADMT amounts) | ||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Pulp | € | 831,396 | € | 856,311 | € | 577,298 | € | 689,320 | € | 704,391 | ||||||||||
Energy | € | 57,972 | € | 44,225 | € | 42,501 | € | 30,971 | € | 22,904 | ||||||||||
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€ | 889,368 | € | 900,536 | € | 619,799 | € | 720,291 | € | 727,295 | |||||||||||
Costs and expenses | € | 778,249 | € | 732,793 | € | 632,598 | € | 706,962 | € | 657,709 | ||||||||||
Operating income (loss) | € | 111,119 | € | 167,743 | € | (12,799 | ) | € | 13,329 | € | 69,586 | |||||||||
Gain (loss) on derivative instruments | € | (1,418 | ) | € | 1,899 | € | (5,760 | ) | € | (25,228 | ) | € | 20,357 | |||||||
Interest expense | € | 58,995 | € | 67,621 | € | 64,770 | € | 65,756 | € | 71,400 | ||||||||||
Investment income (loss) | € | 1,501 | € | 468 | € | (1,804 | ) | € | (1,174 | ) | € | 4,453 | ||||||||
Income (loss) from continuing operations after income taxes(2) | € | 54,006 | € | 94,748 | € | (72,125 | ) | € | (85,540 | ) | € | 23,640 | ||||||||
Net income (loss) per share attributable to common shareholders from continuing operations | ||||||||||||||||||||
Basic | € | 1.00 | € | 2.24 | € | (1.71 | ) | € | (2.00 | ) | € | 0.62 | ||||||||
Diluted | € | 0.89 | € | 1.56 | € | (1.71 | ) | € | (2.00 | ) | € | 0.58 | ||||||||
Weighted average shares outstanding (in thousands) | ||||||||||||||||||||
Basic | 50,117 | 38,591 | 36,297 | 36,285 | 36,081 | |||||||||||||||
Diluted | 56,986 | 56,963 | 36,297 | 36,285 | 45,303 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Current assets | € | 373,226 | € | 356,880 | € | 200,934 | € | 258,901 | € | 290,259 | ||||||||||
Current liabilities | € | 126,067 | € | 125,197 | € | 101,784 | € | 104,527 | € | 121,516 | ||||||||||
Working capital | € | 247,159 | € | 231,683 | € | 99,150 | € | 154,374 | € | 168,743 | ||||||||||
Total assets | € | 1,217,250 | € | 1,216,075 | € | 1,083,831 | € | 1,151,600 | € | 1,272,393 | ||||||||||
Long-term liabilities | € | 807,641 | € | 877,315 | € | 896,074 | € | 914,970 | € | 895,262 | ||||||||||
Total equity | € | 283,542 | € | 213,563 | € | 85,973 | € | 132,103 | € | 255,615 | ||||||||||
Other Data | ||||||||||||||||||||
Pulp sales volume (ADMTs) | 1,427,924 | 1,428,638 | 1,445,461 | 1,423,300 | 1,352,590 | |||||||||||||||
Pulp production (ADMTs) | 1,453,677 | 1,426,286 | 1,397,441 | 1,424,987 | 1,404,673 | |||||||||||||||
Average pulp price realized (per ADMT)(3) | € | 574 | € | 591 | € | 393 | € | 478 | € | 516 |
(1) | The presentation for |
(2) | We do not report the effect of government grants relating to our assets in our income. These grants reduce the cost basis of the assets |
(3) | Our average realized pulp price reflects customer discounts and price movements between the order and shipment date. |
41
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of our operations for the three years ended December 31, 20102011 is based upon and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”.
General We operate in the pulp business and our operations are located in Germany and Western Canada. Our mills have a current combined annual production capacity of approximately We operate in markets that are global, cyclical and commodity based. Our financial performance depends on a number of variables that impact sales and production costs. Sales and production results are influenced largely by the market price for our products, raw materials and foreign currency exchange rates. Kraft pulp markets are highly cyclical, with prices determined by supply and demand. Demand for kraft pulp is influenced to a significant degree by global levels of economic activity and supply is driven by industry capacity and utilization rates. Our product mix is important because premium grades of NBSK pulp generally achieve higher prices and profit margins. Global economic conditions, changes in production capacity and inventory levels are the primary factors affecting kraft pulp prices. Historically, kraft pulp prices have been cyclical in nature. The average European list prices for NBSK pulp between 2000 and Our sales realizations are list prices reduced by customer discounts and other items. Our reported average sale price realizations are affected by NBSK price movements between the order and shipment dates. During the last three years, energy production and sales of surplus energy have become a key source of revenues for us. In 2011, 2010 and 2009, our mills generated 652,113 MWh, 520,005 MWh and 478,674 MWh, respectively, of surplus energy, primarily from a renewable carbon-neutral source. At the end of September 2010, we completed the Celgar Energy Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips and pulp logs. Wood chip and pulp log costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Overall weak lumber markets 1,500,0001,510,000 ADMTs of NBSK pulp.20082011 ranged from a low of $447 per ADMT in 2002 to $900$1,030 per ADMT in mid-2008.2011. In the latter part of 2008, we experienced extremelyas a result of the global economic crisis and difficult market conditions, the NBSK market was characterized by poor demand and rapidly declining prices, all of which impacted our results for 2008. In slowing economic times, a key factor influencing our competitive position is the price of our product.prices. At the end of 2008, NBSK list prices in Europe had declined to $635 per ADMT. As world economies began to stabilize, NBSK list prices rebounded in the latter part of 2009 to finish at $800 per ADMT in Europe at year end. Such price improvement was partially offset by the weakening of the U.S. dollar versus the Euro and the Canadian dollar during the period. In 2010, several increases lifted prices to record levels in the middle of the year. Although pulp list prices decreased slightlycontinued to increase through the first half of 2011, economic uncertainty in Europe and credit tightening in China resulted in a decline in pulp prices in the fourth quarter they remained at historically high levels.of 2011. As at December 31, 2010,2011, list prices were $950, $960$825, $890 and $840$670 per ADMT in Europe, North America and China, respectively. AsAlthough we believe that a modest price recovery might occur in early 2012, as pulp prices are highly cyclical, there can be no assurance that prices will not decline in the future.Project and, based on our Celgar mill operating at or around current levels and our contracted sale prices to B.C. Hydro, we currently estimate that surplus power sales from the Celgar mill will generate approximately C$20.0 million to C$25.0 million in annual revenues.Project. Increasing our generation and sales of surplus renewable energy will continue to be a key focus for us in the near term.term and, to this end, our Project Blue Mill will, in addition to increasing pulp production and efficiencies through debottlenecking, also increase energy production by 109,000 ADMTs. We are currently exploring various other initiatives to enhance suchour generation and sales revenues. Such initiatives, if implemented, will require additional capital spending.since 2008in 2011 have resulted in reduced sawmilling activity and log harvesting in both Germany and British Columbia. This has reduced the supply of both wood residuals such as chips and pulp logs. This cyclical supply reduction has put upward pressure on fiber prices. Additionally, higher energy prices and a focus on “green” or renewable energy, while benefiting our surplus power sales, has also led to an42
Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average cost by spreading fixed costs over more units. Higher operating rates also permit us to increase our generation and sales of surplus renewable energy. Our production levels are also dependent on, among other things, the number of days of scheduled and unscheduled downtime at our mills. Unexpected production downtime, which has not materially affected us during any of the periods described in this discussion, can be particularly disruptive in our industry. Our currently scheduled production downtime for our mills in 2011,2012, compared to prior years, is as follows:
2011(1) | 2010 | 2009 | 2008 | |||||||||||||
Rosenthal | ||||||||||||||||
Scheduled production downtime (Days) | 12 | 9 | (2) | 24 | 10 | |||||||||||
Celgar | ||||||||||||||||
Scheduled production downtime (Days) | 10 | 12 | 10 | 12 | ||||||||||||
Stendal | ||||||||||||||||
Scheduled production downtime (Days) | 17 | 10 | 9 | 11 |
2012(1) | 2011 | 2010 | 2009 | |||||||||||||
Rosenthal | ||||||||||||||||
Scheduled production downtime (Days) | 21 | 9 | 9 | (2) | 24 | |||||||||||
Celgar | ||||||||||||||||
Scheduled production downtime (Days) | 11 | 11 | 12 | 10 | ||||||||||||
Stendal | ||||||||||||||||
Scheduled production downtime (Days) | 10 | 15 | 10 | 9 |
(1) | Projected for |
(2) | In addition to thenine-day scheduled production downtime taken by the Rosenthal mill, we also idled our electricity generation for an additional 51 days for turbine maintenance. |
Our financial performance for any reporting period is also impacted by changes in the U.S. dollar to Euro and Canadian dollar exchange rates and in interest rates. Changes in currency rates affect our operating results because the price for our principal product, NBSK pulp, is generally based on a global industry benchmark that is quoted in U.S. dollars, even though a significant portion of the sales from our German mills is invoiced in Euros and we report our results in Euros. Therefore, a weakening of the U.S. dollar against the Euro and the Canadian dollar will generally reduce the amount of our pulp operations’ revenues. Most of our operating costs at our German mills, including our debt obligations under the Stendal Loan Facility and our revolving working capital facility related to the Rosenthal mill, are incurred in Euros. Most of our operating costs at the Celgar mill, including the mill’s working capital facility, are in Canadian dollars. These costs do not fluctuate with the U.S. dollar to Euro or Canadian dollar exchange rates. Thus, a weakening of the U.S. dollar against the Euro and
the Canadian dollar tends to reduce our sales revenue, gross profit and income from operations. Conversely, an increase in the U.S. dollar versus the Euro and the Canadian dollar positively impacts our revenues and increases our operating margins and cash flow.
Changes in interest rates can impact our operating results because the credit facilities established for our mills use floating rates of interest, to the extent that we have not hedged these rates.
From time to time, we also enter into interest rate, foreign currency and energy derivative contracts to partially protect against the effect of such changes. Gains or losses on such derivatives are included in our earnings, either as
43
Stendal, as required under the Stendal Loan Facility, entered intovariable-to-fixed rate interest swaps, referred to as the “Stendal Interest Rate Swap Contracts”Contract”, in August 2002 to fix the interest rate on approximately €612.6 million of indebtedness for the full term of the Stendal Loan Facility. In 2010 and 2009, we recorded a net unrealized non-cash gain of €1.9 million and non-cash loss of €5.8 million, respectively, before noncontrolling interests on the mark to market valuation of the Stendal Interest Rate Swap Contracts. Such unrealized gain resulted primarily from a small increase in long-term European interest rates. In 2008,2011, we recorded a net unrealized non-cash loss of €25.2€1.4 million before noncontrolling interestsinterest on the mark-to-market valuation on the Stendal Interest Rate Swap Contracts.Contract due to a small decrease in long-term European interest rates. In 2010 and 2009, before noncontrolling interest on the Stendal Interest Rate Swap Contract we recorded a non-cash gain of €1.9 million and a non-cash loss of €5.8 million, respectively. Changes in long-term interest rates could result in our recording of further unrealized non-cash lossesgains or gainslosses on the Stendal Interest Rate Swap ContractsContract in future periods when they are marked to market.
Significant Actions
In 2010,2011, we took the following significant actions:
Redeemed or converted all of our outstanding 2012 Convertible Notes;
Purchased and cancelled approximately $13.6 million in aggregate principal amount of our Senior Notes and approximately 1.3 million shares ($10.6 million) of our common stock;
Improved the fiber line and oxygen delignification process at the Celgar mill;
Continued to focus on cost reductions and working capital management; and
Continued to improve operations, which allowed us to achieve record annual pulp production and energy generation.
Current Market Environment
After reaching record levels in the middle of 2011, pulp prices remain at historically high levels. Recent decreases in NBSK pulp inventory levels, along with an increase in NBSK pulp shipments, particularly to China, indicate continued strengthdeclined in the NBSK pulp market through the firstsecond half of 2011.
44the near- to mid-term.
Selected production, sales and exchange rate data for the periods indicated:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Consolidated | ||||||||||||
Pulp Production (’000 ADMTs) | 1,426.3 | 1,397.4 | 1,425.0 | |||||||||
Scheduled Production Downtime (’000 ADMTs) | 43.5 | 52.1 | 47.0 | |||||||||
Pulp Sales (’000 ADMTs) | 1,428.6 | 1,445.5 | 1,423.3 | |||||||||
Pulp Revenues (in millions) | € | 856.3 | € | 577.3 | € | 689.3 | ||||||
NBSK pulp list prices ($/ADMT) | $ | 938 | $ | 667 | $ | 839 | ||||||
NBSK pulp list prices (€/ADMT) | € | 707 | € | 478 | € | 571 | ||||||
Average pulp sales realizations (€/ADMT)(1) | € | 591 | € | 393 | € | 478 | ||||||
Energy Production (’000 MWh) | 1,444.1 | 1,445.3 | 1,456.6 | |||||||||
Energy Sales (’000 MWh) | 520.0 | 478.7 | 456.1 | |||||||||
Energy Revenue (in millions) | € | 44.2 | € | 42.5 | € | 31.0 | ||||||
Average energy sales realizations (€/MWh) | € | 85 | € | 89 | € | 68 | ||||||
Restricted Group | ||||||||||||
Pulp Production (’000 ADMTs) | 826.3 | 777.1 | 814.6 | |||||||||
Scheduled Production Downtime (’000 ADMTs) | 25.3 | 36.9 | 25.7 | |||||||||
Pulp Sales (’000 ADMTs) | 826.3 | 795.1 | 833.2 | |||||||||
Pulp Revenues (in millions) | € | 490.0 | € | 318.4 | € | 401.0 | ||||||
NBSK pulp list prices ($/ADMT) | $ | 938 | $ | 667 | $ | 839 | ||||||
NBSK pulp list prices (€/ADMT) | € | 707 | € | 478 | € | 571 | ||||||
Average pulp sales realizations (€/ADMT)(1) | € | 592 | € | 400 | € | 480 | ||||||
Energy Production (’000 MWh) | 718.6 | 732.9 | 764.4 | |||||||||
Energy Sales (’000 MWh) | 194.2 | 178.4 | 177.2 | |||||||||
Energy Revenue (in millions) | € | 15.1 | € | 15.2 | € | 12.1 | ||||||
Average energy sales realizations (€/MWh) | € | 78 | € | 85 | € | 68 | ||||||
Average Spot Currency Exchange Rates | ||||||||||||
€ / $(2) | 0.7541 | 0.7176 | 0.6826 | |||||||||
C$ / $(2) | 1.0298 | 1.1412 | 1.0660 | |||||||||
C$ / €(3) | 1.3671 | 1.5851 | 1.5603 |
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Consolidated | ||||||||||||
Pulp Production (‘000 ADMTs) | 1,453.7 | 1,426.3 | 1,397.4 | |||||||||
Scheduled Production Downtime (‘000 ADMTs) | 52.4 | 43.5 | 52.1 | |||||||||
Pulp Sales (‘000 ADMTs) | 1,427.9 | 1,428.6 | 1,445.5 | |||||||||
Pulp Revenues (in millions) | € | 831.4 | € | 856.3 | € | 577.3 | ||||||
NBSK pulp list prices in Europe ($/ADMT) | $ | 956 | $ | 938 | $ | 667 | ||||||
NBSK pulp list prices in Europe (€/ADMT) | € | 687 | € | 707 | € | 478 | ||||||
Average pulp sales realizations (€/ADMT)(1) | € | 574 | € | 591 | € | 393 | ||||||
Energy Production (‘000 MWh) | 1,640.4 | 1,444.1 | 1,445.3 | |||||||||
Energy Sales (‘000 MWh) | 652.1 | 520.0 | 478.7 | |||||||||
Energy Revenue (in millions) | € | 58.0 | € | 44.2 | € | 42.5 | ||||||
Average energy sales realizations (€/MWh) | € | 89 | € | 85 | € | 89 | ||||||
Restricted Group | ||||||||||||
Pulp Production (‘000 ADMTs) | 832.4 | 826.3 | 777.1 | |||||||||
Scheduled Production Downtime (‘000 ADMTs) | 24.5 | 25.3 | 36.9 | |||||||||
Pulp Sales (‘000 ADMTs) | 823.2 | 826.3 | 795.1 | |||||||||
Pulp Revenues (in millions) | € | 474.0 | € | 490.0 | € | 318.4 | ||||||
NBSK pulp list prices in Europe ($/ADMT) | $ | 956 | $ | 938 | $ | 667 | ||||||
NBSK pulp list prices in Europe (€/ADMT) | € | 687 | € | 707 | € | 478 | ||||||
Average pulp sales realizations (€/ADMT)(1) | € | 575 | € | 592 | € | 400 | ||||||
Energy Production (‘000 MWh) | 893.7 | 718.6 | 732.9 | |||||||||
Energy Sales (‘000 MWh) | 301.4 | 194.2 | 178.4 | |||||||||
Energy Revenue (in millions) | € | 25.5 | € | 15.1 | € | 15.2 | ||||||
Average energy sales realizations (€/MWh) | € | 85 | € | 78 | € | 85 | ||||||
Average Spot Currency Exchange Rates | ||||||||||||
€ / $(2) | 0.7186 | 0.7541 | 0.7176 | |||||||||
C$ / $(2) | 0.9887 | 1.0298 | 1.1412 | |||||||||
C$ / €(3) | 1.3761 | 1.3671 | 1.5851 |
(1) | Our average realized pulp price for the period indicated reflect customer discounts and price movements between the order and shipment date. |
(2) | Average Federal Reserve Bank of New York noon spot rate over the reporting period. |
(3) | Average Bank of Canada noon spot rate over the reporting period. |
In the year ended December 31, List prices for NBSK pulp in Europe averaged approximately $956 (€687) per ADMT in 2011, compared to $938 (€707) per ADMT in primarily due to 20102011 Compared to Year Ended December 31, 200920102010,2011, pulp revenues increaseddecreased by approximately 48%3% to €831.4 million from a record €856.3 million from €577.3 million in 2009,2010, primarily due to significantly higher pulp prices and a strongerweaker U.S. dollar relative to the Euro. Pulp prices were higher in the first half of 2011 before declining in the second half because of economic uncertainty in Europe and credit tightening in China. In 2010,2011, revenues from the sale of excess energy increased by approximately 4%31% to €58.0 million from €44.2 million from €42.5 million in 20092010 due to increasedrecord energy sales at all of our Celgar mill, partially offset by reduced energy sales at our Rosenthal mill caused by 60 days of scheduled turbine maintenance.Pulp prices increased in 2010, primarily as a result of stronger pulp markets. mills.2010, compared to approximately $667 (€478) per ADMT in 2009.2010. At the end of 2010,2011, list prices increaseddecreased to approximately $950$825 (€709)636) per ADMT in Europe and $960$890 (€717)686) and $840$670 (€627)516) per ADMT in North America and China, respectively. Average pulp sales realizations increaseddecreased by approximately 50%3% to €574 per ADMT in 2011 from €591 per ADMT in 2010, from €393 per ADMT in 2009, significantly higher pulp prices.a weaker U.S. dollar relative to the Euro. At the end of 2010,2011, reported global inventories for softwood kraft were45
Pulp sales volume marginally decreased slightly to 1,427,924 ADMTs in 2011 from 1,428,638 ADMTs in 2010 from 1,445,461 ADMTs in 2009.
Pulp production increased to a record level of 1,453,677 ADMTs in 2011 from 1,426,286 ADMTs in 2010, from 1,397,441 ADMTs in 2009, primarily as a result of overall strong operating performancerecord annual pulp production at all of our German mills. In 20102011 and 2009,2010, we took a total of 3135 and 4331 days scheduled maintenance downtime, respectively, at our mills and expect to take approximately 3942 days in 2011.
Costs and expenses increased to €732.8€778.2 million in the year ended December 31, 20102011 from €632.6€732.8 million in 2009,2010, primarily due to higher fiber costs.
On average, in 2010,2011, our per unit fiber costs increased by approximately 24%7% compared to 2009. In Germany, fiber costs were higher,2010, primarily as a result of lower levels of harvesting, combined with increased demand for wood from the energy sector for heating and other bio-energy purposes. Extreme winter weather in the fourth quarter of 2010 further reduced the availability ofhigher fiber for our German mills. Fiber costs at our Celgar mill caused by increased marginallycompetition for fiber in the second half of 2011. Fiber prices at our German mills also increased slightly, primarily as a result of low harvesting activity in Germany and competition from board producers in the prior year. In the near term, wefirst half of 2011. We currently expect fiber costs to increasedecline slightly at all of our German mills while remaining generally flat at our Celgar mill.
Selling, general and administrative expenses increased to €33.4€38.8 million in 20102011 from €27.4€33.3 million in 2009,2010, primarily as a result of a higher non-cash stock compensation expense resulting from a higher share price and increased commission costs.
Operating depreciation and amortization increaseddecreased marginally to €55.8 million in 2011 from €55.9 million in 2010 from €53.9 million in 2009, primarily due to capital asset additions related to the Celgar Energy Project.
For the year ended December 31, 2010,2011, operating income significantly increaseddecreased to €111.1 million from €167.7 million from a loss of €12.8 million in 2009,2010, primarily due to higher price realizations resulting fromfiber costs and a weaker U.S. dollar relative to the Euro, partially offset by higher pulp prices.
Interest expense in 2010 increased2011 decreased to €59.0 million from €67.6 million from €64.8 million in 2009,2010, primarily due to accretion expense related to the exchangeconversion of our 2010 Convertible Notes, partially offset byconvertible notes in 2011, and reduced levels of debt associated with our Stendal mill.
Transportation costs marginally increased to €67.8 million in 2011 from €66.4 million in 2010 from €57.3 million in 2009, primarily due to higher container rates.
In 2010,2011, we recorded an unrealized gainloss of €1.9€1.4 million on the Stendal Interest Rate Swap Contracts,Contract, compared to an unrealized lossgain of €5.8€1.9 million in 2009,2010, which was primarily the result of a small increasedecrease in long-term European interest rates.
A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In 2010,2011, we recorded a foreign exchange lossgain on our debt of €6.1€1.2 million as a result of the strengthening of the U.S. dollar against the Euro,in 2011, compared to a gainloss of €2.7€6.1 million in 2009.
During 2010,2011, we recorded losses on the extinguishment of debt of €0.1 million, primarily in connection with the purchase and extinguishment of some of our outstanding Senior Notes. In 2010, we recorded losses of €7.5 million, primarily in connection with the purchase of our 2013 Senior Notes.
In 2009, we recorded a gain of €4.4 million on the extinguishment of our 2010 Convertible Notes.
In 2011, deferred tax recoveries were €2.4 million, compared to €3.9 million from €0.1€9.8 million in 2009,2010, primarily due to improved operating results atthe timing of recognizing deferred tax assets based on forecasted income.
In 2011, we reported net income attributable to common shareholders of €50.1 million, or €1.00 per basic and €0.89 per diluted share. This included a non-cash loss of €1.4 million on our German mills and certain tax deduction limitations with regards to the ability to deduct interest expense and loss carry forwards. Deferred tax recoveries increased in 2010 to €9.8 million from €6.0 million in 2009, primarily due to improved results and forecasted taxable income.
46
In 2009, we reported net loss attributable to common shareholders of €62.2 million, or €1.71 per basic and diluted share. This included unrealized aggregate non-cash net gains of €7.5 million, comprised of a non-cash loss of €5.8 million on our Stendal Interest Rate Swap Contracts, a non-cash foreign exchange gain of €2.7 million on our long-term debt, a non-cash gain of €4.4 million on the extinguishment of our convertible notes and a non-cash income tax benefit of €6.2 million.
Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss) attributable to common shareholders, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America (“GAAP”), and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) noncontrolling interestsinterest on our Stendal NBSK pulp mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) Operating EBITDA does not reflect the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.
47
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Net income (loss) attributable to common shareholders | € | 86,279 | € | (62,189 | ) | |||
Net income (loss) attributable to noncontrolling interest | 8,469 | (9,936 | ) | |||||
Income taxes (benefits) | (5,879 | ) | (5,869 | ) | ||||
Interest expense | 67,621 | 64,770 | ||||||
Investment (income) loss | (468 | ) | 1,804 | |||||
Foreign exchange (gain) loss on debt | 6,126 | (2,692 | ) | |||||
Loss (gain) on extinguishment of debt | 7,494 | (4,447 | ) | |||||
Loss (gain) on derivative instruments | (1,899 | ) | 5,760 | |||||
Operating income (loss) | 167,743 | (12,799 | ) | |||||
Add: Depreciation and amortization | 56,231 | 54,170 | ||||||
Operating EBITDA | € | 223,974 | € | 41,371 | ||||
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Net income attributable to common shareholders | € | 50,075 | € | 86,279 | ||||
Net income attributable to noncontrolling interest | 3,931 | 8,469 | ||||||
Income tax benefits | (695 | ) | (5,879 | ) | ||||
Interest expense | 58,995 | 67,621 | ||||||
Investment income | (1,501 | ) | (468 | ) | ||||
Foreign exchange (gain) loss on debt | (1,175 | ) | 6,126 | |||||
Loss on extinguishment of debt | 71 | 7,494 | ||||||
Loss (gain) on derivative financial instruments | 1,418 | (1,899 | ) | |||||
|
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| |||||
Operating income | 111,119 | 167,743 | ||||||
Add: Depreciation and amortization | 56,005 | 56,231 | ||||||
|
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| |||||
Operating EBITDA | € | 167,124 | € | 223,974 | ||||
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In the year ended December 31, Pulp prices Pulp sales volume Pulp production increased to a record level of 1,426,286 ADMTs in Costs and expenses On average, in Selling, general and administrative expenses increased to €33.3 million in 2010 from €26.9 million in 2009, primarily as a result of Operating depreciation and amortization For the year ended December 31, Interest expense in 20092010 Compared to Year Ended December 31, 200820092009,2010, pulp revenues decreasedincreased by approximately 16%48% to €856.3 million from €577.3 million from €689.3 million in 2008,2009, primarily due to lower averagesignificantly higher pulp sales prices.prices and a stronger U.S. dollar relative to the Euro. In 2009,2010, revenues from the sale of excess energy increased by approximately 4% to €44.2 million from €42.5 million from €31.0 million in 2008.decreasedincreased in 2009,2010, primarily as a result of significantly weaker demand.stronger pulp markets. List prices for NBSK pulp in Europe averaged approximately$938 (€707) per ADMT in 2010, compared to $667 (€478) per ADMT in 2009, compared to approximately $839 (€571) per ADMT in 2008.2009. At the end of 2009,2010, list prices increased to approximately $800$950 (€558)709) per ADMT in Europe and $700$960 (€488)717) and $840 (€627) per ADMT in Asia, depending upon the country of delivery.North America and China, respectively. Average pulp sales realizations decreasedincreased by approximately 18%50% to €591 per ADMT in 2010 from €393 per ADMT in 2009, from €478 per ADMT in 2008 because of lowerprimarily due to significantly higher pulp prices. The weakened market conditions, however,At the end of 2010, reported global inventories for softwood kraft were partially offset by an overall slightly higher U.S. dollar duringapproximately 25 days’ supply, while at the year. At December 31,end of 2009 inventories for softwood kraft decreased toreached historically low levels of approximately 19 days’ supply, compareddays, primarily due to 40 days at the end of 2008.increaseddecreased slightly to 1,428,638 ADMTs in 2010 from 1,445,461 ADMTs in 2009 from 1,423,3002009.2008.Pulp production decreased to2010 from 1,397,441 ADMTs in 2009, from 1,424,987 ADMTs in 2008, primarily as a result of a heavier scheduled maintenance program.overall strong operating performance at all of our mills. In 20092010 and 2008,2009, we took a total of 4331 and 3343 days scheduled maintenance downtime, respectively, at our mills.decreasedincreased to €632.6€732.8 million in the year ended December 31, 20092010 from €707.0€632.6 million in 2008,2009, primarily due to lowerhigher fiber costs.2009,2010, our per unit fiber costs decreasedincreased by approximately 16%24% compared to 2008.2009. In Germany, fiber costs were significantlyhigher, primarily as a result of lower aslevels of harvesting, combined with increased demand for wood from the European board industry decreased.energy sector for heating and other bio-energy purposes. Extreme winter weather in the fourth quarter of 2010 further reduced the availability of fiber for our German mills. Fiber costs at our Celgar mill decreasedincreased marginally from the prior yearyear.improved woodroom performance and decreased reliance on fiber sourced from third party field chippers.Selling, general and administrative expenses decreased to €27.4 million in 2009 from €30.2 million in 2008.In 2009, contribution to income from the sale of emission allowances decreased to €0.5 million, compared to €5.6 million in 2008. increased commission costs.decreasedincreased marginally to €55.9 million in 2010 from €53.9 million in 2009, from €55.5 million in 2008.2009,2010, operating income (loss) decreasedsignificantly increased to €167.7 million from a loss of €12.8 million from an income of €13.3 million in 2008,2009, primarily due to lowerhigher price realizations.2009 decreased2010 increased to €67.6 million from €64.8 million from €65.8 million in 20082009, primarily due to loweraccretion expense related to the exchange of our 2010 Convertible Notes, partially offset by reduced levels of borrowing.48
In 2009,2010, we recorded an unrealized lossgain of €5.8€1.9 million on the Stendal Interest Rate Swap Contracts,Contract, compared to an unrealized loss of €25.2€5.8 million in 2008,2009, which was primarily the result of lower long-terma small increase in European interest rates in 2009.
A portion of our long-term debt is denominated and repayable in foreign currencies, principally U.S. dollars. In 2009,2010, we recorded a foreign exchange gainloss on our debt of €2.7€6.1 million as a result of the weakeningstrengthening of the U.S. dollar inagainst the latter part of the year,Euro, compared to a lossgain of €4.2€2.7 million in 2008.
During 2010, we recorded losses on the fourth quarterextinguishment of debt of €7.5 million, primarily in connection with the purchase of our 2013 Senior Notes. In 2009, we completed an exchange of approximately €30.2 million ($43.3 million) in aggregate principal amount of our 2010 Convertible Notes for new 2012 Convertible Notes. We recorded a gain of approximately €4.4 million on the extinguishment of theour 2010 Convertible Notes.
In 2009,2010, the noncontrolling shareholder’s proportionate interest in the Stendal mill’s lossgain was €9.9€8.5 million, compared to a loss of €13.1€9.9 million in 2008.
During 2009,2010, current income taxes decreased slightlyincreased to €3.9 million from €0.1 million from €0.5 million in 2008.2009, primarily due to improved operating results at our German mills and certain tax deduction limitations with regards to the ability to deduct interest expense and loss carry forwards. Deferred tax recoveries increased in 20092010 to €9.8 million from €6.0 million from a €2.0 million deferred tax provision recognized in 2008,2009, primarily due to management’s belief that it is more likely than not that certain tax assets will be recognized based onimproved results and forecasted taxable income.
