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, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period fromto
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 | (IRS Employer Identification No. ) |
Suite 1120, 700 West Pender Street, Vancouver, British Columbia, Canada | V6C 1G8 | |
(Address of Principal Executive Office) | (Zip Code) |
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 per share | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrantRegistrant 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 registrantRegistrant 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 registrantRegistrant (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 registrantRegistrant 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 registrantRegistrant 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 registrantRegistrant 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’sRegistrant’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 registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 registrantRegistrant is a shell company (as defined inRule 12b-2 of the Act). o¨ Yes þx No
The aggregate market value of the registrant’sRegistrant’s voting and non-voting common equity held by non-affiliates of the registrantRegistrant as of June 30, 2010,2013, the last business day of the registrant’sRegistrant’s most recently completed second fiscal quarter, based on the closing price of the voting stock on the NASDAQ Global Select Market on such date, was approximately $145,474,274.
As of February 17, 2011,19, 2014, the registrantRegistrant had 44,524,80655,853,704 shares of common stock, $1.00 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information that will be contained in the definitive proxy statement for the Registrant’s annual meeting to be held in 20102014 is incorporated by reference into Part III of thisForm 10-K.
2
3
CHANGE IN REPORTING CURRENCY
The following table sets out exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York, (thereferred to as the “Noon Buying Rate”), for the conversion of U.S. dollars to Euros and Canadian dollars to U.S. dollars in effect at the end of the following periods, the average exchange rates during these periods (based on daily Noon Buying Rates) and the range of high and low exchange rates for these periods:
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(€/$) | ||||||||||||||||||||
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 |
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
($/€) | ||||||||||||||||||||
End of period | 1.3779 | 1.3186 | 1.2973 | 1.3269 | 1.4332 | |||||||||||||||
High for period | 1.2774 | 1.2062 | 1.2926 | 1.1959 | 1.2547 | |||||||||||||||
Low for period | 1.3816 | 1.3463 | 1.4875 | 1.4536 | 1.5100 | |||||||||||||||
Average for period | 1.3281 | 1.2859 | 1.3931 | 1.3261 | 1.3935 | |||||||||||||||
($/C$) | ||||||||||||||||||||
End of period | 0.9401 | 1.0042 | 0.9835 | 0.9991 | 0.9559 | |||||||||||||||
High for period | 0.9348 | 0.9600 | 0.9430 | 0.9280 | 0.7695 | |||||||||||||||
Low for period | 1.0164 | 1.0299 | 1.0584 | 1.0040 | 0.9719 | |||||||||||||||
Average for period | 0.9712 | 1.0007 | 1.0121 | 0.9714 | 0.8803 |
On February 11, 2011, the date of18, 2014, the most recent weekly publication of the Daily Noon Buying Rate before the filing of this annual report onForm 10-K reported that the Noon Buying Rate as of February 14, 2014 for the conversion of Euros and Canadian dollars to U.S. dollars was €0.7396$1.3690 per U.S. dollarEuro and C$0.9900$0.9107 per U.S.Canadian dollar.
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(C$/€) | ||||||||||||||||||||
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 |
4
ITEM 1. | BUSINESS |
In this document, please note the following:
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figures.
General We operate in the pulp business and are among the largest publicly traded We are the sole 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).producerproducers of market northern bleached softwood kraft, or “NBSK”, pulp in the world. Mercer Inc. reorganized as a corporation under the laws of the State of Washington in 2006 from a Washington business trust. Its common stock is quoted and listed for trading on the NASDAQ Global Select Market (MERC) and the Toronto Stock Exchange (MRI.U).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. We also generate and sell a significant amount of surplus “green” energy to regional utilities. Our operations are located in Eastern Germany and Western Canada. We currently employ approximately 1,052 people at our German operations, 422 people at our Celgar mill in Western Canada and 17 people at our office in Vancouver, British Columbia, Canada.1,460 people. We operate three NBSK pulp mills with a consolidated annual production capacity of approximately 1.5 million ADMTs:
• | Rosenthal | ||
• | Celgar | ||
• | Stendal |
5
The following chart sets out our directly and indirectly owned principal operating subsidiaries, their jurisdictions of organization, their principal activities and their principal activities:
History and Development of Business
In 1994, we commenced pulp and paper operations in 1993. Subsequently, we disposedwith 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$1.1 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$332.0 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%83.0%.
In December 2013, our Stendal mill completed a $49.3 million project, referred to as “Project Blue Mill”, which was designed to increase production and efficiency through debottlenecking initiatives including the installation of an additional 46 MW steam turbine at our Stendal mill. The debottlenecking which, among other things, required a new turbine in order to enhance and efficiently utilize steam production is designed to increase the mill’s annual pulp production capacity by 30,000 ADMTs. The new turbine is also expected to initially produce an additional 109,000 MWh of surplus renewable energy for sale at premium pricing.
A significant portion of the capital investments at our German mills, including the construction of the Stendal mill, were financed through government grants. Since 1999,1998, our German mills have benefited from an aggregate €384.7approximately $464.1 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.
6
Our competitive strengths include the following:
• | Modern and Competitive Mills.We operate three large, modern, competitive NBSK pulp mills that produce | ||
• | Stable and Growing Income from Surplus Renewable Energy and Chemical Sales.Our modern mills generate electricity and steam in their boilers which is surplus to their operating requirements. Such energy is primarily produced from wood residuals which are a renewable carbon neutral source. All of our mills also generate and sell surplus energy to regional utilities. Our German mills benefit from special tariffs under Germany’sRenewable Energy Sources Act, referred to as the “Renewable Energy Act”, which provides for premium pricing. Our Celgar mill is party to a fixed electricity purchase agreement, referred to as the “Electricity Purchase Agreement”, with the regional public utility provider, for the sale of surplus power that runs until 2020. Our Stendal mill also produces tall oil as a chemical by-product which is sold to third parties. In 2013, our mills produced approximately 699,051 MWh of surplus renewable energy and generated approximately $92.2 million in revenues from energy and chemical sales. These sales provide us with a stable income unrelated to cyclical changes in pulp prices. In 2014, we expect our revenues from this source to increase as we completed the Blue Mill Project at our Stendal mill in December 2013, which is designed to produce an annual incremental 109,000 MWh of surplus energy. Additionally, in 2014, our Rosenthal mill is implementing a capital project to also produce and sell tall oil. We believe our generation and sale of surplus renewable “green” energy and chemicals provides us with a competitive energy advantage over less efficient mills. |
• | Leading Market Position. | ||
• | ||
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 | ||
• | Advantageous Capital Investments and Financing.Our German mills are eligible to receive government grants in respect of qualifying capital investments. Over the last |
7
• | 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 | ||
• | Experienced Management Team. Our directors and senior managers have extensive experience in the pulp and forestry industries. |
Our corporate strategy is to create shareholder value by focusing on the expansion of our asset and earnings base.base through organic growth and acquisitions, primarily in Europe and North America. We pursue organic growth through active management and targeted capital expenditures to generate a high return by increasing pulp, energy and chemical production, reducing costs and improving efficiency. We are also conducting research to develop innovative new products based on other derivatives of the kraft pulping process. We seek to acquire interests in companies and assets in the pulp industry and related businesses where we can leverage our experience and expertise in adding value through a focused management approach. Key features of our strategy include:
• | |||
• | Increasing Stable Revenues from Renewable Energy and Chemical Sales.We focus on the generation and sales of surplus renewable energy and chemicals and, because there are minimal associated incremental costs, such sales are highly profitable and they provide us with a stable income source unrelated to cyclical changes in pulp prices. In 2013, our mills sold 699,051 MWh of surplus electricity resulting in revenues of approximately $79.4 million, compared to 710,241 MWh and approximately $78.0 million in revenues in 2012. In December 2013, our Stendal mill completed Project Blue Mill to increase production and efficiency through debottlenecking initiatives and the installation of a 46 MW steam turbine at the mill. The new turbine is expected to initially produce an additional 109,000 MWh of surplus electricity annually. Our Rosenthal mill is implementing a capital project in 2014 to produce and sell tall oil. Based upon the current production levels of our mills, |
• | Focus on NBSK Market Pulp.We produce NBSK pulp because it is a premium |
8
• | Achieving Operational Excellence.Operating our mills reliably and at a competitive cost is important for our financial performance. In addition to our capital expenditure program, we continuously strive to develop maintenance systems and procedures that will improve the throughput of our products by increasing the reliability of our manufacturing processes. We also seek to reduce operating costs by better managing certain operating activities such as fiber procurement, sales, marketing and logistics activities. We believe that our continued focus on operational excellence should allow us to achieve improved profitability and cash flows. |
• | Strategic Opportunities.We believe there will be continuing change and consolidation in the pulp and paper industry as industry participants continually seek to lower costs, refocus their product lines and react to ever changing global market conditions. We take an opportunistic approach to opportunities that can expand our earnings or grow our business. |
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, a type of chemical 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 other paper-related products.
There are two primary speciesmain types of wood used as fiber:bleached kraft pulp, being softwood kraft made from coniferous trees and hardwood.hardwood kraft made from deciduous trees. 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, list prices for softwood pulp are higher than list prices for hardwood pulp. Most uses of market kraft pulp, including fine printing papers, coated
We produce 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.
Most paper users of market kraft pulp use a mix of softwood and hardwood grades to optimize production and product qualities. In 2013, market kraft pulp consumption was approximately 52% hardwood bleached kraft, 44% softwood bleached kraft and the remainder comprised of unbleached pulp. Over the last several 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. Hardwood kraft generally has a cost advantage over softwood kraft as a result of lower fiber costs, higher wood yields and, for newer hardwood mills, economies of scale. As a result of this growth in supply and lower costs, kraft pulp customers have substituted some of the pulp content in their products to hardwood pulp.
Counteracting customers’ ability to substitute lower priced hardwood pulp for NBSK pulp is the requirement for strength and formation characteristics in finished goods. Paper and tissue makers focus on larger paper machines with higher speeds and lower basis weights for certain papers which require the strength characteristics of softwood pulp. Additionally, where paper products are lightweight or specialized, like direct mail, magazine paper or premium tissue, or where strength or absorbency are important, softwood kraft forms a significant proportion of the fiber used. As a result, we believe that the ability of kraft pulp users 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 125130 million ADMTs of kraftchemical pulp are converted annually into tissues, printing and writing papers, tissues, carton boards and other whitespecialty grades of paper and paperboard around the world. We also believe that approximatelyover 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 19982004 and 20082013, worldwide demand for softwoodchemical market pulp grew at an average rate of approximately 2.3%2% annually. DemandThe following chart illustrates the global demand for softwoodchemical market pulp was negatively impacted by weak global economic conditionsfor the periods indicated:
Two key macro-economic trends in 2009. However,worldwide NBSK pulp demand over the supply/last several years have been:
Since 2007, demand for chemical 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 forimports of softwood market pulp grew by approximately 13.6%13% per annum between 2004 and 2009.2013. We believe the emerging markets now account for approximately 50% of total world demand. China now accounts for approximately 22%28% of global bleached softwood kraft market
9
The following chart sets forth industry-wide bleached softwood kraft delivery levels to China for the periods indicated:
Growth in NBSK pulp demand in China and other emerging markets has, to a large extent, been driven by increased demand from tissue producers, as a result of economic growth and rising income levels and living standards in such markets. These factors generally contribute to a greater demand for personal hygiene products in such regions. In China alone, tissue producers have publicly announced plans to add a total of 132 tissue paper machines at various sites by the end of 2015 to increase their annual tissue capacity by approximately 4.9 million ADMTs. At this time there can be no assurance as to when and how much of such capacity expansion will be implemented.
This has also led to an overall shift in demand for NBSK pulp, as demand from tissue producers has increased, while demand from printing and writing end uses has decreased. Between 2004 and 2012 (the last year for which information is currently available), NBSK pulp demand for tissue production increased by approximately 106%.
The following chart compares NBSK pulp demand by end use in each of 2003 and 2012 (the latest year for which figures are currently available).
We believe 2013 NBSK demand by end use was generally consistent with the trend in the chart above.
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 also 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 relyingrely 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 93%94%, 94% and 92% in 2010, approximately 91% in 20092013, 2012 and approximately 89% in 2008.
A significant factor affecting our market is the amount of closures of old, high-cost capacity. InOver the four-year period from 2006 to 2009, we estimate approximately 5.3 million tonnes of predominantly NBSK capacity waslast several years, mills in North America, Finland and Sweden were permanently or indefinitely closed. In connection with the recent recovery of pulp prices, approximately 1.9 million tonnesAlthough some capacity was restarted in late 2009 and 2010. The2010 in response to very high NBSK pulp prices, we believe the overall net effect reduced NBSK pulp supply and positively impacted markets. Between 2011 and 2013, we believe approximately 1.5 million ADMTs of thesepulp capacity was idled or shut down through mill closures or curtailments. Further, in efforts to improve environmental and restartssafety standards, China has publicly stated that it will be reducing existing pulp and paper capacity in the near term by closing “old” mills, targeting a removal of 7.4 million ADMTs by the end of 2013. At this time, there can be no certainty as to the actual amount and timing of any such closures.
During the course of 2014, the supply of hardwood bleached kraft pulp production is an estimated 3.4projected to increase by approximately 2.1 million tonnesADMTs, primarily from South America. This increase in hardwood chemical production is, in large part, targeted at the growing demand for pulp by tissue makers, particularly in China. As a result of capacity removed from the market. generally lower prices for hardwood bleached pulp, this increase in supply could put downward pressure on NBSK pulp prices.
We are aware of only one plannednew NBSK mill in Russia which started up in 2013. The new mill provided a net incremental increase in annual pulp production capacity of approximately 490,000 ADMTs. Other than the foregoing, we are unaware of any new material NBSK pulp capacity that has been announced. However, certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their NBSK pulp production on the market, if market conditions, prices and trends warrant such actions. We believe that the absence of other plant expansion worldwide in the next few years, which we believeexpansions is due in part to fiber supply constraints and high capital costs.
CompetitionNBSK Pulp Pricing
Pulp prices are highly cyclical. In general, kraft pulp is a globally traded commodity. Pricing and demand are influenced by the balance between supply and demand, as affected by global macroeconomic conditions, changes in consumption and capacity, the level of customer and producer inventories and fluctuations in exchange rates. As Northern Europe has historically been the world’s largest market and NBSK is the premium grade, the European NBSK market price is generally used as a benchmark price by the industry.
The average European list prices for NBSK pulp since 2000 have fluctuated between a low of approximately $447 per ADMT in 2002 to a high of $1,030 per ADMT in 2011.
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:
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 increased demand and the closure of several pulp mills, particularly in North America, which reduced NBSK capacity. 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 pulp price weakness continued into early 2009, though 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 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 in Europe, North America and China, respectively.
In 2011, pulp prices remained strong in the first half of the year, reaching record levels of $1,030 per ADMT in Europe and $1,035 and $920 per ADMT in North America and China, respectively. However, uncertainty concerning the economic situation in Europe, along with credit tightening in China in the last part of the year, caused pulp prices to drop sharply to $825 per ADMT in Europe and $890 and $670 per ADMT in North America and China, respectively, by the end of the year. Economic uncertainty in Europe and China continued to dampen demand and NBSK pulp prices, which remained generally weak in 2012. In 2012, year-end list prices were approximately $810, $870 and $655 per ADMT in Europe, North America and China, respectively. In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which resulted in higher year-end list prices of $905 per ADMT in Europe and $990 and $750 per ADMT in North America and China, respectively.
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 rebates are much 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 Northern European producers, while the price of NBSK pulp is generally quoted in U.S. dollars. As a result, NBSK pricing is often 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 partially 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. Although the U.S. dollar weakened against the Euro for most of 2011, it strengthened at the end of 2011. Overall, the U.S. dollar was 8% stronger against the Euro in 2012 compared to 2011, partially offsetting pulp price decreases in 2012. In 2013, the U.S. dollar was 3% weaker against the Euro, compared to 2012, which reduced the operating margins of our German mills.
The global supply and demand balance for NBSK pulp is a key determinant in pulp pricing. Generally, we and other producers consider global NBSK pulp supply and demand to be evenly balanced when world inventory levels are at about 30 days’ supply.
The following chart sets forth changes in FOEX PIX Pulp index prices for NBSK pulp and global bleached softwood kraft inventory levels between 2004 and 2013:
Seasonality
We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These factors are common in the NBSK pulp industry. We generally have weaker pulp demand in Europe during the summer holiday months and in China in the period relating to its lunar new year. We typically have a seasonal build-up in raw material inventories in the early winter months as the mills build up their fiber supply for the winter when there is reduced availability.
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
10
11
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 thanapproximately 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
12
We, along with other pulp producers both individually and through industry associations, are conducting research and development focused on developing innovative new products that are based on derivatives of the kraft pulping process. Currently these derivatives are focused in two broad categories:
We are engaged with several research partners to participate in and develop new innovative products. To date, one of the most well-developed of these projects is a cellulose derivative generally referred to in the industry as “cellulose filaments”. Cellulose filaments are the result of a new process that unbinds the individual filaments that make up a cellulose fiber. In northern softwoods, there are approximately 1,000 filaments making up a single fiber. The filaments resulting from this patented process are long, ribbon-like structures that have unique strength characteristics similar to other chemical derivatives, such as aramids. We believe that this material may have commercial potential in many applications, including strength enhancers, solution stabilizers and specialty solutions for numerous other industries.
We are part of an industry association that has made considerable progress in developing a particular manufacturing process. We, along with other member companies, including certain other NBSK producers, have license rights to further develop and market existing intellectual property registered under patent to our industry association. Further, such association, in conjunction with one of its member companies, is constructing a pilot production facility and we have access to its product for development purposes. While there remains much research and development to be done, we are encouraged enough to continue to expend resources to develop this technology, both individually and in joint development arrangements with third parties. We estimate expenditures totaling approximately $3.0 million over the next three years.
Such research and development is still at an early stage and there has been no commercialization of the research to date. We currently estimate it may take between three and five years before we can determine if product applications can be commercialized. However, there can be no assurance that such research and development will ever result in commercialization or the production or sales of any products by us at a profit or at all.
We manufacture and sell NBSK pulp produced from wood chipswoodchips and pulp logs.logs at our three mills.
The following table sets out our pulp production capacity and actual production by mill for the periods indicated:
Annual Production Capacity(1) | Year Ended December 31, | |||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||
Pulp Production by Mill: | (ADMTs) | |||||||||||||||
Rosenthal | 360,000 | 361,724 | 337,959 | 344,389 | ||||||||||||
Celgar | 520,000 | 447,935 | 490,018 | 488,007 | ||||||||||||
Stendal | 660,000 | 634,816 | 640,298 | 621,281 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total pulp production | 1,540,000 | 1,444,475 | 1,468,275 | 1,453,677 | ||||||||||||
|
|
|
|
|
|
|
|
(1) | Capacity is the rated capacity of the plants for the year ended December 31, 2013. |
Rosenthal Mill.The Rosenthal mill is situated on a 220 acre site in 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 360,000 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:
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.
Stendal Mill.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 ofSaxony-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 660,000 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:
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.
Celgar Mill.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 theCanada-U.S. border. The city of Seattle, Washington is approximately 650 kilometers southwest of Castlegar. The Celgar mill is a single line mill with a current annual production capacity of approximately 520,000 ADMTs of kraft pulp. Internal power generating capacity resulting 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:
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 and tissue producers in Asia.
Our pulp mills are large scale bio-refineries that, Our surplus energy 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. produce bothin addition to pulp, andalso produce 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 generallyallow us to produce surplus energyelectricity which we sell to third party utilities.2010addition, in recent years we have applied considerable resources to increasing our capacity to produce and 2009, we sold 520,005 MWh and 478,674 MWh ofsell bio-chemicals, primarily tall oil for use in numerous applications including bio-fuels.respectively, and recorded revenues of €44.2 million and €42.5 million, respectively, from such energy sales.chemical sales provide our mills with a new stable revenue source unrelated to pulp prices. Since our energy and chemical production is a by-productare by-products of our pulp production process, there are minimal incremental costs and our surplus energy and chemical sales are
13
In 2013 and 2012, we sold 699,051 MWh and 710,241 MWh of surplus energy, respectively, and recorded revenues of $79.4 million and $78.0 million, respectively, from such energy sales. In 2013 and 2012, we recorded revenues of $12.8 million and $15.0 million, respectively, from the sale of bio-chemicals.
The following table sets out our electricity generation and surplus energyelectricity sales for the last threefive years:
The following chart sets forth our consolidated revenues from electricity and Exports
German Mills
Our Rosenthal and Stendal mills have participatedparticipate in a program established pursuant to the Renewable Energy Act. The Renewable EnergyAct in Germany. Such Act, in existence since 2000, requires that public electric utilities give priority to electricity produced from renewable energy resourcessources 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 2013, our Rosenthal and Stendal mills sold approximately 178,295 MWh and 393,027 MWh of electricity, respectively, for proceeds of $21.5 million and $45.6 million, respectively.
In December 2013, we completed Project Blue Mill which was designed to increase the Stendal mill’s annual pulp production by 30,000 ADMTs and initially produce an additional 109,000 MWh of surplus renewable electricity. We estimate that, based on forecasted pulp production and current prices, sales of such incremental surplus electricity will generate approximately $10.0 million in annual revenues for Stendal.
In 2013, our Stendal mill generated $12.8 million from the sale of tall oil, a by-product of our production process. In 2014, our Rosenthal mill is implementing a capital project to also produce and sell tall oil. We estimate that, when completed and based on current pricing, the project should permit the Rosenthal mill to generate approximately $1.6 million in net annual revenues from tall oil sales.
Celgar Mill
In mid-2008September 2010, we commencedcompleted the Celgar Energy Project at the Celgar mill to increase and optimize the mill’s production of “green” energy and optimize its power generation capacity.energy. 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.British Columbia Hydro and Power Authority, referred to as “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.
In 2013, we entered into a non-repayable contribution agreement, referred to as the “Contribution Agreement”, with NRCan whereby NRCan agreed to providesold approximately C$40.0 million in grants (of our allocated C$57.7 million) towards certain
14
Our major costs of production are fiber, labor, 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 Generally, the cost of wood chips and pulp logs 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 In April 2008, the Russian government raised tariffs on the export of sawmill and pulp wood to 25% from During the past few years, certain customers have endeavored to purchase pulp that is produced using fiber that meets certain recognized wood certification requirements from forest certification agencies like FSC, PEFC, SFI-CSA. If the fiber we purchase does not meet certain wood certifications required by customers, it may make it more difficult or prevent us from selling our pulp to such customers. The wood certification process is a voluntary process which allows a company to demonstrate that they use forest resources in accordance with strict principles and standards in the areas of sustainable forest management practices and environmental management. In an effort to procure wood only from sustainably managed sources, we employ an FSC Chain of Custody protocol which requires tracking of fiber origins and preparing risk based assessments regarding the region and operator. In the areas where we operate, we are actively engaged in the further development of certification processes. Although wood certification requirements continue to evolve and are not consistent from jurisdiction to jurisdiction, we currently do not expect certification requirements to have a material adverse impact on our fiber procurement and pulp sales. 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. WeOperatingProduction Costs 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.LaborFiberOur 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.Fiberlogs 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.areis 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.is expectedto continue to increase.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 August 2012, Russia entered the additional tariff increase would likely reduceWorld Trade Organization, or “WTO”, and, due to inclusion in the export of Russian wood to Europe, in particular to Scandinavian producers who import a significant amount of their wood fromWTO, Russia the European Union (especially Finland) has been pressuring Russia to roll backlowered 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.
15
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 2010,2013, the Rosenthal mill consumed approximately 1.71.8 million cubic meters of fiber. Approximately 65%63% of such consumption was in the form of sawmill wood chips and approximately 35%37% 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%67% 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 supplyone-year contracts with fixed volumes, which providequarterly adjustments for price adjustments.market pricing. 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 and traders on the same basis as wood chips. Like the wood chip supply arrangements, these contracts tend to be of less thanfor one-year terms with quarterly adjustments for market pricing. We organize the harvestingtransportation 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 2010,2013, the Stendal mill consumed approximately 3.13.3 million cubic meters of fiber. Approximately 19%24% of such fiber was in the form of sawmill wood chips and approximately 81%76% 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%58% pine and 34%42% spruce and other species in 2010.2013. 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 2013, the Celgar mill consumed approximately 2.72.4 million cubic meters of fiber. Approximately 61%72% of such fiber was in the form of sawmill wood chips and the remaining 39%28% 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, douglas fir and cedar) and the mill sources fiber from a number of Canadian and U.S. suppliers.
As a result of the cyclical decline in sawmill chip supply resulting from lower lumber production in British Columbia commencing in 2008, the Celgar mill increased its U.S. purchases of fiber, diversified its suppliers and, where possible, increased chip production through third party field chipping contracts and existing sawmill suppliers. In 2009, the Celgar mill upgraded its woodroom which, along with subsequent improvements during the year, increased its capacity to be able to process up to 50% of the mill’s fiber needs. The woodroom upgrades also increased the mill’s ability to process smaller diameter logs and facilitate an efficient flow of fiber. This has increased the overall volume of fiber being processed and helped mitigate increases in the price of fiber.
The Celgar mill has access to over 35approximately 21 different suppliers from Canada and the U.S., representing approximately 73%75% of its total annual fiber requirements. The Celgar mill’s woodroom suppliesand third party chippers supplied the remaining chips to meet25% of the Celgar mill’s fiber requirements.requirements in 2013. Chips are purchased in Canada and the U.S. in accordance with chip purchase agreements. Generally, pricing is reviewed and adjusted periodically to reflect market prices. SeveralOne of the longer-term contracts areis a so-called “evergreen” agreements,agreement, where the contract remains in effect until one of the parties elects to
16 terminate after providing the stipulated notice. All other contracts are generally for one year with quarterly adjustments or on three-month terms.
In 2013, our fiber costs per unit at the Celgar mill were approximately 12% lower than in 2012, as a result of the impact of strong sawmill activity in the region.
EnergyLabor
Our labor costs are 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 largely offset such increases by increasing our efficiencies and production and streamlining operations.
In July 2013, we determined to reduce the Celgar mill’s workforce by approximately 85 employees in order to reduce the mill’s fixed costs. In 2013, we incurred pre-tax charges of approximately $5.0 million for severance and other personnel-related expenses in connection with this reduction. We currently estimate incurring additional pre-tax severance and personnel charges of approximately $0.6 million as additional personnel leave the workforce in 2014. In 2013, we restructured the management team at the Stendal mill and incurred expenses of $1.4 million in respect thereof.
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 2010,2013, we generated 1,444,0651,710,224 MWh and we sold 520,005699,051 MWh of surplus energy. See also “—“– Generation and Sales of ‘Green’ Energy and Chemicals 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 partially 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
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash Production Costs | (per ADMT) | |||||||||||
Fiber | $ | 356 | $ | 331 | $ | 383 | ||||||
Labor | 62 | 60 | 60 | |||||||||
Chemicals | 63 | 63 | 64 | |||||||||
Energy | 32 | 24 | 28 | |||||||||
Other | 64 | 59 | 78 | |||||||||
|
|
|
|
|
| |||||||
Total cash production costs(1) | $ | 577 | $ | 537 | $ | 613 | ||||||
|
|
|
|
|
|
(1) | Cost of production per ADMT produced excluding depreciation. |
17
Our 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 | ||||||
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues by Geographic Area | (in thousands) | |||||||||||
Germany | $ | 309,399 | $ | 293,733 | $ | 357,106 | ||||||
Italy | 65,654 | 55,443 | 71,695 | |||||||||
Other European Union countries(1) | 224,988 | 216,846 | 244,884 | |||||||||
North America | 30,404 | 61,103 | 96,520 | |||||||||
China | 300,827 | 295,797 | 326,610 | |||||||||
Other Asia | 49,855 | 42,692 | 42,970 | |||||||||
Other countries | 2,748 | 2,099 | 1,146 | |||||||||
|
|
|
|
|
| |||||||
Total(2) | $ | 983,875 | $ | 967,713 | $ | 1,140,931 | ||||||
|
|
|
|
|
|
(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 consolidatedpulp revenues as a percentage of our total pulp revenues for the periods indicated:
* | ||||
The distribution of our pulp sales by end customer are set out in the following table for the periods indicated:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands of ADMTs) | ||||||||||||
Tissue | 523 | 576 | 602 | |||||||||
Specialty | 181 | 214 | 222 | |||||||||
Printing & Writing | 662 | 639 | 563 | |||||||||
Other | 74 | 45 | 41 | |||||||||
|
|
|
|
|
| |||||||
1,440 | 1,474 | 1,428 | ||||||||||
|
|
|
|
|
|
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 1815 employees engaged full time in such activities. This group largely handles all European and North American sales directly. Sales to Asia are made directly or through commission agents overseen by our sales group. The global sales and marketing group handles sales to over 200approximately 186 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, 2010,2013, we had no material payment delinquencies. In 20092013, two customers at a number of their individual mills accounted for 10% and 2008,11%, respectively, of our pulp sales. In 2012, one customer at a number of its individual mills accounted for 11% of our pulp sales. In 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% of pulp sales. We don’tdo not believe our pulp sales are dependent upon the activities of any single customer.
