2016 Geographically Segmented Pulp Sales *Excluding Germany and Italy. The distribution of our pulp sales by end customeruse are set out in the following table for the periods indicated: | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | | | | (in thousands of ADMTs) | | | (in thousands of ADMTs) | | Tissue | | | 523 | | | | 576 | | | | 602 | | | | 503 | | | | 501 | | | | 542 | | Specialty | | | 181 | | | | 214 | | | | 222 | | | | 209 | | | | 227 | | | | 205 | | Printing & Writing | | | 662 | | | | 639 | | | | 563 | | | | 663 | | | | 716 | | | | 705 | | Other | | | 74 | | | | 45 | | | | 41 | | | | 54 | | | | 19 | | | | 34 | | | | | | | | | | | | | | | | | | | | | | | | 1,440 | | | | 1,474 | | | | 1,428 | | | | 1,429 | | | | 1,463 | | | | 1,486 | | | | | | | | | | | | | | | | | | | | |
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 15 employees engaged full time in such activities.employees. 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 approximately 186190 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, 2013,2016, we had no material payment delinquencies. In 2013,2016, two customers at a numberthrough several of their individual millsoperations accounted for 10%19% and 11%10%, respectively, of our pulp sales. In 2012,2015, one customer at a numberthrough several of its individual millsoperations accounted for 11%16% of our pulp sales. In 2011, no single2014, one customer through several of its operations accounted for more than 10%13% of our pulp sales. We do not believe our pulp sales are dependent upon the activities of any single customer and the loss of any single customer would not have a material adverse effect on us. Approximately 49%, 54% and 58% of our
Our sales were to tissue and specialty paper product manufacturers for the years ended December 31, 2013, 2012were approximately 50% of our pulp sales in 2016, 2015 and 2011, respectively. Commencing in 2012 and continuing in 2013, our Celgar mill shifted sales of approximately 55,000 ADMTs per annum from a very large North American tissue producer to certain printing and writing customers in China as it could obtain higher margins on these particular sales volumes.2014. Generally tissue producer customers are not as sensitive to cyclical declines in demand caused by downturns in economic activity. The balance of our sales was to other paper product manufacturers. Transportation We transport our NBSK pulp generally by truck, rail and ocean carriers through third-party carriers. We have a small fleet of trucks in Germany that deliver some of our German mills’ pulp. Our carrier contracts are generally from one to two years. 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 Northern 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.truck and rail. 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 directly to the customer or to third party warehouses in the U.S. or directlyUnited States. In 2015, we established a logistics and reload center near Trail, British Columbia. The center provides us with additional warehouse space for our Celgar mill and greater transportation flexibility in terms of access to the customer.rail and trucking options. In each of the years ended December 31, 2013, 20122016, 2015 and 2011,2014, outbound transportation costs comprised approximately 8%, 9% and 9%, respectively, of our total consolidated cost of sales. Generally, in recent years, our transportation costs have increaseddecreased due to increasesthe positive impact of a stronger dollar, decreases in fuel costs and lowerhigher shipping capacity. As a result, weWe have also taken initiatives to target sales to the most “freight logical” customers for overseas sales.customers. Capital Expenditures In 2013, weWe have continued with ourto make capital investment programsinvestments designed to increase pulp, “green” energy and green energy production capacity,chemical generation, reduce costs and improve efficiency and environmental performance at our mills. The improvements made at our mills over the years have reduced operating costs and increased the competitive position of our facilities.
Total capital expenditures at our mills (excluding any related governmental grants) are set out in the following table for the periods indicated: | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | | | | (in thousands) | | | (in thousands of dollars) | | Rosenthal | | $ | 8,375 | | | $ | 19,851 | | | $ | 19,094 | | | $ | 15,167 | | | $ | 15,690 | | | $ | 16,624 | | Stendal | | $ | 32,524 | | | $ | 18,990 | | | $ | 11,547 | | | | 7,801 | | | | 18,490 | | | | 8,700 | | Celgar | | $ | 4,798 | | | $ | 8,309 | | | $ | 21,878 | | | | 19,558 | | | | 12,356 | | | | 9,288 | | | | | | | | | | | | | Total | | | $ | 42,526 | | | $ | 46,536 | | | $ | 34,612 | | | | | | | | | | | | |
Capital investments at the Rosenthal mill in 20132016 related primarily to a railcar acceptance system for logs and a lime kiln retrofit. In 2015, they related to a wastewater reduction project consisting of an evaporation plant upgrade and completion of the recovery upgradean automated chip storage project and, the replacement of capital, while, in 2012,2014, they related primarily to the mill’s recovery boiler upgrade, which reduced our wastewater fees. In 2011, capital expenditures related mainly to the installation ofautomated chip storage project and a new chipper and upgrades to the recovery process.tall oil project. Capital investments at the Stendal mill in 20132016 related to a wastewater reduction project consisting of an evaporation plant upgrade and 2012a project to reduce chloride levels in the process water. In 2015 and 2014, they 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. 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.evaporation plant upgrade.
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 Millour main capital project completed at the Stendal mill in 2013 require us to maintain the employment of core employees for five years after completion of the project. Currently, grants are available for up to 30% of the cost of qualified investments.project, among certain other terms. Previously, government grants were available for up to 35% of the cost of qualified investments, such as for the construction of our Stendal mill.investments. These grants at the 35% of cost level required that at least one permanent job be created for each €0.5 million ($0.70.5 million) of capital investment eligible for such grants and that such jobs be maintained for a period of five years from the completion of the capital investment project. Generally, government grants are not repayable by a recipient unless such recipient fails to complete the proposed capital investment or, if applicable, fails to create or maintain the requisite amount of jobs.jobs or comply with other applicable terms. 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, in which case the government may refrain from reclaiming previous grants. Pursuant to legislation in effect at the time, the Stendal mill recorded approximately $349.5$350.0 million of government grants. We believe that we are currently in compliance in all material respects with all of the terms and conditions governing the government grants we have received in Germany. See “Item 3 – LegalItem 3. “Legal Proceedings”. The following table sets out, foras at the periodsdates indicated, the effect of these government grants on the recorded value of such assets in our Consolidated Balance Sheets: | | | As at December 31, | | | As at December 31, | | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | 2015 | | 2014 | | | | (in thousands) | | | (in thousands) | | Property, plant and equipment, gross amount less amortization | | $ | 1,403,990 | | | $ | 1,431,355 | | | $ | 1,443,315 | | | $ | 971,462 | | | $ | 1,015,569 | | | $ | 1,188,195 | | Less: government grants less amortization | | | 365,359 | | | | 364,849 | | | | 378,348 | | | (233,186 | ) | | (253,178 | ) | | (305,045 | ) | | | | | | | | | | | | | | | | | | | | Property, plant and equipment, net (as shown on the Consolidated Balance Sheet) | | $ | 1,038,631 | | | $ | 1,066,506 | | | $ | 1,064,967 | | | $ | 738,276 | | | $ | 762,391 | | | $ | 883,150 | | | | | | | | | | | | | | | | | | | | |
The following table sets forth, as at the dates indicated, the gross amount of all government grants we have received and capitalized in our balance sheet, the associated amortization and the resulting net balance we include in our property, plant and equipment for the periods indicated:equipment: | | | As at December 31, | | | As at December 31, | | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | 2015 | | 2014 | | | | (in thousands) | | | (in thousands) | | Government grants—gross | | $ | 600,158 | | | $ | 569,039 | | | $ | 557,726 | | | Government grants – gross(1) | | | $ | 467,260 | | | $ | 475,142 | | | $ | 532,696 | | Less: Accumulated amortization | | | 234,799 | | | | 204,190 | | | | 179,378 | | | | (234,074 | ) | | (221,964 | ) | | (227,651 | ) | | | | | | | | | | | | | | | | | | | | Government grants less accumulated amortization | | $ | 365,359 | | | $ | 364,849 | | | $ | 378,348 | | | $ | 233,186 | | | $ | 253,178 | | | $ | 305,045 | | | | | | | | | | | | | | | | | | | | |
(1) | Grants were received in euros and Canadian dollars and amounts change when translated into dollars as a result of changes in currency exchange rates. |
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 2013,2016, capital expendituresinvestments at the Celgar mill included new wood harvesting equipment, a logistics and reload center and other maintenance projects. In 2015, they included the logistics and reload center and other maintenance projects whileand, in 2012 such expenditures2014, they included a new chip screening project, to recover/recycle chemicals from the mill’s effluent, referred to as the “GAP Project”. In 2011, capital expenditures at the Celgar mill related to a project to improve the Celgar mill’s fiber linelogistics and oxygen delignification process.reload center and maintenance projects. In January 2014, we commenced the implementation of a new Enterprise Resource Planning,enterprise resource planning, or “ERP”, solutionsystem to replace our existing business software applications at an estimated cost of $12.0 million. The project iswas designed to be completed in stages over the next three years. After considerable due diligence, we selected SAP, a global leaderand is expected to be substantially completed in the development of2017. The ERP solutions for medium to large sized international businesses. The ERPsystem installation will replace a suite of existing legacy systems which, while functional, will begin becoming obsolete in the near future. The ERP solution introduces state of the art end to endstate-of-the-art, end-to-end business solutions that will provide automation for most aspects of our business including finance, payroll, inventory management, sales, fiber management, supply chain, business analytics and forecasting.
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.business.
Excluding costs for projects financed through government grants, capital expenditures, including ERP expenditures, in 20142017 are expected to be approximately $40.0$48.0 million, comprised principally of:of approximately: a tall oil plant, chip receiving project, wastewater reduction project and maintenance projects$13.0 million at the Rosenthal mill aggregating approximately $16.0 million;for a project to reduce wastewater fees and other projects; wastewater reduction projects$17.0 million at the Stendal mill for a project to reduce wastewater fees and maintenance projects, aggregating approximately $8.6 million;other projects; and a chip screening project and maintenance projects$18.0 million at the Celgar mill aggregating approximately $9.5 million;for maintenance and other projects. Innovation We are well positioned to capitalize on our expertise with fiber and its processing to expand our product mix and into new markets. Accordingly, we have a number of initiatives 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: the further refinement of materials contained in black liquor, the extractive chemical and lignin containing compounds that are a result of the kraft pulping process; and the further refinement of cellulose materials that are currently the basis of NBSK pulp. We are working on some of these initiatives on our own and some with industry associations and others with joint venture partners. Currently, one of the better-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 ERP software implementation acrossindustry 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. The association and one of its member companies have constructed a pilot production facility and we have access to its product for development purposes. While there remains much work to be done, we continue to be encouraged with the entire company, aggregatingresults to date and intend to continue to expend resources to develop this technology, both individually and in joint development arrangements with third parties. We currently estimate expenditures totaling approximately $5.9 million.$1.0 million in 2017. Such research and development is still at an early stage and there has been no commercialization of any products to date. We currently estimate it may take about three 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 have also worked with suppliers to develop new customized forms of railcars in Germany designed to better handle the transportation of logs and chips to our German mills. These customized cars are larger than existing ones and are designed to reduce transportation and handling costs at our German mills. In 2016, we leased and received about 200 such railcars. We have also worked with equipment suppliers to develop innovative logging equipment to permit us to effect second pass harvesting in the fiber procurement area for the Celgar mill. Such equipment includes customized processing and chipping equipment and trailers for haulage. Environmental 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. In particular, the operation of our plants is subject to permits, authorizations and approvals and we have to comply with certain emission limits. Compliance with these requirements is monitored by local authorities and non-compliance may result in administrative orders, fines or closures of the non-compliant mill. Our total capital expenditures on environmental projects at our mills were approximately $1.9$2.9 million in 2013, as compared to2016, approximately $12.0$19.4 million in 2012 related primarily to the Rosenthal mill’s recovery boiler upgrade.2015 and approximately $6.1 million in 2014. In 2014,2017, capital expenditures for environmental projects, principally comprised of projects to reduce wastewater fees and upgrade the effluent system at our German mills, are expected to be approximately $8.0$21.0 million. We believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in material compliance with the requirements of all applicable environmental laws and regulations and our respective operating permits. Under German state environmental rules relating to effluent discharges, industrial users are required to pay wastewater fees based upon the amount of their effluent discharge. These rules also provide that an industrial user which undertakes environmental capital expenditures and lowers certain effluent discharges to prescribed levels may offset the amount of these expenditures against the wastewater fees that they would otherwise be required to pay. We estimate that the aggregate amount of wastewater fees we saved in 2013 as a result of environmentalexpect capital expenditures and initiatives to reduce allowable emissions and discharges at our Stendal mill was approximately $1.8 million. The estimated amount of accrued wastewater fees we expect to recover at our Rosenthal mill is approximately $3.0 million. Capital investment programs and other environmental initiatives at our German mills mostlywill continue to offset the wastewater fees that wereare payable for 2013 and we believe they will ensure that our operations continue in substantial compliance with prescribed standards. 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 discharges are in compliance with the standards currently mandated by the German government. Management believes that, as the Stendal mill is a state-of-the-art facility, it will be able to continue to operate in compliance with the applicable environmental requirements. TheManagement further believes that Celgar will continue to operate in substantial compliance with the requirements of all applicable environmental laws and regulations. However, on September 16, 2016, our Celgar mill operates two landfills, one ofhad a valve issue at its sewage treatment plant which is an older site thatwas promptly notified to environmental authorities and was resolved on the same day. Prior to such resolution, the mill discharged effluent into a river which was toxic to fish. After investigation, our Celgar mill received a written warning from the federal environmental authority under theFisheries Act. While we believe the issue is inresolved and completed, we can provide no assurance that a governmental authority will not take any further actions regarding the process of decommissioning. The mill is continuing work on finalizing a closure plan for such site and then reviewing such plan with the British Columbia Ministry of Environment, or “MOE”. We expect to finalize our closure plan for the older landfill in 2014. The actual closure activities shall be effected pursuant to a timetable agreed to by the mill and the MOE. The cost of closing the landfill is expected to be approximately $3.0 million.same, including monetary penalties.
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. Climate Change AsOver the past several years, changing weather patterns and climatic conditions due to natural and man-made causes have added to the unpredictability and frequency of natural disasters, such as hurricanes, earthquakes, hail storms, wildfires, snow storms and ice storms, which could also affect our operations, including variations in the cost and availability of raw materials, such as fiber. However, as there are differing scientific studies relating to the severity, extent and speed at which climate change is occurring, we cannot identify and predict all of the consequences of climate change on our business and operations.
To date, theThe effects and perceived effects of climate change and social and governmental responses have created both opportunities and negative consequences for our business.
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 residuals, being wood chips and pulp logs, as the base raw material for their production process. Wood chips are residuals 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 residuals and process them through a digester where cellulose is separated from the wood to be used in pulp production and the remaining residuals, called “black liquor”, isare used for green“green” energy production. As a result of their use of wood residuals 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“green” energy legislation, have provided business opportunities for us to enhance our generation and sales of green“green” energy to regional 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 surplus electricity annually. We are constantly exploring other initiatives to enhance our generation and sales of surplus green“green” energy and chemical by-products. Other potential opportunities that may result from climate change include: the expansion of softwood forests and increased growth rates for such forests; more intensive forestry practices and timber salvaging versus harvesting standing timber; greater demand for sustainable energy and cellulosic biomass fuels; and additional governmental incentives and/or legislative requirements to enhance biomass energy production. At this time, we cannot predict which, if any, of these potential opportunities will be realized by us or their economic effect on our business. While all of the specific consequences to our business from climate change are not predictable, the most visible adverse consequence to date is that the focus on renewable energy has created greater demand and competition for wood residuals or fiber from renewable energy producers like the pellet industry in Germany. 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. Declining energy prices, weaker economies or warm winters such as in 2016, 2015 and 2014 temper the demand for wood chips resulting from initiatives by European governments to promote the use of wood as a carbon neutral energy. Over the long term, this non-traditional demand for fiber is expected to increaseremain strong in Europe. Additionally, the growing interest and focus in British Columbia for renewable green“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 “– 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“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 continually engaged in dialogue with governmentgovernments 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 may affect our business include: a greater susceptibility of northern softwood forestforests to disease, fire and insect infestation; the disruption of transportation systems and power supply lines due to more severe storms; the loss of fresh water transportation for logs and pulp due to lower water levels; decreases in the quantity and quality of processed water for our mill operations; the loss of northern softwood boreal forests in areas in sufficient proximity to our mills to competitively acquire fiber; and lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals. Human Resources We currently employ approximately 1,4601,486 people. We have approximately 1,0411,025 employees working in our German operations, including our wood procurement, transportation and sales subsidiaries. In addition, thereCanada, we have approximately 461 employees, of which 21 are approximately 17 people employed at the office we maintain inour Vancouver, British Columbia, Canada. Celgar currentlyoffice. Rosenthal employs approximately 405439 people, in its operations, the vast majority of whichwhom are unionized. Rosenthal, which employs approximately 443 people, is bound by a collective agreements negotiated with Industriegewerkschaft Bergbau, Chemie, Energie, or “IGBCE”, a national union that represents pulp and paper workers.agreement. In July 2013, our2015, the Rosenthal mill renewedrevised its collective agreement for a two-year period until June 2015.2017. The agreement providesprovided for among other things, an initial 1.8%2.4% wage increase for employees thereunder, withand a subsequent 3% wage increase of 2.4% in May 2014.September 2016.
Stendal and its subsidiaries employemploys approximately 592 people.579 people, the majority of which are bound by a collective agreement. In 2011, Stendal entered into a seven-year collective agreement, with IGBCE effective July 2011.2011 and expiring in 2018. 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 for2012 and a further 2.5% minimum annual wage increase from 2013 to 2015. The collective agreement is scheduled2015, with no wage increases from 2016 to expirethe agreement’s expiry in 2018. Our Celgar mill settled, effective May 1, 2012,employs approximately 440 people, the majority of which are bound by a newcollective agreement. Celgar entered into a five-year collective agreement with its hourly workers to replace its expiring prior agreement.in 2012, which expires in April 2017. 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% orand 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 Celgar mill’s workforce by approximately 85 employees over a 12-month period to reduce fixed costs. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.2016, respectively.
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 operations and we would therefore expect to enter into new labor agreements with our workers when the current labor agreements expire without any significant work stoppages. Our directors and senior managers have extensive experience in the pulp and forestry industries, along with experienced managers at all of our mills. Our management has a proven track record of implementing new initiatives and capital projects in order to reduce costs throughout our operations as well as identifying and harnessing new revenue opportunities. Description of Certain Indebtedness The following summaries ofsummarizes certain material provisions of: (i) our 2019, 2022 and 2024 Senior Notes; (ii) theour Stendal LoanRevolving Credit Facility; (iii) a €17.0 million amortizing term facility at our Stendal mill in respect of Project Blue Mill, referredcredit facilities related to as the “Blue Mill Facility”; (iv) the working capital facilities and investment loan associated with our Rosenthal mill; and (v)(iv) the Celgar Working Capital Facility, as such terms are referred to below,Facility. The summaries 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. SecuritiesSEC and Exchange Commission, referred to as the “SEC”.incorporated by reference herein. 2019, 2022 and 2024 Senior Notes In November 2010,2014, we issued $300.0$250.0 million in aggregate principal amount of 9.5%7.000% Senior Notes due 2019, referred to as the “2019 Senior Notes”, and $400.0 million in aggregate principal amount of 7.750% Senior Notes due 2022, referred to as the “2022 Senior Notes”, to refinance our previously outstanding 9.50% Senior Notes due 2017 and Stendal’s two senior project finance facilities. In 2016, we repurchased and cancelled $23.0 million in aggregate principal amount of our 2019 Senior Notes and, in January 2017, we announced the redemption of all of our remaining 2019 Senior Notes, being $227.0 million in aggregate principal amount, with the net proceeds of an issuance of $225.0 million in aggregate principal amount of 6.500% senior notes due 2024, referred to as the “Senior“2024 Senior Notes” and, together with the 2019 Senior Notes and the 2022 Senior Notes, the “2019, 2022 and 2024 Senior Notes”, to principally refinance our 9.25%and cash on hand. The 2024 Senior Notes due 2013. In July 2013, wewere issued an additional $50.0 million inon February 3, 2017 and our outstanding 2019 Notes will be redeemed on March 1, 2017, subject to our deposit with the paying agent of sufficient funds to pay the redemption price, being $1,035.00 per $1,000.00 of principal amount ofredeemed, plus accrued and unpaid interest to, but not including the redemption date. The 2019 Senior Notes at a price of 104.5%. Thewere to mature on December 1, 2019 and interest on the 2019 Senior Notes bear interest at a rate of 9.5% per annum,is payable semi-annually in arrears on Decembereach June 1 and JuneDecember 1. The 2022 Senior Notes mature on December 1, 2017. The2022 and interest on the 2022 Senior Notes are our senior unsecured obligationsis payable semi-annually in arrears on each June 1 and accordingly, rank junior in rightDecember 1. Interest is payable to holders of payment to all existing and future secured indebtedness and all indebtedness and liabilitiesrecord of our subsidiaries, equal in right of payment with all of our existing and future unsecured senior indebtedness and senior in right of payment to any current or future subordinated indebtedness. Thethe 2022 Senior Notes were issued under an indenture which,on the immediately preceding May 15 and November 15 and is computed on the basis of a 360-day year consisting of twelve 30-day months. The 2024 Senior Notes mature on February 1, 2024 and interest on the 2024 Senior Notes is payable semi-annually in arrears on each February 1 and August 1. Interest is payable to holders of record of the 2024 Senior Notes on the immediately preceding January 15 and July 15 and is computed on the basis of a 360-day year consisting of twelve 30-day months. Commencing December 1, 2017, the 2022 Senior Notes will become redeemable at our option at a price equal to 105.813% of the principal amount redeemed and declining ratably on December 1 of each year thereafter to 100.000% on or after December 1, 2020. Commencing February 1, 2020, the 2024 Senior Notes will become redeemable at our option at a price equal to 103.250% of the principal amount redeemed and declining ratably on December 1 of each year thereafter to 100.000% on or after February 1, 2022. The indentures governing the 2019, 2022 and 2024 Senior Notes contain covenants limiting, 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)shareholders; purchase or redeem capital stock or subordinated indebtedness; (iv) make investments; (v) create liens and enter into sale and lease back transactions; (vi)liens; incur restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us; (vii) sell assets; (viii) consolidate or merge with or into other companies or transfer all or substantially all of our assets; and (ix) engage in transactions with affiliates. These limitationsAs of December 31, 2016, all of our subsidiaries were restricted subsidiaries. The 2019, 2022 and 2024 Senior Notes are subjectunsecured and are not guaranteed by any of our operating subsidiaries, all of which are located outside the United States. Our obligations under the 2019, 2022 and 2024 Senior Notes rank: effectively junior in right of payment to important qualificationsall of our existing and exceptions. In orderfuture secured indebtedness, to take into account the natureextent of the non-recourse “project financing” of the loan facility for our Stendal millassets securing such indebtedness, and to enhance our financing flexibility, the indenture governing our Senior Notes provides for a “Restricted Group”all indebtedness 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 are obligations of the Restricted Group. The Stendal Loan Facility and Blue Mill Facility are obligationsliabilities of our unrestricted group.subsidiaries; equal in right of payment with all of our existing and future unsecured senior indebtedness; and senior in right of payment to any of our future subordinated indebtedness.
We have purchased and cancelled an aggregate of approximately $15.6As at December 31, 2016, $227.0 million in aggregate principal amount of our2019 Senior Notes in connection with our share and debt repurchase program. As at December 31, 2013, approximately $334.4$400.0 million in aggregate principal amount of 2022 Senior Notes were outstanding. Upon completion of the redemption of the 2019 Senior Notes and as a result of the issuance of the 2024 Notes, $400.0 million in aggregate principal amount of 2022 Senior Notes and $225.0 million in aggregate principal amount of 2024 Senior Notes will be outstanding.
Stendal LoanRevolving Credit Facility In August 2002,Our Stendal entered into a senior €828.0mill’s €75.0 million project financerevolving credit facility, referred to as the “Stendal LoanRevolving Credit Facility”., with a syndicate of four banks as original lenders matures in October 2019. The Stendal Loan Facility was comprised of several tranches which covered, among other things, project construction and development costs, financing and start-up costs and working capital, as well as the financingprincipal terms of the debt service reserve account, or “DSRA”. Stendal Revolving Credit Facility are as follows:
The DSRA is an account maintained to hold and, if needed, pay up to one year’s principal and interest duetotal availability under the facility as partial security foris €75.0 million. The facility matures on the lenders. Other than the revolving working capital tranche, no further advances are currently available under the Stendal Loan Facility. Pursuantearlier of October 31, 2019 and one month prior to the Stendal Loan Facility, interest accrues at variable rates between Euribor plus 0.90% and Euribor plus 1.80% per year. stated maturity of the 2019 Senior Notes.
The facility allows Stendalmay be utilized in the form of cash advances or advances by letters of credit or bank guarantees of up to manage its risk exposure to€5.0 million. Borrowings accrue 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%Euribor plus an applicable margin, until final payment in October 2017.a 3.50% margin. Fees of 2.25% per annum are payable on issued but undrawn letters of credit and bank guarantees. There is a commitment fee of 1.10% per annum payable on unused availability. The tranches are generally repayable in installments and the Stendal Loan Facility matures in September 2017. The tranches under the Stendal Loan Facility are severally guaranteed by German federal and state governments in respect of an aggregate of 80% of the principal amount of these tranches. Under the guarantees, the German federal and state governments that provide the guarantees are responsible for the performance of our payment obligations for the guaranteed amounts. Such governmental guarantees permit the Stendal Loan Facility to benefit from lower interest costs and other credit terms than would otherwise be unavailable. The Stendal Loan Facilityfacility is secured by substantially alla first ranking registered security interest on the inventories and receivables of the assets of Stendal.
In connection with the All shareholder loans made by Mercer Inc. to 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’ contributionare subordinated to the Stendal mill. Under the terms of the Undertaking, we have agreed, for as long as Stendal has any liabilityindebtedness under the facility.
The facility contains financial maintenance covenants which are tested semi-annually on June 30 and December 31, which require Stendal Loan Facility, to retain control overmaintain (i) a leverage ratio of “net debt” (excluding shareholder loans) to EBITDA of not greater than 2.50:1.00, (ii) an interest coverage ratio (EBITDA to interest expense) of not less than 1.20:1.00 and (iii) a current ratio (current assets to current liabilities) of at least 51% of the voting shares of Stendal.1.10:1.00. In February 2009, we completed an agreement with Stendal’s lending syndicate to amend the
Stendal Loan Facility, referred to as the “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 ofpermitted under the facility in September 2017. Until the Deferred Amount is repaid in full, Stendal may notto make (i) distributions in the form offor regularly scheduled interest and capital payments on its 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 includedloans from Mercer Inc. in the Cash Sweep is an amount of €15.0up to $23.0 million which Stendalper year, provided it maintains pro forma liquidity (availability under the facility plus unencumbered cash) of at least €20.0 million and no event of default is permittedoccurring and (ii) other distributions to retain for working capital purposes. The DSRA balance asMercer Inc. semi-annually, provided it maintains pro forma liquidity of at December 31, 2013 was approximately €33.0 million. The 2009 Amendment implementedleast €20.0 million, no event of default is occurring and it has (A) a permitted leverage ratio (excluding shareholder loans) of total senior debt to EBITDA, or “Senior Debt/EBITDA Cover Ratio”, to be effective from December 31, 2009not greater than 2.50:1.00, (B) a trailing six-month interest coverage ratio of at least 1.40:1.00 and to decline over time from 13.0x on its effective date to 4.5x on June 30, 2017. This(C) a current ratio is determined semi-annually based on the Stendal mill’s trailing 12-month EBITDA and will be 5.5x asof 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 revised the Stendal Loan Facility’s annual debt service cover ratio, or “Annual Debt Ratio”.least 1.25:1.00.
The 2009 Amendment includes the following as events of default:
| • | | if scheduled debt servicePursuant to the facility, Stendal has provided €4.1 million as at December 31, 2016 as partial cash collateral for two consecutive half-year periods is partially or wholly financed by drawings fromvariable-to-fixed interest rate swaps, referred to as the DSRA“Stendal Interest Rate Swap Contract”, and as a resultsuch contract sharespari passu in the DSRA is less than 33 1⁄3% Fully Funded;security for the Stendal Revolving Credit Facility. For further information related to the Stendal Interest Rate Swap Contract, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” and the notes to our consolidated financials included herein. |
if the DSRA is fully drawn and Stendal exercises its current six-month principal payment deferral right in respect of the next repayment date;
failure to meetThe facility contains other customary restrictive covenants which, among other things, govern the Senior Debt/EBITDA Cover Ratio or Annual Debt Ratio; or if, from December 31, 2011 until the date the Stendal Loan Facility is fully repaid, Mercer Inc. raises proceeds from an equity financing (subject to certain exceptions) and the DSRA is not Fully Funded and if we fail to contribute the lesserability of 50% of the net proceeds raised or €10.0 million to the capital of Stendal.
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 Senior Notes.
In January 2012, in order to permit Stendal to incur liens, sell assets, incur indebtedness, make investments, enter into the Blue Mill Facility, the Stendal Loan Facility was amended. In particular, the funds in the DSRA were permitted to be used to bridge any deficiency in funding for Project Blue Mill, payments to Stendal’s capital reserves are no longer an equity cure measure under the Stendal Loan Facilityjoint ventures, change its business and the Stendal Loan Facility now has a cross-default provision with the Blue Mill Facility.
On September 30, 2013, we completed an amendment agreement, referred to as the “2013 Amendment”, with Stendal’s lending syndicate, referred to as the “Lenders”, to amend the Stendal Loan Facility and the Blue Mill Facility, together, the “Stendal Facilities”.issue, repurchase or redeem shares. The 2013 Amendment modifies the Stendal Facilities to provide the Stendal mill greater financial flexibility by, among other things:
waiving compliance with the Annual Debt Ratio and the Senior Debt/EBITDA Cover Ratio, together, the “Ratios”, in 2013;
amending the Ratios so that the financial covenants now deduct from senior debt cash in the DSRA and cash above a stipulated threshold;
revising the Annual Debt Ratio requirement to be at least 1.1x until maturity and providing that a failure to satisfy such covenant to maintain the Annual Debt Ratio under the Stendal Facilities would only be an eventfacility also contains customary events of default when amounts in the DSRA plus certain cash reserves are below a specified threshold; anddefault.
reducing the amount required to cure financial covenant defaults under the Stendal Facilities.
Since completion of the Stendal mill in September 2004, Stendal has repaid €255.0 million of the Stendal Loan Facility. As at December 31, 2013, the principal amount outstanding under the Stendal Loan Facility was €412.9 million ($568.9 million).
Blue Mill Facility
In January 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 (including cure provisions). The Blue Mill Facility and 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 Mercer 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 December 31, 2013, €15.4 million ($21.2 million)2016, the total amount of funds available under the Stendal Revolving Credit Facility was outstanding and was accruing interest at a rate of approximately 3.84%.€75.0 million. Rosenthal LoanCredit Facilities Our Rosenthal mill has the following credit facilities: a €25.0 million revolving working capital facility that matureswhich we extended in 2016 to mature in October 2016,2019, referred to as the “Rosenthal Loan Facility”. The Rosenthal Loan Facility consists of a revolving credit facility which may be utilized by way of cash advances or advances by way of letter of credit or bank guarantees. The interest payable on cash advances is Euribor plus 3.5%2.95%, plus certain other costs incurred by the lenders in connection with the facility. Each cash advance is to be repaid on the last day of the respective interest period and in full on the termination date and each advance by way of a letter of credit or bank guarantee shall be repaid on the applicable expiry date of such letter of credit or bank guarantee. An interest period for cash advances shall be one, three or six months or any other period as Rosenthal and the lenders may determine. There is also a 1.1%0.90% per annum commitment fee on the unused and uncancelled amount of the revolving facility which is payable semi-annually in arrears. This facility is secured by a first ranking security interest on the inventories receivables and accountsreceivables of Rosenthal. It also provides Rosenthal with a hedging facility relating to the hedging of the interest, currency and pulp prices as they affect Rosenthal pursuant to a strategy agreed to by Rosenthal and the lender from time to time. As at December 31, 2013, €0.62016, €3.1 million was supporting bank guarantees, leaving approximately €24.4€21.9 million available under this facility; and a €4.4 million investment loan, referred to as the “Rosenthal Investment Loan”, with a lender, relating to the purchase of a wash press in 2009 at our Rosenthal mill. The four-year amortizing investment loan bears interest at the rate of Euribor plus 2.75% and matures in February 2014. Borrowings under this agreement are secured by the wash press equipment. As at December 31, 2013, the principal amount outstanding under the Rosenthal Investment Loan was €0.5 million ($0.7 million); and
a €5.0 million revolving credit facility for our Rosenthal mill which bears interest at the rate of the three-month Euribor plus 3.5%2.5%. Borrowings under this agreement are secured by certain land at the Rosenthal mill. The facility matures in December 2015.2018. As at December 31, 2013, €1.12016, €3.2 million was supporting bank guarantees, leaving approximately €3.9 million available under this facility.guarantees. As at December 31, 2013,2016, the total amount of funds available under the working capitalRosenthal credit facilities associated with the Rosenthal mill was €28.3€23.7 million. Celgar Working Capital Facility On May 2, 2013, ourOur Celgar mill entered into a Second Amended and Restated Credit Agreement with the lenders party thereto relating to itsmill’s C$40.0 million revolving working capital credit facility with a Canadian bank, referred to as the “Celgar Working Capital Facility”.
The Celgar Working Capital Facility, matures onin May 2, 2016. Such2019. The facility is available by way of: (i) Canadian and U.S. denominated advances, which bear interest at a designated prime rate plus 0.25% for Canadian advances and at a designated base rate plus 0.25% per annum, for U.S. advances; (ii) banker’s acceptance equivalent loans, which bear interest at the applicable Canadian dollar bankers’banker’s acceptance rate plus 1.75%1.50% per annum; and/orannum and (iii) dollar LIBOR advances, which bear interest at the applicable LIBOR plus 1.75%1.50% per annum. The Celgar Working Capital Facility also incorporatesfacility includes a C$3.0 million lettersub-limit for letters of credit sub line.credit. Celgar is also required to pay a 0.35%0.25% per annum standby fee monthly in arrears on any unutilized portionunused availability under the facility and 1.25% per annum on issued but undrawn letters of the revolving facility. Availabilitycredit. The availability of drawdowns under the facility is subject to a borrowing base limit that is based uponon the Celgar mill’s eligible accounts receivable and inventory levels from time to time. The Celgar Working Capital Facility is secured by, among other things, a first fixedpriority charge on the current assetsinventories and receivables of Celgar. The facility is guaranteed by Mercer Inc. and all material subsidiaries of Celgar. The facility includes a springing financial covenant, which is measured when excess availability under the facility is less than C$5.0 million and which requires Celgar to comply with a 1.10:1.00 fixed charge coverage ratio. The facility also contains restrictive covenants which, among other things, restrict the ability of Celgar to declare and pay dividends, incur indebtedness, incur liens and make payments on subordinated debt. The facility contains customary events of default.