In 2010, we reported net income attributable to common shareholders of €86.3 million, or €2.24 per basic and €1.56 per diluted share. This included aggregate net non-cash unrealized losses of €0.5 million, comprised of a non-cash gain of €1.9 million on our Stendal Interest Rate Swap Contract, a non-cash foreign exchange loss of €6.1 million on our long-term debt, a non-cash loss of €2.6 million on the extinguishment of our 2013 Senior Notes and a net non-cash income tax benefit of €6.3 million. In 2009, we reported a net loss attributable to common shareholders of €62.2 million, or €1.71 per basic and diluted share whichshare. This included anaggregate net non-cash unrealized gains of €7.5 million, comprised of a non-cash loss of €3.1€5.8 million on our Stendal Interest Rate Swap Contracts andContract, a non-cash foreign exchange gain on our long-term debt. In 2008, we reported net loss attributable to common shareholders of €72.5€2.7 million or €2.00 per basic and diluted share, which included an unrealized loss of €29.5 million on our Stendal Interest Rate Swap Contracts and a foreign exchange loss on our long-term debt, a non-cash gain of €4.4 million on the extinguishment of our convertible notes and a net non-cash inventory provisions totaling €11.3income tax benefit of €6.2 million.
In 2009,2010, “Operating EBITDA” wasincreased fivefold to €224.0 million from €41.4 million compared to €69.1 million in 2008.2009. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our results for the year ended December 31, 20102011 compared to the year ended December 31, 20092010 for additional information relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the periods indicated:
Years Ended December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Net income (loss) attributable to common shareholders | € | (62,189 | ) | € | (72,465 | ) | ||
Net income (loss) attributable to noncontrolling interest | (9,936 | ) | (13,075 | ) | ||||
Income taxes (benefits) | (5,869 | ) | 2,477 | |||||
Interest expense | 64,770 | 65,756 | ||||||
Investment (income) loss | 1,804 | 1,174 | ||||||
Foreign exchange (gain) loss on debt | (2,692 | ) | 4,234 | |||||
Loss (gain) on extinguishment of debt | (4,447 | ) | — | |||||
Loss (gain) on derivative instruments | 5,760 | 25,228 | ||||||
Operating income (loss) | (12,799 | ) | 13,329 | |||||
Add: Depreciation and amortization | 54,170 | 55,762 | ||||||
Operating EBITDA | € | 41,371 | € | 69,091 | ||||
49
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Net income (loss) attributable to common shareholders | € | 86,279 | € | (62,189 | ) | |||
Net income (loss) attributable to noncontrolling interest | 8,469 | (9,936 | ) | |||||
Income tax benefits | (5,879 | ) | (5,869 | ) | ||||
Interest expense | 67,621 | 64,770 | ||||||
Investment (income) loss | (468 | ) | 1,804 | |||||
Foreign exchange (gain) loss on debt | 6,126 | (2,692 | ) | |||||
Loss (gain) on extinguishment of debt | 7,494 | (4,447 | ) | |||||
Loss (gain) on derivative financial instruments | (1,899 | ) | 5,760 | |||||
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Operating income (loss) | 167,743 | (12,799 | ) | |||||
Add: Depreciation and amortization | 56,231 | 54,170 | ||||||
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Operating EBITDA | € | 223,974 | € | 41,371 | ||||
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NBSK Pulp Price. NBSK pulp is a global commodity that is priced in U.S. dollars, whose markets are highly competitive and cyclical in nature. As a result, our earnings are sensitive to NBSK pulp price changes. Based upon our 20102011 sales volume (and assuming all other factors remained constant), each $10.00 per tonne change in NBSK pulp prices yields a change in Operating EBITDA of approximately €10.8€10.3 million.
Foreign Exchange.As NBSK pulp is principally quoted in U.S. dollars, the amount of revenues we generate fluctuates with changes in the value of the U.S. dollar to the Euro. Based upon our 20102011 revenues, each €0.01 change in the value of the U.S. dollar yields a change in annual gross sales revenue of approximately €11.4€11.6 million.
The following table is a summary of selected financial information for the periods indicated: Years Ended December 31, 2010 2009 (in thousands) Cash and cash equivalents € 99,022 € 51,291 Working capital 231,683 99,150 Property, plant and equipment 846,767 868,558 Total assets 1,216,075 1,083,831 Long-term liabilities 877,315 896,074 Total equity 213,563 85,973
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Financial Position | ||||||||
Cash and cash equivalents | € | 105,072 | € | 99,022 | ||||
Marketable securities(1) | 12,372 | 275 | ||||||
Working capital | 247,159 | 231,683 | ||||||
Property, plant and equipment | 820,974 | 846,767 | ||||||
Total assets | 1,217,250 | 1,216,075 | ||||||
Long-term liabilities | 807,641 | 877,315 | ||||||
Total equity | 283,542 | 213,563 |
(1) | Principally comprised of German federal government bonds with a maturity of less than one year. |
Our principal sources of funds are cash flows from operations, cash on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of funds consist of operating expenditures, payments of principal and interest on the Stendal Loan Facility, capital expenditures and interest payments on our outstanding As at December 31, In The Stendal Loan Facility is provided by a syndicate of eleven financial institutions and both our Celgar Working Capital Facility and our Rosenthal Loan Facility are each provided by one financial institution. To date we have not experienced any reductions in credit availability with respect to these credit facilities. However, if any of these financial institutions were to default on their commitment to fund, we could be adversely affected. For a description of the Celgar Working Capital Facility and the Rosenthal Loan Facility, see “Item 2017 Senior Notes and 2012 Convertible Notes.2010,2011, our cash and cash equivalents and holdings of short-term German federal government bonds were €99.0€117.3 million, compared to €51.3€99.0 million at the end of 2009. February 2009, to increase its liquidity and financial flexibility, Stendal entered into the Amendment for its Stendal Loan Facility. The Amendment revised the repayment schedule of principal payments due by deferring approximately €164.0 million of principal payments until maturity on September 30, 2017. The Deferred Amount includes approximately €20.0 million, €26.0 million and €21.0 million of scheduled principal payments in 2009, 2010 and 2011, respectively. In accordance with the revised repayment schedule, we made principal payments totaling €23.2 million during 2011 and €13.9 million during 2010 and are required to make principal payments totaling €23.2 million during 2011.2010. The Amendment also provided for a cash sweep of any excess cash of Stendal which will be used first to prepay the Deferred Amount and second to fund the DSRA. Not included in the cash sweep is €15.0 million which Stendal is permitted to retain for working capital purposes. For a description of the Stendal Loan Facility see “Item 1 — Business — 1—Business—Description of Certain Indebtedness”.1 — 1—Business — Description—Description of Certain Indebtedness”.50
As at December 31, Additionally, we have For a description of the Senior Notes, 2010,2011, the amount outstanding under Stendal Loan Facility was €500.7€477.5 million. We also had approximately C$20.0€2.7 million outstanding under the Celgar Working Capital Facility and €3.8 million under our Rosenthal investment loan. As at December 31, 2010,2011, we had no amount drawn on the Celgar Working Capital Facility or the Rosenthal Loan Facility.$300$286.4 million (€224.0220.8 million) in principal amount of our 2017 Senior Notes outstanding which mature in December 2017 and for which we pay interest at the rate of 9.5% on June 1 and December 1 of each year. The indenture governing the 2017 Senior Notes does not contain any financial maintenance covenants and there are no scheduled principal payments until maturity. We also had approximately $20.5 million in aggregate principal amount of our 2013 Senior Notes remaining as at December 31, 2010 which were all redeemed on February 15, 2011.Further, we had approximately $42.5 million (€31.7 million) in aggregate principal amount of 2012 Convertible Notes outstanding as of December 31, 2010. The indenture governing the 2012 Convertible Notes does not have any financial maintenance covenants.the 2010 Convertible Notes and the 2012 Convertible Notes, see “Item 1 — Business — 1—Business—Description of Certain Indebtedness”.
Our long-term obligations contain various financial tests and covenants customary to these types of arrangements. The Stendal Loan Facility contains an annual debt service cover ratio which, pursuant to the terms of the Amendment, must not fall below 1.1x for the period from December 31, 2011 to December 31, 2013 and 1.2x for the period after January 1, 2014 until maturity on September 30, 2017. The Amendment also implements a permitted leverage ratio of total debt to EBITDA which is effective from December 31, 2009. This ratio, which the lenders waived for 2009, is set to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. Failure to comply with either ratio constitutes an event of default, but may be cured by the shareholders of Stendal with aonce-per-fiscal-year ratio deficiency cure through a capital contribution or subordinated loan in the amount necessary to cure such deficiency. Under the Rosenthal Loan Facility, our Rosenthal mill must not exceed a ratio of net debt to EBITDA of 3:1 in any12-month period and there must be a ratio of EBITDA to interest expense equal to or in excess of 1.2:1.1 for each 12 month period. Additionally, current assets to current liabilities must equal or exceed 1.1:1.0. The Celgar Working Capital Facility includes a covenant that, for so long as the excess amount under the facility is less than C$2.0 million, then until it becomes equal to or greater than such amount, the Celgar mill must maintain a fixed charge coverage ratio of not less than 1.1:1.0 for each12-month period. As at December 31, 2010,2011, we were in full compliance with all of the covenants of our indebtedness.
Cash Flows from Operating Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and the payment of payables and expenses. Generally, finished goods inventories are increased prior to scheduled maintenance downtime to maintain sales volume while production is stopped. Our fiber inventories exhibit seasonal swings as we increase pulp log and wood chip inventories to ensure adequate supply of fiber to our mills during the winter months. Changes in sales volume canActivities.Activities.We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber, chemicals and debt service.51
Operating activities in 20102011 provided cash of €91.3€111.1 million, compared to providing cash of €37.3€91.3 million in 2009, primarily due to a significant increase in net income, partially offset by an increase in working capital.2010. An increase in receivables, excluding non-cash items, used cash of €1.6 million in 2011, compared to an increase in receivables using cash of €40.0 million in 2010, compared to a decrease in receivables providing cash of €31.9 million in 2009.2010. An increase in inventories used cash of €17.7 million in 2011, compared to an increase in inventories using cash of €24.5 million in 2010, compared to a decrease2010. An increase in inventories providingaccounts payable and accrued expenses provided cash of €32.2€14.3 million in 2009. A2011 and a decrease in accounts payable and accrued expenses used cash of €3.1 million in 2010 and €3.0 million in 2009.
Cash Flows from Investing Activities.Investing activities in 2011 used cash of €46.3 million, primarily due to capital spending of €37.8 million and the purchase of marketable securities of €12.2 million. Investing activities in 2010 used cash of €36.0 million, primarily due to capital spending of €38.3 million. Investing activities in 2009
In 2011, capital expenditures, primarily related to various projects at our mills, used cash of €15.2 million, primarily due to €28.8 million of capital spending being only partially offset by a drawdown of €13.0 million from€37.8 million. In the Stendal Loan Facility’s DSRA.
Excluding costs for projects being financed through government grants under the GTP, we expect our consolidated capital expenditures in 20112012 to total approximately €24.1€40.8 million, primarily comprised of Project Blue Mill at our Stendal mill and an array of small projects at our other mills.
Cash Flows from Financing Activities.In 2011, financing activities used net cash of €60.1 million, primarily due to using cash of €15.2 million to redeem all of our remaining 2013 Senior Notes, €23.2 million to repay principal under the Stendal Loan Facility, €14.7 million to repay the balance of our Celgar Working Capital Facility, €7.5 million to purchase shares of our common stock and €9.7 million to purchase and
extinguish some of our Senior Notes. In 2011, we received €14.2 million in government grants. In 2010, financing activities used net cash of €6.1 million, primarily due to cash used to repurchase our 2013 Senior Notes and €13.9 million in cash used to pay down the Stendal Loan Facility, offset by the receipt of €16.7 million in government grants for the Celgar Energy Project and the proceeds received from the sale of the 2017 Senior Notes, being more than offset by cash used to repurchase our 2013 Senior Notes and €13.9 million in cash used to pay down the Stendal Loan Facility. Financing activities used cash of €13.3 million in 2009 primarily due to principal repayments under the Stendal Loan Facility of €13.9 million, of which €13.0 million was funded from the DSRA under the facility, and the repayment of capital lease obligations of €3.2 million which were partially offset by government investment grants of €9.1 million primarily for the Celgar Energy Project.
As at December 31, 2011, we had no material commitments to acquire assets or operating businesses.We have
In February 2012, we entered into a support agreement (the “Support Agreement”) with Fibrek Inc. (“Fibrek”) whereby we agreed to make a take-over offer to acquire all of Fibrek’s outstanding common shares. Pursuant to the terms of the Support Agreement, the cash portion of the aforesaid offer would be C$70.0 million, which we intend to finance through new credit facilities established with Québec based capital providers. Separately, we have agreed to acquire approximately 32.3 million special warrants of Fibrek at a cost of approximately C$32.3 million which we intend to fund from cash on hand and/or our existing credit facilities.
At this time, there can be no assurances that we will be able to successfully complete the offer for the Fibrek shares or acquire the warrants of Fibrek, either as currently provided for or on amended terms, obtain the required consents and approvals related to the said acquisition, or otherwise complete such transaction.
Our ability to make scheduled payments of principal, or to pay interest on or to refinance our indebtedness, or to fund planned expenditures will depend on our future performance, which is subject to general economic, financial and other factors that are beyond our control. Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our Celgar Working Capital Facility and Rosenthal Loan Facility, will be adequate to meet the future liquidity needs during the next 12 months.
At December 31, 20102011 and 2009,2010, we had no off-balance-sheet arrangements.52
The following table sets out our contractual obligations and commitments as at December 31, 2010 in connection with our long-term liabilities.
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations(8) | 2011 | 2012-2013 | 2014-2015 | Beyond 2015 | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt(1) | € | 16,429 | € | 48,899 | € | 543 | € | 255,396 | € | 321,267 | ||||||||||
Debt, Stendal(2) | 23,167 | 64,583 | 84,000 | 328,907 | 500,657 | |||||||||||||||
Interest on debt(3) | 58,750 | 105,653 | 93,148 | 99,503 | 357,054 | |||||||||||||||
Capital lease obligations(4) | 3,400 | 2,913 | 1,279 | 1,556 | 9,148 | |||||||||||||||
Operating lease obligations(5) | 3,287 | 4,291 | 2,791 | 3,287 | 13,656 | |||||||||||||||
Purchase obligations(6) | 1,055 | 751 | — | — | 1,806 | |||||||||||||||
Other long-term liabilities(7) | 1,973 | 1,285 | 1,538 | 5,115 | 9,911 | |||||||||||||||
Total | € | 108,061 | € | 228,375 | € | 183,299 | € | 693,764 | € | 1,213,499 | ||||||||||
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations(8) | 2012 | 2013-2014 | 2015-2016 | Beyond 2016 | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt(1) | € | 1,088 | € | 1,631 | € | — | € | 253,877 | € | 256,596 | ||||||||||
Debt, Stendal(2) | 24,583 | 80,000 | 88,000 | 284,907 | 477,490 | |||||||||||||||
Interest on debt(3) | 51,827 | 97,843 | 87,088 | 56,735 | 293,493 | |||||||||||||||
Capital lease obligations(4) | 2,719 | 2,254 | 1,483 | 3,362 | 9,818 | |||||||||||||||
Operating lease obligations(5) | 3,167 | 4,416 | 2,641 | 2,900 | 13,124 | |||||||||||||||
Purchase obligations(6) | 1,012 | 745 | — | — | 1,757 | |||||||||||||||
Other long-term liabilities(7) | 2,088 | 1,377 | 1,643 | 5,278 | 10,386 | |||||||||||||||
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Total | € | 86,484 | € | 188,266 | € | 180,855 | € | 607,059 | € | 1,062,664 | ||||||||||
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(1) | This reflects the future principal payments due under our long-term debt obligations, but excludes the Stendal Loan Facility. See “Item |
(2) | This reflects principal only in connection with the Stendal Loan Facility. See “Item |
(3) | Amounts presented for interest payments include guarantee fees, and assume that all debt outstanding as of December 31, |
(4) | Capital lease obligations relate to transportation vehicles and production equipment. These amounts reflect principal and interest. |
(5) | Operating lease obligations relate to transportation vehicles and other production and office equipment. |
(6) | Purchase obligations relate primarily totake-or-pay contracts, including for purchases of raw materials, made in the ordinary course of business. |
(7) | Other long-term liabilities relate primarily to future payments that will be made for post-employment benefits other than pensions. Those amounts are estimated using actuarial assumptions, including expected future service, to project the future obligations. Additionally, the balance also includes pension funding which is calculated on an annual basis. Consequently, the |
(8) | We have identified approximately €0.2 million of potential tax liabilities that are more likely than not to be paid and approximately €4.2 million of asset retirement obligations. However, due to the uncertain timing related to these potential liabilities, we are unable to allocate the payments in the contractual obligations table. |
Our reporting currency is the Euro as the majority of our business transactions are denominated in Euros. However, we hold certain assets and liabilities in U.S. dollars and Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations. We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in our In the year ended December 31, 2011, we reported a net €2.3 million foreign currency translation loss and, as a result, the cumulative foreign exchange translation gain reported within accumulated other comprehensive income (loss) decreased to €36.6 million at December 31, 2011. In the year ended December 31, 2010, we reported a net €11.3 million foreign currency translation Based upon the exchange rate at December 31, consolidated statementConsolidated Statement of comprehensive incomeComprehensive Income (Loss) and impact on shareholders’ equity on the balance sheet but do not affect our net earnings.gain and, as a result, the cumulative foreign exchange translation gain reported within comprehensive income (loss) increased to €38.9 million at December 31, 2010. In the year ended December 31, 2009, we reported a cumulative foreign currency translation gain of €27.5 million.2010,2011, the U.S. dollar has increased by approximately 7.0%3% in value against the Euro since December 31, 2009.2010. See “Item 7A —7A- Quantitative and Qualitative Disclosures about Market Risk”.53
The indenture governing our 2017 Senior Notes requires that we also provide a discussion in annual and quarterly reports we file with the SEC under Management’s Discussion and Analysis of Financial Condition and Results of Operations of the results of operations and financial condition of Mercer Inc. and our restricted subsidiaries under the indenture, referred to as the “Restricted Group”. The Restricted Group is comprised of Mercer Inc., our Rosenthal and Celgar mills and certain holding subsidiaries. The Restricted Group excludes our Stendal mill.
The following is a discussion of the results of operations and financial condition of the Restricted Group. For further information regarding the Restricted Group including, without limitation, a reconciliation to our consolidated results of operations, see Note 19 of the consolidated financial statements included in this annual report onForm 10-K.
Pulp revenues for the Restricted Group for the year ended December 31, 2011 slightly decreased by approximately 3% to €474.0 million from €490.0 million in the comparative period of 2010, primarily due to a weaker U.S. dollar. In 2011, revenues from the sale of excess energy increased by 68% to a record €25.5 million from €15.1 million in 2010, primarily due to record annual energy sales at both our Rosenthal and Celgar mills. Pulp prices were higher in 2011 than in 2010. Average list prices for NBSK pulp in Europe were $956 (€687) per ADMT in 2011, compared to $938 (€707) per ADMT in 2010. In China, average list prices were $834 (€599) per ADMT in 2011 and $821 (€618) per ADMT in 2010. In 2011, average pulp sales realizations for the Restricted Group decreased by approximately 3% to €575 per ADMT from €592 per ADMT in the previous year. Pulp sales volume of the Restricted Group marginally decreased to 823,183 ADMTs in 2011 from 826,340 ADMTs in 2010. Pulp production for the Restricted Group increased to 832,396 ADMTs in 2011 from 826,301 ADMTs in 2010, primarily as a result of record annual production at our Rosenthal mill. In 2011, our Celgar and Rosenthal mills had an aggregate of 20 days (approximately 24,500 ADMTs) of scheduled maintenance downtime, compared to 21 days (approximately 25,300 ADMTs) of scheduled maintenance downtime in 2010. Costs and expenses for the Restricted Group in 2011 increased to €436.5 million from €411.5 million in 2010, primarily due to higher fiber costs. Overall, per unit fiber costs of the Restricted Group increased by approximately 9% in 2011 compared to 2010, primarily due to higher fiber costs at our Celgar mill caused by increased competition for fiber. In 2011, operating depreciation and amortization for the Restricted Group decreased marginally to €29.8 million from €30.0 million in the same period last year. Selling, general and administrative expenses increased to €24.1 million from €20.2 million in 2010, primarily as a result of a higher non-cash stock compensation expense resulting from a higher share price and increased foreign exchange losses. In 2011, the Restricted Group reported operating income of €62.9 million, compared to operating income of €93.7 million in 2010, primarily due to higher fiber costs in 2011 and a weaker U.S. dollar. Transportation costs for the Restricted Group marginally increased to €50.8 million in 2011 from €50.5 million in 2010. Interest expense for the Restricted Group decreased to €24.9 million in 2011 from €31.5 million in 2010, primarily due to the conversion of our convertible notes in 2011. Most of the long-term debt of the Restricted Group is denominated and repayable in foreign currencies, principally in U.S. dollars. In 2011, the Restricted Group recorded a gain on foreign currency denominated debt of €1.2 million, compared to a loss of €6.1 million in 2010. During 2011, the Restricted Group recorded a loss of approximately €0.1 million on the purchase and subsequent extinguishment of some of our Senior Notes. In 2010, the Restricted Group recorded a loss of approximately €7.5 million on the extinguishment of the 2013 Senior Notes. During 2011, the Restricted Group recorded €4.6 million of net income tax expense, compared to net income tax recoveries of €8.7 million in 2010, primarily due to the timing of recognizing deferred tax assets based on forecasted income. The tax recoveries in 2010 reflected our expectation that certain of our tax assets will be utilized to reduce taxable income in the future. For the reasons discussed above, the Restricted Group reported net income for 2011 of €39.8 million, compared to net income of €62.3 million in 2010 and Operating EBITDA of €93.0 million, compared to Operating EBITDA of €124.0 million in the comparative period of 2010. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our results for the year ended December 31, 2011 compared to the year ended December 31, 2010 for additional information relating to such limitations and Operating EBITDA. The following table provides a reconciliation of net income attributable to common shareholders to operating income and Operating EBITDA for the Restricted Group for the periods indicated: Restricted Group(1) Net income Income tax (benefits) Interest expense Investment income Foreign exchange (gain) loss on debt Loss on extinguishment of debt Operating income Add: Depreciation and amortization Operating EBITDA Restricted Group Results—Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Pulp revenues for the Restricted Group for the year ended December 31, 2010 increased by approximately 54% to €490.0 million from €318.4 million in the comparative period of 2009, primarily due to significantly higher pulp prices and a stronger U.S. dollar relative to the Euro. Revenues from the sale of excess energy remained relatively consistent in both 2009 and 2010, primarily due to the commencement of power sales under the Celgar Energy Project, mostly offset by scheduled turbine maintenance at our Rosenthal mill in 2010. During 2010, the Rosenthal mill had nine days of downtime for scheduled maintenance and its turbine was down for an additional 51 days for maintenance. During such51-day period, the Rosenthal mill produced pulp at capacity but purchased energy instead of selling surplus energy. Pulp prices were significantly higher in 2010 than in 2009 due to continued strengthening in global pulp markets. Average list prices for NBSK pulp in Europe were Pulp sales volume of the Restricted Group increased to 826,340 ADMTs in 2010 from 795,092 ADMTs in 2009. Pulp production for the Restricted Group increased to 826,301 ADMTs in 2010 from 777,099 ADMTs in 2009, primarily as a result of improved mill reliability. In 2010, our Celgar and Rosenthal mills had an aggregate of 21 days (approximately 25,000 ADMTs) of scheduled maintenance downtime, compared to 34 days (approximately 37,000 ADMTs) of maintenance downtime in 2009. Costs and expenses for the Restricted Group in 2010 increased to €411.5 million from €354.5 million in 2009, primarily due to higher fiber costs in Germany and higher energy costs resulting from the turbine maintenance at the Rosenthal mill. Overall per unit, fiber costs of the Restricted Group increased by approximately 15% in 2010 compared to 2009, primarily due to higher German fiber prices resulting from lower levels of harvesting in central Germany, combined with increased demand for wood from the energy sector for heating and other bio-energy purposes. In 2010, operating depreciation and amortization for the Restricted Group increased to €30.0 million from €27.5 million in the same period last year. Selling, general and administrative expenses increased to €20.2 million from €15.0 million in 2009, primarily as a result of increased selling costs and a stronger Canadian dollar relative to the Euro. In 2010, the Restricted Group reported operating income of €93.7 million compared to an operating loss of €20.9 million in 2009, primarily due to significantly higher pulp realizations. Transportation costs for the Restricted Group increased to €50.5 million in 2010 from €39.9 million in 2009, primarily due to higher container rates.Results — Results—Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Years Ended December 31, 2011 2010 (in thousands) € 39,809 € 62,327 4,614 (8,651 ) 24,886 31,498 (5,262 ) (5,103 ) (1,175 ) 6,126 71 7,494 62,943 93,691 30,086 30,270 € 93,029 € 123,961 (1) See Note 19 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results. approximately $938 (€707) per ADMT in 2010 compared to approximately $667 (€478) per ADMT in 2009. In China, average list prices were $821 (€618) per ADMT in 2010 and $576 (€414) per ADMT in 2009. In 2010, average pulp sales realizations for the Restricted Group increased by approximately 48% to €592 per ADMT from €400 per ADMT in the previous year.54
Most of the long-term debt of the Restricted Group is denominated and repayable in foreign currencies, principally U.S. dollars. In 2010, the Restricted Group recorded a non-cash loss on foreign currency denominated debt of €6.1 million as a result of the strengthening of the U.S. dollar compared to the Euro during the first half of 2010, compared to a gain of €2.7 million in 2009.
During 2010, the Restricted Group recorded a loss of approximately €7.5 million on the extinguishment of the 2013 Senior Notes. In 2009, the Restricted Group recorded a gain of approximately €4.4 million on the extinguishment of the 2010 Convertible Notes.
During 2010, the Restricted Group recorded €8.7 million of net income tax recoveries, compared to income tax recoveries of €0.2 million in 2009. The tax recoveries reflect our expectation that certain of our tax assets will be utilized to reduce taxable income in the future.
For the reasons discussed above, the Restricted Group reported net income for 2010 of €62.3 million compared to a net loss of €35.9 million in 2009 and Operating EBITDA of €124.0 million compared to Operating EBITDA of €6.8 million in the comparative period of 2009. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our results for the year ended December 31, 20102011 compared to the year ended December 31, 20092010 for additional information relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the Restricted Group for the periods indicated:
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income (loss) | € | 62,327 | € | (35,927 | ) | |||
Income taxes (benefits) | (8,651 | ) | (183 | ) | ||||
Interest expense | 31,498 | 27,351 | ||||||
Investment (income) loss | (5,103 | ) | (5,002 | ) | ||||
Foreign exchange (gain) loss on debt | 6,126 | (2,692 | ) | |||||
Loss (gain) on extinguishment of debt | 7,494 | (4,447 | ) | |||||
Operating income (loss) | 93,691 | (20,900 | ) | |||||
Add: Depreciation and amortization | 30,270 | 27,704 | ||||||
Operating EBITDA | € | 123,961 | € | 6,804 | ||||
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
(in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income (loss) | € | 62,327 | € | (35,927 | ) | |||
Income tax benefits | (8,651 | ) | (183 | ) | ||||
Interest expense | 31,498 | 27,351 | ||||||
Investment income | (5,103 | ) | (5,002 | ) | ||||
Foreign exchange (gain) loss on debt | 6,126 | (2,692 | ) | |||||
Loss (gain) on extinguishment of debt | 7,494 | (4,447 | ) | |||||
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Operating income (loss) | 93,691 | (20,900 | ) | |||||
Add: Depreciation and amortization | 30,270 | 27,704 | ||||||
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| |||||
Operating EBITDA | € | 123,961 | € | 6,804 | ||||
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(1) | See Note 19 of the financial statements included in this annual report on Form10-K for a reconciliation to our consolidated results. |
Restricted Group Results — Year Ended December 31, 2009 Compared to Year Ended December 31, 2008Pulp revenues for the Restricted Group in 2009 decreased to €318.4 million from €401.0 million in 2008, primarily due to lower sales realizations. Revenues from the sale of excess energy were €15.2 million in 2009 compared to €12.1 million in 2008.Pulp prices decreased in the first half of 2009 due to deteriorating global economic conditions but increased in the second half of 2009, primarily as a result of stronger demand and the weakening of the U.S. dollar. List prices for NBSK pulp in Europe were approximately $667 (€478) per ADMT in 2009, compared to approximately $839 (€571) in 2008.55
56
Years Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income (loss) | € | (35,927 | ) | € | (30,432 | ) | ||
Income taxes (benefits) | (183 | ) | 3,728 | |||||
Interest expense | 27,351 | 27,027 | ||||||
Investment (income) loss | (5,002 | ) | (6,834 | ) | ||||
Foreign exchange (gain) loss on debt | (2,692 | ) | 4,114 | |||||
Loss (gain) on extinguishment of debt | (4,447 | ) | — | |||||
Operating income (loss) | (20,900 | ) | (2,397 | ) | ||||
Add: Depreciation and amortization | 27,704 | 28,867 | ||||||
Operating EBITDA | € | 6,804 | € | 26,470 | ||||
Cash Flows from Operating Activities.Activities. Cash provided by operating activities for the Restricted Group increased to €66.7 million in 2011 from €54.6 million in 2010 from €13.32010. A decrease in receivables provided cash of €3.3 million in 2009, primarily due2011, compared to improved operating results, partially offset by working capital movements.an increase in receivables using cash of €25.9 million in 2010. An increase in receivablesinventories used cash of €25.9€10.2 million in 2011, compared to an increase in inventories using cash of €2.9 million in 2010. An increase in accounts payable and accrued expenses provided cash of €5.9 million in 2010, compared to a decrease in receivables providing cash of €26.1 million in 2009. An increase in inventories used cash of €2.9 million in 2010, compared to a decrease in inventories providing cash of €13.2 million in 2009. A decrease in accounts payable and accrued expenses usedusing cash of €10.3 million in 2010, compared to an increase in accounts payable and accrued expenses providing cash of €5.8 million in 2009.
Cash Flows from Investing Activities.Investing activities used cash of €38.5 million and €33.3 million in 2011 and €26.5 million in 2010, and 2009, respectively. In 2010,2011, capital expenditures used cash of €34.7€29.5 million primarily for therelated to various projects at our Rosenthal and Celgar Energy Project.mills. Capital expenditures in 20092010 used cash of €26.8€34.7 million.
Cash Flows from Financing Activities.Financing activities used net cash of €35.4 million in 2011, primarily due to using cash of €15.2 million to redeem our 2013 Senior Notes, €14.7 million to repay the balance of our Celgar Working Capital Facility, €7.5 million to purchase shares of our common stock and €9.7 million to purchase and extinguish some of our Senior Notes. In 2011, we received €14.1 million in government grants. Financing activities provided net cash of €10.1 million in 2010, primarily as a result of the receipt of approximately €16.7 million in government grants for the Celgar Energy Project and proceeds from the sale of the 2017 Senior Notes being partially offset by cash used to purchase our 2013 Senior Notes. Financing activities provided cash of €7.6 million in 2009. Repayment of indebtedness and leases used cash of €221.3 million and €10.7 million in 2010 and 2009, respectively.