18
Our German mills are currently the only significant market kraft pulp producers in Germany, which is the largest import market for kraft pulp in Europe. We therefore have a competitive transportation cost advantage compared to Canadian and ScandinavianNorthern European pulp producers when shipping to customers in Europe. Due to the location of our German mills, we are able to deliver pulp to many of our customers primarily by truck. Most trucks that deliver goods into Eastern Germany generally do not have significant backhaul opportunities as the region is primarily an importer of goods. We are therefore frequently able to obtain relatively low backhaul freight rates for the delivery of our products to many of our customers. Since many of our customers are located within a 500 kilometer radius of our German mills, we can generally supply pulp to customers of these mills faster than our competitors because of the short distances between the mills and our customers.
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.
In each of our consolidated sales were to tissue and specialty paper product manufacturers for the years ended December 31, 2010, 20092013, 2012 and 2008, respectively. The balance2011, outbound transportation costs comprised approximately 9% of our total consolidated cost of sales. Generally, in recent years, our transportation costs have increased due to increases in fuel costs and lower shipping capacity. As a result, we have taken initiatives to target sales to the most “freight logical” customers 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 our mills are set out in the Rosenthal Stendal Celgar Capital investments at the Rosenthal mill in Capital investments at the Stendal mill in In December 2013, the Stendal mill completed Project Blue Mill, which increased production and efficiency at the mill through debottlenecking initiatives, including the installation of an additional 46 MW steam turbine. Project Blue Mill required $49.3 million in capital expenditures over about 21 months, which was primarily funded through approximately €11.3 million ($15.0 million) of non-refundable German government grants and a new €17.0 million ($22.2 million) five-year amortizing secured term debt facility, of which 80% is government guaranteed. The balance of Project Blue Mill was funded through operating cash flow of the Stendal mill and an aggregate of €6.5 million ($8.6 million) in pro rata shareholder loans from Mercer Inc. and Stendal’s noncontrolling shareholder. 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. For example, the government grants received in connection with Project Blue Mill require us to maintain the employment of core employees for five years after completion of the project. Currently, grants are available for up to 2010,2013, we continued with our capital investment programs designed to increase pulp and green energy production capacity, reduce costs and improve efficiency and environmental performance at our mills. The improvements made at our mills over the past seven years have reduced operating costs and increased the competitive position of our facilities.Rosenthal mill in 2010, 2009 and 2008 were €4.0 million, €9.1 million and €8.7 million, respectively. following table for the periods indicated: Year Ended December 31, 2013 2012 2011 (in thousands) $ 8,375 $ 19,851 $ 19,094 $ 32,524 $ 18,990 $ 11,547 $ 4,798 $ 8,309 $ 21,878 20102013 related primarily to completion of the recovery upgrade project and 2009the replacement of capital, while, in 2012, they related primarily to the mill’s recovery boiler upgrade, which reduced our wastewater fees. In 2011, capital expenditures related mainly to the upgradeinstallation of a bleaching linenew chipper and a washer project, which helped offset three years of wastewater fees that would otherwise be payable.Our Stendal mill’s total capital expenditures in 2010, 2009 and 2008 were €3.6 million, €2.0 million and €4.9 million, respectively. upgrades to the recovery process.20102013 and 2012 related primarily to Project Blue Mill. In 2011, capital investments related mainly to relatively small projects designed to improve safety and environmental performance as well as improve the overall efficiency of the mill.15%30% 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 ($0.7 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 itsuch recipient 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, whereinin which case the government may refrain from reclaiming previous grants. Pursuant to such legislation in effect at the time, the Stendal mill receivedrecorded approximately €278.0$349.5 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.
19
As at December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Property, plant and equipment, gross amount less amortization | $ | 1,403,990 | $ | 1,431,355 | $ | 1,443,315 | ||||||
Less: government grants less amortization | 365,359 | 364,849 | 378,348 | |||||||||
|
|
|
|
|
| |||||||
Property, plant and equipment, net (as shown on the Consolidated Balance Sheet) | $ | 1,038,631 | $ | 1,066,506 | $ | 1,064,967 | ||||||
|
|
|
|
|
|
The following table sets forth the gross amount of all government grants we have received and capitalized in our balance sheets:
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, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Government grants—gross | $ | 600,158 | $ | 569,039 | $ | 557,726 | ||||||
Less: Accumulated amortization | 234,799 | 204,190 | 179,378 | |||||||||
|
|
|
|
|
| |||||||
Government grants less accumulated amortization | $ | 365,359 | $ | 364,849 | $ | 378,348 | ||||||
|
|
|
|
|
|
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”.
In 2013, capital expenditures at the Celgar mill included maintenance projects, while in 2010, 2009 and 2008 were €30.6 million, €17.8 million and €12.1 million, respectively.2012 such expenditures included a project to recover/recycle chemicals from the mill’s effluent, referred to as the “GAP Project”. In 2010,2011, capital expenditures related primarily to the Celgar Energy Project. We implemented the Celgar Energy Project 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$64.9 million (€48.7 million). It included the installation of a second turbine generator with a design capacity of 48 MW.
In January 2009,2014, we commenced the Celgar mill finalizedimplementation of a new Enterprise Resource Planning, or “ERP”, solution to replace our existing business software applications at an estimated cost of $12.0 million. The project is designed to be completed in stages over the Electricity Purchase Agreement undernext three years. After considerable due diligence, we selected SAP, a global leader in the development of ERP solutions for medium to large sized international businesses.
The ERP installation will replace a suite of existing legacy systems which, itwhile functional, will sell electrical energy generated bybegin becoming obsolete in the Celgar Energy Projectnear future. The ERP solution introduces state of the art end to B.C. Hydro.
To assist us through the implementation, we have engaged third party advisors with extensive experience in ERP implementations using contemporary systems implementation methodologies that will address not only the technical complexities of such an implementation but also assist with maintaining internal controls over financial reporting.
Excluding costs for projects financed through government grants, under the GTP, capital expenditures for all of our mills in 20112014 are expected to be approximately €24.1$40.0 million, comprised of principally of:
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 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 amount of wastewater fees we saved in €2.5$1.9 million in 2010 (€9.52013, as compared to approximately $12.0 million in 2009). The Oxygen Delignification Project is intended2012 related primarily to generatethe Rosenthal mill’s recovery boiler upgrade. In 2014, capital expenditures for environmental improvements by reducing organic loading on the effluent treatment system.substantialmaterial compliance with the requirements of all applicable environmental laws and regulations and our respective operating permits.20102013 as a result of environmental capital
20
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.
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 operates two landfills, a newly commissioned site andone of which is an older site.site that the mill is in the process of decommissioning. The Celgar mill intends to decommission the old landfill and is developingcontinuing work on finalizing a closure plan for such site and then 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 developing a standard for landfill closures. In addition, the portion of the landfill owned by an adjacent sawmill continuesWe expect to be active. Accordingly, the mill has not been able to move forward with the closure. We currently believe we may receive regulatory approval for suchfinalize our closure plan for the older landfill in 2011 and commence2014. The actual closure activities based onshall be effected pursuant to a timetable agreed to by both Celgarthe mill 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.
As there are Currently,numerous 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 tocannot 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,residuals, being wood chips and pulp logs, as the base raw material for itstheir production process. Wood chips are residueresiduals 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 residueresiduals and process itthem through a digester where cellulose is separated from the wood to be used in pulp production and the remaining residue,residuals, called “black liquor”, is used for green energy production. As a result of their use of wood residueresiduals and because our mills generate combined heat and power in a process known as cogeneration, 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 operational 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 saleregional utilities. In December 2013, we completed Project Blue Mill, a project at our Stendal mill to install a new 46 MW steam turbine which we expect will initially produce an additional 109,000 MWh of emission allowances under the EU ETS.
We are constantly exploring other initiatives to enhance our generation and sales of surplus green energy.energy and chemical by-products. Other potential opportunities that may result from climate change include:
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 negativeadverse consequence to date is that the focus on renewable energy will createhas created greater demand and competition 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“– Production 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 that over time that may affect our business include:
22
We currently employ approximately Rosenthal, which employs approximately Stendal and its subsidiaries employ approximately Our Celgar mill settled, effective May 1, 2012, a new five-year collective agreement with its hourly workers to replace its expiring prior agreement. The agreement provided for lump sum payments of C$3,750 for all active employees in 2012 and 2013 and wage increases of 2.0%, 2.5% or 3.0% in each of 2014, 2015 and 2016. The collective agreement is scheduled to expire in April 2017. In July 2013, we commenced reducing the 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 1,4911,460 people. We have approximately 1,0521,041 employees working in our German operations, including our wood procurement, transportation and sales subsidiaries. In addition, there are approximately 17 people workingemployed at the office we maintain in Vancouver, British Columbia, Canada. Celgar currently employs approximately 422405 people in its operations, the vast majority of which are unionized.445443 people, is bound by collective agreements negotiated with Industriegewerkschaft Bergbau, Chemie, Energie, or “IGBCE”, a national union that represents pulp and paper workers. In December 2010, we successfully negotiatedJuly 2013, our Rosenthal mill renewed its collective agreement for a new agreement with IGBCE substantially upon the same terms as the previous labor contract.two-year period until June 2015. The new collective agreement provides for, among other things, an approximately 3.5%initial 1.8% wage increase for employees thereunder, with a subsequent 3% wage increase in 2011 and expires at the end of November 2011.601592 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 provided for an approximately 5.5% wage increase in 2012. The collective agreement provides for a further 2.5% minimum annual wage increase from 2013 to 2015. The collective agreement is scheduled to expire in 2018.future.German operations and we would therefore expect to enter into new labor agreements with our pulp workers in Germanywhen the current labor agreements expire 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.
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) a €17.0 million amortizing term facility at our Stendal mill in respect of Project Blue Mill, referred to as the “Blue Mill Facility”; (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. In July 2013, we issued an additional $50.0 million in principal amount of Senior Notes at a price of 104.5%. 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, 2011.1. 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 current or 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 the
23
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 and Rosenthal Investment Loan 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 obligationand Blue Mill Facility are obligations of our unrestricted group.
We have purchased and cancelled an aggregate 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.
24
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%1.80% per year. The facility provides forallows 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.
The tranches are generally repayable in installments and mature between the fifth and 15th anniversary of the first advanceStendal Loan Facility matures in September 2017.
The tranches under the Stendal Loan Facility.
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.
In February 2009, we completed an agreement with Stendal’s lending syndicate to amend the Stendal Loan Facility, referred to as the “Amendment”“2009 Amendment”. Pursuant to the 2009 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 2009 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, 20102013 was approximately €7.0€33.0 million.
The 2009 Amendment implemented a permitted leverage ratio of total senior 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. This ratio is determined semi-annually based on the Stendal mill’s trailing 12-month EBITDA and will be 5.5x as at June 30, 2014. Subsequently, Stendal’s lending syndicate waived compliance with the permitted leverage ratio for the year ended December 31, 2009. The 2009 Amendment also revisesrevised 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 2009 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 | ||
The 2009 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.
25
On September 30, 2013, we completed an amendment agreement, referred to benefit from lower interest costs and other credit terms than would otherwise be available. Theas the “2013 Amendment”, with Stendal’s lending syndicate, referred to as the “Lenders”, to amend the Stendal Loan Facility is securedand the Blue Mill Facility, together, the “Stendal Facilities”. The 2013 Amendment modifies the Stendal Facilities to provide the Stendal mill greater financial flexibility by, substantially allamong other things:
Since completion of the assetsStendal mill in September 2004, Stendal has repaid €255.0 million of Stendal.
Blue Mill Facility
In connection withJanuary 2012, our Stendal mill entered into the Blue Mill Facility, being a €17.0 million amortizing term 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 we entered into a shareholders’ undertaking agreement, referred to as the “Undertaking”, dated August 26, 2002, as amended, with Stendal’s then minority shareholders(including cure provisions). The Blue Mill Facility 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 share the same security and have cross-default 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 retain control overMercer Inc. On September 30, 2013, we completed an amendment to the Blue Mill Facility as more fully described in the summary of our Stendal Loan Facility above.
As at least 51%December 31, 2013, €15.4 million ($21.2 million) was outstanding and was accruing interest at a rate of the voting shares of Stendal.
Rosenthal Loan Facilities
Our Rosenthal refinanced its then currentmill has the following credit facilities:
As at December 31, 2013, the total amount of funds available under the working capital facilities associated with the Rosenthal mill is €26.4was €28.3 million.
Celgar Working Capital Facility
On May 2, 2013, our Celgar amendedmill entered into a Second Amended and Restated Credit Agreement with the lenders party thereto relating to its C$40.0 million revolving working capital credit facility, referred to as the “Celgar Working Capital Facility”.
The Celgar Working Capital Facility matures inon May 2013 and2, 2016. Such facility is available by way of: (i) Canadian and U.S. denominated advances which bear interest at a designated prime rate plus 2.0%0.25% for Canadian advances and at a designated base rate plus 2.0%0.25% 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%1.75% per
26
As at December 31, 2010,2013, C$20.033.3 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, or furnish these materials to, 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.
All websites referred to herein are inactive textual references only, meaning that the information contained on such websites is not incorporated by reference herein and you should not consider information contained on such websites as part of this document unless expressly specified.
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; our level of indebtedness could negatively impact our financial condition, results of operations and liquidity; 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; 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; 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; our new ERP system may cost more than expected, be delayed, fail to perform as planned and interrupt operational transactions during and following the implementation, which could adversely affect our operations and results of operations; our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such requirements; future acquisitions may result in additional risks and uncertainties in our business; | ||
27
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”, “design”, “anticipate”, “plan”, “should” 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, (thereferred to as the “Securities Act”), and Section 21E of theSecurities Exchange Act of 1934, as amended, (thereferred to as 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.
During the course of 2014, the supply of hardwood bleached kraft pulp production is projected to increase by approximately 2.1 million ADMTs, primarily from South America. This increase in hardwood chemical production is, in large part, targeted at the growing demand for pulp by tissue makers, particularly in China. If such additional hardwood pulp supply is not absorbed by such demand growth and, as a result of generally lower prices for hardwood bleached pulp, this supply increase could put downward pressure on NBSK pulp prices.
Demand for pulp has historically been determined primarily by the level of economic growthgeneral global macroeconomic conditions and has been closely tied to overall business activity. From 2006 to mid-2008,NBSK pulp prices steadily improved. However,can fluctuate widely over time. Between 2000 and 2013, European list prices for NBSK pulp have fluctuated between a global economic crisislow of approximately $447 per ADMT in the latter half of 2008 resulted in a sharp decline of pulp prices from2002 to a high of €900$1,030 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
28
A producer’s actual sales price realizations are list prices net of customer discounts, rebates and other selling concessions. Over the last three years, these have increased as producers compete for our products.
Accordingly, 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.operations and liquidity.
As of December 31, 2010,2013, we had approximately €821.9$979.4 million of indebtedness outstanding, of which €500.7$590.1 million relates to indebtedness of our Stendal mill pursuant to the Stendal Loan Facility.Facilities. 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:
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.
Certain of the agreements governing our indebtedness, including the Stendal Facilities, have covenants that require us to maintain prescribed financial ratios and tests. We recently found it necessary to seek waivers and amendments in respect of certain ratios under the Stendal Facilities. As the Senior Debt/EBITDA Cover Ratio is based on Stendal’s trailing 12-month EBITDA and its weak 2013 operating results, there can be no assurance that Stendal will be in compliance with such ratio at its next measurement date of June 30, 2014. Failure to comply with thesuch covenants in the indentures 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
29
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.
Principally, as pulp demand has historically been determined by the level of economic growth and business activity,general global macroeconomic activities, demand and prices for our product have historically decreased substantially during economic slowdowns. For example, economic weakness in Europe since the 2008 global financial crisis has adversely affected demand for pulp. 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 and 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 material 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
30
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. Prices for our products are affected by many factors outside of our control and we have no influence over the timing and extent of price changes, which are often volatile. Our profitability with respect to these products depends, in part, on managing our costs, particularly raw material and energy costs which represent significant components of our operating costs and can fluctuate based upon factors beyond our control.
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.
Most of our operating costs and expenses, other than those of the Celgar mill, are incurred in Euros. In addition, allEuros while the majority of theour sales are in products sold by the Celgar mill are quoted in U.S. dollars anddollars. In addition, the Celgar mill costs are primarily incurred in Canadian dollars and the pulp sold by the Celgar mill is quoted in U.S. dollars. Our results of operations and financial condition are reported in Euros.U.S. dollars. As a result, our revenuesexpenses 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.
Interest on borrowings under the Stendal mill financing facility, which has kept Stendal from benefiting from the general declinerevolving working capital and investment loan facilities for our Celgar and Rosenthal mills are at “floating” rates. As a result, increases in interest rates that ensued. These derivatives are marked to market at the endwill increase our costs of each reporting periodborrowing 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.
31
In 2002, Stendal entered into variable-to-fixed interest rate fluctuations. Concurrently with entering intoswaps to fix interest payments under the Stendal financing, Stendal entered intovariable-to-fixed rate interest swaps for the full term of our Stendal Loan Facility, to manage itswhich for several years prevented Stendal from benefiting from the general decline in interest rate risk exposure with respect to the full principal amount of this facility.rates that ensued. 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 2010 included unrealized net gains of €1.9 million on our interest rate derivatives. For 2009 and 2008, our operating results included unrealized net losses 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:
In addition, as a result of our operations, we may be subject to remediation, clean upclean-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.
32
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.
In Germany, government and social focus on and demand for “carbon neutral” or “green” energy will createhas created greater demand and competition for the wood residuals or fiber that is consumed by our pulp mills as part of their production process. This has helped drive up the cost of fiber for German mills. In addition, further or new 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.
33
The occurrence of some or all of these events could have a material adverse effect on our operationsand/or financial results.
Our new ERP system may cost more than expected, be delayed, fail to perform as planned and interrupt operational transactions during and following the implementation, which could adversely affect our operations and results of operations.
In January 2014, we commenced the implementation of a new ERP solution to replace our existing business software applications at a total estimated cost of $12.0 million. The project is designed to be completed in stages over the next three years. Such projects are inherently complex, resource intensive, and lengthy. As a result, we could experience unplanned or unforeseen issues that could adversely affect the project, our business and/or our results of operations, including:
Our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for all of our capital requirements.
Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and, as a result of changes to environmental regulations that require capital expenditures, 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. If our available cash resources and cash generated from operations are not sufficient to fund our operating needs and capital expenditures, we would have to obtain additional funds from borrowings or other available sources or reduce or delay our capital expenditures. The global financial crisis in 2008 adversely affected global credit conditions, caused a downturn in the global economy and resulted in a significant tightening in the credit markets and the overall availability of credit. Our indebtedness could adversely affect our financial health, limit our operations and impair our ability to raise additional capital. If this occurs, we may not be able to obtain additional funds on favorable terms or at all. If we cannot maintain or upgrade our equipment as may be required from time to time, we may become unable to manufacture products that compete effectively. An inability to make required capital expenditures in a timely fashion could have a material adverse effect on our growth, business, financial condition or results of operations.
Future acquisitions may result in additional risks and uncertainties in our business.
In order to grow our business, we may seek to acquire additional assets or companies. Our ability to pursue selective and accretive acquisitions will be dependent on management’s ability to identify, acquire, and develop suitable acquisition targets in both new and existing markets, but, in certain circumstances, acceptable acquisition targets might not be available. In pursuing acquisition and investment opportunities, we face competition from other companies having similar growth strategies, many of which may have substantially greater resources than us. Competition for these acquisitions or investment targets could result in increased acquisition or investment prices, higher risks and a diminished pool of businesses or assets available for acquisition.
Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could have a material adverse effect on our operating results. Furthermore, the costs of integrating acquired businesses (including restructuring charges associated with the acquisitions, as well as other acquisition costs, such as accounting fees, legal fees and investment banking fees) could significantly impact our operating results.
Although we perform diligence on the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. We may not be able to ascertain the value or understand the potential liabilities of the acquired businesses and their operations until we assume operating control of the assets and operations of these businesses.
Furthermore, any future acquisitions of businesses or facilities could entail a number of risks, including:
In addition, geographic and other expansions, acquisitions or joint ventures may require significant managerial attention, which may be diverted from our other operations. If we are unsuccessful in overcoming these risks, our business, financial condition or results of operations could be materially and adversely affected.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing the company on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading could limit our access to the credit markets, increase our cost of financing and have an adverse effect on the market price of our securities.
The actual benefits of the Celgar mill workforce reduction may differ from those currently expected.
In July 2013, we commenced implementing a workforce reduction at the Celgar mill to, among other things, reduce the mill’s fixed costs and improve its competitiveness. We currently estimate that the Celgar mill will realize approximately $8.0 million to $10.0 million in annual pre-tax cost savings once such restructuring has been completed, and currently expect to realize approximately 80% of such savings in 2014. The Celgar workforce reduction initiative is subject to various risks, which could result in the actual benefits of the initiative differing from those currently anticipated. These risks and uncertainties include, among others, that unanticipated disruptions to the Celgar mill’s operations may result in additional costs being incurred, anticipated benefits not being realized and may adversely impact the mill’s operations.
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 future we may enter 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 German and European statutory energy 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 ofETS. Since our Rosenthal and Stendal mills’ eligibility forGerman mills receive stipulated 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 isemission allowances are subject to statutory amendment or change in the future.
In parallel with the European Commission’s recently initiated formal investigation of Germany’s renewable energy charge system under the Renewable Energy Act, the German government has proposed plans to withdraw or amend the exemption from a surcharge for companies that produce energy used in their own manufacturing processes. Additionally, the European Commission has expressed concerns that the Renewable Energy Act and certain exemptions thereunder are not in compliance with current European Union laws and are unpermitted state aid. The European Commission did not address whether the companies that received such substantial reductions could have to refund any benefits. We cannot currently predict the outcome of such developments. However, they could potentially result in an increase in our energy costs at our German mills, which, depending upon legislated changes, may be material.
Our German mills sell surplus “green energy” at stipulated tariffs under the Renewable Energy Act. The German government has publicly announced its intention to review various provisions and features of such Act and its overall energy policies. If the German government enacts legislation as a result, it could, adverselyamong other things, affect the eligibilityour cost of our Rosenthalenergy and Stendal mills to participate in this statutory programand/or the tariffs paid thereunder.we receive for sales of surplus energy. Currently, we cannot predict with any certainty which actions the German government may implement or their effect on our operations. 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:
34
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:
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.
If our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations.
We review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Should the markets for our products deteriorate or should we decide to invest capital differently or should other cash flow assumptions change, it is possible that we will be required to record non-cash impairment charges in the future that could have a material adverse effect on our results of operations.
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, and 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.
35
The price of our common stock may be volatile.
The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described above and the following:
In addition, there has been significant volatility in the market price and trading volume of securities of companies operating in the forest products industry that often has been unrelated to the operating performance of particular companies. Some companies that have had volatile market prices for their securities have had securities litigation brought against them. If litigation of this type is brought against us, it could result in substantial costs and would divert management’s attention and resources.
A small number of our stockholders could significantly influence our business.
As of December 31, 2013, we believe that our top three stockholders control approximately 57% of our common stock. These few significant stockholders, either individually or acting together, may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of the company or our assets. This concentration of ownership may make it more difficult for other stockholders to effect substantial changes in the company, may have the effect of delaying, preventing or expediting, as the case may be, a change in control of the company, and may adversely affect the market price of our common stock. Further, the interests of these few stockholders may not be in the best interests of all stockholders.
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
ITEM 2. | PROPERTIES |
We own the Rosenthal and Celgar mills and the underlying property. The Stendal mill is situated on property owned by Stendal, our 74.9%83.0% owned subsidiary.
We lease offices 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 330,000 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:
36
At the end of 2010,2013, substantially all of the assets relating to the Stendal mill were pledged to secure the Stendal Loan Facility.Facilities. The €5.0 million Rosenthal working capital facility is secured by certain land at the Rosenthal mill. The other working capital loan facilities established for the Rosenthal and Celgar mills are secured by first charges against the inventories and receivables atof the respective mills.
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 | ||||||||||||
ITEM 3. | LEGAL PROCEEDINGS |
Our Celgar Limited, receivedmill is currently appealing a re-assessment for real2013 property tax assessment decision from the British Columbia Supreme Court that resulted in it not recovering approximately C$4.5 million ($4.2 million) of previously paid 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 contestingexpect such appeal to be heard by the re-assessment and we currently expect the SupremeBritish Columbia Court of British Columbia to hold a hearing on this matter sometimeAppeal in 2011. The amount, if any, that may be payable in connection with this matter remains uncertain.
In September 2009, the Celgar mill received a summons for charges under the CanadianFisheries 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 to hold a hearing on this matter some time in 2011. Although we cannot assess with any certainty the potential liability for damages, if any, that may result from these
37
In January 2012, we served a Notice of Intent to Submit a Claim to Arbitration on the Government of Canada, referred to as the “NAFTA Notice”, for breaches by it of its obligations under the North American Free Trade Agreement, referred to as “NAFTA”. The Company’s NAFTA claim, referred to as the “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. Our NAFTA 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. Subsequent to the filing of the NAFTA Notice, our representatives met with representatives of the Government of Canada and the Province of British Columbia to attempt to settle our NAFTA Claim through consultation and negotiation, as required under NAFTA Article 1118. However, no resolution was achieved. As a result, we served a Request for Arbitration on the Government of Canada under NAFTA in order to meet the applicable filing deadline and to preserve and progress our NAFTA Claim. Under our NAFTA Claim, we are 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 that would result from the ongoing application of discriminatory Provincial policies should the status quo remain unchanged. Our NAFTA Claim is being instituted under Chapter 11 of NAFTA and will be heard by a tribunal appointed in accordance with Article 1123 of NAFTA. At this time, there can be no assurance whether we will be successful in such claim and we cannot quantify the amount we may recover, if any, under such proceedings if we were successful.
In 2012, as a result of a regular tax field audit for the Stendal mill, German public authorities commenced a preliminary investigation into a past and then current managers of the mill relating to whether certain settlement amounts received by the Stendal mill in 2007, 2010 and 2011 from the main contractor under the Engineering, Procurement and Construction Contract for the construction of the Stendal mill should have reduced the assessment base for the original investment subsidies granted to the mill by German authorities. The payments were made by the contractor to the Stendal mill to settle certain warranty, performance and remediation claims that the Stendal mill made against the contractor after completion of mill construction in 2004. The amounts currently under review aggregate approximately €8.3 million ($11.4 million). Investment subsidies received by the Stendal mill were generally based upon a percentage of the assessment base for subsidies of the mill. If the settlement payments received by the Stendal mill result in a reduction of the assessment base for subsidies under applicable German rules there could be a proportionate reduction in the investment subsidies and the difference could be repayable by the Stendal mill. The Stendal mill believes that it has properly recorded the settlement amounts received from the contractor and that the same do not reduce the assessment base for subsidies of the mill. However, at this time, there can be no certainty as to the outcome of the current investigation.