As at December 31, 2013, C$33.3 million2016, the total amount of funds were available under the Celgar Working Capital Facility.Facility was C$38.3 million. Internet Availability and Additional Information We make available free of charge on or through our website at www.mercerint.com annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 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 at 1-800-SEC-0330. The SEC maintains an internet site at www.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. ITEM 1A. RISK FACTORS The statements in this “Risk Factors” section describe material risks to our business and should be considered carefully. You should review carefully the risk factors listed below, as well as those factors listed in other documents we file with the SEC. In addition, these statements constitute our cautionary statements under thePrivate Securities Litigation Reform Act of 1995.1995. Our disclosure and analysis in this annual report on Form 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: theour business is highly cyclical nature of our business;cyclical; our level of indebtedness could negatively impact our financial condition, results of operations and liquidity;
a weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources; our level of indebtedness could negatively impact our financial condition, results of operations and liquidity; cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business; we operateface intense competition in highly competitiveour markets; we are exposed to currency exchange rate and interest rate fluctuations;
| �� | | we are exposed to currency exchange 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 haveincur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental liabilities at our facilities;laws and regulations; our business is subject to risks associated with climate change and social and government responses thereto; our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements; future acquisitions may result in additional risks and uncertainties in our business; changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities; we rely on government grants and participate in German statutory energy programs; we are subject to risks related to our employees; we are dependent on key personnel; we may experience material disruptions to our production (including as a result of, among other things, planned and unplanned maintenance downtime); 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 may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters; our insurance coverage may not be adequate; we rely on third parties for transportation services; 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; we periodically use derivatives to manage certain risks which has caused significant fluctuations in our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such requirements;operating results; future acquisitions may result in additional risks and uncertainties in our business;
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 pricefailures or security breaches of our securities;information technology systems could disrupt our operations and negatively impact our business;
the actual benefits of the Celgar workforce reduction may differ from those currently expected;
we are subject to risks related to our employees;
we rely on German federal and state government grants and guarantees and participate in German and European statutory energy programs;
we are dependent on key personnel;
we may experience material disruptions to our production (including as a result of, among other things, planned and unplanned maintenance shutdowns);
if our long-lived assets become impaired, we may be required to record non-cash impairment that could have a material impact 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;
our insurance coverage may not be adequate;
we rely on third parties for transportation services;
the price of our common stock may be volatile; and a small number of our stockholdersshareholders could significantly influence our business.business; our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations; and we are exposed to interest rate fluctuations. 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 on Form 10-K, including in the description of business in “ItemItem 1. Business”“Business” and “ItemItem 7. Management’s“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 referred to as the “Securities Act”, and Section 21E of theSecurities Exchange Act of 1934, as amended, referred to as the “Exchange Act”.amended. 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 are characterized by periods of supply and demand imbalance, which in turn affectscan materially affect 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. Pulp is a commodity that is generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand. Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their NBSK pulp production on the market, if market conditions, prices and trends warrant such actions. During the course of 2014, the supply ofCurrently, there have been publicly announced significant increases to expand chemical pulp capacity worldwide. Producers have announced projects to increase hardwood bleached kraft pulp production is projected to increasecapacity by approximately 2.1an aggregate of about 3.2 million ADMTs in 2017 and 2018, primarily fromin South America.America and Asia. Further capacity increases of about 0.7 million ADMTs have been announced for 2019. This increase in bleached hardwood chemical productionkraft pulp is in large part,largely targeted at the growing demand for pulp by tissue makers,in developing markets, particularly in China.China, by producers of tissues, specialty papers and packaging. If such additional bleached hardwood kraft pulp supply is not absorbed by such demand growth, and, as a result of generally lower prices for bleached hardwood bleachedkraft pulp, this supply increase could put downward pressure on NBSK pulp prices.
Producers have also announced increases to NBSK pulp capacity in 2017 and 2018 of an estimated 1.9 million ADMTs, along with another 0.6 million ADMTs of southern softwood and fluff pulp capacity. Further net capacity increases of NBSK and southern and fluff pulp capacity of about 0.3 million ADMTs have been announced for 2019. At this time, we cannot predict how much of the publicly announced capacity will come on line and when. If such new capacity, particularly for NBSK pulp, is not absorbed in the market or offset by curtailments or closures of older, high-cost NBSK pulp mills, the increase could put downward pressure on NBSK pulp prices and materially adversely affect our results of operations, margin, and profitability. Demand for pulp has historically been determined primarily by general global macroeconomicmacro-economic conditions and has been closely tied to overall business activity. NBSK pulp prices have been and are likely to continue to be volatile and can fluctuate widely over time. Between 20002007 and 2013,2016, European list prices for NBSK pulp have fluctuated between a low of approximately $447$575 per ADMT in 20022009 to a high of $1,030 per ADMT in 2011. In the first half of 2011, pulp prices were near record levels but declined sharply in the latter part of the year and into 2012, primarily due to economic uncertainty in Europe and credit tightening in China. Economic uncertainty in Europe and China, respectively, impacted both demand and prices. At the end of 2012, list prices were approximately $810 in Europe, $870 in North America and $655 in China. In 2013, list prices were on average approximately 6% higher than 2012. At the end of 2013, list prices were approximately $905 in Europe, $990 in North America and $750 in China.
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 customers and sales. Our sales price realizations aremay also be affected by NBSK price movements between the order and shipment dates. 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. A weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources. As demand for pulp has principally historically been determined by general global macro-economic activities, demand and prices for our product have historically decreased substantially during economic slowdowns. A significant economic downturn may affect our sales and profitability. Further, our suppliers and customers may also be adversely affected by an economic downturn. Additionally, restricted credit and capital availability restrains our customers’ ability or willingness to purchase our products resulting in lower revenues. 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. Our level of indebtedness could negatively impact our financial condition, results of operations and liquidity. As of December 31, 2013,2016, we had approximately $979.4an aggregate principal amount of $627.0 million of indebtedness outstanding, of which $590.1 million relates to indebtedness of our Stendal mill pursuant to the Stendal Facilities.outstanding. We may also incur additional indebtedness in the future. Our high debt levels may have important consequences for us, including, but not limited to the following: our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favorable to us or at all; a significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes; increasing our vulnerability to current and future adverse economic and industry conditions; a substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations; our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general; causing us to offer debt or equity securities on terms that may not be favorable to us or our shareholders; limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; and our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness. The indenture governingindentures that govern our 2019, 2022 and 2024 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 such covenants 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 in significant part on the extent to which we can successfully implement successfully our business strategy. We cannot assure you that we will be able to implement our strategy fully or that the anticipated results of our strategy will be realized. Over the next several years, we will require financing to refinance maturing debt obligations (unless extended), and such refinancing may not be available on favorable terms or at all. 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 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. 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.
Cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business. Our main raw material is fiber in the form of wood chips and pulp logs. Suchlogs and represented approximately 60% of our cash production costs in 2016. Fiber is a commodity and both prices and supply are cyclical. Fiber pricing is subject to regional market influences and our costs of fiber is cyclicalmay increase in termsa region as a result of both price and supply.local market shifts. 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 higherGovernmental regulations related to the environment, forest stewardship and “green” or renewable energy prices and a focus on, andcan also affect the supply of fiber. In Germany, governmental initiatives related to “green” orincrease the supply of renewable energy have led to an increase inmore 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. Wood chip supply in Germany was stable during the course of 2015 and 2016 due to stable sawmill production and lower demand from pellet producers and board manufacturers; however, there is no assurance that wood chip supply will continue to be stable or that supply will not be reduced or that fiber costs will not increase in the future. 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. A recovery in U.S. housing starts, which commenced in the latter part of 2012 and has continued through 2016, resulted in increased sawmill activity. This increased the supply of wood chips for the Celgar mill and reduced its need for pulp logs, which are generally a higher cost for the mill than wood chips. Sawmill activity was stable in Canada during 2015 and 2016; however, there is no assurance that sawmill activity will continue to remain stable or that fiber prices will not increase in the future. The 2006 Softwood Lumber Agreement which governed softwood lumber exports from Canada to the United States expired in 2015 and a one-year post-expiration period during which the United States agreed not to impose trade sanctions expired in October 2016. In December 2016, the U.S. Department of Commerce initiated investigations, which could result in countervailing and anti-dumping duties on Canadian softwood lumber exports to the United States commencing in the second and third quarters of 2017, respectively. Canada may appeal any such duties to the World Trade Organization. It is uncertain when or if the United States and Canada may settle a new agreement and what terms or restrictions it may contain. Any duties or other restrictions imposed on Canadian softwood lumber exports by the United States could negatively impact Canadian sawmill production in our Celgar mill’s supply area and result in reduced availability and increased costs for wood chips for the mill. While we believe this may be partially offset by increased wood chip supply from U.S. sawmills and pulp log availability, we cannot currently predict the overall effect on our Celgar mill’s overall fiber costs. Availability of fiber may be further limited by adverse responses to and prevention of wildfires, weather, insect infestation, disease, ice storms, wind storms, flooding and other natural causes. In addition, the quantity, quality and price of fiber we receive could be affected by man-made causes such as those resulting from industrial disputes, material curtailments or shut-down of operations by suppliers, government orders and legislation (including new taxes or tariffs). Any or a combination of these can affect fiber prices in a region. The cyclical nature of pricing for these raw materialsfiber 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 and we currently have few long-term fiber contracts at our German operations. Raw materials areFiber is available from a number of suppliers and we have not historically experienced material supply interruptions or substantial sustained price increases. However, our requirements have increased and may continue to do so as we expand capacity through capital projects or other efficiency measures at our mills. As a result, we may not be able to purchase sufficient quantities of these raw materials to meet our production requirements at prices acceptable to us during times of tight supply. In addition, the quantity, quality and price of fiber we receive could be affected as a result of industrial disputes, material curtailments or shut-down of operations by suppliers, government orders and legislation (including new taxes or tariffs), weather conditions, acts of God and other events beyond our control. An insufficient supply of fiber or reduction in the quality of fiber we receive would materially adversely affect our business, financial condition, results of operations and cash flow. In addition to the supply of wood fiber, we are, to a lesser extent, dependent on the supply of certain chemicals and other inputs used in our production facilities. Any disruption in the supply of these chemicals or other inputs could affect our ability to meet customer demand in a timely manner and could harm our reputation. Any material increase in the cost of these chemicals or other inputs could have a material adverse effect on our business, results of operations, financial condition and cash flows. We operateface intense competition in highly competitiveour markets. We sell our pulp globally, with a large percentage sold in Europe, Asia and North America and Asia.America. 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 respectability to these productsmaintain satisfactory margins depends, in large 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. We have manufacturing operations in Germany and Canada. Most of ourthe operating costs and expenses other than those of the Celgar mill,our German mills are incurred in Euros whileeuros and those of our Celgar mill in Canadian dollars. However, the majority of our sales are in products quoted in U.S. dollars. 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 U.S. dollars. As a result, our expensescosts generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the U.S. dollar relative to the Euroeuro and to the Canadian dollar. Such shiftsdeclines in currenciesthe dollar relative to the Euroeuro 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 revolving working capital and investment loan facilities for our Celgar and Rosenthal mills are at “floating” rates. AsFurther, while a result, increases in interest rates will increasestrengthening dollar generally lowers our costs and expenses, it increases the cost of borrowingNBSK pulp to our customers and reducegenerally puts downward pressure on pulp prices and reduces our operating margins. energy and chemical sales revenues as they are sold in euros and Canadian dollars.Although we report in dollars, we hold certain assets and liabilities, including our mills, in euros and Canadian dollars. We use derivatives to manage certain risk which has caused significant fluctuations in our operating results. In 2002, Stendal enteredtranslate foreign denominated assets and liabilities into variable-to-fixed interest rate swaps to fix interest payments under the Stendal Loan Facility, which for several years prevented Stendal from benefiting from the general decline in interest rates that ensued. Because we effectively fixeddollars at the rate of exchange on our Stendal Loan Facility, the value of our derivative position moves inversely to interestbalance sheet date. Equity accounts are translated using historical exchange rates.
We record unrealized Unrealized gains or losses onfrom these translations are recorded in our derivative instruments when theyother comprehensive income (loss) and do not affect our net earnings, operating income or Operating EBITDA.
Certain intercompany dollar advances between Mercer Inc. and its foreign subsidiaries are marked to marketheld in euros and Canadian dollars. When such advances are translated by the subsidiaries into dollars at the end of each reporting period, and realizedthe gains or losses on them when theythereon are settled. These unrealized and realized gains and losses can materially impact our operating results for any reporting period. 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. The purpose of our derivative activity may also be considered speculativereflected 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.net earnings.
We are subject to extensive environmental regulation and we could haveincur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental liabilities at our facilities.laws and regulations. Our operations are subject to numerous environmental laws and regulations as well as permits, guidelines and policies.policies relating to the protection of the environment. These laws, regulations, permits, guidelines and policies govern, among other things: unlawful discharges to land, air, water and sewers; waste collection, storage, transportation and disposal; dangerous goods and hazardous materials and the collection, storage, transportation and disposal of such substances; the clean-up of unlawful discharges; employee health and safety. In addition, as a result of our operations, we may be subject to remediation, clean-up or other administrative orders or amendments to our operating permits, and we may be involved from time to time in administrative and judicial proceedings or inquiries. Future orders, proceedings or inquiries could have a material adverse effect on our business, financial condition and results of operations. Environmental laws and land use laws and regulations are constantly changing. New regulations or the increased enforcement of existing laws could have a material adverse effect on our business and financial condition. In addition, compliance with regulatory requirements is expensive, at times requiring the replacement, enhancement or modification of equipment, facilities or operations. There can be no assurance that we will be able to maintain our profitability by offsetting any increased costs of complying with future regulatory requirements. We are subject to liability for environmental damage at the facilities that we own or operate, including damage to neighboring landowners, residents or employees, particularly as a result of the contamination of soil, groundwater or surface water and especially drinking water. The costs of such liabilities can be substantial. Our potential liability may include damages resulting from conditions existing before we purchased or operated these facilities. We may also be subject to liability for any offsite environmental contamination caused by pollutants or hazardous substances that we or our predecessors arranged to transport, treat or dispose of at other locations. In addition, we may be held legally responsible for liabilities as a successor owner of businesses that we acquire or have acquired. Except for Stendal, our facilities have been operating for decades and we have not done invasive testing to determine whether or to what extent any such environmental contamination exists. As a result, these businesses may have liabilities for conditions that we discover or that become apparent, including liabilities arising from non-compliance with environmental laws by prior owners. Because of the limited availability of insurance coverage for environmental liability, any substantial liability for environmental damage could materially adversely affect our results of operations and financial condition. We have incurred, and we expect to continue to incur, significant capital, operating and other expenditures as a result of complying with applicable environmental laws and regulations. EnactmentFurther, enactment of new environmental laws or regulations, or changes in existing laws or regulations or the interpretation of these laws and 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.
Our business is subject to risks associated with climate change and social and government responses thereto. Currently, thereOur operations and those of our suppliers are subject to climate change variations which can impact the productivity of forests, the abundance of species, harvest levels and lumber. Further, over the last few years, changing weather patterns and climate conditions due to natural and man-made causes have added to the frequency and unpredictability of natural disasters like earthquakes, storms, wildfires and snow and ice storms. One or a combination of these factors could adversely affect our fiber supply which is our largest cash production cost. 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 potential and/or perceived effects ofFurther, governmental initiatives in response to climate change and social and government responses to italso have created both opportunities, such as enhanced sales of surplus “green” energy, and risks for our business.an impact on operations.
In Germany, government and social focus on and demand for “carbon neutral” or “green” energy has 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“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 residuals and/or governmental initiatives may materially increase the competition and prices for wood residuals over time. This could increase our fiber costs and/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 curtail and/or shut down production. This could have a material adverse effect on operations, financial results and financial position. Other potential risks to our business from climate change include: a greater susceptibility of northern softwood forestforests to disease, fire and insect infestation, which could diminish fiber availability; the disruption of transportation systems and power supply lines due to more severe storms; the loss of fresh water transportation for logs and pulp due to lower water levels; decreases in the quantity and quality of processed water for our mill operations; the loss of northern softwood boreal forests in areas in sufficient proximity to our mills to competitively acquire fiber; and lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals. The occurrence of someany or alla combination of these events could have a material adverse effect on our operations and/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:
costs of implementation that materially exceed our expectation;
delays in the go-live of one or more of the stages of the project, resulting in additional costs or time for completion;
errors in implementation resulting in errors in the commencement or reporting of business transactions;
failure in the deliverables of our key partners, suppliers and implementation advisors, resulting in an inferior product, reduced business efficacy and the project not providing expected benefits;
deficiencies in the training of employees in the use of the new solution, resulting in errors in the recording of data or transactions, leading to delays in input deliveries and production impairment;
a control failure during or post implementation, which may result in a material weakness in our internal controls over financial reporting; and
other implementation issues leading to delays and impacts on our business.
Our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for all of oursuch 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 directorswe 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 andor 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.markets. 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: problems with the effective integration of operations; inability to maintain key pre-acquisition business relationships; increased operating costs; exposure to substantial unanticipated liabilities; and difficulties in realizing projected efficiencies, synergies and cost savings. 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.securities, including the 2019, 2022 and 2024 Senior Notes. The actual benefitsWe rely on government grants and participate in German statutory energy programs.
We currently benefit from a subsidized capital expenditure program as a result of German federal and state government grants. Should either the German federal or state governments be prohibited from honoring legislative grants, 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 received emission allowances under the EU ETS. Since our German 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 and, as a result, from time to time, we purchase emission allowances in order to meet statutory requirements. Additionally, such emission allowances are subject to statutory amendment or change in the future. In 2014, in response to an investigation by the European Commission into whether portions of the Celgar mill workforce reduction may differRenewable Energy Act constituted unpermitted state aid, the German government amended the Renewable Energy Act. After such amendment, our German mills continued to sell “green” energy into the market at stipulated prices or “tariffs” and were exempted, as “existing installations”, from thosecertain surcharges on the consumption of energy that they generate, or “auto-generation”. The German government further amended the Renewable Energy Act effective January 1, 2017, so that funding for renewable energy is to be allocated through an auction system, primarily to create a competitive bidding process for new installations of wind, solar and biomass energy. However, the amendments provide that existing pulp mills, including our German mills, are ineligible for such auction process and instead will have their tariffs renewed upon expiry of their initial 20-year terms for a further 10-year period, based upon the price received in the last year prior to renewal regressing at a rate of 8% per annum. Our Rosenthal mill’s initial 20-year tariff expires on December 31, 2019 and our Stendal mill’s initial 20-year tariff expires on December 31, 2024. Such 10-year extensions for such mills have been notified by the German government to the European Commission for review for compliance with applicable state aid rules. While we currently expected.expect they will become effective, we can provide no assurance that they will be permitted under EU rules. As a result, we cannot currently predict the effect of promulgated amendments to the Renewable Energy Act on our German mills’ sale or consumption of energy. In July 2013, we commenced implementing a workforce reduction atOur costs of energy for our operations in Germany could increase in the Celgar mill to, among other things, reduce the mill’s fixed costs and improve its competitiveness. We currently estimateevent 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 initiativeauto-generation surcharge exemption is subject to various risks, which could resultremoved or reduced in the actual benefitsfuture. Additionally, if the stipulated tariffs for energy sold by our German mills are reduced in the future, our energy sales in Germany may not be as profitable. Any 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’sforegoing situations or any combination of them could have a material adverse effect on our results of 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 mills. Although we have not experienced any material 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.agreements, including our collective agreement with hourly workers at the Celgar mill which expires in April 2017. 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. Additionally, changing demographics may make it more difficult for us to recruit skilled employees in the future. Accordingly, we could experience a significant disruption of our operations or higher on-goingongoing labor costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, whenever we seek to reduce workforce at any of our mills, the affected mill’s labor force could seek to hinder or delay such actions, we could incur material severance or other costs, and our operations could be disrupted. 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 ETS. Since our German 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, such emission 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, among other things, affect our cost of energy and the tariffs 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: reducing operating costs; identifying capital projects which provide a high rate of return; and prioritizing expenditures and maintaining employee relations. The loss of one or more of our officers could make us less competitive in these areas, which could materially adversely affect our business, financial condition, results of operations and cash flows. We do not maintain any key person life insurance for any of our executive or senior mill operating officers. We may experience material disruptions to our production. A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our pulp and energy sales and/or negatively impact our results of operations. Any of our mills could cease operations unexpectedly due to a number of events, including: unscheduled maintenance outages; prolonged power failures; employee errors or failures; design error or employee or contractor error; chemical spill or release; disruptions in the transportation infrastructure, including roads, bridges, railway tracks, tunnels, canals and ports; fires, floods, earthquakes or other natural catastrophes; prolonged supply disruption of major inputs; capital projects that require temporary cost increases or curtailment of production; and other operational problems. Any such downtime or facility damage could prevent us from meeting customer demand for our products and/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. Further, if our transportation providers fail to deliver our pulp in a timely manner, it could negatively impact our customer relationships and we may be unable to sell it at full value. If our transportation providers fail to deliver our raw materials in a timely fashion, we may be unable to manufacture pulp in response to customer orders.orders or sell our pulp at full value. Also, if any of our transportation providers were to cease operations, we may be unable to replace them at a reasonable cost. The occurrence of any of the foregoing events could materially adversely affect our results of operations. 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 was designed to be completed in stages and is expected to be substantially completed in 2017. 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: costs of implementation that materially exceed our expectation; delays in the go-live of one or more of the stages of the project, resulting in additional costs or time for completion; errors in implementation resulting in errors in the commencement or reporting of business transactions; failure in the deliverables of our key partners, suppliers and implementation advisors, resulting in an inferior product, reduced business efficacy and the project not providing expected benefits; deficiencies in the training of employees in the use of the new solution, resulting in errors in the recording of data or transactions, leading to delays in input deliveries and production impairment; a control failure during or post implementation, which may result in a material weakness in our internal controls over financial reporting; and other implementation issues leading to delays and impacts on our business. We periodically use derivatives to manage certain risks which has caused significant fluctuations in our operating results. In 2002, Stendal entered into the Stendal Interest Rate Swap Contract to fix interest payments under its indebtedness until 2017, which prevented Stendal from benefiting from the general decline in interest rates that ensued. Because we effectively fixed the rate on Stendal’s indebtedness under such contract, the value of our derivative position moves inversely to interest rates. The Stendal Interest Rate Swap Contract remains in place after we refinanced Stendal’s indebtedness in 2014. We also periodically use other derivatives related to currency exchange rates, pulp prices and energy prices. 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. If any of the variety of instruments and strategies we utilize is not effective, we may incur losses which may have a material adverse effect on our business, financial condition, results of operations and cash flow. 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. Failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business. We use information technologies to securely manage our operations and various business functions. We rely on various technologies to process, store and report on our business and to communicate electronically between our facilities, personnel, customers and suppliers. We also use information technologies to process financial information and results of operations for internal reporting purposes and to comply with regulatory, legal and tax requirements. Despite our security design and controls, and those of our third party providers, our information technology systems may be vulnerable to a variety of interruptions, including during the process of upgrading or replacing software, databases or components thereof, natural disasters, terrorist attacks, telecommunications failures, computer viruses, cyber-attacks, hackers, unauthorized access attempts and other security issues or may be breached due to employee error, malfeasance or other disruptions. Any such interruption or breach could result in operational disruptions or the misappropriation of sensitive data that could subject us to civil and criminal penalties, litigation or have a negative impact on our reputation. There can be no assurance that such disruptions or misappropriations and the resulting repercussions will not negatively impact our cash flows and materially affect our results of operations or financial condition. 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: actual or anticipated fluctuations in our operating results or our competitors’ operating results; announcements by us or our competitors of new products, capacity changes, significant contracts, acquisitions or strategic investments; our growth rate and our competitors’ growth rates; the financial market and general economic conditions; changes in stock market analyst recommendations regarding us, our competitors or the forest products industry generally or lack of analyst coverage of our common stock; sales of common stock by our executive officers, directors and significant stockholders; andshareholders; changes in accounting principles.principles; and changes in laws and regulations. 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 stockholdersshareholders could significantly influence our business. AsThere are a few significant shareholders of December 31, 2013, we believe that our top three stockholders control approximately 57%common stock who own a substantial percentage of the outstanding shares of our common stock. These few significant stockholders,shareholders, either individually or acting together, may be able to exercise significant influence over matters requiring stockholdershareholder 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 stockholdersshareholders 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 possibility that one or more of these significant shareholders may sell all or a large portion of their common stock in a short period of time could adversely affect the trading price of our common stock. Also, the interests of these few stockholdersshareholders may not be in the best interests of all stockholders.shareholders. Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations. As a result of our international sales and operations, we are subject to trade and economic sanctions and other restrictions imposed by the United States, Canada and other governments or organizations, including prohibitions in the United States against foreign competitors’ (including our operating subsidiaries) receipt of certain unlawful foreign governmental benefits. We are also subject to the U.S.Foreign Corrupt Practices Act, the CanadianCorruption of Foreign Public Officials Act and other anti-bribery laws that generally bar bribes or unreasonable gifts to foreign governments or officials. Changes in trade sanctions laws could restrict our business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in modifications to compliance programs. Violations of these laws or regulations could result in sanctions including fines, loss of authorizations needed to conduct our international business, the imposition of tariffs or duties, and other penalties, which could adversely impact our business, operating results and financial condition. We are exposed to interest rate fluctuations. Interest on borrowings under our revolving credit facilities are at “floating” rates. As a result, increases in interest rates will increase our costs of borrowing and reduce our operating margins. ITEM 1B. | UNRESOLVED STAFF COMMENTS.COMMENTS |
None. We own the Rosenthal, Stendal and Celgar mills and the underlying property. properties. Rosenthal mill.The Rosenthal mill is situated on a 230 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: an approximately 425,000 square feet fiber storage area; debarking and chipping facilities for pulp logs; an approximately 700,000 square feet roundwood yard; a fiber line, which includes a Kamyr continuous digester and bleaching facilities; a pulp machine, which includes a dryer, a cutter and a baling line; an approximately 60,000 square feet finished goods storage area; a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln; a wastewater treatment plant; and a power station with a turbine capable of producing 57 MW of electrical power from steam produced by the recovery boiler and a power boiler. Stendal Mill.The Stendal mill is situated on propertya 200 acre site owned by Stendal our 83.0% owned subsidiary. Forthat 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: an approximately 740,000 square feet fiber and roundwood storage area; debarking and chipping facilities for pulp logs; a fiber line, which includes ten SuperBatch™ digesters and bleaching facilities; a pulp machine, which includes a dryer, a cutter and a baling line; an approximately 105,000 square feet finished goods storage area; a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln; a wastewater treatment plant; and a power station with two turbines capable of producing 148 MW of electrical power. 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: an approximately 25,000 square feet fiber storage area; a woodroom containing debarking and chipping facilities for pulp logs; a fiber line, which includes a dual vessel hydraulic digester, a two stage oxygen delignification system and a four stage bleach plant; two pulp machines, which each include a dryer, a cutter and a baling line; an approximately 28,000 square feet on-site finished goods storage area and an approximately 29,000 square feet off-site finished goods storage area; a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln; a wastewater treatment system; and a power station with two turbines capable of producing approximately 100 MW of electrical power. The Manufacturing Process.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 please see “Part I. – Item 1. Business – Our Mills and Product”.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. WeCooked pulp flows out of the digester and is washed and screened to remove most of the residual spent chemicals 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 approximately 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 residuals from sawmills and our woodrooms and residue generated by the effluent treatment system. Additionally, during times of upset, we may use natural gas to generate steam. The high pressure steam produced by the recovery and power boilers is used to power a turbine generator to generate electricity, low pressure steam coming off the turbine is then used to provide heat for the digesting and pulp drying processes. Other Properties. In addition, we own a logistics and reload center near Trail, British Columbia and lease offices in Vancouver, British Columbia, Berlin, Arneburg and Hamburg, Germany and Seattle, Washington. At the end of 2013, substantially all of the assets relating to the Stendal mill were pledged to secure the Stendal Loan 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 Celgarour three mills are secured by first charges against the inventories and receivables of the respective mills.
Our Celgar mill is currently appealing a 2013 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 in connection with the acquisition of the Celgar mill. We expect such appeal to be heard by the British Columbia Court of Appeal in 2014.
In September 2010, the Celgar mill received a letter from the Upper Columbia River Natural Resources Trustee Council, an organization consisting of aboriginal groups and US government representatives, referred to as the “Council”, alleging that, based on their preliminary assessment, or the “Preliminary Assessment”, between 1961 to 1993, the Celgar mill had discharged chlorinated organic compounds into the Columbia River. The Preliminary Assessment was conducted to evaluate the need to conduct a formal natural resource damage assessment under the U.S.Comprehensive Environmental Response, Compensation and Liability Act, referred to as “CERCLA”. Although we did not acquire the Celgar mill until 2005, and the Celgar mill’s alleged discharges occurred prior to our acquisition of the mill, the Council determined to proceed with a formal natural resource damage assessment under the CERCLA. Although at this time it is unclear as to whether any harm was caused by these alleged discharges and, in any event, we do not believe we are liable, due to the preliminary nature of the assessment, we cannot at this time quantify the costs, if any, associated with this matter.
In January 2012, we servedinitiated a Notice of Intent to Submit a Claim to Arbitration onclaim against 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’sNAFTA. Our NAFTA claim referred to as the “NAFTA Claim”, relates to its investmentsour investment 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 Claimclaim 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 Claimclaim 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,claim, we are seeking approximately C$250250.0 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 beclaim was heard by a tribunal appointed pursuant thereto in accordance with Article 11232015. We currently expect to receive a decision from the tribunal some time in 2017. As a result of NAFTA. At this time,the inherent uncertainty of litigation, there can be no assurance whether we will be successful in such NAFTA 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. PART II ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(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”“MERC.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-year period ended December 31, 2013:2016: | Fiscal Quarter Ended | | High | | | Low | | | High | | | Low | | 2013 | | | | | | 2016 | | | | | | March 31 | | $ | 7.51 | | | $ | 6.50 | | | $ | 9.54 | | | $ | 5.95 | | June 30 | | $ | 7.07 | | | $ | 5.87 | | | $ | 10.42 | | | $ | 7.13 | | September 30 | | $ | 7.84 | | | $ | 6.22 | | | $ | 8.94 | | | $ | 7.03 | | December 31 | | $ | 10.55 | | | $ | 7.04 | | | $ | 10.75 | | | $ | 7.60 | | 2012 | | | | | | 2015 | | | | | | March 31 | | $ | 8.80 | | | $ | 6.15 | | | $ | 15.50 | | | $ | 11.87 | | June 30 | | $ | 8.10 | | | $ | 5.55 | | | $ | 15.95 | | | $ | 13.00 | | September 30 | | $ | 7.51 | | | $ | 5.05 | | | $ | 14.21 | | | $ | 8.28 | | December 31 | | $ | 7.80 | | | $ | 6.18 | | | $ | 11.68 | | | $ | 8.80 | |
(b)Shareholder Information.As at February 19, 2014,9, 2017, there were approximately 295217 holders of record of our shares and a total of 55,853,70464,694,138 shares were outstanding. (c)Dividend Information.On February 8, 2017, our board of directors approved a quarterly dividend of $0.115 per share to be paid to holders of our common stock on April 4, 2017 to shareholders of record on March 28, 2017. In 2016, our board of directors approved four quarterly dividend payments of $0.115 per share each, the first being paid on April 5, 2016, the second being paid on July 7, 2016, the third being paid on October 4, 2016 and the fourth being paid on January 4, 2017. The further declaration and payment of dividends is at the discretion of our board of directors. Ourdirectors and will depend upon various factors, including our earnings, financial condition, restrictions imposed by our credit facilities and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by our board of directors has not declared or paid any dividends ondirectors. The indentures governing our shares in the past two years2019, 2022 and does not anticipate declaring or paying dividends in the foreseeable future. In addition, the indenture governing our2024 Senior Notes and our bank credit facilities limit our ability to pay dividends or make other distributions on capital stock. See Part I, “ItemItem 1. Business“Business – Description of Certain Indebtedness”. (d)Equity Compensation Plans.The following table sets forth information as at December 31, 2013 regarding2016 with respect to the shares of our common stock that may be issued under our existing equity compensation plans approved by our shareholders. As at December 31, 2013, 1,081,654 of our shares were 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, referred to as the “2004 Plan”. Our Amended and Restated 1992 Non-Qualified Stock Option Plan expired in 2008.plans. | | | | | | | | | | | | | | | 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) |
| | | | | | | | | | | | | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | Plan Category | | | | | | | | | | | | | Equity compensation plans approved by shareholders | | | - | (1) | | $ | - | | | | 1,044,478 | (2) | Equity compensation plans not approved by shareholders | | | - | | | $ | - | | | | - | |
(1) | AsExcludes 38,000 outstanding restricted shares which vest in 2017 and a maximum of 2,068,174 outstanding performance share units, 657,654 of which had vested as at December 31, 2013, we had 791,4322016. The underlying shares of common stock relating to the vested performance share units outstanding underwere issued in February 2017. Of the 2010 Plan. In February 2011, we awarded 783,395remaining 1,410,520 performance share units, under433,728 will vest in 2017 and 976,792 will vest in 2018. The actual number of shares of common stock issued in respect of unvested performance share units will vary from 0% to 200% of performance share units granted, based upon achievement of performance objectives established for such awards. |
(2) | Represents the 2010 Plan which may vest and become issuable into a maximumnumber 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 unitsremaining available for issuance 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 Plan will govern all prior awards granted under such plan until such awards have been cancelled or forfeited or exercised in accordance with the terms thereof. |
(4) | Our 1992 Amended and Restated Stock Option Plan expired in 2008 but an aggregate of 45,000 unexercised options that were previously granted under this plan remained outstanding as of December 31, 2013. |
(5) | The plan has expired.2016. Our 2010 Plan replaced the 2004 Plan and the 1992 Plan expired in 2008. Our 2010 Plan provides for options, restricted stock rights, restricted shares, performance shares, performance share units and stock appreciation rights to be awarded to employees, consultants and non-employee directors. |
Our 2010 Plan 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 Plan. However, the terms of the 2004 Plan 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 common shares under the 2010 Plan, plus the number of common shares remaining available for grant pursuant to the 2004 Plan.