The following table is a summary of selected financial information for the Restricted Group for the periods indicated: Years Ended December 31, 2010 2009 (in thousands) Cash and cash equivalents € 50,654 € 20,635 Working capital 150,667 57,015 Property, plant and equipment 362,274 362,311 Total assets 662,944 555,977 Long-term liabilities 312,631 301,173 Total equity 289,141 200,247
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Restricted Group Financial Position(1) | ||||||||
Cash and cash equivalents | € | 44,829 | € | 50,654 | ||||
Marketable securities(2) | 12,372 | 275 | ||||||
Working capital | 149,973 | 150,667 | ||||||
Property, plant and equipment | 353,925 | 362,274 | ||||||
Total assets | 658,844 | 662,944 | ||||||
Long-term liabilities | 262,770 | 312,631 | ||||||
Total equity | 344,415 | 289,141 |
(1) | See Note 19 of the financial statements included in this annual report onForm 10-K for a reconciliation to our consolidated results. |
(2) | Principally comprised of German federal government bonds with a maturity of less than one year. |
57
As at December 31, 2010,2011, we had not drawn any amount under the Rosenthal Loan Facility and had drawn C$20.0 million under the C$40.0 million Celgar Working Capital Facility.
Standard & Poor’s Rating Services (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”) base their assessment of our credit risk on the business and financial profile of the Restricted Group only. Factors that may affect our credit rating include changes in our operating performance and liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing costs and access to capital markets.
In November 2011, as a result of our deleveraging strategy and increased renewable energy production at our Celgar mill, Moody’s upgraded its outlook from “stable” to “positive” while keeping the rating for our Senior Notes at B2. Further, despite pulp price decreases in the second half of 2011, Moody’s expects that pulp prices will remain high enough over the near term to enable us to continue to generate strong cash flows and further reduce our debt.
During the second quarter of 2010,2011, we were subject to improved rating actions by Moody’s and S&P. In May 2010,July 2011, S&P raised its target creditratings on the Senior Notes from B to B+ and improved its recovery rating from “4” to B from B- with a stable“3”. The improved ratings outlook to reflect temporaryour balance sheet deleveraging in the first half of 2011 and S&P’s belief that demand for NBSK pulp supply shortagesshould remain robust and the strengthening of pulp markets. S&P believes that weour liquidity position should be able to maintain sufficient liquidity to support this new credit rating. The B rating also reflected the expectation that we would continue to benefit from favorable foreign exchange rates resulting from the strength of the U.S. dollar relative to the Euro.
We expect the Restricted Group to meet its interest and debt service obligations and meet the working and maintenance capital requirements for its current operations from cash flow from operations, cash on hand, the Rosenthal Loan Facility and the Celgar Working Capital Facility.
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 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 increase, these judgments become even more subjective and complex. Our significant accounting policies are disclosed in Note 1 to our audited annual consolidated financial statements included in Part IV of this annual report. 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 pensions and post-retirement benefits, provisions for bad debt and doubtful accounts, derivative instruments, impairment of long-lived assets, deferred taxes, inventory provisions and environmental conservation and legal liabilities. Actual estimates could differ from these estimates. The following accounting policies require management’s most difficult, subjective and complex judgments, and are subject to a fair degree of measurement uncertainty. Derivative Instruments. Derivative instruments are measured at fair value and reported in the balance sheet as assets or liabilities. Accounting for gains or losses depends on the intended use of the derivative instruments. Gains or losses on derivative instruments which are not designated hedges for accounting purposes are recognized in earnings in the period of the change in fair value. Gains or losses on derivative instruments formally designated as hedges are recognized in either earnings or other comprehensive income.58
Impairment of Long-Lived Assets. We evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, we estimate future cash flows expected to result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management to make subjective judgments. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of possible outcomes in determining the best estimate of future cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values, actual impairment losses could vary materially, either positively or negatively, from estimated impairment losses.
As a result of improving market conditions, we concluded that there were no impairment indicators. Accordingly, we did not undertake a long-lived asset impairment review in 2010.
Deferred Taxes. We currently have deferred tax assets which are comprised primarily of tax loss carryforwards and deductible temporary differences, both of which will reduce taxable income in the future. The amounts recorded for deferred tax are based upon various judgments, assumptions and estimates. We assess the realization of these deferred tax assets on a periodic basis to determine whether a valuation allowance is required. We determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized, based on currently available information, including, but not limited to, the following:
the history of the tax loss carryforwards and their expiry dates;
future reversals of temporary differences;
our projected earnings; and
tax planning opportunities.
If we believe that it is more likely than not that some of these deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is recorded against these deferred tax assets. Additionally, based on guidance noted in FASB Accounting Standards Codification Topic 740,Income Taxes, tax assets are not permitted to be recognized where the entity does not have a strong history of profitability. As at December 31, 2010,2011, we had €22.6€19.0 million in deferred tax assets and €7.8€2.6 million in deferred tax liabilities, resulting in a net deferred tax asset of €14.8€16.5 million. Our tax assets are net of a €88.9€81.9 million valuation allowance. For the year ended December 31, 2010,2011, our review concluded that it was appropriate to decrease the valuation allowance against loss carryforwards by approximately €10.6€7.1 million, after considering expected future earnings and reversals of temporary differences.
If market conditions improve or tax planning opportunities arise in the future, we will reduce our valuation allowances, resulting in future tax benefits. If market conditions deteriorate in the future, we will increase our valuation allowances, resulting in future tax expenses. Any change in tax laws, particularly in Germany, will change the valuation allowances in future periods.
Inventory Provisions. Inventories of NBSK pulp and logs and wood chips are valued at the lower of cost, using the weighted-average cost method, or net realizable value. We estimate the net realizable value based on future cash flows expected to result from the sale of our product (NBSK pulp). The cash flows are estimated based on the expected time it will take to exhaust the respective inventory, including estimates of additional costs that will need to be incurred to bring that inventory to a salable state. The future cash flows, based on reasonable and supportable assumptions and projections, require management to make subjective judgments. Depending on the assumptions and estimates used, the estimated future cash flows can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. If actual results are not consistent with the assumptions and judgments used in estimating future cash flows, actual inventory provisions could vary materially, either positively or negatively, from estimated inventory provisions.
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See Note 1 to our consolidated financial statements included in Item 15 of this annual report onForm 10-K.
The statements in this annual report onForm 10-K that are not reported financial results or other historical information are “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995, as amended. These statements appear in a number of different places in this report and can be identified by words such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. You are cautioned that any such forward-looking statements are not guarantees and may involve risks and uncertainties. Our actual results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our estimates. Some of these risks and assumptions include those set forth in reports and other documents we have filed with or furnished to the SEC, including in our annual report onForm 10-K for the fiscal year ended December 31, 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. Factors that could cause actual results to differ materially include, but are not limited to those set forth under “Item 2010.2011. 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 to1A — 1A—Risk Factors” in this annual report onForm 10-K.
We do not believe that inflation has had a material impact on revenues or income during 2010.
ITEM 7A. | 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 Euro and the U.S. dollar and the Canadian dollar versus the U.S. dollar and the Euro. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We may in the future use derivatives to reduce or limit our exposure to fluctuations in pulp prices. We also use derivatives to reduce our potential losses or to augment our potential gains, depending on our management’s perception of future economic events and developments. These types of derivatives are generally highly speculative in nature. They are also very volatile as they are highly leveraged given that margin requirements are relatively low in proportion to notional amounts.
Many of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our management’s expectations of future events. However, these strategies may not be effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize is not effective, we may incur significant losses.
Derivatives are contracts between two parties where payments between the parties are dependent upon movements in the price of an underlying asset, index or financial rate. Examples of derivatives include swaps, options and forward rate agreements. The notional amount of the derivatives is the contract amount used as a60
The principal derivatives we use are foreign exchange derivatives and interest rate derivatives.
Foreign exchange derivatives include currency swaps which involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Such cross currency swaps involve the exchange of both interest and principal amounts in two different currencies. They also include foreign exchange forwards which are contractual obligations in which two counterparties agree to exchange one currency for another at a specified price for settlement at a pre-determined future date. Forward contracts are effectively tailor-made agreements that are transacted between counterparties in theover-the-counter market.
Interest rate derivatives include interest rate forwards (forward rate agreements) which are contractual obligations to buy or sell an interest-rate-sensitive financial instrument on a future date at a specified price. They also include interest rate swaps which areover-the-counter contracts in which two counterparties exchange interest payments based upon rates applied to a notional amount.
Energy derivatives include fixed electricity forward sales and purchase contracts which are contractual obligations to buy or sell electricity at a future specified date. Our mills produce surplus electricity that we sell to third parties. As a result, we monitor the electricity market closely. Where possible and to the extent we think it is advantageous, we may sell into the forward market through forward contracts.
We occasionally use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from Euros to U.S. dollars as our principal product is priced in U.S. dollars. We have also converted some of our costs to U.S. dollars by issuing long-term U.S. dollar denominated debt in the form of our 2012 Convertible Notes and our 2017 Senior Notes. We use interest rate derivatives to fix the rate of interest on indebtedness, including under the Stendal Loan Facility.
The interest rate derivatives we entered into were pursuant to the Stendal Loan Facility which provides facilities for foreign exchange derivatives, interest rate derivatives and commodities derivatives, subject to prescribed controls, including maximum notional and at-risk amounts. The Stendal Loan Facility is secured by substantially all of the assets of the Stendal mill and has the benefit of certain German governmental guarantees. This credit facility does not have a separate margin requirement when derivatives are entered into and is subsequently marked to market each period.
The Rosenthal Loan Facility also allows us to enter into derivative instruments to manage risks relating to its operations but, as at December 31, 2010,2011, we had not entered into any such derivative instruments.
We record unrealized gains and losses on our outstanding derivatives when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. We determine market valuations based primarily upon valuations provided by our counterparties.
In August 2002, Stendal entered into the Stendal Interest Rate Swap ContractsContract in connection with its long-term indebtedness relating to the Stendal mill to fix the interest rate under the Stendal Loan Facility at the then low level, relative to its historical trend and projected variable interest rate. These contracts were entered into under a specific credit line under the Stendal Loan Facility and are subject to prescribed controls, including certain maximum amounts for notional and at-risk amounts. Under the Stendal Interest Rate Swap Contracts,Contract, Stendal pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The interest rates payable under the Stendal Loan Facility were swapped into fixed rates based on the Eur-Euribor rate for the repayment periods of the tranches under the Stendal Loan Facility. Stendal effectively converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate uncertainty.
We are exposed to very modest credit related risks in the event of non-performance by counterparties to derivative contracts. However, we do not expect that the counterparties, which are major financial institutions and large utilities, will fail to meet their obligations.
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Recognized | Recognized | |||||||||||||||||||
Gain (Loss) | Gain (Loss) | |||||||||||||||||||
Year Ended | Year Ended | |||||||||||||||||||
Notional | December 31, | Notional | December 31, | |||||||||||||||||
Derivative Instrument | Maturity Date | Amount | 2010 | Amount | 2009 | |||||||||||||||
(in millions of | (in thousands) | (in millions of | (in thousands) | |||||||||||||||||
Euros) | Euros) | |||||||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||||
Stendal interest rate swaps(1) | October 2017 | € | 447.8 | € | 1,899 | € | 487.0 | € | (5,760 | ) | ||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||||
Derivative Instrument | Maturity Date | Notional Amount | Recognized Gain (Loss) | Notional Amount | Recognized Gain (Loss) | |||||||||||||
(in millions) | (in thousands) | (in millions) | (in thousands) | |||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||
Stendal interest rate swap(1) | October 2017 | € | 404.4 | € | (1,418 | ) | € | 447.8 | € | 1,899 | ||||||||
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(1) | In connection with the Stendal Loan Facility, in the third quarter of 2002 Stendal entered into the Stendal Interest Rate Swap |
Loan Facility, with respect to an aggregate maximum amount of approximately €612.6 million of the principal amount of the long-term indebtedness under the Stendal Loan Facility. The |
Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate financial instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. We seek to manage our interest rate risks through the use of interest rate derivatives. For a discussion of our interest rate derivatives including maturities, notional amounts, gains or losses and swap rates, see “Derivatives” in this Item 7A. The following tables provide information about our exposure to interest rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 20102011 and expected cash flows from these instruments: As at December 31, 2010 Carrying Fair Expected maturity date Value Value 2011 2012 2013 2014 2015 Thereafter (in thousands) Long-term debt: Fixed rate ($)(1) € 15,341 € 15,571 € 15,341 € — € — € — € — € — Average interest rate 9.25 % 9.25 % 9.25 % Fixed rate ($)(2) € 224,031 € 230,192 € — € — € — € — € — € 224,031 Average interest rate 9.50 % 9.50 % 9.50 % Fixed rate ($)(3) € 31,707 € 74,790 € — € 31,707 € — € — € — € — Average interest rate 8.5 % 8.5 % 8.5 % Variable rate (€)(4) € 500,657 € 500,657 € 23,167 € 24,583 € 40,000 € 40,000 € 44,000 € 328,907 Average interest rate 6.3 % 6.3 % 6.3 % 6.3 % 6.3 % 6.3 % 6.3 % 6.3 % Variable rate (€)(5) € 3,807 € 3,807 € 1,088 € 1,088 € 1,088 € 543 € — € — Average interest rate 3.90 % 3.90 % 3.90 % 3.90 % 3.90 % 3.90 % Variable rate (C$)(6) € 15,016 € 15,016 € — € — € 15,016 € — € — € — Average interest rate 5.70 % 5.70 % 5.70 % 62
As at December 31, 2011 | ||||||||||||||||||||||||||||||||
Carrying Value | Fair Value | Expected maturity date | ||||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | |||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||
Fixed rate ($)(1) | € | 220,753 | € | 225,720 | € | — | € | — | € | — | € | — | € | — | € | 220,753 | ||||||||||||||||
Average interest rate | 9.5 | % | 9.5 | % | 9.5 | % | ||||||||||||||||||||||||||
Variable rate (€)(2) | € | 477,490 | € | 477,490 | € | 24,583 | € | 40,000 | € | 40,000 | € | 44,000 | € | 44,000 | € | 284,907 | ||||||||||||||||
Average interest rate | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | 6.3 | % | ||||||||||||||||
Variable rate (€)(3) | € | 2,719 | € | 2,719 | € | 1,088 | € | 1,088 | € | 543 | € | — | € | — | € | — | ||||||||||||||||
Average interest rate | 4.57 | % | 4.57 | % | 4.57 | % | 4.57 | % | 4.57 | % | ||||||||||||||||||||||
Nominal Amount | Fair Value | Expected maturity date | ||||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | |||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||||||||||||||||
Interest rate swap: | ||||||||||||||||||||||||||||||||
Variable to fixed (€)(4) | € | 404,448 | € | (52,391 | ) | € | 46,873 | € | 50,794 | € | 54,959 | € | 59,388 | € | 64,100 | € | 128,334 | |||||||||||||||
Average pay rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | ||||||||||||||||
Average receive rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % |
Nominal | Fair | Expected maturity date | ||||||||||||||||||||||||||||||
Amount | Value | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||||||||||
Variable to fixed (€)(7) | € | 447,763 | € | (50,973 | ) | € | 43,315 | € | 46,873 | € | 50,794 | € | 54,959 | € | 59,388 | € | 192,434 | |||||||||||||||
Average pay rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | ||||||||||||||||
Average receive rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % |
(1) | Senior Notes | |
(2) | Stendal Loan Facility bears interest at varying rates of between Euribor plus 0.90% to Euribor plus |
(3) | Rosenthal investment loan bears interest at Euribor plus 2.75%. As at December 31, |
(4) | Interest rate |
Our reporting currency is the Euro. However, we hold financial instruments denominated in U.S. dollars and Canadian dollars which are sensitive to foreign currency exchange rate fluctuations. A depreciation of these currencies against the Euro will decrease the fair value of such financial instrument assets and an appreciation of these currencies against the Euro will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against the Euro will increase the fair value of such financial instrument assets and a depreciation of these currencies against the Euro will decrease the fair value of financial instrument liabilities, thereby increasing our fair value. We seek to manage our foreign currency risks by utilizing foreign exchange rate derivatives. For a discussion of such derivatives including maturities, notional amounts, gains or losses and strike rates, see “Derivatives” in this Item 7A. The following table provides information about our exposure to foreign currency exchange rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 20102011 and expected cash flows from these instruments: As at December 31, 2010 Carrying Fair Expected maturity date Value Value 2011 2012 2013 2014 2015 Thereafter (in thousands) Euro functional currency Liabilities: Fixed rate ($)(1) € 15,341 € 15,571 € 15,341 € — € — € — € — € — Average interest rate 9.25 % 9.25 % 9.25 % Fixed rate ($)(2) € 224,031 € 230,192 € — € — € — € — € — € 224,031 Average interest rate 9.5 % 9.5 % 9.5 % Fixed rate ($)(3) € 31,707 € 74,790 € — € 31,707 € — € — € — € — Average interest rate 8.5 % 8.5 % 8.5 % Variable rate (C$)(4) € 15,016 € 15,016 € — € — € 15,016 € — € — € — Average interest rate 5.70 % 5.70 % 5.70 %
As at December 31, 2011 | ||||||||||||||||||||||||||||||||
Carrying Value | Fair Value | Expected maturity date | ||||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | |||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
On-Balance Sheet Financial Instruments | ||||||||||||||||||||||||||||||||
Euro functional currency Liabilities: | ||||||||||||||||||||||||||||||||
Fixed rate ($) (1) | € | 220,753 | € | 225,720 | € | — | € | — | € | — | € | — | € | — | € | 220,753 | ||||||||||||||||
Average interest rate | 9.5 | % | 9.5 | % |
(1) | Senior Notes, | |
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We are subject to some electricityenergy price risk, primarily for natural gas purchases. Our electricity price risks are mitigated by the electricity thatability of all of our operations purchase.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements and supplementary data required with respect to this Item 8, and as listed in Item 15 of this annual report onForm 10-K, are included in this annual report onForm 10-K commencing on page 72.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. | 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 inRules 13a-15(e) and15d-15(e) under the Exchange Act), as of the end of the period covered by this annual report onForm 10-K. 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.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Mercer Inc.’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer;• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.64
Mercer Inc.’s independent registered chartered accountants have issued an audit report on Mercer Inc.’s internal control over financial reporting, which appears below.
There have been no changes in our internal control over financial reporting (as defined inRules 13a-15(f) and15d-15(f) under the Exchange Act) during the year ended December 31, 20102011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
Not applicable.
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
We are governed by a board of directors, referred to as the “Board”, each member of which is elected annually. The following sets forth information relating to our directors and executive officers.
Jimmy S.H. Lee, age 53,54, has been a director since May 1985 and President and Chief Executive Officer since 1992. Previously, during the period that MFC Bancorp Ltd. was our affiliate, he served as a director from 1986 and President from 1988 to December 1996 when it was spun out. During Mr. Lee’s tenure with Mercer, we acquired the Rosenthal mill and converted it to the production of kraft pulp, constructed and commenced operations at the Stendal mill and acquired the Celgar mill.
William D. McCartney, age 55,56, has been a director since January 2003. Mr. McCartney has been President and Chief Executive Officer of Pemcorp Management Inc., a management services company, since 1990. Mr. McCartney is also a member of the Institute of Chartered Accountants in Canada.
Guy W. Adams, age 59,60, has been a director since August 2003. Mr. Adams is the managing member of GWA Advisors, LLC, GWA Investments, LLC and GWA Capital Partners, LLC, where he has served since 2002. GWA Investments is an investment fund investing in publicly traded securities managed by GWA Capital Partners, LLC, a registered investment advisor. Prior to 2002, Mr. Adams was the President of GWA Capital, which he founded in 1996 to invest his own capital in public and private equity transactions, and a business consultant to entities seeking refinancing or recapitalization.
Eric Lauritzen, age 72,73, has been a director since June 2004. Mr. Lauritzen was President and Chief Executive Officer of Harmac Pacific, Inc., a North American producer of softwood kraft pulp previously listed on the Toronto Stock Exchange and acquired by Pope & Talbot Inc. in 1998, from May 1994 to July 1998, when he retired. Mr. Lauritzen was Vice President, Pulp and Paper Marketing of MacMillan Bloedel Limited, a North American pulp and paper company previously listed on the Toronto Stock Exchange and acquired by Weyerhaeuser Company Limited in 1999, from July 1981 to April 1994.
Graeme A. Witts, age 72,73, has been a director since January 2003. Mr. Witts organized Sanne Trust Company Limited, a trust company located in the Channel Islands, in 1988 and was managing director from 1988 to 2000, when he retired. He is now managing director of Azure Property Group, SA, a European hotel group. Mr. Witts is also a fellow of the Institute of Chartered Accountants of England and Wales and has previous executive experience with the Procter & Gamble Company and Clarks Shoes, as well as government auditing.
George MalpassBernard Picchi, age 71,62, has been a director since November 2006.June 2011. Mr. MalpassPicchi has been the Managing Director of Private Wealth Management for Palisade Capital Management, LLC since July 2009. Prior to 2009, Mr. Picchi has been an analyst and consultant for several mid-sized broker/dealers and investment advisory firms. In particular, from 1980 to 1999, Mr. Picchi was an All Star rated energy analyst at Solomon Brothers, Kidder Peabody and Lehman Brothers, where he also served as Director of U.S. Stock Research. Mr. Picchi has also been the sole manager of the 5-Star rated $1.5 billion Capital Appreciation Fund of Federated Investors, where he served as U.S. Director of Research from January 2000 to June 2002. Mr. Picchi is also a Chartered Financial Analyst.
James Shepherd, age 59, has been a director since June 2011. Mr. Shepherd was President and Chief Executive Officer of Canfor Corporation from 2004 to 2007 and Slocan Forest Products Ltd. from 1999 to 2004. Mr. Shepherd is also the former President of Crestbrook Forest Industries Ltd. and Finlay Forest Industries Limited and is the former Chairman of the Forest Products Association of Canada. Mr. Shepherd has been a director with Canfor Corporation, which is listed on the Toronto Stock Exchange, from 2004 to 2007 and has been a director of Canfor Pulp Income Fund from 2006 to 2007. Mr. Shepherd is also currently a director of Conifex Timber Inc. He was formerly, which is listed on the Chief Executive OfficerTSX Venture Exchange, and a director of Primex Forest Products Ltd. and is also a former director of bothBuckman Laboratories International Forest Products Ltd. and Riverside Forest Products Ltd.
David M. Gandossi, age 53,54, has been Secretary, Executive Vice-President and Chief Financial Officer since August 15, 2003. Mr. Gandossi was formerly the Chief Financial Officer and Executive Vice-President of Formation Forest Products (a closely held corporation) from June 2002 to August 2003. Mr. Gandossi previously served as Chief Financial Officer, Vice-President, Finance and Secretary of Pacifica Papers Inc., a North American specialty pulp and paper manufacturing company previously listed on the Toronto Stock Exchange, from December 1999 to August 2001 and Controller and Treasurer from June 1998 to December 1999. From June 1998 to August 31, 1998, he also served as Secretary to Pacifica Papers Inc. From March 1998 to June 1998, Mr. Gandossi served as Controller, Treasurer and Secretary of MB Paper Ltd. From April 1994 to March 1998, Mr. Gandossi held
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Claes-Inge Isacson, age 65,66, has been our Chief Operating Officer since November 2006 and is based in our Berlin office. Mr. Isacson brings over 24 years of senior level pulp and paper management to our senior management team, with a focus on kraft pulp. Mr. Isacson held the positions of President Norske Skog Europe, and then Senior Vice President Production for Norske Skogindustrier ASA between 1989 and 2004. His most recent position was President, AF Process, a consulting and engineering company working worldwide. He holds a Masters of Science, Mechanical Engineering.
Richard Short, age 43,44, has been our Controller since December 2010, prior to which he was our Director, Corporate Finance, since joining Mercer in 2007. Prior to joining Mercer, Mr. Short was Controller, Financial Reporting from 2006 to 2007 and Director, Corporate Finance from 2004 to 2006 with Catalyst Paper Corp. Mr. Short is a member of the Institute of Chartered Accountants in Canada.
Leonhard Nossol, age 53,54, has been our Group Controller for Europe since August 2005. He has also been a managing director of Rosenthal since 1997 and the sole managing director of Rosenthal since September 2005. Mr. Nossol had a significant involvement in the conversion of the Rosenthal mill to the production of kraft pulp in 1999 and increases in the mill’s annual production capacity to 330,000345,000 ADMTs, as well as the reduction in production costs at the mill.
David M. Cooper, age 57,58, has been Vice President of Sales and Marketing for Europe since June 2005. Mr. Cooper previously held a variety of senior positions around the world in Sappi Ltd., a large global forest products group, from 1982 to 2005, including the sales and marketing of various pulp and paper grades and the management of a manufacturing facility. He has more than 25 years of diversified experience in the international pulp and paper industry.
Eric X. Heine, age 47,48, has been Vice President of Sales and Marketing for North America and Asia since June 2005. Mr. Heine was previously Vice President Pulp and International Paper Sales and Marketing for Domtar Inc., a global pulp and paper corporation, from 1999 to 2005. He has over 18 years of experience in the pulp and paper industry, including developing strategic sales channels and market partners to build corporate brands.
Wolfram Ridder, age 49,50, was appointed Vice President of Business Development in August 2005, prior to which he was a managing director of Stendal. Mr. Ridder was the principal assistant to our Chief Executive Officer from November 1995 until September 2002.
Genevieve Stannus, age 40,41, has been our Treasurer since July 2005, prior to which she was a Senior Financial Analyst with Mercer from August 2003. Prior to joining Mercer, Ms. Stannus held Senior Treasury
Analyst positions with Catalyst Paper Corporation and Pacifica Papers Inc. She has over ten yearsyears’ experience in the forest products industry. Ms. Stannus is a member of the Certified General Accountants’ Association of Canada.
Niklaus Gruenenfelder, age 53,54, became the Managing Director of Stendal in January 2009. Previously, from 1989 until 2006, Mr. Gruenenfelder held a variety of positions in Switzerland, China, Germany and Pakistan with Swiss chemicals manufacturer Ciba Specialty Chemicals Holding Inc. (formerly Ciba-Geigy AG). In 2006, Huntsman Corporation, a global chemical and chemical products company, acquired the textile effects business from Ciba and Mr. Gruenenfelder was the Managing Director and Head of Technical Operations at Huntsman’s Langweid am LeichLech plant in Germany from 2006 until he joined Mercer. Mr. Gruenenfelder holds a Ph.D. in Technical Science and an MBA.
Brian Merwin, age 37,38, has been our Vice President of Strategic Initiatives since February 2009, prior to which he was our Director of Strategic and Business Initiatives since August 2007 and Business Analyst since May 2005. BrianMr. Merwin has an MBA from the Richard Ivey School of Business at the University of Western Ontario.
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The Board met fiveeight times during 20102011 and each current member of the Board attended 75% or more of the total number of such meetings and meetings of the committees of the Board on which they serve during their term. In addition, our independent directors regularly meet in separate executive sessions without any member of our management present. The Lead Director presides over these meetings. Although we do not have a formal policy with respect to attendance of directors at our annual meetings, all directors are encouraged and expected to attend such meetings if possible. All of our directors attended our 20102011 annual meeting.
The Board has developed corporate governance guidelines in respect of: (i) the duties and responsibilities of the Board, its committees and officers; and (ii) practices with respect to the holding of regular quarterly and strategic meetings of the Board including separate meetings of non-management directors. The Board has established four standing committees, the Audit Committee, the Compensation and Human Resource Committee, the Governance and Nominating Committee and the Environmental, Health and Safety Committee.
The Audit Committee functions pursuant to a charter adopted by the directors. A copy of the current charter is incorporated by reference in the exhibits to thisForm 10-K and is available on our website atwww.mercerint.com under the “Governance” link. The function of the Audit Committee generally is to meet with and review the results of the audit of our financial statements performed by the independent public accountants and to recommend the selection of independent public accountants. The members of the Audit Committee are Mr. McCartney, Mr. The Audit Committee has established procedures for: (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters; and (ii) the confidential and anonymous submission by our employees and others of concerns regarding questionable accounting or auditing matters. A person wishing to notify us of such a complaint or concern should send a written notice thereof, marked “Private & Confidential”, to the Chairman of the Audit Committee, Mercer International Inc.,c/o Suite WittsAdams and Mr. Lauritzen,Shepherd, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. Both Mr. McCartney and Mr. Witts are Chartered Accountants and Mr. McCartney is a Chartered Accountant and a “financial expert” within the meaning of such term under theSarbanes-Oxley Act of 2002. The Audit Committee met four times during 2010.2840, P.O. Box 11576, 6501120, 700 West GeorgiaPender Street, Vancouver, British Columbia, Canada V6B 4N8.
The Board has established a Compensation and Human Resource Committee. The Compensation and Human Resource Committee is responsible for reviewing and approving the strategy and design of our compensation, equity-based and benefits programs. The Compensation and Human Resource Committee functions pursuant to a charter adopted by the directors, a copy of which is available on our website atwww.mercerint.com in the Corporate Governance Guidelines under the “Governance” link. The Compensation and Human Resource Committee is also responsible for approving all compensation actions relating to executive officers. The members of the Compensation and Human Resource Committee are Mr. Malpass,Witts, Mr. Lauritzen and Mr. Adams,Picchi, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. The Compensation and Human Resource Committee met sixten times during 2010.
The Board has established a Governance and Nominating Committee comprised of Mr. Shields,Lauritzen, Mr. McCartney and Mr. Witts, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Market. The Governance and Nominating Committee functions pursuant to a charter adopted by the directors, a copy of which is incorporated by reference in the exhibits to thisForm 10-K and is available on our website atwww.mercerint.com in the Corporate Governance Guidelines under the “Governance” link. The purpose of the committee is to: (i) manage the corporate governance system of the Board; (ii) assist the Board in fulfilling its duties to meet applicable legal and regulatory and self-regulatory business principles and68
The Board established an Environmental, Health and Safety Committee in 2006, currently comprised of Mr. Lauritzen,Shepherd, Mr. MalpassLauritzen and Mr. Lee, to review on behalf of the Board the policies and processes implemented by management, and the resulting impact and assessments of all our environmental, health and safety related activities. The Environmental, Health and Safety Committee functions pursuant to a charter adopted by the directors, a copy of which is available on our website atwww.mercerint.com in the Corporate Governance Guidelines under the “Governance” link. More specifically, the Environmental, Health and Safety Committee is to: (i) review and approve, and if necessary revise, our environmental, health and safety policies and environmental compliance programs; (ii) monitor our environmental, health and safety management systems including internal and external audit results and reporting; and (iii) provide direction to management on the frequency and focus of external independent environmental, health and safety audits. The Environmental, Health and Safety Committee met four times in 2010.