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. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM |
38
MARKET FOR REGISTRANT’S COMMON EQUITY, |
(a)Market Information.Our shares are quoted for trading on the NASDAQ Global Select 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 Select Market for each quarter in the two yeartwo-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 | ||||||
2013 | ||||||||
March 31 | $ | 7.51 | $ | 6.50 | ||||
June 30 | $ | 7.07 | $ | 5.87 | ||||
September 30 | $ | 7.84 | $ | 6.22 | ||||
December 31 | $ | 10.55 | $ | 7.04 | ||||
2012 | ||||||||
March 31 | $ | 8.80 | $ | 6.15 | ||||
June 30 | $ | 8.10 | $ | 5.55 | ||||
September 30 | $ | 7.51 | $ | 5.05 | ||||
December 31 | $ | 7.80 | $ | 6.18 |
(b)Shareholder Information.As at February 15, 2011,19, 2014, there were approximately 368295 holders of record of our shares and a total of 44,524,80655,853,704 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, 20102013 regarding our equity compensation plans approved by our shareholders. 2,543,854As at December 31, 2013, 1,081,654 of our shares may be issuedwere available for future issuance pursuant to grants of options, stock appreciation rights, restricted stock, restricted stock rights, performance shares and performance units under our 2010 Stock Incentive Plan, referred to as the “2010 Plan”, which was adopted in June 2010 and which replaced our 2004 Stock Incentive Plan.Plan, referred to as the “2004 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 (Excluding Shares Reflected in Column (a)) | ||||||||||
(a) | (b) | (c) | ||||||||||
2010 Stock Incentive Plan | — | $ | — | 1,081,654 | (1)(2) | |||||||
2004 Stock Incentive Plan | 30,000 | (3) | $ | 7.30 | — | |||||||
Amended and Restated 1992 Non-Qualified Stock Option Plan | 45,000 | (4) | $ | 7.92 | — | (5) |
(1) | As at December 31, 2013, we had 791,432 performance share units outstanding under the 2010 Plan. In February 2011, we awarded 783,395 performance share units under the 2010 Plan which may vest and become issuable into a maximum of 783,395 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 ended on December 31, 2013. In February 2011, we awarded 29,180 performance share units under the 2010 Plan. These were subsequently forfeited in 2012, and a cash payment was made as compensation. During 2012, we awarded 55,478 performance share units under the 2010 Plan which may vest and become issuable into a maximum of 55,478 shares of our common stock only upon the attainment of designated performance objectives over a performance period that commenced on January 1, 2011 and ended on December 31, 2013. During 2013, we awarded 40,499 performance share units under the 2010 Plan which may vest and become issuable into a maximum of 40,499 shares of our common stock only upon the attainment of designated performance objectives, for 28,340 of the performance share units the performance period commenced on January 1, 2011 and ended on December 31, 2013 and for 12,159 of the performance share units the performance period will end in March 2014. The scheduled vesting dates for the performance shares units are: 30,399 shares on March 31, 2014; 355,386 shares on January 1, 2014; 203,181 shares on January 1, 2015 and 202,466 shares on January 1, 2016. 35,196 performance share units were forfeited in 2013, 64,661 performance share units were forfeited in 2012 and 17,263 shares in 2011. |
(2) | As at December 31, 2013, we had 158,000 restricted stock outstanding under the 2010 Plan. In 2011, we issued 238,000 shares of restricted stock under the 2010 Plan, of which 78,000 vested in 2012, 40,000 vested in 2013 and the remaining 120,000 vest in equal amounts over a three-year period between 2014 and 2016. During 2012, we issued 36,500 shares of restricted stock under the 2010 Plan, which vested in June 2013. During 2013, we issued 38,000 shares of restricted stock under the 2010 Plan, which vest in June 2014. |
(3) | The terms of the 2004 |
(5) | The plan has expired. |
Our 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”.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
39
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 amount 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.
COMPARISON OF CUMULATIVE TOTAL RETURN
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 |
40
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||
Mercer International Inc. | 100.00 | 161.46 | 403.65 | 317.71 | 372.92 | 519.27 | ||||||||||||||||||
SIC Code Index | 100.00 | 142.23 | 406.11 | 302.73 | 339.46 | 427.49 | ||||||||||||||||||
NASDAQ Stock Market Index | 100.00 | 145.36 | 171.74 | 170.39 | 200.62 | 281.22 |
ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected historical financial and operating data as at and for the periods indicated. Our consolidated financial statements as at and for each of the years in the four-year period ended December 31, 2012 were reported using the Euro. Effective October 1, 2013, we changed our reporting currency to the U.S. dollar. With the change in reporting currency, all comparative financial information has been recast from Euros to U.S. dollars to reflect our consolidated financial statements as if they had been historically reported in U.S. dollars, consistent with Accounting Standards Codification Topic 830. The consolidated Euro balance sheet information was translated into the U.S. dollar reporting currency by translating assets and liabilities at the rate of exchange on the balance sheet date and translating equity accounts using historical exchange rates. The consolidated statement of operations information was translated into U.S. dollars using the weighted average exchange rate for the period. Unrealized gains or losses from these translations are recorded in our Consolidated Statement of Comprehensive Income (Loss) and do not affect our net earnings.
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 |
Year Ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands, other than per share and per ADMT amounts) | ||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Pulp | $ | 996,187 | $ | 979,770 | $ | 1,157,206 | $ | 1,136,595 | $ | 804,426 | ||||||||||
Energy and chemicals | 92,198 | 92,966 | 94,758 | 65,421 | 63,457 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
$ | 1,088,385 | $ | 1,072,736 | $ | 1,251,964 | $ | 1,202,016 | $ | 867,883 | |||||||||||
Costs and expenses | $ | 1,056,725 | $ | 1,009,714 | $ | 1,097,299 | $ | 979,368 | $ | 885,719 | ||||||||||
Operating income (loss) | $ | 31,660 | $ | 63,022 | $ | 154,665 | $ | 222,648 | $ | (17,836 | ) | |||||||||
Interest expense | $ | 69,156 | $ | 71,767 | $ | 82,114 | $ | 89,754 | $ | 90,253 | ||||||||||
Gain (loss) on derivative instruments | $ | 19,709 | $ | 4,812 | $ | (1,974 | ) | $ | 2,521 | $ | (8,026 | ) | ||||||||
Other income (expense) | $ | 1,215 | $ | (179 | ) | $ | 3,625 | $ | (17,457 | ) | $ | 7,434 | ||||||||
Net income (loss)(1)(2) | $ | (26,375 | ) | $ | (15,670 | ) | $ | 69,699 | $ | 114,521 | $ | (86,658 | ) | |||||||
Net income (loss) per share(2) | ||||||||||||||||||||
Basic | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.39 | $ | 2.97 | $ | (2.39 | ) | |||||||
Diluted | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.24 | $ | 2.07 | $ | (2.39 | ) | |||||||
Weighted average shares outstanding (in thousands) | ||||||||||||||||||||
Basic | 55,674 | 55,597 | 50,117 | 38,591 | 36,297 | |||||||||||||||
Diluted | 55,674 | 55,597 | 56,986 | 56,963 | 36,297 | |||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Current assets | $ | 471,773 | $ | 454,880 | $ | 484,149 | $ | 477,897 | $ | 287,978 | ||||||||||
Current liabilities | $ | 165,499 | $ | 179,876 | $ | 163,534 | $ | 167,651 | $ | 145,877 | ||||||||||
Working capital | $ | 306,274 | $ | 275,004 | $ | 320,615 | $ | 310,246 | $ | 142,101 | ||||||||||
Total assets | $ | 1,548,559 | $ | 1,560,581 | $ | 1,579,017 | $ | 1,628,445 | $ | 1,553,345 | ||||||||||
Long-term liabilities | $ | 1,034,743 | $ | 1,012,943 | $ | 1,047,672 | $ | 1,174,812 | $ | 1,284,253 | ||||||||||
Total equity | $ | 348,317 | $ | 367,762 | $ | 367,811 | $ | 285,982 | $ | 123,215 | ||||||||||
Other Data | ||||||||||||||||||||
Pulp sales volume (ADMTs) | 1,440,147 | 1,473,519 | 1,427,924 | 1,428,638 | 1,445,461 | |||||||||||||||
Pulp production (ADMTs) | 1,444,475 | 1,468,275 | 1,453,677 | 1,426,286 | 1,397,441 | |||||||||||||||
Average pulp price realized (per ADMT)(3) | $ | 683 | $ | 657 | $ | 799 | $ | 785 | $ | 548 |
(1) | ||
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 |
(2) | Attributable to common shareholders. |
(3) |
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, 20102013, 2012 and 2011 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”.
Effective October 1, 2013, we changed our reporting currency from Euros to the U.S. dollar. As a result of our change in reporting currency, all comparative financial information has been recast from Euros to U.S. dollars to reflect our financial statements as if they had been historically reported in U.S. dollars, consistent with the method described in significant accounting policies. See “—Critical Accounting Policies—Change in Reporting Currency” for more information about our change in reporting currency, including the reasons for the change and the manner in which the change has been applied to recast prior period financial statements. See also Note 1 of the consolidated financial statements included in this annual report on Form 10-K.
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 Markets for NBSK pulp 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 for kraft pulp are influenced largely by the market price for During the first half of 2011, pulp prices were around record highs, primarily as a result of strong demand from China and the closure of several older mills in the prior years. However, economic uncertainty in Europe and credit tightening in China resulted in a sharp decline in pulp prices commencing in the fourth quarter of 2011. In 2012, there was continuing economic uncertainty in Europe and credit tightening in China in the first half of the year. Further, in the latter part of Our sales realizations are list prices, Surplus energy and chemicals are by-products of our pulp production and the Production and sales of surplus 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. 1,500,0001.5 million ADMTs of NBSK pulp.We operate in markets thatpulp and 305 MW of electrical generation.our products, raw materialsNBSK pulp, fiber costs and foreign currency exchange rates. Kraft pulp markets are highly cyclical, with prices determined by supply and demand. Demand forIn general, kraft pulp is a globally traded commodity. Pricing and demand are influenced to a significant degreeby the balance between supply and demand, as affected 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 economicmacroeconomic conditions, changes in productionconsumption and industry capacity, the level of customer and inventory levels are the primary factors affecting kraft pulp prices. Historically, kraft pulp prices have been cyclicalproducer inventories and fluctuations in nature.exchange rates. The average European list prices for NBSK pulp between 2000 and 2008 ranged from2013 have fluctuated between a low of $447 per ADMT in 2002 to $900a high of $1,030 per ADMT in mid-2008.2011.2008, we experienced extremely difficult2012, weak demand for paper in Europe resulted in some integrated producers curtailing their paper production and selling their pulp on the market, conditions characterized by poorprimarily in China. These factors negatively impacted demand and rapidly declininglist prices all offor NBSK pulp. In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which impacted our results for 2008. In slowing economic times, a key factor influencing our competitive position is the price of our product. At the end of 2008,resulted in higher prices. On average, NBSK list prices in Europe had declined to $635 per ADMT. As world economies began to stabilize, NBSKdecreased by approximately 15% in 2012 from the prior year and increased by approximately 6% in 2013 from 2012. At the end of 2013, list prices rebounded in the latter part of 2009 to finish at $800were approximately $905 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 slightly in the fourth quarter, they remained at historically high levels. As at December 31, 2010, list prices were $950, $960$990 and $840$750 per ADMT in Europe, North America and China, respectively. As pulp prices are highly cyclical, there can be no assurance that prices will not decline in the future.reduced bynet of customer discounts, rebates and other items.selling concessions. Over the last three years, these discounts, rebates and concessions have increased as producers compete for customers and sales. Our reported average sale price realizations are affected by NBSK price movements between the order and shipment dates.Duringlast three years,volumes generated and sold are primarily related to the rate of pulp production. Prices for our energy productionand chemical sales are generally stable and unrelated to cyclical changes in pulp prices.have become aand chemicals are key source of revenuesrevenue sources for us. In 20102013, 2012 and 2009,2011, our mills generated 520,005699,051 MWh, 710,241 MWh and 478,674652,113 MWh, respectively, of surplus energy, primarily from a renewable carbon-neutral source. At the end of September 2010, we completed the Celgar Energy Project and, based on our Celgar mill operating at or around current levels and our contracted sale pricesInitiatives 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. Increasingincrease our generation and sales of surplus renewable energy and chemicals will continue to be a key focus for usus. In the last quarter of 2013, our Stendal mill completed Project Blue Mill, which is expected to both increase pulp production and increase surplus electricity production by approximately 109,000 MWh annually. Additionally, in the near term. We are currently exploring various2014, our Rosenthal mill is implementing a capital project at an estimated cost of approximately $3.1 million to process and sell tall oil, a chemical by-product. Further initiatives to enhance suchincrease energy generation and chemical sales revenues. Such initiatives, if implemented, willmay require additional capital spending.Overall weak lumber markets since 2008 have resulted in reduced sawmilling activityOver the last three years, the demand 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 oncompetition for fiber prices. Additionally, higher energy prices and a focus on “green” or renewable energy, while benefiting our surplus power sales, has also led to an
42
Generally weak lumber markets in 2011 and most of 2012 resulted in reduced sawmill activity and log harvesting in the regional fiber baskets for our mills. In 2013, the lumber markets improved globally which had the effect of increasing supply of chips and increased demand for the substantial majority of itssaw logs and higher quality pulp logs, which put upward pressure on log pricing. Additionally, higher energy prices and a focus on “green” or renewable energy, while benefiting our surplus power sales, led to an overall increase in demand for wood residuals in Germany from other renewable energy producers such as pellet producers. This increased demand and competition for fiber supply. With the severe economic declinehas put upward pressure on fiber prices. A recovery in 2008 and the corresponding adverse effect it had on the U.S. housing starts which commenced in the latter part of 2012 and lumber industries, many sawmills shut down or dramatically curtailed their production. Thiscontinued in 2013 resulted in a significantly reducedincreased sawmill activity. This increased the supply of sawmill chips and materially higher fiber priceswoodchips for the Celgar mill. Asmill and reduced its need for pulp logs, which are generally a result, we implemented a substantial enhancement tohigher cost for the whole log chipping facility at our Celgar mill. The capital cost of the project was approximately C$11.0 million and it was completed in early 2009. During 2009, we started up this new facility and, over the course of the year, substantially enhanced its capability so that it is now capable of supplying up to a potential 50% of the Celgar mill’s total fiber needs. The ability to conduct such whole log chipping has permitted the Celgar mill to materially reduce its dependence on third party field chippers and residual sawmill chips and to better manage its fiber costs. For a more detailed discussion of our fiber needs and resources, see “Business — Operating Costs — Fiber”.
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.energy and chemicals. Our production levels are also dependent on, among other things, the number of days of scheduled and unscheduled downtime at our mills. In 2014, we have no scheduled downtime in the first quarter. For the balance of 2014, we have scheduled maintenance downtime of ten days, or approximately 14,000 ADMTs, for our Celgar mill in the second quarter and 12 days, or approximately 12,000 ADMTs, for our Rosenthal mill in the third quarter. Our Stendal mill is not scheduled to have major maintenance downtime in 2014. Instead, in the second and fourth quarters of 2014, our Stendal mill will have two two-day shutdowns, or approximately 3,600 ADMTs for each shutdown. 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, compared to prior years,product mix 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 |
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. Mostmost 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,Facilities, 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 reduceincrease our sales revenue, gross profitoperating and interest costs and decrease our operating margin and income from operations. Conversely, an increase in the U.S. dollar versus the Euro and the Canadian dollar positively impactsdecreases our revenuesoperating and interest costs and increases our operating margins and cash flow.
On average, in interest rates can impact2012, the U.S. dollar increased by approximately 8% and by approximately 1%, respectively, versus the Euro and the Canadian dollar compared to 2011. On average, in 2013, the U.S. dollar declined by approximately 3% and increased by approximately 3%, respectively, versus the Euro and the Canadian dollar compared to 2012. If sustained in 2014, the appreciation of the U.S. dollar versus the Canadian dollar during the latter part of 2013 should positively benefit our Celgar mill’s 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.
We also periodically enter into interest rate, foreign currency, pulp price and energy price 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
We do not believe that inflation has had a material impact on revenues or income during 2013.
Significant Actions
In 2010,2013, we took the following significant actions:
Current Market Environment
Demand from China was stable throughout the year and pulpsupply was slightly under-balanced, which resulted in higher 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 strength in2013.
At year end, the NBSK pulp market throughwas slightly under-balanced with world producer inventories at about 27 days’ supply. In addition, we expect to see continued growth in NBSK demand in emerging markets, particularly in China, driven by increasing strong demand from tissue producers. As a result of the foregoing and the closure of a Norwegian mill, we currently expect that NBSK pulp prices will continue their moderate upward trend over the first half of 2011.
44the future.
Summary Financial Highlights
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands, other than per share amounts) | ||||||||||||
Pulp revenues | $ | 996,187 | $ | 979,770 | $ | 1,157,206 | ||||||
Energy and chemical revenues | $ | 92,198 | $ | 92,966 | $ | 94,758 | ||||||
Operating income | $ | 31,660 | $ | 63,022 | $ | 154,665 | ||||||
Restructuring expenses | $ | 6,415 | $ | — | $ | — | ||||||
Gain (loss) on derivative instruments | $ | 19,709 | $ | 4,812 | $ | (1,974 | ) | |||||
Income tax benefit (provision) | $ | (9,196 | ) | $ | (9,379 | ) | $ | 968 | ||||
Net income (loss)(1) | $ | (26,375 | ) | $ | (15,670 | ) | $ | 69,699 | ||||
Net income (loss) per share(1) | ||||||||||||
Basic | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.39 | ||||
Diluted | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.24 |
(1) | Attributable to common shareholders. |
Selected Production, Sales and Other Data
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 |
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Consolidated | ||||||||||||
Pulp production (‘000 ADMTs) | 1,444.5 | 1,468.3 | 1,453.7 | |||||||||
Scheduled production downtime (‘000 ADMTs) | 47.8 | 50.9 | 52.4 | |||||||||
Scheduled production downtime (days) | 33 | 40 | 35 | |||||||||
Pulp sales (‘000 ADMTs) | 1,440.1 | 1,473.5 | 1,427.9 | |||||||||
Average NBSK pulp list prices in Europe ($/ADMT)(1) | 864 | 813 | 956 | |||||||||
Average pulp sales realizations ($/ADMT)(2) | 683 | 657 | 799 | |||||||||
Energy production (‘000 MWh) | 1,710.2 | 1,704.1 | 1,640.4 | |||||||||
Energy sales (‘000 MWh) | 699.1 | 710.2 | 652.1 | |||||||||
Average energy sales realizations ($/MWh) | 114 | 110 | 124 | |||||||||
Average Spot Currency Exchange Rates | ||||||||||||
$ / €(3) | 1.3281 | 1.2859 | 1.3931 | |||||||||
$ / C$(3) | 0.9712 | 1.0007 | 1.0121 |
(1) | Source: RISI pricing report. |
(2) |
(3) | Average Federal Reserve Bank of New York noon spot rate over the reporting period. | |
In In 2013, surplus energy and chemicals sales List prices for NBSK pulp in Europe averaged approximately 20102013 Compared to Year Ended December 31, 20092012the year ended December 31, 2010,2013, pulp revenues increased by approximately 48%2% to €856.3$996.2 million from €577.3$979.8 million in 2009,2012, primarily due to significantly higher average pulp prices and a stronger U.S. dollar relative to the Euro. In 2010, revenues from the sale of excess energy increased by approximately 4% to €44.2 million from €42.5 million in 2009 due to increased energy sales at our Celgar mill,realizations, partially offset by reducedlower sales volume. In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which resulted in higher prices in 2013.at our Rosenthal mill caused by 60 days of scheduled turbine maintenance.Pulp prices increasedmarginally decreased to $92.2 million from $93.0 million in 2010,2012, primarily as a result of stronger pulp markets. lower sales volumes.$938 (€707)$864 per ADMT in 2010,2013, compared to approximately $667 (€478)$813 per ADMT in 2009.2012. At the end of 2010,2013, list prices increased to approximately $950 (€709)were $905 per ADMT in Europe and $960 (€717)$990 and $840 (€627)$750 per ADMT in North America and China, respectively. Average pulp sales realizations increased by approximately 50%4% to €591$683 per ADMT in 20102013 from €393$657 per ADMT in 2009,2012, primarily due to significantly higher pulp prices. At the end of 2010,2013, reported global inventories for softwood kraft were
45
Pulp sales volume decreased slightlyby approximately 2% to 1,428,6381,440,147 ADMTs in 20102013 from 1,445,4611,473,519 ADMTs in 2009.
Pulp production decreased to 1,444,475 ADMTs in 2013 from 1,468,275 ADMTs in 2012, primarily due to lower production at our Celgar mill. In 20102013 and 2009,2012, we took a total of 3133 and 43 days40 days’ scheduled maintenance downtime, respectively, at our mills and expect to take approximately 3926 days in 2011.
Costs and expenses increased to €732.8$1,056.7 million in the year ended December 31, 20102013 from €632.6$1,009.7 million in 2009,2012, primarily due to higher fiber costs.
On average, in 2010,2013, our overall per unit fiber costs increased by approximately 24%8% compared to 2009. In Germany,2012, primarily due to a 13% increase in per unit fiber costs in Germany, only partially offset by a 12% decrease in per unit fiber costs in Canada. Fiber costs in Germany were higher primarily as a resultbecause of lower levels of harvesting, combined with increasedstrong demand for wood from the energy sectorEuropean pellet and board producers and sawmills, which increased prices for heating and other bio-energy purposes. Extreme winter weather inpulp logs, the fourth quarter of 2010 further reduced the availabilitymajor source of fiber for the Stendal mill. Further, in 2013, fiber supply in Germany was negatively impacted by several different factors. These included harsh winter conditions at the start of 2013, which later resulted in record flooding and mild, very wet conditions at the end of 2013. All these conditions hampered harvesting and fiber logistics during 2013. We currently expect fiber costs at our German mills.mills to stabilize in the short- to mid-term, primarily due to the mild winter in Germany which should reduce competition from the pellet industry and improve supply. Fiber costs at our Celgar mill were lower, primarily due to strong sawmill activity in the region, which reduces Celgar’s need for pulp logs, which are generally a higher cost for the mill than woodchips. We expect flat pricing in Canada as a result of continued strong sawmill activity in British Columbia.
Operating depreciation and amortization increased marginallyto $78.3 million in 2013 from the prior year. In the near term, we expect fiber costs to increase slightly at our German mills, while remaining generally flat at our Celgar mill.
In 2013, we had restructuring expenses of $6.4 million, primarily related to the workforce reduction at our Celgar mill.
In 2013, operating income decreased to $31.7 million from $63.0 million in 2012, primarily due to higher fiber costs in Germany, the impact of a weaker U.S. dollar relative to the Euro on our German mill expenses and the Celgar restructuring, partially offset by a higher realized sales price.
Interest expense in 2013 decreased to $69.2 million from $71.8 million in 2012, primarily due to reduced debt levels associated with our Stendal mill.
Transportation costs decreased to $90.0 million in 2013 from $92.3 million in 2012, primarily as a result of increased commission costs.
In 2010, contribution to income from the sale of emission allowances decreased to €0.1 million, compared to €0.5 million in 2009. Operating depreciation and amortization increased marginally to €55.9 million in 2010 from €53.9 million in 2009, primarily due to capital asset additions related to the Celgar Energy Project.
In 2013, Senior Notes. In 2009, we recorded a gain of €4.4 million on the extinguishment of our 2010 Convertible Notes.
In 2013, we recognized a deferred tax expense of $11.5 million, primarily as a result of an increase in the valuation allowance against the carrying value of deferred tax assets on our balance sheet, compared to a recovery of $0.2 million in 2012. This is a non-cash charge and does not reduce our underlying tax attributes or hinder our ability to use them. See “— Critical Accounting Policies — Deferred Tax Assets”.
In 2013, we reported a net loss of €9.9 million in 2009.
46
In 2010,2013, “Operating EBITDA” increased fivefolddecreased to €224.0$110.3 million from €41.4$137.7 million in 2009.2012 for the same reasons that operating income declined. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss) attributable to common shareholders, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America, (“GAAP”)referred to as “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 | ||||
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Net income (loss) attributable to common shareholders | $ | (26,375 | ) | $ | (15,670 | ) | ||
Net income (loss) attributable to noncontrolling interest | 607 | 2,179 | ||||||
Income tax provision | 9,196 | 9,379 | ||||||
Interest expense | 69,156 | 71,767 | ||||||
Loss (gain) on derivative instruments | (19,709 | ) | (4,812 | ) | ||||
Other expense (income) | (1,215 | ) | 179 | |||||
|
|
|
| |||||
Operating income | 31,660 | 63,022 | ||||||
Add: Depreciation and amortization | 78,645 | 74,657 | ||||||
|
|
|
| |||||
Operating EBITDA | $ | 110,305 | $ | 137,679 | ||||
|
|
|
|
In In 2012, surplus energy List prices for NBSK pulp in Europe averaged approximately Pulp sales volume increased by approximately 3% to Pulp production increased to a Costs and expenses decreased to On average, in Operating depreciation and amortization decreased In Interest expense in 20092012 Compared to Year Ended December 31, 20082011the year ended December 31, 2009,2012, pulp revenues decreased by approximately 16%15% to €577.3$979.8 million from €689.3$1,157.2 million in 2008,2011, primarily due to lower average pulp sales prices.realizations, partially offset by higher pulp sales volumes. In 2009, revenues from2012, there was continuing economic uncertainty in Europe and credit tightening in China in the salefirst half of excessthe year. Further, in the latter part of 2012, weak demand for paper in Europe resulted in some integrated producers curtailing their paper production and selling their pulp on the market, primarily in China. These factors negatively impacted demand and supply and list prices for NBSK pulp. NBSK pulp prices remained relatively stable during the first quarter of 2012 before decreasing in the middle part of the year and were generally stagnant in the latter part of 2012.increasedand chemicals sales decreased by approximately 2% to €42.5$93.0 million from €31.0$94.8 million in 2008.Pulp prices decreased in 2009,2011, primarily asdue to the impact of a resultstronger U.S. dollar relative to the Euro on sales from our German mills, partially offset by the impact of significantly weaker demand. record pulp production.$667 (€478)$813 per ADMT in 2009,2012, compared to approximately $839 (€571)$956 per ADMT in 2008.2011. At the end of 2009,2012, list prices increased to approximately $800 (€558)were $810 per ADMT in Europe and $700 (€488)$870 and $655 per ADMT in Asia, depending upon the country of delivery.North America and China, respectively. Average pulp sales realizations decreased by approximately 18% to €393$657 per ADMT in 20092012 from €478$799 per ADMT in 2008 because of2011, primarily due to lower pulp prices. The weakened market conditions, however, were partially offset by an overall slightly higher U.S. dollar duringAt the year. At December 31, 2009,end of 2012, reported global inventories for softwood kraft decreased towere approximately 1929 days’ supply, compared to 40 dayswhile at the end of 2008.1,445,461a record 1,473,519 ADMTs in 20092012 from 1,423,3001,427,924 ADMTs in 2008.Pulp production decreased to 1,397,441 ADMTs in 2009 from 1,424,987 ADMTs in 2008,2011, primarily as a result of increased sales to China in 2012.heavier scheduled maintenance program.record level of 1,468,275 ADMTs in 2012 from 1,453,677 ADMTs in 2011, primarily due to increased pulp production at our Stendal and Celgar mills. In 20092012 and 2008,2011, we took a total of 4340 and 3335 days scheduled maintenance downtime, respectively, at our mills.€632.6$1,009.7 million in the year ended December 31, 20092012 from €707.0$1,097.3 million in 2008,2011, primarily due to the impact of a stronger U.S. dollar relative to the Euro on our German mill expenses and lower fiber costs.2009,2012, our per unit fiber costs decreased by approximately 16%14% compared to 2008. In Germany,2011, primarily due to lower fiber costs were significantly lower asin Germany caused by the impact of a stronger U.S. dollar relative to the Euro and decreased demand from the European particle board industry decreased.and other regional residual fiber users. Fiber costs at our Celgar mill decreased fromwere lower due to the prior year primarily as a resultimpact of improved woodroom performancewood chip availability for the region.reliance on fiber sourcedto $74.3 million in 2012 from third party field chippers.€27.4$49.3 million in 20092012 from €30.2$54.0 million in 2008.2009, contribution to2012, operating income from the sale of emission allowances decreased to €0.5$63.0 million compared to €5.6from $154.7 million in 2008. Operating depreciation and amortization decreased marginally to €53.9 million in 2009 from €55.5 million in 2008.For the year ended December 31, 2009, operating income (loss) decreased to a loss of €12.8 million from an income of €13.3 million in 2008,2011, primarily due to lower price realizations.20092012 decreased to €64.8$71.8 million from €65.8$82.1 million in 20082011, primarily due to lowerthe impact of a stronger U.S. dollar relative to the Euro on our Stendal mill interest expense, reduced debt levels associated with our Stendal mill and the conversion of borrowing.