We do not have any equity compensation plans that have not been approved by shareholders.
(e)Performance Graph.The following graph shows a five-year comparison of cumulative total shareholder return, calculated on an assumed dividend reinvested basis, for our common stock, the NASDAQ Stock Market Index, (thereferred to as the “NASDAQ Index”), and Standard Industrial Classification, or “SIC”, Code Index (SIC Code 2611- pulp mills) (the, referred to as the “Industry Index”). The graph assumes $100 was invested in each of our common stock, the NASDAQ Index and the Industry Index on December 31, 2008.2011. Data points on the graph are annual. COMPARISON OF CUMULATIVE TOTAL RETURNComparison of Cumulative Total Return
| | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | Mercer International Inc. | | | 100.00 | | | | 161.46 | | | | 403.65 | | | | 317.71 | | | | 372.92 | | | | 519.27 | | | $ | 100.00 | | | $ | 117.38 | | | $ | 163.44 | | | $ | 201.48 | | | $ | 152.06 | | | $ | 188.86 | | SIC Code Index | | | 100.00 | | | | 142.23 | | | | 406.11 | | | | 302.73 | | | | 339.46 | | | | 427.49 | | | $ | 100.00 | | | $ | 114.04 | | | $ | 136.21 | | | $ | 152.54 | | | $ | 97.82 | | | $ | 137.58 | | NASDAQ Stock Market Index | | | 100.00 | | | | 145.36 | | | | 171.74 | | | | 170.39 | | | | 200.62 | | | | 281.22 | | | $ | 100.00 | | | $ | 117.45 | | | $ | 164.57 | | | $ | 188.84 | | | $ | 201.98 | | | $ | 219.89 | |
ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected historical financial and operating data as at and for the periodsyears indicated. Our consolidated financial statements as at and for each of the years in the four-year periodyear ended December 31, 2012 were reported using the Euro.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 Euroseuros 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 EuroCertain balance sheet information was translated intoitems for 2015, 2014, 2013 and 2012 have been reclassified as a result of our adoption of Accounting Standards Update 2015-03,Simplifying the U.S. dollar reporting currency by translating assetsPresentation of Debt Issuance Costs, and liabilities at the rateAccounting Standards Update 2015-17,Balance Sheet Classification 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.Deferred Taxes. The following selected financial data isare qualified in itstheir entirety by, and should be read in conjunction with, our consolidated financial statements and related notes contained in this annual report and “ItemItem 7. Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”. | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | | | (in thousands, other than per share and per ADMT amounts) | | | (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 | | | $ | 847,328 | | | $ | 946,237 | | | $ | 1,073,632 | | | $ | 996,187 | | | $ | 979,770 | | Energy and chemicals | | | 92,198 | | | 92,966 | | | 94,758 | | | 65,421 | | | 63,457 | | | 84,295 | | | 86,967 | | | 101,480 | | | 92,198 | | | 92,966 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,088,385 | | | $ | 1,072,736 | | | $ | 1,251,964 | | | $ | 1,202,016 | | | $ | 867,883 | | | $ | 931,623 | | | $ | 1,033,204 | | | $ | 1,175,112 | | | $ | 1,088,385 | | | $ | 1,072,736 | | Costs and expenses | | $ | 1,056,725 | | | $ | 1,009,714 | | | $ | 1,097,299 | | | $ | 979,368 | | | $ | 885,719 | | | $ | 817,880 | | | $ | 867,520 | | | $ | 1,013,314 | | | $ | 1,056,725 | | | $ | 1,009,714 | | Operating income (loss) | | $ | 31,660 | | | $ | 63,022 | | | $ | 154,665 | | | $ | 222,648 | | | $ | (17,836 | ) | | Operating income | | | $ | 113,743 | | | $ | 165,684 | | | $ | 161,798 | | | $ | 31,660 | | | $ | 63,022 | | Interest expense | | $ | 69,156 | | | $ | 71,767 | | | $ | 82,114 | | | $ | 89,754 | | | $ | 90,253 | | | $ | (51,575 | ) | | $ | (53,891 | ) | | $ | (67,516 | ) | | $ | (69,156 | ) | | $ | (71,767 | ) | Foreign exchange gain (loss) on intercompany debt | | | $ | (1,140 | ) | | $ | (5,306 | ) | | $ | (4,777 | ) | | $ | 904 | | | $ | - | | Gain (loss) on derivative instruments | | $ | 19,709 | | | $ | 4,812 | | | $ | (1,974 | ) | | $ | 2,521 | | | $ | (8,026 | ) | | $ | (241 | ) | | $ | (935 | ) | | $ | 11,501 | | | $ | 19,709 | | | $ | 4,812 | | 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) | | | | | | | | | | | | Other income (expenses) | | | $ | (1,323 | ) | | $ | (601 | ) | | $ | 3,186 | | | $ | 311 | | | $ | (179 | ) | Net income (loss)(1) | | | $ | 34,943 | | | $ | 75,502 | | | $ | 113,154 | | | $ | (26,375 | ) | | $ | (15,670 | ) | Net income (loss) per share | | | | | | | | | | | | Basic | | $ | (0.47 | ) | | $ | (0.28 | ) | | $ | 1.39 | | | $ | 2.97 | | | $ | (2.39 | ) | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.82 | | | $ | (0.47 | ) | | $ | (0.28 | ) | Diluted | | $ | (0.47 | ) | | $ | (0.28 | ) | | $ | 1.24 | | | $ | 2.07 | | | $ | (2.39 | ) | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.81 | | | $ | (0.47 | ) | | $ | (0.28 | ) | Weighted average shares outstanding (in thousands) | | | | | | | | | | | | Dividends declared per common share | | | $ | 0.46 | | | $ | 0.23 | | | $ | - | | | $ | - | | | $ | - | | Weighted average shares outstanding | | | | | | | | | | | | Basic | | | 55,674 | | | | 55,597 | | | | 50,117 | | | | 38,591 | | | | 36,297 | | | 64,631 | | | 64,381 | | | 62,013 | | | 55,674 | | | 55,597 | | Diluted | | | 55,674 | | | | 55,597 | | | | 56,986 | | | | 56,963 | | | | 36,297 | | | 65,098 | | | 64,777 | | | 62,515 | | | 55,674 | | | 55,597 | | Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | Current assets | | $ | 471,773 | | | $ | 454,880 | | | $ | 484,149 | | | $ | 477,897 | | | $ | 287,978 | | | $ | 401,851 | | | $ | 388,811 | | | $ | 357,867 | | | $ | 465,447 | | | $ | 448,993 | | Current liabilities | | $ | 165,499 | | | $ | 179,876 | | | $ | 163,534 | | | $ | 167,651 | | | $ | 145,877 | | | $ | 93,170 | | | $ | 104,421 | | | $ | 115,503 | | | $ | 180,259 | | | $ | 179,876 | | Working capital | | $ | 306,274 | | | $ | 275,004 | | | $ | 320,615 | | | $ | 310,246 | | | $ | 142,101 | | | $ | 308,681 | | | $ | 284,390 | | | $ | 242,364 | | | $ | 285,188 | | | $ | 269,117 | | Total assets | | $ | 1,548,559 | | | $ | 1,560,581 | | | $ | 1,579,017 | | | $ | 1,628,445 | | | $ | 1,553,345 | | | $ | 1,158,708 | | | $ | 1,182,817 | | | $ | 1,306,229 | | | $ | 1,531,908 | | | $ | 1,546,977 | | Long-term liabilities | | $ | 1,034,743 | | | $ | 1,012,943 | | | $ | 1,047,672 | | | $ | 1,174,812 | | | $ | 1,284,253 | | | $ | 686,410 | | | $ | 695,420 | | | $ | 751,846 | | | $ | 1,003,332 | | | $ | 999,339 | | Total equity | | $ | 348,317 | | | $ | 367,762 | | | $ | 367,811 | | | $ | 285,982 | | | $ | 123,215 | | | $ | 379,128 | | | $ | 382,976 | | | $ | 438,880 | | | $ | 348,317 | | | $ | 367,762 | | Other Data | | | | | | | | | | | | | | | | | | | | | Pulp sales volume (ADMTs) | | | 1,440,147 | | | | 1,473,519 | | | | 1,427,924 | | | | 1,428,638 | | | | 1,445,461 | | | 1,428.7 | | | 1,463.1 | | | 1,486.4 | | | 1,440.1 | | | 1,473.5 | | Pulp production (ADMTs) | | | 1,444,475 | | | | 1,468,275 | | | | 1,453,677 | | | | 1,426,286 | | | | 1,397,441 | | | 1,428.4 | | | 1,458.0 | | | 1,485.0 | | | 1,444.5 | | | 1,468.3 | | Average pulp price realized (per ADMT)(3) | | $ | 683 | | | $ | 657 | | | $ | 799 | | | $ | 785 | | | $ | 548 | | | Average pulp sales realizations (per ADMT)(2) | | | $ | 586 | | | $ | 640 | | | $ | 715 | | | $ | 683 | | | $ | 657 | |
(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 purchased. See “Item 1 – BusinessItem 1. “Business – Capital Expenditures”. |
(2) | Attributable to common shareholders. |
(3) | Average realizedSales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price for the years indicated reflects customer discounts and pulp price movementsvariations occurring between the order and shipment date.dates. |
NON-GAAP FINANCIAL MEASURES This annual report on Form 10-K contains “non-GAAP financial measures”, that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with the generally accepted accounting principles in the United States, referred to as “GAAP”. Specifically, we make use of the non-GAAP measures “Operating EBITDA” and “Operating EBITDA margin”. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA margin is Operating EBITDA expressed as a percentage of revenues. We use Operating EBITDA and Operating EBITDA margin as benchmark measurements of our own operating results and as benchmarks relative to our competitors. We consider them to be meaningful supplements to operating income as performance measures primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs, and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance. Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss) attributable to common shareholders, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, or as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA and Operating EBITDA margin are internal measures and therefore may not be comparable to other companies. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) noncontrolling interests in our Stendal NBSK pulp mill operations prior to our acquisition of 100% of the economic interest of Stendal in September 2014; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) 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. 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. 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 years ended December 31, 2013, 20122016, 2015 and 20112014 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.Item 1A. “Risk Factors”.
Results of Operations 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 1.5 million ADMTs of NBSK pulp and 305 MW of electrical generation. 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 NBSK pulp, fiber costs and foreign currency exchange rates. Kraft pulp marketsprices are highly cyclical with pricesand primarily determined by the balance between supply and demand. 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 macroeconomicmacro-economic conditions, changes in consumption and industry capacity, the level of customer and producer inventories and fluctuations in exchange rates. The average European list prices for NBSK pulp between 20002007 and 20132016 have fluctuated between a low of $447$575 per ADMT in 20022009 to a high of $1,030 per ADMT in 2011. DuringOur financial performance is also impacted by changes in the first halfdollar to euro and Canadian dollar exchange rates. Changes in currency rates affect our operating results because most of 2011,our operating costs at our German mills are incurred in euros. Most of our operating costs at the Celgar mill are in Canadian dollars. These costs do not fluctuate with the dollar to euro or Canadian dollar exchange rates. Thus, an increase in the strength of the dollar versus the euro and the Canadian dollar decreases our operating costs and increases our operating margins and income from operations. Conversely, a weakening of the dollar against the euro and the Canadian dollar tends to increase our operating costs and decrease our operating margins and income from operations. Our energy and chemical sales are made in local currencies and, as a result, decline in dollar terms when the dollar strengthens and increase when the dollar weakens.
As a corollary to changes in exchange rates between the dollar and the euro and Canadian dollar, a stronger dollar generally increases costs to our customers and results in downward pressure on prices. Conversely, a weakening dollar generally supports higher pulp prices were around record highs, primarilypricing. However, there is invariably a time lag between changes in currency exchange rates and pulp prices. This lag can vary and is not predictable with any precision. In 2016, a generally overall strong dollar benefited our costs and expenses, as they are incurred in euros and Canadian dollars. In 2015, changes in foreign exchange had a very significant effect on revenues, costs and expenses and results of operations, as the dollar was 16% and 14% stronger against the euro and Canadian dollar, respectively, compared to 2014. This largely contributed to a 14% decrease in costs and expenses in 2015 compared to 2014. In 2014, the dollar was flat against the euro, but 7% stronger against the Canadian dollar, compared to 2013. This contributed to a 4% decrease in costs and expenses in 2014 compared to 2013. In 2016, largely as a result of the strong demand from Chinadollar 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 pulpweakening hardwood 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 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 listNBSK prices for NBSK pulp. In 2013, demand from China was stable throughout the year and supply was slightly under-balanced, which resulted in higher prices. On average, NBSK list prices in Europe decreaseddeclined by approximately 15% in 2012 from the prior year and increased by approximately 6% in 2013 from 2012.about 4% compared to 2015. At the end of 2013,2016, the NBSK list prices wereprice was approximately $905 per ADMT in Europe and $990 and $750 per ADMT in North America and $810 and $605 per ADMT in Europe and China, respectively. In 2015, although pulp markets and demand were generally stable, the appreciation and the strength of the dollar versus the euro and Canadian dollar resulted in list prices declining by about 8% compared to 2014. In 2014, generally strong markets resulted in average NBSK list prices being about 7% higher than the previous year. Our pulp sales realizations are list prices, net of customer discounts, rebates and other selling concessions.commissions. Over the last three years, these discounts, rebates and concessionscommissions, particularly in Europe and North America, have increased as producers compete for customers and sales. Our reported average salesales to China are closer to a net price realizationswith significantly lower or little discounts and rebates. Production and sales of surplus energy and chemicals are affected by NBSK price movements between the orderkey revenue sources for us. In 2016, 2015 and shipment dates.2014, our mills generated and sold 785,845 MWh, 814,966 MWh and 807,758 MWh, respectively, of surplus renewable energy. Initiatives to increase our generation and sales of surplus renewable energy, chemicals and other by-products will continue to be a key focus for us. Such further initiatives may require additional capital spending. Surplus energy and chemicals are by-products of our pulp production and the volumes generated and sold are primarily related to the rate of pulp production. In 2016, our energy and chemical revenues declined from 2015 as a result of lower sales volumes. Prices for our energy and chemical sales are generally stable and unrelated to cyclical changes in pulp prices. Production and sales of surplus As our energy and chemicals are key revenue sources for us. In 2013, 2012 and 2011, our mills generated 699,051 MWh, 710,241 MWh and 652,113 MWh, respectively, of surplus energy, primarily from a renewable carbon-neutral source. Initiatives to increase our generation and sales of surplus renewable energy and chemicals will continue to be a key focus for us. 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 2014, 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 increase energy generation and chemical sales may require additional capital spending.are sold in the local currencies of our mills, the overall strength of the dollar largely contributed to a decline in revenues therefrom in 2015 compared to 2014.
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. Over the last three years, the demand and competition for fiber has also been impacted by renewable energy producers in Germany, particularly by wood pellet producers. Higher fiber costs could affect producer profit margins if they are unable to pass along price increases to pulp customers or purchasers of surplus energy. Generally weak lumber markets in 2011 and most of 2012 resulted in reduced sawmillDuring the past few years, strong sawmilling 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 saw 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, coupled with initiatives to increase harvest levels, particularly from other renewable energy producers such as pellet producers. This increased demand and competition for fiber has put upward pressure on fiber prices.small private forest owners, have contributed to a balanced wood market in Germany. A recovery in U.S. housing starts, which commenced in the latter part of 2012 and continued in 2013through 2016, resulted in increased sawmill activity.activity in North America. This increased the supply of woodchipswood chips for the Celgar mill and reduced its need for pulp logs, which are generally a higher cost for the mill than woodchips.wood chips.
In 2016, our per unit fiber costs were 8% lower than in 2015, primarily as a result of a balanced wood market in both Germany and the Celgar mill’s fiber basket. In 2015, our per unit fiber costs were 14% lower than in 2014, as a result of the strength of the dollar against the euro and the Canadian dollar. In 2014, our per unit fiber costs decreased by approximately 7% from 2013, primarily as a result of lower average fiber prices in the markets from which our mills source their fiber and the strengthening of the dollar against the Canadian dollar. Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average per ADMT cost by spreading fixed costs over more units. Higher operating rates also permit us to increase our generation and sales of surplus renewable energy and chemicals. Our production levels are also dependent on, among other things, the number of days of scheduled and unscheduledmaintenance downtime at our mills. In 2014, we have no scheduledThe following table sets out the number of days (and ADMTs) of annual maintenance downtime at each of our mills for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | | Days | | | ADMTs | | | Days | | | ADMTs | | | Days | | | ADMTs | | | | (in thousands, except numbers of days) | | Rosenthal | | | 10 | | | | 10.2 | | | | 11 | | | | 11.1 | | | | 10 | | | | 10.1 | | Stendal | | | 15 | | | | 26.7 | | | | 15 | | | | 28.1 | | | | 4 | | | | 7.5 | | Celgar | | | 18 | | | | 24.5 | | | | 14 | | | | 19.2 | | | | 10 | | | | 14.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 43 | | | | 61.4 | | | | 40 | | | | 58.4 | | | | 24 | | | | 31.6 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Going forward in the first quarter. For the balance of 2014,2017, we have scheduled maintenance downtime of ten36 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 major49,200 ADMTs. Unexpected 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 product mix is also important because premium grades of NBSK pulp generally achieve higher prices and profit margins. Our financialSelected 2016 Highlights
In 2016: we achieved strong operating performance for any reporting period is impacted by changesand generated $185.7 million in the U.S. dollarOperating EBITDA* and $34.9 million in net income; we continued to Eurostrengthen our balance sheet and Canadian dollar exchange ratesincreased our cash position to $136.6 million from $99.6 million and in interest rates. Changes in currency rates affect our operating results because most of our operating costs at our German mills, including our debt obligations under the Stendal 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 withto $308.7 million from $284.4 million, respectively, from the U.S. dollar to Euro or Canadian dollar exchange rates. Thus, a weakeningstart of the U.S. dollar against the Euro and the Canadian dollar tends to increase our operating and interestyear; overall, per unit fiber 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 decreases our operating and interest costs and increases our operating margins and income from operations. On average, in 2012, the U.S. dollar increaseddecreased by approximately 8% and by approximately 1%, respectively, versus the Euro and the Canadian dollarat our mills compared to 2011. On average,2015, primarily as a result of a balanced wood market and strong sawmilling activity in 2013, the U.S. dollar declined by approximately 3%both Germany 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 margins.
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 they are settled or as they are marked to market for each reporting period. Stendal, as required under the Stendal Loan Facility, entered into variable-to-fixed rate interest swaps, referred to as the “Stendal Interest Rate Swap Contract”, in August 2002 to fix the interest rate on such indebtedness for the full term of the Stendal Loan Facility. Changes in long-term interest rates result in our recording unrealized non-cash gains or losses on the Stendal Interest Rate Swap Contract when it is marked to market on a quarterly basis. Such non-realized gains or losses can materially impact our operating results for any reporting period. See “Quantitative and Qualitative Disclosures about Market Risk”.
We do not believe that inflation has had a material impact on revenues or income during 2013.
Significant Actions
In 2013, we took the following significant actions:
In July 2013, we commenced reducing the Celgar mill’s workforce byfiber basket combined with steady progress on several cost reduction initiatives;
our board authorized a quarterly cash dividend of $0.115 per share and we returned approximately 85 employees$29.7 million to our shareholders over the following 12-monthscourse of the year; and we continued to reduce its fixed costs. We incurred pre-tax chargesindebtedness and future debt service costs through the repurchase and cancellation of approximately $5.0 million in 2013 and expect to incur an additional $0.6$23 million of such expensesour 7.0% senior notes due 2019 and, in 2014. We currently estimate thatJanuary 2017, we announced the redemption of our Celgar mill will realize approximately $8.0remaining 7.0% senior notes with the proceeds of an issuance of $225 million 6.5% senior notes due 2024 and cash on hand. * See page 60 of this annual report on Form 10-K for a reconciliation of net income to $10.0 million in annual pre-tax costs savings once such restructuring has been completed and currently expect to realize approximately 80% of such savings in 2014; Operating EBITDA.In July 2013, we completed our registered public offering of $50.0 million aggregate principal amount of additional Senior Notes at an issue price of 104.5%;
In September 2013, our Stendal mill amended the Stendal Facilities to provide it greater financial flexibility by, among other things, waiving compliance with certain financial ratios in 2013, amending such ratios to make them less restrictive and reducing the amount required to cure failures to satisfy such ratios;
In December 2013, we completed Project Blue Mill at our Stendal mill to increase the mill’s production of pulp and green energy and further enhance our stable stream of income from energy and chemical sales; and
We continued to improve mill operations and efficiencies, which allowed us to achieve record annual pulp production and energy generation at our German mills.
Current Market Environment Demand from China and Europe was generally stable throughout the yearin 2016 and supply was slightly under-balanced, which resulted in highergenerally balanced. However, the strength of the dollar contributed to downward pressure on pulp prices during the year. In 2016, pulp prices in 2013.North America were marginally higher than in 2015 while prices in Europe and China decreased by about 6% compared to 2015. At the end of 2016, list prices in North America were approximately $990 per ADMT and list prices in Europe and China were approximately $810 and $605 per ADMT, respectively. At year end,As at December 31, 2016, the NBSK pulp market was slightly under-balancedgenerally balanced with world producer inventories at about 2732 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 2014. During the course of 2014, the global supply of hardwood kraft pulp is projected to increase by approximately 2.1 million ADMTs, primarily from South America. This increase in hardwood production is largely 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, as a result of generally lower prices for hardwood pulp, this supply increase could put downward pressure on NBSK pulp prices. However, we believe customers’ ability to further substitute NBSK pulp for lower priced hardwood pulp is limited by the strength characteristic provided by NBSK pulp that large modern paper machines need to run lower basis weight paper products efficiently. As pulp prices are highly cyclical, there can be no assurance that prices will not decline in the future.
Summary Financial Highlights | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2013 | | 2012 | | 2011 | | | 2016 | | 2015 | | 2014 | | | | (in thousands, other than per share amounts) | | | (in thousands, other than percent and per share amounts) | | Pulp revenues | | $ | 996,187 | | | $ | 979,770 | | | $ | 1,157,206 | | | $ | 847,328 | | | $ | 946,237 | | | $ | 1,073,632 | | Energy and chemical revenues | | $ | 92,198 | | | $ | 92,966 | | | $ | 94,758 | | | $ | 84,295 | | | $ | 86,967 | | | $ | 101,480 | | Operating income | | $ | 31,660 | | | $ | 63,022 | | | $ | 154,665 | | | $ | 113,743 | | | $ | 165,684 | | | $ | 161,798 | | Restructuring expenses | | $ | 6,415 | | | $ | — | | | $ | — | | | Operating EBITDA(1) | | | $ | 185,727 | | | $ | 234,017 | | | $ | 239,810 | | Operating EBITDA margin(1) | | | | 20 | % | | 23 | % | | 20 | % | Foreign exchange loss on intercompany debt | | | $ | (1,140 | ) | | $ | (5,306 | ) | | $ | (4,777 | ) | Gain (loss) on derivative instruments | | $ | 19,709 | | | $ | 4,812 | | | $ | (1,974 | ) | | $ | (241 | ) | | $ | (935 | ) | | $ | 11,501 | | Income tax benefit (provision) | | $ | (9,196 | ) | | $ | (9,379 | ) | | $ | 968 | | | $ | (24,521 | ) | | $ | (29,449 | ) | | $ | 16,774 | | Net income (loss)(1) | | $ | (26,375 | ) | | $ | (15,670 | ) | | $ | 69,699 | | | Net income (loss) per share(1) | | | | | | | | Net income | | | $ | 34,943 | | | $ | 75,502 | | | $ | 113,154 | | Net income per share | | | | | | | | Basic | | $ | (0.47 | ) | | $ | (0.28 | ) | | $ | 1.39 | | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.82 | | Diluted | | $ | (0.47 | ) | | $ | (0.28 | ) | | $ | 1.24 | | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.81 | | Common shares outstanding at period end | | | | 64,694 | | | 64,502 | | | 64,274 | |
(1) | AttributableSee “Non-GAAP Financial Measures” for a description of Operating EBITDA and Operating EBITDA margin, their limitations and why we consider them to common shareholders.be useful measures. The following table provides a reconciliation of net income to operating income and Operating EBITDA for the periods indicated: |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | | (in thousands) | | Net income | | $ | 34,943 | | | $ | 75,502 | | | $ | 113,154 | | Net income attributable to noncontrolling interest | | | - | | | | - | | | | 7,812 | | Income tax provision (benefit) | | | 24,521 | | | | 29,449 | | | | (16,774 | ) | Interest expense | | | 51,575 | | | | 53,891 | | | | 67,516 | | Foreign exchange loss on intercompany debt | | | 1,140 | | | | 5,306 | | | | 4,777 | | (Gain) loss on derivative instruments | | | 241 | | | | 935 | | | | (11,501 | ) | Other expenses (income) | | | 1,323 | | | | 601 | | | | (3,186 | ) | | | | | | | | | | | | | | Operating income | | | 113,743 | | | | 165,684 | | | | 161,798 | | Add: Depreciation and amortization | | | 71,984 | | | | 68,333 | | | | 78,012 | | | | | | | | | | | | | | | Operating EBITDA | | $ | 185,727 | | | $ | 234,017 | | | $ | 239,810 | | | | | | | | | | | | | | |
Selected Production, Sales and Other Data Selected production, sales and exchange rate data for the periods indicated:
| | | Year Ended December 31, | | | Year Ended December 31, | | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | | Consolidated | | | | | | | | Pulp production (‘000 ADMTs) | | | 1,444.5 | | | | 1,468.3 | | | | 1,453.7 | | | | 1,428.4 | | | | 1,458.0 | | | | 1,485.0 | | Scheduled production downtime (‘000 ADMTs) | | | 47.8 | | | | 50.9 | | | | 52.4 | | | Scheduled production downtime (days) | | | 33 | | | | 40 | | | | 35 | | | Annual maintenance downtime (‘000 ADMTs) | | | | 61.4 | | | | 58.4 | | | | 31.6 | | Annual maintenance downtime (days) | | | | 43 | | | | 40 | | | | 24 | | Pulp sales (‘000 ADMTs) | | | 1,440.1 | | | | 1,473.5 | | | | 1,427.9 | | | | 1,428.7 | | | | 1,463.1 | | | | 1,486.4 | | Average NBSK pulp list prices in Europe ($/ADMT)(1) | | | 864 | | | | 813 | | | | 956 | | | | 803 | | | | 850 | | | | 928 | | Average NBSK pulp list prices in China ($/ADMT)(1) | | | | 599 | | | | 643 | | | | 733 | | Average NBSK pulp list prices in North America ($/ADMT)(1) | | | | 978 | | | | 972 | | | | 1,025 | | Average pulp sales realizations ($/ADMT)(2) | | | 683 | | | | 657 | | | | 799 | | | | 586 | | | | 640 | | | | 715 | | Energy production (‘000 MWh) | | | 1,710.2 | | | | 1,704.1 | | | | 1,640.4 | | | | 1,812.6 | | | | 1,846.8 | | | | 1,853.5 | | Energy sales (‘000 MWh) | | | 699.1 | | | | 710.2 | | | | 652.1 | | | | 785.8 | | | | 815.0 | | | | 807.8 | | Average energy sales realizations ($/MWh) | | | 114 | | | | 110 | | | | 124 | | | �� | 91 | | | | 92 | | | | 110 | | Average Spot Currency Exchange Rates | | | | | | | | | | | | | $ / €(3) | | | 1.3281 | | | | 1.2859 | | | | 1.3931 | | | | 1.1072 | | | | 1.1096 | | | | 1.3297 | | $ / C$(3) | | | 0.9712 | | | | 1.0007 | | | | 1.0121 | | | | 0.7558 | | | | 0.7830 | | | | 0.9060 | |
(1) | Source: RISI pricing report. |
(2) | Average realizedSales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price for the periods indicated reflect customer discounts and pulp price movementsvariations occurring between the order and shipment date.dates. |
(3) | Average Federal Reserve Bank of New York noon spot rateNoon Buying Rates over the reporting period. |
Year Ended December 31, 20132016 Compared to Year Ended December 31, 20122015 In 2013, pulpTotal revenues increasedin 2016 decreased by approximately 2%10% to $996.2$931.6 million from $979.8$1,033.2 million in 2012,2015.
Pulp revenues in 2016 decreased by approximately 10% to $847.3 million from $946.2 million in 2015, due to lower pulp sales realizations and sales volumes. Energy and chemical revenues decreased by approximately 3% to $84.3 million in 2016 from $87.0 million in 2015, primarily due to higher average pulp sales realizations, partially offset by lower 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. In 2013, surplus energy and chemicals sales marginally decreased to $92.2 million from $93.0 million in 2012, primarily as a result of lower sales volumes.
List prices for NBSK pulp in Europe averaged approximately $864 per ADMT in 2013, compared to $813 per ADMT in 2012. At the end of 2013, list prices were $905 per ADMT in Europe and $990 and $750 per ADMT in North America and China, respectively. Average pulp sales realizations increased by approximately 4% to $683 per ADMT in 2013 from $657 per ADMT in 2012, primarily due to higher pulp prices. At the end of 2013, reported global inventories for softwood kraft were approximately 27 days’ supply, while at the end of 2012 inventories for softwood kraft were approximately 29 days’ supply.
Pulp sales volumeproduction decreased by approximately 2% to 1,440,1471,428,384 ADMTs in 20132016 from 1,473,5191,457,973 ADMTs in 2012, primarily as2015. In 2016, we had annual maintenance downtime of a resulttotal of lower production levels43 days (approximately 61,400 ADMTs), 37 days of which were scheduled and six days of which were unscheduled to effect additional work at our Celgar mill. In 2015, we had scheduled annual maintenance downtime of 40 days (approximately 58,400 ADMTs). In 2017, we currently estimate taking an aggregate of 36 days of maintenance downtime at our mills.We estimate that such maintenance downtime in 2016 adversely impacted our Operating EBITDA by approximately $38.4 million, comprised of approximately $29.8 million in direct out-of-pocket expenses and the balance in reduced production. Many of our competitors that report their financial results using International Financial Reporting Standards, referred to as “IFRS”, capitalize their direct costs of maintenance downtime. Pulp productionsales volumes marginally decreased by approximately 2% to 1,444,4751,428,672 ADMTs in 20132016 from 1,468,2751,463,132 ADMTs in 2012,2015, primarily due to lower production at our Celgar mill due to an extended shut and subsequent slow start up at the mill. In 2013 and 2012, we took a total of 33 and 40 days’ scheduled maintenance downtime, respectively, at our mills and expect to take approximately 26 days in 2014. During the second quarter of 2013, our Celgar mill took its annual scheduled major maintenance shutdown. As2016, list prices for NBSK pulp declined from 2015, largely as a result of the strong dollar and the impact of weakening hardwood pulp prices on NBSK pricing. Average list prices for NBSK pulp in Europe were approximately $803 per ADMT, compared to approximately $850 per ADMT in 2015. Average list prices for NBSK pulp in China and North America were approximately $599 per ADMT and $978 per ADMT, respectively, in 2016, compared to approximately $643 per ADMT and $972 per ADMT, respectively, in 2015. Average pulp sales realizations decreased by approximately 8% to $586 per ADMT in 2016 from approximately $640 per ADMT in 2015, primarily due to lower list prices. In 2016, the dollar was flat against the euro and 3% stronger against the Canadian dollar compared to 2015, which had a combinationpositive impact on our Canadian dollar denominated costs and expenses. However, this was more than offset by the negative impact of a lightning strikeweaker dollar at the millyear end on our Celgar mill’s dollar-denominated cash balances and equipment and execution issues, the shutdown which was planned for 11 days took 15 days instead. Further, the start-up of the mill was slower than budgeted. The shutdown and slower start-up resultedreceivables, resulting in a lossan overall negative impact of approximately 30,300 ADMTs of NBSK pulp production (of which approximately 14,300 ADMTs was unplanned) and a consequential loss of energy production.$1.8 million in 2016 compared to 2015. Costs and expenses increasedin 2016 decreased by approximately 6% to $1,056.7$817.9 million from $867.5 million in 2013 from $1,009.7 million in 2012,2015, primarily due to higherlower fiber costsprices, lower sales volumes and the reversal of $20.8 million in accrued wastewater fees at our German millsmills. In 2016, operating depreciation and the impact of a weaker U.S. dollar relativeamortization increased by approximately 5% to the Euro on our German mill expenses and restructuring costs, partially offset by lower sales volume. Our costs and expenses in 2013 included approximately $24.7$71.5 million for regularly scheduled maintenance costs, compared to $17.9from $67.8 million in 2012. Several competing producers2015. Selling, general and members of the peer group that we benchmarkadministrative expenses decreased by approximately 4% to $44.5 million in 2016 from $46.2 million in 2015, due to lower costs associated with our performance against report their financial resultscompleted NAFTA claim. Transportation costs decreased to $68.1 million in accordance with International Financial Reporting Standards which permit a significant portion of such maintenance costs2016 from $74.4 million in 2015, primarily due to be capitalized instead of expensed. Such costs are not chargedlower pulp shipments to EBITDA by the peer group companies but instead are expensed as depreciation.China. On average, in 2013, our overall per unit fiber costs increasedin 2016 decreased by approximately 8% compared to 2012,from 2015, primarily due toas a 13% increaseresult of a balanced wood market in Germany and the Celgar mill’s fiber basket. In 2016, our per unit fiber costs in Germany only partially offset by a 12% decreasewere 9% lower than in 2015. In 2016, our Celgar mill’s per unit fiber costs were approximately 6% lower than in Canada. Fiber costs in Germany were higher because of strong demand from the European pellet and board producers and sawmills, which increased prices for pulp logs, the major 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 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, primarily2015, due to strong sawmillsawmilling activity in the region, which reduces Celgar’s need for pulp logs, which areCelgar mill’s fiber basket. In 2017, we currently expect our overall per unit fiber costs to be generally a higher cost for the mill than woodchips. We expect flat, pricing in Canadalargely as a result of continued strong sawmill activitya continuation of balanced market conditions in British Columbia. Operating depreciation and amortization increased to $78.3 million in 2013 from $74.3 million in 2012. Selling, general and administrative expenses increased to $51.2 million in 2013 from $49.3 million in 2012.both markets.