The Board appointed Mr. Executive Officer; (iv) ensuring that delegated committee functions are carried out and reported to the Board; and (v) communicating to management, as appropriate, the results of private discussions among outside directors and acting as a liaison between the Board and the Chief Executive Officer.ShieldsLauritzen as its interim Lead Director in September 2003 andJanuary 2012 to replace Kenneth Shields who resigned from the Board in 2006 as Deputy Chairman of the Board.2012. The role of the Lead Director is to provide leadership to the non-management directors on the Board and to ensure that the Board can operate independently of management and that directors have an independent leadership contact. The duties of the Lead Director include, among other things: (i) ensuring that the Board has adequate resources to support its decision-making process and ensuring that the Board is appropriately approving strategy and supervising management’s progress against that strategy; (ii) ensuring that the independent directors have adequate opportunity to meet to discuss issues without management being present; (iii) chairing meetings of directors in the absence of the Chairman and Chief
The Board has adopted a Code of Business Conduct and Ethics that applies to our directors, employees and executive officers. The code is incorporated by reference in the exhibits to thisForm 10-K and is available on our website atwww.mercerint.com under the “Governance” link. A copy of the code may also be obtained without charge upon request to Investor Relations, Mercer International Inc., Suite 2840, P.O. Box 11576, 6501120, 700 West GeorgiaPender Street, Vancouver, British Columbia, Canada V6B 4N8V6C 1G8 (Telephone:(604) 684-1099) or Investor Relations, Mercer International Inc., 14900 Interurban Avenue South, Suite 282, Seattle WA, U.S.A. 98168 (Telephone:(206) 674-4639).
The information required under “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2011,2012, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2011,2012, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item 12 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2011,2012, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Pursuant to the terms of the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving the terms and conditions of all proposed transactions between us, any of our officers, directors or shareholders who beneficially own more than 5% of our outstanding shares of common stock, or relatives or affiliates of any such officers, directors or shareholders, to ensure that such related party transactions are fair and are in our overall best interest and that of our shareholders. In the case of transactions with employees, a portion of the review authority is delegated to supervising employees pursuant to the terms of our written Code of Business Conduct and Ethics. The Audit Committee has not adopted any specific procedures for conduct of reviews and considers each transaction in light of the facts and circumstances. In the course of its review and approval of a transaction, the Audit Committee considers, among other factors it deems appropriate: Whether the transaction is fair and reasonable to us; The business reasons for the transaction; Whether the transaction would impair the independence of one of our non-employee directors; and Whether the transaction is material, taking into account the significance of the transaction. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction. The information called for by Items 404(a) and 407(a) ofRegulation S-K required to be included under this Item 13 is incorporated by reference from the proxy statement relating to our annual meeting to be held in • Whether the transaction is fair and reasonable to us;• The business reasons for the transaction;• Whether the transaction would impair the independence of one of our non-employee directors; and• Whether the transaction is material, taking into account the significance of the transaction.2011,2012, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2011,2012, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) (1) | Financial Statements |
Page | ||||
(b) | |
List of Exhibits |
2 | .1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | ||
3 | .1 | Articles of Incorporation of the Company, as amended. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
3 | .2 | Bylaws of the Company. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
4 | .1 | Indenture dated as of December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm S-3 filed December 10, 2004. | ||
4 | .2 | First Supplemental Indenture dated February 14, 2005 to Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated February 17, 2005. | ||
4 | .3 | Indenture dated as of December 10, 2009 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated December 11, 2009. | ||
4 | .4 | Second Supplemental Indenture dated as of November 16, 2010 to the Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated November 19, 2010. | ||
4 | .5 | Indenture dated as of November 17, 2010 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated November 19, 2010. | ||
4 | .6 | Registration Rights Agreement among Mercer International Inc. and RBC Capital Markets, LLC and Credit Suisse Securities (USA) LLC dated November 17, 2010. Incorporated by reference fromForm 8-K dated November 19, 2010. | ||
10 | .1* | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009. | ||
10 | .2 | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated September 10, 2002. | ||
10 | .3* | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG. | ||
10 | .4* | Contract for the Engineering, Design, Procurement, Construction, Erection andStart-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | ||
10 | .5* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. |
71
10 | .6 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference fromForm 8-K dated August 11, 2003. | ||
10 | .7 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference fromForm 8-K dated April 28, 2004. | ||
10 | .8 | 2004 Stock Incentive Plan. Incorporated by reference fromForm S-8 dated June 15, 2004. | ||
10 | .9 | 2010 Stock Incentive Plan. Incorporated by reference fromForm S-8 dated June 11, 2010. | ||
10 | .10 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference fromForm 8-K dated October 2, 2006. | ||
10 | .11* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | ||
10 | .12 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference fromForm 10-Q dated May 6, 2008. | ||
10 | .13* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | ||
10 | .14* | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and BayerischeHypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
10 | .15 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
10 | .16 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference fromForm 8-K dated November 30, 2009. | ||
14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |||
99 | .1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | ||
99 | .2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | ||
99 | .3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
99 | .4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
99 | .5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
21 | List of Subsidiaries of Registrant. | |||
23 | .1 | Consent of Independent Registered Chartered Accountants — PricewaterhouseCoopers LLP. | ||
31 | .1 | Section 302 Certificate of Chief Executive Officer. | ||
31 | .2 | Section 302 Certificate of Chief Financial Officer. | ||
32 | .1** | Section 906 Certificate of Chief Executive Officer. | ||
32 | .2** | Section 906 Certificate of Chief Financial Officer. |
2.1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | |
2.2 | Support Agreement dated February 9, 2012 among Mercer International Inc. and Fibrek Inc. | |
3.1 | Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006. | |
3.2 | Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006. | |
4.1 | Indenture dated as of November 17, 2010 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference from Form 8-K dated November 19, 2010. | |
10.1 | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009 and the Amendment Agreement dated January 20, 2012. | |
10.2 | Project Blue Mill Financing Facility Agreement dated January 20, 2012 between Zellstoff Stendal GmbH and Unicredit Bank AG and IKB Deutsche Industriebank AG. | |
10.3 | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. As amended by the Amendment Restatement and Undertaking Agreement dated January 20, 2012. | |
10.4 | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG. As amended by the Amendment Agreement dated January 20, 2012. | |
10.5* | Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | |
10.6* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | |
10.7 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003. |
10.8 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference from Form 8-K dated April 28, 2004. | |
10.9 | 2004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004. | |
10.10 | 2010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010. | |
10.11 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K dated October 2, 2006. | |
10.12* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | |
10.13 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference from Form 10-Q dated May 6, 2008. | |
10.14* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | |
10.15* | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated August 24, 2009. | |
10.16 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference from Form 8-K dated August 24, 2009. | |
10.17 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference from Form 8-K dated November 30, 2009. | |
10.18 | Special Warrant Agreement dated as of February 9, 2012 among Mercer International Inc. and Fibrek Inc. | |
14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |
99.1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | |
99.2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | |
99.3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference from Form 8-K filed November 27, 2009. | |
99.4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference from Form 8-K filed November 27, 2009. | |
99.5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference from Form 8-K filed November 27, 2009. | |
21 | List of Subsidiaries of Registrant. |
23.1 | Consent of Independent Registered Chartered Accountants—PricewaterhouseCoopers LLP. | |
31.1 | Section 302 Certificate of Chief Executive Officer. | |
31.2 | Section 302 Certificate of Chief Financial Officer. | |
32.1** | Section 906 Certificate of Chief Executive Officer. | |
32.2** | Section 906 Certificate of Chief Financial Officer. |
* | Filed inForm 10-K for prior years. |
** | In accordance with Release33-8212 of the Commission, these Certifications: (i) are “furnished” to the Commission and are not “filed” for the purposes of liability under the Exchange Act; and (ii) are not to be subject to automatic incorporation by reference into any of our Company’s registration statements filed under the Securities Act for the purposes of liability thereunder or any offering memorandum, unless our Company specifically incorporates them by reference therein. |
72
Report of Independent Registered Public Accounting Firm
of
Mercer International Inc.
We have audited the accompanying consolidated balance sheets of Mercer International Inc. (the “company”) as of December 31, 20102011 and December 31, 20092010 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010.2011. We also have audited Mercer International Inc.’s internal control over financial reporting as of December 31, 2010,2011, based on criteria established in Internal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control.Control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercer International Inc. as of December 31, 20102011 and December 31, 2009,2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20102011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Mercer International Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2011, based on criteria established in Internal Control — Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
February 15, 2011
7314, 2012
(In thousands of Euros, except per share data)Euros)
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents (Note 2) | € | 99,022 | € | 51,291 | ||||
Receivables (Note 3) | 121,709 | 71,143 | ||||||
Inventories (Note 4) | 102,219 | 72,629 | ||||||
Prepaid expenses and other | 11,360 | 5,871 | ||||||
Deferred income tax (Note 9) | 22,570 | — | ||||||
Total current assets | 356,880 | 200,934 | �� | |||||
Long-term assets | ||||||||
Property, plant and equipment (Note 5) | 846,767 | 868,558 | ||||||
Deferred note issuance and other | 11,082 | 8,186 | ||||||
Deferred income tax (Note 9) | — | 3,426 | ||||||
Note receivable | 1,346 | 2,727 | ||||||
859,195 | 882,897 | |||||||
Total assets | € | 1,216,075 | € | 1,083,831 | ||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses (Note 6) | € | 84,873 | € | 85,185 | ||||
Pension and other post-retirement benefit obligations (Note 8) | 728 | 567 | ||||||
Debt (Note 7) | 39,596 | 16,032 | ||||||
Total current liabilities | 125,197 | 101,784 | ||||||
Long-term liabilities | ||||||||
Debt (Note 7) | 782,328 | 813,142 | ||||||
Unrealized interest rate derivative losses (Note 14) | 50,973 | 52,873 | ||||||
Pension and other post-retirement benefit obligations (Note 8) | 24,236 | 17,902 | ||||||
Capital leases and other (Note 15) | 12,010 | 12,157 | ||||||
Deferred income tax (Note 9) | 7,768 | — | ||||||
877,315 | 896,074 | |||||||
Total liabilities | € | 1,002,512 | € | 997,858 | ||||
EQUITY | ||||||||
Shareholders’ equity | ||||||||
Share capital (Note 10) | 219,211 | 202,844 | ||||||
Paid-in capital | (3,899 | ) | (6,082 | ) | ||||
Retained earnings (deficit) | (10,956 | ) | (97,235 | ) | ||||
Accumulated other comprehensive income (loss) | 31,712 | 23,695 | ||||||
Total shareholders’ equity | 236,068 | 123,222 | ||||||
Noncontrolling interest (deficit) (Note 17) | (22,505 | ) | (37,249 | ) | ||||
Total equity | 213,563 | 85,973 | ||||||
Total liabilities and equity | € | 1,216,075 | € | 1,083,831 | ||||
Commitments and contingencies (Note 16) | ||||||||
Subsequent events (Note 18) |
December 31, | ||||||||
2011 | 2010 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents (Note 2) | € | 105,072 | € | 99,022 | ||||
Marketable securities (Note 3) | 12,216 | — | ||||||
Receivables (Note 4) | 120,487 | 121,709 | ||||||
Inventories (Note 5) | 120,539 | 102,219 | ||||||
Prepaid expenses and other | 8,162 | 11,360 | ||||||
Deferred income tax (Note 10) | 6,750 | 22,570 | ||||||
|
|
|
| |||||
Total current assets | 373,226 | 356,880 | ||||||
|
|
|
| |||||
Long-term assets | ||||||||
Property, plant and equipment (Note 6) | 820,974 | 846,767 | ||||||
Deferred note issuance and other | 10,763 | 11,082 | ||||||
Deferred income tax (Note 10) | 12,287 | — | ||||||
Note receivable | — | 1,346 | ||||||
|
|
|
| |||||
844,024 | 859,195 | |||||||
|
|
|
| |||||
Total assets | € | 1,217,250 | € | 1,216,075 | ||||
|
|
|
| |||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accounts payable and other (Note 7) | € | 99,640 | € | 84,873 | ||||
Pension and other post-retirement benefit obligations (Note 9) | 756 | 728 | ||||||
Debt (Note 8) | 25,671 | 39,596 | ||||||
|
|
|
| |||||
Total current liabilities | 126,067 | 125,197 | ||||||
|
|
|
| |||||
Long-term liabilities | ||||||||
Debt (Note 8) | 708,415 | 782,328 | ||||||
Unrealized interest rate derivative losses (Note 15) | 52,391 | 50,973 | ||||||
Pension and other post-retirement benefit obligations (Note 9) | 31,197 | 24,236 | ||||||
Capital leases and other (Note 16) | 13,053 | 12,010 | ||||||
Deferred income tax (Note 10) | 2,585 | 7,768 | ||||||
|
|
|
| |||||
807,641 | 877,315 | |||||||
|
|
|
| |||||
Total liabilities | € | 933,708 | € | 1,002,512 | ||||
|
|
|
| |||||
EQUITY | ||||||||
Shareholders’ equity | ||||||||
Share capital (Note 11) | 247,642 | 219,211 | ||||||
Paid-in capital | (4,857 | ) | (3,899 | ) | ||||
Retained earnings (deficit) | 37,985 | (10,956 | ) | |||||
Accumulated other comprehensive income | 21,346 | 31,712 | ||||||
|
|
|
| |||||
Total shareholders’ equity | 302,116 | 236,068 | ||||||
|
|
|
| |||||
Noncontrolling deficit | (18,574 | ) | (22,505 | ) | ||||
|
|
|
| |||||
Total equity | 283,542 | 213,563 | ||||||
|
|
|
| |||||
Total liabilities and equity | € | 1,217,250 | € | 1,216,075 | ||||
|
|
|
|
Commitments and contingencies (Note 17)
Subsequent event (Note 18)
The accompanying notes are an integral part of these financial statements.
74
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of Euros, except per share data)
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues | ||||||||||||
Pulp | € | 856,311 | € | 577,298 | € | 689,320 | ||||||
Energy | 44,225 | 42,501 | 30,971 | |||||||||
900,536 | 619,799 | 720,291 | ||||||||||
Costs and expenses | ||||||||||||
Operating costs | 643,529 | 551,781 | 626,933 | |||||||||
Operating depreciation and amortization | 55,932 | 53,919 | 55,484 | |||||||||
201,075 | 14,099 | 37,874 | ||||||||||
Selling, general and administrative expenses | 33,442 | 27,414 | 30,158 | |||||||||
Purchase (sale) of emission allowances | (110 | ) | (516 | ) | (5,613 | ) | ||||||
Operating income (loss) | 167,743 | (12,799 | ) | 13,329 | ||||||||
Other income (expense) | ||||||||||||
Interest expense | (67,621 | ) | (64,770 | ) | (65,756 | ) | ||||||
Investment income (loss) | 468 | (1,804 | ) | (1,174 | ) | |||||||
Foreign exchange gain (loss) on debt | (6,126 | ) | 2,692 | (4,234 | ) | |||||||
Gain (loss) on extinguishment of debt (Note 7) | (7,494 | ) | 4,447 | — | ||||||||
Gain (loss) on derivative instruments (Note 14) | 1,899 | (5,760 | ) | (25,228 | ) | |||||||
Total other income (expense) | (78,874 | ) | (65,195 | ) | (96,392 | ) | ||||||
Income (loss) before income taxes | 88,869 | (77,994 | ) | (83,063 | ) | |||||||
Income tax benefit (provision) | ||||||||||||
— current | (3,881 | ) | (134 | ) | (501 | ) | ||||||
— deferred (Note 9) | 9,760 | 6,003 | (1,976 | ) | ||||||||
Net income (loss) | 94,748 | (72,125 | ) | (85,540 | ) | |||||||
Less: net loss (income) attributable to noncontrolling interest | (8,469 | ) | 9,936 | 13,075 | ||||||||
Net income (loss) attributable to common shareholders | € | 86,279 | € | (62,189 | ) | € | (72,465 | ) | ||||
Net income (loss) per share attributable to common shareholders (Note 12) | ||||||||||||
Basic | € | 2.24 | € | (1.71 | ) | € | (2.00 | ) | ||||
Diluted | € | 1.56 | € | (1.71 | ) | € | (2.00 | ) | ||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Revenues | ||||||||||||
Pulp | € | 831,396 | € | 856,311 | € | 577,298 | ||||||
Energy | 57,972 | 44,225 | 42,501 | |||||||||
|
|
|
|
|
| |||||||
889,368 | 900,536 | 619,799 | ||||||||||
Costs and expenses | ||||||||||||
Operating costs | 683,718 | 643,529 | 551,781 | |||||||||
Operating depreciation and amortization | 55,760 | 55,932 | 53,919 | |||||||||
|
|
|
|
|
| |||||||
149,890 | 201,075 | 14,099 | ||||||||||
Selling, general and administrative expenses | 38,771 | 33,332 | 26,898 | |||||||||
|
|
|
|
|
| |||||||
Operating income (loss) | 111,119 | 167,743 | (12,799 | ) | ||||||||
|
|
|
|
|
| |||||||
Other income (expense) | ||||||||||||
Interest expense | (58,995 | ) | (67,621 | ) | (64,770 | ) | ||||||
Investment income (loss) | 1,501 | 468 | (1,804 | ) | ||||||||
Foreign exchange gain (loss) on debt | 1,175 | (6,126 | ) | 2,692 | ||||||||
Gain (loss) on extinguishment of debt (Note 8) | (71 | ) | (7,494 | ) | 4,447 | |||||||
Gain (loss) on derivative instruments (Note 15) | (1,418 | ) | 1,899 | (5,760 | ) | |||||||
|
|
|
|
|
| |||||||
Total other income (expense) | (57,808 | ) | (78,874 | ) | (65,195 | ) | ||||||
|
|
|
|
|
| |||||||
Income (loss) before income taxes | 53,311 | 88,869 | (77,994 | ) | ||||||||
Income tax benefit (provision) (Note 10) | ||||||||||||
Current | (1,682 | ) | (3,881 | ) | (134 | ) | ||||||
Deferred | 2,377 | 9,760 | 6,003 | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) | 54,006 | 94,748 | (72,125 | ) | ||||||||
Less: net loss (income) attributable to noncontrolling interest | (3,931 | ) | (8,469 | ) | 9,936 | |||||||
|
|
|
|
|
| |||||||
Net income (loss) attributable to common shareholders | € | 50,075 | € | 86,279 | € | (62,189 | ) | |||||
|
|
|
|
|
| |||||||
Net income (loss) per share attributable to common shareholders (Note 13) | ||||||||||||
Basic | € | 1.00 | € | 2.24 | € | (1.71 | ) | |||||
|
|
|
|
|
| |||||||
Diluted | € | 0.89 | € | 1.56 | € | (1.71 | ) | |||||
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
75
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands of Euros)
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net income (loss) | € | 94,748 | € | (72,125 | ) | € | (85,540 | ) | ||||
Other comprehensive income (loss), net of taxes | ||||||||||||
Foreign currency translation adjustment | 11,333 | 28,316 | (41,876 | ) | ||||||||
Pension income (expense) (Note 8) | (3,314 | ) | (3,128 | ) | 4,079 | |||||||
Unrealized gains (losses) on securities arising during the year | (2 | ) | 379 | (340 | ) | |||||||
Other comprehensive income (loss), net of taxes | 8,017 | 25,567 | (38,137 | ) | ||||||||
Total comprehensive income (loss) | 102,765 | (46,558 | ) | (123,677 | ) | |||||||
Comprehensive (income) loss attributable to noncontrolling interest | (8,469 | ) | 9,936 | 13,075 | ||||||||
Comprehensive income (loss) attributable to common shareholders | € | 94,296 | € | (36,622 | ) | € | (110,602 | ) | ||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net income (loss) | € | 54,006 | € | 94,748 | € | (72,125 | ) | |||||
Other comprehensive income (loss), net of taxes | ||||||||||||
Foreign currency translation adjustment, net of tax of €683 (2010—nil, 2009—nil) | (2,305 | ) | 11,333 | 28,316 | ||||||||
Pension income (expense) (Note 9) | (8,049 | ) | (3,314 | ) | (3,128 | ) | ||||||
Unrealized gains (losses) on securities arising during the year | (12 | ) | (2 | ) | 379 | |||||||
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Other comprehensive income (loss), net of taxes | (10,366 | ) | 8,017 | 25,567 | ||||||||
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Total comprehensive income (loss) | 43,640 | 102,765 | (46,558 | ) | ||||||||
Comprehensive loss (income) attributable to noncontrolling interest | (3,931 | ) | (8,469 | ) | 9,936 | |||||||
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Comprehensive income (loss) attributable to common shareholders | € | 39,709 | € | 94,296 | € | (36,622 | ) | |||||
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The accompanying notes are an integral part of these consolidated financial statements.
76
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands of Euros)
Accumulated Other | ||||||||||||||||||||||||||||||||||||||||
Common Shares | Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
Amount | Foreign | Defined | Unrealized | |||||||||||||||||||||||||||||||||||||
Paid in | Retained | Currency | Benefit | Gains | ||||||||||||||||||||||||||||||||||||
Number | Par | Excess of | Paid-in | Earnings | Translation | Pension | (Losses) on | Shareholders’ | ||||||||||||||||||||||||||||||||
of Shares | Value | Par Value | Capital | (Deficit) | Adjustments | Plans | Securities | Total | Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2007 | 36,285,027 | € | 27,576 | € | 175,268 | € | 134 | € | 37,419 | € | 41,099 | € | (4,929 | ) | € | 95 | € | 36,265 | € | 276,662 | ||||||||||||||||||||
Shares issued on grants of restricted stock | 21,000 | — | — | 61 | — | — | — | — | — | 61 | ||||||||||||||||||||||||||||||
Shares issued on grants of performance stock | 116,460 | — | — | 29 | — | — | — | — | — | 29 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 75 | — | — | — | — | — | 75 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | (72,465 | ) | — | — | — | — | (72,465 | ) | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (41,876 | ) | 4,079 | (340 | ) | (38,137 | ) | (38,137 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2008 | 36,422,487 | € | 27,576 | € | 175,268 | € | 299 | € | (35,046 | ) | € | (777 | ) | € | (850 | ) | € | (245 | ) | € | (1,872 | ) | € | 166,225 | ||||||||||||||||
Capital contribution to acquire additional 4.32% of Stendal Mill | — | — | — | (6,809 | ) | — | — | — | — | — | (6,809 | ) | ||||||||||||||||||||||||||||
Shares issued on grants of restricted stock | 21,000 | — | — | 52 | — | — | — | — | — | 52 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 376 | — | — | — | — | — | 376 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | (62,189 | ) | — | — | — | — | (62,189 | ) | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 28,316 | (3,128 | ) | 379 | 25,567 | 25,567 | |||||||||||||||||||||||||||||
Balance at December 31, 2009 | 36,443,487 | € | 27,576 | € | 175,268 | € | (6,082 | ) | € | (97,235 | ) | € | 27,539 | € | (3,978 | ) | € | 134 | € | 23,695 | € | 123,222 | ||||||||||||||||||
Shares issued on exercise of stock options | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Shares issued on grants of restricted stock | 56,000 | — | — | 153 | — | — | — | — | — | 153 | ||||||||||||||||||||||||||||||
Shares issued on conversion of convertible note | 6,500,171 | 4,961 | 11,406 | — | — | — | — | — | — | 16,367 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 2,030 | — | — | — | — | — | 2,030 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | 86,279 | — | — | — | — | 86,279 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 11,333 | (3,314 | ) | (2 | ) | 8,017 | 8,017 | ||||||||||||||||||||||||||||
Balance at December 31, 2010 | 42,999,658 | € | 32,537 | € | 186,674 | € | (3,899 | ) | € | (10,956 | ) | € | 38,872 | € | (7,292 | ) | € | 132 | € | 31,712 | € | 236,068 | ||||||||||||||||||
Common Shares | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||||||||||||||||||
Number of Shares | Par Value | Amount Paid in Excess of Par Value | Paid-in Capital | Retained Earnings (Deficit) | Foreign Currency Translation Adjustments | Defined Benefit Pension Plans | Unrealized Gains (Losses) on Securities | Total | Shareholders’ Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2008 | 36,422,487 | € | 27,576 | € | 175,268 | € | 299 | € | (35,046 | ) | € | (777 | ) | € | (850 | ) | € | (245 | ) | € | (1,872 | ) | € | 166,225 | ||||||||||||||||
Capital contribution to acquire additional 4.32% of Stendal Mill | — | — | — | (6,809 | ) | — | — | — | — | — | (6,809 | ) | ||||||||||||||||||||||||||||
Shares issued on grants of restricted shares | 21,000 | — | — | 52 | — | — | — | — | — | 52 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 376 | — | — | — | — | — | 376 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | (62,189 | ) | — | — | — | — | (62,189 | ) | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 28,316 | (3,128 | ) | 379 | 25,567 | 25,567 | |||||||||||||||||||||||||||||
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Balance at December 31, 2009 | 36,443,487 | € | 27,576 | € | 175,268 | € | (6,082 | ) | € | (97,235 | ) | € | 27,539 | € | (3,978 | ) | € | 134 | € | 23,695 | € | 123,222 | ||||||||||||||||||
Shares issued on grants of restricted shares | 56,000 | — | — | 153 | — | — | — | — | — | 153 | ||||||||||||||||||||||||||||||
Shares issued on conversion of convertible notes | 6,500,171 | 4,961 | 11,406 | — | — | — | — | — | — | 16,367 | ||||||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 2,030 | — | — | — | — | — | 2,030 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | 86,279 | — | — | — | — | 86,279 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 11,333 | (3,314 | ) | (2 | ) | 8,017 | 8,017 | ||||||||||||||||||||||||||||
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Balance at December 31, 2010 | 42,999,658 | € | 32,537 | € | 186,674 | € | (3,899 | ) | € | (10,956 | ) | € | 38,872 | € | (7,292 | ) | € | 132 | € | 31,712 | € | 236,068 | ||||||||||||||||||
Shares issued on grants of restricted shares | 238,000 | 74 | 296 | (370 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Shares issued on grants of performance shares | 358,268 | 243 | 3,585 | (3,828 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Shares issued on conversion of convertible notes | 13,446,679 | 9,499 | 21,076 | — | — | — | — | — | — | 30,575 | ||||||||||||||||||||||||||||||
Treasury shares retired | (1,263,401 | ) | (971 | ) | (5,371 | ) | — | (1,134 | ) | — | — | — | — | (7,476 | ) | |||||||||||||||||||||||||
Stock compensation expense | — | — | — | 3,240 | — | — | — | — | — | 3,240 | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | 50,075 | — | — | — | — | 50,075 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (2,305 | ) | (8,049 | ) | (12 | ) | (10,366 | ) | (10,366 | ) | |||||||||||||||||||||||||
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Balance at December 31, 2011 | 55,779,204 | € | 41,382 | € | 206,260 | € | (4,857 | ) | € | 37,985 | € | 36,567 | € | (15,341 | ) | € | 120 | € | 21,346 | € | 302,116 | |||||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
77
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) attributable to common shareholders | € | 86,279 | € | (62,189 | ) | € | (72,465 | ) | ||||
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss (gain) on derivative instruments | (1,899 | ) | 5,760 | 25,228 | ||||||||
Foreign exchange (gain) loss on debt | 6,126 | (2,692 | ) | 4,234 | ||||||||
Loss (gain) on extinguishment of debt | 7,494 | (4,447 | ) | — | ||||||||
Depreciation and amortization | 56,231 | 54,170 | 55,762 | |||||||||
Accretion expense (income) | 2,492 | 181 | — | |||||||||
Noncontrolling interest | 8,469 | (9,936 | ) | (13,075 | ) | |||||||
Deferred income taxes | (9,760 | ) | (6,003 | ) | 1,976 | |||||||
Stock compensation expense | 2,394 | 455 | 264 | |||||||||
Pension and other post-retirement expense, net of funding | 418 | 282 | (758 | ) | ||||||||
Inventory provisions | — | — | 11,272 | |||||||||
Other | 5,190 | 2,482 | 3,025 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | (40,038 | ) | 31,907 | (14,811 | ) | |||||||
Inventories | (24,462 | ) | 32,158 | (13,331 | ) | |||||||
Accounts payable and accrued expenses | (3,089 | ) | (2,950 | ) | (1,091 | ) | ||||||
Other | (4,566 | ) | (1,859 | ) | 1,904 | |||||||
Net cash from (used in) operating activities | 91,279 | 37,319 | (11,866 | ) | ||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (38,300 | ) | (28,828 | ) | (25,704 | ) | ||||||
Proceeds on sale of property, plant and equipment | 1,138 | 436 | 2,000 | |||||||||
Cash, restricted | — | 13,000 | 20,000 | |||||||||
Note receivable | 1,113 | 152 | 5,708 | |||||||||
Net cash from (used in) investing activities | (36,049 | ) | (15,240 | ) | 2,004 | |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (234,598 | ) | (26,499 | ) | (34,023 | ) | ||||||
Repayment of capital lease obligations | (2,920 | ) | (3,178 | ) | (3,312 | ) | ||||||
Proceeds from borrowings of notes payable and debt | 222,193 | 13,511 | — | |||||||||
Proceeds from (repayment of) credit facilities, net | (2,660 | ) | (4,272 | ) | 5,837 | |||||||
Proceeds from government grants | 17,952 | 9,058 | 266 | |||||||||
Payment of deferred note issuance costs | (6,095 | ) | (1,969 | ) | — | |||||||
Net cash from (used in) financing activities | (6,128 | ) | (13,349 | ) | (31,232 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,371 | ) | 109 | (1,302 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 47,731 | 8,839 | (42,396 | ) | ||||||||
Cash and cash equivalents, beginning of period | 51,291 | 42,452 | 84,848 | |||||||||
Cash and cash equivalents, end of period | € | 99,022 | € | 51,291 | € | 42,452 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid (received) during the period for | ||||||||||||
Interest | € | 65,167 | € | 62,022 | € | 60,652 | ||||||
Income taxes | 461 | 377 | 1,100 | |||||||||
Supplemental schedule of non-cash investing and financing activities | ||||||||||||
Acquisition of production and other equipment under capital lease obligations | € | 2,087 | € | 625 | € | 5,318 | ||||||
Decrease (increase) in accounts payable relating to investing activities | (8,562 | ) | (1,471 | ) | 2,627 |
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) attributable to common shareholders | € | 50,075 | € | 86,279 | € | (62,189 | ) | |||||
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss (gain) on derivative instruments | 1,418 | (1,899 | ) | 5,760 | ||||||||
Foreign exchange loss (gain) on debt | (1,175 | ) | 6,126 | (2,692 | ) | |||||||
Loss (gain) on extinguishment of debt | 71 | 7,494 | (4,447 | ) | ||||||||
Depreciation and amortization | 56,005 | 56,231 | 54,170 | |||||||||
Accretion expense | 597 | 2,492 | 181 | |||||||||
Noncontrolling interest | 3,931 | 8,469 | (9,936 | ) | ||||||||
Deferred income taxes | (2,377 | ) | (9,760 | ) | (6,003 | ) | ||||||
Stock compensation expense | 3,310 | 2,394 | 455 | |||||||||
Pension and other post-retirement expense, net of funding | (269 | ) | 418 | 282 | ||||||||
Other | 1,308 | 5,190 | 2,482 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | (1,604 | ) | (40,038 | ) | 31,907 | |||||||
Inventories | (17,713 | ) | (24,462 | ) | 32,158 | |||||||
Accounts payable and accrued expenses | 14,252 | (3,089 | ) | (2,950 | ) | |||||||
Other | 3,226 | (4,566 | ) | (1,859 | ) | |||||||
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Net cash from operating activities | 111,055 | 91,279 | 37,319 | |||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (37,809 | ) | (38,300 | ) | (28,828 | ) | ||||||
Proceeds on sale of property, plant and equipment | 813 | 1,138 | 436 | |||||||||
Cash, restricted | — | — | 13,000 | |||||||||
Note receivable | 2,865 | 1,113 | 152 | |||||||||
Purchase of marketable securities | (12,187 | ) | — | — | ||||||||
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Net cash used in investing activities | (46,318 | ) | (36,049 | ) | (15,240 | ) | ||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (49,193 | ) | (234,582 | ) | (26,499 | ) | ||||||
Repayment of capital lease obligations | (2,942 | ) | (2,920 | ) | (3,178 | ) | ||||||
Proceeds from borrowings of notes payable and debt | — | 222,177 | 13,511 | |||||||||
Repayment of credit facilities, net | (14,652 | ) | (2,660 | ) | (4,272 | ) | ||||||
Proceeds from government grants | 14,199 | 17,952 | 9,058 | |||||||||
Payment of note issuance costs | — | (6,095 | ) | (1,969 | ) | |||||||
Purchase of treasury shares | (7,476 | ) | — | — | ||||||||
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Net cash used in financing activities | (60,064 | ) | (6,128 | ) | (13,349 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 1,377 | (1,371 | ) | 109 | ||||||||
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Net increase in cash and cash equivalents | 6,050 | 47,731 | 8,839 | |||||||||
Cash and cash equivalents, beginning of year | 99,022 | 51,291 | 42,452 | |||||||||
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Cash and cash equivalents, end of year | € | 105,072 | € | 99,022 | € | 51,291 | ||||||
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Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the year for | ||||||||||||
Interest | € | 57,725 | € | 65,167 | € | 62,022 | ||||||
Income taxes | 3,197 | 461 | 377 | |||||||||
Supplemental schedule of non-cash investing and financing activities | ||||||||||||
Acquisition of production and other equipment under capital lease obligations | € | 2,782 | € | 2,087 | € | 625 | ||||||
Decrease (increase) in accounts payable relating to investing activities | 324 | 352 | (1,471 | ) | ||||||||
Increase (decrease) in accounts receivable and other current assets relating to investing activities | 7,903 | (8,914 | ) | — |
The accompanying notes are an integral part of these financial statements.