48
In 2009,2012, we recorded an unrealized lossgain of €5.8$2.2 million on the Stendal Interest Rate Swap Contracts,Contract, compared to an unrealized loss of €25.2$2.0 million in 2008,2011, which was primarily the result of lower long-terman increase in short-term European interest rates in 2009.
In 2009,2012, the noncontrolling shareholder’s proportionate interest in the Stendal mill’s lossincome was €9.9$2.2 million, compared to a loss of €13.1$5.5 million in 2008.
In 2012, deferred tax recoveries were $0.2 million, compared to €0.1 million from €0.5deferred tax recoveries of $3.3 million in 2008. Deferred tax recoveries increased in 2009 to €6.0 million from a €2.0 million deferred tax provision recognized in 2008,2011, primarily due to management’s belief that it is more likely than not that certainthe timing of recognizing deferred tax assets will be recognized based on forecasted taxable income.
In 2009,2012, we reported a net loss attributable to common shareholders of €62.2$15.7 million, or €1.71$0.28 per basic and diluted share whichshare. This included an unrealizeda net gain of $4.8 million on the Stendal interest rate derivatives and fixed price pulp derivatives. In 2011, we reported net income of $69.7 million, or $1.39 per basic and $1.24 per diluted share. This included a non-cash loss of €3.1$2.0 million on our Stendal Interest Rate Swap Contracts and a foreign exchange gain on our long-term debt. Contract.
In 2008, we reported net loss attributable2012, Operating EBITDA decreased to common shareholders of €72.5$137.7 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 and non-cash inventory provisions totaling €11.3 million.
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
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Net income (loss) attributable to common shareholders | $ | (15,670 | ) | $ | 69,699 | |||
Net income attributable to noncontrolling interest | 2,179 | 5,471 | ||||||
Income tax provision (benefit) | 9,379 | (968 | ) | |||||
Interest expense | 71,767 | 82,114 | ||||||
Loss (gain) on derivative instruments | (4,812 | ) | 1,974 | |||||
Other expense (income) | 179 | (3,625 | ) | |||||
|
|
|
| |||||
Operating income | 63,022 | 154,665 | ||||||
Add: Depreciation and amortization | 74,657 | 77,952 | ||||||
|
|
|
| |||||
Operating EBITDA | $ | 137,679 | $ | 232,617 | ||||
|
|
|
|
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 20102013 sales volume (and assuming all other factors remained constant), each $10.00 per tonne change in NBSK list pulp prices yields a change in Operating EBITDA of approximately €10.8$12.0 million.
Foreign Exchange.Our operating costs are in Euros for our German mills and Canadian dollars for our Celgar mill. As NBSK pulp is principally quoted in U.S. dollars, the amount of revenues we generate fluctuatesa result, our operating costs will fluctuate with changes in the value of the U.S.U.S dollar relative to the Euro.Euro and Canadian dollar. Based uponon our 2010 revenues,2013 operating costs, each €0.01$0.01 change in the value of the U.S. dollar relative to the Euro and the Canadian dollar yields a total change in annual gross sales revenueoperating costs of approximately €11.4$8.0 million.
Seasonal Influences.We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These factors are common in the NBSK pulp industry. We generally have weaker pulp demand in Europe during the summer holiday months and in China in the period relating to its lunar new year. We typically have a seasonal build-up in raw material inventories in the early winter months as the mills build up their fiber supply for the winter when there is reduced availability.
Summary of The following table is a summaryselected 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 Sources and Uses of FundsCash FlowsOur 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 2017 Senior Notes and 2012 Convertible Notes.As at December 31, 2010, our cash and cash equivalents were €99.0 million, compared to €51.3 million at the end of 2009.In 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 €13.9 million during 2010 and are required to make principal payments totaling €23.2 million during 2011. 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 — Description of Certain Indebtedness”.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 1 — Business — Description of Certain Indebtedness”.
50
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Net cash provided by operating activities | $ | 36,325 | $ | 59,115 | $ | 154,576 | ||||||
Net cash provided by (used in) investing activities | (44,968 | ) | (30,610 | ) | (63,849 | ) | ||||||
Net cash provided by (used in) financing activities | 15,233 | (29,667 | ) | (82,862 | ) | |||||||
Effect of exchange rate on changes in cash and cash equivalents | 3,699 | 2,302 | (4,166 | ) | ||||||||
|
|
|
|
|
| |||||||
Net increase in cash and cash equivalents | $ | 10,289 | $ | 1,140 | $ | 3,699 | ||||||
|
|
|
|
|
|
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 can
51
Cash provided by operating activities in 20102013 decreased to $36.3 million from $59.1 million in 2012 and $154.6 million in 2011 due to lower operating income. A decrease in receivables, excluding non-cash items, provided cash of €91.3$14.0 million in 2013, compared to providing cash of €37.3$10.8 million in 2009, primarily due to a significant increase in net income, partially offset by2012 and an increase in working capital. An increase in receivables usedusing cash of €40.0$2.2 million in 2010, compared to a decrease in receivables providing cash of €31.9 million in 2009.2011. An increase in inventories used cash of €24.5$14.6 million in 2010,2013, compared to a decrease in inventories providing cash of €32.2$1.7 million in 2009.2012 and an increase in inventories using cash of $24.7 million in 2011. A decrease in accounts payable and accrued expenses used cash of €3.1$11.6 million in 2010 and €3.02013, compared to $18.0 million in 2009.
Cash Flows from Investing Activities. Investing activities in 20102013 used cash of €36.0$45.0 million, primarily related to capital expenditures of $45.7 million. Investing activities in 2012 used cash of $30.6 million, primarily due to capital spending of €38.3$47.2 million. The maturity of government bonds in 2012 provided cash of $15.8 million. Investing activities in 20092011 used cash of €15.2$63.8 million, primarily due to €28.8 million of capital spending being only partially offset by a drawdown of €13.0$52.6 million fromand the Stendal Loan Facility’s DSRA.
In 2010,2013, capital expenditures, primarily related to the Celgar Energy Project Blue Mill, used cash of €25.6$45.7 million. In the same period last year,2012, capital expenditures, primarily related to Project Blue Mill and the Celgar Energy Projectrecovery boiler upgrade at our Rosenthal mill, used cash of €13.4$47.2 million.
Cash Flows from Financing Activities. In 2010,2013, financing activities usedprovided net cash of €6.1$15.2 million, primarily due to borrowings by the receiptStendal mill under the Blue Mill Facility, which provided cash of €16.7$22.2 million, in government grants for the Celgar Energy Project and the proceeds received from the saleissuance of the 2017an additional $50.0 million of Senior Notes, being more thanwhich provided cash of $52.3 million, partially 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 Facilities which used cash of $55.0 million. In 2013, we received $9.3 million in government grants. In 2012, financing activities used net cash of $29.7 million, primarily due to $32.1 million used to repay principal under the Stendal Loan Facility and $2.0 million to purchase and extinguish some of €13.9our Senior Notes. In 2012, we received $5.0 million in government grants. In 2011, financing activities used net cash of $82.9 million, primarily due to using cash of $20.5 million to redeem all of our remaining 2013 Senior Notes, $32.2 million to repay principal under the Stendal Loan Facility, $20.5 million to repay the balance of our Celgar Working Capital Facility, $10.6 million to purchase shares of our common stock and $13.5 million to purchase and extinguish some of our Senior Notes. In 2011, we received $20.0 million in government grants.
The following table is a summary of selected financial information for the dates indicated:
December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Financial Position | ||||||||
Cash and cash equivalents | $ | 147,728 | $ | 137,439 | ||||
Working capital | $ | 306,274 | $ | 275,004 | ||||
Total assets | $ | 1,548,559 | $ | 1,560,581 | ||||
Long-term liabilities | $ | 1,034,743 | $ | 1,012,943 | ||||
Total equity | $ | 348,317 | $ | 367,762 |
Our principal sources of funds are cash flows from operations, cash and cash equivalents 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 Facilities, capital expenditures and interest payments on our outstanding Senior Notes.
As at December 31, 2013, our cash and cash equivalents were $147.7 million, compared to cash and cash equivalents of $137.4 million at the end of 2012. At the end of 2013, $64.8 million of our cash and cash equivalents were held by Stendal and under the Stendal Facilities are limited to its use.
As at December 31, 2013, we had approximately €28.3 million and C$33.3 million available under our Rosenthal and Celgar facilities, respectively.
In 2014, excluding amounts being financed through government grants, we currently expect capital expenditures to be approximately $40.0 million, primarily related to a tall oil plant, chip receiving project and wastewater reduction project at the Rosenthal mill, wastewater reduction projects at the Stendal mill, a chip screening project and maintenance projects at the Celgar mill and an ERP software implementation across the entire company.
In 2013, we implemented Project Blue Mill at a cost of $49.3 million, which €13.0was primarily funded through approximately €11.3 million ($15.0 million) of non-refundable German government grants and the €17.0 million ($22.2 million) Blue Mill Facility. The balance of such project was funded through operating cash flow of the Stendal mill and an aggregate €6.5 million ($8.6 million) in pro rata shareholder loans from us and Stendal’s noncontrolling shareholder. As at December 31, 2013, €7.0 million ($9.3 million) of the DSRA under the facility, and the repaymentapproximately €11.3 million ($15.0 million) of capital lease obligations of €3.2 million which were partially offset bynon-refundable German government investment grants of €9.1 million primarily for the Celgar Energy Project.
As at December 31, 2013, we had no material commitments to acquire assets or operating businesses.
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,facilities, will be adequate to meet the future liquidity needs during the next 12 months.
In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
We had the following amounts outstanding under our credit facilities and Senior Notes as at the dates indicated: Rosenthal Loan Facility Rosenthal Investment Loan Rosenthal revolving €5.0 million facility Celgar Working Capital Facility Senior Notes Stendal Loan Facility Blue Mill Facility For a description of such indebtedness, see Part I, “Item 1. Business – Description of Certain Indebtedness”. Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. The Stendal Facilities require the Stendal mill to maintain an Annual Debt Ratio, which, pursuant to the terms of the 2013 Amendment, must not fall below 1.1x until maturity on September 30, 2017; provided that a failure to satisfy such covenant would only be an event of default when amounts in the debt service reserve account plus certain cash reserves are below a specified threshold. They also require the Stendal mill to satisfy a Senior Debt/EBITDA Cover Ratio, which, at the next measurement date of June 30, 2014, must not exceed 5.5x. Failure to comply with the Ratios constitutes an event of default (subject to the proviso set forth in the first sentence of this paragraph) which may be cured and the same shall not constitute a default by the shareholders of Stendal with a once-per-fiscal-year equity cure through a capital contribution or subordinated loan to Stendal in the amount necessary to cure such deficiency. As the Senior Debt/EBITDA Cover Ratio is based on Stendal’s trailing 12-month EBITDA and its weak 2013 operating results, there can be no assurance that Stendal will be in compliance with such ratio at its next measurement date of June 30, 2014. If Stendal is not in compliance with such ratio and it is not waived, we intend to exercise our equity cure right to avoid a default. The 2013 Amendment modified the Stendal Facilities to provide the Stendal mill greater financial flexibility by, among other things: (i) waiving compliance with the Ratios in 2013; (ii) amending the Ratios so that the financial covenants now deduct from senior debt cash in the debt service reserve account and cash above a stipulated threshold; and (iii) reducing the amount required to cure financial covenant defaults under the Stendal Facilities. Under the Rosenthal Loan Facility, our Rosenthal mill must not exceed a ratio of net debt to EBITDA of 3:1 in any 12-month period and there must be a ratio of EBITDA to interest expense equal to or in excess of 1.2:1.0 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$5.0 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 each 12-month period. The Stendal Loan Facility is provided by a syndicate of eight financial institutions, the Stendal Blue Mill Facility by two financial institutions and our Celgar Working Capital Facility and our Rosenthal facilities 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. The indenture governing the Senior Notes does not contain any financial maintenance covenants and there are no scheduled principal payments until maturity. We pay interest on our Senior Notes at the rate of 9.5% on June 1 and December 1 of each year and they mature in December 2017. As at December 31, 2013, we were in full compliance with all of the covenants of our indebtedness. At December 31, December 31, 2013 2012 (in thousands) $ — $ — $ 749 $ 2,152 $ — $ — $ — $ 6,031 $ 336,382 $ 284,361 $ 568,945 $ 597,158 $ 21,179 $ — 20102013 and 2009,2012, we had no off-balance-sheetoff-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) | 2014 | 2015-2016 | 2017-2018 | Beyond 2018 | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt(1) | $ | 749 | $ | — | $ | 373,254 | $ | — | $ | 374,003 | ||||||||||
Debt, Stendal(2) | 59,606 | 131,132 | 399,386 | — | 590,124 | |||||||||||||||
Interest on debt(3) | 64,274 | 112,943 | 60,491 | — | 237,708 | |||||||||||||||
Capital lease obligations(4) | 2,406 | 4,677 | 2,391 | 3,111 | 12,585 | |||||||||||||||
Operating lease obligations(5) | 2,280 | 3,371 | 2,476 | 929 | 9,056 | |||||||||||||||
Purchase obligations(6) | 6,036 | 677 | — | — | 6,713 | |||||||||||||||
Other long-term liabilities(7) | 5,262 | 7,767 | 8,225 | 22,311 | 43,565 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 140,613 | $ | 260,567 | $ | 846,223 | $ | 26,351 | $ | 1,273,754 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | This reflects the future principal payments due under our long-term debt obligations, but excludes the Stendal |
(2) | This reflects principal only in connection with the Stendal |
(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 |
(8) | We have identified approximately |
Effective October 1, 2013, our reporting currency is the We translate foreign denominated assets and liabilities into In the year ended December 31, Based upon the exchange rate at December 31, OurEuro as the majority of our business transactions are denominated in Euros.U.S. dollar. However, we hold certain assets and liabilities in U.S.Euros and Canadian dollars and the majority of our expenditures are denominated in Euros or Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.EurosU.S. dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in our consolidated statementConsolidated Statement of comprehensive incomeComprehensive Income (Loss) and impact on shareholders’ equity on the balance sheet but do not affect our net earnings.2010,2013, we reported a net €11.3$1.7 million foreign currency translation gainloss and, as a result, the cumulative foreign exchange translation gain reported within accumulated other comprehensive income (loss) increaseddecreased to €38.9$47.8 million at December 31, 2010.2013. In the year ended December 31, 2009,2012, we reported a cumulativenet $11.6 million foreign currency translation gain of €27.5 million.2010,2013, the U.S. dollar has increaseddecreased by approximately 7.0%5% in value against the Euro and increased by approximately 6% in value against the Canadian dollar since December 31, 2009.2012. See “Item 7A —7A. Quantitative and Qualitative Disclosures about Market Risk”.
53
General
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.
Summary Financial Highlights for the Restricted Group
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Pulp revenues | $ | 561,350 | $ | 545,205 | $ | 659,741 | ||||||
Energy and chemical revenues | $ | 33,783 | $ | 36,638 | $ | 35,455 | ||||||
Operating income | $ | 15,711 | $ | 9,814 | $ | 87,609 | ||||||
Restructuring expenses | $ | 5,029 | $ | — | $ | — | ||||||
Gain (loss) on derivative instruments | $ | (2,767 | ) | $ | 2,609 | $ | — | |||||
Income tax benefit (provision) | $ | (9,365 | ) | $ | (7,050 | ) | $ | (6,422 | ) | |||
Net income (loss) | $ | (19,525 | ) | $ | (18,287 | ) | $ | 55,408 |
Selected Production, Sales and Other Data for the Restricted Group
Selected production, sales and exchange rate data for the Restricted Group for the periods indicated:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Restricted Group | ||||||||||||
Pulp Production (‘000 ADMTs) | 809.7 | 828.0 | 832.4 | |||||||||
Scheduled Production Downtime (‘000 ADMTs) | 25.4 | 32.8 | 24.5 | |||||||||
Scheduled Production Downtime (days) | 21 | 30 | 20 | |||||||||
Pulp Sales (‘000 ADMTs) | 818.6 | 826.9 | 823.2 | |||||||||
Average NBSK pulp list prices in Europe ($/ADMT)(1) | 864 | 813 | 956 | |||||||||
Average pulp sales realizations ($/ADMT)(2) | 686 | 659 | 800 | |||||||||
Energy Production (‘000 MWh) | 901.2 | 930.1 | 893.7 | |||||||||
Energy Sales (‘000 MWh) | 306.0 | 341.6 | 301.4 | |||||||||
Average energy sales realizations ($/MWh) | 110 | 107 | 118 | |||||||||
Average Spot Currency Exchange Rates | ||||||||||||
$ / €(3) | 1.3281 | 1.2859 | 1.3931 | |||||||||
$ / C$(3) | 0.9712 | 1.0007 | 1.0121 |
(1) | Source: RISI pricing report. |
(2) | Average realized pulp price for the years indicated reflect customer discounts and pulp price movements between the order and shipment date. |
(3) | Average Federal Reserve Bank of New York noon spot rate over the reporting period. |
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 1921 of the consolidated financial statements included in this annual report onForm 10-K.
Restricted Group Results — Year Ended December 31, 20102013 Compared to Year Ended December 31, 20092012
Pulp revenues for the Restricted Group for the year ended December 31, 2010in 2013 increased by approximately 54%3% to €490.0$561.4 million from €318.4$545.2 million in the comparative period of 2009,2012, primarily due to significantly higher average pulp prices and a stronger U.S. dollar relative to the Euro. Revenuessales realizations, partially offset by lower sales volume.
In 2013, revenues from the sale of excess energy remained relatively consistentdecreased by approximately 8% to $33.8 million from $36.6 million in both 2009 and 2010,2012, primarily due to the commencement of powerlower 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 20102013 than in 2009 due to continued strengthening in global pulp markets.2012. Average list prices for NBSK pulp in Europe were approximately $938 (€707)$864 per ADMT in 20102013, compared to approximately $667 (€478)$813 per ADMT in 2009.2012. In China, average list prices were $821 (€618)$700 per ADMT in 20102013 and $576 (€414)$667 per ADMT in 2009.2012. In 2010,2013, average pulp sales realizations for the Restricted Group increased by approximately 48%4% to €592$686 per ADMT from €400$659 per ADMT in the previous year.
Pulp sales volume of the Restricted Group increaseddecreased to 826,340818,570 ADMTs in 20102013 from 795,092826,921 ADMTs in 2009.
Pulp production for the Restricted Group increaseddecreased to 826,301809,659 ADMTs in 20102013 from 777,099827,977 ADMTs in 2009, primarily as a result of improved mill reliability.2012. In 2010,2013 and 2012, our Celgar and Rosenthal mills had an aggregate of 21 days (approximately 25,00025,400 ADMTs) and 30 days (approximately 32,800 ADMTs) of scheduled maintenance downtime, comparedrespectively, and expect to 34take approximately 22 days (approximately 37,000 ADMTs)in 2014. We had 15 days of maintenance downtime at our Celgar mill in 2009.
Costs and expenses for the Restricted Group in 20102013 increased to €411.5$579.4 million from €354.5$572.0 million in 2009,2012, primarily due to higher fiber costs at our Rosenthal mill and the impact of a weaker U.S. dollar relative to the Euro on our German mill expenses, partially offset by lower sales volume. The Restricted Group’s costs and expenses in Germany2013 included approximately $14.3 million for regularly scheduled maintenance costs, compared to $9.6 million in 2012. Several competing producers and higher energymembers of the peer group that we benchmark the Restricted Group’s performance against report their financial results in accordance with International Financial Reporting Standards which permit a significant portion of such maintenance costs resulting fromto be capitalized instead of expensed. Such costs are not charged to EBITDA by the turbine maintenance at the Rosenthal mill.
Overall, average per unit fiber costs of the Restricted Group increased by approximately 15%3% in 20102013 compared to 2009,2012, primarily due to 16% higher Germanper unit fiber prices resulting from lower levels of harvestingcosts in central Germany combined with increasedcaused by strong demand for wood from the energy sectorEuropean pellet and board producers and sawmills, only partially offset by a 12% decrease in per unit fiber costs for heating and other bio-energy purposes.
In 2010,2013, operating depreciation and amortization for the Restricted Group increased to €30.0$43.5 million from €27.5$40.1 million in the same period last year.
In 2013, the Restricted Group had restructuring expenses of increased selling costs and a stronger Canadian dollar relative$5.0 million related to the Euro.
In 2010,2013, the Restricted Group reported operating income of €93.7$15.7 million, compared to an operating lossincome of €20.9$9.8 million in 2009,2012, primarily due to significantlya higher pulp realizations.
Transportation costs for the Restricted Group increasedmarginally decreased to €50.5$64.1 million in 20102013 from €39.9$66.1 million in 2009, primarily due to higher container rates.
54
In 2013, we recognized a deferred tax expense related to the exchange of our 2010 Convertible Notes.
For the reasons discussed above, the Restricted Group reported a net incomeloss for 20102013 of €62.3$19.5 million, compared to a net loss of €35.9$18.3 million in 20092012, and Operating EBITDA of €124.0$59.5 million for 2013, compared to Operating EBITDA of €6.8$50.3 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.2012. See the discussion of our results for the year ended December 31, 20102013 compared to the year ended December 31, 20092012 for the definition of Operating EBITDA, significant limitations in Operating EBITDA as an analytical tool and additional information relating to such limitations and Operating EBITDA.
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 | ||||
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 | ||||
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income (loss) | $ | (19,525 | ) | $ | (18,287 | ) | ||
Income tax provision | 9,365 | 7,050 | ||||||
Interest expense | 32,321 | 30,125 | ||||||
Loss (gain) on derivative instruments | 2,767 | (2,609 | ) | |||||
Other (income) expense | (9,217 | ) | (6,465 | ) | ||||
|
|
|
| |||||
Operating income | 15,711 | 9,814 | ||||||
Add: Depreciation and amortization | 43,833 | 40,474 | ||||||
|
|
|
| |||||
Operating EBITDA | $ | 59,544 | $ | 50,288 | ||||
|
|
|
|
(1) | See Note |
Cash Flow AnalysisYear Ended December 31, 2012 Compared to Year Ended December 31, 2011
Pulp revenues for the Restricted Group in 2012 decreased by approximately 17% to $545.2 million from $659.7 million in the comparative period of 2011, primarily due to lower average pulp sales realizations, partially offset by higher sales volumes.
In 2012, revenues from the sale of excess energy increased by approximately 3% to a record $36.6 million from $35.5 million in 2011, primarily due to record annual energy sales volumes at both our Rosenthal and Celgar mills.
Pulp prices were lower in 2012 than in 2011. Average list prices for NBSK pulp in Europe were $813 per ADMT in 2012, compared to $956 per ADMT in 2011. In China, average list prices were $667 per ADMT in 2012 and $834 per ADMT in 2011. In 2012, average pulp sales realizations for the Restricted Group decreased by approximately 18% to $659 per ADMT from $800 per ADMT in the previous year.
Pulp sales volume of the Restricted Group marginally increased to 826,921 ADMTs in 2012 from 823,183 ADMTs in 2011.
Pulp production for the Restricted Group decreased to 827,977 ADMTs in 2012 from 832,396 ADMTs in 2011. In 2012 and 2011, our Celgar and Rosenthal mills had an aggregate of 30 days (approximately 32,800 ADMTs) and 20 days (approximately 24,500 ADMTs) of scheduled maintenance downtime, respectively.
Costs and expenses for the Restricted Group in 2012 decreased to $572.0 million from $607.6 million in 2011, primarily due to the impact of a stronger U.S. dollar relative to the Euro on our German mill expenses and lower fiber costs during the year, partially offset by higher sales volumes. The Restricted Group’s costs and expenses in 2012 included approximately $9.6 million for regularly scheduled maintenance costs, compared to $13.6 million in 2011. Several competing producers and members of the peer group that we benchmark the Restricted Group’s performance against report their financial results in accordance with International Financial Reporting Standards which permit a significant portion of such maintenance costs to be capitalized instead of expensed. Such costs are not charged to EBITDA by the peer group companies but instead are expensed as depreciation.
Overall, per unit fiber costs of the Restricted Group decreased by approximately 10% in 2012 compared to 2011, primarily due to decreased fiber costs in Germany and at our Celgar mill.
In 2012, operating depreciation and amortization for the Restricted Group decreased to $40.1 million from $41.5 million in the same period last year. Selling, general and administrative expenses marginally decreased to $31.7 million from $33.6 million in 2011.
In 2012, the Restricted Group reported operating income of $9.8 million, compared to operating income of $87.6 million in 2011, primarily due to lower average pulp sales realizations, partially offset by a stronger U.S. dollar relative to the Euro and lower fiber costs in 2012.
Transportation costs for the Restricted Group decreased to $66.1 million in 2012 from $70.7 million in 2011.
Interest expense for the Restricted Group decreased to $30.1 million in 2012 from $34.6 million in 2011, primarily due to the conversion of our convertible notes in 2011.
During 2012, the Restricted Group recorded $7.1 million of net income tax expense, compared to $6.4 million in 2011.
For the reasons discussed above, the Restricted Group reported net loss for 2012 of $18.3 million, compared to net income of $55.4 million in 2011 and Operating EBITDA of $50.3 million, compared to Operating EBITDA of $129.5 million in the comparative period of 2011. See the discussion of our results for the year ended December 31, 2013 compared to the year ended December 31, 2012 for the definition of Operating EBITDA, significant limitations in Operating EBITDA as an analytical tool and additional information relating to such limitations and Operating EBITDA.
The following table provides a reconciliation of net income (loss) to operating income and Operating EBITDA for the Restricted Group for the periods indicated:
Year Ended December 31, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Restricted Group(1) | ||||||||
Net income (loss) | $ | (18,287 | ) | $ | 55,408 | |||
Income tax provision | 7,050 | 6,422 | ||||||
Interest expense | 30,125 | 34,639 | ||||||
Gain on derivative instruments | (2,609 | ) | — | |||||
Other income | (6,465 | ) | (8,860 | ) | ||||
|
|
|
| |||||
Operating income | 9,814 | 87,609 | ||||||
Add: Depreciation and amortization | 40,474 | 41,875 | ||||||
|
|
|
| |||||
Operating EBITDA | $ | 50,288 | $ | 129,484 | ||||
|
|
|
|
(1) | See Note 21 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results. |
Summary of Cash Flows
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Net cash provided by (used in) operating activities | $ | 23,513 | $ | (3,336 | ) | $ | 92,806 | |||||
Net cash provided by (used in) investing activities | (32,602 | ) | (11,990 | ) | (52,978 | ) | ||||||
Net cash provided by (used in) financing activities | 42,597 | 5,360 | (48,516 | ) | ||||||||
Effect of exchange rate on changes in cash and cash equivalents | 995 | 221 | (990 | ) | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | $ | 34,503 | $ | (9,745 | ) | $ | (9,678 | ) | ||||
|
|
|
|
|
|
Cash Flows from Operating Activities.Activities Cash provided by operating. Operating activities for the Restricted Group increased to €54.6provided cash of $23.5 million in 2010 from €13.32013 compared to using cash of $3.3 million in 2009, primarily due2012 and providing cash of $92.8 million in 2011. A decrease in receivables provided cash of $4.8 million in 2013, compared to improved operating results, partially offset by working capital movements. Anan increase in receivables usedusing cash of €25.9$0.8 million in 2010, compared to2012 and a decrease in receivables providing cash of €26.1$4.5 million in 2009. An2011. A decrease in inventories provided cash of $2.0 million in 2013, compared to an increase in inventories usedusing cash of €2.9$5.1 million in 2010, compared to a decrease in inventories providing cash of €13.22012 and $14.2 million in 2009.2011. A decrease in accounts payable and accrued expenses used cash of €10.3$6.0 million in 2010, compared to2013 and $9.6 million in 2012 and an increase in accounts payable and accrued expenses providingprovided cash of €5.8$8.2 million in 2009.