In 2013, we had restructuring expenses of $6.4 million, primarily related to the workforce reduction at2016, our Celgar mill. In 2013, operating income decreased to $31.7$113.7 million from $63.0$165.7 million in 2012,2015, primarily due to higher fiber costs in Germany, the impact of a weaker U.S. dollar relative to the Euro on our German mill expenseslower pulp sales realizations and the Celgar restructuring,sales volumes, partially offset by a higher realized sales price.lower fiber prices and the reversal of wastewater fee accruals at our German mills.
Interest expense in 20132016 decreased by approximately 4% to $69.2$51.6 million from $71.8$53.9 million in 2012,2015, 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 lower sales volume.indebtedness.
In 2013,2016, we recorded an unrealized gaina derivative loss of $22.5$0.2 million on the mark to market adjustment of the Stendal Interest Rate Swap Contract, compared to an unrealized gaina derivative loss of $2.2$0.9 million in 2012, which was primarily the2015. During 2016, as a result of an increase in short-term European interest rates. Wethe strengthening of the dollar versus the euro at the end of 2016, we recorded a non-cash loss on the foreign exchange translation of approximately $2.8 million related to fixed pulp price swap contracts during the year ended December 31, 2013, compared to a gaininter-company debt between Mercer Inc. and its wholly-owned subsidiaries of $2.6 million during the year ended December 31, 2012. In 2013, the noncontrolling shareholder’s proportionate interest in the Stendal mill was income of $0.6$1.1 million, compared to $2.2$5.3 million in 2012.2015.
In 2013,During 2016, we recognized a deferredrecorded an income tax expense of $11.5$24.5 million, compared to an income tax expense of $29.4 million in 2015.
Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the related amounts of income we earn in such jurisdictions, as well as discrete items that may occur in any given year but are not consistent from year to year. Our effective tax rate for fiscal 2016 was 41%, compared to 28% in 2015. This increase was due to lower income from entities for which we do not recognize deferred tax assets. We had net income of $34.9 million, or $0.54 per basic and diluted share, in 2016. In 2015, net income was $75.5 million, or $1.17 per basic and diluted share. In 2016, Operating EBITDA decreased by 21% to $185.7 million from $234.0 million in 2015, 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 chargelower pulp sales realizations 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 $26.4 million, or $0.47 per basic and diluted share. This included a net gain of $19.7 million on Stendal interest rate derivatives and pulp price derivatives, restructuring expenses of $6.4 million and $11.5 million of a deferred tax expense. In 2012, we reported a net loss of $15.7 million, or $0.28 per basic and diluted share. This included a net gain of $4.8 million on our Stendal interest rate derivatives and fixed price pulp derivatives.
In 2013, “Operating EBITDA” decreased to $110.3 million from $137.7 million in 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 usedsales volumes, only being partially offset 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 costslower fiber prices and the effectreversal of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America, 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 ofwastewater fee accruals at 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 interest 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.German mills.
The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income and Operating EBITDA for the periods indicated:
| | | | | | | | | | | 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 | | | | | | | | | | |
Year Ended December 31, 20122015 Compared to Year Ended December 31, 20112014 In 2012,Total revenues in 2015 decreased by approximately 12% to $1,033.2 million from $1,175.1 million in 2014.
Pulp revenues in 2015 decreased by approximately 12% to $946.2 million from $1,073.6 million in 2014, due to lower pulp sales realizations and sales volumes. Energy and chemical revenues decreased by approximately 15%14% to $979.8 million from $1,157.2$87.0 million in 2011, primarily due to lower average pulp sales realizations, partially offset by higher pulp sales volumes. 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 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. In 2012, surplus energy and chemicals sales decreased by approximately 2% to $93.0 million2015 from $94.8$101.5 million in 2011,2014, primarily due to the impact of a stronger U.S. dollar relative to the Euro on sales from our German mills,euro and Canadian dollar, partially offset by the impacthigher sales volumes.
Pulp production marginally decreased by approximately 2% to 1,457,973 ADMTs in 2015 from 1,485,011 ADMTs in 2014. We had an aggregate of record pulp production.40 days (approximately 58,400 ADMTs) of annual maintenance downtime at our mills in 2015, including $26.4 million in direct out-of-pocket expenses, compared to 24 days (approximately 31,600 ADMTs) in 2014, including $19.3 million in direct out-of-pocket expenses. Many of our competitors that report their financial results using IFRS capitalize their direct costs of maintenance downtime. ListPulp sales volumes marginally decreased by approximately 2% to 1,463,132 ADMTs in 2015 from 1,486,356 ADMTs in 2014, primarily due to lower production resulting from higher annual maintenance downtime days in 2015.
Average list prices for NBSK pulp in Europe averagedwere approximately $813$850 per ADMT in 2012,2015, compared to $956approximately $928 per ADMT in 2011. At the end of 2012,2014. Average list prices were $810 per ADMT in Europe and $870 and $655 per ADMTfor NBSK pulp in North America and China respectively. were approximately $972 per ADMT and $643 per ADMT, respectively, in 2015, compared to approximately $1,025 per ADMT and $733 per ADMT, respectively, in 2014. Average pulp sales realizations decreased by approximately 18%10% to $657$640 per ADMT in 20122015 from $799approximately $715 per ADMT in 2011,2014, primarily due to lower pulp prices. Atlist prices resulting from the endstrength of 2012, reported global inventories for softwood kraft were approximately 29 days’ supply, while at the end of 2011 inventories for softwood kraft were approximately 36 days’ supply.dollar. Pulp sales volume increased by approximately 3%In 2015, the dollar was 16% and 14% stronger against the euro and Canadian dollar, respectively, compared to a record 1,473,519 ADMTs in 2012 from 1,427,924 ADMTs in 2011, primarily as a result of increased sales to China in 2012.
Pulp production increased to a 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 2012 and 2011, we took a total of 40 and 35 days scheduled maintenance downtime, respectively, at our mills.2014.
Costs and expenses in 2015 decreased by approximately 14% to $867.5 million from $1,013.3 million in 2014, primarily due to the overall impact on costs of the stronger dollar, partially offset by higher annual maintenance downtime costs. In 2015, operating depreciation and amortization decreased by approximately 13% to $67.8 million from $77.7 million in 2014, due to the impact of a stronger dollar relative to the euro and Canadian dollar. Selling, general and administrative expenses decreased marginally to $46.2 million from $47.9 million in 2014, due to the stronger dollar. Transportation costs decreased to $1,009.7$74.4 million in 20122015 from $1,097.3$88.6 million in 2011,2014, primarily due to the impact of a stronger U.S. dollar relative to the Euro on our German mill expenses and lower fiber costs, partially offset by higher pulp sales volumes in 2012. Our costs and expenses in 2012 included approximately $17.9 million for regularly scheduled maintenance costs, compared to $24.2 million in 2011. Several competing producers and members of the peer group that we benchmark our 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.dollar. On average, in 2012, our overall per unit fiber costs in 2015 decreased by approximately 14% compared to 2011,from 2014, primarily due to loweras a result of the effect of a strong dollar versus the euro and the Canadian dollar on local currency per unit fiber costsprices. In 2015, in local currency terms, average fiber prices in Germany caused by the impactwere marginally lower than in 2014, as a result of a stronger U.S.generally balanced wood market. In Canadian dollar relative to the Euro and decreased demand from the European particle board industry and other regional residualterms, average fiber users. Fiber costs atprices for our Celgar mill were lower due to the impact of improved wood chip availability for the region. Operating depreciation and amortization decreased to $74.3 millionapproximately 17% higher than in 2012 from $77.6 million in 2011. Selling, general and administrative expenses decreased to $49.3 million in 2012 from $54.0 million in 2011.
In 2012, operating income decreased to $63.0 million from $154.7 million in 2011, primarily due to lower average pulp sales realizations, partially offset by lower fiber costs.
Interest expense in 2012 decreased to $71.8 million from $82.1 million in 2011, primarily2014, due to the impact of a stronger U.S. dollar, relativeas a portion of our Celgar mill’s fiber is sourced in dollars and due to increased demand for chips in our Celgar mill’s procurement area from coastal pulp mills.
In 2015, our operating income increased to $165.7 million from $161.8 million in 2014, primarily due to the Euro on our Stendal mill interest expense, reduced debt levels associated with our Stendal mill and the conversioneffect of our remaining convertible notes in 2011. Transportation costs decreased to $92.3 million in 2012 from $94.4 million in 2011, primarily as a result of lower container costs,strong dollar, partially offset by lower pulp sales realizations and higher sales volumes.annual maintenance downtime costs.
Interest expense in 2015 decreased by approximately 20% to $53.9 million from $67.5 million in 2014, primarily due to lower indebtedness. The noncontrolling shareholder’s interest in the Stendal mill’s net income, which was eliminated in the third quarter of 2014, was $7.8 million in 2014. In 2012,2015, we recorded an unrealized gaina derivative loss of $2.2$0.9 million on the mark to market adjustment of the Stendal Interest Rate Swap Contract, compared to an unrealized lossa non-cash derivative gain of $2.0$11.5 million in 2011,2014. During 2014, we recorded a net gain on the settlement of debt of $3.4 million, which was primarily the result of an increase in short-term European interest rates. We also recordedreflected a gain of approximately $2.6$31.9 million related to these fixed pulp price swap contracts duringon our acquisition of all of the year ended December 31, 2012.shareholder loans of the former noncontrolling shareholder in Stendal, in large part offset by a loss of $28.5 million on the settlement of debt resulting from the refinancing of our long-term debt. In 2012,During 2015, as a result of the noncontrolling shareholder’s proportionate interest instrengthening of the Stendal mill’s income was $2.2dollar versus the euro, we recorded a non-cash loss on the foreign exchange translation of inter-company debt between Mercer Inc. and its wholly-owned subsidiaries of $5.3 million, compared to $5.5$4.8 million in 2011. 2014.In 2012, deferredDuring 2015, we recorded an income tax recoveries were $0.2expense of $29.4 million, compared to deferreda net income tax recoveriesbenefit of $3.3$16.8 million in 2011, primarily2014, due to the timingrecognition of recognizingincome tax loss carryforwards. The effective tax rate for 2015 was 28%. In 2014, the effective tax rate was a recovery as a result of the recognition of deferred German tax assets based on forecasted income.primarily consisting of tax loss carryforwards.
In 2012, we reported aWe had net lossincome of $15.7$75.5 million, or $0.28$1.17 per basic and diluted share. Thisshare, in 2015. In 2014, net income was $113.2 million, or $1.82 per basic and $1.81 per diluted share, which included a net income tax benefit of $16.8 million, a non-cash gain on derivative instruments of $4.8$11.5 million and a net gain on the Stendal interest rate derivatives and fixed price pulp derivatives. In 2011, we reported net incomesettlement of $69.7 million, or $1.39 per basic and $1.24 per diluted share. This included a non-cash lossdebt of $2.0 million on our Stendal Interest Rate Swap Contract.$3.4 million.
In 2012,2015, Operating EBITDA marginally decreased by 2% to $137.7$234.0 million from $232.6$239.8 million in 2011. See2014, as the discussiondecline in pulp sales realizations, lower energy revenues and higher maintenance costs more than offset the positive effect from the strength of the dollar. In 2015, our results for the year ended December 31, 2013Operating EBITDA margin was 23%, compared to the year ended December 31, 2012 for the definition of Operating EBITDA, significant limitations20% in Operating EBITDA as an analytical tool and additional information relating to such limitations of Operating EBITDA.2014. The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income and Operating EBITDA for the periods indicated:
| | | | | | | | | | | 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 | | | | | | | | | | |
Sensitivities Our earnings are sensitive to, among other things, fluctuations in: 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 20132016 sales volume (and assuming all other factors remained constant), each $10.00 per tonne change in NBSK pulp list pulp prices yields a change in Operating EBITDA of approximately $12.0$11.0 million. Foreign Exchange.Our operating costs are primarily in Euroseuros for our German mills and Canadian dollars for our Celgar mill.mill and our principal product, NBSK pulp, is quoted in dollars. As a result, our operating costs when translated into dollars will fluctuate with changes in the value of the U.S dollar relative to the Euroeuro and Canadian dollar. Our business and operating margins have materially benefited from the current strengthening of the dollar. Based on our 20132016 operating costs, each $0.01 change in the value of the U.S. dollar relative to the Euroeuro and the Canadian dollar yields a total change in annual operating costs of approximately $8.0 million. Our energy and chemical sales are made in local currencies and, as a result, decline in dollar terms when the dollar strengthens. Based on our 2016 energy and chemical revenues, each $0.01 change in the value of the dollar relative to the euro and the Canadian dollar yields a total change in energy and chemical revenues of approximately $1.0 million. The above sensitivity analysis provides only a limited point-in-time view of the NBSK pulp price and foreign exchange rates discussed. The actual impact of the underlying price and rate changes may differ materially from that shown in the sensitivity analysis. 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 theour mills build up their fiber supply for the winter when there is reduced availability. Liquidity and Capital Resources Summary of Cash Flows | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | | (in thousands) | | Net cash from operating activities | | $ | 140,782 | | | $ | 159,220 | | | $ | 144,588 | | Net cash used in investing activities | | | (44,303 | ) | | | (49,817 | ) | | | (38,478 | ) | Net cash used in financing activities | | | (62,377 | ) | | | (56,664 | ) | | | (175,752 | ) | Effect of exchange rate on changes in cash, cash equivalents and restricted cash | | | (2,065 | ) | | | (7,338 | ) | | | (14,628 | ) | | | | | | | | | | | | | | Net increase (decrease) in cash, cash equivalents and restricted cash | | $ | 32,037 | | | $ | 45,401 | | | $ | (84,270 | ) | | | | | | | | | | | | | |
Cash Flows from Operating Activities.Cash from operations includes: cash received from customers; cash paid to employees and suppliers; cash paid for interest on our debt; and cash paid or received for taxes. We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber, chemicals and debt service. 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 affect the level of receivables and influence overall working capital levels. We believe our management practices with respect to working capital conform to common business practices. Cash provided by operating activities in 20132016 decreased to $36.3$140.8 million from $59.1$159.2 million in 20122015 and $154.6$144.6 million in 20112014 due to lower operating income. A decrease in receivables, excluding non-cash items,accounts receivable provided cash of $14.0$9.5 million in 2013,2016, compared to $10.8 million in 2012 and an increase in receivablesaccounts receivable using cash of $2.2$11.3 million in 2011. An2015 and $25.1 million in 2014. A decrease in inventories provided cash of $6.8 million in 2016, compared to an increase in inventories usedusing cash of $14.6$13.2 million in 2013, compared to2015 and a decrease in inventories providing cash of $1.7$6.4 million in 2012 and an increase in inventories using cash of $24.7 million in 2011.2014. A decrease in accounts payable and accrued expenses used cash of $11.6$10.3 million in 2013,2016, compared to $18.0 million in 2012 and an increase in accounts payable and accrued expenses providing cash of $19.8$9.7 million in 2011.2015 and a decrease in accounts payable and accrued expenses using cash of $5.4 million in 2014. Cash Flows from Investing Activities. Cash from investing activities includes: acquisitions of property, plant and equipment; proceeds from the sale of assets; and purchases and sales of short-term investments. Investing activities in 20132016 used cash of $45.0$44.3 million, primarily related to capital expenditures of $45.7 million.$42.5 million and intangible asset purchases of $1.8 million, primarily related to our ERP project. Investing activities in 20122015 used cash of $30.6$49.8 million, primarily duerelated to capital spendingexpenditures of $47.2 million. The maturity$46.5 million and intangible asset purchases of government bonds in 2012 provided cash of $15.8 million.$3.8 million, primarily related to our ERP project. Investing activities in 20112014 used cash of $63.8$38.5 million, primarily due to capital spending of $52.6 million and the purchase of marketable securities of $16.3 million. In 2013, capital expenditures, primarily related to Project Blue Mill,capital expenditures of $34.6 million and intangible asset purchases of $4.8 million, primarily related to our ERP project.
In 2016, capital expenditures, which used cash of $45.7 million. In 2012, capital expenditures,$42.5 million, were primarily related to Project Blue Milla railcar acceptance system for logs and the recovery boiler upgradea lime kiln retrofit at our Rosenthal mill, a wastewater reduction project consisting of an evaporation plant upgrade and a project to reduce chloride levels in the process water at our Stendal Mill and new wood harvesting equipment, a logistics and reload center and other maintenance projects at our Celgar mill. In 2015, capital expenditures, which used cash of $47.2 million. In 2011, capital expenditures,$46.5 million, were primarily related to variouswastewater reduction projects at our German mills designed to reduce wastewater fees that would otherwise be payable and the completion of an automated chip storage project at the Rosenthal mill. In 2014, capital expenditures, which used cash of $52.6 million.$34.6 million, were primarily related to a new chip screening project and a logistics and reload center at our Celgar mill and the automated chip storage project and a new tall oil plant at our Rosenthal mill. Cash Flows from Financing Activities. In 2013,Cash from financing activities provided netincludes: issuance and payments of debt; borrowings and payments under revolving lines of credit; proceeds from issuances of stock; and payment of cash dividends and repurchases of stock. In 2016, financing activities used cash of $15.2$62.4 million, primarily due to borrowingsour quarterly dividend payments which used cash of $29.7 million, the repurchase and cancellation of $23.0 million of our 2019 Senior Notes, which used cash of $23.1 million, and scheduled payments in respect of the Stendal Interest Rate Swap Contract, which used cash of $10.9 million. In 2015, financing activities used cash of $56.7 million, primarily due to repayments of our revolving credit facilities, which used cash of $23.1 million, the redemption of the payment-in-kind note issued in respect of the purchase of the minority interest in our Stendal mill in 2014, which used cash of $10.8 million, scheduled payments in respect of the Stendal Interest Rate Swap Contract, which used cash of approximately $13.5 million, and our quarterly dividend payment, which used cash of $7.4 million. In 2014, financing activities used cash of $175.8 million, primarily due to the repurchase of $334.4 million of our senior notes due 2017 and the payout and discharge of the Stendal mill’s then credit facility, which used cash of approximately $891.0 million, and the payment of $20.2 million in associated costs, partially offset by the Stendal mill under the Blue Mill Facility,issuance of shares of our common stock, which provided cash of $22.2approximately $53.9 million, and the issuance of an additional $50.0 million ofour 2019 and 2022 Senior Notes, which provided cash of $52.3$650.0 million partially offset by principal repayments under the Stendal Facilitiesand borrowings on our revolving credit facilities, which usedprovided cash of $55.0$26.3 million. In 2013,2014, we received $9.3$6.7 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 our 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. Balance Sheet Data The following table is a summary of selected financial information for the dates indicated: | | | December 31, | | | | | | | | | 2013 | | | 2012 | | | December 31, | | | | (in thousands) | | | 2016 | | 2015 | | Financial Position | | | | | | (in thousands) | | Cash and cash equivalents | | $ | 147,728 | | | $ | 137,439 | | | $ | 136,569 | | | $ | 99,629 | | Working capital | | $ | 306,274 | | | $ | 275,004 | | | $ | 308,681 | | | $ | 284,390 | | Total assets | | $ | 1,548,559 | | | $ | 1,560,581 | | | $ | 1,158,708 | | | $ | 1,182,817 | | Long-term liabilities | | $ | 1,034,743 | | | $ | 1,012,943 | | | $ | 686,410 | | | $ | 695,420 | | Total equity | | $ | 348,317 | | | $ | 367,762 | | | $ | 379,128 | | | $ | 382,976 | |
At the end of 2016, as a result of the strengthening of the dollar versus the euro, we recorded a non-cash reduction in the carrying value of our net assets, consisting primarily of our fixed assets, denominated in euros. This non-cash reduction of approximately $14.4 million does not affect our net income, Operating EBITDA or cash flows but is reflected in our other comprehensive income (loss) and as a reduction to our total equity. Sources and Uses of Funds Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills.hand. 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 currently outstanding 2019 and 2022 Senior Notes. The following table sets out our total capital expenditures and interest expense for the periods indicated: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | | (in thousands) | | Capital expenditures | | $ | 42,526 | | | $ | 46,536 | | | $ | 34,612 | | Cash paid for interest expense(1) | | $ | 50,159 | | | $ | 51,975 | | | $ | 65,013 | | Interest expense(2) | | $ | 51,575 | | | $ | 53,891 | | | $ | 67,516 | |
(1) | Amounts differ from interest expense which includes non-cash items. See supplemental disclosure of cash flow information from our consolidated financial statements included in this annual report. |
(2) | Interest on our 2019 Senior Notes and our 2022 Senior Notes is paid semi-annually in June and December of each year. In January 2017, we announced the redemption of our 2019 Senior Notes, effective March 1, 2017. See “Business – Description of Certain Indebtedness” for further information. |
As at December 31, 2013,2016, our cash and cash equivalents were $147.7$136.6 million, compared to cash and cash equivalents of $137.4$99.6 million at the end of 2012. At2015. As at the end of 2013, $64.82016, we also had cash of $4.3 million of our cash and cash equivalents were held by Stendal and underused to secure the Stendal Facilities are limited to its use.Interest Rate Swap Contract. As at December 31, 2013,2016, we had approximately €28.3 million and C$33.3$132.7 million available under our Rosenthal and Celgar facilities, respectively.revolving credit facilities. As at December 31, 2016, we had no material commitments to acquire assets or operating businesses. In 2014,2017, excluding amounts being financed through government grants, we currently expect capital expenditures to be approximately $40.0 million, primarily related$48.0 million. We currently consider the majority of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and accordingly no U.S. income tax has been provided on such earnings. However, if we were required to repatriate funds to the United States, we believe that we currently could repatriate the majority thereof without incurring any material amount of taxes as a tall oil plant, chip receiving projectresult of our shareholder advances and wastewater reduction project attax loss carryforwards. However, it is currently not practical to estimate the Rosenthal mill, wastewater reduction projects atincome tax liability that might be incurred if such earnings were remitted to 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 was 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 approximately €11.3 million ($15.0 million) of non-refundable German government grants had been received.
As at December 31, 2013, we had no material commitments to acquire assets or operating businesses.United States.
Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp 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 Rosenthalrevolving credit facilities, will be adequate to meetfinance the future liquidity needscapital requirements for our business including the payment of our quarterly dividend during the next 12 months. In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities. Credit FacilityFacilities and Debt Covenants We had the following principal amounts outstanding under our credit facilities, 2019 Senior Notes and 2022 Senior Notes as at the dates indicated: | | | | | | | | | | | December 31, | | | | 2013 | | | 2012 | | | | (in thousands) | | Rosenthal Loan Facility | | $ | — | | | $ | — | | Rosenthal Investment Loan | | $ | 749 | | | $ | 2,152 | | Rosenthal revolving €5.0 million facility | | $ | — | | | $ | — | | Celgar Working Capital Facility | | $ | — | | | $ | 6,031 | | Senior Notes | | $ | 336,382 | | | $ | 284,361 | | Stendal Loan Facility | | $ | 568,945 | | | $ | 597,158 | | Blue Mill Facility | | $ | 21,179 | | | $ | — | |
| | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | | | (in thousands) | | Stendal Revolving Credit Facility | | $ | - | | | $ | - | | Rosenthal Loan Facility | | $ | - | | | $ | - | | Rosenthal revolving €5.0 million facility | | $ | - | | | $ | - | | Celgar Working Capital Facility | | $ | - | | | $ | - | | 2019 Senior Notes(1) | | $ | 227,000 | | | $ | 250,000 | | 2022 Senior Notes | | $ | 400,000 | | | $ | 400,000 | |
(1) | In January 2017, we announced the redemption of our 2019 Senior Notes, effective March 1, 2017. See “Item I. Business – Description of Certain Indebtedness” for further information. |
For a description of such indebtedness, see Part I, “ItemItem 1. Business –“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 requireUnder 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 theRevolving Credit Facility, our 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. Failurea ratio of net debt to comply with the Ratios constitutes an eventEBITDA of default (subject2.5:1 in any 12-month period and there must be a ratio of EBITDA to the proviso set forthinterest expense equal to or in the first sentenceexcess 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 contribution1.2:1 for each 12-month period. Additionally, current assets to current liabilities must equal 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.exceed 1.1:1.
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 1.2:1.01 for each 12 month period. Additionally, current assets to current liabilities must equal or exceed 1.1:1.0.1. 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 1.1:1.01 for each 12-month period. The Stendal LoanRevolving Credit Facility is provided by a syndicate of eight financial institutions, the Stendal Blue Mill Facility by twofour 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 indentureindentures governing the 2019 and 2022 Senior Notes doesdo not contain any financial maintenance covenants and there are no scheduled principal payments until maturity. We pay interestInterest on our 2019 Senior Notes at the rate of 9.5%is payable semi-annually in arrears on June 1 and December 1, commencing June 1, 2015, at the rate of each year7.000% and they mature in December 2017.2019. Interest on our 2022 Senior Notes is payable semi-annually in arrears on June 1 and December 1, commencing June 1, 2015, at the rate of 7.750% and they mature in December 2022. As at December 31, 2013,2016, we were in full compliance with all of the covenants of our indebtedness. Off-Balance-Sheet Activities At December 31, 20132016 and 2012,2015, we had no off-balance sheet arrangements. Contractual Obligations and Commitments The following table sets out our contractual obligations and commitments as at December 31, 2013.2016: | | | Payments Due By Period | | | Payments Due By Period | | Contractual Obligations(8)(1) | | 2014 | | | 2015-2016 | | | 2017-2018 | | | Beyond 2018 | | | Total | | | 2017 | | 2018-2019 | | 2020-2021 | | Beyond 2021 | | Total | | | | (in thousands) | | | (in thousands) | | Long-term debt(1) | | $ | 749 | | | $ | — | | | $ | 373,254 | | | $ | — | | | $ | 374,003 | | | Debt, Stendal(2) | | | 59,606 | | | | 131,132 | | | | 399,386 | | | | — | | | | 590,124 | | | Debt(2) | | | $ | - | | | $ | 227,000 | (3) | | $ | - | | | $ | 400,000 | (3) | | $ | 627,000 | | Interest rate derivative | | | 6,522 | | | | - | | | | - | | | | - | | | 6,522 | | Interest on debt(3)(4) | | | 64,274 | | | | 112,943 | | | | 60,491 | | | | — | | | | 237,708 | | | 48,141 | | | 94,694 | | | 62,000 | | | 28,417 | | | 233,252 | | Capital lease obligations(4)(5) | | | 2,406 | | | | 4,677 | | | | 2,391 | | | | 3,111 | | | | 12,585 | | | 3,908 | | | 7,490 | | | 3,867 | | | 12,208 | | | 27,473 | | Operating lease obligations(5)(6) | | | 2,280 | | | | 3,371 | | | | 2,476 | | | | 929 | | | | 9,056 | | | 1,666 | | | 2,616 | | | 1,102 | | | | - | | | 5,384 | | Purchase obligations(6)(7) | | | 6,036 | | | | 677 | | | | — | | | | — | | | | 6,713 | | | 4,996 | | | 3,186 | | | 361 | | | | - | | | 8,543 | | Other long-term liabilities(7)(8) | | | 5,262 | | | | 7,767 | | | | 8,225 | | | | 22,311 | | | | 43,565 | | | 3,949 | | | 6,343 | | | 6,474 | | | 16,843 | | | 33,609 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 140,613 | | | $ | 260,567 | | | $ | 846,223 | | | $ | 26,351 | | | $ | 1,273,754 | | | $ | 69,182 | | | $ | 341,329 | | | $ | 73,804 | | | $ | 457,468 | | | $ | 941,783 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | We have identified approximately $4.7 million of asset retirement obligations. However, due to the uncertain timing related to these potential liabilities, we are unable to allocate the payments in the contractual obligations table. |
(2) | This reflects the future principal payments due under our long-term debt obligations, but excludes the Stendal Facilities.obligations. See “Item 1Item 1. “Business- Business—Description of Certain Indebtedness”, footnote 2 below and Note 76 to our annualconsolidated financial statements included herein for a description of such indebtedness. |
(2) | This reflects principal only in connection with the Stendal Facilities. See “Item 1- Business—Description of Certain Indebtedness” and Note 7 to our annual financial statements included herein for a description of such indebtedness. This does not include amounts associated with derivatives entered into in connection with the Stendal Loan Facility. See “Item 7A- Quantitative and Qualitative Disclosure about Market Risk” for information about our derivatives. |
(3) | In January 2017, we announced the redemption of our 2019 Senior Notes, effective March 1, 2017, and the issuance of $225.0 million in aggregate principal amount of our 2024 Senior Notes. See Item 1. “Business- Description of Certain Indebtedness” for further information. |
(4) | Amounts presented for interest payments include guarantee fees, and assume that all debt outstanding as of December 31, 20132016 will remain outstanding until maturity, and interest rates on variable rate debt in effect as of December 31, 20132016 will remain in effect until maturity. |
(4)(5) | Capital lease obligations relate to transportation vehicles and production equipment. These amounts reflect principal and imputed interest. |
(5)(6) | Operating lease obligations relate to transportation vehicles and other production and office equipment. |
(6)(7) | Purchase obligations relate primarily to take-or-pay contracts, including for purchases of raw materials, made in the ordinary course of business. |
(7)(8) | Other long-term liabilities relate primarily to future payments that will be made for post-employment benefits. Those amounts are estimated using actuarial assumptions, including expected future service, to project the future obligations. Additionally, the balance also includes pension funding which is calculated on an annual basis. Consequently, the 20142017 amount includes $1.6$0.9 million related to pension funding. |
(8) | We have identified approximately $5.5 million of asset retirement obligations. However, due to the uncertain timing related to these potential liabilities, we are unable to allocate the payments in the contractual obligations table. |
Foreign Currency Effective October 1, 2013, ourOur reporting currency is the U.S. dollar. However, we hold certain assets and liabilities in Euroseuros and Canadian dollars and the majority of our expenditures are denominated in Euroseuros or Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.
We translate foreign denominated assets and liabilities into U.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 Statement of Comprehensive Income (Loss)other comprehensive income (loss) and do not affect our net earnings. In the year ended December 31, 2013,2016, we reported a net $1.7$14.4 million foreign currency translation loss and, as a result, the cumulative foreign exchange translation gainloss reported within accumulated other comprehensive income (loss) decreasedloss increased to $47.8$170.6 million as at December 31, 2013.2016. In the year ended December 31, 2012,2015, we reported a net $11.6$123.0 million foreign currency translation gain.loss. Based upon the exchange rate at December 31, 2013,2016, the U.S. dollar decreasedincreased by approximately 5%3% in value against the Euroeuro and increaseddecreased by approximately 6%3% in value against the Canadian dollar since December 31, 2012.2015. See “ItemItem 7A. Quantitative“Quantitative and Qualitative Disclosures about Market Risk”. Results of Operations of the Restricted Group under our Senior Note Indenture
General
The indenture governing our 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. |
Restricted Group Results
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 21 of the consolidated financial statements included in this annual report on Form 10-K.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Pulp revenues for the Restricted Group in 2013 increased by approximately 3% to $561.4 million from $545.2 million in the comparative period of 2012, primarily due to higher average pulp sales realizations, partially offset by lower sales volume.
In 2013, revenues from the sale of excess energy decreased by approximately 8% to $33.8 million from $36.6 million in 2012, primarily due to lower sales volume.
Pulp prices were higher in 2013 than in 2012. Average list prices for NBSK pulp in Europe were $864 per ADMT in 2013, compared to $813 per ADMT in 2012. In China, average list prices were $700 per ADMT in 2013 and $667 per ADMT in 2012. In 2013, average pulp sales realizations for the Restricted Group increased by approximately 4% to $686 per ADMT from $659 per ADMT in the previous year.
Pulp sales volume of the Restricted Group decreased to 818,570 ADMTs in 2013 from 826,921 ADMTs in 2012.
Pulp production for the Restricted Group decreased to 809,659 ADMTs in 2013 from 827,977 ADMTs in 2012. In 2013 and 2012, our Celgar and Rosenthal mills had an aggregate of 21 days (approximately 25,400 ADMTs) and 30 days (approximately 32,800 ADMTs) of scheduled maintenance downtime, respectively, and expect to take approximately 22 days in 2014. We had 15 days of maintenance downtime at our Celgar mill in the first half of 2013, which, together with a slower startup, resulted in a loss of approximately 30,300 ADMTs of NBSK pulp production. See “—Results of Operations –Selected Production, Sales and Other Data – Year Ended December 31, 2013 Compared to Year Ended December 31, 2012” for further information regarding the Celgar mill shutdown.
Costs and expenses for the Restricted Group in 2013 increased to $579.4 million from $572.0 million in 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 2013 included approximately $14.3 million for regularly scheduled maintenance costs, compared to $9.6 million in 2012. 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, average per unit fiber costs of the Restricted Group increased by approximately 3% in 2013 compared to 2012, primarily due to 16% higher per unit fiber costs in Germany caused by strong demand from the European pellet and board producers and sawmills, only partially offset by a 12% decrease in per unit fiber costs for the Celgar mill.
In 2013, operating depreciation and amortization for the Restricted Group increased to $43.5 million from $40.1 million in the same period last year. Selling, general and administrative expenses marginally increased to $31.9 million from $31.7 million in 2012.
In 2013, the Restricted Group had restructuring expenses of $5.0 million related to the workforce reduction at the Celgar mill.
In 2013, the Restricted Group reported operating income of $15.7 million, compared to operating income of $9.8 million in 2012, primarily due to a higher realized sales price, partially offset by higher fiber costs in Germany, lower sales volume and the impact of a weaker U.S. dollar relative to the Euro on our German mill expenses.
Transportation costs for the Restricted Group marginally decreased to $64.1 million in 2013 from $66.1 million in 2012.