78
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies Background
|
Mercer Inc. operates three pulp manufacturing facilities, one in Canada and two in Germany, and is one of the largest producers of market northern bleached softwood kraft or “NBSK”,(“NBSK”) pulp in the world.
In these consolidated financial statements, unless otherwise indicated, all amounts are expressed in Euros (“€”). The term “U.S. dollars” and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.
Basis of Presentation
These consolidated financial statements contained herein include the accounts of the Company and its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). All significant inter-company balances and transactions have been eliminated upon consolidation.
Use of Estimates
Preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgementjudgment is required in determining the accounting for, among other things, the accounting for doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
Cash and Cash Equivalents
Cash and cash equivalents include cash held in bank accounts and highly liquid money market investments with original maturities of three months or less.
Investments
Investments in debt securities consisting of marketable securities, are classified as current investments and are reported at fair values with realized gains or losses and unrealized holding gains or losses included in the results of operations.
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
|
Inventories of pulp, logsraw materials, finished goods and wood chipswork in progress are valued at the lower of cost, using the weighted-average cost method, or net realizable value. Other materials and supplies are valued at the lower of cost and replacement cost. Cost includes labor, materials and production overhead and is determined by using the weighted average cost method. InventoriesRaw materials inventories include both roundwood (logs) and wood chips. These inventories are located both at the pulp mills and at various offsite locations. In accordance with industry practice, physical inventory counts utilize standardized techniques to estimate quantities of roundwood and wood chip inventory volumes. These techniques historically have provided reasonable estimates of such inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation of buildings and production equipment is based on the estimated useful lives of the assets and is computed using the straight-line method. Buildings are depreciated over 10 to 50 years and production and other equipment primarily over 25 years.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset.
The costs of major rebuilds, replacements and those expenditures that substantially increase the useful lives of existing property, plant, and equipment are capitalized, as well as interest costs associated with major capital projects until ready for their intended use. The cost of repairs and maintenance as well as planned shutdown maintenance performed on manufacturing facilities, composed of labor, materials and other incremental costs, is charged to operations as incurred.
Leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the present value of the minimum lease payments. Capital leases are depreciated over the lease term. Operating lease payments are recognized as an expense in the Consolidated Statement of Operations on a straight-line basis over the lease term.
The Company provides for asset retirement obligations when there areis a legislated or contractual basesbasis for those obligations. Obligations are recorded as a liability at fair value, with a corresponding increase to property, plant, and equipment, and are amortized over the remaining useful life of the related assets. The liability is accreted using a risk free interest rate.
Asset Retirement and Environment. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout its older facilities. 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 estimate the fair value of its asbestos removal and disposal obligation.
The Company records investment grants from federal and state governments when theythe conditions of their receipt are complied with and there is reasonable assurance that the grants will be received. Grants related to assets are government grants whose primary condition is that the company qualifying for them should purchase, construct or otherwise acquire long-term assets. Secondary conditions may also be attached, including
80
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Grants related to income are government grants which are either unconditional, related to reduced environmental emissions or related to the Company’s normal business operations, and are reported as a reduction of related expenses in the Consolidated Statement of Operations when received.
The Company is required to pay certain fees based on water consumption levels at its German mills. Unpaid fees can be reduced by wastewater grants upon the mills’ demonstration of reduced environmental emissions. The fees are expensed as incurred and the grants are recognized once the German regulators have evaluated and accepted the measurement of the wastewater emission reduction. There may be a significant period of time between recognition of the wastewater expense and recognition of the wastewater grant.
To the extent that government grants have been received and not applied, these grants are recorded in cash with a corresponding adjustment to the “Accounts payable and accrued expenses”other” in the Consolidated Balance Sheet due to the short-term nature of the related payments.
Deferred Note Issuance Costs
Note issuance costs are deferred and amortized as a component of interest expense“Interest expense” in the Consolidated Statement of Operations over the term of the related debt instrument.
Pensions
The Company maintains a defined benefit pension plan for its salaried employees at its Celgar mill which is funded and non-contributory. The cost of the benefits earned by the salaried employees is determined using the projected benefit method pro ratedprorated on services. The pension expense reflects the current service cost, the interest on the unfunded liability and the amortization over the estimated average remaining service life of the employees of (i) the unfunded liability, and (ii) experience gains or losses.
In accordance with the guidance as outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 715,Compensation-Retirement BenefitsTopic (“ASC 715 (“ASC715-30” and “ASC715-60”715”), the Company recognizes the net funded status of the plan.
Effective December31,2008, the defined benefit pension plan was closed to new members and the defined benefit service accrual ceased. Members began to accrue benefits under a new defined contribution plan effective January1,2009. The contributions to the new plan will beare charged against earnings in the Consolidated Statement of Operations.
In addition, hourly-paid employees at the Celgar mill are covered by a multi-employer defined contributionmultiemployer pension plan for which contributions are charged against earnings in the Consolidated Statement of Operations.
Foreign Operations and Currency Translation
The Company translates foreign assets and liabilities of its subsidiaries, other than those denominated in Euros, at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the year. Transaction gains and losses related to net assets primarily located in Canada are recognized as unrealized foreign currency translation adjustments within “Accumulated other comprehensive income (loss)
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
income” in shareholders’Shareholders’ equity, until all of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax when the Company expects earnings of the foreign subsidiary to reinvestbe indefinitely reinvested. The income tax effect on currency translation adjustments related to foreign subsidiaries that are not considered indefinitely reinvested is recorded as a component of deferred taxes in the amounts indefinitely in operations.Consolidated Balance Sheet with an offset to other comprehensive income. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in “Costs and expenses” in the Consolidated Statement of Operations.
Revenue and Related Cost Recognition
The Company recognizes revenue from product, sales, transportation and other sales when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, title of ownership and risk of loss have passed to the customer and collectability is reasonably assured. Sales are reported net of discounts and allowances.
81
The Company increased its focus on the production and sale of surplus electricity. Accordingly, management no longer considered this activity to be a by-product and, commencing in 2008, the Company began reportingreports revenue from sales of surplus electricity as “Energy revenue” in the Consolidated Statement of Operations. Energy revenues are recognized as the customers are invoiced at agreed upon rates and when collection is reasonably assured. These revenues include an estimate of the value of electricity consumed by customers in the year but billed subsequent to year-end. Customer bills are based on meter readings that indicate electricity consumption. This activity does not meet the tests to be considered an operating segment, as defined in theFASB’s Accounting Standards Codification No. 280,Segment Reporting Topic (“ASC 280 (“ASC280-10”280”).
Environmental Conservation
Liabilities for environmental conservation are recorded when it is probable that obligations have been incurred and their fair value can be reasonably estimated. Any potential recoveries of such liabilities are recorded when there is an agreement with the reimbursing entity and recovery is assessed as likely to occur.
Stock-Based Compensation
Under theFASB’s Accounting Standards Codification No. 718,Compensation-Stock CompensationTopic ASC 718 (“ASC 718”), the Company recognizes stock-based compensation expense over an award’s vesting period based on the award’s fair value. Stock based compensation expense has been recordedvalue in “Selling, general, and administrative expenses” inwithin the Consolidated Statement of Operations.
The fair value of performance stockshare awards is re-measured at each balance sheet date. The cumulative effect of the change in fair value is recognized in the period of the change as an adjustment to compensation cost. The Company estimates forfeitures of performance stock awardsshares based on management’s expectations and recognizes compensation cost only for those awards expected to vest. Estimated forfeitures are adjusted to actual experience as needed.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
The fair value of restricted stockshare awards areis determined by multiplying the market price of a share of Mercer Inc. common shares on the grant date by the number of units.
Income Taxes
Income taxes are reported under the guidance of theFASB’s Accounting Standards Codification No. 740,Income TaxesTopic (“ASC 740 (“ASC740-10”740”) and accordingly, deferred income taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided if, after considering both positive and negative available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.
Deferred income taxes are determined separately for each tax-paying component of the Company. For each tax-paying component, all current deferred tax liabilities and assets shall be offset and presented as a single net amount and all noncurrent deferred tax liabilities and assets shall be offset and presented as a single net amount.
Derivative Financial Instruments
The Company occasionally enters into derivative financial instruments, including foreign currency forward contracts, electricity forward contracts, and interest rate swaps to limit exposures to changes in foreign currency
82
Net Income (Loss) Per Share
Basic net income (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted income (loss) per share is calculated to give effect to all potentially dilutive common shares outstanding (computed under basic EPS) by applying the “Treasury Stock” and “If Converted” methods. Outstanding stock options, restricted stock, awards such as restricted stock awards withshares, performance conditions (known as “performance stock”),shares, and convertible notes represent the only potentially dilutive effects on the Company’s weighted average shares. See
Note 12-NetReclassifications Income (Loss) Per Share.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
New Accounting Standards
In April 2010, theSeptember 2011, FASB issued guidance within Accounting Standards Update No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plan. (“ASU”ASU 2011-09”)2010-13,Compensation — Stock Compensation (ASC 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this update should be applied by recording a cumulative-effect adjustment, which is intended to enhance the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
employers participating in multiemployer pension plans to improve transparency and increase awareness of the commitments and risks involved with participation in multiemployer plans. The new accounting guidance requires employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans. The new standard is effective for fiscal years ending after December 15, 2011. The Company participates in a multiemployer plan for its hourly-paid employees at the Celgar mill. The additional disclosure required by this standard is included in Note 9 – Pension and Other Post-Retirement Benefit Obligations.
In May 2011, FASB issued Accounting Standards Update 2011-04,Fair Value Measurements (“ASU 2011-04”), which expands the existing disclosure requirements for fair value measurements (particularly for Level 3 inputs) defined under FASB’s Accounting Standards Codification No. 820,Fair Value Measurement(“ASC 820”), and makes other amendments. Many of the amendments to ASC 820 are being made to eliminate wording differences between GAAP and International Financial Reporting Standards and are not intended to result in a change in the application of the requirements of ASC 820. However, some of the amendments clarify the application of existing fair value measurement requirements and others change certain requirements for measuring fair value and could change how the fair value measurement guidance in ASC 820 is applied. The measurement and disclosure requirements of ASU 2011-04 are effective for reporting periods beginning after December
In June 2011, FASB issued Accounting Standards Update 2011-05,Presentation of Comprehensive Income (“ASU 2011-05”), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance amends FASB’s Accounting Standards Codification No. 220,Comprehensive Income(“ASC 220”), and gives reporting entities the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. Under the two-statement approach, which the Company currently uses, the first statement includes components of net income, and the second statement includes components of other comprehensive income. ASU 2011-05 does not change the items that must be reported in other comprehensive income. This new guidance is effective for reporting periods beginning after December 15, 2011 and is to be applied retrospectively. The Company does not expect the adoption of this guidance to have an impact on the consolidated financial statements or related note disclosures.
Note 2. | Cash |
December 31, | ||||||||
2010 | 2009 | |||||||
Cash and cash equivalents | € | 99,022 | € | 51,291 | ||||
December 31, | ||||||||
2011 | 2010 | |||||||
Cash and cash equivalents | € | 105,072 | € | 99,022 | ||||
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Cash and cash equivalents includes cash allocated for debt service reserves as required under a debt agreements (Note 7(a))agreement (see Note8(a)—Debt).
December 31, | ||||||||
2010 | 2009 | |||||||
Sale of pulp (net of allowance of €1,005 and €952, respectively) | € | 105,950 | € | 64,864 | ||||
Value added tax | 3,669 | 3,001 | ||||||
Other | 12,090 | 3,278 | ||||||
€ | 121,709 | € | 71,143 | |||||
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 3. Marketable Securities
The Company’s marketable securities at December 31, 2011 and 2010 are summarized as follows:
December 31, 2011 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Current | ||||||||||||||||
0.5% German federal government bonds due June 2012 | € | 2,008 | € | 3 | € | — | € | 2,011 | ||||||||
0.75% German federal government bonds due September 2012 | 7,036 | 19 | — | 7,055 | ||||||||||||
5.00% German federal government bonds due July 2012 | 3,143 | 7 | — | 3,150 | ||||||||||||
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€ | 12,187 | € | 29 | € | — | € | 12,216 | |||||||||
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Long-term | ||||||||||||||||
Equity securities | € | 65 | € | 132 | € | (41 | ) | € | 156 | |||||||
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December 31, 2010 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Long-term | ||||||||||||||||
Equity securities | € | 63 | € | 213 | € | (1 | ) | € | 275 | |||||||
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In order to maintain the Company’s liquidity requirements and manage risk, the Company invests in low risk and highly liquid marketable debt securities that are classified as available-for-sale investments and accordingly are carried at fair value. As at December31,2011, the Company had invested in German federal government bonds. The bonds are classified as current assets as they have contractual maturities of less than one year.
The Company has also invested nominal amounts in equity securities. The equity securities are classified as available-for-sale investments and accordingly are carried at fair value.
The Company recognizes any gross unrealized gains or losses through the “Accumulated other comprehensive income” line, and records investments in long-term marketable securities in the Consolidated Balance Sheet within the “Deferred note issuance and other” line.
The Company reviews for other-than-temporary losses on a regular basis and has concluded that the gross unrealized losses indicated above are temporary in nature.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 4. Receivables
December 31, | ||||||||
2011 | 2010 | |||||||
Sale of pulp and energy (net of allowance of €105 and €1,005, respectively) | € | 108,094 | € | 108,567 | ||||
Value added tax | 7,411 | 3,669 | ||||||
Other | 4,982 | 9,473 | ||||||
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| |||||
€ | 120,487 | € | 121,709 | |||||
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The Company reviews the collectability of receivables on a periodic basis. The Company maintains an allowance for doubtful accounts at an amount estimated to cover the potential losses on certain uninsured receivables. Any amounts that are determined to be uncollectible and uninsured are offset against the allowance. The allowance is based on the Company’s evaluation of numerous factors, including the payment history and financial position of the debtors. TheFor certain customers the Company does not generally require collateralreceives a letter of credit prior to shipping its product.
As at December31,2011, pursuant to a contribution agreement under the Pulp and Paper Green Transformation Program (“GTP”), the Company recorded €634 (C$0.9 million) within other receivables in relation to the Oxygen Delignification Project and €1,858 (C$2.4 million) for any of its receivables.
Other than the above mentioned item,items, other receivables relates to non-trade receivables that are individually not material.
December 31, | ||||||||
2010 | 2009 | |||||||
Raw materials | € | 47,179 | € | 24,888 | ||||
Finished goods | 27,127 | 24,198 | ||||||
Work in process and other | 27,913 | 23,543 | ||||||
€ | 102,219 | € | 72,629 | |||||
84
December 31, | ||||||||
2011 | 2010 | |||||||
Raw materials | € | 48,063 | € | 47,179 | ||||
Finished goods | 41,392 | 27,127 | ||||||
Spare parts, work in process and other | 31,084 | 27,913 | ||||||
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€ | 120,539 | € | 102,219 | |||||
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December 31, | ||||||||
2010 | 2009 | |||||||
Land | € | 25,137 | € | 24,921 | ||||
Buildings | 131,546 | 126,570 | ||||||
Production equipment and other | 1,130,294 | 1,098,380 | ||||||
1,286,977 | 1,249,871 | |||||||
Less: Accumulated depreciation | (440,210 | ) | (381,313 | ) | ||||
€ | 846,767 | € | 868,558 | |||||
Note 6. Property, Plant and Equipment
December 31, | ||||||||
2011 | 2010 | |||||||
Land | € | 25,156 | € | 25,137 | ||||
Buildings | 133,316 | 131,546 | ||||||
Production equipment and other | 1,125,953 | 1,130,294 | ||||||
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1,284,425 | 1,286,977 | |||||||
Less: accumulated depreciation | (463,451 | ) | (440,210 | ) | ||||
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€ | 820,974 | € | 846,767 | |||||
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MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 6. Property, Plant and Equipment (continued)
As at December 31, 20102011 property, plant and equipment was net of €297,992€291,655 of unamortized government investment grants (2009 — €283,730)(2010 – €297,992).
As at December31, 2010,2011, included in production equipment and other is equipment under capital leases which had gross amounts of €17,468 (2009 — €17,465)€17,036 (2010 – €17,468), and accumulated depreciation of €9,585 (2009 — €9,280)€9,096 (2010 – €9,585). During the year production equipment and other totalling €2,087€2,782 was acquired under capital lease obligations (2009 — €625; 2008 — €5,318)(2010 – €2,087; 2009 – €625).
The Company maintains industrial landfills on its premises for the disposal of waste, primarily from the mill’s pulp processing activities. The mills have obligations under their landfill permits to decommission these disposal facilities pursuant to the requirements of its local regulations. As at December31,2011, the Company had recorded €4,170 (2010 – €4,180) of asset retirement obligations in the “Capital leases and other” line in the Consolidated Balance Sheet.
Note 7. Accounts Payable and Other
December 31, | ||||||||
2011 | 2010 | |||||||
Trade payables | € | 45,751 | € | 36,680 | ||||
Accrued expenses | 28,422 | 27,452 | ||||||
Accrued interest | 10,054 | 13,640 | ||||||
Capital leases, current portion (Note 16) | 2,505 | 3,240 | ||||||
Other | 12,908 | 3,861 | ||||||
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€ | 99,640 | € | 84,873 | |||||
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On January 28, 2011, the Company received approximately €10,000, which was intended to compensate the Company for remediation work that is required at the Stendal mill. The €10,000 was recognized as an increase in cash, and a corresponding increase in other accounts payable. As at December 31, 2010,2011, the Company had recorded €4,180 (2009 — €3,912) of asset retirement obligations.
December 31, | ||||||||
2010 | 2009 | |||||||
Trade payables | € | 36,680 | € | 31,771 | ||||
Accounts payable and other | 3,861 | 1,225 | ||||||
Accrued expenses | 27,452 | 31,441 | ||||||
Accrued interest | 13,640 | 18,039 | ||||||
Capital leases, current portion | 3,240 | 2,709 | ||||||
€ | 84,873 | € | 85,185 | |||||
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt
Debt consists of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
Note payable to bank, included in a total loan credit facility of €827,950 to finance the construction related to the Stendal mill (a) | € | 500,657 | € | 514,574 | ||||
Senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured (b)(1) | 15,341 | 216,299 | ||||||
Senior notes due December 2017, interest at 9.50% accrued and payable semi-annually, unsecured (c) | 224,031 | — | ||||||
Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually (d)(2) | — | 16,749 | ||||||
Subordinated convertible notes due January 2012, interest at 8.5% accrued and payable semi-annually (e) | 31,707 | 26,160 | ||||||
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (f) | 15,016 | 16,000 | ||||||
Loan payable to the noncontrolling shareholder of the Stendal mill (g) | 31,365 | 35,881 | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €25,000 (h) | — | — | ||||||
Investment loan agreement with a lender with respect to the wash press project at the Rosenthal mill of €4,351 (i) | 3,807 | 3,511 | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €3,500 (j) | — | — | ||||||
821,924 | 829,174 | |||||||
Less: current portion | (39,596 | ) | (16,032 | ) | ||||
Debt, less current portion | € | 782,328 | € | 813,142 | ||||
December 31, | ||||||||
2011 | 2010 | |||||||
Note payable to bank, included in a total loan credit facility of €827,950 to finance the construction related to the Stendal mill (a) | € | 477,490 | € | 500,657 | ||||
Senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured (b) | — | 15,341 | ||||||
Senior notes due December 2017, interest at 9.50% accrued and payable semi-annually, unsecured (c) | 220,753 | 224,031 | ||||||
Subordinated convertible notes due January 2012, interest at 8.50% accrued and payable semi-annually (d) | — | 31,707 | ||||||
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (e) | — | 15,016 | ||||||
Loan payable to the noncontrolling shareholder of the Stendal mill (f) | 33,124 | 31,365 | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €25,000 (g) | — | — | ||||||
Investment loan agreement with a lender with respect to the wash press project at the Rosenthal mill of €4,351 (h) | 2,719 | 3,807 | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €3,500 (i) | — | — | ||||||
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734,086 | 821,924 | |||||||
Less: current portion | (25,671 | ) | (39,596 | ) | ||||
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Debt, less current portion | € | 708,415 | € | 782,328 | ||||
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The Company made scheduled principal repayments under these facilities of €16,086€63,845 in 2010,2011, and expects the principal repayments to be €39,596€25,671 in 2011.2012. As of December 31, 2010,2011, the principal maturities of debt are as follows:
Matures | Amount | |||
2011(1) | € | 39,596 | ||
2012 | 57,378 | |||
2013(1)(3) | 56,104 | |||
2014 | 40,543 | |||
2015 | 44,000 | |||
Thereafter | 584,303 | |||
€ | 821,924 | |||
86
Matures | Amount | |||
2012 | € | 25,671 | ||
2013 | 41,088 | |||
2014 | 40,543 | |||
2015 | 44,000 | |||
Thereafter | 582,784 | |||
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€ | 734,086 | |||
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(a) | |
Note payable to bank, included in a total loan facility of €827,950 to finance the construction related to the Stendal mill (“Stendal Loan Facility”), interest at rates varying from Euribor plus 0.90% to Euribor plus |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt (continued)
Saxony-Anhalt, respectively, of up to |
On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan Facility. The amendment deferred approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017. The amendment also provided for a 100% cash sweep, referred to as the “Cash Sweep”, of any cash in excess of a €15,000 working capital reserve and the Guarantee Amount, as discussed in Note 17—Commitments and Contingencies, held by Stendal which will be used first to fund the DSRA to a level sufficient to service the amounts due and payable under the Stendal Loan Facility during the then following 12 months, which means the DSRA is “Fully Funded”, and second to prepay the deferred principal amounts. As at December 31, 2011, the DSRA balance was approximately €31,800 and was not Fully Funded.
(b) | In February 2005, the Company issued $310 million of senior notes due February 2013 (“2013 |
87
(c) | |
On November17,2010, the Company completed a private offering of $300 million in aggregate principal amount of |
In August 2011, the Company’s Board of Directors authorized the purchase of up to $25.0 million in aggregate principal amount of the Company’s 2017 Notes from time to time, over a period ending August 2012. During the twelve months ended December 31, 2011, the Company purchased $13.6 million of its outstanding 2017 Notes, which in aggregate, were purchased at a nominal discount to the principal amount thereof, plus accrued and unpaid interest to, but not including the repurchase date. Pursuant to ASC 470, the Company recognized a loss of €71 on the extinguishment of these notes, in the “Gain (loss) on extinguishment of debt” line in the Consolidated Statement of Operations, mainly relating to the write-off of unamortized debt issuance costs.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt (continued)
The 2017 Notes are general unsecured senior obligations of the Company. The 2017 Notes rank equal in right of payment with all existing and future senior unsecured indebtedness of the Company and senior in right of payment to any current or future subordinated indebtedness of the Company. The 2017 Notes are effectively junior in right of payment to all borrowings of the Company’s restricted subsidiaries, including borrowings under the Company’s credit agreements which are secured by certain assets of its restricted subsidiaries.
The Company may redeem all or a part of the 2017 Notes, upon not less than 30 days or more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) equal to 104.75% for the twelve-month period beginning on December1,2014, 102.38% for the twelve-month period beginning on December1,2015, and 100.00% beginning on December1,2016, and at any time thereafter, plus accrued and unpaid interest.
(d) | ||
The 2012 Notes bearbore interest at 8.50%, accrued and payable semi-annually, arewere convertible at anytimeany time by the holder into common shares of the Company at $3.30 per share and arewere unsecured. The Company maycould redeem for cash all or a portion of the notes2012 Notes on or after July 15, 2011 at 100% of the principal amount of the notes plus accrued interest up to the redemption date. During the year, approximately $21.4twelve months ended December31,2011, $44.4 million of Subordinated Convertible2012 Notes due January 2012 were converted into 6,500,171 shares. The13,446,679 common shares and the Company paid $1.5 million of accrued and unpaid interest. Pursuant to the 2012 Notes indenture, on July15,2011, the nominal amount of remaining 2012 Notes were redeemed by the Company on July15,2011 at par plus accrued and unpaid interest to, but not including, July15,2011. In accordance with FASB’s Accounting Standards Codification No. 470Debt—Debt with Conversions and Other Options(“ASC 470”), the Company recorded a debt conversion expense of approximately $0.9 million for the year ended December 31, 2010, as a resultcarrying amount of the conversions,converted 2012 Notes, which is included within interest expense in the Consolidated Statementsapproximately €800 of Operations. See Note 18 — Subsequent Events.
(e) | |
Credit agreement with respect to a revolving credit facility of C$40.0 million for the Celgar mill. The credit agreement matures May 2013. Borrowings under the credit agreement are collateralized by the mill’s inventory and receivables and are restricted by a borrowing base calculated on the mill’s inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 3.75% or |
88
Canadian prime plus 2.00%. U.S. dollar denominated amounts bear interest at LIBOR plus 3.75% or U.S. base plus 2.00%. The Company fully repaid this facility on March30,2011. As at December31, |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 8. Debt (continued)
(f) | A loan payable by the |
A €25,000 working capital facility at the Rosenthal mill that matures in December 2012. Borrowings under the facility are collateralized by the mill’s inventory and receivables and bear interest at |
On February8,2010, the Rosenthal mill finalized a credit agreement with a lender for a €3,500 facility maturing in December2012. Borrowings under |
Note 9. Pension and Other Post-Retirement Benefit Obligations
Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and GermanRosenthal mills. The largest component of this obligation is with respect to the Celgar mill which maintains a defined benefit pension and post-retirement benefit plans for certain employees (“Celgar Plans”).
Pension benefits are based on employee’s earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions for the twelve monthtwelve-month period ended December31, 2010 totalled2011 totaled €2,039 (2010 – €1,053).
€1,053 (2009 — €963).