Cash Flows from Investing Activities. Investing activities used cash of €33.3$32.6 million, $12.0 million and €26.5$53.0 million in 20102013, 2012 and 2009,2011, respectively. In 2010,2013, a capital investment in Stendal, an unrestricted subsidiary, used cash of $20.0 million. In 2013, capital expenditures used cash of €34.7$13.2 million primarily for therelated to various projects at our Rosenthal and Celgar Energy Project.mills. Capital expenditures in 20092012 and 2011 used cash of €26.8 million.
Cash Flows from Financing Activities. Financing activities provided net cash of €10.1$42.6 million in 2010,2013, primarily as a resultdue to cash of the receipt of approximately €16.7$52.3 million in government grants for the Celgar Energy Project andprovided from proceeds from the saleissuance of the 2017additional Senior Notes, being partially offset by cash used to purchasethe repayment of our 2013 Senior Notes.credit facilities of $5.6 million. Financing activities provided net cash of €7.6$5.4 million in 2009. Repayment of indebtedness2012 and leases used net cash of €221.3 million and €10.7$48.5 million in 20102011, primarily due to using cash of $20.5 million to redeem all of our remaining 2013 Senior Notes, $20.5 million to repay the balance of our Celgar Working Capital Facility and 2009, respectively.
The following table is a summary of selected financial information for the Restricted Group for the Liquidity and Capital ResourcesBalance Sheet Data of the Restricted Groupperiodsdates 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
December 31, | ||||||||
2013 | 2012 | |||||||
(in thousands) | ||||||||
Restricted Group Financial Position(1) | ||||||||
Cash and cash equivalents | $ | 82,910 | $ | 48,407 | ||||
Working capital | $ | 211,749 | $ | 174,213 | ||||
Total assets | $ | 858,824 | $ | 849,271 | ||||
Long-term liabilities | $ | 394,821 | $ | 343,056 | ||||
Total equity | $ | 412,033 | $ | 442,161 |
(1) | See Note |
57
The Restricted Group’s principal sources of funds are cash flows from operations, cash and cash equivalents on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. The Restricted Group’s principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our outstanding Senior Notes.
As at December 31, 2013, the Restricted Group’s cash and cash equivalents were $82.9 million, compared to cash and cash equivalents of €50.7 million, compared to €20.6$48.4 million at the end of 2009. At December 31, 2010, the Restricted Group had working capital of €150.7 million.
As at December 31, 2010,2013, we had not drawn any amount€28.3 million available under the credit facilities related to the Rosenthal Loan Facilitymill and had drawn C$20.033.3 million under the C$40.0 million Celgar Working Capital Facility.
In 2014, excluding amounts being financed by governmental grants, we currently expect capital expenditures to be approximately $28.0 million, primarily for a tall oil plant, chip receiving project and wastewater reduction project at the Rosenthal mill, a chip screening project and maintenance projects at the Celgar mill and an enterprise resource planning software implementation across the entire company.
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 and cash equivalents on hand, the Rosenthal facilities and the Celgar Working Capital Facility.
In the future we may make acquisitions of businesses or assets or commitments to additional projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
Credit Ratings of Senior Notes
Standard & Poor’s Rating Services, (“Sreferred to as “S&P”), and Moody’s Investors Service, Inc. (“Moody’s”), referred to as “Moody’s”, base their assessment of ourthe credit risk on our Senior Notes 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 July 2013, S&P lowered its rating on the second quarter of 2010, we were subject to improved rating actions by Moody’s and S&P. In May 2010, S&P raised its target credit ratingSenior Notes to B from B- with a stableB+ but maintained its recovery rating at “3” and Moody’s maintained its B3 rating and “stable” outlook for our Senior Notes.
Credit ratings outlookare not recommendations to reflect temporary pulp supply shortagesbuy, sell or hold securities and may be subject to revision or withdrawal by the strengthening of pulp markets. S&P believes that weassigning rating organization. Each rating should be able to maintain sufficient liquidity to support this new creditevaluated independently of any other 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.
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, among other things, doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, legal liabilities, asset retirement obligations, pensions and post-retirement The following accounting policies require management’s most difficult, subjective and complex judgments, and are subject to a fair degree of measurement uncertainty. Change in Reporting Currency. Our consolidated financial statements for each of the years in the four-year period ended December 31, 2012 were reported using the Euro. Effective October 1, 2013, we changed our reporting currency to the U.S. dollar to enhance communication and understanding with shareholders, analysts and other stakeholders and improve comparability of our financial information with other competitors and peer group companies. With the change in reporting currency, all comparative financial information has been recast from Euros to U.S. dollars to reflect our consolidated financial statements as if they had been historically reported in U.S. dollars, consistent with our currency translation policy described below and in Note 1 of our consolidated financial statements. In order for our shareholders to better understand the transition to U.S. dollars, the following table provides selected financial information in Euros and U.S. dollars as at and for the year ended December 31, 2013. Statement of Operations Data Revenues Pulp Energy and chemicals Costs and expenses Operating income (loss) Interest expense Gain (loss) on derivative instruments Other income (expense) Net income (loss)(1) Net income (loss) per share(1) Basic and diluted Weighted average shares outstanding (in thousands) Basic and diluted Balance Sheet Data Current assets Current liabilities Working capital Total assets Long-term liabilities Total equity Other Data Average pulp price realized (per ADMT)(2) Foreign Operations and Currency Translation.We translate foreign assets and liabilities of our subsidiaries, other than those denominated in U.S. dollars, at the rate of exchange at our 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 are recognized as unrealized foreign currency translation adjustments within accumulated other comprehensive income in 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 we expect earnings of the foreign subsidiary to be 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 our 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 our Consolidated Statement of Operations. Where inter-company loans are of a long-term investment nature, the after-tax effect of exchange rate changes are included as an unrealized foreign currency translation adjustment within accumulated other comprehensive income in shareholders’ equity. Derivative Instruments.We occasionally enter into derivative financial instruments, including foreign currency forward contracts, electricity forward contracts, interest rate swaps and pulp price swaps to limit exposures to changes in foreign currency exchange rates, energy prices, interest rates, and pulp prices. These derivative instruments are not designated as hedging instruments. Derivative instruments are measured at fair value and reported in benefits, provisions for bad debtbenefit obligations, income taxes, contingencies and doubtful accounts, derivative instruments, impairment of long-lived assets, deferred taxes, inventory provisionsobsolescence and environmental conservation and legal liabilities.provisions. Actual estimatesresults could differ materially from these estimates. Euros US$ (in thousands, other than per share data
and per ADMT amounts) € 749,858 $ 996,187 69,400 92,198 € 819,258 $ 1,088,385 € 795,427 $ 1,056,725 € 23,831 $ 31,660 € (52,056 ) $ (69,156 ) € 14,836 $ 19,709 € 915 $ 1,215 € (19,853 ) $ (26,375 ) € (0.36 ) $ (0.47 ) 55,674 55,674 € 342,386 $ 471,773 € 120,110 $ 165,499 € 222,276 $ 306,274 € 1,123,855 $ 1,548,559 € 750,957 $ 1,034,743 € 252,788 $ 348,317 € 514 $ 683 (1) Attributable to common shareholders. (2) Average realized pulp price for 2013 reflects customer discounts and pulp price movements between order and shipment date. theour balance sheet as assets or liabilities. Accounting for gains or losses depends onThe change in fair value of electricity derivative contracts is included in operating costs in our Consolidated Statement of Operations and any changes in the intended usefair value of theforeign currency, interest rate and pulp price derivative instruments. Gains or lossescontracts are recognized in gain (loss) on derivative instruments in our Consolidated Statement of Operations. Periodically, we enter into derivative contracts to supply materials for our own use, 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 state property, plant and equipment 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 equipment and other primarily over 25 years.
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amountvalue 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.
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 us 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 our Consolidated Statement of Operations on a straight-line basis over the lease term.
We provide for asset retirement obligations when there is a legislated or contractual basis 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.
As a result of improvingcurrent 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:
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, a cumulative loss position is considered significant negative evidence in assessing the realizability of deferred income tax assets are not permittedthat is difficult to be recognized where the entity does not have a strong history of profitability.overcome. As at December 31, 2010,2013, we had €22.6$23.5 million in deferred tax assets and €7.8$14.5 million in deferred tax liabilities, resulting in a net deferred tax asset of €14.8$9.0 million. Our tax assets are net of a €88.9$140.8 million valuation allowance. For the year ended December 31, 2010,2013, our review concluded that it was appropriate to decreaseincrease the valuation allowance against loss carryforwards by approximately €10.6$17.0 million, after considering expected future earningshistorical and reversalsforecast taxable income, income tax strategies and the best estimates of the timing of movements in 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.
Government Grants.We record investment grants from federal and state governments when the 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 restricting the type or location of the assets and/or other conditions that must be met. Grants related to assets are deducted from the asset costs in our balance sheet.
Grants related to income are government grants which are either unconditional, related to reduced environmental emissions or related to our normal business operations, and are reported as a reduction of related expenses in our Consolidated Statement of Operations when received.
We are required to pay certain fees based on water consumption levels at our German mills. Unpaid fees can be reduced upon the mills’ demonstration of reduced wastewater emissions. The fees are expensed as incurred and the fee reduction is recognized once we have reasonable assurance that the German regulators will accept the reduced level of wastewater emissions. There may be a significant period of time between recognition of the wastewater expense and recognition of the wastewater fee reduction.
To the extent that government grants have been received and not applied, these grants are recorded in cash with a corresponding adjustment to accounts payable and other in our Consolidated Balance Sheet due to the short-term nature of the related payments.
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.
59
New Accounting StandardsStandards.
The statements in this annual report onForm 10-K that are not reported financial results or other historical information are “forward-looking“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 suchforward-looking statements are not guarantees and may involve risks and uncertainties. Our actual results may differ materially from those in theforward-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, 2010.2013. We advise you that these cautionary remarks expressly qualify in their entirety allforward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to updateforward-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 1A —– Risk Factors” in this annual report onForm 10-K.InflationWe 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.dollar. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We may in the futurealso 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 a
60
The principal derivatives we use are interest rate derivatives, pulp price derivatives, energy derivatives and foreign exchange derivatives.
Interest rate derivatives andinclude interest rate derivatives.
Pulp price derivatives include fixed price pulp swaps which are contracts in which two counterparties exchange payments based upon the difference between the market price of pulp and the notional amount in the contract.
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.
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.
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, 2010,2013, 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.
In May 2012, we entered into a fixed price pulp swap contract with a bank. Under the contract, 5,000 MTs of pulp per month is fixed at a price of $915 per MT for each month between May and December of 2012. The contract expired in December 2012. In November 2012, we entered into two additional contracts. Under the terms of these contracts, 3,000 MTs of pulp per month is fixed at prices which range from $880 to $890 per MT. These contracts expired in December 2013.
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.
61
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, 2013 | December 31, 2012 | |||||||||||||||||
Derivative Instrument | Maturity Date | Notional Amount | Recognized Gain (Loss) | Notional Amount | Recognized Gain (Loss) | |||||||||||||
(in millions) | (in thousands) | (in millions) | (in thousands) | |||||||||||||||
Stendal interest rate swap(1) | October 2017 | $ | 422.7 | $ | 22,476 | $ | 471.5 | $ | 2,203 | |||||||||
Fixed price pulp swap(2) | December 2013 | $ | — | $ | (2,767 | ) | $ | 36.4 | $ | 2,609 |
(1) | In connection with the Stendal Loan Facility, in the third quarter of 2002 Stendal entered into the Stendal Interest Rate Swap |
(2) | In May 2012, we entered into a fixed price pulp swap contract with a bank. Under the contract, 5,000 MTs of pulp per month is fixed at a price of $915 per MT for each month between May and December of 2012. In November 2012, we entered into two additional contracts under the terms of which 3,000 MTs of pulp per month are fixed at prices which range from $880 to $890 per MT. These contracts matured in December 2013. |
Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate financial instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. We seek to manage our interest rate risks through the use of interest rate derivatives. For a discussion of our interest rate derivatives including maturities, notional amounts, gains or losses and swap rates, see “Derivatives” in this Item 7A. The following tables provide information about our exposure to interest rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 20102013 and expected cash flows from these instruments: As at December 31, 2010 Carrying Fair Expected maturity date Value Value 2011 2012 2013 2014 2015 Thereafter (in thousands) Long-term debt: Fixed rate ($)(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$)(6) € 15,016 € 15,016 € — € — € 15,016 € — € — € — Average interest rate 5.70 % 5.70 % 5.70 %
62
As at December 31, 2013 | ||||||||||||||||||||||||||||||||
Carrying | Fair | Expected maturity date | ||||||||||||||||||||||||||||||
Value | Value | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | |||||||||||||||||||||||||
(in thousands, other than percentages) | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||
Fixed rate ($)(1) | 336,382 | 366,656 | — | — | — | 336,382 | — | — | ||||||||||||||||||||||||
Average interest rate | 9.5 | % | 9.5 | % | ||||||||||||||||||||||||||||
Variable rate ($)(2) | 590,124 | 590,124 | 59,606 | 65,566 | 65,566 | 399,386 | — | — | ||||||||||||||||||||||||
Average interest rate | 1.75 | % | 1.75 | % | 1.75 | % | 1.75 | % | 1.75 | % | 1.75 | % | — | |||||||||||||||||||
Variable rate ($)(3) | 749 | 749 | 749 | — | — | — | — | — | ||||||||||||||||||||||||
Average interest rate | 3.09 | % | 3.09 | % | 3.09 | % |
Nominal | Fair | Expected maturity date | ||||||||||||||||||||||||||||||
Amount | Value | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | |||||||||||||||||||||||||
(in thousands, other than percentages) | ||||||||||||||||||||||||||||||||
Interest Rate Derivatives | ||||||||||||||||||||||||||||||||
Interest rate swap: | ||||||||||||||||||||||||||||||||
Variable to fixed ($)(4) | 422,715 | (46,517 | ) | 75,729 | 81,830 | 88,323 | 176,833 | — | — | |||||||||||||||||||||||
Average pay rate | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | 5.3 | % | — | |||||||||||||||||||
Average receive rate | 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % | — |
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%. |
(4) | Interest rate |
Our reporting currency is the 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, Euro.U.S. dollar. However, we hold financial instruments denominated in U.S. dollarsEuros and Canadian dollars which are sensitive to foreign currency exchange rate fluctuations. A depreciation of these currencies against the EuroU.S. dollar will decrease the fair value of such financial instrument assets and an appreciation of these currencies against the EuroU.S. dollar will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against the EuroU.S. dollar will increase the fair value of such financial instrument assets and a depreciation of these currencies against the EuroU.S. dollar 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”“–Derivatives” in this Item 7A.20102013 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 % (1)Senior Notes due February 2013, bearing interest at 9.25%, principal amount $20.5 million.(2)Senior Notes due 2017, bearing interest at 9.50%, principal amount $300.0 million.(3)2012 Convertible Notes due January 2012, principal amount $44.4 million.(4)Celgar Working Capital Facility bears interest at bankers acceptance plus 3.75% or Canadian prime plus 2.0% on Canadian dollar denominated amounts and bears interest at LIBOR plus 3.75% or U.S. base plus 2.0% on U.S. dollar denominated amounts. As at December 31, 2010, the principal amount owing was C$20.0 million.
63
As at December 31, 2013 | ||||||||||||||||||||||||||||||||||||
Carrying Value | Fair Value | Nominal Amount | Expected maturity date | |||||||||||||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | |||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
On-Balance Sheet Financial Instruments | ||||||||||||||||||||||||||||||||||||
Euro functional currency | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents (€) | 59,075 | 59,075 | — | 59,075 | — | — | — | — | — | |||||||||||||||||||||||||||
Receivables (€) | 53,280 | 53,280 | — | 53,280 | — | — | — | — | — | |||||||||||||||||||||||||||
Accounts payable and other (€) | 47,724 | 47,724 | — | 47,724 | — | — | — | — | — | |||||||||||||||||||||||||||
Interest rate derivative liability (€) | 33,760 | 33,760 | 306,782 | 54,960 | 59,387 | 64,100 | 128,335 | — | — | |||||||||||||||||||||||||||
Debt (€) | 466,645 | 445,842 | — | 43,802 | 47,584 | 47,584 | 327,675 | — | — | |||||||||||||||||||||||||||
CAD functional currency | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents (C$) | 9,175 | 9,175 | — | 9,175 | — | — | — | — | — | |||||||||||||||||||||||||||
Receivables (C$) | 2,805 | 2,805 | — | 2,805 | — | — | — | — | — | |||||||||||||||||||||||||||
Accounts payable and other (C$) | 25,629 | 25,629 | — | 25,629 | — | — | — | — | — |
Fluctuations in the price of pulp will affect the fair value of our pulp price swaps. A decrease in pulp prices will increase the fair value of the pulp price swaps and an increase in pulp prices will decrease the fair value of the pulp price swaps.
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. Our internal control over financial reporting includes those policies and procedures that: 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.Mercer Inc.’sMercer’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.• 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
The effectiveness of Mercer’s internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report 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, 20102013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
Not applicable.
65
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 53,56, has been aserved as 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. Mr. Lee was also a director of Quinsam Capital Corp. from March 2004 to November 2007 and Fortress Paper Ltd. from August 2006 to April 2008. 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.
Eric Lauritzen, age 72,75, has beenserved as a director since June 2004. Mr. LauritzenFrom 1994 until his retirement in 1998, he was President and Chief Executive Officer of Harmac Pacific, Inc., a North AmericanTSX-listed pulp producer of softwood kraft pulp previously listed on the Toronto Stock Exchange andthat was acquired by Pope & Talbot Inc. in 1998, from MayFrom 1981 to 1994, to July 1998, when he retired. Mr. Lauritzen wasserved as Vice President, Pulp and Paper Marketing of MacMillan Bloedel Limited, a TSX-listed North American pulp and paper company previously listed on the Toronto Stock Exchange andthat was acquired by Weyerhaeuser Company LimitedLimited. Mr. Lauritzen has accumulated extensive executive, production and marketing experience in 1999,the pulp and paper industry, particularly in the softwood kraft pulp sector. He received his Bachelor of Commerce degree in 1961 from July 1981the University of British Columbia and his M.B.A. in 1963 from Harvard Business School.
William D. McCartney, age 58, has served as a director since January 2003. He has been the President and Chief Executive Officer of Pemcorp Management Inc., a corporate finance and management consulting firm, since its inception in 1990. From 1984 to April 1994.
Graeme A. Witts, age 72,75, has beenserved as a director since January 2003. Mr. WittsHe is also a Director and the former Chairman of Azure Property Group, SA, a European hotel group. He organized Sanne Trust Company Limited, a trust company located in the Channel Islands, in 1988 and was managing directorManaging Director from 1988 to 2000, when he retired. Mr. Witts has previous executive experience with the Procter & Gamble Company, as well as with Clarks shoes. He is now managing director of Azure Property Group, SA,also has experience in government auditing and brings significant financial accounting knowledge from a European hotel group.global perspective. 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 Companyholds a masters degree in chemistry from Oxford University and Clarks Shoes, as well as government auditing.
George MalpassBernard Picchi, age 71,64, has beenserved as a director since November 2006.June 2011. He is now Managing Director of Private Wealth Management for Palisade Capital Management, LLC, of Fort Lee, New Jersey, and has been in that role since July 2009. Before joining Palisade, Mr. MalpassPicchi served as Managing Partner of Willow Rock Associates from August 2008 through June 2009, which advised securities firms on energy investments. From March 2003 through July 2008, Mr. Picchi served as Senior Energy Analyst at two independent research firms based in New York City, Foresight Research Solutions (2003-2005) and Wall Street Access (2006-2008). From 1999 through 2002, he was Director of U.S. Equity Research at Pittsburgh-based Federated Investors, where he also managed the Capital Appreciation Fund, a 5-star rated (during his tenure) $1.5 billion equity mutual fund. Before Federated, Mr. Picchi enjoyed a 20-year career on Wall Street (Salomon Brothers, Kidder Peabody, and Lehman Brothers) both as an award-winning energy analyst and as an executive (Director of U.S. Equity Research at Lehman in the mid-1990s). He began his post-college career at Mellon Bank in Pittsburgh, Pennsylvania. Mr. Picchi holds a Bachelor of Science degree in Foreign Service from Georgetown University, and he has achieved the professional designation Chartered Financial Analyst. He has also served on various non-profit boards, most notably that of the Georgetown University Library which he has served for the past 30 years.
James Shepherd, age 61, has served as a director since June 2011. He is also currently a director of Conifex Timber Inc. He, which is listed on the TSX Venture Exchange, and Buckman Laboratories International Inc. Mr. Shepherd was formerly thePresident and Chief Executive Officer of Canfor Corporation from 2004 to 2007 and Slocan Forest Products Ltd. from 1999 to 2004. He is also the former President of Crestbrook Forest Industries Ltd. and Finlay Forest Industries Limited and the former Chairman of the Forest Products Association of Canada. Mr. Shepherd has previously served as a director of Primex ForestCanfor Corporation as well as Canfor Pulp Income Fund (now Canfor Pulp Products Ltd. andInc.). Mr. Shepherd holds a degree in Mechanical Engineering from Queen’s University.
R. Keith Purchase, age 69, has served as a director since June 2012. He is currently also a former director of both International Forest Products Ltd. and Riverside Forest Products Ltd.
66
Nancy Orr, age 63, has served as a director since May 2013. Ms. Orr is currently also a director of Blue Goose Capital Inc., Cavendish Health and Social Services Centre, Ressources Quebec Inc. and Prometic Life Sciences Inc. Ms. Orr’s previous experience includes serving as President of Dynamis Group Inc. from 1991 to 2007 and Interim Chief Financial Officer of Redline Communications Inc., where she also served as a director, Chair of the Audit Committee and a member of its Compensation Committee. Ms. Orr was also a director of Dundee Wealth Management Inc., Fibrek Inc. and FRV Media Inc. She brings to the Board significant experience as a senior executive, director and audit committee member of a wide variety of companies. Ms. Orr is a member of the British Columbia Working Roundtable on Forestry. From FebruaryInstitute of Corporate Directors and has been a member of the Canadian Institute of Chartered Accountants since 1978. She holds a Master of Business and Administration from Queen’s University and a Bachelor of Arts degree in Business Administration from the University of Western Ontario.
David M. Gandossi, age 56, has served as Executive Vice-President, Chief Financial Officer and Secretary since August 2003. His previous roles included Chief Financial Officer and other senior executive positions with Formation Forest Products and Pacifica Papers Inc. Since 2007, to present, heMr. Gandossi has chaired the B.C. Pulp and Paper Task Force, a joint government industry and labor effort that is mandated to identify measures to improve the competitiveness of the British Columbia pulp and paper industry. Mr. Gandossi isHe also participated in the Pulp and Paper Advisory Committee to the BC Competition Council and was a member of BC’s Working Roundtable on Forestry. He is currently a Director of FPInnovations and Chair of the InstituteFPI National Research Advisory Committee. He also co-chairs the BC Bio-economy Transformation Council, a collaborative effort between Government and industry. Mr. Gandossi holds a Bachelor of Commerce Degree from the University of British Columbia and is a Chartered AccountantsAccountant in Canada.
Claes-Inge Isacson, age 65,68, has been ourserved as Chief Operating Officer since November 20062006. Prior to this role at Mercer, Mr. Isacson was President at AF Process, a worldwide consulting and is based in our Berlin office.engineering company. Mr. Isacson also served as Vice President Operations Indonesia for APRIL, Senior Vice President Production for Norske Skogindustrier ASA and President at Norske Skog Europe. Mr. Isacson brings over 24twenty-eight years of senior level pulp and paper management to ourthe senior management team, withteam. He holds a focus on kraft pulp. Mr. Isacson heldMaster of Science Degree in Mechanical Engineering.
David K. Ure, age 46, returned to Mercer in September 2013, assuming the positionsrole of President Norske Skog Europe, and then Senior Vice President, Production for Norske Skogindustrier ASA between 1989Finance. Prior to serving as Vice President, Finance of Sierra Wireless Inc., Mr. Ure was Vice President, Controller at Mercer from 2006 to 2010. He has also served as Controller at various companies including Catalyst Paper Corp., Pacifica Papers Inc., and 2004. His most recent position was President, AF Process, a consultingTrojanLitho, as well as CFO and engineering company working worldwide.Secretary of Finlay Forest Industries Inc. Mr. Ure has over fifteen years’ experience in the forest products industry. He holds a MastersBachelor of Commerce in Finance from the University of British Columbia, Canada and is a member of the Certified General Accountants’ Association of Canada.
Leonhard Nossol, age 56, has served as our Group Controller for Europe since August 2005. He has also been Managing Director of Rosenthal since 1997 and the sole Managing Director of Rosenthal since 2005. Before joining Mercer, Mr. Nossol was Director, Finance and Administration for a German household appliance producer from 1992 to 1997. Prior to this, he was Operations Controller at Grundig AG (consumer electronics) in Nürnberg. Mr. Nossol has been a member of the German Industry Federation’s (BDI) Tax Committee since 2003. He was elected President of the German Wood Users Association (AGR) in 2013. Mr. Nossol holds a Political Science Mechanical Engineering.
Richard Short, age 43,46, has been ourserved as Controller since DecemberNovember 2010, prior to which he was ourserved as Director, Corporate Finance since joining Mercer in 2007. Prior to joining Mercer, Mr. Short wasPrevious roles include Controller, Financial Reporting from 2006 to 2007 and Director, Corporate Finance from 2004 to 2006 with Catalyst Paper Corp.Corporation. Mr. Short isholds a Bachelor of Arts in Psychology from the University of British Columbia and has been a member of the Canadian Institute of Chartered Accountants in Canada.
David M. Cooper, age 57,60, has beenserved as Vice President of Sales and Marketing for Europe since June 2005. Mr. Cooper previously held a variety of senior positions around the world inat Sappi Ltd., a large global forest products group, from 1982 to 2005, including2005. These roles included the sales and marketing of various pulp and paper grades and the management of a manufacturing facility. HeMr. Cooper has more than 25thirty years of diversified experience in the international pulp and paper industry.
Eric X. Heine, age 47,50, has beenserved as 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. HeMr. Heine has over 18twenty-five 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, was appointed52, has served as Vice President of Business Development in Augustsince 2005, prior to which he was a managing director of Stendal.served as Managing Director at Mercer’s Stendal mill from 2001 to 2005. Mr. Ridder wasalso served as Vice President Pulp Operations, Assistant to CEO from 1999 to 2005 and Assistant Managing Director at the principal assistantRosenthal mill from 1995 to our Chief Executive Officer1998. Prior to joining Mercer, Mr. Ridder worked as a Scientist for pulping technology development at the German Federal Research Center for Wood Science and Technology in Hamburg from November 1995 until September 2002.
Genevieve Stannus, age 40,43, has been ourserved as Treasurer since July 2005, prior to which she was aserved as Senior Financial Analyst withsince joining Mercer fromin August 2003. Prior to joiningher role at Mercer, Ms. Stannus held Senior Treasury Analyst positions with Catalyst Paper Corporation and Pacifica Papers Inc. SheMs. Stannus has over tentwenty years of experience in the forest products industry. Ms. StannusShe is a member of the Certified General Accountants’Accountants Association of Canada.
Brian Merwin, age 37,40, has been ourserved as Vice President, of Strategic Initiatives since February 2009, prior to which he was our2009. Mr. Merwin previously held roles within Mercer such as Director, of Strategic and Business Initiatives, since August 2007 and Business Analyst since May 2005. BrianAnalyst. He was a key member of Celgar’s Green Energy Project, and was instrumental in the development of the BC Hydro energy purchase agreement and securing the ecoENERGY grant. Mr. Merwin has an MBAa Master of Business and Administration from the Richard Ivey School of Business atin Ontario, Canada and a Bachelor of Commerce Degree from the University of Western Ontario.