Interest expense for the Restricted Group increased to $32.3 million in 2013 from $30.1 million in 2012, primarily due to the issuance of $50.0 million of additional Senior Notes in July 2013.
In 2013, we recognized a deferred tax expense of $7.3 million, primarily as a result of the increase in the valuation reserve for our deferred tax assets on our balance sheet, compared to $6.7 million in 2012. This is a non-cash tax charge and does not reduce our underlying tax attributes.
For the reasons discussed above, the Restricted Group reported a net loss for 2013 of $19.5 million, compared to a net loss of $18.3 million in 2012, and Operating EBITDA of $59.5 million for 2013, compared to Operating EBITDA of $50.3 million for 2012. 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, | | | | 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 21 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results. |
Year 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. |
Liquidity and Capital Resources
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. Operating activities for the Restricted Group provided cash of $23.5 million in 2013 compared to using cash of $3.3 million in 2012 and providing cash of $92.8 million in 2011. A decrease in receivables provided cash of $4.8 million in 2013, compared to an increase in receivables using cash of $0.8 million in 2012 and a decrease in receivables providing cash of $4.5 million in 2011. A decrease in inventories provided cash of $2.0 million in 2013, compared to an increase in inventories using cash of $5.1 million in 2012 and $14.2 million in 2011. A decrease in accounts payable and accrued expenses used cash of $6.0 million in 2013 and $9.6 million in 2012 and an increase in accounts payable and accrued expenses provided cash of $8.2 million in 2011.
Cash Flows from Investing Activities. Investing activities used cash of $32.6 million, $12.0 million and $53.0 million in 2013, 2012 and 2011, respectively. In 2013, a capital investment in Stendal, an unrestricted subsidiary, used cash of $20.0 million. In 2013, capital expenditures used cash of $13.2 million related to various projects at our Rosenthal and Celgar mills. Capital expenditures in 2012 and 2011 used cash of $28.2 million and $41.1 million, respectively.
Cash Flows from Financing Activities. Financing activities provided net cash of $42.6 million in 2013, primarily due to cash of $52.3 million provided from proceeds from the issuance of additional Senior Notes, partially offset by the repayment of our credit facilities of $5.6 million. Financing activities provided net cash of $5.4 million in 2012 and used net cash of $48.5 million in 2011, 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 $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 $19.9 million in governmental grants.
Balance Sheet Data of the Restricted Group
The following table is a summary of selected financial information for the Restricted Group for the dates indicated:
| | | | | | | | | | | 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 21 of the financial statements included in this annual report on Form 10-K for a reconciliation to our consolidated results. |
Sources and Uses of Funds of the Restricted Group
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 $48.4 million at the end of 2012.
As at December 31, 2013, we had €28.3 million available under the credit facilities related to the Rosenthal mill and C$33.3 million under the 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 2019, 2022 and 2024 Senior Notes We and our 2019 and 2022 Senior Notes are rated by Standard & Poor’s Rating Services, referred to as “S&P”, and Moody’s Investors Service, Inc., referred to as “Moody’s”. On October 14, 2016, Moody’s upgraded its current rating on our 2019 and 2022 Senior Notes to B1 from B2 and upgraded our corporate family rating to Ba3 from B1, maintaining its outlook as “stable”. On October 20, 2016, S&P upgraded its current rating on our 2019 and 2022 Senior Notes to BB- from B+ and upgraded our long-term corporate credit rating to BB- from B+, maintaining its outlook as “stable”. S&P and Moody’s base their assessment of the credit risk on our 2019 and 2022 Senior Notes on the business and financial profile of Mercer Inc. and our restricted subsidiaries under the Restricted Group only.indentures governing the 2019 and 2022 Senior Notes. As of December 31, 2016, all of our subsidiaries are restricted subsidiaries. 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 Senior Notes to B from B+ but maintained its recovery rating at “3” and Moody’s maintained its B3 rating and “stable” outlook for our Senior Notes.
Credit ratings are not recommendations to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating. In January 2017, we announced the redemption of all of our outstanding 2019 Senior Notes and the issuance of $225.0 million aggregate principal amount of 2024 Senior Notes. Moody’s rating on the 2024 Senior Notes is B1 and its outlook is stable and S&P’s rating on the 2024 Senior Notes is BB- and its recovery rating is “3”. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of 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 accountspension and reserves,other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, legal liabilities asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies and inventory obsolescence and provisions.contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known. 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 CurrencyPension and Other Post-Retirement Benefit Obligations. Our consolidated financial statements
We maintain a defined benefit pension plan and other post-retirement benefit plan for eachcertain employees at our Celgar mill which is funded based on actuarial estimates and requirements and are non-contributory. We recognize the net funded status of the yearsplan and we record net periodic benefit costs associated with these net obligations. As at December 31, 2016, we had pension and other post-retirement benefit obligations aggregating $59.1 million and accumulated pension plan assets with a fair value of $33.0 million. Our 2016 net periodic pension and other post-retirement benefit costs were $2.0 million. The amounts recorded for the net pension and other post-retirement obligations include various judgments and uncertainties. The following inputs are used to determine our net obligations and our net periodic benefit costs each year and the determination of these inputs requires judgment: discount rate – used to determine the net present value of our pension and other post-retirement benefit obligations and to determine the interest cost component of our net periodic pension and other post-retirement benefit costs; return on assets – used to estimate the growth in the four-year period ended December 31, 2012 were reported usingvalue of invested assets that are available to satisfy pension obligations and to determine the Euro. Effective October 1, 2013, we changedexpected return on plan assets component of our reporting currencynet periodic pension costs; mortality rate – used to estimate the U.S. dollar to enhance communication and understanding with shareholders, analystsimpact of mortality on pension and other stakeholderspost-retirement benefit obligations; rate of compensation increase – used to calculate the impact future pay increases will have on pension benefit obligations; and improve comparability health care cost trend rate – used to calculate the impact of future health care costs on other post-retirement benefit obligations. For the discount rate, we use the rates available on high-quality corporate bonds with a duration that is expected to match the timing of expected pension and other post-retirement benefit obligations. High-quality corporate bonds are those with a rating of “AA” or better. In determining the expected return on assets, we consider the historical long-term returns, expected asset mix and the active management premium. For the mortality rate we use actuarially-determined mortality tables that are consistent with our historical mortality experience and future expectations for mortality of the employees who participate in our pension and other post-retirement benefit plans. In determining the rate of compensation increase, we review historical compensation increases and promotions, while considering current industry conditions, the terms of collective bargaining agreements with employees and the outlook for the industry. For the health care cost trend rate, we consider historical trends for these costs, as well as recently enacted healthcare legislation. We also compare our health care rate to those of our financial information withindustry. Variations in assumptions described above could have a significant effect on the pension and other competitorspost-retirement benefit net periodic benefit cost and peer group companies. With the changeobligation reported 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 reportedstatements. For example, a one-percentage point change in U.S. dollars, consistent with our currency translation policy described below and in Note 1any one 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 Eurosassumptions would have increased (decreased) our 2016 net periodic benefit cost and U.S. dollarsour accrued benefit obligation as follows:
| | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | | Accrued benefit obligation | | | | 1% increase | | | 1% decrease | | | 1% increase | | | 1% decrease | | Assumption | | ($ in thousands) | | Discount rate | | | 112 | | | | (185 | ) | | | (7,077 | ) | | | 8,102 | | Return on assets | | | (294 | ) | | | 294 | | | | N/A | | | | N/A | | Rate of compensation | | | 15 | | | | (15 | ) | | | 359 | | | | (355 | ) | Health care cost trend rate | | | 32 | | | | (34 | ) | | | 578 | | | | (564 | ) |
Deferred Taxes As at and for the year ended December 31, 2013.2016, we had $11.0 million in deferred tax assets and $17.3 million in deferred tax liabilities, resulting in a net deferred tax liability of $6.3 million. Our tax assets are net of an $81.4 million valuation allowance. Our deferred tax assets are comprised primarily of tax loss carryforwards and deductible temporary differences, both of which will reduce taxable income in the future. We assess the realization of these deferred tax assets at each reporting period to determine whether it is more likely than not that the deferred tax assets will be realized. Our assessment includes a review of all available positive and negative evidence, including, but not limited to, the following: | | | | | | | | | | | Euros | | | US$ | | | | (in thousands, other than per share data and per ADMT amounts) | | Statement of Operations Data | | | | | | | | | Revenues | | | | | | | | | Pulp | | € | 749,858 | | | $ | 996,187 | | Energy and chemicals | | | 69,400 | | | | 92,198 | | | | | | | | | | | | | € | 819,258 | | | $ | 1,088,385 | | Costs and expenses | | € | 795,427 | | | $ | 1,056,725 | | Operating income (loss) | | € | 23,831 | | | $ | 31,660 | | Interest expense | | € | (52,056 | ) | | $ | (69,156 | ) | Gain (loss) on derivative instruments | | € | 14,836 | | | $ | 19,709 | | Other income (expense) | | € | 915 | | | $ | 1,215 | | Net income (loss)(1) | | € | (19,853 | ) | | $ | (26,375 | ) | Net income (loss) per share(1) | | | | | | | | | Basic and diluted | | € | (0.36 | ) | | $ | (0.47 | ) | Weighted average shares outstanding (in thousands) | | | | | | | | | Basic and diluted | | | 55,674 | | | | 55,674 | | Balance Sheet Data | | | | | | | | | Current assets | | € | 342,386 | | | $ | 471,773 | | Current liabilities | | € | 120,110 | | | $ | 165,499 | | Working capital | | € | 222,276 | | | $ | 306,274 | | Total assets | | € | 1,123,855 | | | $ | 1,548,559 | | Long-term liabilities | | € | 750,957 | | | $ | 1,034,743 | | Total equity | | € | 252,788 | | | $ | 348,317 | | Other Data | | | | | | | | | Average pulp price realized (per ADMT)(2) | | € | 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. |
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 allhistory of the investmenttax loss carryforwards and their expiry dates;
future reversals of temporary differences; our historical and projected earnings; and tax planning opportunities. Significant judgment is required when evaluating the positive and negative evidence, specifically the Company’s estimates of future earnings. 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. A cumulative loss position during the most recent three-year period is considered significant negative evidence in assessing the realizability of deferred income tax assets that is difficult to overcome. Once our evaluation of the evidence is complete, if we believe that it is more likely than not that some of the deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is recorded against the deferred tax assets. If market conditions improve or tax planning opportunities arise in the subsidiaries is sold or liquidated. The translation adjustments do not recognizefuture, we may reduce our valuation allowance, resulting in future tax benefits. If market conditions deteriorate in the effect of incomefuture, we may increase our valuation allowance, resulting in future tax whenexpenses. Any change in tax laws may change the valuation allowances in future periods. Property, Plant and Equipment As at December 31, 2016, 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 ishad property, plant and equipment recorded as a component of deferred taxes in our Consolidated Balance Sheet with an offset to other comprehensive income. Gainsof $738.3 million. In 2016, we recorded depreciation 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 our balance sheet as assets or liabilities. The change in fair value of electricity derivative contracts is included in operating costs in our Consolidated Statement of Operations and any changes in the fair value of foreign currency, interest rate and pulp price derivative contracts are recognized in gain (loss) on derivative instruments in our Consolidated Statement of Operations. Periodically, we enter into derivative contracts to supply materialsamortization for our own use, which are exempt from mark-to-market accounting.
In 2013, we reported an unrealized non-cash gain of $22.5 million before noncontrolling interest in respect of the Stendal Interest Rate Swap Contract and a realized loss of $2.8 million for our pulp price swap contracts.
Impairment of Long-Lived Assets. We state property, plant and equipment at cost less accumulated depreciation. Depreciation of buildings$69.1 million.
The calculation of depreciation and productionamortization of property, plant and equipment is based onrequires us to apply judgment in selecting the estimatedremaining useful lives of the assetsassets. The remaining useful life of an asset must address both physical and is computed using the straight-line method. Buildings are depreciated over 10 to 50economic considerations. The remaining economic life of property, plant and equipment may be shorter than its physical life. The pulp industry in recent years has been characterized by considerable uncertainty in business conditions. Estimates of future economic conditions for our property, plant and production equipment and other primarily over 25 years.therefore, their remaining useful economic life, require considerable judgment. If our estimate of the remaining useful life changes, such a change is accounted for prospectively in our determination of depreciation and amortization. Actual depreciation and amortization charges for an individual asset may therefore be significantly accelerated if the outlook for its remaining useful life is shortened considerably. We evaluate long-lived assetsproperty, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value 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 assetsproperty, plant and equipment 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 costsContingent Liabilities
We are subject to lawsuits, investigations and other claims related to environmental, product and other matters, and are required to assess the likelihood of major rebuilds, replacements and those expenditures that substantially increase the useful lives of existing property, plant, and equipment are capitalized,any adverse judgments or outcomes to these matters, as well as interest costs associated with major capital projects until ready for their intended use. The costpotential ranges 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.
probable losses. We provide for asset retirement obligationsdisclose contingent liabilities when there is a legislated or contractual basis for those obligations. Obligations are recorded as a liability at fair value, with a corresponding increasereasonable possibility that an ultimate loss may occur and we record contingent liabilities when it becomes probable that we will have to property, plant,make payments and equipment,the amount of loss can be reasonably estimated. Assessing probability of loss and are amortized over the remaining useful lifeestimating probable losses requires analysis of the related assets. The liability is accreted using a risk-free interest rate. As a result of current market conditions, we concluded that there were no impairment indicators. Accordingly, we did not undertake a long-lived asset impairment review in 2013.
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,multiple factors, including, but not limited to, the following:
the history of the tax loss carryforwards and their expiry dates;historical experience; future reversalsjudgments about the potential actions of temporary differences;third party claimants and courts; and our historical and projected earnings; andrecommendations of legal counsel. tax planning opportunities.
If we believe that it is more likely than not that some of these deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is recorded against these deferred tax assets. Additionally, based on guidance noted in FASB Accounting Standards Codification Topic 740,Income Taxes, a cumulative loss position is considered significant negative evidence in assessing the realizability of deferred income tax assets that is difficult to overcome. As at December 31, 2013, we had $23.5 million in deferred tax assets and $14.5 million in deferred taxContingent liabilities resulting in a net deferred tax asset of $9.0 million. Our tax assets are net of a $140.8 million valuation allowance. For the year ended December 31, 2013, our review concluded that it was appropriate to increase the valuation allowance against loss carryforwards by approximately $17.0 million, after considering historical and forecast 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 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 takebest information available and actual losses in any future period are inherently uncertain. If estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges. These exposures and proceedings can be significant and the ultimate negative outcomes could be material 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 outcomesour operating results or liquidity 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 positivelyany given quarter or negatively, from estimated inventory provisions.
As at December 31, 2013, we did not record an inventory provision against any of our finished goods and raw materials inventories.year.
New Accounting Standards.Standards See Note 1 to our consolidated financial statements included in Item 15 of this annual report onForm 10-K. Cautionary Statement RegardingForward-Looking Information
The statements in this annual report on Form 10-K that are not reported financial results or other historical information are“forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995, as amended. These statements appear in a number of different places in this report and can be identified by words such as “estimates”, “projects”, “expects”, “intends”, “believes”, “plans”, or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties.Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. You are cautioned that any 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 on Form 10-K for the fiscal year ended December 31, 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 on Form 10-K.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 euro and Canadian dollar versus the U.S. dollar. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the periodic use of derivatives. We may use derivatives to reduce or limit our exposure to interest rate and currency risks. We may also use derivatives to reduce or limit our exposure to fluctuations in pulp prices. We 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 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 reference point to calculate the payments to be exchanged between the two parties and the notional amount itself is not generally exchanged by the parties. The principal derivatives we periodically use are interest rate derivatives, pulp price derivatives, energy derivatives and foreign exchange derivatives. Interest rate derivatives include interest rate forwards (forward rate agreements) which are contractual obligations to buy or sell an interest-rate-sensitive financial instrument on a future date at a specified price. They also include interest rate swaps which are over-the-counter contracts in which two counterparties exchange interest payments based upon rates applied to a notional amount. 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 the over-the-counter market. We occasionally
As at December 31, 2016 and 2015, we had no outstanding derivatives, other than the Stendal Interest Rate Swap Contract. However, in the future, we may from time to time use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from Euroseuros 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 denominateddollar-denominated debt in the form of our 2019 Senior Notes, 2022 Senior Notes and, commencing in February 2017, 2024 Senior Notes. We may also from time to time use pulp price derivatives to fix price realizations and interest rate derivatives to fix the rate of interest on indebtedness, including underindebtedness. In August 2002, Stendal entered into the Stendal Loan Facility. The interest rate derivatives we entered into were pursuantInterest Rate Swap Contract in connection with its long-term indebtedness relating to the Stendal Loan Facility which provides facilities for foreign exchange derivatives,mill to fix the interest rate derivativesthereunder at the then low level, relative to its historical trend and commodities derivatives, subject to prescribed controls, including maximumprojected variable interest rate. Under the Stendal Interest Rate Swap Contract, Stendal pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional and at-risk amounts.amount. The interest rates payable thereunder were swapped into fixed rates based on the Euribor rate for the repayment periods of the tranches under Stendal’s indebtedness. Stendal effectively converted its indebtedness from a variable interest rate loan into a fixed interest rate loan. The Stendal Loan Facility is secured by substantially allInterest Rate Swap Contract was left in place following the refinancing 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, 2013, we had not entered into any such derivative instruments.Stendal’s indebtedness in November 2014.
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 Contract 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 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. The following table and the notes thereto sets forth the maturity date, the notional amount, the recognized gain or loss and the strike and swap rates for derivatives that were in effect during 20132016 and 2012:2015: | | | | | December 31, 2013 | | December 31, 2012 | | | | | December 31, 2016 | | December 31, 2015 | | Derivative Instrument | | Maturity Date | | Notional Amount | | | Recognized Gain (Loss) | | Notional Amount | | | Recognized Gain (Loss) | | | Maturity Date | | Notional Amount | | Recognized Gain (Loss) | | Notional Amount | | Recognized Gain (Loss) | | | | | | (in millions) | | | (in thousands) | | (in millions) | | | (in thousands) | | | | | (in millions) | | (in thousands) | | (in millions) | | (in thousands) | | Stendal interest rate swap(1) | | October 2017 | | $ | 422.7 | | | $ | 22,476 | | | $ | 471.5 | | | $ | 2,203 | | | October 2017 | | | $ | 135.4 | | | $ (241) | | | $ | 209.0 | | | $ (935) | | 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 Contract which are variable-to-fixed interest rate swaps, for the term of the Stendal Loan Facility, with respect to an aggregate maximum amount of approximately €612.6 million of the principal amount of the long-term indebtedness under the Stendal Loan Facility.its then credit facility. The remaining contract commenced in April 2005 for a notional amount of €612.6 million, with an interest rate of 5.28%, and the notional amount gradually decreases and the contract terminates upon the maturity of the Stendal Loan Facility in October 2017. |
(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 $890 per MT. These contracts matured in December 2013. |
Interest Rate Risk Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate financial instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. We may seek to manage our interest rate risks through the use of interest rate derivatives. For a discussion of our interest rate derivatives including maturities, notional amounts, gains or losses and swap rates, see “Derivatives” in this Item 7A.“- Derivatives”. The following tables provide information about our exposure to interest rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 20132016 and expected cash flows from these instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As at December 31, 2013 | | | | Carrying | | | Fair | | | Expected maturity date | | | | Value | | | Value | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | Thereafter | | | | (in thousands, other than percentages) | | Liabilities | | | | | Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed rate ($)(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 | | | As at December 31, 2016 | | | | Amount | | Value | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | | Thereafter | | | Total | | | Fair Value | | | Expected maturity date | | | | (in thousands, other than percentages) | | | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Interest Rate Derivatives | | | | | | | | | (in thousands, other than percentages) | | Liabilities | | | | | | Long-term debt: | | | | | | | | | | | | | | | | | | Fixed rate ($)(1)(2) | | | 627,000 | | | 654,378 | | | | - | | | | - | | | 227,000 | | | | - | | | | - | | | 400,000 | | Average interest rate | | | 7.47 | % | | 7.47 | % | | | | | | | | | | | | | | | | | Notional Amount | | | Fair Value | | | Expected maturity date | | | | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | | | | (in thousands, other than percentages) | | Interest Rate Derivative Liability | | | | | | Interest rate swap: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Variable to fixed ($)(4) | | | 422,715 | | | (46,517 | ) | | 75,729 | | | 81,830 | | | 88,323 | | | 176,833 | | | | — | | | | — | | | Variable to fixed ($)(3) | | | 135,432 | | | 6,522 | | | 135,432 | | | | - | | | | - | | | | - | | | | - | | | | - | | Average pay rate | | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | | — | | | | | 5.28 | % | | 5.28 | % | | 5.28 | % | | | - | | | | - | | | | - | | | | - | | | | - | | Average receive rate | | | 0.3 | % | | 0.3 | % | | 0.3 | % | | 0.3 | % | | 0.3 | % | | 0.3 | % | | | — | | | | | (0.20 | )% | | (0.20 | )% | | (0.20 | )% | | | - | | | | - | | | | - | | | | - | | | | - | |
(1) | 2019 Senior Notes bearing interest at 9.50%7.0%, principal amount $336.4$227.0 million. In January 2017, we announced the redemption of our 2019 Senior Notes, effective March 1, 2017. See “Item 1. Business – Description of Certain Indebtedness” for further information. |
(2) | Stendal Loan Facility bears2022 Senior Notes bearing interest at varying rates of between Euribor plus 0.90% to Euribor plus 1.80%. The Blue Mill Facility bears interest at Euribor plus 3.5%.7.75%, principal amount $400.0 million. |
(3) | Rosenthal investment loan bears interest at Euribor plus 2.75%. |
(4) | The Stendal Interest rate swap put in place on the Stendal Loan Facility, effectively converting it from a variable interest rate to a fixed interest rate loan.Rate Swap Contract. |
Foreign Currency Exchange Rate Risk Our reporting currency is the U.S. dollar. However, we hold financial instruments denominated in Euroseuros and Canadian dollars which are sensitive to foreign currency exchange rate fluctuations. A depreciation of these currencies against the U.S. dollar will decrease the fair value of such financial instrument assets and an appreciation of these currencies against the U.S. dollar will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against the U.S. dollar will increase the fair value of such financial instrument assets and a depreciation of these currencies against the U.S. dollar will decrease the fair value of financial instrument liabilities, thereby increasing our fair value. We may seek to manage our foreign currency risks by utilizing foreign exchange rate derivatives. For a discussion of such derivatives including maturities, notional amounts, gains or losses and strike rates, see “–Derivatives” in this Item 7A.. The following table provides information about our exposure to foreign currency exchange rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 20132016 and expected cash flows from these instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As at December 31, 2016 | | | | Carrying Value | | | Fair Value | | | Expected maturity date | | Financial Instruments | | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Thereafter | | | | (in thousands) | | in euros | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 63,078 | | | | 63,078 | | | | 63,078 | | | | - | | | | - | | | | - | | | | - | | | | - | | Restricted cash | | | 4,100 | | | | 4,100 | | | | 4,100 | | | | - | | | | - | | | | - | | | | - | | | | - | | Accounts receivable | | | 53,847 | | | | 53,847 | | | | 53,847 | | | | - | | | | - | | | | - | | | | - | | | | - | | Accounts payable and accrued liabilities | | | 44,665 | | | | 44,665 | | | | 44,665 | | | | - | | | | - | | | | - | | | | - | | | | - | | Derivative financial instruments | | | 6,180 | | | | 6,180 | | | | 6,180 | | | | - | | | | - | | | | - | | | | - | | | | - | | Capital leases | | | 20,502 | | | | 20,502 | | | | 2,931 | | | | 2,428 | | | | 3,113 | | | | 1,341 | | | | 1,270 | | | | 9,419 | | | | | | | | | | | in Canadian dollars | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 11,728 | | | | 11,728 | | | | 11,728 | | | | - | | | | - | | | | - | | | | - | | | | - | | Accounts receivable | | | 4,166 | | | | 4,166 | | | | 4,166 | | | | - | | | | - | | | | - | | | | - | | | | - | | Accounts payable and accrued liabilities | | | 29,113 | | | | 29,113 | | | | 29,113 | | | | - | | | | - | | | | - | | | | - | | | | - | | Capital leases | | | 1,393 | | | | 1,393 | | | | 276 | | | | 276 | | | | 276 | | | | 276 | | | | 276 | | | | 13 | |
Pulp Price Risk 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. Energy Price Risk We are subject to some energy price risk, primarily for natural gas purchases. Our electricity price risks are mitigated by the ability of all of our mills to produce renewable energy. 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 on Form 10-K, are included in this annual report on Form 10-K commencing on page 84.88. ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable. ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this annual report on Form 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. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Mercer’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Mercer’s internal control over financial reporting as of December 31, 2013.2016. In making this assessment, management used the criteria set forth inInternal Control-Integrated Framework, as issued in 19922013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management concluded that Mercer maintained effective internal control over financial reporting as of December 31, 2013.2016. The effectiveness of Mercer’s internal control over financial reporting as of December 31, 20132016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which appears within. Changes in Internal Controls There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2013period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. | OTHER INFORMATION |
Not applicable. PART III ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Executive Chairman, Chief Executive Officer and Directors 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 56,59, has served as director since May 1985, andas President and Chief Executive Officer from 1992 to July 2015 and as Executive Chairman since 1992.July 2015. In March 2016, Mr. Lee was appointed a director of Golden Valley Mines Ltd. Previously, during the period thatwhen 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. He holds a Bachelor of Science degree in Chemical Engineering from the University of British Columbia, Canada. Mr. Lee possesses particular knowledge and experience in our business as a “founder” and as our Chief Executive Officer for over 24 years. He also has broad knowledge and experience in finance and banking, credit markets, international pulp markets, derivative risk management and internationalcapital allocation. Through his experience and background, Mr. Lee provides vision and leadership to the Board. Mr. Lee also provides the Board with insight and information regarding our strategy, operations and business. David M. Gandossi, age 59, has served as a director and as Chief Executive Officer and President since July 2015 and served as Executive Vice-President, Chief Financial Officer and Secretary from August 2003 to July 2015. His previous roles included Chief Financial Officer and other senior executive positions with Formation Forest Products and Pacifica Papers Inc. Since 2007, Mr. Gandossi has chaired the B.C. Pulp and Paper Task Force, a joint government industry and labor effort mandated to identify measures to improve the competitiveness of the British Columbia pulp markets.and paper industry. He also participated in the Pulp and Paper Advisory Committee to the BC Competition Council and was a member of B.C.’s Working Roundtable on Forestry. He is currently a director of FPInnovations and Chair of the FPI 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 Science Degree in Chemical EngineeringCommerce degree from the University of British Columbia and is a Fellow of the Institute of Chartered Accountants of British Columbia in Canada. Eric Lauritzen, age 75,78, has served as a director since June 2004. From 1994 until his retirement in 1998, he was President and Chief Executive Officer of Harmac Pacific, Inc., a TSX-listed pulp producer that was acquired by Pope & Talbot Inc. From 1981 to 1994, he served as Vice President, Pulp and Paper Marketing of MacMillan Bloedel Limited, a TSX-listed North American pulp and paper company that was acquired by Weyerhaeuser Company Limited. Mr. Lauritzen has accumulated extensive executive, production and marketing experience in the pulp and paper industry, particularly in the softwood kraft pulp sector. He received his Bachelor of Commerce degree in 1961 from the University of British Columbia and his M.B.A. in 1963 from Harvard Business School. Mr. Lauritzen brings to the Board broad industry and leadership experience and understanding of the pulp business on a global basis, including sales and marketing. He also provides leadership to our Board on board practices, governance matters and succession planning in his role as the Lead Director of the Board. William D. McCartney, age 58,61, 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 1990, he was a founding partner of Davidson & Company, chartered accountants,Chartered Accountants, where he specialized in business advisory services. He has been involved with numerous capital restructuring and financing events involving several public companies and brings substantial knowledge relating to the financial accounting and auditing processes. He is a member of the Local Advisory Committee of the TSX and TSX Ventures Exchanges.Venture Exchange. He is a chartered accountant and has been a member of the Canadian Institute of Chartered Accountants since 1980. He holds a Bachelor of Arts degree in Business Administration from Simon Fraser University. Mr. McCartney has extensive experience in accounting, financial and capital markets. He provides the Board with insight and leads its review and understanding of accounting, financial and reporting matters. Mr. McCartney provides the Board experience and leadership on accounting and financial matters in his role as Chair of the Board’s Audit Committee. Graeme A. Witts, age 75,78, has served as a director since 2003. He is also a Directordirector 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 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 also has experience in government auditing and brings significant financial accounting knowledge from a global perspective. Mr. Witts is a fellowFellow of the Institute of Chartered Accountants of England and Wales and holds a masters degree in chemistry from Oxford University and a research degree in magnetic resonance. Mr. Witts has extensive experience in global accounting and financial matters, which he brings to the Board along with senior executive experience with large international companies. His broad knowledge and senior level experience in European businesses, accounting and financing matters provide valuable insights to the Board. Bernard Picchi, age 64,67, has served as a director since 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. Picchi served as Managing Partner of Willow Rock Associates from August 2008 through June 2009, a company 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 Investors, 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 on which he has served for the past 30 years. Mr. Picchi brings to our Board his significant experience and financial expertise in the capital markets, investments and analysis of public companies. His broad experience in the capital markets and particularly as a financial analyst and wealth manager provide the Board with valuable insight into the expectations, concerns and interests of investors, shareholders and the capital markets generally. James Shepherd, age 61,64, has served as a director since June 2011. He is also currently a director of Conifex Timber Inc., which is listed on the TSX Venture Exchange, and Buckman Laboratories International Inc. Mr. Shepherd was President 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 Conifex Timber Inc., Canfor Corporation as well asand Canfor Pulp Income Fund (now Canfor Pulp Products Inc.). Mr. Shepherd holds a degree in Mechanical Engineering from Queen’s University. Mr. Shepherd has held several chief executive officer leadership and other senior positions in the forest industry. As a result, Mr. Shepherd brings to the Board extensive senior executive experience relevant to our operations and an understanding of all aspects of the forest products business, ranging from fiber harvesting to lumber and pulp and paper operations. He also brings to our Board significant experience and background in the designing, execution and implementation of large, complex capital projects at large manufacturing facilities like our mills. R. Keith Purchase, age 69,72, has served as a director since June 2012. He is currently also a director of Hardwoods Distribution Inc., which is listed on the Toronto Stock Exchange. Mr. Purchase was Executive Vice-President and Chief Operating Officer for MacMillan Bloedel Ltd. from 1998 to 1999, President and Chief Executive Officer of TimberWest Forest Ltd. from 1994 to 1998 and Managing Director of Tasman Pulp and Paper from 1990 to 1994. Mr. Purchase was previously a director of Catalyst Paper Corporation and Chair of theits board of directors. As heMr. Purchase has held several very senior positions in significant companies involved in the forestry industry, Mr. Purchaseindustry. He brings to the Board extensive senior executive experience relevant to the Company’s operations, as well as significant board of director leadership experience from a wide variety of companies. Nancy Orr, age 63,66, has served as a director since May 2013. Ms. Orr is currently also a director of Blue Goose Capital Inc.Protocol Biomass Corp., Cavendish Health and Social Services Centre, Ressources Quebec Inc. and Prometic Life Sciences Inc. and Ressources Québec, a subsidiary of Investissement Québec. Ms. Orr’s previous experience includes serving as President of Dynamis Group Inc. from 1991 to 2007, a private company involved in the energy and wood recycling sectors in Europe and the United States. Ms. Orr also served as Interim Chief Financial Officer of Redline Communications Inc., where she also served as a director, Chair of theits 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 and compensation committee member of a wide variety of companies.publicly traded companies and government corporations, including the Bank of Canada, Dundee Wealth Management Inc., Fibrek Inc., Donohue Inc., les Services Financiers CDPQ – la Caisse de dépôt et placement du Québec, H.E.C. Montréal and FRV Media Inc. Ms. Orr is a member of the Institute ofWomen Corporate Directors and has been a Fellow member of the Canadian InstituteChartered Professional Accountants of Chartered Accountants since 1978. SheQuebec and 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 Ms. Orr brings to the Board extensive experience 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, Mr. Gandossi has chairedknowledge in the B.C. Pulp and Paper Task Force, a joint governmentforest products industry and labor effort mandated to identify measures to improvein financial and accounting matters. She provides the competitiveness of the British Columbia pulpBoard with valuable experience and paper industry. He also participated in the Pulpinsight into board and Paper Advisory Committee to the BC Competition Councilgovernance practices and was a member of BC’s Working Roundtable on Forestry. He is currently a Director of FPInnovations and Chair of the FPI 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 Accountant in Canada CPA, CA.accounting matters.