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
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2011 | ||||||||||||
Other | ||||||||||||
Post-Retirement | ||||||||||||
Benefit | ||||||||||||
Pension | Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2010 | € | 32,068 | € | 16,643 | € | 48,711 | ||||||
Service cost | 87 | 469 | 556 | |||||||||
Interest cost | 1,511 | 815 | 2,326 | |||||||||
Benefit payments | (1,716 | ) | (461 | ) | (2,177 | ) | ||||||
Past service cost (credit) | — | — | — | |||||||||
Actuarial losses | 3,382 | 2,049 | 5,431 | |||||||||
Foreign currency exchange rate changes | 446 | 282 | 728 | |||||||||
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Benefit obligation, December 31, 2011 | 35,778 | 19,797 | 55,575 | |||||||||
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Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2010 | 23,863 | — | 23,863 | |||||||||
Actual returns | (204 | ) | — | (204 | ) | |||||||
Contributions | 1,578 | 461 | 2,039 | |||||||||
Benefit payments | (1,716 | ) | (461 | ) | (2,177 | ) | ||||||
Foreign currency exchange rate changes | 213 | — | 213 | |||||||||
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Fair value of plan assets, December 31, 2011 | 23,734 | — | 23,734 | |||||||||
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Funded status, December 31, 2011(1) | € | (12,044 | ) | € | (19,797 | ) | € | (31,841 | ) | |||
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Components of the net benefit cost recognized | ||||||||||||
Service cost | € | 87 | € | 469 | € | 556 | ||||||
Interest cost | 1,511 | 815 | 2,326 | |||||||||
Expected return on plan assets | (1,549 | ) | — | (1,549 | ) | |||||||
Amortization of recognized items | 511 | (69 | ) | 442 | ||||||||
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Net benefit costs | € | 560 | € | 1,215 | € | 1,775 | ||||||
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(1) | The total of €31,953 on the Consolidated Balance Sheet also includes the pension liabilities of €112 relating to employees at the Company’s Rosenthal operation. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
Information about the Celgar Plans, in aggregate for the year ended December 31,2010 is as follows:
2010 | ||||||||||||
Other | ||||||||||||
Post-Retirement | ||||||||||||
Benefit | ||||||||||||
Pension | Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2009 | € | 27,219 | € | 12,073 | € | 39,292 | ||||||
Service cost | 81 | 391 | 472 | |||||||||
Interest cost | 1,672 | 771 | 2,443 | |||||||||
Benefit payments | (2,494 | ) | (483 | ) | (2,977 | ) | ||||||
Past service cost (credit) | — | — | — | |||||||||
Actuarial (gains) losses | 2,118 | 2,289 | 4,407 | |||||||||
Foreign currency exchange rate changes | 3,472 | 1,602 | 5,074 | |||||||||
Benefit obligation, December 31, 2010 | 32,068 | 16,643 | 48,711 | |||||||||
Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2009 | 20,947 | — | 20,947 | |||||||||
Actual returns | 2,189 | — | 2,189 | |||||||||
Contributions | 570 | 483 | 1,053 | |||||||||
Benefit payments | (2,494 | ) | (483 | ) | (2,977 | ) | ||||||
Foreign currency exchange rate changes | 2,651 | — | 2,651 | |||||||||
Fair value of plan assets, December 31, 2010 | 23,863 | — | 23,863 | |||||||||
Funded status, December 31, 2010(1) | € | (8,205 | ) | € | (16,643 | ) | € | (24,848 | ) | |||
Components of the net benefit cost recognized | ||||||||||||
Service cost | € | 81 | € | 391 | € | 472 | ||||||
Interest cost | 1,672 | 771 | 2,443 | |||||||||
Expected return on plan assets | (1,563 | ) | — | (1,563 | ) | |||||||
Amortization of recognized items | 438 | (310 | ) | 128 | ||||||||
Net benefit costs | € | 628 | € | 852 | € | 1,480 | ||||||
2010 | ||||||||||||
Pension | Other Post-Retirement Benefit Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2009 | € | 27,219 | € | 12,073 | € | 39,292 | ||||||
Service cost | 81 | 391 | 472 | |||||||||
Interest cost | 1,672 | 771 | 2,443 | |||||||||
Benefit payments | (2,494 | ) | (483 | ) | (2,977 | ) | ||||||
Past service cost (credit) | — | — | — | |||||||||
Actuarial losses | 2,118 | 2,289 | 4,407 | |||||||||
Foreign currency exchange rate changes | 3,472 | 1,602 | 5,074 | |||||||||
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Benefit obligation, December 31, 2010 | 32,068 | 16,643 | 48,711 | |||||||||
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Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2009 | 20,947 | — | 20,947 | |||||||||
Actual returns | 2,189 | — | 2,189 | |||||||||
Contributions | 570 | 483 | 1,053 | |||||||||
Benefit payments | (2,494 | ) | (483 | ) | (2,977 | ) | ||||||
Foreign currency exchange rate changes | 2,651 | — | 2,651 | |||||||||
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Fair value of plan assets, December 31, 2010 | 23,863 | — | 23,863 | |||||||||
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Funded status, December 31, 2010(1) | € | (8,205 | ) | € | (16,643 | ) | € | (24,848 | ) | |||
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| |||||||
Components of the net benefit cost recognized | ||||||||||||
Service cost | € | 81 | € | 391 | € | 472 | ||||||
Interest cost | 1,672 | 771 | 2,443 | |||||||||
Expected return on plan assets | (1,563 | ) | — | (1,563 | ) | |||||||
Amortization of recognized items | 438 | (310 | ) | 128 | ||||||||
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Net benefit costs | € | 628 | € | 852 | € | 1,480 | ||||||
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(1) | The total of €24,964 on the |
90
2009 | ||||||||||||
Other | ||||||||||||
Post-Retirement | ||||||||||||
Benefit | ||||||||||||
Pension | Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2008 | € | 20,028 | € | 10,297 | € | 30,325 | ||||||
Service cost | 56 | 305 | 361 | |||||||||
Interest cost | 1,513 | 785 | 2,298 | |||||||||
Benefit payments | (1,715 | ) | (373 | ) | (2,088 | ) | ||||||
Past service cost (credit) | — | (70 | ) | (70 | ) | |||||||
Actuarial (gains) losses | 4,366 | (295 | ) | 4,071 | ||||||||
Foreign currency exchange rate changes | 2,971 | 1,424 | 4,395 | |||||||||
Benefit obligation, December 31, 2009 | 27,219 | 12,073 | 39,292 | |||||||||
Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2008 | 17,098 | — | 17,098 | |||||||||
Actual returns | 2,561 | — | 2,561 | |||||||||
Contributions | 589 | 373 | 962 | |||||||||
Benefit payments | (1,715 | ) | (373 | ) | (2,088 | ) | ||||||
Foreign currency exchange rate changes | 2,414 | — | 2,414 | |||||||||
Fair value of plan assets, December 31, 2009 | 20,947 | — | 20,947 | |||||||||
Funded status, December 31, 2009(1) | € | (6,272 | ) | € | (12,073 | ) | € | (18,345 | ) | |||
Components of the net benefit cost recognized | ||||||||||||
Service cost | € | 56 | € | 305 | € | 361 | ||||||
Interest cost | 1,513 | 785 | 2,298 | |||||||||
Expected return on plan assets | (1,272 | ) | — | (1,272 | ) | |||||||
Amortization of recognized items | 141 | (279 | ) | (138 | ) | |||||||
Net benefit costs | € | 438 | € | 811 | € | 1,249 | ||||||
Amount | ||||
2011 | € | 2,448 | ||
2012 | 2,509 | |||
2013 | 2,611 | |||
2014 | 2,734 | |||
2015 | 2,862 | |||
2016 — 2020 | 16,445 |
91
Amount | ||||
2012 | € | 2,475 | ||
2013 | 2,612 | |||
2014 | 2,754 | |||
2015 | 2,890 | |||
2016 | 3,033 | |||
2017 – 2021 | 16,938 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
During the year ended December 31, 2010,2011, the Company recognized a loss, net of €3,314tax of €8,049 in other comprehensive income (2009 —(2010 – loss of €3,128; 2008 — income€3,314; 2009 – loss of €4,079)€3,128). As at December 31, 2010,2011, the pension related accumulated other comprehensive income balance of €7,292 (2009 — €3,978)€15,341 (2010 – €7,292) is a result of net actuarial losses. These amounts have been stated net of tax. The Celgar Plans do not have any net transition asset or obligation recognized as a reclassification adjustment of other comprehensive income. The amount included in other comprehensive income which is expected to be recognized in 20112012 is approximately €571€1,106 of net actuarial losses. There are no plan assets that are expected to be returned to the Company in 2011.
Summary of key assumptions:
December 31, | ||||||||
2010 | 2009 | |||||||
Benefit obligations | ||||||||
Discount rate | 5.00 | % | 5.75 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Net benefit cost for year ended | ||||||||
Discount rate | 5.75 | % | 7.25 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Expected rate of return on plan assets | 7.00 | % | 7.00 | % | ||||
Assumed health care cost trend rate at | ||||||||
Initial health care cost trend rate | 10.00 | % | 11.00 | % | ||||
Annual rate of decline in trend rate | 1.00 | % | 1.00 | % | ||||
Ultimate health care cost trend rate | 4.50 | % | 4.50 | % | ||||
Medical services plan premiums trend rate | 6.00 | % | 6.00 | % |
December 31, | ||||||||
2011 | 2010 | |||||||
Benefit obligations | ||||||||
Discount rate | 4.25 | % | 5.00 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Net benefit cost for year ended | ||||||||
Discount rate | 5.00 | % | 5.75 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Expected rate of return on plan assets | 6.75 | % | 7.00 | % | ||||
Assumed health care cost trend rate at | ||||||||
Initial health care cost trend rate | 9.00 | % | 10.00 | % | ||||
Annual rate of decline in trend rate | 0.50 | % | 1.00 | % | ||||
Ultimate health care cost trend rate | 4.50 | % | 4.50 | % | ||||
Medical services plan premiums trend rate | 6.00 | % | 6.00 | % |
The expected rate of return on plan assets is a management estimate based on, among other factors, historical long-term returns, expected asset mix and active management premium.
The discount rate assumption is adjusted annually to reflect the rates available on high-quality debt instruments, with a duration that is expected to match the timing of expected pension and other post-retirement benefit obligations. High-quality debt instruments are corporate bonds with a rating of “AA” or better.
A one-percentage point change in assumed health care cost trend rate would have the following effect on the post-retirement benefit obligations:
December 31, 2010 | December 31, 2009 | |||||||||||||||
1% increase | 1% decrease | 1% increase | 1% decrease | |||||||||||||
Effect on total service and interest rate components | € | 38 | € | (39 | ) | € | 37 | € | (38 | ) | ||||||
Effect on post-retirement benefit obligation | € | 572 | € | (551 | ) | € | 436 | € | (419 | ) |
December 31, 2011 | December 31, 2010 | |||||||||||||||
1% increase | 1% decrease | 1% increase | 1% decrease | |||||||||||||
Effect on total service and interest rate components | € | 39 | € | (40 | ) | € | 38 | € | (39 | ) | ||||||
Effect on post-retirement benefit obligation | € | 621 | € | (600 | ) | € | 572 | € | (551 | ) |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
Asset allocation of funded plans:
Target | 2010 | 2009 | ||||||||||
Equity securities | 60 | % | 63 | % | 63 | % | ||||||
Debt securities | 35 | % | 34 | % | 35 | % | ||||||
Cash and cash equivalents | 5 | % | 3 | % | 2 | % | ||||||
100 | % | 100 | % | |||||||||
Target | 2011 | 2010 | ||||||||||
Equity securities | 60 | % | 56% | 63% | ||||||||
Debt securities | 40 | % | 44% | 34% | ||||||||
Cash and cash equivalents | 0 | % | 0% | 3% | ||||||||
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100% | 100% | |||||||||||
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Investment Objective:
The investment objective for the Celgar Plans is to sufficiently diversify invested plan assets to maintain a reasonable level of risk without imprudently sacrificing the return on the invested funds, and ultimately to achieve a long-term total rate of return, net of fees and expenses, at least equal to the long-term interest rate assumptions used
92
Celgar Plans’ asset fair value measurements at December 31, 2010:
Quoted | ||||||||||||||||
prices in | ||||||||||||||||
active | Significant | |||||||||||||||
markets for | other | Significant | ||||||||||||||
identical | observable | unobservable | ||||||||||||||
assets | inputs | Inputs | Total | |||||||||||||
Asset Category | ||||||||||||||||
Leith Wheeler Diversified Balanced Fund | € | 11,971 | € | — | € | — | € | 11,971 | ||||||||
Phillips, Hagar and North Balanced Pension Trust | 11,892 | — | — | 11,892 | ||||||||||||
Total assets | € | 23,863 | € | — | € | — | € | 23,863 | ||||||||
Asset category | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Total | ||||||||||||
Leith Wheeler Diversified Funds | € | 13,340 | € | — | € | ��� | € | 13,340 | ||||||||
Phillips, Hagar and North Bond Fund | 10,394 | — | — | 10,394 | ||||||||||||
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Total assets | € | 23,734 | € | — | € | — | € | 23,734 | ||||||||
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Concentrations of Risk in the Celgar Plans’ Assets:
The Company has reviewed the Celgar Plans’ investments and determined that they are allocated based on the specific investment manager’s stated investment strategy with only slight over- or under-weightings within any specific category, and that those investments are within the constraints that have been set by the Company. Those constraints include a limitation on the value that can be invested in any one entity or group and the investment category targets noted above. In addition, we have two independent investment managers. The Company has concluded that there are no significant concentrations of risk.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 9. Pension and Other Post-Retirement Benefit Obligations (continued)
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 an amount per hour worked pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. Plan details are included in the following table:
Legal name | Provincially registered plan number | Expiration date of collective bargaining agreement | Company Contributions | Are the Company’s contributions greater than 5% of total contributions | ||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
The Pulp and Paper Industry Pension Plan | P085324 | April 30, 2012 | € | 1,760 | € | 1,774 | Yes | Yes |
Note 10. Income Taxes
The Company accounts for income taxes in accordance with ASC 740,Income Taxes,(“ASC 740”).740. The Company’s effective income tax (benefit) rate can be affected by many factors, including but not limited to, changes in the mix of earnings in tax jurisdictions with differing statutory rates, changes in corporate structure, changes in the valuation of deferred tax assets and liabilities, the result of audit examinations of previously filed tax returns and changes in tax laws. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The Companyand/or one or more of its subsidiaries filesfile income tax returns in the United States, Germany and Canada. Currently, the Company does not anticipate that the expiration of the statue of limitations or the completion of audits in the next fiscal year will result in liabilities for uncertain income tax positions that are materially different than the amounts accrued as of December 31, 2010.2011. However, this belief could change as tax years are examined by taxing authorities, the timing of those examinations, if any, are uncertain at this time. During 2010, the German tax
93
As at December 31, 2010,2011, the Company had approximately €500€1,100 of total gross unrecognized tax benefits, substantially all of which would affect the Company’s effective tax rate if recognized. A reconciliation of the beginning and ending amount ofThe Company recorded unrecognized tax benefits is as follows:
2010 | 2009 | |||||||
Balance at January 1 | € | 700 | € | 800 | ||||
Reductions — prior year tax positions | (500 | ) | — | |||||
Lapse of statute of limitations | — | (100 | ) | |||||
Balance at December 31 | € | 200 | € | 700 | ||||
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2010,2011, the Company recognized approximately €nilnil in penalties and interest (2009-€nil)(2010 – €nil). The Company had approximately €nil for the paymentpayments of interest and penalties accrued at December 31, 2010.
The provision for current income taxes consists entirelyprimarily ofnon-U.S. taxes for the years ended December 31, 2011, 2010 and 2009, and 2008, respectively.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10. Income Taxes (continued)
Differences between the U.S. Federal Statutory and the Company’s effective rates are as follows:
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
U.S. Federal statutory rate | 34 | % | 34 | % | 34 | % | ||||||
U.S. Federal statutory rate on (income) loss from continuing operations before income tax and noncontrolling interest | € | (30,206 | ) | € | 26,526 | € | 28,241 | |||||
Tax differential on foreign income (loss) | 8,754 | (3,412 | ) | (2,966 | ) | |||||||
Effect of foreign earnings | (6,721 | ) | — | (17,800 | ) | |||||||
Valuation allowance | 13,326 | (20,806 | ) | (5,530 | ) | |||||||
Change in undistributed earnings | 15,186 | — | — | |||||||||
Other | 5,540 | 3,561 | (4,422 | ) | ||||||||
€ | 5,879 | € | 5,869 | € | (2,477 | ) | ||||||
Comprised of: | ||||||||||||
Current | € | (3,881 | ) | € | (134 | ) | € | (501 | ) | |||
Deferred | 9,760 | 6,003 | (1,976 | ) | ||||||||
€ | 5,879 | € | 5,869 | € | (2,477 | ) | ||||||
94
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
U.S. Federal statutory rate | 35 | % | 34 | % | 34 | % | ||||||
U.S. Federal statutory rate on (income) loss from continuing operations before income tax and noncontrolling interest | € | (18,659 | ) | € | (30,206 | ) | € | 26,526 | ||||
Tax differential on foreign income (loss) | 5,670 | 8,754 | (3,412 | ) | ||||||||
Effect of foreign earnings | (9,906 | ) | (6,721 | ) | — | |||||||
Valuation allowance | 7,069 | 13,326 | (20,806 | ) | ||||||||
Tax benefit of partnership structure | 5,234 | 5,076 | 5,796 | |||||||||
Pension adjustment | 1,864 | 937 | (904 | ) | ||||||||
Non-taxable foreign subsidiaries | 4,024 | — | — | |||||||||
Change in undistributed earnings | — | 15,186 | — | |||||||||
Other | 5,399 | (473 | ) | (1,331 | ) | |||||||
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€ | 695 | € | 5,879 | € | 5,869 | |||||||
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Comprised of: | ||||||||||||
Current | € | (1,682 | ) | € | (3,881 | ) | € | (134 | ) | |||
Deferred | 2,377 | 9,760 | 6,003 | |||||||||
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€ | 695 | € | 5,879 | € | 5,869 | |||||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10. Income Taxes (continued)
Deferred income tax assets and liabilities are composed of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
German tax loss carryforwards | € | 86,087 | € | 83,362 | ||||
U.S. tax loss carryforwards | 28,310 | 9,409 | ||||||
Canadian tax loss carryforwards | 34,516 | 10,653 | ||||||
Basis difference between income tax and financial reporting with respect to operating pulp mills | (65,237 | ) | (15,960 | ) | ||||
Derivative financial instruments | 14,311 | 14,844 | ||||||
Long-term debt | (477 | ) | (2,407 | ) | ||||
Payables and accrued expenses | (1,412 | ) | (1,454 | ) | ||||
Reserve for deferred pension liability | 5,102 | 3,358 | ||||||
Capital leases | 1,734 | 530 | ||||||
Other | 805 | 620 | ||||||
103,739 | 102,955 | |||||||
Valuation allowance | (88,937 | ) | (99,529 | ) | ||||
Net deferred tax (liability) asset | € | 14,802 | € | 3,426 | ||||
Comprised of: | ||||||||
Deferred income tax asset | € | 22,570 | € | 3,426 | ||||
Deferred income tax liability | 7,768 | — | ||||||
€ | 14,802 | € | 3,426 | |||||
December 31, | ||||||||
2011 | 2010 | |||||||
German tax loss carryforwards | € | 87,023 | € | 86,087 | ||||
U.S. tax loss carryforwards | 27,914 | 28,310 | ||||||
Canadian tax loss carryforwards | 33,891 | 34,516 | ||||||
Basis difference between income tax and financial reporting with respect to operating pulp mills | (77,440 | ) | (65,237 | ) | ||||
Derivative financial instruments | 14,709 | 14,311 | ||||||
Long-term debt | 1,367 | (477 | ) | |||||
Payable and accrued expenses | (89 | ) | (1,412 | ) | ||||
Deferred pension liability | 7,381 | 5,102 | ||||||
Capital leases | 1,941 | 1,734 | ||||||
Other | 1,623 | 805 | ||||||
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98,320 | 103,739 | |||||||
Valuation allowance | (81,868 | ) | (88,937 | ) | ||||
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Net deferred tax (liability) asset | € | 16,452 | € | 14,802 | ||||
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| |||||
Comprised of: | ||||||||
Deferred income tax asset—current | € | 6,750 | € | 22,570 | ||||
Deferred income tax asset—non-current | 12,287 | — | ||||||
Deferred income tax liability—non-current | (2,585 | ) | (7,768 | ) | ||||
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€ | 16,452 | € | 14,802 | |||||
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The Company is subject to income tax audits on a continuing basis which may result in changes to the amounts in the above table. Due to this and other uncertainties regarding future amounts of taxable income in Germany, Canada and the United States, the Company has provided a valuation allowance against a portion of its deferred tax assets, which primarily consist of tax losses carried forward for income tax purposes.forward. However, during the year, based on forecasted taxable income for the entities in each tax jurisdiction, income tax strategies, and its best estimates of the timing of temporary differences, the Company believes that it is more likely than not that certain tax assets will be realized and accordingly the Company has reversed certain valuation allowances totalling €10.6 million.approximately €7,900. The Company’s tax asset recognition methodology consists of forecasting taxable income into the future along with related temporary differences. The Company then estimates which tax assets, based on a variety of factors are more likely than not to be realized, and recognizes the tax assets accordingly. However, ASC 740 does not allow for tax assets to be recognized where the entity does not have a strong history of profitability. However, ASC 740 does not provide specific guidance with respect to what strong history of profitability is. As a result, professional judgement is required when considering whether a company has a strong history of profitability or not. For example, the relative impact of negative and positive evidence of profitability where a company has cumulative losses in recent years. The weight given to negative and positive evidence is commensurate with the extent to which it can be objectively verified. Operating results during the most recent three-year period are generally given more weight than expectations of future profitability, which are inherently uncertain. As a result of this rule,guidance, the Company was previously not able to recognize certain tax assetsassets; however, as at December 31, 2010. Management expects that certain entities will meet2011, a subsidiary now meets the history of profitability tests in 2011,criteria, and if so, additionalas a result certain tax assets are expected to behave been recognized.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 10. Income Taxes (continued)
The Company’s German tax loss carryforward amount includes corporate and trade tax losses totalling approximately €442,500€421,100 at December 31, 20102011 which have no expiration date. The Company’s U.S. loss carryforwards amount is approximately €83,200€79,700 at December 31, 2010,2011, of which approximately €2,600, €5,800€7,400 and €74,000,€72,300, if not used, will expire in the tax years ending 2011, 2012 to 20192020 and 20202021 to 2030, respectively. The Company has implemented certain tax planning strategies in 2011 to minimize the risk that US tax losses otherwise expiring in 2011 and 2012 will go unused. The Company’s Canadian tax loss carryforward amount is approximately €138,100€135,600 at December 31, 20102011 which will begin to expire in the tax year ending 2026, if not used. Management has concluded that it is more likely than not that thesea portion of the above noted losses will not be utilized, under current circumstances, and accordingly has reserved any resulting potential tax benefit that is not expected to be realized in the near future.
95
Note 11. Share Capital
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The Company has authorized 200,000,000 common shares (2009 —(2010 – 200,000,000) with a par value of $1 per share.
During the twelve months ended December 31, 2010, 6,500,1712011, 13,446,679 common shares were issued as a result of certain holders of the Company’s Subordinated Convertible2012 Notes due January 2012 exercising their conversion option. Seeoption (2010 – 6,500,171) (see Note 7(e) 8(d)— Debt. Debt). In addition, 474,728 shares were issued to employees of the Company as part of the share based performance plan and 116,460 performance shares, which were issued in 2008, were cancelled. 238,000 restricted shares were issued to directors and the Chief Executive Officer of the Company. The Company also repurchased and retired 1,263,401 common shares. These retired shares are now included in the Company’s pool of authorized but unissued common shares.
As at December 31, 2010,2011, the Company had 42,999,658 (2009 — 36,443,487)55,779,204 common shares (2010 – 42,999,658) issued and outstanding.
Share Repurchase Program
In August 2011, the Company’s Board of Directors authorized a share repurchase program (the “Program”) to repurchase up to $25.0 million worth of the Company’s outstanding common shares from time to time over a period ending August 2012. During the year ended December 31, 2011, the Company repurchased 1,263,401 of its common shares at an aggregate cost of $10.6 million. The Company recorded these as treasury shares, and accounted for the repurchase using the Cost Method as outlined in FASB’s Accounting Standards Codification No. 505,Equity—Treasury Stock (“ASC 505”).
The Company retired all outstanding treasury shares prior to December 31, 2011. The retired treasury shares had a carrying value of approximately €6,342. Upon the formal retirement of treasury shares and in accordance with ASC 505, the Company reduced its share capital based on the estimated average cost of the common shares and reduced the treasury share account based on the repurchase price. The difference between the repurchase price and the original issue value was recorded as a reduction to retained earnings.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 11. Share Capital (continued)
The Company may make additional repurchases of common shares under its Program, depending on prevailing market conditions, alternate uses of capital, and other factors. Whether and when to initiate a purchase of common shares and the amount of common shares purchased is at the Company’s discretion. As at December 31, 2011, the Company had an authorized amount of $14.4 million left to repurchase its common shares.
Preferred shares
The Company has authorized 50,000,000 preferred shares (2009 —(2010 – 50,000,000) with U.S. $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at December 31, 2010,2011, no preferred shares had been issued by the Company.
Note 12. Stock-Based Compensation
In June 2010, the Company adopted a new stock incentive plan (the “2010 Plan”) which provides for options, restricted stock rights, restricted stock,shares, performance shares, performance share units (“PSUs”) and stock appreciation rights to be awarded to employees, consultants and non-employee directors. The 2010 Plan replaced the Company’s 2004 stock incentive plan (the “2004 Plan”). However, the terms of the 2004 Plan will govern prior awards untilAs at December 31, 2011, after factoring in all awards granted under the 2004 Plan have been exercised, forfeited, cancelled, expired, or otherwise terminated in accordance with the terms thereof. The Company may grant up to a maximum of 2,000,000allocated shares, there remains approximately 1.2 million common shares under the 2010 plan, plus the number of common shares remaining available for grant pursuant to the 20042010 Plan.
Performance StockShares and PSUs
Performance shares are common shares granted to an employee which have restrictive conditions, such as the ability to sell the shares, until the Company and the grantee achieve certain performance stockobjectives. PSUs comprise rights to receive stockcommon shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. During the year ended December 31, 2010, potential stock based performance awards totaled 534,783 shares (2009 — 565,165; 2008 — 570,614).
Expense recognized for the year for the performance shares and PSUs was €2,255(€916 (2010 – €2,255; 2009 — €397; 2008 — €96)– €397).
Between February 11, 2010,and March 2011, the Company awardedgranted and issued a total of 13,000 performance stock to two employees. During the twelve month period ended474,728 common shares for its PSUs which were originally awarded in 2008 and vested on December 31, 2010, 43,382 performance stock were forfeited due2010. Pursuant to ASC718, the Company adjusted the number of common shares awarded to employees to the departurenumber granted by the Board of two employees.
96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 12. Stock-Based Compensation (continued)
On February 11, 2011, the Company duringgranted a total of 812,575 PSUs to employees of the first quarterCompany, the majority of 2011.which vest using a partial vesting schedule between 2014 and 2016; 50% are scheduled to vest on January 1, 2014, 25% are scheduled to vest on January 1, 2015, and the remaining 25% are scheduled to vest on January 1, 2016.
During the year ended December 31, 2011, the Company cancelled 116,460 performance shares that were issued in 2008. As at such date,December 31, 2011, there are no remaining performance shares outstanding.
Following is a summary of the Company will record any outstanding unrecognized compensation cost associated with the final determination of performance stock within stock compensation expense during the three month period ended March 31, 2011.
Number of PSUs | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Outstanding at January 1 | 534,783 | 565,165 | 570,614 | |||||||||
Granted | 812,575 | 13,000 | 34,542 | |||||||||
Vested and issued | (474,728 | ) | — | — | ||||||||
Cancelled | (60,055 | ) | — | — | ||||||||
Forfeited | (17,263 | ) | (43,382 | ) | (39,991 | ) | ||||||
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Outstanding at December 31 | 795,312 | 534,783 | 565,165 | |||||||||
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Restricted StockShares
The fair value of restricted stockshares is determined based upon the number of shares granted and the quoted price of the Company’s stockshares on the date of grant. Restricted stockshares generally vestsvest over one year.year, except as noted below. Expense is recognized on a straight-line basis over the vesting period.
During the year ended December 31, 2011, 38,000 restricted share awards were granted to directors of the Company (2010 – 56,000; 2009 – 21,000), which vest over one year, and 200,000 restricted shares were granted to the Chief Executive Officer of the Company (2010 – nil; 2009 – nil), which vest in equal amounts over a five year period commencing in 2012.
Expense recognized for the year ended December 31, 20102011 was €139 (2009 — €58; 2008 — €168)€998 (2010 – €139; 2009 – €58).
Following is a summary of the Company (2009 — 21,000; 2008 — 21,000) and nooutstanding restricted stock was cancelled during the year (2009 — nil; 2008 — nil).
Number of restricted shares | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Outstanding at January 1 | 56,000 | 21,000 | 21,000 | |||||||||
Awarded | 238,000 | 56,000 | 21,000 | |||||||||
Vested | (56,000 | ) | (21,000 | ) | (21,000 | ) | ||||||
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Outstanding at December 31 | 238,000 | 56,000 | 21,000 | |||||||||
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MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of restricted stock outstanding was 56,000 (2009 — 21,000; 2008 — 21,000), which had not vested.
Note 12. Stock-Based Compensation (continued)
Stock Options
Following is a summary of the status of options outstanding at December 31, 2010:
Outstanding Options | ||||||||||||||||||||
Weighted | Exercisable Options | |||||||||||||||||||
Exercise | Average | Weighted | Weighted | |||||||||||||||||
Price | Remaining | Average | Average | |||||||||||||||||
Range | Number | Contractual Life | Exercise Price | Number | Exercise Price | |||||||||||||||
(In U.S. Dollars) | (Years) | (In U.S. Dollars) | ||||||||||||||||||
$5.65 | 100,000 | 2.70 | $5.65 | 100,000 | $5.65 | |||||||||||||||
$7.25 | 30,000 | 4.57 | 7.25 | 30,000 | 7.25 | |||||||||||||||
$7.92 | 60,000 | 3.58 | 7.92 | 60,000 | 7.92 |
Outstanding Options | Exercisable Options | |||||||||
Exercise Price Range | Number | Weighted Average Remaining | Weighted Average | Number | Weighted Average Exercise Price | |||||
(In U.S. Dollars) | (Years) | (In U.S. Dollars) | ||||||||
$5.65 | 100,000 | 1.70 | $5.65 | 100,000 | $5.65 | |||||
$7.30 | 30,000 | 3.57 | $7.30 | 30,000 | $7.30 | |||||
$7.92 | 45,000 | 3.69 | $7.92 | 45,000 | $7.92 |
During the years ended December 31, 20102011 and 2009,2010, no options were granted, exercised or cancelled and 738,334 (2009 — nil; 2008 — nil)15,000 (2010 – 738,334) options expired. The aggregate intrinsic value of options outstanding and currently exercisableis calculated as the difference between the quoted market price for the Company’s common stock at December 31, 20102011 and those options where the exercise price is $1.73 per option.
Stock compensation expense recognized for the year ended December 31, 20102011 was €nil (2009 -(2010 – €nil; 2009 – €nil). As at December 31, 2010,2011, all stock options had fully vested.
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 13. Net Income (Loss) Per Share Attributable to Common Shareholders
Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Net income (loss) attributable to common shareholders—basic | € | 50,075 | € | 86,279 | € | (62,189 | ) | |||||
Interest on convertible notes, net of tax | € | 797 | 2,439 | — | ||||||||
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Net income (loss) attributable to common shareholders—diluted | € | 50,872 | € | 88,718 | € | (62,189 | ) | |||||
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Net income (loss) per share attributable to common shareholders | ||||||||||||
Basic | € | 1.00 | € | 2.24 | € | (1.71 | ) | |||||
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Diluted | € | 0.89 | € | 1.56 | € | (1.71 | ) | |||||
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Weighted average number of common shares outstanding: | ||||||||||||
Basic(1) | 50,116,982 | 38,590,797 | 36,296,649 | |||||||||
Effect of dilutive shares: | ||||||||||||
Performance shares | 544,853 | 442,844 | — | |||||||||
Restricted shares | 87,923 | 26,683 | — | |||||||||
Stock options and awards | 57,483 | — | — | |||||||||
Convertible notes | 6,178,778 | 17,902,638 | — | |||||||||
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Diluted | 56,986,019 | 56,962,962 | 36,296,649 | |||||||||
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Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net income (loss) attributable to common shareholders — basic | € | 86,279 | € | (62,189 | ) | € | (72,465 | ) | ||||
Interest on convertible notes, net of tax | 2,439 | — | — | |||||||||
Net income (loss) attributable to common shareholders — diluted | € | 88,718 | € | (62,189 | ) | € | (72,465 | ) | ||||
Net income (loss) per share attributable to common shareholders | ||||||||||||
Basic | € | 2.24 | € | (1.71 | ) | € | (2.00 | ) | ||||
Diluted | € | 1.56 | € | (1.71 | ) | € | (2.00 | ) | ||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic(1) | 38,590,797 | 36,296,649 | 36,285,027 | |||||||||
Effect of dilutive shares: | ||||||||||||
Stock options and awards | 469,527 | — | — | |||||||||
Convertible notes | 17,902,638 | — | — | |||||||||
Diluted | 56,962,962 | 36,296,649 | 36,285,027 | |||||||||
(1) | The basic weighted average number of shares |
The calculation of diluted net income (loss) per share attributable to common shareholders does not assume the exercise of stock options and awards or the conversion of convertible notesany instruments that would have an anti-dilutive effect on earnings per share.