67
The Board met fivesix times during 20102013 and each current member of the Board attended 75% or more100% 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 20102013 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 was established in accordance with Section 3(a)(58)(A) of the Exchange Act and 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 WittsShepherd and Mr. Lauritzen,Ms. Orr, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Select Market. Both Mr. McCartney and Mr. Witts areis a Chartered AccountantsAccountant and Mr. McCartney is 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,Picchi, Mr. LauritzenWitts, Mr. Purchase and Mr. Adams,Ms. Orr, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Select Market. The Compensation and Human Resource Committee met six 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 Select 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 and
68
The Board established an Environmental, Health and Safety Committee in 2006, currently comprised of Mr. Lauritzen,Shepherd, Mr. MalpassPurchase 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. ShieldsLauritzen as its Lead Director in September 2003 and 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 itsdecision-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 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.
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 2011,2014, 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 2011,2014, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
69
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 2011,2014, 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: 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.2011,2014, 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 2011,2014, which will be filed with the SEC within 120 days of our most recently completed fiscal year.
70
ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS |
(a) (1)Financial Statements
Page | ||||
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. | |
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 filed on July 23, 2013. | |
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 | Extension, Amendment and Confirmation Letter dated October 4, 2012 among Zellstoff- und Papierfabrik Rosenthal GmbH, D&Z Holding GmbH, D&Z Beteiligungs GmbH, ZPR Logistik GmbH and Mercer International Inc. Incorporated by reference from Form 10-Q dated November 2, 2012. | |
10.18 | Second Amended and Restated Credit Agreement dated as of May 2, 2013 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and Canadian Imperial Bank of Commerce, as agent. Incorporated by reference from Form 8-K dated May 8, 2013. | |
10.19 | Amendment Agreement, dated September 30, 2013, among Zellstoff Stendal GmbH, as Borrower, UniCredit Bank AG, as Arranger, Agent, Security Agent and Original Lender, the Lenders from time to time parties thereto, E & Z Industrie-Lösungen GmbH, Mercer International Inc. and Stendal Pulp Holding GmbH. Incorporated by reference from Form 10-Q filed on November 1, 2013. | |
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. | |
21 | List of Subsidiaries of Registrant. | |
23.1 | Consent of Independent Registered Public Accounting Firm. | |
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
To the Shareholders and Board of Directors of
Mercer International Inc.
We have audited the accompanying consolidated balance sheets of Mercer International Inc. and its subsidiaries as of December 31, 20102013 and December 31, 20092012 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’shareholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2010.2013. We also have audited Mercer International Inc.’s and its subsidiaries’ internal control over financial reporting as of December 31, 2010,2013, based on criteria established in Internal Control — Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these consolidated 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 appearing under Item 9A of this Form 10-K. 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 integrated 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 auditsaudit 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated 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 thatthat: (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. and its subsidiaries as of December 31, 20102013 and December 31, 2009,2012 and the results of itstheir operations and itstheir cash flows for each of the years in the three-year period ended December 31, 20102013 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Mercer International Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2013, based on criteria established in Internal Control — Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Vancouver, Canada
February 15, 2011
73
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) |
74
December 31, | ||||||||
2013 | 2012 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents (Note 2) | $ | 147,728 | $ | 137,439 | ||||
Receivables (Note 3) | 135,893 | 145,150 | ||||||
Inventories (Note 4) | 170,908 | 155,979 | ||||||
Prepaid expenses and other | 10,918 | 10,425 | ||||||
Deferred income tax (Note 9) | 6,326 | 5,887 | ||||||
|
|
|
| |||||
Total current assets | 471,773 | 454,880 | ||||||
|
|
|
| |||||
Long-term assets | ||||||||
Property, plant and equipment (Note 5) | 1,038,631 | 1,066,506 | ||||||
Deferred note issuance costs and other | 20,998 | 16,036 | ||||||
Deferred income tax (Note 9) | 17,157 | 23,159 | ||||||
|
|
|
| |||||
1,076,786 | 1,105,701 | |||||||
|
|
|
| |||||
Total assets | $ | 1,548,559 | $ | 1,560,581 | ||||
|
|
|
| |||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accounts payable and other (Note 6) | $ | 103,814 | $ | 118,599 | ||||
Pension and other post-retirement benefit obligations (Note 8) | 1,330 | 1,072 | ||||||
Debt (Note 7) | 60,355 | 60,205 | ||||||
|
|
|
| |||||
Total current liabilities | 165,499 | 179,876 | ||||||
|
|
|
| |||||
Long-term liabilities | ||||||||
Debt (Note 7) | 919,017 | 877,780 | ||||||
Interest rate derivative liability (Note 17) | 46,517 | 66,819 | ||||||
Pension and other post-retirement benefit obligations (Note 8) | 35,466 | 42,378 | ||||||
Capital leases and other (Note 19) | 19,293 | 18,375 | ||||||
Deferred income tax (Note 9) | 14,450 | 7,591 | ||||||
|
|
|
| |||||
1,034,743 | 1,012,943 | |||||||
|
|
|
| |||||
Total liabilities | 1,200,242 | 1,192,819 | ||||||
|
|
|
| |||||
EQUITY | ||||||||
Shareholders’ equity | ||||||||
Share capital (Note 10) | 328,549 | 327,818 | ||||||
Paid-in capital | (11,756 | ) | (4,481 | ) | ||||
Retained earnings | 10,815 | 37,190 | ||||||
Accumulated other comprehensive income (Note 14) | 31,470 | 28,577 | ||||||
|
|
|
| |||||
Total shareholders’ equity | 359,078 | 389,104 | ||||||
|
|
|
| |||||
Noncontrolling interest (deficit) (Note 15) | (10,761 | ) | (21,342 | ) | ||||
|
|
|
| |||||
Total equity | 348,317 | 367,762 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 1,548,559 | $ | 1,560,581 | ||||
|
|
|
| |||||
Commitments and contingencies (Note 20) |
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 | ) | ||||
75
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 | ) | ||||
76
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
OPERATIONS
(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 | ||||||||||||||||||
For the Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues | ||||||||||||
Pulp | $ | 996,187 | $ | 979,770 | $ | 1,157,206 | ||||||
Energy and chemicals | 92,198 | 92,966 | 94,758 | |||||||||
|
|
|
|
|
| |||||||
1,088,385 | 1,072,736 | 1,251,964 | ||||||||||
Costs and expenses | ||||||||||||
Operating costs | 920,832 | 886,144 | 965,723 | |||||||||
Operating depreciation and amortization | 78,309 | 74,302 | 77,611 | |||||||||
|
|
|
|
|
| |||||||
89,244 | 112,290 | 208,630 | ||||||||||
Selling, general and administrative expenses | 51,169 | 49,268 | 53,965 | |||||||||
Restructuring expenses (Note 13) | 6,415 | — | — | |||||||||
|
|
|
|
|
| |||||||
Operating income | 31,660 | 63,022 | 154,665 | |||||||||
|
|
|
|
|
| |||||||
Other income (expense) | ||||||||||||
Interest expense | (69,156 | ) | (71,767 | ) | (82,114 | ) | ||||||
Gain (loss) on derivative instruments (Note 17) | 19,709 | 4,812 | (1,974 | ) | ||||||||
Other income (expense) | 1,215 | (179 | ) | 3,625 | ||||||||
|
|
|
|
|
| |||||||
Total other income (expense) | (48,232 | ) | (67,134 | ) | (80,463 | ) | ||||||
|
|
|
|
|
| |||||||
Income (loss) before income taxes | (16,572 | ) | (4,112 | ) | 74,202 | |||||||
Income tax benefit (provision) (Note 9) | ||||||||||||
Current | 2,286 | (9,531 | ) | (2,341 | ) | |||||||
Deferred | (11,482 | ) | 152 | 3,309 | ||||||||
|
|
|
|
|
| |||||||
Net income (loss) | (25,768 | ) | (13,491 | ) | 75,170 | |||||||
Less: net income attributable to noncontrolling interest | (607 | ) | (2,179 | ) | (5,471 | ) | ||||||
|
|
|
|
|
| |||||||
Net income (loss) attributable to common shareholders | $ | (26,375 | ) | $ | (15,670 | ) | $ | 69,699 | ||||
|
|
|
|
|
| |||||||
Net income (loss) per share attributable to common shareholders (Note 12) | ||||||||||||
Basic | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.39 | ||||
Diluted | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.24 |
The accompanying notes are an integral part of these consolidated financial statements.
77
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPREHENSIVE INCOME (LOSS)
(In thousands of Euros)
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 Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income (loss) | $ | (25,768 | ) | $ | (13,491 | ) | $ | 75,170 | ||||
Other comprehensive income (loss), net of taxes | ||||||||||||
Foreign currency translation adjustment (net of tax effect of ($1,002), ($454), $951) | (1,733 | ) | 11,635 | (19,394 | ) | |||||||
Change in unrecognized losses and prior service costs related to defined benefit plans (net of tax effect of $nil in all years) | 4,636 | (808 | ) | (11,203 | ) | |||||||
Change in unrealized gains (losses) on marketable securities (net of tax effect of $nil in all years) | (10 | ) | (1 | ) | (17 | ) | ||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss), net of taxes | 2,893 | 10,826 | (30,614 | ) | ||||||||
|
|
|
|
|
| |||||||
Total comprehensive income (loss) | (22,875 | ) | (2,665 | ) | 44,556 | |||||||
Comprehensive income attributable to noncontrolling interest | (607 | ) | (2,179 | ) | (5,471 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) attributable to common shareholders | $ | (23,482 | ) | $ | (4,844 | ) | $ | 39,085 | ||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
78
(In thousands of U.S. dollars)
Common shares | ||||||||||||||||||||||||||||||||||||
Number of Shares (thousands of shares) | Par Value | Amount Paid in Excess of Par Value | Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Shareholders’ Equity | Noncontrolling Interest (Deficit) | Total Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2010 | 42,999 | $ | 42,785 | $ | 242,840 | $ | (4,550 | ) | $ | (14,466 | ) | $ | 48,365 | $ | 314,974 | $ | (28,992 | ) | $ | 285,982 | ||||||||||||||||
Shares issued on grants of restricted shares | 238 | 98 | 386 | (484 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Shares issued on grants of performance shares | 358 | 358 | 5,315 | (5,673 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Shares issued on conversion of convertible notes | 13,447 | 13,447 | 29,842 | — | — | — | 43,289 | — | 43,289 | |||||||||||||||||||||||||||
Treasury shares retired | (1,263 | ) | (1,263 | ) | (6,987 | ) | — | (2,373 | ) | — | (10,623 | ) | — | (10,623 | ) | |||||||||||||||||||||
Stock compensation expense | — | — | — | 4,607 | — | — | 4,607 | — | 4,607 | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 69,699 | — | 69,699 | 5,471 | 75,170 | |||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | (19,394 | ) | (19,394 | ) | — | (19,394 | ) | ||||||||||||||||||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans | — | — | — | — | — | (11,203 | ) | (11,203 | ) | — | (11,203 | ) | ||||||||||||||||||||||||
Change in unrealized losses on marketable securities | — | — | — | — | — | (17 | ) | (17 | ) | — | (17 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at December 31, 2011 | 55,779 | 55,425 | 271,396 | (6,100 | ) | 52,860 | 17,751 | 391,332 | (23,521 | ) | 367,811 | |||||||||||||||||||||||||
Shares issued on grants of restricted shares | 37 | 78 | 919 | (997 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 2,616 | — | — | 2,616 | — | 2,616 | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (15,670 | ) | — | (15,670 | ) | 2,179 | (13,491 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 11,635 | 11,635 | — | 11,635 | |||||||||||||||||||||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans | — | — | — | — | — | (808 | ) | (808 | ) | — | (808 | ) | ||||||||||||||||||||||||
Change in unrealized losses on marketable securities | — | — | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at December 31, 2012 | 55,816 | 55,503 | 272,315 | (4,481 | ) | 37,190 | 28,577 | 389,104 | (21,342 | ) | 367,762 | |||||||||||||||||||||||||
Shares issued on grants of restricted shares | 38 | 77 | 654 | (731 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Stock compensation expense | — | — | — | 3,574 | — | — | 3,574 | — | 3,574 | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (26,375 | ) | — | (26,375 | ) | 607 | (25,768 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | (1,733 | ) | (1,733 | ) | — | (1,733 | ) | ||||||||||||||||||||||||
Capital contribution to acquire additional 8.1% of Stendal mill | — | — | — | (10,118 | ) | — | — | (10,118 | ) | 9,974 | (144 | ) | ||||||||||||||||||||||||
Change in unrecognized losses and prior service costs related to defined benefit plans | — | — | — | — | — | 4,636 | 4,636 | — | 4,636 | |||||||||||||||||||||||||||
Change in unrealized losses on marketable securities | — | — | — | — | — | (10 | ) | (10 | ) | — | (10 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at December 31, 2013 | 55,854 | $ | 55,580 | $ | 272,969 | $ | (11,756 | ) | $ | 10,815 | $ | 31,470 | $ | 359,078 | $ | (10,761 | ) | $ | 348,317 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
For the Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | $ | (25,768 | ) | $ | (13,491 | ) | $ | 75,170 | ||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | (21,494 | ) | (3,186 | ) | 1,974 | |||||||
Depreciation and amortization | 78,645 | 74,657 | 77,952 | |||||||||
Deferred income taxes | 11,482 | (152 | ) | (3,309 | ) | |||||||
Stock compensation expense | 3,574 | 2,616 | 4,607 | |||||||||
Pension and other post-retirement expense, net of funding | 648 | 365 | (374 | ) | ||||||||
Other | 3,169 | 4,991 | 1,116 | |||||||||
Changes in working capital | ||||||||||||
Receivables | 13,993 | 10,795 | (2,233 | ) | ||||||||
Inventories | (14,563 | ) | 1,726 | (24,654 | ) | |||||||
Accounts payable and accrued expenses | (11,569 | ) | (17,992 | ) | 19,837 | |||||||
Other | (1,792 | ) | (1,214 | ) | 4,490 | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | 36,325 | 59,115 | 154,576 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (45,707 | ) | (47,203 | ) | (52,626 | ) | ||||||
Proceeds on sale of property, plant and equipment | 739 | 840 | 1,132 | |||||||||
Purchase of marketable securities | — | — | (16,343 | ) | ||||||||
Proceeds on maturity of marketable securities | — | 15,753 | — | |||||||||
Note receivable | — | — | 3,988 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (44,968 | ) | (30,610 | ) | (63,849 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of debt and purchase of notes | (56,416 | ) | (35,440 | ) | (67,702 | ) | ||||||
Proceeds from issuance of notes and borrowings of debt | 74,472 | — | — | |||||||||
Repayment of capital lease obligations | (2,593 | ) | (2,733 | ) | (4,095 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | (5,640 | ) | 6,031 | (20,491 | ) | |||||||
Payment of note issuance costs | (3,855 | ) | (2,570 | ) | — | |||||||
Proceeds from government grants | 9,265 | 5,045 | 20,049 | |||||||||
Purchase of treasury shares | — | — | (10,623 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | 15,233 | (29,667 | ) | (82,862 | ) | |||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | 3,699 | 2,302 | (4,166 | ) | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 10,289 | 1,140 | 3,699 | |||||||||
Cash and cash equivalents, beginning of year | 137,439 | 136,299 | 132,600 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 147,728 | $ | 137,439 | $ | 136,299 | ||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands of U.S. dollars)
For the Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid during the year for | ||||||||||||
Interest | $ | 65,747 | $ | 66,673 | $ | 80,347 | ||||||
Income taxes | $ | 7,307 | $ | 5,003 | $ | 4,450 | ||||||
Supplemental schedule of non-cash investing and financing activities | ||||||||||||
Acquisition of production and other equipment under capital lease obligations | $ | 2,112 | $ | 2,648 | $ | 3,872 | ||||||
Increase (decrease) in accounts payable and accrued purchases for property, plant and equipment | $ | (5,712 | ) | $ | 7,986 | $ | 451 | |||||
Increase (decrease) in receivables of government grants for long-term assets | $ | 2,871 | $ | (3,291 | ) | $ | (9,514 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
MERCER INTERNATIONAL INC.
(In thousands of Euros,U.S. dollars, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies
Background
Mercer International Inc. (“Mercer Inc.” or the “Company”) is a Washington corporation and the Company’s shares of common stock are quoted and listed for trading on the NASDAQ Global Market and the Toronto Stock Exchange, respectively. The Company converted its corporate form from a Washington business trust to a corporation effective March 1, 2006 without effecting any changes to its business, management, accounting practices, assets or liabilities.
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,Consolidated Financial Statements, unless otherwise indicated, all amounts are expressed in EurosUnited States dollars (“€$” or “U.S. dollar”). The term “U.S. dollars”symbol “€” refers to the Euro and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.
Basis of Presentation
These consolidated financial statementsConsolidated 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 transactionsThe Company’s consolidated financial statements have been eliminated upon consolidation.
Effective October 1, 2013, the Company changed its reporting currency from the Euro to the U.S. dollar, to enhance communication and understanding with its shareholders, analysts and other stakeholders and improve comparability of the Company’s financial information with its competitors and peer group companies. With the change in reporting currency, all comparative financial information has been restated from Euros to U.S. dollars to reflect the Company’s consolidated financial statements as if it had been historically reported in U.S. dollars, consistent with the Company’s currency translation policy described below inForeign Operations and Currency Translation.
Use of Estimates
Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management 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,U.S. dollars, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Inventories
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 suppliesspare parts 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 equipment 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 freerisk-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
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.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
The Company is required to pay certain fees based on water consumption levels at its German mills. Accrued fees can be reduced upon the mills’ demonstration of reduced wastewater emissions. The fees are expensed as incurred and the fee reduction is recognized once the Company has reasonable assurance that the German regulators will accept the reduced level of wastewater emissions. There may be a significant period of time between recognition of the wastewater expense and recognition of the wastewater fee reduction.
To the extent that government grants have been received and not applied, these grants are recorded in cash with a corresponding adjustment to the “Accountsaccounts 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 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 liabilityprior service costs, and (ii) experience gainsthe net actuarial gain or losses.
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,U.S. dollars, 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 and Germany are recognized as unrealized foreign currency translation adjustments within accumulated other comprehensive income (loss) in 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 “Costscosts and expenses”expenses in the Consolidated Statement of Operations.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Revenue and Related Cost Recognition
The Company recognizes revenue from product, sales, transportation, chemical 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 and the sale of chemicals as “Energy revenue”energy and chemical revenues in the Consolidated Statement of Operations. Energy revenues are recognized as the electricity is consumed by customers are invoiced at agreed upon rates and when collection is reasonably assured. These revenues include an estimate of the value of electricity consumed bytransferred to customers in the year but billed subsequent to year-end. Customer bills are based on agreed upon rates and meter readings that indicate electricity consumption. This activity does not meet the tests to be considered an operating segment, as defined in the
Segment Reporting Topic ASC 280 (“ASC280-10”).
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,selling, general, and administrative expenses” inexpenses within the Consolidated Statement of Operations.
The fair value of performance stock awardsshare units is re-measured at each balance sheet date.date by multiplying the market price of a share of Mercer Inc. common shares by the expected number of common shares to be awarded. 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 awardsshare units 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.
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 TaxesTopic ASC 740 (“ASC740-10”) and accordingly, deferred
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 beare offset and presented as a single net amount and all noncurrent deferred tax liabilities and assets shall beare offset and presented as a single net amount.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 1. The Company and Summary of Significant Accounting Policies (continued)
Derivative Financial Instruments
The Company occasionally enters into derivative financial instruments, including foreign currency forward contracts, electricity forward contracts, and interest rate swaps, and pulp price swaps to limit exposures to changes in foreign currency
82
Net Income (Loss) Per Share Attributable to Common Shareholders
Basic net income (loss) per share attributable to common shareholders (“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 attributable to common shareholders is calculated to give effect to all potentially dilutive common shares outstanding (computed under basic EPS) by applying the “Treasury Stock” and “If Converted”“If-Converted” methods. Outstanding stock options, restricted stock, awards such as restricted stock awards withshares, performance conditions (known as “performance stock”),shares, performance share units, and convertible notes represent the only potentially dilutive effects on the Company’s weighted average shares. SeeNote 12-Net Income (Loss) Per Share.
ReclassificationsNew Accounting Standards
In March 2013, the FASB issued ASU 2013-05, an update to Foreign Currency Matters, which indicates that a cumulative translation adjustment is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. Thus, the entire amount of the cumulative translation adjustment associated with the foreign entity would be released when there has been (i) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity; (ii) a loss of a controlling financial interest in an investment in a foreign entity; or (iii) a step acquisition for a foreign entity. The update does not change the requirement to release a pro-rata portion of the cumulative translation adjustment of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The amendments are effective for interim and annual periods beginning after December 15, 2013 and will not have an impact on the Company’s consolidated financial statements have been reclassified to conform tounless one or more of the current year presentation.
In April 2010,July 2013, the FASB issued ASU 2013-11, which provides guidance within Accounting Standards Updateon the financial statement presentation of an unrecognized tax benefit when a net operating loss (“ASU”NOL”)2010-13,Compensation — Stock Compensation (ASC 718): Effect of Denominating the Exercise Price carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a Share-Based Payment Award indeferred tax asset for a NOL or tax credit carryforward whenever the CurrencyNOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the Market in Which the Underlying Equity Security Trades.reporting date. The amendments in this update are effective for fiscal years,interim and interimannual periods within those fiscal years, beginning on or after December 15, 2010.2013. The amendments in this update should be applied by recording a cumulative-effect adjustment to 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 isCompany has determined these changes will not expected to have a material impact on the Company’sconsolidated financial statements.
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 2. | Cash |
December 31, | ||||||||
2010 | 2009 | |||||||
Cash and cash equivalents | € | 99,022 | € | 51,291 | ||||
December 31, | ||||||||
2013 | 2012 | |||||||
Cash and cash equivalents | $ | 147,728 | $ | 137,439 | ||||
|
|
|
|
Cash and cash equivalents includes cash allocated for debt service reserves and for a capital project as required under certain debt agreements (Note(see Note 7(a))(d) – 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 | |||||
Note 3. Receivables
December 31, | ||||||||
2013 | 2012 | |||||||
Sale of pulp, energy and chemicals, net of allowance of $178 (2012 – $148) | $ | 124,579 | $ | 133,764 | ||||
Value added tax | 4,545 | 5,656 | ||||||
Other non-trade receivables | 6,769 | 5,730 | ||||||
|
|
|
| |||||
$ | 135,893 | $ | 145,150 | |||||
|
|
|
|
The Company reviews the collectability of receivables on a periodic basis.at each reporting date. 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. The Company does not generally require collateral for any of its receivables.
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, | ||||||||
2013 | 2012 | |||||||
Raw materials | $ | 66,356 | $ | 60,688 | ||||
Finished goods | 54,982 | 50,326 | ||||||
Spare parts and other | 49,570 | 44,965 | ||||||
|
|
|
| |||||
$ | 170,908 | $ | 155,979 | |||||
|
|
|
|
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
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 5. Property, Plant and Equipment
December 31, | ||||||||
2013 | 2012 | |||||||
Land | $ | 34,421 | $ | 33,210 | ||||
Buildings | 194,676 | 177,198 | ||||||
Production equipment and other | 1,570,196 | 1,536,415 | ||||||
|
|
|
| |||||
1,799,293 | 1,746,823 | |||||||
Less: accumulated depreciation | (760,662 | ) | (680,317 | ) | ||||
|
|
|
| |||||
$ | 1,038,631 | $ | 1,066,506 | |||||
|
|
|
|
As at December 31, 20102013, property, plant and equipment was net of €297,992$365,359 of unamortized government investment grants (2009 — €283,730)(2012 – $364,849).
As at December 31, 2010,2013, included in production equipment and other is equipment under capital leases which had gross amounts of €17,468 (2009 — €17,465)$20,550 (2012 – $21,710), and accumulated depreciation of €9,585 (2009 — €9,280)$9,447 (2012 – $11,042). During the year, production equipment and other totalling €2,087$2,112 was acquired under capital lease obligations (2009 — €625; 2008 — €5,318)(2012 – $2,648; 2011 – $3,872).
The Company maintains industrial landfills on its premises for the disposal of waste, primarily from the mills’ pulp processing activities. The mills have obligations under their landfill permits to decommission these disposal facilities pursuant to certain regulations. As at December 31, 2010,2013, the Company had recorded €4,180 (2009 — €3,912)$5,549 (2012 – $5,605) of asset retirement obligations.
Note 16 — Commitments6. Accounts Payable and Contingencies.
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
December 31, | ||||||||
2013 | 2012 | |||||||
Trade payables | $ | 44,289 | $ | 39,896 | ||||
Accrued expenses | 39,060 | 47,271 | ||||||
Accrued interest | 10,697 | 11,522 | ||||||
Capital leases, current portion (Note 19) | 2,254 | 2,582 | ||||||
Current taxes payable (Note 9) | 1,132 | 9,516 | ||||||
Other | 6,382 | 7,812 | ||||||
|
|
|
| |||||
$ | 103,814 | $ | 118,599 | |||||
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 7. 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, | ||||||||
2013 | 2012 | |||||||
Note payable to bank, included in a total loan credit facility of €828.0 million to finance the construction related to the Stendal mill (a) | $ | 568,945 | $ | 597,158 | ||||
Senior notes, interest at 9.50% accrued and payable semi-annually, unsecured (b) | 336,382 | 284,361 | ||||||
Credit agreement with a lender with respect to a revolving credit facility of C$40.0 million (c) | — | 6,031 | ||||||
Term bank facility for a project at the Stendal mill of €17.0 million (d) | 21,179 | — | ||||||
Loans payable to the noncontrolling shareholder of the Stendal mill (e) | 52,117 | 48,283 | ||||||
Investment loan agreement with a lender with respect to a project at the Rosenthal mill of €4.4 million (f) | 749 | 2,152 | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €25.0 million (g) | — | — | ||||||
Credit agreement with a bank with respect to a revolving credit facility of €5.0 million (h) | — | — | ||||||
|
|
|
| |||||
979,372 | 937,985 | |||||||
Less: current portion | (60,355 | ) | (60,205 | ) | ||||
|
|
|
| |||||
Debt, less current portion | $ | 919,017 | $ | 877,780 | ||||
|
|
|
|
As of December 31, 2010,2013, 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 | |||
2014 | $ | 60,355 | ||
2015 | 65,566 | |||
2016 | 65,566 | |||
2017 | 787,885 | |||
2018 | — | |||
Thereafter | — | |||
|
| |||
$ | 979,372 | |||
|
|
(a) | Note payable to bank, included in a total loan facility of |
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 7. Debt (continued)
On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan Facility. The amendment deferred approximately €164.0 million 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 €15.0 million working capital reserve and the Guarantee Amount, as discussed in Note 20(b) – Commitments and Contingencies, and other amounts as contemplated in the amendment, 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, 2013, the DSRA balance was €33.0 million and was not Fully Funded.
On September 30, 2013, the Company amended the terms of the Stendal Loan Facility and Project Blue Mill facility (the “Facilities”) (Note 7(d)). The amendment included waiving compliance with the annual debt service cover ratio and the senior debt cover ratio under the Facilities until and including December 31, 2013; amending the senior debt cover ratio so that it now deducts the DSRA and other specified cash above a stipulated threshold in the calculation of senior debt; providing that a failure to satisfy the annual debt service cover ratio under the Facilities would only be an event of default when amounts in the DSRA plus certain cash reserves are below a specified threshold; and revising the calculation of amounts required to cure a senior debt cover ratio default. Pursuant to the amended agreement the Company made a capital investment of $20,000 in Stendal. See Note 15 – Noncontrolling Interest for details of the investment.