Claes-Inge Isacson, age 68, has served as Chief Operating Officer since November 2006. Prior to this role at Mercer, Mr. Isacson was President at AF Process, a worldwide consulting and 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 twenty-eight years of senior level pulp and paper management to the senior management team. He holds a Master of Science Degree in Mechanical Engineering.Other Executive Officers
David K. Ure, age 46,49, returned to Mercer in September 2013, assuming the role of Senior Vice President, Finance.Finance from September 2013 to July 2015 and the role of Chief Financial Officer and Secretary from July 2015. 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 TrojanLitho,Trojan Lithograph Corporation, as well as CFO and Secretary of Finlay Forest Industries Inc. Mr. Ure has over fifteen15 years’ experience in the forest products industry. He holds a Bachelor 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 56,59, 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 degree from Freie Universität Berlin and a degree in Business Management from the University of Applied Sciences in Berlin. Richard Short, age 46,49, has served as Vice President, Controller since February 2014 and as Controller from November 2010 to February 2014, prior to which he served as Controller and Director, Corporate Finance since joining Mercer in 2007. Previous roles include Controller, Financial Reporting from 2006 to 2007 and Director, Corporate Finance from 2004 to 2006 with Catalyst Paper Corporation.Corporation and Assistant Controller at the Alderwoods Group Inc. Mr. Short holds a Bachelor of Arts in Psychology from the University of British Columbia and has been a member of the Canadian Institute of Chartered Accountants since 1993. David M. Cooper, age 60,63, has served as Vice President of Sales and Marketing for Europe since 2005. Mr. Cooper previously held a variety of senior positions around the world at Sappi Ltd. from 1982 to 2005. These roles included the sales and marketing of various pulp and paper grades and the management of a manufacturing facility. Mr. Cooper has more than thirty years of diversified experience in the international pulp and paper industry. Eric X. Heine, age 50,53, has served 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. from 1999 to 2005. Mr. Heine has over twenty-five years of experience in the pulp and paper industry, including developing strategic sales channels and market partners to build corporate brands. He holds a Bachelor of Science in Forestry (Wood Science) from the University of Toronto, Canada. Wolfram Ridder, age 52,55, has served as Vice President of Business Development since 2005, prior to which he served as Managing Director at Mercer’s Stendal mill from 2001 to 2005. Mr. Ridder also served as Vice President Pulp Operations, Assistant to CEO from 1999 to 2005 and Assistant Managing Director at the Rosenthal mill from 1995 to 1998. 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 1988 to 1995. Mr. Ridder has a Master of Business and Administration and a Master of Wood Science and Forest Product Technology from Hamburg University. Genevieve Stannus, age 43,46, has served as Treasurer since July 2005, prior to which she served as Senior Financial Analyst since joining Mercer in August 2003. Prior to her role at Mercer, Ms. Stannus held Senior Treasury Analyst positions with Catalyst Paper Corporation and Pacifica Papers Inc. Ms. Stannus has over twenty years of experience in the forest products industry. She is a member of the Certified General Accountants Association of Canada. Brian Merwin, age 40,43, has served as Vice President, Strategic Initiatives since February 2009. Mr. Merwin previously held roles within Mercer such as Director, Strategic and Business Initiatives, and Business Analyst. He was a key member of Celgar’s Greenthe Celgar Energy Project, and was instrumental in the development of the BCB.C. Hydro energy purchase agreement and securing the ecoENERGY grant. Mr. Merwin has a Master of Business and Administration from the Richard Ivey School of Business in Ontario, Canada and a Bachelor of Commerce Degreedegree from the University of British Columbia, Canada. We also have experienced mill managers at all of our mills who have operated through multiple business cycles in the pulp industry. The Board met six times during 20132016 and each current member of the Board attended 100% 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 20132016 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. Audit 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 this Form 10-K and is available on our website at www.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. ShepherdWitts and Ms. Orr, each of whom is independent under applicable laws and regulations and the listing requirements of the NASDAQ Global Select Market. Mr. McCartney is a Chartered Accountant and a “financial expert” within the meaning of such term under theSarbanes-Oxley Act of 2002. The Audit Committee met four times during 2013.2016. 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 1120, 700 West Pender Street, Vancouver, British Columbia, Canada V6C 1G8. Compensation and Human Resource Committee 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 at www.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. Picchi, Mr. Witts, Mr. PurchaseShepherd and 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 sixfour times during 2013.2016. Governance and Nominating Committee The Board has established a Governance and Nominating Committee comprised of Mr. Lauritzen, Mr. McCartney and Mr. Witts,Purchase, 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 this Form 10-K and is available on our website at www.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 codes of best practice; (iii) assist in the creation of a corporate culture and environment of integrity and accountability; (iv) in conjunction with the Lead Director, monitor the quality of the relationship between the Board and management; (v) review management succession plans; (vi) recommend to the Board nominees for appointment to the Board; (vii) lead the Board’s annual review of the Chief Executive Officer’s performance; and (viii) set the Board’s forward meeting agenda. The Governance and Nominating Committee met sixfive times in 2013.2016. Environmental, Health and Safety Committee The Board established an Environmental, Health and Safety Committee in 2006, currently comprised of Mr. Shepherd, Mr. Purchase 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 at www.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 fourfive times in 2013.2016. Lead Director/Deputy Chairman The Board appointed Mr. Lauritzen as Lead Director in 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. Code of Business Conduct and Ethics and Anti-Corruption Policy The Board has adopted a Code of Business Conduct and Ethics that applies to our directors, employees and executive officers.officers and an Anti-Corruption Policy. The code is incorporated by reference inand the exhibits to this Form 10-K and ispolicy are available on our website at www.mercerint.com under the “Governance” link. A copyCopies of the code and the policy may also be obtained without charge upon request to Investor Relations, Mercer International Inc., Suite 1120, 700 West Pender Street, Vancouver, British Columbia, Canada V6C 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). Section 16(a) Beneficial Ownership Reporting Compliance 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 2014,2017, 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 2014,2017, which will be filed with the SEC within 120 days of our most recently completed fiscal year. 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 2014,2017, 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 |
Review, Approval or Ratification of Transactions with Related Persons Pursuant to the terms of the Audit Committee Charter, the Audit Committee is responsible for reviewing and approving the terms and conditions of all proposed transactions between us, any of our officers, directors or shareholders who beneficially own more than 5% of our outstanding shares of common stock, or relatives or affiliates of any such officers, directors or shareholders, to ensure that such related party transactions are fair and are in our overall best interest and that of our shareholders. In the case of transactions with employees, a portion of the review authority is delegated to supervising employees pursuant to the terms of our written Code of Business Conduct and Ethics. The Audit Committee has not adopted any specific procedures for conduct of reviews and considers each transaction in light of the facts and circumstances. In the course of its review and approval of a transaction, the Audit Committee considers, among other factors it deems appropriate: Whether the transaction is fair and reasonable to us; The business reasons for the transaction; Whether the transaction would impair the independence of one of our non-employee directors; and Whether the transaction is material, taking into account the significance of the transaction. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction. The information called for by Items 404(a) and 407(a) of Regulation 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 2014,2017, 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 2014,2017, which will be filed with the SEC within 120 days of our most recently completed fiscal year. PART IV ITEM 15. | EXHIBITS AND FINANCIAL STATEMENTSSTATEMENT SCHEDULES |
(a) (1)Financial Statements
(b)(a)(2)List of Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (a)(3) Exhibits Exhibits that are not filed herewith have been previously filed with the SEC and are incorporated herein by reference. | | | 2.1 3.1 | | 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,Mercer International Inc., as amended. Incorporated by reference from Form 8-A datedfiled March 1,2, 2006. | | | 3.2 | | Bylaws of the Company.Mercer International Inc. Incorporated by reference from Form 8-A datedfiled March 1,2, 2006. | | | 4.1 | | Indenture dated as of November 17, 201026, 2014 between Mercer International Inc. and Wells Fargo Bank, National Association.Association, as trustee, relating to the 2019 Senior Notes. Incorporated by reference from Form 8-K filed on July 23, 2013.November 28, 2014. | | | 10.1* 4.2 | | Project Financing Facility AgreementIndenture dated AugustNovember 26, 20022014 between Zellstoff Stendal GmbHMercer International Inc. and Bayerische Hypo-und Vereinsbank AG,Wells Fargo Bank, National Association, as amendedtrustee, relating to the 2022 Senior Notes. Incorporated by Amendment, Restatement and Undertaking Agreement dated January 31, 2009 and the Amendment Agreement dated January 20, 2012.reference from Form 8-K filed November 28, 2014. | | | 10.2* 4.3 | | Project Blue Mill Financing Facility AgreementIndenture dated January 20, 2012February 3, 2017 between Zellstoff Stendal GmbHMercer International Inc. and UnicreditWells Fargo Bank, AG and IKB Deutsche Industriebank AG.National Association, as trustee, relating to the 2024 Senior Notes. Incorporated by reference from Form 8-K filed February 3, 2017. | | | 10.3* 10.1 | | Shareholders’ UndertakingRevolving Credit Facility Agreement dated August 26, 2002November 25, 2014 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH, UniCredit Bank AG, Credit Suisse AG, London Branch, Royal Bank of Canada and Bayerische Hypo-und Vereinsbank AG as amendedBarclays Bank PLC. Incorporated by the Amendment Restatement and Undertaking Agreement dated January 20, 2012.reference from Form 8-K filed November 28, 2014. | | | 10.4* 10.2 | | 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. Incorporated by reference from Form 10-K filed March 31, 2003. | | | 10.7 10.3† | | 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 datedfiled June 15,16, 2004. | | | 10.10 10.4† | | Mercer International Inc. 2010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010. | Appendix A to Mercer International Inc.’s definitive proxy statement on Schedule 14A filed April 24, 2014. | | | | | 10.11 10.5† | | 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 datedfiled May 6, 2008. |
| | | 10.6† | | Employment Agreement dated October 20, 2005 between Mercer Pulp Sales GmbH and David Cooper. Incorporated by reference from Form 10-Q filed April 29, 2015. | | | 10.14* 10.7† | | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K filed October 3, 2006. | | | 10.8 | | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Incorporated by reference from Form 10-K filed March 2, 2009. Certain non-public information has been omitted from the appendices to Exhibit 10.1310.9 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 10.9 | | 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 datedfiled August 24, 2009. | | | 10.16 10.10 | | 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, Bayerische Hypo-und Vereinsbank AG and Mercer International Inc. Incorporated by reference from Form 10-Q datedfiled November 2, 2012. | | | 10.18 10.11 | | 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 datedfiled May 8, 2013. | | | 10.19 10.12 | | Second Extension, Amendment and Confirmation Letter dated February 5, 2016 among Zellstoff- und Papierfabrik Rosenthal GmbH, D&Z Holding GmbH, ZPR Logistik GmbH and Mercer International Inc. Incorporated by reference from Form 10-K filed February 12, 2016. | | | 10.13† | | Employment 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,between Mercer International Inc. and Stendal Pulp Holding GmbH.David Ure dated August 12, 2013. Incorporated by reference from Form 8-K filed on July 19, 2015. | | | 10.14 | | First Amending Agreement dated October 21, 2014 between Zellstoff Celgar Limited Partnership, Mercer International Inc., as guarantor, and Canadian Imperial Bank of Commerce. Incorporated by reference from Form 10-Q filed on November 1, 2013.October 31, 2014. | | | 14 10.15† | | Amendment to Employment Agreement between Mercer International Inc. and David Ure, dated July 17, 2015. Incorporated by reference from Form 8-K filed July 19, 2015. | | | 10.16† | | Second Amended and Restated Employment Agreement between Mercer International Inc. and Jimmy S.H. Lee, dated for reference September 29, 2015. Incorporated by reference from Form 8-K filed September 28, 2015. | | | 10.17† | | Amended and Restated Employment Agreement between Mercer International Inc. and David M. Gandossi, dated for reference September 29, 2015. Incorporated by reference from Form 8-K filed September 28, 2015. | | | 10.18 | | Registration Rights Agreement dated February 3, 2017 between Mercer International Inc. and Credit Suisse Securities (USA) LLC, related to the 2024 Senior Notes. Incorporated by reference from Form 8-K filed on February 3, 2017. | | | 14.1 | | Code of Business Conduct and Ethics. Incorporated by reference from theMercer International Inc.’s definitive proxy statement on Schedule 14A datedfiled August 11, 2003. | | | 99.1 21.1* | | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005.List of Subsidiaries of Registrant. |
| | | | | 99.2 23.1* | | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004.Consent of PricewaterhouseCoopers LLP. | | | 21 31.1* | | 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 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. | | | 101* | | The following financial statements from the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 10, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements. |
* | Filed in Form 10-K for prior years.herewith. |
**† | In accordance with Release 33-8212 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 thereunderDenotes management contract or any offering memorandum, unless our Company specifically incorporates them by reference therein.compensatory plan or arrangement. |
Report of Independent Registered Public Accounting Firm 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, 2013 and December 31, 2012 and the related consolidated statements of operations, comprehensive income (loss), changes in shareholder’sshareholders’ equity and cash flows of Mercer International Inc. and its subsidiaries as of December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013.2016. We also have audited Mercer International Inc.’s and its subsidiaries’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established inInternal Control—Control - Integrated Framework (1992) (2013) 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 over Financial Reporting appearing under Item 9A of this Form 10-K.9A. 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 audit 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 that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of 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, 20132016 and December 31, 20122015 and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 20132016 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, 2013,2016, based on criteria established in Internal Control—Control - Integrated Framework (1992)(2013) issued by COSO. /s/ PricewaterhouseCoopers LLP Chartered Professional Accountants Vancouver, British Columbia February 21, 201410, 2017 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS (In thousands of U.S. dollars)dollars, except per share data) | | | | | | | | | | | 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 Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | Revenues | | | | | | | | | | | | | Pulp | | $ | 847,328 | | | $ | 946,237 | | | $ | 1,073,632 | | Energy and chemicals | | | 84,295 | | | | 86,967 | | | | 101,480 | | | | | | | | | | | | | | | | | | 931,623 | | | | 1,033,204 | | | | 1,175,112 | | Costs and expenses | | | | | | | | | | | | | Operating costs, excluding depreciation and amortization | | | 701,875 | | | | 753,523 | | | | 887,712 | | Operating depreciation and amortization | | | 71,476 | | | | 67,761 | | | | 77,675 | | Selling, general and administrative expenses | | | 44,529 | | | | 46,236 | | | | 47,927 | | | | | | | | | | | | | | | Operating income | | | 113,743 | | | | 165,684 | | | | 161,798 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income (expenses) | | | | | | | | | | | | | Interest expense | | | (51,575 | ) | | | (53,891 | ) | | | (67,516 | ) | Foreign exchange loss on intercompany debt | | | (1,140 | ) | | | (5,306 | ) | | | (4,777 | ) | Gain (loss) on derivative instruments (Note 13) | | | (241 | ) | | | (935 | ) | | | 11,501 | | Other income (expenses) | | | (1,323 | ) | | | (601 | ) | | | 3,186 | | | | | | | | | | | | | | | Total other expenses | | | (54,279 | ) | | | (60,733 | ) | | | (57,606 | ) | | | | | | | | | | | | | | Income before provision for income taxes | | | 59,464 | | | | 104,951 | | | | 104,192 | | | | | | | | | | | | | | | Current income tax provision (Note 8) | | | (7,712 | ) | | | (11,934 | ) | | | (5,242 | ) | Deferred income tax benefit (provision) (Note 8) | | | (16,809 | ) | | | (17,515 | ) | | | 22,016 | | | | | | | | | | | | | | | Net income | | | 34,943 | | | | 75,502 | | | | 120,966 | | Less: net income attributable to noncontrolling interest | | | — | | | | — | | | | (7,812 | ) | | | | | | | | | | | | | | Net income attributable to common shareholders | | $ | 34,943 | | | $ | 75,502 | | | $ | 113,154 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income per share attributable to common shareholders (Note 10) | | | | | | | | | | | | | Basic | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.82 | | Diluted | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.81 | | | | | | | | | | | | | | | Dividends declared per share attributable to common shareholders (Note 9) | | $ | 0.46 | | | $ | 0.23 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME (LOSS) (In thousands of U.S. dollars, except per share data)dollars) | | | | | | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | For the Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | Net income | | $ | 34,943 | | | $ | 75,502 | | | $ | 120,966 | | Other comprehensive income (loss), net of taxes(1) | | | | | | | | | | | | | Foreign currency translation adjustment | | | (14,369 | ) | | | (122,955 | ) | | | (81,024 | ) | Change in unrecognized losses and prior service costs related to defined benefit pension plan | | | 675 | | | | 3,949 | | | | (2,873 | ) | Change in unrealized gains/losses on marketable securities | | | (1 | ) | | | (127 | ) | | | (14 | ) | | | | | | | | | | | | | | Other comprehensive loss, net of taxes | | | (13,695 | ) | | | (119,133 | ) | | | (83,911 | ) | | | | | | | | | | | | | | Total comprehensive income (loss) | | | 21,248 | | | | (43,631 | ) | | | 37,055 | | Comprehensive income attributable to noncontrolling interest | | | — | | | | — | | | | (7,812 | ) | | | | | | | | | | | | | | Comprehensive income (loss) attributable to common shareholders | | $ | 21,248 | | | $ | (43,631 | ) | | $ | 29,243 | | | | | | | | | | | | | | |
(1) | Balances are net of tax effects of $nil in all years. |
The accompanying notes are an integral part of these consolidated financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)BALANCE SHEETS (In thousands of U.S. dollars)dollars, except share and per share data) | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
| | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | ASSETS | | | | | | | | | Current assets | | | | | | | | | Cash and cash equivalents | | $ | 136,569 | | | $ | 99,629 | | Restricted cash (Note 13) | | | 4,327 | | | | 9,230 | | Accounts receivable (Note 2) | | | 123,892 | | | | 134,254 | | Inventories (Note 3) | | | 133,451 | | | | 141,001 | | Prepaid expenses and other | | | 3,612 | | | | 4,697 | | | | | | | | | | | Total current assets | | | 401,851 | | | | 388,811 | | | | | | | | | | | Property, plant and equipment, net (Note 4) | | | 738,276 | | | | 762,391 | | Intangible and other assets | | | 7,591 | | | | 8,461 | | Deferred income tax (Note 8) | | | 10,990 | | | | 23,154 | | | | | | | | | | | Total assets | | $ | 1,158,708 | | | $ | 1,182,817 | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | Current liabilities | | | | | | | | | Accounts payable and other (Note 5) | | $ | 92,133 | | | $ | 103,450 | | Pension and other post-retirement benefit obligations (Note 7) | | | 1,037 | | | | 971 | | | | | | | | | | | Total current liabilities | | | 93,170 | | | | 104,421 | | | | | | | | | | | Debt (Note 6) | | | 617,545 | | | | 638,043 | | Interest rate derivative liability (Note 13) | | | — | | | | 6,533 | | Pension and other post-retirement benefit obligations (Note 7) | | | 25,084 | | | | 25,374 | | Capital leases and other (Note 15) | | | 26,467 | | | | 12,299 | | Deferred income tax (Note 8) | | | 17,314 | | | | 13,171 | | | | | | | | | | | Total liabilities | | | 779,580 | | | | 799,841 | | | | | | | | | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | Common shares $1 par value; 200,000,000 authorized; 64,694,000 issued and outstanding (2015 – 64,502,000) | | | 64,656 | | | | 64,424 | | Additional paid-in capital | | | 333,673 | | | | 329,246 | | Retained earnings | | | 166,068 | | | | 160,880 | | Accumulated other comprehensive loss (Note 11) | | | (185,269 | ) | | | (171,574 | ) | | | | | | | | | | Total shareholders’ equity | | | 379,128 | | | | 382,976 | | | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 1,158,708 | | | $ | 1,182,817 | | | | | | | | | | | | | | | | | | | | Commitments and contingencies (Note 16) | | | | | | | | | Subsequent events (Note 6(a), 9) | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’SHAREHOLDERS’ EQUITY (In thousands of U.S. dollars)dollars, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common shares | | | | | | | | | | | | | | | | | | | | | | Number (thousands of shares) | | | Amount, at Par Value | | | Additional Paid-in Capital | | | Retained Earnings (Deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Shareholders’ Equity | | | Noncontrolling Interest (Deficit) | | | Total Equity | | Balance, December 31, 2013 | | | 55,854 | | | $ | 55,696 | | | $ | 261,097 | | | $ | 10,815 | | | $ | 31,470 | | | $ | 359,078 | | | $ | (10,761 | ) | | $ | 348,317 | | Shares issued through public share offering | | | 8,050 | | | | 8,050 | | | | 45,809 | | | | — | | | | — | | | | 53,859 | | | | — | | | | 53,859 | | Shares issued on grants of restricted shares | | | 38 | | | | 78 | | | | (78 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Shares issued on grants of performance share units | | | 332 | | | | 332 | | | | (332 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Stock compensation expense | | | — | | | | — | | | | 1,470 | | | | — | | | | — | | | | 1,470 | | | | — | | | | 1,470 | | Net income | | | — | | | | — | | | | — | | | | 113,154 | | | | — | | | | 113,154 | | | | 7,812 | | | | 120,966 | | Acquisition of noncontrolling interest in the Stendal mill | | | — | | | | — | | | | 18,985 | | | | (23,755 | ) | | | — | | | | (4,770 | ) | | | 2,949 | | | | (1,821 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (83,911 | ) | | | (83,911 | ) | | | — | | | | (83,911 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2014 | | | 64,274 | | | | 64,156 | | | | 326,951 | | | | 100,214 | | | | (52,441 | ) | | | 438,880 | | | | — | | | | 438,880 | | Shares issued on grants of restricted shares | | | 38 | | | | 78 | | | | (78 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Shares issued on grants of performance share units | | | 160 | | | | 160 | | | | (160 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Shares issued on exercise of stock options | | | 30 | | | | 30 | | | | (30 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Stock compensation expense | | | — | | | | — | | | | 2,563 | | | | — | | | | — | | | | 2,563 | | | | — | | | | 2,563 | | Net income | | | — | | | | — | | | | — | | | | 75,502 | | | | — | | | | 75,502 | | | | — | | | | 75,502 | | Dividends declared | | | — | | | | — | | | | — | | | | (14,836 | ) | | | — | | | | (14,836 | ) | | | — | | | | (14,836 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (119,133 | ) | | | (119,133 | ) | | | — | | | | (119,133 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2015 | | | 64,502 | | | | 64,424 | | | | 329,246 | | | | 160,880 | | | | (171,574 | ) | | | 382,976 | | | | — | | | | 382,976 | | Shares issued on grants of restricted shares | | | 38 | | | | 78 | | | | (78 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Shares issued on grants of performance share units | | | 154 | | | | 154 | | | | (154 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Stock compensation expense | | | — | | | | — | | | | 4,659 | | | | — | | | | — | | | | 4,659 | | | | — | | | | 4,659 | | Net income | | | — | | | | — | | | | — | | | | 34,943 | | | | — | | | | 34,943 | | | | — | | | | 34,943 | | Dividends declared | | | — | | | | — | | | | — | | | | (29,755 | ) | | | — | | | | (29,755 | ) | | | — | | | | (29,755 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (13,695 | ) | | | (13,695 | ) | | | — | | | | (13,695 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2016 | | | 64,694 | | | $ | 64,656 | | | $ | 333,673 | | | $ | 166,068 | | | $ | (185,269 | ) | | $ | 379,128 | | | $ | — | | | $ | 379,128 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | For the Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | Cash flows from (used in) operating activities | | | | | | | | | | | | | Net income | | $ | 34,943 | | | $ | 75,502 | | | $ | 120,966 | | Adjustments to reconcile net income to cash flows from operating activities | | | | | | | | | | | | | Unrealized (gain) loss on derivative instruments | | | 181 | | | | 573 | | | | (11,501 | ) | Depreciation and amortization | | | 71,984 | | | | 68,333 | | | | 78,012 | | Deferred income tax (benefit) provision | | | 16,809 | | | | 17,515 | | | | (22,016 | ) | Foreign exchange loss on intercompany debt | | | 1,140 | | | | 5,306 | | | | 4,777 | | Defined benefit pension plan and other post-retirement benefit plan expense | | | 1,955 | | | | 2,162 | | | | 2,475 | | Stock compensation expense | | | 4,659 | | | | 2,409 | | | | 1,586 | | Other | | | 3,715 | | | | 2,756 | | | | (1,281 | ) | Defined benefit pension plan and other post-retirement benefit plan contributions | | | (2,316 | ) | | | (2,349 | ) | | | (2,951 | ) | Changes in working capital | | | | | | | | | | | | | Accounts receivable | | | 9,466 | | | | (11,256 | ) | | | (25,113 | ) | Inventories | | | 6,844 | | | | (13,235 | ) | | | 6,445 | | Accounts payable and accrued expenses | | | (10,274 | ) | | | 9,665 | | | | (5,382 | ) | Other | | | 1,676 | | | | 1,839 | | | | (1,429 | ) | | | | | | | | | | | | | | Net cash from (used in) operating activities | | | 140,782 | | | | 159,220 | | | | 144,588 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used in) investing activities | | | | | | | | | | | | | Purchase of property, plant and equipment | | | (42,526 | ) | | | (46,536 | ) | | | (34,612 | ) | Purchase of intangible assets | | | (1,844 | ) | | | (3,809 | ) | | | (4,776 | ) | Other | | | 67 | | | | 528 | | | | 910 | | | | | | | | | | | | | | | Net cash from (used in) investing activities | | | (44,303 | ) | | | (49,817 | ) | | | (38,478 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used in) financing activities | | | | | | | | | | | | | Repurchase of notes and repayment of debt | | | (23,079 | ) | | | (10,763 | ) | | | (891,019 | ) | Proceeds from issuance of notes | | | — | | | | — | | | | 650,000 | | Proceeds from issuance of shares | | | — | | | | — | | | | 53,859 | | Dividend payments | | | (29,733 | ) | | | (7,418 | ) | | | — | | Proceeds from (repayment of) revolving credit facilities, net | | | — | | | | (23,058 | ) | | | 26,254 | | Payment of interest rate derivative liability | | | (10,883 | ) | | | (13,530 | ) | | | — | | Payment of debt issuance costs | | | — | | | | (326 | ) | | | (20,169 | ) | Proceeds from government grants | | | 2,988 | | | | 158 | | | | 6,699 | | Other | | | (1,670 | ) | | | (1,727 | ) | | | (1,376 | ) | | | | | | | | | | | | | | Net cash from (used in) financing activities | | | (62,377 | ) | | | (56,664 | ) | | | (175,752 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | (2,065 | ) | | | (7,338 | ) | | | (14,628 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 32,037 | | | | 45,401 | | | | (84,270 | ) | Cash, cash equivalents and restricted cash, beginning of year | | | 108,859 | | | | 63,458 | | | | 147,728 | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash, end of year | | $ | 140,896 | | | $ | 108,859 | | | $ | 63,458 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental cash flow disclosure | | | | | | | | | | | | | Cash paid for interest | | $ | 50,159 | | | $ | 51,975 | | | $ | 65,013 | | Cash paid for income taxes | | $ | 13,352 | | | $ | 8,784 | | | $ | 3,718 | | | | | | | | | | | | | | | Supplemental schedule of non-cash investing and financing activities | | | | | | | | | | | | | Payment-in-kind note issued to acquire noncontrolling interest | | $ | — | | | $ | — | | | $ | 12,101 | |
The accompanying notes are an integral part of these consolidated financial statements. MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and 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’sits shares of common stock are quoted and listed for trading on the NASDAQ Global Market and the Toronto Stock Exchange. 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 (“NBSK”) pulp in the world. In these Consolidated Financial Statements,consolidated financial statements, unless otherwise indicated, all amounts are expressed in United StatesU.S. dollars (“$” or “U.S. dollar”). The symbol “€” refers to the Euroeuros and the symbol “C$” refers to Canadian dollars. Basis of Presentation These Consolidated Financial Statementsconsolidated financial statements contained herein include the accounts of the CompanyMercer Inc. and all of its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of AmericaU.S. (“GAAP”). All significant inter-companyintercompany balances and transactions 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 judgment is required in determining the accounting for, among other things, doubtful accountspension and reserves,other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, legal liabilities asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies and inventory obsolescence and provisions.contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known. Significant Accounting Policies Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents include cash held in bank accounts and highly liquid investments with original maturities of three months or less. Restricted cash is comprised of cash deposits that cannot be withdrawn without prior notice or penalty. InvestmentsAccounts Receivable
Investments in debt securities and equity investments in publicly traded companies in whichAccounts receivable are recorded at cost, net of an allowance for doubtful accounts. The Company reviews the collectability of receivables at each reporting date. The Company does not exercise significant influencemaintains an allowance for doubtful accounts at an amount estimated to cover the potential losses on certain uninsured receivables. Any amounts that are classified as available-for-sale securities. These securities are reported at fair values; based upon quoted market prices, with the unrealized gains or losses included in accumulated other comprehensive income as a separate component of shareholders’ equity, until realized. If a loss in value in available-for-sale securities is considereddetermined to be other than temporary,uncollectible and uninsured are offset against the loss is recognized in the determination of net income.allowance. The cost of all securities soldallowance is based on the specific identification methodCompany’s evaluation of numerous factors, including the payment history and financial position of the debtors. For certain customers the Company receives a letter of credit prior to determine realized gains or losses.shipping its product.
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 1. The Company and Summary of Significant Accounting Policies (continued) Inventories Inventories of raw materials, finished goods and work in progress are valued at the lower of cost, using the weighted-average cost method, or net realizable value. Other materials and spare 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. Raw 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 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 operationsrecognized as an expense in the Consolidated Statement of 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 is a legislated or contractual basis for those obligations. Obligations areAn obligation is recorded as a liability at fair value in the period in which the Company incurs a legal obligation associated with a corresponding increase to property, plant, and equipment, andthe retirement of an asset. The associated costs are amortized overcapitalized as part of the remaining useful lifecarrying value of the related assets.asset and amortized over its remaining useful life. The liability is accreted using a risk-free interest rate. Government Grants The Company records 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 MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 1. The Company and Summary of Significant Accounting Policies (continued) 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 costscost of the assets in the Consolidated Balance Sheet. 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 thousandsthe conditions of U.S. dollars, except per share data)
Note 1. The Companytheir receipt are complied with and Summary of Significant Accounting Policies (continued)
there is reasonable assurance that the grants will be received. The Company is required to pay certain fees based on water consumption levelswastewater emissions 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 accounts payable and 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.
PensionsPension Plans
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 prorated 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) prior service costs, and (ii) the net actuarial gain or loss that exceeds 10% of the greater of the accrued benefit obligation and the fair value of plan assets as ofat the beginning of the period.year. The Company recognizes the net funded status of the plan. In addition, hourly-paid employees at the Celgar mill are covered by a multiemployer pension plan for which contributions are charged against earnings in the Consolidated Statement of Operations. Foreign Operations and Currency Translation The Company determines its foreign subsidiaries’ functional currency by reviewing the currency of the primary economic environment in which the foreign subsidiaries operate, which is normally the currency of the environment in which the foreign subsidiaries generate and expend cash. The Company translates foreign assets and liabilities of its non-U.S. dollar functional currency subsidiaries other than those denominated ininto U.S. dollars atusing the rate of exchangein effect at the balance sheet date. Revenuesdate and revenues and expenses are translated at the average rate of exchange throughout the year. Transactionperiod. Foreign currency translation 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 incomeloss in shareholders’ equity, until allequity. Transactions in foreign currencies are translated to the respective functional currencies of each operation using exchange rates at the dates of the investmenttransactions. Monetary assets and liabilities denominated in foreign currencies at the subsidiaries is sold or liquidated. The translation adjustments do not recognizereporting date are translated to the effect of income tax whenfunctional currency using the Company expects earnings ofexchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies are translated to the foreign subsidiary to be indefinitely reinvested. The income tax effect onfunctional currency translation adjustments related to foreign subsidiaries that are not considered indefinitely reinvested is recorded as a component of deferred taxes in the Consolidated Balance Sheet with an offset to other comprehensive income.using historical exchange rates. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency)related to operating activities are included in costs and expenses while those related to non-operating activities are included in other income (expenses) in the 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. MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 1. The Company and Summary of Significant Accounting Policies (continued) Where intercompany loans are of a long-term investment nature, exchange rate changes are included as a foreign currency translation adjustment within accumulated other comprehensive loss in shareholders’ equity. Revenue and Related Cost Recognition The Company recognizes revenue from product, transportation,pulp and 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. Amounts charged to customers for shipping and handling are recognized as revenue in the Consolidated Statement of Operations. Shipping and handling costs incurred by the Company are included in operating costs in the Consolidated Statement of Operations.
The Company reports revenue from sales of surplus electricity and the sale of chemicals as energy“energy and chemical revenueschemicals” revenue in the Consolidated Statement of Operations. Energy revenues are recognized as the electricity is consumed by customers and when collection is reasonably assured. These revenues include an estimate of the value of electricity transferred to customers in the yearperiod but billed subsequent to year-end.period-end. Customer bills are based on agreed upon rates and meter readings that indicate electricity consumption. Shipping and Handling Costs Amounts charged to customers for shipping and handling costs are recognized as revenue in the Consolidated Statement of Operations. Shipping and handling costs incurred by the Company are included in operating costs in the Consolidated Statement of Operations. Stock-Based Compensation The Company recognizes stock-based compensation expense over an award’s vestingrequisite service period based on the award’s fair value in selling, general, and administrative expenses within the Consolidated Statement of Operations. The Company issues new shares upon the exercise of stock-based compensation awards. The fair value ofFor performance share units (“PSUs”) which have the same grant and service inception date, the fair value is re-measured at each balance sheet date by multiplyingbased upon the targeted number of shares to be awarded and the quoted market price of a share of Mercer Inc. commonthe Company’s shares byat that date. For PSUs where the expectedservice inception date precedes the grant date, the fair value is based upon the targeted number of commonshares awarded and the quoted price of the Company’s shares at each reporting date up to the grant date. The target number of shares is determined using management’s best estimate. The final determination of the number of shares to be awarded. The cumulative effectgranted is made by the Company’s Board of the change in fair value is recognized in the period of the change as an adjustment to compensation cost.Directors. The Company estimates forfeitures of performance share unitsPSUs based on management’s expectations and recognizes compensation cost only for those awards expected to vest. Estimated forfeitures are adjusted to actual experience at each balance sheet date.
The fair value of restricted share awardsshares is determined by multiplyingbased upon the marketnumber of shares granted and the quoted price of a share of Mercer Inc. commonthe Company’s shares on the grant date by the number of units granted.grant. Deferred Income Taxes 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,basis, and operating loss MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 1. The Company and Summary of Significant Accounting Policies (continued) 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 are offset and presented as a single net amount and all noncurrent deferred tax liabilities and assets are 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, interest rate swaps, and pulp price swaps to limit exposures to changes in foreign currency exchange rates, energy prices, interest rates, and pulp prices.manage certain market risks. These derivative instruments are not designated as hedging instruments. The changeinstruments and accordingly, are recorded at fair value on the Consolidated Balance Sheet with the changes in fair value of electricity derivative contracts is included in operating costs in the Consolidated Statement of Operations and any changes in the fair value of foreign currency, interest rate, and pulp price derivative contracts are recognized in gain (loss) on derivative instruments in the Consolidated Statement of Operations. Periodically, the Company enters into derivative contracts to supply materials for its own use and as such are exempt from mark-to-market accounting. Fair Value Measurements The fair value methodologies and, as a result, the fair value of the Company’s financial instruments are determined based on the fair value hierarchy provided in the Fair Value Measurements and Disclosures topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, and are as follows: Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities. Level 2 – Valuations based on observable inputs in active markets for similar assets 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 financial instrument’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 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) availableattributable to common shareholders by the weighted average number of common shares outstanding in the period. Diluted net income (loss) per share attributable to common shareholders is calculated to give effect to all potentially dilutive common shares outstanding by applying the “Treasury Stock” and “If-Converted” methods. Outstanding stock options, restricted shares, performance shares, performance share units, and convertible notes represent the onlyInstruments that could have a potentially dilutive effectseffect on the Company’s weighted average shares. New Accounting Standards
In March 2013, the FASB issued ASU 2013-05, an update to Foreign Currency Matters, which indicates thatshares outstanding include all or 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 interimoutstanding stock options, restricted shares, restricted share units, performance shares and annual periods beginning after December 15, 2013 and will not have an impact on the Company’s consolidated financial statements unless one or more of the derecognition events stated above occur after the effective date.PSUs.