Stock options and awards excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented 190,000 for the year ended December 31, 2010 (2009 — 928,334; 2008 —– 928,334).
Restricted stockshares excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented nil21,000 for the year ended December 31, 2010 (2009 — 21,000; 2008 — 21,000).
Shares associated with the convertible notes excluded from the calculation of diluted income (loss) per share attributable to common shareholders because they are anti-dilutive represented nil9,141,910 for the year ended December 31, 2010 (2009 — 9,141,910; 2008 — 8,678,065).
Performance stockshares excluded from the calculation of diluted net income (loss) per share attributable to common shareholders because they are anti-dilutive represented nil369,924 for the year ended December 31, 2010 (2009 — 369,924; 2008 — 372,642).
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 14. Business Segment Information
The Company has three operating segments, the individual pulp mills that are aggregated into one reportable business segment, market pulp. Accordingly, the results presented are those of the one reportable business segment.
98
2010 | 2009 | 2008 | ||||||||||
Germany | € | 278,348 | € | 154,323 | € | 198,340 | ||||||
China | 196,022 | 146,613 | 131,412 | |||||||||
Italy | 56,301 | 44,616 | 56,487 | |||||||||
Other European Union countries(1) | 182,246 | 107,276 | 133,621 | |||||||||
Other Asia | 37,561 | 38,946 | 65,192 | |||||||||
North America | 92,628 | 68,213 | 78,718 | |||||||||
Other countries | 1,503 | 8,312 | 17,146 | |||||||||
844,609 | 568,299 | 680,916 | ||||||||||
Energy revenues | 44,225 | 42,501 | 30,971 | |||||||||
Third party transportation revenues | 11,702 | 8,999 | 8,404 | |||||||||
€ | 900,536 | € | 619,799 | € | 720,291 | |||||||
2011 | 2010 | 2009 | ||||||||||
Germany | € | 256,563 | € | 278,348 | € | 154,323 | ||||||
China | 234,654 | 196,022 | 146,613 | |||||||||
Italy | 51,509 | 56,301 | 44,616 | |||||||||
Other European Union countries(1) | 175,937 | 182,246 | 107,276 | |||||||||
Other Asia | 30,872 | 37,561 | 38,946 | |||||||||
North America | 69,345 | 92,628 | 68,213 | |||||||||
Other countries | 823 | 1,503 | 8,312 | |||||||||
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819,703 | 844,609 | 568,299 | ||||||||||
Energy revenues | 57,972 | 44,225 | 42,501 | |||||||||
Third party transportation revenues | 11,693 | 11,702 | 8,999 | |||||||||
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€ | 889,368 | € | 900,536 | € | 619,799 | |||||||
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(1) | Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission. |
The following table presents total long-lived assets from continuing operations by geographic area based on location of the asset.
2010 | 2009 | |||||||
Germany | € | 656,090 | € | 689,545 | ||||
Canada | 190,648 | 178,941 | ||||||
Other | 1,507 | 2,934 | ||||||
€ | 848,245 | € | 871,420 | |||||
2011 | 2010 | |||||||
Germany | € | 638,467 | € | 656,089 | ||||
Canada | 182,438 | 190,648 | ||||||
Other | 69 | 30 | ||||||
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€ | 820,974 | € | 846,767 | |||||
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In 2010,2011, no single customer accounted for 10% or more of the Company’s total pulp sales to the Company’s largest(2010 one customer amounted to approximately 15% (2009 — 10%– 11%; 2008 — 9%)2009 no single customer).
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of total pulp sales.
Note 15. Financial Instruments
The fair value of financial instruments at December 31 is summarized as follows:
2010 | 2009 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Cash and cash equivalents | € | 99,022 | € | 99,022 | € | 51,291 | € | 51,291 | ||||||||
Investments | 275 | 275 | 230 | 230 | ||||||||||||
Receivables | 121,709 | 121,709 | 71,143 | 71,143 | ||||||||||||
Notes receivable | 2,978 | 2,978 | 3,819 | 3,819 | ||||||||||||
Accounts payable and accrued expenses | 84,873 | 84,873 | 85,185 | 85,185 | ||||||||||||
Debt | 821,924 | 847,875 | 829,174 | 769,207 | ||||||||||||
Interest rate derivative contracts — liability | 50,973 | 50,973 | 52,873 | 52,873 |
99
2011 | 2010 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Cash and cash equivalents | € | 105,072 | € | 105,072 | € | 99,022 | € | 99,022 | ||||||||
Marketable securities | 12,372 | 12,372 | 275 | 275 | ||||||||||||
Receivables | 120,487 | 120,487 | 121,709 | 121,709 | ||||||||||||
Note receivable | — | — | 2,978 | 2,978 | ||||||||||||
Accounts payable and other | 99,640 | 99,640 | 84,873 | 84,873 | ||||||||||||
Debt | 734,086 | 717,522 | 821,924 | 847,875 | ||||||||||||
Interest rate derivative contract—liability | 52,391 | 52,391 | 50,973 | 50,973 |
Many of the Company’s transactions are denominated in foreign currencies, primarily the U.S. dollar. As a result of these transactions the Company and its subsidiaries hashave financial risk that the value of the Company’s financial instruments will vary due to fluctuations in foreign exchange rates.
The carrying value of cash and cash equivalents, note receivable and accounts payable and accrued expensesother approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. The fair value of notes receivable was estimated using discounted cash flows at prevailing market rates. The fair value of debt reflects recent market transactions and discounted cash flow estimate.estimates. See the Fair Value Measurement and Disclosures section for details on how the fair value of the interest rate derivative contracts was determined.
The Company uses interest rate derivatives to fix the rate of interest on indebtedness under the Stendal Loan FacilitiesFacility and sometimes uses foreign exchange derivatives to convert some costs (including currency swaps relating to long-term indebtedness) from Euros to U.S. dollars. As at December 31, 2010,2011, there were only interest rate derivative instruments in place and there were no foreign exchange derivatives outstanding. The interest rate derivative contracts are with a large European bank that is the largest holder of the Stendal Loan Facility and the Company does not anticipate non-performance.
2010 | 2009 | 2008 | ||||||||||
Unrealized net gain (loss) on derivative financial instruments | € | 1,899 | € | (5,760 | ) | € | (25,228 | ) | ||||
Energy Derivatives
The Company is also subject to price risk for electricity used in its manufacturing operations. During 2008, theThe Company enteredenters into fixed electricity forward sales contracts in connection with the Stendal and Rosenthal mills electricity generation. The Company realized no gains for the years ended 2010, 2009, and 2008. The Company entered into the electricity forward sales contracts becausewhen it sawsees an opportunity to sell forward electricity at opportunistic rates. No electricity forward sales contracts were entered into in 2010.2009, 2010, and 2011. Although the Company does not currently have plans to enter into similarsuch transactions, should similar situations present themselves, the Company may enter into similar electricity derivative contracts. As at December 31, 2010, the Company had no outstanding electricity derivative contracts. Gains or losses from energy derivatives arewould be included within “Operating costs” in the Consolidated Statement of Operations.
Interest Rate Derivatives
During 2004, the Company entered into certainvariable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €612,619€612,600 of the principal amount
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 15. Financial Instruments (continued)
of the indebtedness under the Stendal Loan Facility. Under the remaining interest rate swap, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Currently, the contract has an aggregate notional amount of these contracts is €447,763€404,448 at a fixed interest rate of 5.28% and they matureit matures in October 2017 (which for the most part matches the maturity of the Stendal Loan Facility). The Company recognized an unrealized gainloss of €1,899,€1,418, with respect to thesethis interest rate swapsswap for the year ended December 31, 2010 (2009 —2011 (2010 – an unrealized gain of €1,899; 2009 – an unrealized loss of €5,760; 2008 — an€5,760) in the “Gain (loss) on derivative instruments” line in the Consolidated Statement of Operations. Derivative instruments are required to be measured at fair value. Accordingly, the fair value of the interest rate swap is presented in the “Unrealized interest rate derivative losses” line in the Consolidated Balance Sheet, which currently amounts to a cumulative unrealized loss of €25,228)€52,391 (2010 – €50,973).
Foreign Exchange Derivatives
The Company did not enter into foreign exchange derivatives in 2011, 2010 2009 and 2008.
100
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 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 products is managed through establishing long-term contractual relationships with its customers, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping its product. Concentrations of credit risk on the sale of pulp products are with customers and agents based in Germany, China, Italy and the United States.
The carrying amount of cash and cash equivalents of €105,072 and receivables of €120,487 recorded in the Consolidated Balance Sheet, net of any allowances for losses, represents the Company’s maximum exposure to credit risk.
Fair Value Measurement and Disclosures
The fair value methodologies and, as a result, the fair value of the Company’s investments and derivative instruments are determined based on the fair value hierarchy provided in ASC 820. The fair value hierarchy per ASC 820, isand are as follows:
Level 1 — 1—Valuations based on quoted prices in active markets foridenticalassets and liabilities.
Level 2 — 2—Valuations based on observable inputs in active markets forsimilarassets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates.
Level 3 — 3—Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.
The Company classified its marketable security investments within Level 1 of the valuation hierarchy wherebecause quoted prices are available in an active market. Level 1market for both the exchange-traded equities and the German federal
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 15. Financial Instruments (continued)
government bonds. The Company classified the German federal government bonds as available-for-sale as it is not certain these investments include exchange-traded equities.
The Company’s derivatives are classified within Level 2 of the valuation hierarchy, as they are traded on theover-the-counter market and are valued using internal models that use as their basis readily observable market inputs, such as forward interest rates.
The valuation techniques used by the Company in determining the fair value of the derivative instruments are based upon observable inputs. Observable inputs reflect market data obtained from independent sources. In addition, the Company considered the risk of non-performance of the obligor, which in some cases reflects the Company’s own credit risk, in determining the fair value of the derivative instruments.risk. The counterparty to our interest rate swap derivative is a multi-national financial institution.
The following table presents a summary of the Company’s outstanding financial instruments and their estimated fair values under the hierarchy defined in ASC 820:
Fair value measurements at December 31, 2010 using: | ||||||||||||||||
Quoted prices | Significant | |||||||||||||||
in active | other | Significant | ||||||||||||||
markets for | observable | unobservable | ||||||||||||||
identical assets | inputs | inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Assets | ||||||||||||||||
Investments(a) | € | 275 | € | — | € | — | € | 275 | ||||||||
Liabilities | ||||||||||||||||
Derivatives(b) | ||||||||||||||||
— Interest rate swaps | € | — | € | 50,973 | € | — | € | 50,973 | ||||||||
101
Fair value measurements at December 31, 2011 using: | ||||||||||||||||
Description | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
Assets | ||||||||||||||||
Marketable securities | ||||||||||||||||
German federal government bonds | € | 12,216 | € | — | € | — | € | 12,216 | ||||||||
Exchange traded equities | 156 | — | — | 156 | ||||||||||||
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€ | 12,372 | € | — | € | — | € | 12,372 | |||||||||
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Liabilities | ||||||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap | € | — | € | 52,391 | € | — | € | 52,391 | ||||||||
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Fair value measurements at December 31, 2010 using: | ||||||||||||||||
Description | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
Assets | ||||||||||||||||
Exchange traded equities | € | 275 | € | — | € | — | € | 275 | ||||||||
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Liabilities | ||||||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap | € | — | € | 50,973 | € | — | € | 50,973 | ||||||||
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MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 16. Lease Commitments
Minimum lease payments, primarily for various vehicles, and plant and equipment under capital and non-cancellable operating leases and the present value of net minimum payments at December 31, 20102011 were as follows:
Capital | Operating | |||||||
Leases | Leases | |||||||
2011 | € | 3,400 | € | 3,287 | ||||
2012 | 2,114 | 2,740 | ||||||
2013 | 799 | 1,551 | ||||||
2014 | 612 | 1,404 | ||||||
2015 | 667 | 1,387 | ||||||
Thereafter | 1,556 | 3,287 | ||||||
Total | € | 9,148 | € | 13,656 | ||||
Less imputed interest | 1,166 | |||||||
Total present value of minimum capitalized payments | 7,982 | |||||||
Less current portion of capital lease obligations | 3,240 | |||||||
Long-term capital lease obligations | € | 4,742 | ||||||
Capital Leases | Operating Leases | |||||||
2012 | € | 2,719 | € | 3,167 | ||||
2013 | 1,308 | 2,819 | ||||||
2014 | 946 | 1,597 | ||||||
2015 | 993 | 1,565 | ||||||
2016 | 490 | 1,076 | ||||||
Thereafter | 3,362 | 2,900 | ||||||
|
|
|
| |||||
Total | € | 9,818 | € | 13,124 | ||||
|
| |||||||
Less imputed interest | 1,782 | |||||||
|
| |||||||
Total present value of minimum capitalized payments | 8,036 | |||||||
Less current portion of capital lease obligations | 2,505 | |||||||
|
| |||||||
Long-term capital lease obligations | € | 5,531 | ||||||
|
|
Rent expense under operating leases was €2,246€3,313 for 2010 (2009 — €1,218; 2008 — €1,011)2011 (2010 – €2,246; 2009 – €1,218). The current portion of the capital lease obligations is included in accounts“Accounts payable and accrued expensesother” and the long-term portion is included in capital“Capital leases and otherother” in the Consolidated Balance Sheets.
Note 17. Commitments and Contingencies
(a) | |
102
(b) | The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove the 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 obligations for the proper removal and disposal of asbestos products from the Company’s mills meets the definition of a conditional asset retirement obligation as found in FASB’s Accounting Standards Codification No. 410,Asset Retirement and Environment (“ASC 410”). 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. |
(c) | Pursuant to an arbitration proceeding with the general construction contractor of the Stendal mill regarding certain warranty claims, the Company acted upon a bank guarantee for defect liability on civil works that was about to expire as provided in the engineering, procurement, and construction contract. On January 28, 2011, the Company received approximately €10,000 (the “Guarantee Amount”), which is intended to |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 17. Commitments and Contingencies (continued)
(d) | The Company is involved in a property transfer tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. While the outcome of these legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. |
(e) | The Company had also entered into certain other capital commitments at the Rosenthal mill, none of which is individually material. |
(f) | The Company entered into certain minimum or fixed purchase commitments primarily related to the purchase of raw materials, none of which are individually material, that extend beyond 2012. Commitments under these contracts are approximately €1,000 in 2012, approximately €500 in 2013 and approximately €200 in 2014. |
Note 18. Subsequent Event
In January 2012, the Company’s majority owned subsidiary secured a new €17,000 five year amortizing secured term debt facility, of which 80% is guaranteed by the State of Saxony-Anhalt. The facility is non-recourse to Mercer. The facility will be used to finance a project, referred to as “Project Blue Mill”, to increase the Stendal mill’s annual pulp production capacity by 30,000 air-dried metric tonnes and February 2011, approximately $1.9 million and $3.2 millionincludes the installation of Subordinated Convertible Notes due January 2012 were converted into 565,757 and 959,391 shares, respectively.
As part of Project Blue Mill, subsequent to year end, the Company acted upon a performance guarantee and received a pre-paymententered into approximately €12,800 of approximately €10.0 million, which the Company treated as a contingent gain and accordingly was not accountedfixed purchase commitments for as a reduction to property, plant and equipment prior to receipt. The ultimate settlement will be determined in an arbitration proceeding that remains ongoing.
103capital equipment.
Note 19. Restricted Group Supplemental Disclosure
The terms of the indentures governing our 9.25% senior unsecured notes and our 9.5%9.50% senior secured notes require that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the years ended December 31, 20102011 and 2009,2010, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.
December 31, 2010 | ||||||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||||||
Group | Subsidiaries | Eliminations | Group | |||||||||||||
ASSETS | ||||||||||||||||
Current | ||||||||||||||||
Cash and cash equivalents | € | 50,654 | € | 48,368 | € | — | € | 99,022 | ||||||||
Receivables | 70,865 | 50,844 | — | 121,709 | ||||||||||||
Inventories | 60,910 | 41,309 | — | 102,219 | ||||||||||||
Prepaid expenses and other | 6,840 | 4,520 | — | 11,360 | ||||||||||||
Deferred income tax | 22,570 | — | — | 22,570 | ||||||||||||
Total current assets | 211,839 | 145,041 | — | 356,880 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 362,274 | 484,493 | — | 846,767 | ||||||||||||
Deferred note issuance and other | 6,903 | 4,179 | — | 11,082 | ||||||||||||
Deferred income tax | — | — | — | — | ||||||||||||
Due from unrestricted group | 80,582 | — | (80,582 | ) | — | |||||||||||
Note receivable | 1,346 | — | — | 1,346 | ||||||||||||
Total assets | € | 662,944 | € | 633,713 | € | (80,582 | ) | € | 1,216,075 | |||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued expenses | € | 44,015 | € | 40,858 | € | — | € | 84,873 | ||||||||
Pension and other post-retirement benefit obligations | 728 | — | — | 728 | ||||||||||||
Debt | 16,429 | 23,167 | — | 39,596 | ||||||||||||
Total current liabilities | 61,172 | 64,025 | — | 125,197 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 273,473 | 508,855 | — | 782,328 | ||||||||||||
Due to restricted group | — | 80,582 | (80,582 | ) | — | |||||||||||
Unrealized interest rate derivative losses | — | 50,973 | — | 50,973 | ||||||||||||
Pension and other post-retirement benefit obligations | 24,236 | — | — | 24,236 | ||||||||||||
Capital leases and other | 7,154 | 4,856 | — | 12,010 | ||||||||||||
Deferred income tax | 7,768 | — | — | 7,768 | ||||||||||||
Total liabilities | 373,803 | 709,291 | (80,582 | ) | 1,002,512 | |||||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 289,141 | (53,073 | ) | — | 236,068 | |||||||||||
Noncontrolling interest (deficit) | — | (22,505 | ) | — | (22,505 | ) | ||||||||||
Total liabilities and equity | € | 662,944 | € | 633,713 | € | (80,582 | ) | € | 1,216,075 | |||||||
104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Balance Sheets
December 31, 2009 | ||||||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||||||
Group | Subsidiaries | Eliminations | Group | |||||||||||||
ASSETS | ||||||||||||||||
Current | ||||||||||||||||
Cash and cash equivalents | € | 20,635 | € | 30,656 | € | — | € | 51,291 | ||||||||
Receivables | 34,588 | 36,555 | — | 71,143 | ||||||||||||
Inventories | 52,897 | 19,732 | — | 72,629 | ||||||||||||
Prepaid expenses and other | 3,452 | 2,419 | — | 5,871 | ||||||||||||
Total current assets | 111,572 | 89,362 | — | 200,934 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 362,311 | 506,247 | — | 868,558 | ||||||||||||
Deferred note issuance and other | 3,388 | 4,798 | — | 8,186 | ||||||||||||
Deferred income tax | 3,426 | — | — | 3,426 | ||||||||||||
Due from unrestricted group | 72,553 | — | (72,553 | ) | — | |||||||||||
Note receivable | 2,727 | — | — | 2,727 | ||||||||||||
Total assets | € | 555,977 | € | 600,407 | € | (72,553 | ) | € | 1,083,831 | |||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued expenses | € | 51,875 | € | 33,310 | € | — | € | 85,185 | ||||||||
Pension and other post-retirement benefit obligations | 567 | — | — | 567 | ||||||||||||
Debt | 2,115 | 13,917 | — | 16,032 | ||||||||||||
Total current liabilities | 54,557 | 47,227 | — | 101,784 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 276,604 | 536,538 | — | 813,142 | ||||||||||||
Due to restricted group | — | 72,553 | (72,553 | ) | — | |||||||||||
Unrealized interest rate derivative losses | — | 52,873 | — | 52,873 | ||||||||||||
Pension and other post-retirement benefit obligations | 17,902 | — | — | 17,902 | ||||||||||||
Capital leases and other | 6,667 | 5,490 | — | 12,157 | ||||||||||||
Total liabilities | 355,730 | 714,681 | (72,553 | ) | 997,858 | |||||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 200,247 | (77,025 | ) | — | 123,222 | |||||||||||
Noncontrolling interest (deficit) | — | (37,249 | ) | — | (37,249 | ) | ||||||||||
Total liabilities and equity | € | 555,977 | € | 600,407 | € | (72,553 | ) | € | 1,083,831 | |||||||
105
December 31, 2011 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | € | 44,829 | € | 60,243 | € | — | € | 105,072 | ||||||||
Marketable securities | 12,216 | — | — | 12,216 | ||||||||||||
Receivables | 62,697 | 57,790 | — | 120,487 | ||||||||||||
Inventories | 71,692 | 48,847 | — | 120,539 | ||||||||||||
Prepaid expenses and other | 5,019 | 3,143 | — | 8,162 | ||||||||||||
Deferred income tax | 5,179 | 1,571 | — | 6,750 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | 201,632 | 171,594 | — | 373,226 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 353,925 | 467,049 | — | 820,974 | ||||||||||||
Deferred note issuance and other | 5,971 | 4,792 | — | 10,763 | ||||||||||||
Deferred income tax | 8,492 | 3,795 | — | 12,287 | ||||||||||||
Due from unrestricted group | 88,824 | — | (88,824 | ) | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | € | 658,844 | € | 647,230 | € | (88,824 | ) | € | 1,217,250 | |||||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and other | € | 49,815 | € | 49,825 | € | — | € | 99,640 | ||||||||
Pension and other post-retirement benefit obligations | 756 | — | — | 756 | ||||||||||||
Debt | 1,088 | 24,583 | — | 25,671 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current liabilities | 51,659 | 74,408 | — | 126,067 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 222,384 | 486,031 | — | 708,415 | ||||||||||||
Due to restricted group | — | 88,824 | (88,824 | ) | — | |||||||||||
Unrealized interest rate derivative losses | — | 52,391 | — | 52,391 | ||||||||||||
Pension and other post-retirement benefit obligations | 31,197 | — | — | 31,197 | ||||||||||||
Capital leases and other | 6,604 | 6,449 | — | 13,053 | ||||||||||||
Deferred income tax | 2,585 | — | — | 2,585 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | 314,429 | 708,103 | (88,824 | ) | 933,708 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 344,415 | (42,299 | ) | — | 302,116 | |||||||||||
Noncontrolling interest (deficit) | — | (18,574 | ) | — | (18,574 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities and equity | € | 658,844 | € | 647,230 | € | (88,824 | ) | € | 1,217,250 | |||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of OperationsBalance Sheets
Year Ended December 31, 2010 | ||||||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||||||
Group | Subsidiaries | Eliminations | Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 490,020 | € | 366,291 | € | — | € | 856,311 | ||||||||
Energy | 15,145 | 29,080 | — | 44,225 | ||||||||||||
505,165 | 395,371 | — | 900,536 | |||||||||||||
Operating costs | 361,272 | 282,257 | — | 643,529 | ||||||||||||
Operating depreciation and amortization | 29,971 | 25,961 | — | 55,932 | ||||||||||||
Selling, general and administrative expenses and other | 20,231 | 13,101 | — | 33,332 | ||||||||||||
411,474 | 321,319 | — | 732,793 | |||||||||||||
Operating income (loss) | 93,691 | 74,052 | — | 167,743 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (31,498 | ) | (40,852 | ) | 4,729 | (67,621 | ) | |||||||||
Investment income (loss) | 5,103 | 94 | (4,729 | ) | 468 | |||||||||||
Foreign exchange gain (loss) on debt | (6,126 | ) | — | — | (6,126 | ) | ||||||||||
Gain (loss) on extinguishment of debt | (7,494 | ) | — | — | (7,494 | ) | ||||||||||
Gain (loss) on derivative instruments | — | 1,899 | — | 1,899 | ||||||||||||
Total other income (expense) | (40,015 | ) | (38,859 | ) | — | (78,874 | ) | |||||||||
Income (loss) before income taxes | 53,676 | 35,193 | — | 88,869 | ||||||||||||
Income tax benefit (provision) | 8,651 | (2,772 | ) | — | 5,879 | |||||||||||
Net income (loss) | 62,327 | 32,421 | — | 94,748 | ||||||||||||
Less: net (income) loss attributable to noncontrolling interest | — | (8,469 | ) | — | (8,469 | ) | ||||||||||
Net income (loss) attributable to common shareholders | € | 62,327 | € | 23,952 | € | — | € | 86,279 | ||||||||
106
December 31, 2010 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | € | 50,654 | € | 48,368 | € | — | € | 99,022 | ||||||||
Receivables | 70,865 | 50,844 | — | 121,709 | ||||||||||||
Inventories | 60,910 | 41,309 | — | 102,219 | ||||||||||||
Prepaid expenses and other | 6,840 | 4,520 | — | 11,360 | ||||||||||||
Deferred income tax | 22,570 | — | — | 22,570 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | 211,839 | 145,041 | — | 356,880 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 362,274 | 484,493 | — | 846,767 | ||||||||||||
Deferred note issuance and other | 6,903 | 4,179 | — | 11,082 | ||||||||||||
Due from unrestricted group | 80,582 | — | (80,582 | ) | — | |||||||||||
Note receivable | 1,346 | — | — | 1,346 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | € | 662,944 | € | 633,713 | € | (80,582 | ) | € | 1,216,075 | |||||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and other | € | 44,015 | € | 40,858 | € | — | € | 84,873 | ||||||||
Pension and other post-retirement benefit obligations | 728 | — | — | 728 | ||||||||||||
Debt | 16,429 | 23,167 | — | 39,596 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current liabilities | 61,172 | 64,025 | — | 125,197 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 273,473 | 508,855 | — | 782,328 | ||||||||||||
Due to restricted group | — | 80,582 | (80,582 | ) | — | |||||||||||
Unrealized interest rate derivative losses | — | 50,973 | — | 50,973 | ||||||||||||
Pension and other post-retirement benefit obligations | 24,236 | — | — | 24,236 | ||||||||||||
Capital leases and other | 7,154 | 4,856 | — | 12,010 | ||||||||||||
Deferred income tax | 7,768 | — | — | 7,768 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | 373,803 | 709,291 | (80,582 | ) | 1,002,512 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 289,141 | (53,073 | ) | — | 236,068 | |||||||||||
Noncontrolling interest (deficit) | — | (22,505 | ) | — | (22,505 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities and equity | € | 662,944 | € | 633,713 | € | (80,582 | ) | € | 1,216,075 | |||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
Year Ended December 31, 2009 | ||||||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||||||
Group | Subsidiaries | Eliminations | Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 318,448 | € | 258,850 | € | — | € | 577,298 | ||||||||
Energy | 15,183 | 27,318 | — | 42,501 | ||||||||||||
333,631 | 286,168 | — | 619,799 | |||||||||||||
Operating costs | 312,029 | 239,752 | — | 551,781 | ||||||||||||
Operating depreciation and amortization | 27,453 | 26,466 | — | 53,919 | ||||||||||||
Selling, general and administrative expenses and other | 15,049 | 11,849 | — | 26,898 | ||||||||||||
354,531 | 278,067 | — | 632,598 | |||||||||||||
Operating income (loss) | (20,900 | ) | 8,101 | — | (12,799 | ) | ||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (27,351 | ) | (41,932 | ) | 4,513 | (64,770 | ) | |||||||||
Investment income (loss) | 5,002 | (2,293 | ) | (4,513 | ) | (1,804 | ) | |||||||||
Foreign exchange gain (loss) on debt | 2,692 | — | — | 2,692 | ||||||||||||
Gain (loss) on extinguishment of debt | 4,447 | — | — | 4,447 | ||||||||||||
Gain (loss) on derivative instruments | — | (5,760 | ) | — | (5,760 | ) | ||||||||||
Total other income (expense) | (15,210 | ) | (49,985 | ) | — | (65,195 | ) | |||||||||
Income (loss) before income taxes | (36,110 | ) | (41,884 | ) | — | (77,994 | ) | |||||||||
Income tax benefit (provision) | 183 | 5,686 | — | 5,869 | ||||||||||||
Net income (loss) | (35,927 | ) | (36,198 | ) | — | (72,125 | ) | |||||||||
Less: net (income) loss attributable to noncontrolling interest | — | 9,936 | — | 9,936 | ||||||||||||
Net income (loss) attributable to common shareholders | € | (35,927 | ) | € | (26,262 | ) | € | — | € | (62,189 | ) | |||||
107
Year Ended December 31, 2011 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 473,992 | € | 357,404 | € | — | € | 831,396 | ||||||||
Energy | 25,473 | 32,499 | — | 57,972 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
499,465 | 389,903 | — | 889,368 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating costs | 382,555 | 301,163 | — | 683,718 | ||||||||||||
Operating depreciation and amortization | 29,841 | 25,919 | — | 55,760 | ||||||||||||
Selling, general and administrative expenses | 24,126 | 14,645 | — | 38,771 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
436,522 | 341,727 | — | 778,249 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 62,943 | 48,176 | — | 111,119 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (24,886 | ) | (39,074 | ) | 4,965 | (58,995 | ) | |||||||||
Investment income (loss) | 5,262 | 1,204 | (4,965 | ) | 1,501 | |||||||||||
Foreign exchange gain on debt | 1,175 | — | — | 1,175 | ||||||||||||
Loss on extinguishment of debt | (71 | ) | — | — | (71 | ) | ||||||||||
Loss on derivative instruments | — | (1,418 | ) | — | (1,418 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (18,520 | ) | (39,288 | ) | — | (57,808 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | 44,423 | 8,888 | — | 53,311 | ||||||||||||
Income tax benefit (provision) | (4,614 | ) | 5,309 | — | 695 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | 39,809 | 14,197 | — | 54,006 | ||||||||||||
Less: net income attributable to noncontrolling interest | — | (3,931 | ) | — | (3,931 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to common shareholders | € | 39,809 | € | 10,266 | € | — | € | 50,075 | ||||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
Year Ended December 31, 2008 | ||||||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||||||
Group | Subsidiaries | Eliminations | Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 400,969 | € | 288,351 | € | — | € | 689,320 | ||||||||
Energy | 12,119 | 18,852 | — | 30,971 | ||||||||||||
413,088 | 307,203 | — | 720,291 | |||||||||||||
Operating costs | 369,923 | 257,010 | — | 626,933 | ||||||||||||
Operating depreciation and amortization | 28,589 | 26,895 | — | 55,484 | ||||||||||||
Selling, general and administrative expenses and other | 16,973 | 7,572 | — | 24,545 | ||||||||||||