On November 17, 2010, the Company completed a private offering of |
In July 2013, the Company issued $50,000 in aggregate principal amount of its Senior Notes. The additional notes were priced at 104.50% plus accrued interest from June 1, 2013. The net proceeds from the offering were $50,500, after deducting the underwriter’s discounts, offering expenses and accrued interest. The Company used the net proceeds from the offering to repay the revolving credit facilities of the Rosenthal and Celgar mills and for general corporate purposes. The Senior Notes are general unsecured senior obligations of the Company. The Senior Notes rank equal in right of payment with all existing and future senior unsecured indebtedness | ||
The Company may redeem for cash all or a portionpart of the notesSenior 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 or after July 15, 2011December 1, 2014, 102.38% for the twelve month period beginning on December 1, 2015, and 100.00% beginning on December 1, 2016 and at 100% of the principal amount of the notesany time thereafter, plus accrued interest up to the redemption date. During the year, approximately $21.4 million of Subordinated Convertible Notes due January 2012 were converted into 6,500,171 shares. The Company recorded a debt conversion expense of approximately $0.9 million for the year ended December 31, 2010, as a result of the conversions, which is included within interest expense in the Consolidated Statements of Operations. See Note 18 — Subsequent Events.
Credit agreement with respect to a revolving credit facility of up to C$40.0 million for the Celgar mill. The credit |
88
Canadian prime plus |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 7. Debt (continued)
(d) | A €17.0 million amortizing term facility to partially finance a project, referred to as “Project Blue Mill”. The facility, 80% of which is guaranteed by the State of Saxony-Anhalt, bears interest at a rate of Euribor plus 3.5% per annum. The interest period for the facility, at the choice of the Company, will be of one, three or six months duration and interest is paid on the last day of the interest period selected. The facility, together with accrued interest, is scheduled to mature in September 2017. The facility will be repaid semi-annually, commencing September 30, 2013, is collateralized by the gross assets of the Stendal mill, and will be non-recourse to Mercer Inc. As at December 31, 2013, the facility was accruing interest at a rate of |
As part of this term facility, the Company was required to open an investment account with the lender for the purpose of managing project costs and is required to deposit all funding associated with Project Blue Mill in this account. As at December 31, 2013, the balance in the investment account was $2,618.
Loans of €26.8 million payable by the Stendal mill to |
As at December 31, 2013, accrued interest on these loans was €11.1 million (2012 – €9.9 million).
A |
(g) | A €25.0 million working capital facility at the Rosenthal mill that matures in |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 8. 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 plan and post-retirement benefit plans for certain employees (“Celgar Plans”).
Pension benefits are based on employee’semployees’ earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions forduring the twelve month periodyear ended December 31, 2010 totalled€1,053 (2009 — €963)2013 totaled $2,878 (2012 – $2,941).
Effective December 31, 2008, the defined benefit plan was closed to new members. In addition, the defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the year ended December 31, 2013, the Company made contributions of approximately €2,264$773 (2012 – $795) to its defined contribution plans (2009 — €1,844).
89
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 | ||||||
2013 | ||||||||||||
Pension | Other Post- Retirement Benefit Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2012 | $ | 48,639 | $ | 28,314 | $ | 76,953 | ||||||
Service cost | 137 | 753 | 890 | |||||||||
Interest cost | 1,836 | 1,108 | 2,944 | |||||||||
Benefit payments | (2,772 | ) | (767 | ) | (3,539 | ) | ||||||
Special termination benefits | 277 | — | 277 | |||||||||
Actuarial losses (gains) | (1,472 | ) | 943 | (529 | ) | |||||||
Foreign currency exchange rate changes | (3,079 | ) | (1,893 | ) | (4,972 | ) | ||||||
|
|
|
|
|
| |||||||
Benefit obligation, December 31, 2013 | 43,566 | 28,458 | 72,024 | |||||||||
|
|
|
|
|
| |||||||
Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2012 | 33,647 | — | 33,647 | |||||||||
Actual returns | 4,686 | — | 4,686 | |||||||||
Contributions | 2,111 | 767 | 2,878 | |||||||||
Benefit payments | (2,772 | ) | (767 | ) | (3,539 | ) | ||||||
Foreign currency exchange rate changes | (2,300 | ) | — | (2,300 | ) | |||||||
|
|
|
|
|
| |||||||
Fair value of plan assets, December 31, 2013 | 35,372 | — | 35,372 | |||||||||
|
|
|
|
|
| |||||||
Funded status, December 31, 2013(1) | $ | (8,194 | ) | $ | (28,458 | ) | $ | (36,652 | ) | |||
|
|
|
|
|
| |||||||
Components of the net benefit cost recognized | ||||||||||||
Service cost | $ | 137 | $ | 753 | $ | 890 | ||||||
Interest cost | 1,836 | 1,108 | 2,944 | |||||||||
Expected return on plan assets | (2,133 | ) | — | (2,133 | ) | |||||||
Special termination benefits | 277 | — | 277 | |||||||||
Amortization of unrecognized items | 1,439 | 116 | 1,555 | |||||||||
|
|
|
|
|
| |||||||
Net benefit costs | $ | 1,556 | $ | 1,977 | $ | 3,533 | ||||||
|
|
|
|
|
|
(1) | The total of |
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 8. Pension and Other Post-Retirement Benefit Obligations (continued)
Information about the Celgar Plans, in aggregate for the year ended December 31, 20092012 is as follows:
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 | ||||||
2012 | ||||||||||||
Pension | Other Post- Retirement Benefit Obligations | Total | ||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation, December 31, 2011 | $ | 46,413 | $ | 25,681 | $ | 72,094 | ||||||
Service cost | 144 | 725 | 869 | |||||||||
Interest cost | 1,961 | 1,126 | 3,087 | |||||||||
Benefit payments | (2,449 | ) | (777 | ) | (3,226 | ) | ||||||
Actuarial losses (gains) | 1,534 | 980 | 2,514 | |||||||||
Foreign currency exchange rate changes | 1,036 | 579 | 1,615 | |||||||||
|
|
|
|
|
| |||||||
Benefit obligation, December 31, 2012 | 48,639 | 28,314 | 76,953 | |||||||||
|
|
|
|
|
| |||||||
Reconciliation of fair value of plan assets | ||||||||||||
Fair value of plan assets, December 31, 2011 | 30,789 | — | 30,789 | |||||||||
Actual returns | 2,449 | — | 2,449 | |||||||||
Contributions | 2,164 | 777 | 2,941 | |||||||||
Benefit payments | (2,449 | ) | (777 | ) | (3,226 | ) | ||||||
Foreign currency exchange rate changes | 694 | — | 694 | |||||||||
|
|
|
|
|
| |||||||
Fair value of plan assets, December 31, 2012 | 33,647 | — | 33,647 | |||||||||
|
|
|
|
|
| |||||||
Funded status, December 31, 2012(1) | $ | (14,992 | ) | $ | (28,314 | ) | $ | (43,306 | ) | |||
|
|
|
|
|
| |||||||
Components of the net benefit cost recognized | ||||||||||||
Service cost | $ | 144 | $ | 725 | $ | 869 | ||||||
Interest cost | 1,961 | 1,126 | 3,087 | |||||||||
Expected return on plan assets | (2,105 | ) | — | (2,105 | ) | |||||||
Amortization of unrecognized items | 1,453 | 7 | 1,460 | |||||||||
|
|
|
|
|
| |||||||
Net benefit costs | $ | 1,453 | $ | 1,858 | $ | 3,311 | ||||||
|
|
|
|
|
|
(1) | The total of |
The Company anticipates that it will make contributions to the pension planCelgar Plans of approximately €1,419$1,606 in 2011.2014. Estimated future benefit payments under the Celgar Plans are as follows:
Amount | ||||
2011 | € | 2,448 | ||
2012 | 2,509 | |||
2013 | 2,611 | |||
2014 | 2,734 | |||
2015 | 2,862 | |||
2016 — 2020 | 16,445 |
91
Amount | ||||
2014 | $ | 3,656 | ||
2015 | 3,824 | |||
2016 | 3,943 | |||
2017 | 4,052 | |||
2018 | 4,173 | |||
2019 – 2023 | 22,311 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 8. Pension and Other Post-Retirement Benefit Obligations (continued)
During the year ended December 31, 2010,2013, the Company recognized a lossincome, net of €3,314tax of $4,636 in other comprehensive income (2009 —(2012 – loss of €3,128; 2008 — income$808; 2011 – loss of €4,079)$11,203). As at December 31, 2010,2013, the pension related accumulated other comprehensive income balance of €7,292 (2009 — €3,978)$16,414 (2012 – $21,050) is primarily 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 accumulated other comprehensive income which is expected to be recognized in 20112014 is approximately €571$805 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, | ||||||||
2013 | 2012 | |||||||
Benefit obligations | ||||||||
Discount rate | 4.50 | % | 4.00 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Net benefit cost for year ended | ||||||||
Discount rate | 4.00 | % | 4.25 | % | ||||
Rate of compensation increase | 2.75 | % | 2.75 | % | ||||
Expected rate of return on plan assets | 6.60 | % | 6.75 | % | ||||
Assumed health care cost trend rate at | ||||||||
Initial health care cost trend rate | 8.00 | % | 8.50 | % | ||||
Annual rate of decline in trend rate | 0.50 | % | 0.50 | % | ||||
Ultimate health care cost trend rate | 4.50 | % | 4.50 | % | ||||
Medical services plan premiums trend rate | 4.50 | % | 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, 2013 | December 31, 2012 | |||||||||||||||
1% | 1% | 1% | 1% | |||||||||||||
Increase | Decrease | Increase | Decrease | |||||||||||||
Effect on total service and interest rate components | $ | 51 | $ | (53 | ) | $ | 50 | $ | (53 | ) | ||||||
Effect on post-retirement benefit obligation | $ | 927 | $ | (896 | ) | $ | 957 | $ | (921 | ) |
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 | 2013 | 2012 | ||||||||||
Equity securities | 60 | % | 64 | % | 58 | % | ||||||
Debt securities | 40 | % | 36 | % | 42 | % | ||||||
Cash and cash equivalents | 0 | % | 0 | % | 0 | % | ||||||
|
|
|
| |||||||||
100 | % | 100 | % | |||||||||
|
|
|
|
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 8. Pension and Other Post-Retirement Benefit Obligations (continued)
Investment Objective: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 | $ | 22,458 | $ | — | $ | — | $ | 22,458 | ||||||||
Phillips, Hagar and North Bond Fund | 12,821 | — | — | 12,821 | ||||||||||||
Cash | 93 | — | — | 93 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 35,372 | $ | — | $ | — | $ | 35,372 | ||||||||
|
|
|
|
|
|
|
|
Concentrations of Risk in the Celgar Plans’ Assets:Plans
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.
Multiemployer Plan
The Company accountsparticipates in a multiemployer plan for income taxesthe 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 accordance with ASC 740,excess of the contractual contributions. The contributions during the year ended December 31, 2013 totaled $2,635 (2012 – $2,644; 2011 – $2,450). Plan details are included in the following table:
Expiration | ||||||||
Date of | Are the Company’s | |||||||
Provincially | Collective | Contributions Greater Than | ||||||
Registered | Bargaining | 5% of Total Contributions | ||||||
Legal name | Plan Number | Agreement | 2013 | 2012 | ||||
The Pulp and Paper Industry Pension Plan | P085324 | April 30, 2017 | Yes | Yes |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 9. Income Taxes(“ASC 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 statuestatute 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 or disclosed as of December 31, 2010.2013. 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 2010,2013, the German tax
93
A reconciliation of the beginning and ending amount of total gross 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 | ||||
2013 | 2012 | |||||||
Balance at January 1 | $ | 82,934 | $ | 1,427 | ||||
Reduction prior year tax positions | (82,934 | ) | (1,427 | ) | ||||
Addition of current year tax positions | — | 82,934 | ||||||
|
|
|
| |||||
Balance at December 31 | $ | — | $ | 82,934 | ||||
|
|
|
|
The liability in the Consolidated Balance Sheet related to unrecognized tax benefits was $nil as at December 31, 2013 (2012—$8,605). The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.benefit (provision) in the Consolidated Statement of Operations. During the year ended December 31, 2010,2013, the Company recognized approximately €nil$nil in penalties and interest (2009-€nil). The Company had approximately €nil for the payment of interest and penalties accrued at(2012 – $134).
During the year ended December 31, 2010.
The provision for current income taxes consists entirelyprimarily ofnon-U.S. taxes for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 9. 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
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
U.S. Federal statutory rate | 35 | % | 35 | % | 35 | % | ||||||
U.S. Federal statutory rate on (income) loss before income taxes and noncontrolling interest | $ | 5,797 | $ | 1,439 | $ | (25,971 | ) | |||||
Tax differential on foreign income | 736 | 874 | 7,892 | |||||||||
Effect of foreign earnings | (945 | ) | (8,382 | ) | (13,788 | ) | ||||||
Valuation allowance | (17,040 | ) | (17,529 | ) | 12,897 | |||||||
Tax benefit of partnership structure | 5,942 | 6,785 | 7,285 | |||||||||
Pension adjustment | (1,206 | ) | 174 | 2,595 | ||||||||
Non-taxable foreign subsidiaries | 1,696 | 1,897 | 5,601 | |||||||||
Research and development expense | 1,319 | 3,436 | — | |||||||||
Prior year adjustments | (5,749 | ) | — | — | ||||||||
Other | 254 | 1,927 | 4,457 | |||||||||
|
|
|
|
|
| |||||||
$ | (9,196 | ) | $ | (9,379 | ) | $ | 968 | |||||
|
|
|
|
|
| |||||||
Comprised of: | ||||||||||||
Current | $ | 2,286 | $ | (9,531 | ) | $ | (2,341 | ) | ||||
Deferred | (11,482 | ) | 152 | 3,309 | ||||||||
|
|
|
|
|
| |||||||
$ | (9,196 | ) | $ | (9,379 | ) | $ | 968 | |||||
|
|
|
|
|
|
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, | ||||||||
2013 | 2012 | |||||||
German tax loss carryforwards | $ | 123,735 | $ | 100,251 | ||||
U.S. tax loss carryforwards | 44,718 | 36,090 | ||||||
Canadian tax loss carryforwards | 11,606 | 40,992 | ||||||
Basis difference between income tax and financial reporting with respect to operating pulp mills | (64,252 | ) | (71,191 | ) | ||||
Derivative financial instruments | 13,060 | 18,760 | ||||||
Long-term debt | 2,204 | 2,066 | ||||||
Payable and accrued expenses | 578 | (257 | ) | |||||
Deferred pension liability | 9,605 | 10,810 | ||||||
Capital leases | 2,574 | 2,816 | ||||||
Research and development expense pool | 4,573 | 3,523 | ||||||
Other | 1,400 | 1,323 | ||||||
|
|
|
| |||||
149,801 | 145,183 | |||||||
Valuation allowance | (140,768 | ) | (123,728 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | $ | 9,033 | $ | 21,455 | ||||
|
|
|
| |||||
Comprised of: | ||||||||
Deferred income tax asset – current | $ | 6,326 | $ | 5,887 | ||||
Deferred income tax asset – non-current | 17,157 | 23,159 | ||||||
Deferred income tax liability – non-current | (14,450 | ) | (7,591 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | $ | 9,033 | $ | 21,455 | ||||
|
|
|
|
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands 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. 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. 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. As a result of this rule, the Company was not able to recognize certain tax assets as at December 31, 2010. Management expects that certain entities will meet the history of profitability tests in 2011, and if so, additional tax assets are expected to be recognized.
Note 9. Income Taxes (continued)
The Company’s German tax loss carryforward amount includes corporate and trade tax losses totalling approximately €442,500$528,700 at December 31, 20102013 which have no expiration date. In addition, the Company has approximately $162,700 of German interest carryforwards which have no expiration date and can be used to reduce taxable income, with certain limitations. The Company’s U.S. loss carryforwards and tax credits amount is approximately €83,200$125,700 at December 31, 2010,2013, of which approximately €2,600, €5,800$6,200 and €74,000,$119,500, if not used, will expire in the tax years ending 2011, 20122019 to 20192023 and 20202024 to 2030,2033, respectively. The Company has U.S. foreign tax credits of approximately $700 which begin to expire in 2030. The Company’s Canadian tax loss carryforward amount is approximately €138,100$43,800 at December 31, 20102013 of which approximately $12,300 will expire in 2015 and approximately $31,500 will begin to expire in the tax year ending 2026,2029, if not used. ManagementThe Company has concluded thatCanadian investment tax credits for scientific research and experimental development of approximately $4,600 which begin to expire in the taxation year 2030.
At each reporting period, the Company assesses whether it is more likely than not that the deferred tax assets will be realized, based on the review of all available positive and negative evidence, including future reversals of existing taxable temporary differences, estimates of future taxable income, past operating results and prudent and feasible tax planning strategies. The carrying value of our deferred tax assets reflects our expected ability to generate sufficient future taxable income in certain tax jurisdictions to utilize these deferred income tax benefits. Significant judgment is required when evaluating this positive and negative evidence, specifically the Company’s estimates of future taxable income. 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.
The following table summarizes the changes in valuation allowances related to net deferred tax assets:
2013 | 2012 | |||||||
Balance at January 1 | $ | 123,728 | $ | 106,199 | ||||
Additions (reversals) | ||||||||
United States | 10,134 | 477 | ||||||
Canada | 12,324 | 15,844 | ||||||
Germany | (5,681 | ) | (71 | ) | ||||
The impact of changes in foreign exchange rates | 263 | 1,279 | ||||||
|
|
|
| |||||
Balance at December 31 | $ | 140,768 | $ | 123,728 | ||||
|
|
|
|
For the year ended December 31, 2013, the Company increased its valuation allowance for certain Canadian and U.S. entities and decreased its valuation allowance for a German entity as after weighing all available evidence it concluded that it was more likely than not that the deferred tax assets for the Canadian and U.S. entities will not be utilized, underrealized and the deferred tax assets for the German entity will be realized. These assessments were based on historical and forecast taxable income, income tax strategies, and the best estimates of the timing of movements in temporary differences. The Company’s accounting for the German deferred tax assets represents its current circumstances,best estimate. It is reasonably possible that changes in the Company’s current estimates could have a material effect on the Company’s financial statements and accordingly has reserved any resulting potential tax benefit that is not expected to be realizedresults of operations in the near future.
95
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. income taxes that would be payable if such undistributed foreign earnings were repatriated.
Note 10. Share Capital
Common shares
The Company has authorized 200,000,000 common shares (2009 —(2012 – 200,000,000) with a par value of $1 per share. During the twelve months ended December 31, 2010, 6,500,171 shares were issued as a result of certain holders of the Company’s Subordinated Convertible Notes due January 2012 exercising their conversion option. See Note 7(e) — Debt.
As at December 31, 2010,2013, the Company had 42,999,658 (2009 — 36,443,487)55,853,704 common shares (2012 – 55,815,704) issued and outstanding.
Preferred shares
The Company has authorized 50,000,000 preferred shares (2009 —(2012 – 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, 2010,2013, no preferred shares had been issued by the Company.
Note 11. 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 replacedDuring the Company’s 2004years ended December 31, 2013 and December 31, 2012, there were no issued and outstanding restricted stock incentive plan (the “2004 Plan”). However, the terms of the 2004 Plan will govern prior awards untilrights or stock appreciation rights. As at December 31, 2013, 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 remain approximately 1.1 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 basedThe performance awards totaled 534,783 shares (2009 — 565,165; 2008 — 570,614). Expense recognized for the year was €2,255(2009 — €397; 2008 — €96).
The fair value of the performance stockshares and PSUs is recorded as compensation expense over the vesting period. The fair value is determined based upon the targeted number of shares awarded and the quoted price of the Company’s stockshares at the reporting date. Performance stock generally cliff vest three years fromThe target number of shares is determined using management’s best estimate. The final determination of the award date.
The following table summarizes PSU activity during the performance stock had vested (2009 — nil; 2008 — nil), however the decision determining the total number of performance awards to be granted to employees will be finalized by the
96
Number of PSUs | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Outstanding at January 1 | 786,129 | 795,312 | 534,783 | |||||||||
Granted | 40,499 | 55,478 | 812,575 | |||||||||
Vested and issued | — | — | (474,728 | ) | ||||||||
Cancelled | — | — | (60,055 | ) | ||||||||
Forfeited | (35,196 | ) | (64,661 | ) | (17,263 | ) | ||||||
|
|
|
|
|
| |||||||
Outstanding at December 31 | 791,432 | 786,129 | 795,312 | |||||||||
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 11. Stock-Based Compensation (continued)
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. Expenseyear; however, 200,000 restricted shares granted during the year ended December 31, 2011 vest in equal amounts over a five-year period commencing in 2012. The fair value of the restricted shares is recognizedrecorded as compensation expense on a straight-line basis over the vesting period.
Expense recognized for the year ended December 31, 20102013 was €139 (2009 — €58; 2008 — €168)$692 (2012 – $1,070; 2011 – $1,389).
The following table summarizes restricted stock awards were granted to Directors of the Company (2009 — 21,000; 2008 — 21,000) and no restricted stock was cancelledshare activity during the year (2009 — nil; 2008 — nil).
Number of Restricted Shares | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Outstanding at January 1 | 196,500 | 238,000 | 56,000 | |||||||||
Granted | 38,000 | 36,500 | 238,000 | |||||||||
Vested | (76,500 | ) | (78,000 | ) | (56,000 | ) | ||||||
|
|
|
|
|
| |||||||
Outstanding at December 31 | 158,000 | 196,500 | 238,000 | |||||||||
|
|
|
|
|
|
Stock Options
The following table summarizes 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 (U.S. dollars) | Number | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price (U.S. dollars) | Number | Weighted Average Exercise Price (U.S. dollars) | |||||||||||
$7.30 | 30,000 | 1.57 | $ | 7.30 | 30,000 | $ | 7.30 | |||||||||
$7.92 | 45,000 | 1.69 | $ | 7.92 | 45,000 | $ | 7.92 |
During the years ended December 31, 20102013 and 2009,December 31, 2012, no options were granted, exercised or cancelled and 738,334 (2009 —cancelled. During the year ended December 31, 2013, 100,000 options expired (2012 – nil; 2008 — nil) options expired.2011 – 15,000). 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 as at December 31, 20102013, and the exercise price of the stock options for those options where the exercise price is $1.73 per option.
Stock compensation expense recognized for the year ended December 31, 20102013 was €nil (2009 - €nil)$nil (2012 – $nil; 2011 – $nil). As at December 31, 2010, all stock options had fully vested.
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 12. Net Income (Loss) Per Share Attributable to Common Shareholders
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income (loss) attributable to common shareholders – basic | $ | (26,375 | ) | $ | (15,670 | ) | $ | 69,699 | ||||
Interest on convertible notes, net of tax | — | — | 1,110 | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) attributable to common shareholders – diluted | $ | (26,375 | ) | $ | (15,670 | ) | $ | 70,809 | ||||
|
|
|
|
|
| |||||||
Net income (loss) per share attributable to common shareholders | ||||||||||||
Basic | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.39 | ||||
|
|
|
|
|
| |||||||
Diluted | $ | (0.47 | ) | $ | (0.28 | ) | $ | 1.24 | ||||
|
|
|
|
|
| |||||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic(1) | 55,673,838 | 55,596,761 | 50,116,982 | |||||||||
Effect of dilutive shares: | ||||||||||||
Performance shares and PSUs | — | — | 544,853 | |||||||||
Restricted shares | — | — | 87,923 | |||||||||
Stock options and awards | — | — | 57,483 | |||||||||
Convertible notes | — | — | 6,178,778 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 55,673,838 | 55,596,761 | 56,986,019 | |||||||||
|
|
|
|
|
|
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 excludes |
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 earningsnet income (loss) per share.
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Stock options and awards | 75,000 | 175,000 | — | |||||||||
PSUs | 791,432 | 786,129 | — | |||||||||
Restricted shares | 158,000 | 196,500 | — |
Note 13. Restructuring Expenses
In July 2013, the Company announced a workforce reduction at the Celgar mill. The planned reduction will affect both hourly and salaried employees and will reduce the workforce by approximately 85 employees over the next five years, with the majority of employees affected in 2013 and over the next six months. In connection with implementing this workforce reduction, during the year ended December 31, 2010 (2009 — 369,924; 2008 — 372,642).
In 2013, the results presented are thoseCompany restructured the management team at the Stendal mill. In connection with this restructuring, the Company recorded expenses of $1,386 for severance and other personnel expenses, such as termination benefits. As at December 31, 2013, the one reportable business segment.
98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 14. Accumulated Other Comprehensive Income
The following table presents net sales from continuing operations to external customers by geographic area based on locationcomponents of accumulated other comprehensive income are as follows:
Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Foreign currency translation adjustments | $ | 47,756 | $ | 49,489 | ||||
Unrecognized losses and prior service costs related to defined benefit plans | (16,414 | ) | (21,050 | ) | ||||
Unrealized gains on marketable securities | 128 | 138 | ||||||
|
|
|
| |||||
Accumulated other comprehensive income | $ | 31,470 | $ | 28,577 | ||||
|
|
|
|
Note 15. Noncontrolling Interest
In September 2013, the customer.
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 | |||||||
2010 | 2009 | |||||||
Germany | € | 656,090 | € | 689,545 | ||||
Canada | 190,648 | 178,941 | ||||||
Other | 1,507 | 2,934 | ||||||
€ | 848,245 | € | 871,420 | |||||
Note 16. 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.
The following table presents net sales to external customers by geographic area based on location of the customer:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Germany | $ | 309,399 | $ | 293,733 | $ | 357,106 | ||||||
China | 300,827 | 295,797 | 326,610 | |||||||||
Other European Union countries(1) | 224,988 | 216,846 | 244,884 | |||||||||
Italy | 65,654 | 55,443 | 71,695 | |||||||||
Other Asia | 49,855 | 42,692 | 42,970 | |||||||||
North America | 30,404 | 61,103 | 96,520 | |||||||||
Other countries | 2,748 | 2,099 | 1,146 | |||||||||
|
|
|
|
|
| |||||||
983,875 | 967,713 | 1,140,931 | ||||||||||
Energy and chemical revenues | 92,198 | 92,966 | 94,758 | |||||||||
Third party transportation revenues | 12,312 | 12,057 | 16,275 | |||||||||
|
|
|
|
|
| |||||||
$ | 1,088,385 | $ | 1,072,736 | $ | 1,251,964 | |||||||
|
|
|
|
|
|
(1) | |
The fair valuefollowing table presents total long-lived assets by geographic area based on location of financial instrumentsthe asset:
December 31, | ||||||||
2013 | 2012 | |||||||
Germany | $ | 843,777 | $ | 839,535 | ||||
Canada | 194,854 | 226,971 | ||||||
|
|
|
| |||||
$ | 1,038,631 | $ | 1,066,506 | |||||
|
|
|
|
In 2013, two customers 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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 17. Derivative Transactions
The Company is exposed to certain market risks relating to its ongoing business. The Company seeks to manage these risks through internal risk management policies as well as, from time to time, the use of derivatives. The Company currently manages its interest rate risk with the use of a derivative instrument. The derivatives are measured at fair value with changes in fair value immediately recognized in gain (loss) on derivative instruments in the Consolidated Statement of Operations.
Derivative assets are presented in prepaid expenses and Debt Instruments
Interest Rate Derivative
During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €612.6 million of the principal amount 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 €306.8 million at a fixed interest rate of 5.28% and it matures in October 2017 (which for the most part matches the maturity of the Stendal Loan Facility).
The interest rate derivative contract is with a bank that is part of a banking syndicate that holds the Stendal Loan Facility and the Company does not anticipate non-performance by the bank.
Pulp Price Derivatives
In May 2012, the Company entered into a fixed price pulp swap contract with a bank. Under the terms of the contract, 5,000 metric tonnes (“MT”) of pulp per month was fixed at a price of 915 U.S. dollars per MT. The contract matured in December 2012. In November 2012, the Company entered into two additional contracts. Under the terms of the contracts, 3,000 MT of pulp per month is fixed at prices which range from 880 U.S. dollars to 890 U.S. dollars per MT. The contracts matured in December 2013.