In July 2013, the FASB issued ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) 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 deferred tax asset for a NOL or tax credit carryforward whenever the NOL 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 reporting date. The amendments are effective for interim and annual periods beginning after December 15, 2013. The Company has determined these changes will not have a material impact on the consolidated financial statements.
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 1. The Company and Summary of Significant Accounting Policies (continued) Note 2.New Accounting Pronouncements
Accounting Pronouncements Implemented In August 2016, the FASB issued Accounting Standards Update 2016-15, Classification of Certain Cash Receipts and Cash EquivalentsPayments (“ASU 2016-15”) which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and should be applied retrospectively to all periods presented. Early adoption is permitted for all entities at the beginning of an interim or annual reporting period. The Company has elected to early adopt ASU 2016-15 in the fourth quarter of 2016 for which there was no material impact to the classification of balances in the Consolidated Statement of Cash Flows for all periods presented. | | | | | | | | | | | December 31, | | | | 2013 | | | 2012 | | Cash and cash equivalents | | $ | 147,728 | | | $ | 137,439 | | | | | | | | | | |
In November 2016, the FASB issued Accounting Standards Update 2016-18, Restricted Cash (“ASU 2016-18”) which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and should be applied retrospectively to all periods presented. Early adoption is permitted for all entities at the beginning of an interim or annual reporting period. The Company has elected to early adopt ASU 2016-18 in the fourth quarter of 2016 and as at December 31, 2016, the restricted cash balance of $4,327 has been included in cash and cash equivalents includesand restricted cash allocated for debt service reserveson the Consolidated Statement of Cash Flows. For the years ended December 31, 2015 and for2014, $nil and an increase of $10,627, respectively, in restricted cash has been reclassified from cash flows from (used) in investing activities to cash and cash equivalents and restricted cash on the Consolidated Statement of Cash Flows. Accounting Pronouncements Not Yet Implemented In May 2014, the FASB issued Accounting Standards Update 2014-9, Revenue Recognition – Revenue from Contracts with Customers (“ASU 2014-9”) that requires companies to recognize revenue when a capital project as required under certain debt agreements (see Note 7(a)(d) – Debt). Note 3. Receivablescustomer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. In 2016 the FASB issued the following Accounting Standards which further affect the guidance of ASU 2014-09:
| | | | | | | | | | | 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 | | | | | | | | | | |
March 2016: ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net); April 2016: ASU 2016-10, Identifying Performance Obligations and Licensing; and May 2016: ASU 2016-12, Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients. These standards are effective for annual reporting periods beginning on or after December 15, 2017 with early adoption permitted at the beginning of an interim or annual reporting period beginning after December 15, 2016. Currently, the Company believes this new standard will not have a material impact on its consolidated financial statements, however, its assessment of this standard is ongoing. The Company reviews the collectabilityexpects to adopt this standard as of receivables 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. For certain customers the Company receives a letter of credit prior to shipping its product.January 1, 2018. Note 4. Inventories
| | | | | | | | | | | 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 U.S. dollars, except share and per share data) Note 1. The Company and Summary of Significant Accounting Policies (continued) In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”) which requires that inventory within the scope of this update, including inventory stated at average cost, be measured at the lower of cost and net realizable value. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016, with early adoption permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 will not materially impact the Company’s financial position. In February 2016, the FASB issued Accounting Standards Update 2016-2, Leases (“ASU 2016-2”) which requires lessees to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and liability. This update is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of ASU 2016-2 will have on its consolidated financial statements. In March 2016, the FASB issued Accounting Standards Update 2016-9, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-9”) which simplifies several aspects of accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and accounting for forfeitures. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016. The Company is currently assessing the impact, if any, the adoption of ASU 2016-9 will have on its consolidated financial statements. In October 2016, the FASB issued Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”) which eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory until the transferred assets are sold to a third party or recovered through use. This update is effective on a modified retrospective approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently assessing the impact the adoption of ASU 2016-16 will have on its consolidated financial statements. Note 2. Accounts Receivable | | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | Sale of pulp, energy and chemicals, net of allowance of $18 (2015 – $15) | | $ | 118,434 | | | $ | 119,359 | | Other non-trade receivables | | | 5,458 | | | | 14,895 | | | | | | | | | | | | | $ | 123,892 | | | $ | 134,254 | | | | | | | | | | |
Note 3. Inventories | | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | Raw materials | | $ | 50,056 | | | $ | 57,592 | | Finished goods | | | 33,510 | | | | 36,829 | | Spare parts and other | | | 49,885 | | | | 46,580 | | | | | | | | | | | | | $ | 133,451 | | | $ | 141,001 | | | | | | | | | | |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 5.4. Property, Plant and Equipment | | | December 31, | | | December 31, | | | | 2013 | | 2012 | | | 2016 | | 2015 | | Land | | $ | 34,421 | | | $ | 33,210 | | | $ | 27,139 | | | $ | 27,625 | | Buildings | | | 194,676 | | | 177,198 | | | | 156,110 | | | 154,047 | | Production equipment and other | | | 1,570,196 | | | 1,536,415 | | | Production and other equipment | | | | 1,326,046 | | | 1,299,076 | | | | | | | | | | | | | | | | | | 1,799,293 | | | | 1,746,823 | | | | 1,509,295 | | | 1,480,748 | | Less: accumulated depreciation | | | (760,662 | ) | | | (680,317 | ) | | | (771,019 | ) | | (718,357 | ) | | | | | | | | | | | | | | | | $ | 1,038,631 | | | $ | 1,066,506 | | | $ | 738,276 | | | $ | 762,391 | | | | | | | | | | | | | | |
As at December 31, 2013,2016, property, plant and equipment was net of $365,359$233,186 of unamortized government investment grants (2012(2015 – $364,849)$253,178). As at December 31, 2013,2016, included in production equipment and other equipment is equipment under capital leases which had gross amounts of $20,550 (2012$31,916 (2015 – $21,710)$16,233), and accumulated depreciation of $9,447 (2012$9,712 (2015 – $11,042)$8,395). During the year ended December 31, 2016, production equipment and other totalling $2,112equipment totaling $17,792 was acquired under capital lease obligations (2012(2015 – $2,648; 2011$70; 2014 – $3,872).$2,960) primarily related to the leasing of new customized railcars in Germany. 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, 2013,2016, the Company had recorded $5,549 (2012$4,716 (2015 – $5,605)$4,620) of asset retirement obligations in capital leases and other in the Consolidated Balance Sheet. Note 6.5. Accounts Payable and Other | | | December 31, | | | December 31, | | | | 2013 | | | 2012 | | | 2016 | | | 2015 | | Trade payables | | $ | 44,289 | | | $ | 39,896 | | | $ | 28,815 | | | $ | 20,637 | | Accrued expenses | | | 39,060 | | | | 47,271 | | | | 39,903 | | | | 55,648 | | 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 | | | Interest rate derivative liability, current portion (Note 13) | | | | 6,522 | | | | 10,380 | | Dividends payable (Note 9) | | | | 7,440 | | | | 7,418 | | Other | | | 6,382 | | | | 7,812 | | | | 9,453 | | | | 9,367 | | | | | | | | | | | | | | | | | $ | 103,814 | | | $ | 118,599 | | | $ | 92,133 | | | $ | 103,450 | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 7.6. Debt Debt consists
| | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | 2019 Senior Notes, unsecured, $227,000 face value (a) | | $ | 224,085 | | | $ | 245,689 | | 2022 Senior Notes, unsecured, $400,000 face value (a) | | | 393,460 | | | | 392,354 | | Revolving credit facilities | | | | | | | | | €75.0 million (b) | | | — | | | | — | | C$40.0 million (c) | | | — | | | | — | | €25.0 million (d) | | | — | | | | — | | €5.0 million (e) | | | — | | | | — | | | | | | | | | | | | | $ | 617,545 | | | $ | 638,043 | | | | | | | | | | |
As at December 31, 2016, the maturities of the following: | | | | | | | | | | | 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, 2013, the maturitiesprincipal portion of debt are as follows:
| | | | | Matures | | Amount | | 2014 | | $ | 60,355 | | 2015 | | | 65,566 | | 2016 | | | 65,566 | | 2017 | | | 787,885 | | 2018 | | | — | | Thereafter | | | — | | | | | | | | | $ | 979,372 | | | | | | |
| | | | | 2017 | | $ | — | | 2018 | | | — | | 2019 | | | 227,000 | | 2020 | | | — | | 2021 | | | — | | Thereafter | | | 400,000 | | | | | | | | | $ | 627,000 | | | | | | |
Certain of the Company’s debt instruments were issued under an indentureagreements which, among other things, restrictsmay limit its ability and the ability of its restricted subsidiaries to make certain payments.payments, including dividends. These limitations are subject to specific exceptions. As at December 31, 2013,2016, the Company wasis in compliance with the terms of the indenture.its debt agreements. (a) | Note payable to bank, included in a total loan facility of €828.0 million to finance the construction related to the Stendal mill (“Stendal Loan Facility”), interest at rates varying from Euribor plus 0.90% to Euribor plus 1.80% (rates on amounts of borrowing at December 31, 2013 range from 1.39% to 2.14%), principal due in required installments beginning September 30, 2006 until September 30, 2017, collateralized by the gross assets of the Stendal mill, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to €352.9 million of the outstanding principal, subject to a debt service reserve account (“DSRA”) for purposes of paying amounts due in the following 12 months under the terms of the Stendal Loan Facility; payment of dividends is only permitted if certain cash flow requirements are met. See Note 17 – Derivative Transactions for a discussion of the Company’s variable-to-fixed interest rate swap that was put in place to effectively fix the interest rate on the Stendal Loan Facility. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of 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.
(b) | On November 17, 2010,26, 2014, the Company completed a private offeringissued $650,000 of $300,000senior notes consisting of $250,000 in aggregate principal amount of 7.00% senior notes due 2017which mature on December 1, 2019 (“2019 Senior Notes”) and $400,000 in aggregate principal amount of 7.75% senior notes which mature on December 1, 2022 (“2022 Senior Notes” and collectively with the 2019 Senior Notes, the “Senior Notes”). The Senior Notes were issued at a price of 100% of their principal amount. TheUpon their issuance the Senior Notes will mature on December 1, 2017were recorded at $635,949 which included debt issuance costs of $14,051. These costs were proportionally allocated to the 2019 Senior Notes and bear interest at 9.50% which is accrued and payable semi-annually.the 2022 Senior Notes. |
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 NotesThey rank equal in right of payment with all existing and future unsecured senior unsecured indebtedness of the Company and are senior in right of payment to any current or future subordinated indebtedness of the Company. The Senior Notes are effectively junior in right of payment to all borrowingsexisting and future secured indebtedness, to the extent of the assets securing such indebtedness, and all indebtedness and liabilities of the Company’s restricted subsidiaries, including borrowings under the Company’s credit agreements which are secured by certain assetssubsidiaries. MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of its restricted subsidiaries.U.S. dollars, except share and per share data) Note 6. Debt (continued) The Company may redeem all or a part of the Senior Notes, upon not less than 30 days’ or more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) discussed below, plus accrued and unpaid interest to (but not including) the applicable redemption date. The 2019 Senior Notes redemption prices are equal to 104.75%103.50% for the twelve month period beginning on December 1, 2014, 102.38%2016, 101.75% for the twelve month period beginning on December 1, 2015,2017, and 100.00% beginning on December 1, 20162018 and at any time thereafter, plus accruedthereafter. The 2022 Senior Notes redemption prices are equal to 105.813% for the twelve month period beginning on December 1, 2017, 103.875% for the twelve month period beginning on December 1, 2018, 101.938% for the twelve month period beginning on December 1, 2019, and unpaid interest.100.00% beginning on December 1, 2020 and at any time thereafter. In March 2016, the Company purchased $23,000 in aggregate principal amount of its 2019 Senior Notes. In connection with this purchase the Company recorded a loss on extinguishment of debt of $454 in other income (expenses) in the Consolidated Statement of Operations which included the write-off of certain unamortized debt issuance costs. In February 2017, the Company issued $225,000 in aggregate principal amount of 6.50% senior notes which mature on February 1, 2024. The net proceeds of this offering, along with cash on hand, will be used to purchase the remaining $227,000 in aggregate principal amount of outstanding 2019 Senior Notes. (c)(b) | Credit agreement with respect to aA €75.0 million revolving credit facility of up to C$40.0 million forat the Celgar mill. The credit facilityStendal mill that matures May 2016.in October 2019. Borrowings under the credit facility are collateralized by the mill’s inventory and receivablesaccounts receivable and bear interest at Euribor plus 3.50%. As at December 31, 2016, approximately €75.0 million ($79,148) was available. |
(c) | A C$40.0 million revolving credit facility at the Celgar mill that matures in May 2019. Borrowings under the facility are collateralized by the mill’s inventory and accounts receivable and are restricted by a borrowing base calculated on the mill’s inventory and receivables.accounts receivable. Canadian dollar denominated amounts bear interest at bankers acceptance plus 1.75%1.50% or Canadian prime plus 0.25%.prime. U.S. dollar denominated amounts bear interest at LIBOR plus 1.75%1.50% or U.S. base plus 0.25%.base. As at December 31, 2013,2016, approximately C$1.7 million of this facility($1,265) was supporting letters of credit and approximately C$33.338.3 million ($28,525) was available. |
(d) | A €25.0 million revolving credit facility at the Rosenthal mill that matures in October 2019. Borrowings under the facility are collateralized by the mill’s inventory and accounts receivable and bear interest at Euribor plus 2.95%. As at December 31, 2016, approximately €3.1 million ($3,230) of this facility was supporting bank guarantees leaving approximately €21.9 million ($23,152) available. |
(e) | A €5.0 million revolving credit facility at the Rosenthal mill that matures in December 2018. Borrowings under this facility bear interest at the rate of the three-month Euribor plus 2.50% and are secured by certain land at the Rosenthal mill. As at December 31, 2016 approximately €3.2 million ($3,359) of this facility was supporting bank guarantees leaving approximately €1.8 million ($1,918) available. |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and 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 3.84%. |
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.
(e) | Loans of €26.8 million payable by the Stendal mill to its noncontrolling shareholder bear interest at a rate of 1.00% per annum and are due in 2017, provided that the Project Blue Mill facility (Note 7(d)) and the Stendal Loan Facility (Note 7(a)) have been fully repaid on such date. The loans are unsecured, subordinated to all liabilities of the Stendal mill, non-recourse to the Company and its restricted subsidiaries. One of the loans, which has a principal amount of €0.4 million, may be repaid prior to October 1, 2017 if the DSRA has been Fully Funded for the first time and this loan is subordinated to all liabilities of the Stendal mill only until such time as the DSRA is Fully Funded for the first time. |
As at December 31, 2013, accrued interest on these loans was €11.1 million (2012 – €9.9 million).
(f) | A four-year amortizing investment loan agreement with a lender relating to the wash press project at the Rosenthal mill with a total facility of €4.4 million bearing interest at the rate of Euribor plus 2.75% that matures February 2014. Borrowings under this agreement are secured by the wash press equipment. As at December 31, 2013, the balance outstanding was accruing interest at a rate of 3.09%. |
(g) | A €25.0 million working capital facility at the Rosenthal mill that matures in October 2016. Borrowings under the facility are collateralized by the mill’s inventory and receivables and bear interest at Euribor plus 3.50%. As at December 31, 2013, approximately €0.6 million of this facility was supporting bank guarantees leaving approximately €24.4 million available. |
(h) | A €5.0 million facility at the Rosenthal mill that matures in December 2015. Borrowings under this facility bear interest at the rate of the three-month Euribor plus 3.50% and are secured by certain land at the Rosenthal mill. As at December 31, 2013 approximately €1.1 million of this facility was supporting bank guarantees leaving approximately €3.9 million available. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 8.7. Pension and Other Post-Retirement Benefit Obligations Defined Benefit Plans Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and Rosenthal mills. The largest component of this obligationthese obligations is with respect to the Celgar mill which maintains a defined benefit pension plan and other post-retirement benefit plans for certain employees (“Celgar(the “Celgar Defined Benefit Plans”). Pension benefits are based on employees’ earnings and years of service. The Celgar Defined Benefit Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions during the year ended December 31, 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 $773 (2012 – $795) to this plan.
Information about the Celgar Defined Benefit Plans, in aggregate for the year ended December 31, 2013 is2016 was as follows: | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2016 | | | | Pension | | | Other Post- Retirement Benefits | | | Total | | Change in benefit obligation | | | | | | | | | | | | | Benefit obligation, December 31, 2015 | | $ | 34,426 | | | $ | 21,278 | | | $ | 55,704 | | Service cost | | | 91 | | | | 483 | | | | 574 | | Interest cost | | | 1,396 | | | | 894 | | | | 2,290 | | Benefit payments | | | (2,329 | ) | | | (633 | ) | | | (2,962 | ) | Actuarial losses | | | 479 | | | | 1,278 | | | | 1,757 | | Foreign currency exchange rate changes | | | 1,062 | | | | 628 | | | | 1,690 | | | | | | | | | | | | | | | Benefit obligation, December 31, 2016 | | | 35,125 | | | | 23,928 | | | | 59,053 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation of fair value of plan assets | | | | | | | | | | | | | Fair value of plan assets, December 31, 2015 | | | 29,446 | | | | — | | | | 29,446 | | Actual returns | | | 3,342 | | | | — | | | | 3,342 | | Contributions | | | 1,683 | | | | 633 | | | | 2,316 | | Benefit payments | | | (2,329 | ) | | | (633 | ) | | | (2,962 | ) | Foreign currency exchange rate changes | | | 869 | | | | — | | | | 869 | | | | | | | | | | | | | | | Fair value of plan assets, December 31, 2016 | | | 33,011 | | | | — | | | | 33,011 | | | | | | | | | | | | | | | Funded status, December 31, 2016 (1) | | $ | (2,114 | ) | | $ | (23,928 | ) | | $ | (26,042 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Components of the net benefit cost recognized | | | | | | | | | | | | | Service cost | | $ | 91 | | | $ | 483 | | | $ | 574 | | Interest cost | | | 1,396 | | | | 894 | | | | 2,290 | | Expected return on plan assets | | | (1,926 | ) | | | — | | | | (1,926 | ) | Amortization of unrecognized items | | | 1,169 | | | | (152 | ) | | | 1,017 | | | | | | | | | | | | | | | Net benefit costs | | $ | 730 | | | $ | 1,225 | | | $ | 1,955 | | | | | | | | | | | | | | |
(1) | The total of $36,796$26,121 on the Consolidated Balance Sheet also includes the pension liabilities of $144$79 relating to employees at the Company’s Rosenthal operation.mill. |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 8.7. Pension and Other Post-Retirement Benefit Obligations (continued) Information about the Celgar Defined Benefit Plans, in aggregate for the year ended December 31, 2012 is2015 was as follows: | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2015 | | | | Pension | | | Other Post- Retirement Benefits | | | Total | | Change in benefit obligation | | | | | | | | | | | | | Benefit obligation, December 31, 2014 | | $ | 43,073 | | | $ | 28,465 | | | $ | 71,538 | | Service cost | | | 121 | | | | 798 | | | | 919 | | Interest cost | | | 1,427 | | | | 984 | | | | 2,411 | | Benefit payments | | | (2,345 | ) | | | (587 | ) | | | (2,932 | ) | Actuarial gains | | | (1,021 | ) | | | (3,988 | ) | | | (5,009 | ) | Foreign currency exchange rate changes | | | (6,829 | ) | | | (4,394 | ) | | | (11,223 | ) | | | | | | | | | | | | | | Benefit obligation, December 31, 2015 | | | 34,426 | | | | 21,278 | | | | 55,704 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation of fair value of plan assets | | | | | | | | | | | | | Fair value of plan assets, December 31, 2014 | | | 35,653 | | | | — | | | | 35,653 | | Actual returns | | | 107 | | | | — | | | | 107 | | Contributions | | | 1,762 | | | | 587 | | | | 2,349 | | Benefit payments | | | (2,345 | ) | | | (587 | ) | | | (2,932 | ) | Foreign currency exchange rate changes | | | (5,731 | ) | | | — | | | | (5,731 | ) | | | | | | | | | | | | | | Fair value of plan assets, December 31, 2015 | | | 29,446 | | | | — | | | | 29,446 | | | | | | | | | | | | | | | Funded status, December 31, 2015 (1) | | $ | (4,980 | ) | | $ | (21,278 | ) | | $ | (26,258 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Components of the net benefit cost recognized | | | | | | | | | | | | | Service cost | | $ | 121 | | | $ | 798 | | | $ | 919 | | Interest cost | | | 1,427 | | | | 984 | | | | 2,411 | | Expected return on plan assets | | | (2,054 | ) | | | — | | | | (2,054 | ) | Amortization of unrecognized items | | | 878 | | | | 8 | | | | 886 | | | | | | | | | | | | | | | Net benefit costs | | $ | 372 | | | $ | 1,790 | | | $ | 2,162 | | | | | | | | | | | | | | |
(1) | The total of $43,450$26,345 on the Consolidated Balance Sheet also includes the pension liabilities of $144$87 relating to employees at the Company’s Rosenthal operation.mill. |
The amortization of unrecognized items relates to net actuarial losses and prior service costs. The Company anticipates that it will make contributionsexpects to the Celgar Plans ofrecognize approximately $1,606 in 2014. Estimated future benefit payments under the Celgar Plans are as follows: | | | | | | | Amount | | 2014 | | $ | 3,656 | | 2015 | | | 3,824 | | 2016 | | | 3,943 | | 2017 | | | 4,052 | | 2018 | | | 4,173 | | 2019 – 2023 | | | 22,311 | |
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)
During the year ended December 31, 2013, the Company recognized income, net of tax of $4,636 in other comprehensive income (2012 – loss of $808; 2011 – loss of $11,203). As at December 31, 2013, the pension related accumulated other comprehensive income balance of $16,414 (2012 – $21,050) is primarily a result$836 of net actuarial losses. These amounts have been stated net of tax.losses and prior service costs in 2017. The Celgar Defined Benefit 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 2014 is approximately $805 of net actuarial losses. There are no plan assets that are expected to be returned to the Company in 2014.2017.
Summary
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of key assumptions:U.S. dollars, except share and per share data) Note 7. Pension and Other Post-Retirement Benefit Obligations (continued) | | | | | | | | | | | 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 rateCompany anticipates that it will make contributions to the Celgar Defined Benefit Plans of return on plan assets is a management estimate based on, among other factors, historical long-term returns, expected asset mixapproximately $871 in 2017. Estimated future benefit payments under the Celgar Defined Benefit Plans are as follows: | | | | | | | | | | | Pension | | | Other Post- Retirement Benefits | | 2017 | | $ | 2,287 | | | $ | 791 | | 2018 | | | 2,300 | | | | 845 | | 2019 | | | 2,301 | | | | 897 | | 2020 | | | 2,280 | | | | 947 | | 2021 | | | 2,251 | | | | 996 | | 2022 - 2026 | | | 11,088 | | | | 5,755 | |
Weighted Average Assumptions The weighted-average assumptions used to determine the benefit obligations at the measurement dates and active management premium.the net benefit costs were as follows: | | | | | | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | Benefit obligations | | | | | | | | | | | | | Discount rate | | | 3.80 | % | | | 4.00 | % | | | 3.75 | % | Rate of compensation increase | | | 2.50 | % | | | 2.50 | % | | | 2.50 | % | Net benefit cost for year ended | | | | | | | | | | | | | Discount rate | | | 4.00 | % | | | 3.75 | % | | | 4.50 | % | Rate of compensation increase | | | 2.50 | % | | | 2.50 | % | | | 2.75 | % | Expected rate of return on plan assets | | | 6.40 | % | | | 6.40 | % | | | 6.60 | % |
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 trendThe expected rate would haveof 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 expected rate of compensation increase is a management estimate based on, among other factors, historical compensation increases and promotions, while considering current industry conditions, the following effect onterms of collective bargaining agreements with employees and the post-retirement benefit obligations:outlook for the industry. | | | | | | | | | | | | | | | | | | | 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 | | | 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 share and per share data) Note 8.7. Pension and Other Post-Retirement Benefit Obligations (continued) The assumed health care cost trend rates used to determine the other post-retirement benefit obligations were as follows: | | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | Health care cost trend rate assumed for next year | | | 6.00 | % | | | 6.50 | % | Rate to which the cost trend is assumed to decline to (ultimate trend rate) | | | 4.50 | % | | | 4.50 | % | Year that the rate reaches the ultimate trend rate | | | 2020 | | | | 2020 | |
The expected health care cost trend rates are based on historical trends for these costs, as well as recently enacted health care legislation. The Company also compares health care cost trend rates to those of the industry. A one-percentage point change in assumed health care cost trend rate would have the following effect on other post-retirement benefit obligations: | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | December 31, 2015 | | | | 1% Increase | | | 1% Decrease | | | 1% Increase | | | 1% Decrease | | Effect on total service and interest rate components | | $ | 32 | | | $ | (34 | ) | | $ | 36 | | | $ | (39 | ) | Effect on other post-retirement benefit obligations | | $ | 578 | | | $ | (564 | ) | | $ | 613 | | | $ | (598 | ) |
Investment Objective and Asset Allocation The investment objective for the Celgar Plansdefined benefit pension plan 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 for funding actuarial valuations. To achieve this objective, the Company’s overall investment strategy is to maintain an investment allocation mix of long-term growth investments (equities) and fixed income investments (debt securities). Investment allocation targets have been established by asset class as summarized above. The asset allocation targets are set after considering the nature of the liabilities, long-term return expectations, the risks associated with key asset classes, inflation and interest rates and related management fees and expenses. In addition, the Celgar Plans’defined benefit pension plan’s investment strategy seeks to minimize risk beyond legislated requirements by constraining the investment managers’ investment options. There are a number of specific constraints based on investment type, but they all have the general purpose of ensuring that the investments are fully diversified and that risk is appropriately managed. For example, no more than 10% ofthere are constraints on the book value of the assets that can be invested in any one entity or group, investments in any one entity cannot exceed 30% of the voting shares and all equity holdings must be listed on a public exchange. Reviews of the investment objectives, key assumptions and the independent investment managers are performed periodically. Celgar Plans’
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 7. Pension and Other Post-Retirement Benefit Obligations (continued) The target asset allocation of the defined benefit pension plan’s assets, based on the fair value of the assets held, is 60% equity securities and 40% debt securities. The following table presents the defined benefit pension plan’s assets fair value measurements as at December 31, 2013:2016 under the fair value hierarchy: | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Fair value measurements as at December 31, 2016 using: | | Asset Category | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Equity securities | | $ | 20,528 | | | $ | — | | | $ | — | | | $ | 20,528 | | Debt securities | | | 12,483 | | | | — | | | | — | | | | 12,483 | | | | | | | | | | | | | | | | | | | Total assets | | $ | 33,011 | | | $ | — | | | $ | — | | | $ | 33,011 | | | | | | | | | | | | | | | | | | |
Concentrations of Risk in the Celgar Plans’Defined Benefit Pension Plan’s Assets The Company has reviewed the Celgar Plans’defined benefit pension plan’s 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 twothree independent investment managers. The Company has concluded that there are no significant concentrations of risk. Defined Contribution Plan Effective December 31, 2008, the Celgar Defined Benefit Plans were 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, 2016, the Company made contributions of $743 (2015 – $646; 2014 – $759), to this plan. Multiemployer Plan The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on an amount per hour workeda percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. The contributionsContributions during the year ended December 31, 20132016 totaled $2,635 (2012$1,944 (2015 – $2,644; 2011$1,390; 2014 – $2,450)$2,085). 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 | | Provincially Registered Plan Number | | Expiration Date of Collective Bargaining Agreement | | Are the Company’s Contributions Greater Than 5% of Total Contributions? | Legal name | | Plan Number | | Agreement | | 2013 | | 2012 | | 2016 | | 2015 | | 2014 | The Pulp and Paper Industry Pension Plan | | P085324 | | April 30, 2017 | | Yes | | Yes | | P085324 | | April 30, 2017 | | No | | No | | No |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 9.8. Income Taxes Income before provision for income taxes by taxing jurisdiction was as follows: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | U.S. | | $ | (32,511 | ) | | $ | (27,788 | ) | | $ | (55,089 | ) | Foreign | | | 91,975 | | | | 132,739 | | | | 159,281 | | | | | | | | | | | | | | | | | $ | 59,464 | | | $ | 104,951 | | | $ | 104,192 | | | | | | | | | | | | | | |
The net income tax benefit (provision) recognized in the Consolidated Statement of Operations for the years ended December 31, 2016, 2015 and 2014 was related to foreign tax jurisdictions. The Company’s effective income tax 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 Company and/or one or more of its subsidiaries file income tax returns in the United States,U.S., Germany and Canada. Currently, the Company does not anticipate that the expiration of the statute 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, 2013.2016. 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 2013, theThe German tax authorities have completed examinations of 2011up to and including the 2013 tax year for all but two German entities. For one of the German entities, 2008 2009, and 2010to 2013 tax years are still being reviewedexamined and the review is expected to be completed in 2014. Forfor the other entity, the 2010 examination2011 to 2013 tax years are being examined. The Company is complete.generally not subject to U.S. or Canadian income tax examinations for tax years before 2013 and 2012, respectively. The Company believes that it has adequately provided for any reasonable foreseeable outcomes related to its tax audits and that any settlement will not have a material adverse effect on its consolidated results. However, there can be no assurances as to the possible outcomes. The Company is generally not subject to U.S. or Canadian income tax examinations for tax years before 2010 and 2008, respectively. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:
| | | | | | | | | | | 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)2016 (2015 – $nil). The Company recognizes interest and penalties related to unrecognized tax benefits in current income tax benefit (provision)provision in the Consolidated Statement of Operations. During the year ended December 31, 2013,2016, the Company recognized approximately $nil in interest and penalties (2012(2015 – $134)$nil; 2014 – $nil). During the year ended December 31, 2013, the Company resolved an outstanding issue with the German tax authorities. As a result, the Company reduced its unrecognized tax benefit from $8,605 to $nil and recorded a current tax expense of $4,270. Additionally, the Company increased its valuation allowance by $4,137, thereby reducing the deferred tax asset and increasing the deferred tax expense by this amount.
The provision for current income taxes consists primarily of non-U.S. taxes for the years ended December 31, 2013, 2012 and 2011, respectively.
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 9.8. Income Taxes (continued) Differences between the U.S. Federal Statutory and the Company’s effective rates are as follows: | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
Deferred income tax assets and liabilities are composed of the following: | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | U.S. Federal statutory rate | | | 35% | | | | 35% | | | | 35% | | U.S. Federal statutory rate on income before provision for income taxes and noncontrolling interest | | $ | (20,812 | ) | | $ | (36,972 | ) | | $ | (36,467 | ) | Tax differential on foreign income | | | 5,822 | | | | 9,330 | | | | 11,295 | | Effect of foreign earnings | | | (13,850 | ) | | | (5,290 | ) | | | (9,998 | ) | Change in undistributed earnings | | | (13,297 | ) | | | — | | | | — | | Valuation allowance | | | 9,188 | | | | (2,765 | ) | | | 52,906 | | Tax benefit of partnership structure | | | 4,933 | | | | 5,217 | | | | 5,987 | | Non-taxable foreign subsidies | | | 2,118 | | | | 2,281 | | | | 1,263 | | True-up of prior year taxes | | | (980 | ) | | | 5,073 | | | | — | | Foreign exchange on valuation allowance | | | 632 | | | | (5,005 | ) | | | (7,146 | ) | Foreign exchange on settlement of debt | | | 3,150 | | | | — | | | | — | | Other | | | (1,425 | ) | | | (1,318 | ) | | | (1,066 | ) | | | | | | | | | | | | | | | | $ | (24,521 | ) | | $ | (29,449 | ) | | $ | 16,774 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprised of: | | | | | | | | | | | | | Current income tax provision | | $ | (7,712 | ) | | $ | (11,934 | ) | | $ | (5,242 | ) | Deferred income tax benefit (provision) | | | (16,809 | ) | | | (17,515 | ) | | | 22,016 | | | | | | | | | | | | | | | | | $ | (24,521 | ) | | $ | (29,449 | ) | | $ | 16,774 | | | | | | | | | | | | | | |
| | | | | | | | | | | 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 U.S. dollars, except share and per share data) Note 9.8. Income Taxes (continued) Deferred income tax assets and liabilities are composed of the following: | | | | | | | | | | | December 31, | | | | 2016 | | | 2015 | | German tax loss carryforwards | | $ | 65,582 | | | $ | 75,668 | | U.S. tax loss carryforwards and credits | | | 62,202 | | | | 65,957 | | Canadian tax loss carryforwards | | | 2,033 | | | | 217 | | Basis difference between income tax and financial reporting with respect to operating pulp mills | | | (56,723 | ) | | | (58,047 | ) | Undistributed earnings of foreign subsidiary | | | (13,297 | ) | | | — | | Long-term debt | | | (5,996 | ) | | | (6,253 | ) | Payable and accrued expenses | | | 3,102 | | | | 7,328 | | Deferred pension liability | | | 6,877 | | | | 6,911 | | Capital leases | | | 5,640 | | | | 1,146 | | Research and development expense pool | | | 2,904 | | | | 3,539 | | Other | | | 2,791 | | | | 4,144 | | | | | | | | | | | | | | 75,115 | | | | 100,610 | | Valuation allowance | | | (81,439 | ) | | | (90,627 | ) | | | | | | | | | | Net deferred tax asset (liability) | | $ | (6,324 | ) | | $ | 9,983 | | | | | | | | | | | | | | | | | | | | Comprised of: | | | | | | | | | Deferred income tax asset | | $ | 10,990 | | | $ | 23,154 | | Deferred income tax liability | | | (17,314 | ) | | | (13,171 | ) | | | | | | | | | | Net deferred tax asset (liability) | | $ | (6,324 | ) | | $ | 9,983 | | | | | | | | | | |
The following table details the scheduled expiration dates of the Company’s Germannet operating loss, interest and income tax loss carryforward amount includes corporate and trade tax losses totalling approximately $528,700credit carryforwards as at December 31, 2013 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 $125,700 at December 31, 2013, of which approximately $6,200 and $119,500, if not used, will expire in the tax years ending 2019 to 2023 and 2024 to 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 $43,800 at December 31, 2013 of which approximately $12,300 will expire in 2015 and approximately $31,500 will begin to expire in the tax year ending 2029, if not used. The Company has Canadian investment tax credits for scientific research and experimental development of approximately $4,600 which begin to expire in the taxation year 2030.2016: | | | | | | | | | | | Amount | | | Expiration Date | | Germany | | | | | | | | | Net operating loss | | $ | 203,800 | | | | Indefinite | | Interest | | $ | 121,700 | | | | Indefinite | | U.S. | | | | | | | | | Net operating loss | | $ | 157,400 | | | | 2025 – 2035 | | Income tax credits | | $ | 7,100 | | | | 2020 – 2026 | | Canada | | | | | | | | | Net operating loss | | $ | 7,800 | | | | 2029 – 2036 | | Scientific research and experimental development tax credits | | $ | 3,900 | | | | 2030 – 2035 | |
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 MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 8. Income Taxes (continued) results and prudent and feasible tax planning strategies. The carrying value of ourthe Company’s deferred tax assets reflects ourits 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.evidence. 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 | | | | | | | | | | |
| | | | | | | | | | | 2016 | | | 2015 | | Balance as at January 1 | | $ | 90,627 | | | $ | 87,862 | | Additions (reversals) | | | | | | | | | U.S. | | | (16,043 | ) | | | 11,571 | | Canada | | | 6,223 | | | | (3,801 | ) | The impact of changes in foreign exchange rates | | | 632 | | | | (5,005 | ) | | | | | | | | | | Balance as at December 31 | | $ | 81,439 | | | $ | 90,627 | | | | | | | | | | |
For the year endedAs at December 31, 2013,2016, the Company increasedhas fully recognized all deferred tax assets for its German entities and has a full 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 thatagainst the deferred tax assets for its U.S. or Canadian entities.