415,485 | 291,477 | — | 706,962 | |||||||||||||
Operating income (loss) | (2,397 | ) | 15,726 | — | 13,329 | |||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (27,027 | ) | (43,117 | ) | 4,388 | (65,756 | ) | |||||||||
Investment income (loss) | 6,834 | (3,620 | ) | (4,388 | ) | (1,174 | ) | |||||||||
Foreign exchange gain (loss) on debt | (4,114 | ) | (120 | ) | — | (4,234 | ) | |||||||||
Gain (loss) on derivative instruments | — | (25,228 | ) | — | (25,228 | ) | ||||||||||
Total other income (expense) | (24,307 | ) | (72,085 | ) | — | (96,392 | ) | |||||||||
Income (loss) before income taxes | (26,704 | ) | (56,359 | ) | — | (83,063 | ) | |||||||||
Income tax benefit (provision) | (3,728 | ) | 1,251 | — | (2,477 | ) | ||||||||||
Net income (loss) | (30,432 | ) | (55,108 | ) | — | (85,540 | ) | |||||||||
Less: net (income) loss attributable to noncontrolling interest | — | 13,075 | — | 13,075 | ||||||||||||
Net income (loss) attributable to common shareholders | € | (30,432 | ) | € | (42,033 | ) | € | — | € | (72,465 | ) | |||||
108
Year Ended December 31, 2010 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 490,020 | € | 366,291 | € | — | € | 856,311 | ||||||||
Energy | 15,145 | 29,080 | — | 44,225 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
505,165 | 395,371 | — | 900,536 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating costs | 361,272 | 282,257 | — | 643,529 | ||||||||||||
Operating depreciation and amortization | 29,971 | 25,961 | — | 55,932 | ||||||||||||
Selling, general and administrative expenses | 20,231 | 13,101 | — | 33,332 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
411,474 | 321,319 | — | 732,793 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 93,691 | 74,052 | — | 167,743 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (31,498 | ) | (40,852 | ) | 4,729 | (67,621 | ) | |||||||||
Investment income (loss) | 5,103 | 94 | (4,729 | ) | 468 | |||||||||||
Foreign exchange loss on debt | (6,126 | ) | — | — | (6,126 | ) | ||||||||||
Loss on extinguishment of debt | (7,494 | ) | — | — | (7,494 | ) | ||||||||||
Gain on derivative instruments | — | 1,899 | — | 1,899 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (40,015 | ) | (38,859 | ) | — | (78,874 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income taxes | 53,676 | 35,193 | — | 88,869 | ||||||||||||
Income tax benefit (provision) | 8,651 | (2,772 | ) | — | 5,879 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | 62,327 | 32,421 | — | 94,748 | ||||||||||||
Less: net income attributable to noncontrolling interest | — | (8,469 | ) | — | (8,469 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income attributable to common shareholders | € | 62,327 | € | 23,952 | € | — | € | 86,279 | ||||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash FlowsOperations
Year Ended December 31, 2010 | ||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||
Group | Group | Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) attributable to common shareholders | € | 62,327 | € | 23,952 | € | 86,279 | ||||||
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss (gain) on derivative instruments | — | (1,899 | ) | (1,899 | ) | |||||||
Foreign exchange (gain) loss on debt | 6,126 | — | 6,126 | |||||||||
Loss (gain) on extinguishment of debt | 7,494 | — | 7,494 | |||||||||
Depreciation and amortization | 30,270 | 25,961 | 56,231 | |||||||||
Accretion expense (income) | 2,492 | — | 2,492 | |||||||||
Noncontrolling interest | — | 8,469 | 8,469 | |||||||||
Deferred income taxes | (9,760 | ) | — | (9,760 | ) | |||||||
Stock compensation expense | 2,394 | — | 2,394 | |||||||||
Pension and other post-retirement expense, net of funding | 418 | — | 418 | |||||||||
Other | 2,519 | 2,671 | 5,190 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | (25,913 | ) | (14,125 | ) | (40,038 | ) | ||||||
Inventories | (2,885 | ) | (21,577 | ) | (24,462 | ) | ||||||
Accounts payable and accrued expenses | (10,304 | ) | 7,215 | (3,089 | ) | |||||||
Other(1) | (10,597 | ) | 6,031 | (4,566 | ) | |||||||
Net cash from (used in) operating activities | 54,581 | 36,698 | 91,279 | |||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (34,675 | ) | (3,625 | ) | (38,300 | ) | ||||||
Proceeds on sale of property, plant and equipment | 251 | 887 | 1,138 | |||||||||
Cash, restricted | — | — | — | |||||||||
Note receivable | 1,113 | — | 1,113 | |||||||||
Net cash from (used in) investing activities | (33,311 | ) | (2,738 | ) | (36,049 | ) | ||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (220,681 | ) | (13,917 | ) | (234,598 | ) | ||||||
Repayment of capital lease obligations | (589 | ) | (2,331 | ) | (2,920 | ) | ||||||
Proceeds from borrowings of notes payable and debt | 222,193 | — | 222,193 | |||||||||
Proceeds from (repayment of) credit facilities, net | (2,660 | ) | — | (2,660 | ) | |||||||
Proceeds from government grants | 17,952 | — | 17,952 | |||||||||
Payment of deferred note issuance costs | (6,095 | ) | — | (6,095 | ) | |||||||
Net cash from (used in) financing activities | 10,120 | (16,248 | ) | (6,128 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (1,371 | ) | — | (1,371 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 30,019 | 17,712 | 47,731 | |||||||||
Cash and cash equivalents, beginning of period | 20,635 | 30,656 | 51,291 | |||||||||
Cash and cash equivalents, end of period | € | 50,654 | € | 48,368 | € | 99,022 | ||||||
109
Year Ended December 31, 2009 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | € | 318,448 | € | 258,850 | € | — | € | 577,298 | ||||||||
Energy | 15,183 | 27,318 | — | 42,501 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
333,631 | 286,168 | — | 619,799 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating costs | 312,029 | 239,752 | — | 551,781 | ||||||||||||
Operating depreciation and amortization | 27,453 | 26,466 | — | 53,919 | ||||||||||||
Selling, general and administrative expenses | 15,049 | 11,849 | — | 26,898 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
354,531 | 278,067 | — | 632,598 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | (20,900 | ) | 8,101 | — | (12,799 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (27,351 | ) | (41,932 | ) | 4,513 | (64,770 | ) | |||||||||
Investment income (loss) | 5,002 | (2,293 | ) | (4,513 | ) | (1,804 | ) | |||||||||
Foreign exchange gain on debt | 2,692 | — | — | 2,692 | ||||||||||||
Gain on extinguishment of debt | 4,447 | — | — | 4,447 | ||||||||||||
Loss on derivative instruments | — | (5,760 | ) | — | (5,760 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (15,210 | ) | (49,985 | ) | — | (65,195 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Loss before income taxes | (36,110 | ) | (41,884 | ) | — | (77,994 | ) | |||||||||
Income tax benefit | 183 | 5,686 | — | 5,869 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net loss | (35,927 | ) | (36,198 | ) | — | (72,125 | ) | |||||||||
Less: net loss attributable to noncontrolling interest | — | 9,936 | — | 9,936 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net loss attributable to common shareholders | € | (35,927 | ) | € | (26,262 | ) | € | — | € | (62,189 | ) | |||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash Flows
Year Ended December 31, 2009 | ||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||
Group | Group | Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) attributable to common shareholders | € | (35,927 | ) | € | (26,262 | ) | € | (62,189 | ) | |||
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss (gain) on derivative instruments | — | 5,760 | 5,760 | |||||||||
Foreign exchange (gain) loss on debt | (2,692 | ) | — | (2,692 | ) | |||||||
Loss (gain) on extinguishment of debt | (4,447 | ) | — | (4,447 | ) | |||||||
Depreciation and amortization | 27,704 | 26,466 | 54,170 | |||||||||
Accretion expense (income) | 181 | — | 181 | |||||||||
Noncontrolling interest | — | (9,936 | ) | (9,936 | ) | |||||||
Deferred income taxes | (176 | ) | (5,827 | ) | (6,003 | ) | ||||||
Stock compensation expense | 455 | — | 455 | |||||||||
Pension and other post-retirement expense, net of funding | 282 | — | 282 | |||||||||
Other | 934 | 1,548 | 2,482 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | 26,140 | 5,767 | 31,907 | |||||||||
Inventories | 13,234 | 18,924 | 32,158 | |||||||||
Accounts payable and accrued expenses | 5,839 | (8,789 | ) | (2,950 | ) | |||||||
Other(1) | (18,265 | ) | 16,406 | (1,859 | ) | |||||||
Net cash from (used in) operating activities | 13,262 | 24,057 | 37,319 | |||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (26,839 | ) | (1,989 | ) | (28,828 | ) | ||||||
Proceeds on sale of property, plant and equipment | 158 | 278 | 436 | |||||||||
Cash, restricted | — | 13,000 | 13,000 | |||||||||
Note receivable | 152 | — | 152 | |||||||||
Net cash from (used in) investing activities | (26,529 | ) | 11,289 | (15,240 | ) | |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (10,000 | ) | (16,499 | ) | (26,499 | ) | ||||||
Repayment of capital lease obligations | (680 | ) | (2,498 | ) | (3,178 | ) | ||||||
Proceeds from borrowings of notes payable and debt | 13,511 | — | 13,511 | |||||||||
Proceeds from (repayment of) credit facilities, net | (4,272 | ) | — | (4,272 | ) | |||||||
Proceeds from government investment grants | 9,058 | — | 9,058 | |||||||||
Payment of deferred note issuance costs | — | (1,969 | ) | (1,969 | ) | |||||||
Net cash from (used in) financing activities | 7,617 | (20,966 | ) | (13,349 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 109 | — | 109 | |||||||||
Net increase (decrease) in cash and cash equivalents | (5,541 | ) | 14,380 | 8,839 | ||||||||
Cash and cash equivalents, beginning of period | 26,176 | 16,276 | 42,452 | |||||||||
Cash and cash equivalents, end of period | € | 20,635 | € | 30,656 | € | 51,291 | ||||||
Year Ended December 31, 2011 | ||||||||||||
Restricted Group | Unrestricted Group | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income attributable to common shareholders | € | 39,809 | € | 10,266 | € | 50,075 | ||||||
Adjustments to reconcile net income attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss on derivative instruments | — | 1,418 | 1,418 | |||||||||
Foreign exchange gain on debt | (1,175 | ) | — | (1,175 | ) | |||||||
Loss on extinguishment of debt | 71 | — | 71 | |||||||||
Depreciation and amortization | 30,086 | 25,919 | 56,005 | |||||||||
Accretion expense | 597 | — | 597 | |||||||||
Noncontrolling interest | — | 3,931 | 3,931 | |||||||||
Deferred income taxes | 2,989 | (5,366 | ) | (2,377 | ) | |||||||
Stock compensation expense | 3,310 | — | 3,310 | |||||||||
Pension and other post-retirement expense, net of funding | (269 | ) | — | (269 | ) | |||||||
Other | 816 | 492 | 1,308 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | 3,255 | (4,859 | ) | (1,604 | ) | |||||||
Inventories | (10,175 | ) | (7,538 | ) | (17,713 | ) | ||||||
Accounts payable and accrued expenses | 5,868 | 8,384 | 14,252 | |||||||||
Other(1) | (8,503 | ) | 11,729 | 3,226 | ||||||||
|
|
|
|
|
| |||||||
Net cash from operating activities | 66,679 | 44,376 | 111,055 | |||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (29,513 | ) | (8,296 | ) | (37,809 | ) | ||||||
Proceeds on sale of property, plant and equipment | 327 | 486 | 813 | |||||||||
Note receivable | 2,865 | — | 2,865 | |||||||||
Purchase of marketable securities | (12,187 | ) | — | (12,187 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (38,508 | ) | (7,810 | ) | (46,318 | ) | ||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (26,026 | ) | (23,167 | ) | (49,193 | ) | ||||||
Repayment of capital lease obligations | (1,310 | ) | (1,632 | ) | (2,942 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | (14,652 | ) | — | (14,652 | ) | |||||||
Proceeds from government grants | 14,091 | 108 | 14,199 | |||||||||
Purchase of treasury shares | (7,476 | ) | — | (7,476 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used in financing activities | (35,373 | ) | (24,691 | ) | (60,064 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 1,377 | — | 1,377 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | (5,825 | ) | 11,875 | 6,050 | ||||||||
Cash and cash equivalents, beginning of year | 50,654 | 48,368 | 99,022 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | € | 44,829 | € | 60,243 | € | 105,072 | ||||||
|
|
|
|
|
|
(1) | Includes intercompany working capital related transactions. |
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed StatementStatements of Cash Flows
Year Ended December 31, 2008 | ||||||||||||
Restricted | Unrestricted | Consolidated | ||||||||||
Group | Group | Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) attributable to common shareholders | € | (30,432 | ) | € | (42,033 | ) | € | (72,465 | ) | |||
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss (gain) on derivative instruments | — | 25,228 | 25,228 | |||||||||
Foreign exchange (gain) loss on debt | 4,114 | 120 | 4,234 | |||||||||
Depreciation and amortization | 28,868 | 26,894 | 55,762 | |||||||||
Noncontrolling interest | — | (13,075 | ) | (13,075 | ) | |||||||
Deferred income taxes | 3,464 | (1,488 | ) | 1,976 | ||||||||
Stock compensation expense | 264 | — | 264 | |||||||||
Pension and other post-retirement expense, net of funding | (758 | ) | — | (758 | ) | |||||||
Inventory provisions | 8,637 | 2,635 | 11,272 | |||||||||
Other | 2,046 | 979 | 3,025 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | (24,427 | ) | 9,616 | (14,811 | ) | |||||||
Inventories | (12,207 | ) | (1,124 | ) | (13,331 | ) | ||||||
Accounts payable and accrued expenses | 861 | (1,952 | ) | (1,091 | ) | |||||||
Other(1) | (2,321 | ) | 4,225 | 1,904 | ||||||||
Net cash from (used in) operating activities | (21,891 | ) | 10,025 | (11,866 | ) | |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (20,776 | ) | (4,928 | ) | (25,704 | ) | ||||||
Proceeds on sale of property, plant and equipment | 189 | 1,811 | 2,000 | |||||||||
Cash, restricted | — | 20,000 | 20,000 | |||||||||
Note receivable | 5,708 | — | 5,708 | |||||||||
Net cash from (used in) investing activities | (14,879 | ) | 16,883 | 2,004 | ||||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | — | (34,023 | ) | (34,023 | ) | |||||||
Repayment of capital lease obligations | (1,226 | ) | (2,086 | ) | (3,312 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | 5,837 | — | 5,837 | |||||||||
Proceeds from government investment grants | 266 | — | 266 | |||||||||
Net cash from (used in) financing activities | 4,877 | (36,109 | ) | (31,232 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (1,302 | ) | — | (1,302 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (33,195 | ) | (9,201 | ) | (42,396 | ) | ||||||
Cash and cash equivalents, beginning of period | 59,371 | 25,477 | 84,848 | |||||||||
Cash and cash equivalents, end of period | € | 26,176 | € | 16,276 | € | 42,452 | ||||||
Year Ended December 31, 2010 | ||||||||||||
Restricted Group | Unrestricted Group | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income attributable to common shareholders | € | 62,327 | € | 23,952 | € | 86,279 | ||||||
Adjustments to reconcile net income attributable to common shareholders to cash flows from operating activities | ||||||||||||
Gain on derivative instruments | — | (1,899 | ) | (1,899 | ) | |||||||
Foreign exchange loss on debt | 6,126 | — | 6,126 | |||||||||
Loss on extinguishment of debt | 7,494 | — | 7,494 | |||||||||
Depreciation and amortization | 30,270 | 25,961 | 56,231 | |||||||||
Accretion expense | 2,492 | — | 2,492 | |||||||||
Noncontrolling interest | — | 8,469 | 8,469 | |||||||||
Deferred income taxes | (9,760 | ) | — | (9,760 | ) | |||||||
Stock compensation expense | 2,394 | — | 2,394 | |||||||||
Pension and other post-retirement expense, net of funding | 418 | — | 418 | |||||||||
Other | 2,519 | 2,671 | 5,190 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | (25,913 | ) | (14,125 | ) | (40,038 | ) | ||||||
Inventories | (2,885 | ) | (21,577 | ) | (24,462 | ) | ||||||
Accounts payable and accrued expenses | (10,304 | ) | 7,215 | (3,089 | ) | |||||||
Other(1) | (10,597 | ) | 6,031 | (4,566 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from operating activities | 54,581 | 36,698 | 91,279 | |||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (34,675 | ) | (3,625 | ) | (38,300 | ) | ||||||
Proceeds on sale of property, plant and equipment | 251 | 887 | 1,138 | |||||||||
Note receivable | 1,113 | — | 1,113 | |||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (33,311 | ) | (2,738 | ) | (36,049 | ) | ||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (220,665 | ) | (13,917 | ) | (234,582 | ) | ||||||
Repayment of capital lease obligations | (589 | ) | (2,331 | ) | (2,920 | ) | ||||||
Proceeds from borrowings of notes payable and debt | 222,177 | — | 222,177 | |||||||||
Proceeds from (repayment of) credit facilities, net | (2,660 | ) | — | (2,660 | ) | |||||||
Proceeds from government grants | 17,952 | — | 17,952 | |||||||||
Payment of note issuance costs | (6,095 | ) | — | (6,095 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | 10,120 | (16,248 | ) | (6,128 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (1,371 | ) | — | (1,371 | ) | |||||||
|
|
|
|
|
| |||||||
Net increase in cash and cash equivalents | 30,019 | 17,712 | 47,731 | |||||||||
Cash and cash equivalents, beginning of year | 20,635 | 30,656 | 51,291 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | € | 50,654 | € | 48,368 | € | 99,022 | ||||||
|
|
|
|
|
|
(1) | Includes intercompany working capital related transactions. |
111
MERCER INTERNATIONAL INC.
(In thousands of Euros, except per share data)
Note 19. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash Flows
Year Ended December 31, 2009 | ||||||||||||
Restricted Group | Unrestricted Group | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net loss attributable to common shareholders | € | (35,927 | ) | € | (26,262 | ) | € | (62,189 | ) | |||
Adjustments to reconcile net loss attributable to common shareholders to cash flows from operating activities | ||||||||||||
Loss on derivative instruments | — | 5,760 | 5,760 | |||||||||
Foreign exchange gain on debt | (2,692 | ) | — | (2,692 | ) | |||||||
Gain on extinguishment of debt | (4,447 | ) | — | (4,447 | ) | |||||||
Depreciation and amortization | 27,704 | 26,466 | 54,170 | |||||||||
Accretion expense | 181 | — | 181 | |||||||||
Noncontrolling interest | — | (9,936 | ) | (9,936 | ) | |||||||
Deferred income taxes | (176 | ) | (5,827 | ) | (6,003 | ) | ||||||
Stock compensation expense | 455 | — | 455 | |||||||||
Pension and other post-retirement expense, net of funding | 282 | — | 282 | |||||||||
Other | 934 | 1,548 | 2,482 | |||||||||
Changes in current assets and liabilities | ||||||||||||
Receivables | 26,140 | 5,767 | 31,907 | |||||||||
Inventories | 13,234 | 18,924 | 32,158 | |||||||||
Accounts payable and accrued expenses | 5,839 | (8,789 | ) | (2,950 | ) | |||||||
Other(1) | (18,265 | ) | 16,406 | (1,859 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from operating activities | 13,262 | 24,057 | 37,319 | |||||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (26,839 | ) | (1,989 | ) | (28,828 | ) | ||||||
Proceeds on sale of property, plant and equipment | 158 | 278 | 436 | |||||||||
Cash, restricted | — | 13,000 | 13,000 | |||||||||
Note receivable | 152 | — | 152 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (26,529 | ) | 11,289 | (15,240 | ) | |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of notes payable and debt | (10,000 | ) | (16,499 | ) | (26,499 | ) | ||||||
Repayment of capital lease obligations | (680 | ) | (2,498 | ) | (3,178 | ) | ||||||
Proceeds from borrowings of notes payable and debt | 13,511 | — | 13,511 | |||||||||
Proceeds from (repayment of) credit facilities, net | (4,272 | ) | — | (4,272 | ) | |||||||
Proceeds from government investment grants | 9,058 | — | 9,058 | |||||||||
Payment of note issuance costs | — | (1,969 | ) | (1,969 | ) | |||||||
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|
|
|
|
| |||||||
Net cash from (used in) financing activities | 7,617 | (20,966 | ) | (13,349 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 109 | — | 109 | |||||||||
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|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | (5,541 | ) | 14,380 | 8,839 | ||||||||
Cash and cash equivalents, beginning of year | 26,176 | 16,276 | 42,452 | |||||||||
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|
|
|
|
| |||||||
Cash and cash equivalents, end of year | € | 20,635 | € | 30,656 | € | 51,291 | ||||||
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|
|
|
|
(1) | Includes intercompany working capital related transactions. |
Quarterly Financial Data (Thousands of Euros, except per share amounts) Quarter Ended March 31 June 30 September 30 December 31 Revenues € 180,252 € 240,224 € 234,418 € 245,642 Gross profit 18,024 47,888 51,411 50,420 Net income (loss) attributable to common shareholders (7,546 ) 12,401 46,135 35,289 Net income (loss) per share attributable to common shareholders* (0.21 ) 0.23 0.82 0.63 Revenues € 139,572 € 158,884 € 156,231 € 165,112 Gross profit (12,413 ) (9,736 ) (493 ) 9,843 Net income (loss) attributable to common shareholders (39,350 ) (11,476 ) (14,112 ) 2,749 Net income (loss) per share attributable to common shareholders* (1.08 ) (0.32 ) (0.39 ) 0.07
Quarters Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
2011 | ||||||||||||||||
Revenues | € | 224,135 | € | 231,215 | € | 204,778 | € | 229,240 | ||||||||
Gross profit | 36,644 | 36,211 | 35,307 | 2,957 | ||||||||||||
Net income (loss) attributable to common shareholders | 29,053 | 14,383 | 8,440 | (1,801 | ) | |||||||||||
Net income (loss) per share attributable to common shareholders* | 0.52 | 0.26 | 0.15 | (0.03 | ) | |||||||||||
2010 | ||||||||||||||||
Revenues | € | 180,252 | € | 240,224 | € | 234,418 | € | 245,642 | ||||||||
Gross profit | 18,024 | 47,888 | 51,411 | 50,420 | ||||||||||||
Net income (loss) attributable to common shareholders | (7,546 | ) | 12,401 | 46,135 | 35,289 | |||||||||||
Net income (loss) per share attributable to common shareholders* | (0.21 | ) | 0.23 | 0.82 | 0.63 |
* | On a diluted basis |
112
Dated: February | By: | /s/ JIMMY S.H. LEE | ||||||
Jimmy S.H. Lee | ||||||||
Chairman |
Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
113
Exhibit | ||||
No. | Description of Exhibit | |||
2 | .1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | ||
3 | .1 | Articles of Incorporation of the Company, as amended. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
3 | .2 | Bylaws of the Company. Incorporated by reference fromForm 8-A dated March 1, 2006. | ||
4 | .1 | Indenture dated as of December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm S-3 filed December 10, 2004. | ||
4 | .2 | First Supplemental Indenture dated February 14, 2005 to Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated February 17, 2005. | ||
4 | .3 | Indenture dated as of December 10, 2009 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated December 11, 2009. | ||
4 | .4 | Second Supplemental Indenture dated as of November 16, 2010 to the Indenture dated December 10, 2004 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated November 19, 2010. | ||
4 | .5 | Indenture dated as of November 17, 2010 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference fromForm 8-K dated November 19, 2010. | ||
4 | .6 | Registration Rights Agreement among Mercer International Inc. and RBC Capital Markets, LLC and Credit Suisse Securities (USA) LLC dated November 17, 2010. Incorporated by reference fromForm 8-K dated November 19, 2010. | ||
10 | .1* | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009. | ||
10 | .2 | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated September 10, 2002. | ||
10 | .3* | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG. | ||
10 | .4* | Contract for the Engineering, Design, Procurement, Construction, Erection andStart-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | ||
10 | .5* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | ||
10 | .6 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference fromForm 8-K dated August 11, 2003. | ||
10 | .7 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference fromForm 8-K dated April 28, 2004. | ||
10 | .8 | 2004 Stock Incentive Plan. Incorporated by reference fromForm S-8 dated June 15, 2004. | ||
10 | .9 | 2010 Stock Incentive Plan. Incorporated by reference fromForm S-8 dated June 11, 2010. | ||
10 | .10 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference fromForm 8-K dated October 2, 2006. | ||
10 | .11* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. |
114
Exhibit | ||||
No. | Description of Exhibit | |||
10 | .12 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference fromForm 10-Q dated May 6, 2008. | ||
10 | .13* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. | ||
10 | .14 | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and BayerischeHypo-und Vereinsbank AG. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
10 | .15 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference fromForm 8-K dated August 24, 2009. | ||
10 | .16 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference fromForm 8-K dated November 30, 2009. | ||
14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |||
99 | .1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | ||
99 | .2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | ||
99 | .3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
99 | .4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
99 | .5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference fromForm 8-K filed November 27, 2009. | ||
21 | List of Subsidiaries of Registrant. | |||
23 | .1 | Consent of Independent Registered Chartered Accountants — PricewaterhouseCoopers LLP. | ||
31 | .1 | Section 302 Certificate of Chief Executive Officer. | ||
31 | .2 | Section 302 Certificate of Chief Financial Officer. | ||
32 | .1** | Section 906 Certificate of Chief Executive Officer. | ||
32 | .2** | Section 906 Certificate of Chief Financial Officer. |
/s/ JIMMY S.H. LEE Jimmy S.H. Lee Chairman, Chief Executive Officer and Director | Date: February 21, 2012 | |
/s/ DAVID M. GANDOSSI David M. Gandossi Secretary, Executive Vice President, Chief Financial Officer and Principal Accounting Officer | Date: February 21, 2012 | |
/s/ ERIC LAURITZEN Eric Lauritzen Director | Date: February 21, 2012 | |
/s/ WILLIAM D. MCCARTNEY William D. McCartney Director | Date: February 21, 2012 | |
/s/ GRAEME A. WITTS Graeme A. Witts Director | Date: February 21, 2012 | |
/s/ GUY W. ADAMS Guy W. Adams Director | Date: February 21, 2012 | |
/s/ BERNARD PICCHI Bernard Picchi Director | Date: February 21, 2012 | |
/s/ JAMES SHEPHERD James Shepherd Director | Date: February 21, 2012 |
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
2.1 | Agreement and Plan of Merger among Mercer International Inc., Mercer International Regco Inc. and Mercer Delaware Inc. dated December 14, 2005. Incorporated by reference to the Proxy Statement/Prospectus filed on December 15, 2005. | |
2.2 | Support Agreement dated February 9, 2012 among Mercer International Inc. and Fibrek Inc. | |
3.1 | Articles of Incorporation of the Company, as amended. Incorporated by reference from Form 8-A dated March 1, 2006. | |
3.2 | Bylaws of the Company. Incorporated by reference from Form 8-A dated March 1, 2006. | |
4.1 | Indenture dated as of November 17, 2010 between Mercer International Inc. and Wells Fargo Bank, National Association. Incorporated by reference from Form 8-K dated November 19, 2010. | |
10.1 | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG, as amended by Amendment, Restatement and Undertaking Agreement dated January 31, 2009 and the Amendment Agreement dated January 20, 2011. | |
10.2 | Project Blue Mill Financing Facility Agreement dated January 20, 2012 between Zellstoff Stendal GmbH and Unicredit Bank AG and IKB Deutsche Industriebank AG. | |
10.3 | Shareholders’ Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. As amended by the Amendment Restatement and Undertaking Agreement. | |
10.4 | Shareholders’ Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH and FAHR Beteiligungen AG. As amended by the Amendment Agreement dated January 20, 2012. | |
10.5* | Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain non-public information has been omitted from the appendices to Exhibit 10.4 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in January 2004. | |
10.6* | Form of Trustee’s Indemnity Agreement between Mercer International Inc. and its Trustees. | |
10.7 | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003. | |
10.8 | Employment Agreement effective as of April 28, 2004 between Mercer International Inc. and Jimmy S.H. Lee. Incorporated by reference from Form 8-K dated April 28, 2004. | |
10.9 | 2004 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 15, 2004. | |
10.10 | 2010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010. | |
10.11 | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K dated October 2, 2006. | |
10.12* | Employment Agreement effective September 25, 2006 between Mercer International Inc. and Claes-Inge Isacson dated December 5, 2008. | |
10.13 | Employment Agreement effective September 1, 2005 between Mercer International Inc. and Leonhard Nossol dated August 18, 2005. Incorporated by reference from Form 10-Q dated May 6, 2008. | |
10.14* | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Certain non-public information has been omitted from the appendices to Exhibit 10.13 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the request for confidential treatment in March 2009. |
10.15 | Revolving Credit Facility Agreement dated August 19, 2009 among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal GmbH, D&Z Beteiligungs GmbH and ZPR Logistik GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated August 24, 2009. | |
10.16 | Loan Agreement dated August 19, 2009 among Zellstoff-und Papierfabrik Rosenthal GmbH, as borrower, and Bayerische Hypo-und Vereinsbank Aktiengesellschaft, as lender. Incorporated by reference from Form 8-K dated August 24, 2009. | |
10.17 | Amended and Restated Credit Agreement dated as of November 27, 2009 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and CIT Business Credit Canada Inc., as agent. Incorporated by reference from Form 8-K dated November 30, 2009. | |
10.18 | Special Warrant Agreement dated as of February 9, 2012 among Mercer International Inc. and Fibrek Inc. | |
14 | Code of Business Conduct and Ethics. Incorporated by reference from the definitive proxy statement on Schedule 14A dated August 11, 2003. | |
99.1 | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005. | |
99.2 | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004. | |
99.3 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and IAT Reinsurance Co. Ltd. Incorporated by reference from Form 8-K filed November 27, 2009. | |
99.4 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Alden Global Distressed Opportunities Fund L.P. Incorporated by reference from Form 8-K filed November 27, 2009. | |
99.5 | Exchange Agreement dated November 25, 2009 between Mercer International Inc. and Greenlight Capital Qualified LP, Greenlight Capital LP and Greenlight Capital Offshore Partners. Incorporated by reference from Form 8-K filed November 27, 2009. | |
21 | List of Subsidiaries of Registrant. | |
23.1 | Consent of Independent Registered Chartered Accountants – PricewaterhouseCoopers LLP. | |
31.1 | Section 302 Certificate of Chief Executive Officer. | |
31.2 | Section 302 Certificate of Chief Financial Officer. | |
32.1** | Section 906 Certificate of Chief Executive Officer. | |
32.2** | Section 906 Certificate of Chief Financial Officer. |
* | Filed inForm 10-K for prior years. |
** | In accordance with Release33-8212 of the SEC, these Certifications: (i) are “furnished” to the SEC and are not “filed” for the purposes of liability under the Exchange Act; 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 for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein. |
115