Energy Derivatives
The Company is also subject to price risk for electricity used in its manufacturing operations. The Company enters into electricity forward sales contracts when it sees an opportunity to sell forward electricity at opportunistic rates. No electricity forward sales contracts were entered into in 2013, 2012 or 2011. Although the Company does not currently have plans to enter into such transactions, the Company may enter into similar electricity derivative contracts in the future.
Foreign Exchange Derivatives
Many of the Company’s transactions are denominated in foreign currencies, primarily the U.S.Euro and Canadian 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 Company did not enter into foreign exchange derivatives in 2013, 2012 and 2011.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 17. Derivative Transactions (continued)
Credit Risk
The Company’s credit risk is primarily attributable to cash held in bank accounts and receivables. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company’s credit risk associated with the sale of pulp products is managed through establishing long-term contractual relationships with its customers, setting credit limits, 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 $147,728 and receivables of $135,893 recorded in the Consolidated Balance Sheet, net of any allowances for losses, represents the Company’s maximum exposure to credit risk.
The following table shows the derivative gains and losses by instrument type as they are recognized in gain (loss) on derivative instruments in the Consolidated Statement of Operations:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Interest rate derivative contract | $ | 22,476 | $ | 2,204 | $ | (1,974 | ) | |||||
Pulp price derivative contracts | (2,767 | ) | 2,608 | — | ||||||||
|
|
|
|
|
| |||||||
$ | 19,709 | $ | 4,812 | $ | (1,974 | ) | ||||||
|
|
|
|
|
|
Note 18. Financial Instruments
The fair value of financial instruments as at December 31 is summarized as follows:
2013 | 2012 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Cash and cash equivalents | $ | 147,728 | $ | 147,728 | $ | 137,439 | $ | 137,439 | ||||||||
Marketable securities | $ | 217 | $ | 217 | $ | 243 | $ | 243 | ||||||||
Receivables | $ | 135,893 | $ | 135,893 | $ | 145,150 | $ | 145,150 | ||||||||
Pulp price derivative contracts – asset | $ | — | $ | — | $ | 982 | $ | 982 | ||||||||
Accounts payable and other | $ | 103,814 | $ | 103,814 | $ | 118,599 | $ | 118,599 | ||||||||
Debt | $ | 979,372 | $ | 980,982 | $ | 937,985 | $ | 922,951 | ||||||||
Interest rate derivative contract – liability | $ | 46,517 | $ | 46,517 | $ | 66,819 | $ | 66,819 |
The carrying value of cash and cash equivalents 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. TheMarketable securities are recorded at fair value of notes receivable was estimated using discounted cash flows at prevailing market rates. The fair value of debt reflectsbased on recent market transactions and discounted cash flow estimate.transactions. See the Fair Value Measurement and DisclosuresDisclosure section below for details on how the fair value of the pulp price derivative contracts, interest rate derivative contractscontract and debt was determined.
2010 | 2009 | 2008 | ||||||||||
Unrealized net gain (loss) on derivative financial instruments | € | 1,899 | € | (5,760 | ) | € | (25,228 | ) | ||||
100
The fair value methodologies and, as a result, the fair value of the Company’s investmentsmarketable securities, debt and derivative instruments are determined based on the fair value hierarchy provided in ASC 820. The fair value hierarchythe Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification, and are as follows:
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per ASC 820 is as follows:
Note 18. Financial Instruments (continued)
Level 1 —– Valuations based on quoted prices in active markets foridenticalassets and liabilities.
Level 2 —– Valuations based on observable inputs in active markets forsimilarassets and liabilities, other than Level 1 prices, such as quoted commodity prices or interest or currency exchange rates.
Level 3 —– Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.
The Company classified its investmentsmarketable securities within Level 1 of the valuation hierarchy wherebecause quoted prices are available in an active market. Level 1 investments includemarket for the exchange-traded equities.
The Company’s interest rate and pulp price 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 Company’s debt is recognized at amortized cost. The fair value of the derivative instruments. The counterparty to ourdebt classified as Level 2 reflects recent market transactions and discounted cash flow estimates. Discounted cash flow models use observable market inputs taking into consideration variables such as interest rate swap derivativechanges, comparative securities, subordination discount and credit rating changes. The fair value of debt classified as Level 3 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, 2013 using: | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Marketable securities | $ | 217 | $ | — | $ | — | $ | 217 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Interest rate derivative contract | $ | — | $ | 46,517 | $ | — | $ | 46,517 | ||||||||
Debt | — | 367,405 | 613,577 | 980,982 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | — | $ | 413,922 | $ | 613,577 | $ | 1,027,499 | |||||||||
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2012 using: | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Marketable securities | $ | 243 | $ | — | $ | — | $ | 243 | ||||||||
Pulp price derivative contracts | — | 982 | — | 982 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 243 | $ | 982 | $ | — | $ | 1,225 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Interest rate derivative contract | $ | — | $ | 66,819 | $ | — | $ | 66,819 | ||||||||
Debt | — | 308,894 | 614,057 | 922,951 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | — | $ | 375,713 | $ | 614,057 | $ | 989,770 | |||||||||
|
|
|
|
|
|
|
|
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
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 | ||||||
Note 19. 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, 2010,2013 is as follows:
Capital | Operating | |||||||
Leases | Leases | |||||||
2014 | $ | 2,406 | $ | 2,280 | ||||
2015 | 2,414 | 2,076 | ||||||
2016 | 2,263 | 1,295 | ||||||
2017 | 1,511 | 1,239 | ||||||
2018 | 880 | 1,237 | ||||||
Thereafter | 3,111 | 929 | ||||||
|
|
|
| |||||
Total | 12,585 | $ | 9,056 | |||||
|
| |||||||
Less: imputed interest | 1,771 | |||||||
|
| |||||||
Total present value of minimum capitalized payments | 10,814 | |||||||
Less: current portion of capital lease obligations | 2,254 | |||||||
|
| |||||||
Long-term capital lease obligations | $ | 8,560 | ||||||
|
|
Rent expense under operating leases was $3,497 for the year ended December 31, 2013 (2012 – $3,866; 2011 – $4,611). The current portion of the capital lease obligations is included in accounts payable and other and the long-term portion is included in capital leases and other in the Consolidated Balance Sheet.
Note 20. Commitments and Contingencies
(a) | At December 31, 2013, the Company has liabilities for environmental conservation expenditures which include asset retirement obligations of $5,549 (2012 – $5,605) and wastewater fees of $6,929 (2012 – $8,765). Management believes the accrued amounts recorded are sufficient. |
(b) | Pursuant to an arbitration proceeding with the general construction contractor (the noncontrolling shareholder) 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 €10.0 million ($13,606) (the “Guarantee Amount”), which is intended to compensate the Company for remediation work that is required at the Stendal mill, but it was less than the amount claimed by the Company under the arbitration. Most of the claims have been settled; however, the arbitration proceeding is ongoing, and there is no certainty that the Company will be successful with its remaining claim. |
The €10.0 million ($13,606) was initially recognized as an increase in cash and a corresponding increase in accounts payable and other. As civil works remediation steps are agreed to with the noncontrolling shareholder an agreed to portion of the payable is reversed with the offset recorded in operating costs to offset the remediation expenditures. As at December 31, 2013, the Company recorded a liability for environmental conservation expenditureshad Guarantee Amount proceeds of approximately €2,085. Management believes the liability amount recorded is sufficient.
102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 20. Commitments and Contingencies (continued)
(c) | |
(d) | |
103
(e) | The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout older facilities. The Company’s obligation for the proper removal and disposal of asbestos products from the Company’s mills is a conditional asset retirement obligation. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value. |
(f) | The Company entered into certain minimum or fixed purchase commitments primarily related to the purchase of raw materials that extend beyond 2014, none of which are individually or together material. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure
The terms of the indenturesindenture governing our 9.25% senior unsecured notes and our 9.5% senior secured notesthe Company’s Senior Notes require that we provideit provides the results of operations and financial condition of Mercer International Inc. and ourthe restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the years ended December 31, 20102013 and 2009,2012, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and ourits Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.
Combined Condensed Balance Sheets
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
December 31, 2013 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 82,910 | $ | 64,818 | $ | — | $ | 147,728 | ||||||||
Receivables | 75,987 | 59,906 | — | 135,893 | ||||||||||||
Inventories | 93,807 | 77,101 | — | 170,908 | ||||||||||||
Prepaid expenses and other | 7,742 | 3,176 | — | 10,918 | ||||||||||||
Deferred income tax | 3,273 | 3,053 | — | 6,326 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | 263,719 | 208,054 | — | 471,773 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 420,373 | 618,258 | — | 1,038,631 | ||||||||||||
Deferred note issuance costs and other | 10,987 | 10,011 | — | 20,998 | ||||||||||||
Deferred income tax | 9,894 | 7,263 | — | 17,157 | ||||||||||||
Due from unrestricted group | 153,851 | — | (153,851 | ) | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 858,824 | $ | 843,586 | $ | (153,851 | ) | $ | 1,548,559 | |||||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and other | $ | 49,891 | $ | 53,923 | $ | — | $ | 103,814 | ||||||||
Pension and other post-retirement benefit obligations | 1,330 | — | — | 1,330 | ||||||||||||
Debt | 749 | 59,606 | — | 60,355 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current liabilities | 51,970 | 113,529 | — | 165,499 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 336,382 | 582,635 | — | 919,017 | ||||||||||||
Due to restricted group | — | 153,851 | (153,851 | ) | — | |||||||||||
Interest rate derivative liability | — | 46,517 | — | 46,517 | ||||||||||||
Pension and other post-retirement benefit obligations | 35,466 | — | — | 35,466 | ||||||||||||
Capital leases and other | 8,523 | 10,770 | — | 19,293 | ||||||||||||
Deferred income tax | 14,450 | — | — | 14,450 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | 446,791 | 907,302 | (153,851 | ) | 1,200,242 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 412,033 | (52,955 | ) | — | 359,078 | |||||||||||
Noncontrolling interest (deficit) | — | (10,761 | ) | — | (10,761 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities and equity | $ | 858,824 | $ | 843,586 | $ | (153,851 | ) | $ | 1,548,559 | |||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. 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, 2012 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 48,407 | $ | 89,032 | $ | — | $ | 137,439 | ||||||||
Receivables | 80,708 | 64,442 | — | 145,150 | ||||||||||||
Inventories | 98,606 | 57,373 | — | 155,979 | ||||||||||||
Prepaid expenses and other | 7,661 | 2,764 | — | 10,425 | ||||||||||||
Deferred income tax | 2,885 | 3,002 | — | 5,887 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current assets | 238,267 | 216,613 | — | 454,880 | ||||||||||||
Long-term assets | ||||||||||||||||
Property, plant and equipment | 455,293 | 611,213 | — | 1,066,506 | ||||||||||||
Deferred note issuance costs and other | 8,712 | 7,324 | — | 16,036 | ||||||||||||
Deferred income tax | 12,102 | 11,057 | — | 23,159 | ||||||||||||
Due from unrestricted group | 134,897 | — | (134,897 | ) | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 849,271 | $ | 846,207 | $ | (134,897 | ) | $ | 1,560,581 | |||||||
|
|
|
|
|
|
|
| |||||||||
LIABILITIES | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and other | $ | 55,517 | $ | 63,082 | $ | — | $ | 118,599 | ||||||||
Pension and other post-retirement benefit obligations | 1,072 | — | — | 1,072 | ||||||||||||
Debt | 7,465 | 52,740 | — | 60,205 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total current liabilities | 64,054 | 115,822 | — | 179,876 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Debt | 285,079 | 592,701 | — | 877,780 | ||||||||||||
Due to restricted group | — | 134,897 | (134,897 | ) | — | |||||||||||
Interest rate derivative liability | — | 66,819 | — | 66,819 | ||||||||||||
Pension and other post-retirement benefit obligations | 42,378 | — | — | 42,378 | ||||||||||||
Capital leases and other | 8,008 | 10,367 | — | 18,375 | ||||||||||||
Deferred income tax | 7,591 | — | — | 7,591 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | 407,110 | 920,606 | (134,897 | ) | 1,192,819 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
EQUITY | ||||||||||||||||
Total shareholders’ equity (deficit) | 442,161 | (53,057 | ) | — | 389,104 | |||||||||||
Noncontrolling interest (deficit) | — | (21,342 | ) | — | (21,342 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities and equity | $ | 849,271 | $ | 846,207 | $ | (134,897 | ) | $ | 1,560,581 | |||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
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
Year Ended December 31, 2013 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | $ | 561,350 | $ | 434,837 | $ | — | $ | 996,187 | ||||||||
Energy and chemicals | 33,783 | 58,415 | — | 92,198 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
595,133 | 493,252 | — | 1,088,385 | |||||||||||||
Operating costs | 498,952 | 421,880 | — | 920,832 | ||||||||||||
Operating depreciation and amortization | 43,498 | 34,811 | — | 78,309 | ||||||||||||
Selling, general and administrative expenses | 31,943 | 19,226 | — | 51,169 | ||||||||||||
Restructuring expenses | 5,029 | 1,386 | — | 6,415 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
579,422 | 477,303 | — | 1,056,725 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 15,711 | 15,949 | — | 31,660 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (32,321 | ) | (45,011 | ) | 8,176 | (69,156 | ) | |||||||||
Gain (loss) on derivative instruments | (2,767 | ) | 22,476 | — | 19,709 | |||||||||||
Other income (expense) | 9,217 | 174 | (8,176 | ) | 1,215 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (25,871 | ) | (22,361 | ) | — | (48,232 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | (10,160 | ) | (6,412 | ) | — | (16,572 | ) | |||||||||
Income tax benefit (provision) | (9,365 | ) | 169 | — | (9,196 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | (19,525 | ) | (6,243 | ) | — | (25,768 | ) | |||||||||
Less: net income attributable to noncontrolling interest | — | (607 | ) | — | (607 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) attributable to common shareholders | $ | (19,525 | ) | $ | (6,850 | ) | $ | — | $ | (26,375 | ) | |||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. 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, 2012 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | $ | 545,205 | $ | 434,565 | $ | — | $ | 979,770 | ||||||||
Energy and chemicals | 36,638 | 56,328 | — | 92,966 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
581,843 | 490,893 | — | 1,072,736 | |||||||||||||
Operating costs | 500,223 | 385,921 | — | 886,144 | ||||||||||||
Operating depreciation and amortization | 40,118 | 34,184 | — | 74,302 | ||||||||||||
Selling, general and administrative expenses | 31,688 | 17,580 | — | 49,268 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
572,029 | 437,685 | — | 1,009,714 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 9,814 | 53,208 | — | 63,022 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (30,125 | ) | (48,934 | ) | 7,292 | (71,767 | ) | |||||||||
Gain (loss) on derivative instruments | 2,609 | 2,203 | — | 4,812 | ||||||||||||
Other income (expense) | 6,465 | 648 | (7,292 | ) | (179 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (21,051 | ) | (46,083 | ) | — | (67,134 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | (11,237 | ) | 7,125 | — | (4,112 | ) | ||||||||||
Income tax benefit (provision) | (7,050 | ) | (2,329 | ) | — | (9,379 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | (18,287 | ) | 4,796 | — | (13,491 | ) | ||||||||||
Less: net income attributable to noncontrolling interest | — | (2,179 | ) | — | (2,179 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) attributable to common shareholders | $ | (18,287 | ) | $ | 2,617 | $ | — | $ | (15,670 | ) | ||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. 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, 2011 | ||||||||||||||||
Restricted Group | Unrestricted Subsidiaries | Eliminations | Consolidated Group | |||||||||||||
Revenues | ||||||||||||||||
Pulp | $ | 659,741 | $ | 497,465 | $ | — | $ | 1,157,206 | ||||||||
Energy and chemicals | 35,455 | 59,303 | — | 94,758 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
695,196 | 556,768 | — | 1,251,964 | |||||||||||||
Operating costs | 532,471 | 433,252 | — | 965,723 | ||||||||||||
Operating depreciation and amortization | 41,535 | 36,076 | — | 77,611 | ||||||||||||
Selling, general and administrative expenses | 33,581 | 20,384 | — | 53,965 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
607,587 | 489,712 | — | 1,097,299 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 87,609 | 67,056 | — | 154,665 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (34,639 | ) | (54,386 | ) | 6,911 | (82,114 | ) | |||||||||
Gain (loss) on derivative instruments | — | (1,974 | ) | — | (1,974 | ) | ||||||||||
Other income (expense) | 8,860 | 1,676 | (6,911 | ) | 3,625 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income (expense) | (25,779 | ) | (54,684 | ) | — | (80,463 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | 61,830 | 12,372 | — | 74,202 | ||||||||||||
Income tax benefit (provision) | (6,422 | ) | 7,390 | — | 968 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | 55,408 | 19,762 | — | 75,170 | ||||||||||||
Less: net income attributable to noncontrolling interest | — | (5,471 | ) | — | (5,471 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) attributable to common shareholders | $ | 55,408 | $ | 14,291 | $ | — | $ | 69,699 | ||||||||
|
|
|
|
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash Flows
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 | ||||||
Year Ended December 31, 2013 | ||||||||||||
Restricted Group | Unrestricted Subsidiaries | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | $ | (19,525 | ) | $ | (6,243 | ) | $ | (25,768 | ) | |||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | 982 | (22,476 | ) | (21,494 | ) | |||||||
Depreciation and amortization | 43,833 | 34,812 | 78,645 | |||||||||
Deferred income taxes | 7,263 | 4,219 | 11,482 | |||||||||
Stock compensation expense | 3,574 | — | 3,574 | |||||||||
Pension and other post-retirement expense, net of funding | 648 | — | 648 | |||||||||
Other | (360 | ) | 3,529 | 3,169 | ||||||||
Changes in working capital | ||||||||||||
Receivables | 4,780 | 9,213 | 13,993 | |||||||||
Inventories | 1,965 | (16,528 | ) | (14,563 | ) | |||||||
Accounts payable and accrued expenses | (6,026 | ) | (5,543 | ) | (11,569 | ) | ||||||
Other(1) | (13,621 | ) | 11,829 | (1,792 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | 23,513 | 12,812 | 36,325 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (13,183 | ) | (32,524 | ) | (45,707 | ) | ||||||
Acquisition of noncontrolling interest (Note 15) | (20,000 | ) | 20,000 | — | ||||||||
Proceeds on sale of property, plant and equipment | 581 | 158 | 739 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (32,602 | ) | (12,366 | ) | (44,968 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of debt and purchase of notes | (1,459 | ) | (54,957 | ) | (56,416 | ) | ||||||
Proceeds from issuance of notes and borrowings of debt | 52,250 | 22,222 | 74,472 | |||||||||
Repayment of capital lease obligations | (725 | ) | (1,868 | ) | (2,593 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | (5,640 | ) | — | (5,640 | ) | |||||||
Payment of note issuance costs | (1,829 | ) | (2,026 | ) | (3,855 | ) | ||||||
Proceeds from government grants | — | 9,265 | 9,265 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | 42,597 | (27,364 | ) | 15,233 | ||||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | 995 | 2,704 | 3,699 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | 34,503 | (24,214 | ) | 10,289 | ||||||||
Cash and cash equivalents, beginning of year | 48,407 | 89,032 | 137,439 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 82,910 | $ | 64,818 | $ | 147,728 | ||||||
|
|
|
|
|
|
(1) | Includes intercompany working capital related transactions. |
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. 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, 2012 | ||||||||||||
Restricted Group | Unrestricted Subsidiaries | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | $ | (18,287 | ) | $ | 4,796 | $ | (13,491 | ) | ||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | (983 | ) | (2,203 | ) | (3,186 | ) | ||||||
Depreciation and amortization | 40,474 | 34,183 | 74,657 | |||||||||
Deferred income taxes | 6,660 | (6,812 | ) | (152 | ) | |||||||
Stock compensation expense | 2,616 | — | 2,616 | |||||||||
Pension and other post-retirement expense, net of funding | 365 | — | 365 | |||||||||
Other | 1,574 | 3,417 | 4,991 | |||||||||
Changes in working capital | ||||||||||||
Receivables | (755 | ) | 11,550 | 10,795 | ||||||||
Inventories | (5,132 | ) | 6,858 | 1,726 | ||||||||
Accounts payable and accrued expenses | (9,576 | ) | (8,416 | ) | (17,992 | ) | ||||||
Other(1) | �� | (20,292 | ) | 19,078 | (1,214 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | (3,336 | ) | 62,451 | 59,115 | ||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (28,213 | ) | (18,990 | ) | (47,203 | ) | ||||||
Proceeds on sale of property, plant and equipment | 470 | 370 | 840 | |||||||||
Proceeds on maturity of marketable securities | 15,753 | — | 15,753 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (11,990 | ) | (18,620 | ) | (30,610 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of debt and purchase of notes | (3,378 | ) | (32,062 | ) | (35,440 | ) | ||||||
Repayment of capital lease obligations | (945 | ) | (1,788 | ) | (2,733 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | 6,031 | — | 6,031 | |||||||||
Payment of note issuance costs | (409 | ) | (2,161 | ) | (2,570 | ) | ||||||
Proceeds from government grants | 4,061 | 984 | 5,045 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | 5,360 | (35,027 | ) | (29,667 | ) | |||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | 221 | 2,081 | 2,302 | |||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | (9,745 | ) | 10,885 | 1,140 | ||||||||
Cash and cash equivalents, beginning of year | 58,152 | 78,147 | 136,299 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 48,407 | $ | 89,032 | $ | 137,439 | ||||||
|
|
|
|
|
|
(1) | Includes intercompany working capital related transactions. |
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros,U.S. dollars, except per share data)
Note 21. 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, 2011 | ||||||||||||
Restricted Group | Unrestricted Subsidiaries | Consolidated Group | ||||||||||
Cash flows from (used in) operating activities | ||||||||||||
Net income (loss) | $ | 55,408 | $ | 19,762 | $ | 75,170 | ||||||
Adjustments to reconcile net income (loss) to cash flows from operating activities | ||||||||||||
Unrealized loss (gain) on derivative instruments | — | 1,974 | 1,974 | |||||||||
Depreciation and amortization | 41,875 | 36,077 | 77,952 | |||||||||
Deferred income taxes | 4,160 | (7,469 | ) | (3,309 | ) | |||||||
Stock compensation expense | 4,607 | — | 4,607 | |||||||||
Pension and other post-retirement expense, net of funding | (374 | ) | — | (374 | ) | |||||||
Other | 431 | 685 | 1,116 | |||||||||
Changes in working capital | ||||||||||||
Receivables | 4,530 | (6,763 | ) | (2,233 | ) | |||||||
Inventories | (14,162 | ) | (10,492 | ) | (24,654 | ) | ||||||
Accounts payable and accrued expenses | 8,167 | 11,670 | 19,837 | |||||||||
Other(1) | (11,836 | ) | 16,326 | 4,490 | ||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) operating activities | 92,806 | 61,770 | 154,576 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) investing activities | ||||||||||||
Purchase of property, plant and equipment | (41,079 | ) | (11,547 | ) | (52,626 | ) | ||||||
Proceeds on sale of property, plant and equipment | 456 | 676 | 1,132 | |||||||||
Purchase of marketable securities | (16,343 | ) | — | (16,343 | ) | |||||||
Note receivable | 3,988 | — | 3,988 | |||||||||
|
|
|
|
|
| |||||||
Net cash from (used in) investing activities | (52,978 | ) | (10,871 | ) | (63,849 | ) | ||||||
|
|
|
|
|
| |||||||
Cash flows from (used in) financing activities | ||||||||||||
Repayment of debt and purchase of notes | (35,477 | ) | (32,225 | ) | (67,702 | ) | ||||||
Repayment of capital lease obligations | (1,823 | ) | (2,272 | ) | (4,095 | ) | ||||||
Proceeds from (repayment of) credit facilities, net | (20,491 | ) | — | (20,491 | ) | |||||||
Proceeds from government grants | 19,898 | 151 | 20,049 | |||||||||
Purchase of treasury shares | (10,623 | ) | — | (10,623 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash from (used in) financing activities | (48,516 | ) | (34,346 | ) | (82,862 | ) | ||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (990 | ) | (3,176 | ) | (4,166 | ) | ||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash and cash equivalents | (9,678 | ) | 13,377 | 3,699 | ||||||||
Cash and cash equivalents, beginning of year | 67,830 | 64,770 | 132,600 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, end of year | $ | 58,152 | $ | 78,147 | $ | 136,299 | ||||||
|
|
|
|
|
|
(1) | Includes intercompany working capital related transactions. |
111
(UNAUDITED)
Quarterly Financial Data
(ThousandsIn thousands of Euros,U.S. Dollars, except per share amounts)
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
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 | |||||||||||
2009 | ||||||||||||||||
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 | |||||||||||||
2013 | ||||||||||||||||
Revenues | $ | 261,785 | $ | 274,700 | $ | 269,218 | $ | 282,682 | ||||||||
Gross profit | 12,607 | (1,169 | ) | 13,304 | 6,918 | |||||||||||
Net income (loss) attributable to common shareholders | (561 | ) | (13,015 | ) | (2,966 | ) | (9,833 | ) | ||||||||
Net income (loss) per share attributable to common shareholders* | (0.01 | ) | (0.23 | ) | (0.05 | ) | (0.18 | ) | ||||||||
2012 | ||||||||||||||||
Revenues | $ | 286,362 | $ | 261,650 | $ | 279,927 | $ | 244,797 | ||||||||
Gross profit | 21,302 | 23,506 | 8,730 | 9,484 | ||||||||||||
Net income (loss) attributable to common shareholders | 1,539 | 1,948 | (12,494 | ) | (6,663 | ) | ||||||||||
Net income (loss) per share attributable to common shareholders* | 0.03 | 0.03 | (0.22 | ) | (0.12 | ) |
* | On a diluted basis |
112
MERCER INTERNATIONAL INC. | ||||
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. |
Date: February 21, 2014 | ||
Jimmy S.H. Lee | ||
Chairman, Chief Executive Officer and Director | ||
/s/ DAVID M. GANDOSSI | Date: February 21, 2014 | |
David M. Gandossi | ||
Secretary, Executive Vice President, | ||
Chief Financial Officer and Principal Accounting Officer | ||
/s/ ERIC LAURITZEN | Date: February 21, 2014 | |
Eric Lauritzen | ||
Director | ||
/s/ WILLIAM D. MCCARTNEY | Date: February 21, 2014 | |
William D. McCartney | ||
Director | ||
/s/ GRAEME A. WITTS | Date: February 21, 2014 | |
Graeme A. Witts | ||
Director | ||
/s/ BERNARD PICCHI | Date: February 21, 2014 | |
Bernard Picchi | ||
Director | ||
/s/ JAMES SHEPHERD | Date: February 21, 2014 | |
James Shepherd | ||
Director | ||
/s/ KEITH PURCHASE | Date: February 21, 2014 | |
Keith Purchase | ||
Director | ||
/s/ NANCY ORR | Date: February 21, 2014 | |
Nancy Orr | ||
Director |
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. | |
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 July 23, 2013. | |
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 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 Restatement and Undertaking 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 | Extension, Amendment and Confirmation Letter dated October 4, 2012 among Zellstoff- und Papierfabrik Rosenthal GmbH, D&Z Holding GmbH, D&Z Beteiligungs GmbH, ZPR Logistik GmbH and Mercer International Inc. Incorporated by reference from Form 10-Q dated November 2, 2012. | |
10.18 | Second Amended and Restated Credit Agreement dated as of May 2, 2013 among Zellstoff Celgar Limited Partnership, as borrower, and the lenders from time to time parties thereto, as lenders, and Canadian Imperial Bank of Commerce, as agent. Incorporated by reference from Form 8-K dated May 8, 2013. | |
10.19 | Amendment Agreement, dated September 30, 2013, among Zellstoff Stendal GmbH, as Borrower, UniCredit Bank AG, as Arranger, Agent, Security Agent and Original Lender, the Lenders from time to time parties thereto, E & Z Industrie-Lösungen GmbH, Mercer International Inc. and Stendal Pulp Holding GmbH. Incorporated by reference from Form 10-Q filed on November 1, 2013. | |
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. | |
21 | List of Subsidiaries of Registrant. | |
23.1 | Consent of Independent Registered Public Accounting Firm. | |
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