The Company has recognized a tax liability on undistributed earnings that it does not intend to be indefinitely reinvested outside the Canadian and U.S. entities will not be realized 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 estimatesA significant portion of the timingCompany’s undistributed earnings are intended to be indefinitely reinvested in operations outside of movements in temporary differences. The Company’s accounting for the German deferred tax assets represents its current best estimate. It is reasonably possible that changesU.S. If these foreign earnings were to be repatriated in the Company’sfuture, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. In addition, the Company has loss carryforwards which may be used to offset any current estimates could have a material effect ontax liability. As of December 31, 2016, the Company’s financial statements and resultscumulative amount of operations in the near term. The Company’s policy is to indefinitely reinvest undistributed earnings of Mercer Inc.’s foreign subsidiaries. Accordingly, no provision forupon which U.S. income taxes hashave not been made forprovided was approximately $238,300. It is not practicable to estimate the income tax liability that might be incurred if such undistributed earnings.earnings were remitted to the U.S.
Note 9. Shareholders’ Equity Dividends During the years ended December 31, 2016 and 2015 the Company’s Board of Directors declared the following quarterly dividends: | | | | | | | | | Date Declared | | Dividend Per Common Share | | | Amount | | February 11, 2016 | | $ | 0.115 | | | $ | 7,435 | | April 28, 2016 | | | 0.115 | | | | 7,440 | | July 28, 2016 | | | 0.115 | | | | 7,440 | | October 27, 2016 | | | 0.115 | | | | 7,440 | | | | | | | | | | | | | $ | 0.460 | | | $ | 29,755 | | | | | | | | | | |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 9. Shareholders’ Equity (continued) | | | | | | | | | Date Declared | | Dividend Per Common Share | | | Amount | | July 30, 2015 | | $ | 0.115 | | | $ | 7,418 | | October 29, 2015 | | | 0.115 | | | | 7,418 | | | | | | | | | | | | | $ | 0.230 | | | $ | 14,836 | | | | | | | | | | |
Note 10. Share CapitalDividends are paid in the quarter subsequent to the quarter in which they were declared.
Common shares
The Company has authorized 200,000,000In February 2017, the Company’s Board of Directors declared a quarterly dividend of $0.115 per common shares (2012 – 200,000,000) with a par value of $1 per share.
As at December 31, 2013, the Company had 55,853,704 common shares (2012 – 55,815,704) issued and outstanding. During the year ended December 31, 2013, the Company issued 38,000 restricted shares to directors Payment of the Company.dividend will be made on April 4, 2017 to all shareholders of record on March 28, 2017. Future dividends are subject to approval by the Board of Directors and may be adjusted as business and industry conditions warrant.
Share Capital Preferred shares The Company has authorized 50,000,000 preferred shares (2012(2015 – 50,000,000) with $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 designationsseries. Designations and preferences for each series as shall be stated in the resolutions providing for the designation and issueissuance of each such series adopted by the Company’s Board of Directors of the Company.Directors. 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, 2013,2016, no preferred shares had been issued by the Company. Note 11. Stock-BasedStock Based Compensation
In June 2010, the Company adopted a new stock incentive plan (the “2010 Plan”) which provides for options, restricted stock rights, restricted shares, performance shares, performance share units (“PSUs”)PSUs and stock appreciation rights to be awarded to employees, consultants and non-employee directors. During the yearsyear ended December 31, 2013 and December 31, 2012,2016, there were no issued and outstanding options, restricted stock rights, performance shares or stock appreciation rights. As at December 31, 2013,2016, after factoring in all allocated shares, there remain approximately 1.1 million1,044,000 common shares available for grant pursuant to the 2010 Plan.grant. Performance Shares 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 objectives. PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally three years or less.years.
The fair value of the performance shares 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 shares at the reporting date. The target number of shares is determined using management’s best estimate. The final determination of the number of shares to be granted or unrestricted will be made by the Company’s Board of Directors. For the year ended December 31, 2013,2016, the Company recognized an expense of $2,882$4,210 related to the PSUs (2012(2015 – $1,546; 2011$1,819; 2014 – $1,274)$1,023). As at December 31, 2013, there are no performance shares outstanding.
The following table summarizes PSU activity during the year:
| | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 9. Shareholders’ Equity (continued) Note 11. Stock-Based Compensation (continued)The following table summarizes PSU activity during the year:
| | | | | | | | | | | Number of PSUs | | | Weighted Average Grant Date Fair Value Per Unit | | Outstanding as at January 1, 2016 | | | 1,255,919 | | | $ | 11.21 | | Granted | | | 997,863 | | | $ | 6.04 | | Vested and issued | | | (154,242 | ) | | $ | 12.92 | | Forfeited | | | (31,366 | ) | | $ | 8.63 | | | | | | | | | | | Outstanding as at December 31, 2016 | | | 2,068,174 | | | $ | 8.63 | | | | | | | | | | |
The weighted-average grant date fair value per unit of all PSUs granted in 2015 and 2014 was $12.95 and $9.50, respectively. The total fair value of PSUs vested and issued in 2016, 2015 and 2014 was $1,382, $2,031 and $3,046, respectively. Restricted Shares The fair value of restricted shares is determined based upon the number of shares granted and the quoted price of the Company’s shares on the date of grant. Restricted shares generally vest overat the end of one year; however, 200,000 restricted shares granted during the year ended December 31, 2011 vestvested in equal amounts over a five-year period commencing in 2012. The fair value of the restricted shares is recorded as compensation expense on a straight-line basis over the vesting period.
Expense recognized for the year ended December 31, 20132016 was $692 (2012$449 (2015 – $1,070; 2011$590; 2014 – $1,389)$563). As at December 31, 2013,2016, the total remaining unrecognized compensation cost related to restricted stockshares amounted to approximately $511 (2012 – $937),$153 which will be amortized over the remaining vesting periods. The following table summarizes restricted share activity during the year: | | | | | | | | | | | | | | | 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
| | | | | | | | | | | Number of Restricted Shares | | | Weighted Average Grant Date Fair Value Per Share | | Outstanding as at January 1, 2016 | | | 78,000 | | | $ | 13.65 | | Granted | | | 38,000 | | | $ | 9.41 | | Vested and issued | | | (78,000 | ) | | $ | 13.65 | | | | | | | | | | | Outstanding as at December 31, 2016 | | | 38,000 | | | $ | 9.41 | | | | | | | | | | |
The following table summarizes the statusweighted-average grant date fair value per share of options outstanding at December 31, 2013: | | | | | | | | | | | | | | | | | 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, 2013all restricted shares granted in 2015 and December 31, 2012, no options were granted, exercised or cancelled. During the year ended December 31, 2013, 100,000 options expired (2012 – nil; 2011 – 15,000).2014 was $14.48 and $8.85, respectively. The aggregate intrinsictotal fair value of options is calculated as the difference between the quoted market price for the Company’s common stock as at December 31, 2013,restricted shares vested and the exercise price of the stock options for those options where the exercise price is below the quoted market price. As at December 31, 2013, the Company had 75,000 options (2012 – 100,000; 2011 – 100,000) with an exercise price below the quoted market price resultingissued in an aggregate intrinsic value of $172 (2012 – $151; 2011 – $45). The Company issues new shares upon the exercise of stock options.
Stock compensation expense recognized for the year ended December 31, 20132016, 2015 and 2014 was $nil (2012 – $nil; 2011 – $nil).$697, $1,096 and $670, respectively.
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 12.10. 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, | | | | 2016 | | | 2015 | | | 2014 | | Net income attributable to common shareholders | | | | | | | | | | | | | Basic and diluted | | $ | 34,943 | | | $ | 75,502 | | | $ | 113,154 | | | | | | | | | | | | | | | Net income per share attributable to common shareholders | | | | | | | | | | | | | Basic | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.82 | | | | | | | | | | | | | | | Diluted | | $ | 0.54 | | | $ | 1.17 | | | $ | 1.81 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of common shares outstanding: | | | | | | | | | | | | | Basic(1) | | | 64,631,491 | | | | 64,380,565 | | | | 62,012,947 | | Effect of dilutive shares: | | | | | | | | | | | | | PSUs | | | 447,465 | | | | 335,922 | | | | 406,922 | | Restricted shares | | | 19,309 | | | | 56,453 | | | | 79,889 | | Stock options | | | — | | | | 3,852 | | | | 15,112 | | | | | | | | | | | | | | | Diluted | | | 65,098,265 | | | | 64,776,792 | | | | 62,514,870 | | | | | | | | | | | | | | |
(1) | TheFor the year ended December 31, 2016, the basic weighted average number of common shares outstanding excludes 158,00038,000 restricted shares which have been issued, but have not vested as at December 31, 2013 (20122016 (2015 – 196,50078,000 restricted shares; 20112014 – 238,000118,000 restricted shares). |
The calculation of diluted net income (loss) per share attributable to common shareholders does not assume the exercise of any instruments that would have an anti-dilutive effect on net income (loss) per share. The following table summarizes the instruments excluded from the calculation of net income (loss) per share attributable to common shareholders because theyshareholders. There were anti-dilutive. | | | | | | | | | | | | | | | 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,no anti-dilutive instruments for 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, 2013, the Company recorded restructuring expenses of $5,029 for severance2016, 2015 and other personnel expenses, such as termination benefits. The Company expects to incur approximately $600 of additional expenses in 2014. As at December 31, 2013, the Company had a liability for these restructuring expenses of $2,898 in accounts payable and other.
In 2013, the Company 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 Company had a liability for these restructuring expenses of $1,096 in accounts payable and other.
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 14.11. Accumulated Other Comprehensive IncomeLoss The components of accumulated other comprehensive incomeloss 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 Company made a $20,000 capital investment in the Stendal mill, resulting in an 8.1% increase in the Company’s equity ownership in the mill as it went from 74.9% to 83.0%. The increase in equity ownership was accounted for as an equity transaction and as a result, the noncontrolling deficit was reduced by $9,974, and the paid-in capital, which includes legal fees associated with the transaction, was reduced by $10,118.
| | | | | | | | | | | | | | | | | | | Foreign Currency Translation Adjustment | | | Defined Benefit Pension and Other Post- Retirement Benefit Items | | | Unrealized Gains / Losses on Marketable Securities | | | Total | | Balance as at December 31, 2014 | | $ | (33,268 | ) | | $ | (19,287 | ) | | $ | 114 | | | $ | (52,441 | ) | Other comprehensive income (loss) before reclassifications | | | (122,955 | ) | | | 3,063 | | | | (127 | ) | | | (120,019 | ) | Amounts reclassified from accumulated other comprehensive loss | | | — | | | | 886 | | | | — | | | | 886 | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss), net of taxes | | | (122,955 | ) | | | 3,949 | | | | (127 | ) | | | (119,133 | ) | | | | | | | | | | | | | | | | | | Balance as at December 31, 2015 | | | (156,223 | ) | | | (15,338 | ) | | | (13 | ) | | | (171,574 | ) | | | | | | | | | | | | | | | | | | Other comprehensive loss before reclassifications | | | (14,369 | ) | | | (342 | ) | | | (1 | ) | | | (14,712 | ) | Amounts reclassified from accumulated other comprehensive loss | | | — | | | | 1,017 | | | | — | | | | 1,017 | | | | | | | | | | | | | | | | | | | Other comprehensive income (loss), net of taxes | | | (14,369 | ) | | | 675 | | | | (1 | ) | | | (13,695 | ) | | | | | | | | | | | | | | | | | | Balance as at December 31, 2016 | | $ | (170,592 | ) | | $ | (14,663 | ) | | $ | (14 | ) | | $ | (185,269 | ) | | | | | | | | | | | | | | | | | |
Note 16.12. Business Segment Information The Company has three operating segments, the individual pulp mills that are aggregated into one reportable business segment, market pulp.pulp, due to the similar economic characteristics of the mills. Accordingly, the results presented are those of the one reportable business segment. MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 12. Business Segment Information (continued) The following table presents net sales to external customers by product and 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 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | Pulp revenues | | | | | | | | | | | | | Germany | | $ | 326,898 | | | $ | 344,843 | | | $ | 346,879 | | China | | | 221,773 | | | | 266,632 | | | | 276,848 | | Other European Union countries(1) | | | 173,585 | | | | 210,218 | | | | 250,952 | | Italy | | | 53,702 | | | | 53,919 | | | | 80,730 | | Other Asia | | | 31,897 | | | | 43,981 | | | | 69,711 | | U.S. | | | 26,985 | | | | 15,453 | | | | 39,146 | | Other countries | | | 12,488 | | | | 11,191 | | | | 9,366 | | | | | | | | | | | | | | | | | | 847,328 | | | | 946,237 | | | | 1,073,632 | | Energy and chemical revenues | | | | | | | | | | | | | Germany | | | 74,904 | | | | 75,776 | | | | 91,375 | | Canada | | | 9,391 | | | | 11,191 | | | | 10,105 | | | | | | | | | | | | | | | | | $ | 931,623 | | | $ | 1,033,204 | | | $ | 1,175,112 | | | | | | | | | | | | | | |
(1) | Not including Germany or Italy; includes new entrant countries to the European Union from their time of admission.Italy. |
The following table presents total long-lived assets by geographic area based on location of the asset: | | | December 31, | | | December 31, | | | | 2013 | | | 2012 | | | 2016 | | | 2015 | | Germany | | $ | 843,777 | | | $ | 839,535 | | | $ | 593,237 | | | $ | 623,932 | | Canada | | | 194,854 | | | | 226,971 | | | | 145,039 | | | | 138,459 | | | | | | | | | | | | | | | | | $ | 1,038,631 | | | $ | 1,066,506 | | | $ | 738,276 | | | $ | 762,391 | | | | | | | | | | | | | | |
In 2013,2016, two customers at a numberthrough several of their individual millsoperations accounted for 10%19% and 11%10%, respectively, of the Company’s total pulp sales (2012revenues (2015 – one customer at a numberthrough several of its individual millsoperations accounted for 11%16%; 20112014 – no single customerone customers through several of their operations accounted for 10% or more)13%). MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 17.13. 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. MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 13. Derivative assets are presented in prepaid expenses and other, and derivative liabilities are presented in interest rate derivative liability in the Consolidated Balance Sheet.Transactions (continued)
Interest Rate DerivativeSwaps During 2004,2002, 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.mill’s senior project finance facility, which was settled in November 2014. Under the remaining interest rate swap,swaps, the Company pays a fixed rate and receives a floating rate with the interestderivative payments being calculated on a notional amount. Currently,As at December 31, 2016, the contract has a fair value of €6.2 million ($6,522; 2015 – $16,913) of which €6.2 million ($6,522; 2015 – $10,380) was classified as current within accounts payable and other and $nil (2015 – $6,533) was classified as a long-term liability in the Consolidated Balance Sheet. The contract has an aggregate notional amount of €306.8€128.3 million, at a fixed interest rate of 5.28% and it matures in October 2017 (which for2017. The Company has pledged as collateral cash in the most part matches the maturityamount of 67% of the Stendal Loan Facility)fair value of the interest rate swap up to €8.5 million to the derivative counterparty. The calculation to determine the collateral is performed semi-annually, with the final calculation in October 2017. As at December 31, 2016, the collateral was €4.1 million ($4,327; 2015 – $9,230). This cash has been classified as restricted cash in the Consolidated Balance Sheet. The counterparty to the interest rate derivative contract is with a bank that is parta member of a banking syndicate that holds the Stendal Loan Facility€75.0 million revolving credit 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 Euro and Canadian dollar. As a result of these transactions the Company and its subsidiaries have 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.accounts receivable. The Company maintains cash balances in foreign financial institutions in excess of insured limits. The Company limits its credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. The Company’s credit risk associated with the sale of pulp 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 primarily in Germany, China Italy and the United States.Italy. The carrying amount of cash and cash equivalents of $147,728$136,569, restricted cash of $4,327 and receivablesaccounts receivable of $135,893$123,892 recorded in the Consolidated Balance Sheet, net of any allowances for losses, represents the Company’s maximum exposure to credit risk. The following table showsNote 14. Fair Value Measurement and Disclosure
Due to their short-term maturity, 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 valueamounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable and other approximates thetheir fair value due to the immediate or short-term maturity of these financial instruments. value.
The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. Marketable securities are recorded at fair value based on recent transactions. See the Fair Value Measurement and Disclosure section below for details on how the fair value of the pulp price derivative contracts, interest rate derivative contractliability classified as Level 2 was determined using a discounted cash flow model that uses as its basis readily observable market inputs, such as forward interest rates and debt was determined. Fair Value Measurement and Disclosure
yield curves observable at specified intervals. The fair value methodologies and, as a result,observable inputs reflect market data obtained from independent sources, including the fair value ofEuribor rate provided by the Company’s marketable securities, debt and derivative instruments are determined based oncounterparty to the fair value hierarchy provided in the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification, and are as follows:interest rate derivative. MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 18. Financial Instruments14. Fair Value Measurement and Disclosure (continued) Level 1 – Valuations based on quoted prices in active markets foridentical assets and liabilities.
Level 2 – Valuations based on observable inputs in active markets forsimilar assets 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 marketable securities within Level 1 of the valuation hierarchy because quoted prices are available in an active market 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 valued using internal models that use as their basis readily observable market inputs, such as forward interest rates, yield curves observable at specified intervals and commodity price curves. The observable inputs reflect market data obtained from independent sources. In addition, the Company considered the risk of non-performance of the obligor, which in some cases reflects the Company’s own credit risk. The counterparty to its interest rate and pulp price derivatives are multi-national financial institutions.
The Company’s debt is recognized at amortized cost. The fair value of debtthe Senior Notes classified as Level 2 reflectswas determined using quoted prices in a dealer market, or using recent market transactions and discounted cash flow estimates. Discounted cash flow models use observable market inputs taking into consideration variables such as interest rate changes, comparative securities, subordination discount and credit rating changes. The fair value of debt classified as Level 3 is valued using discounted cash flow models or select comparable transactions, which require significant management estimates. These estimates are developed using available market, historical, and forecast data, including taking into account variables such as recent financing activities, the capital structure, and the lack of marketability of such debt.transactions.
The following table presentstables present a summary of the Company’s outstanding financial instruments and their estimated fair values under the hierarchy defined in Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification:fair value hierarchy: | | | | | | | | | | | | | | | | | | | 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 U.S. dollars, except per share data)
| | | | | | | | | | | | | | | | | | | Fair value measurements as at December 31, 2016 using: | | Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Interest rate derivative liability | | $ | — | | | $ | 6,522 | | | $ | — | | | $ | 6,522 | | Senior Notes debt | | | — | | | | 654,378 | | | | — | | | | 654,378 | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | 660,900 | | | $ | — | | | $ | 660,900 | | | | | | | | | | | | | | | | | | | | | | | Fair value measurements as at December 31, 2015 using: | | Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | Interest rate derivative liability | | $ | — | | | $ | 16,913 | | | $ | — | | | $ | 16,913 | | Senior Notes debt | | | — | | | | 654,625 | | | | — | | | | 654,625 | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | 671,538 | | | $ | — | | | $ | 671,538 | | | | | | | | | | | | | | | | | | |
Note 19.15. 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 as at December 31, 2013 is2016 are as follows: | | | Capital | | | Operating | | | Capital Leases | | Operating Leases | | | | Leases | | | Leases | | | 2014 | | $ | 2,406 | | | $ | 2,280 | | | 2015 | | | 2,414 | | | | 2,076 | | | 2016 | | | 2,263 | | | | 1,295 | | | 2017 | | | 1,511 | | | | 1,239 | | | $ | 3,908 | | | $ | 1,666 | | 2018 | | | 880 | | | | 1,237 | | | 3,270 | | | 1,323 | | 2019 | | | 4,220 | | | 1,293 | | 2020 | | | 1,980 | | | 1,102 | | 2021 | | | 1,887 | | | | — | | Thereafter | | | 3,111 | | | | 929 | | | 12,208 | | | | — | | | | | | | | | | | | | | | Total | | | 12,585 | | | $ | 9,056 | | | 27,473 | | | $ | 5,384 | | | | | | | | | | | | | Less: imputed interest | | | 1,771 | | | | | 4,799 | | | | | | | | | | | | | | | Total present value of minimum capitalized payments | | | 10,814 | | | | | 22,674 | | | | Less: current portion of capital lease obligations | | | 2,254 | | | | | 3,066 | | | | | | | | | | | | | | | Long-term capital lease obligations | | $ | 8,560 | | | | | $ | 19,608 | | | | | | | | | | | | | | |
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 iswas included in accounts payable and other and the long-term portion iswas included in capital leases and other in the Consolidated Balance Sheet. Rent expense under operating leases was $1,393 for the year ended December 31, 2016 (2015 – $2,271; 2014 – $2,978).
MERCER INTERNATIONAL INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands of U.S. dollars, except share and per share data) Note 20.16. 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 had Guarantee Amount proceeds of $2,437 remaining in accounts payable and other.
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 20. Commitments and Contingencies (continued)
(c) | The Company is involved in a property transfer tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. Celgar had previously paid the property transfer tax assessment of approximately C$4.5 million ($4,200). During the second quarter of 2013, the Company lost its Supreme Court of British Columbia appeal of the property transfer tax assessment and as a result the Company filed an application to seek leave to appeal to the British Columbia Court of Appeal. In September 2013, the leave to appeal was granted to the Company and a hearing date with the Court of Appeal is expected in the first half of 2014. While the outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claimclaims which isare pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. |
(d)(b) | 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 ($11,400). 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. While it is not reasonably possible to predict the outcome of the legal action and claim, it is the opinion of management that the outcome will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company. |
(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. |
MERCER INTERNATIONAL INC.SUPPLEMENTARY FINANCIAL INFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
Selected Quarterly Financial Data (In thousands of U.S. dollars, except per share data) | | | | | | | | | | | | | | | | | | | Quarters Ended | | | | March 31 | | | June 30 | | | September 30 | | | December 31 | | 2016 | | | | | | | | | | | | | | | | | Revenues | | $ | 253,843 | | | $ | 218,145 | | | $ | 237,941 | | | $ | 221,694 | | Gross profit | | | 28,100 | | | | 16,777 | | | | 29,821 | | | | 39,045 | | Net income (loss) attributable to common shareholders | | | 8,769 | | | | (4,241 | ) | | | 11,926 | | | | 18,489 | | Net income (loss) per share attributable to common shareholders* | | $ | 0.14 | | | $ | (0.07 | ) | | $ | 0.18 | | | $ | 0.28 | | 2015 | | | | | | | | | | | | | | | | | Revenues | | $ | 257,547 | | | $ | 266,936 | | | $ | 270,893 | | | $ | 237,828 | | Gross profit | | | 43,931 | | | | 33,549 | | | | 44,032 | | | | 44,172 | | Net income (loss) attributable to common shareholders | | | 13,634 | | | | 16,412 | | | | 23,760 | | | | 21,696 | | Net income (loss) per share attributable to common shareholders* | | $ | 0.21 | | | $ | 0.25 | | | $ | 0.37 | | | $ | 0.33 | |
Note 21. Restricted Group Supplemental Disclosure
The terms of the indenture governing the Company’s Senior Notes require that it provides the results of operations and financial condition of Mercer International Inc. and the restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the years ended December 31, 2013 and 2012, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and its Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.
Combined Condensed Balance Sheets
| | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)* On a diluted basis
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Balance Sheets
| | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
| | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
| | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Operations
| | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | 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. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | 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. |
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except per share data)
Note 21. Restricted Group Supplemental Disclosure (continued)
Combined Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | 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. |
SUPPLEMENTARY FINANCIAL INFORMATION
(UNAUDITED)
Quarterly Financial Data
(In thousands of U.S. Dollars, except per share amounts)
| | | | | | | | | | | | | | | | | | | 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 | ) |
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934,, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | | MERCER INTERNATIONAL INC. | | | | | Dated: February 21, 201410, 2017 | | By: | | /s/By: | | /s/ JIMMY S.H. LEE | | | | | | | Jimmy S.H. Lee | | | | | | | Executive 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. | | | | | | | /s/ JIMMY S.H. LEE | | | | Date: February 21, 2014 | Jimmy S.H. Lee10, 2017 | | | Chairman, Chief Jimmy S.H. Lee | | | | | | | Executive OfficerChairman and Director | | | | | | | | | | | /s/ DAVID M. GANDOSSI | | | | Date: February 21, 2014 | David M. Gandossi10, 2017 | | | Secretary, Executive Vice President,David M. Gandossi | | | | | | | Chief FinancialExecutive Officer and Principal Accounting OfficerDirector | | | | | | | | | | | /s/ ERIC LAURITZENDAVID K.URE | | | | Date: February 21, 2014 | Eric Lauritzen10, 2017 | | | DirectorDavid K. Ure | | | | | | | Executive Vice President, | | | | | | | Chief Financial Officer and Principal | | | | | | | Accounting Officer | | | | | | | | | | | /s/ WILLIAM D. MCCARTNEYERIC LAURITZEN | | | | Date: February 21, 2014 | William D. McCartney10, 2017 | | | Eric Lauritzen | | | | | | | Director | | | | | | | | | | | /s/ GRAEME A. WITTSWILLIAM D. MCCARTNEY | | | | Date: February 21, 2014 | Graeme A. Witts10, 2017 | | | William D. McCartney | | | | | | | Director | | | | | | | | | | | /s/ BERNARD PICCHIGRAEME A. WITTS | | | | Date: February 21, 2014 | Bernard Picchi10, 2017 | | | Graeme A. Witts | | | | | | | Director | | | | | | | | | | | /s/ JAMES SHEPHERDBERNARD PICCHI | | | | Date: February 21, 2014 | James Shepherd10, 2017 | | | Bernard Picchi | | | | | | | Director | | | | | | | | | | | /s/ KEITH PURCHASEJAMES SHEPHERD | | | | Date: February 21, 2014 | Keith Purchase10, 2017 | | | James Shepherd | | | | | | | Director | | | | | | |
| | | | | | | | | | | /s/ KEITH PURCHASE | | | | Date: February 10, 2017 | | | Keith Purchase | | | | | | | Director | | | | | | | | | | | /s/ NANCY ORR | | | | Date: February 21, 2014 | Nancy Orr10, 2017 | | | 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,Mercer International Inc., as amended. Incorporated by reference from Form 8-A datedfiled March 1,2, 2006. | | | 3.2 | | Bylaws of the Company.Mercer International Inc. Incorporated by reference from Form 8-A datedfiled March 1,2, 2006. | | | 4.1 | | Indenture dated as of November 17, 201026, 2014 between Mercer International Inc. and Wells Fargo Bank, National Association.Association, as trustee, relating to the 2019 Senior Notes. Incorporated by reference from Form 8-K dated July 23, 2013.filed November 28, 2014. | | | 10.1*4.2 | | Project Financing Facility AgreementIndenture dated AugustNovember 26, 20022014 between Zellstoff Stendal GmbHMercer International Inc. and Bayerische Hypo-und Vereinsbank AG,Wells Fargo Bank, National Association, as amendedtrustee, relating to the 2022 Senior Notes. Incorporated by Amendment, Restatement and Undertaking Agreement dated January 31, 2009 and the Amendment Agreement dated January 20, 2011.reference from Form 8-K filed November 28, 2014. | | | 10.2*4.3 | | Project Blue Mill Financing Facility AgreementIndenture dated January 20, 2012February 3, 2017 between Zellstoff Stendal GmbHMercer International Inc. and UnicreditWells Fargo Bank, AG and IKB Deutsche Industriebank AG.National Association, as trustee, relating to the 2024 Senior Notes. Incorporated by reference from Form 8-K filed February 3, 2017. | | | 10.3*10.1 | | Shareholders’ UndertakingRevolving Credit Facility Agreement dated August 26, 2002November 25, 2014 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen AG and Zellstoff Stendal GmbH, UniCredit Bank AG, Credit Suisse AG, London Branch, Royal Bank of Canada and Bayerische Hypo-und Vereinsbank AG as amendedBarclays Bank PLC. Incorporated by the Amendment Restatement and Undertaking Agreement dated January 20, 2012.reference from Form 8-K filed November 28, 2014. | | | 10.4*10.2 | | 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. Incorporated by reference from Form 10-K filed March 31, 2003. | | | 10.710.3† | | 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 datedfiled June 15,16, 2004. | | | 10.1010.4† | | Mercer International Inc. 2010 Stock Incentive Plan. Incorporated by reference from Form S-8 dated June 11, 2010.Appendix A to Mercer International Inc.’s definitive proxy statement on Schedule 14A filed April 24, 2014. | | | 10.1110.5† | | 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 datedfiled May 6, 2008. | | | 10.14*10.6† | | Employment Agreement dated October 20, 2005 between Mercer Pulp Sales GmbH and David Cooper. Incorporated by reference from Form 10-Q filed April 29, 2015. | | | 10.7† | | Employment Agreement dated October 2, 2006 between Stendal Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference from Form 8-K filed October 3, 2006. | | | 10.8 | | Electricity Purchase Agreement effective January 27, 2009 between Zellstoff Celgar Limited Partnership and British Columbia Hydro and Power Authority. Incorporated by reference from Form 10-K filed March 2, 2009. Certain non-public information has been omitted from the appendices to Exhibit 10.1310.9 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. | | | 10.1510.9 | | 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 datedfiled August 24, 2009. |
| | | Exhibit No. | | Description of Exhibit | | | 10.1610.10 | | 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, Bayerische Hypo-und Vereinsbank AG and Mercer International Inc. Incorporated by reference from Form 10-Q datedfiled November 2, 2012. | | | 10.1810.11 | | 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 datedfiled May 8, 2013. | | | 10.1910.12 | | Second Extension, Amendment and Confirmation Letter dated February 5, 2016 among Zellstoff- und Papierfabrik Rosenthal GmbH, D&Z Holding GmbH, ZPR Logistik GmbH and Mercer International Inc. Incorporated by reference from Form 10-K filed February 12, 2016. | | | 10.13† | | Employment 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,between Mercer International Inc. and Stendal Pulp Holding GmbH.David Ure dated August 12, 2013. Incorporated by reference from Form 8-K filed on July 19, 2015. | | | 10.14 | | First Amending Agreement dated October 21, 2014 between Zellstoff Celgar Limited Partnership, Mercer International Inc., as guarantor, and Canadian Imperial Bank of Commerce. Incorporated by reference from Form 10-Q filed on November 1, 2013.October 31, 2014. | | | 1410.15† | | Amendment to Employment Agreement between Mercer International Inc. and David Ure, dated July 17, 2015. Incorporated by reference from Form 8-K filed July 19, 2015. | | | 10.16† | | Second Amended and Restated Employment Agreement between Mercer International Inc. and Jimmy S.H. Lee, dated for reference September 29, 2015. Incorporated by reference from Form 8-K filed September 28, 2015. | | | 10.17† | | Amended and Restated Employment Agreement between Mercer International Inc. and David M. Gandossi, dated for reference September 29, 2015. Incorporated by reference from Form 8-K filed September 28, 2015. | | | 10.18 | | Registration Rights Agreement dated February 3, 2017 between Mercer International Inc. and Credit Suisse Securities (USA) LLC, related to the 2024 Senior Notes. Incorporated by reference from Form 8-K filed on February 3, 2017. | | | 14.1 | | Code of Business Conduct and Ethics. Incorporated by reference from theMercer International Inc.’s definitive proxy statement on Schedule 14A datedfiled August 11, 2003. | | | 99.121.1* | | Audit Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2005.List of Subsidiaries of Registrant. | | | 99.223.1* | | Governance and Nominating Committee Charter. Incorporated by reference from the definitive proxy statement on Schedule 14A dated April 28, 2004.Consent of PricewaterhouseCoopers LLP. | | | 2131.1* | | List of Subsidiaries of Registrant. | | | 23.1 | | Consent of Independent Registered Public Accounting Firm. | | | 31.1 | | Section 302 Certificate of Chief Executive Officer. | | | 31.231.2* | | 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. | | | 101* | | The following financial statements from the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 10, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Balance Sheets; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements. |
* | Filed in Form 10-K for prior years.herewith. |
**† | In accordance with Release 33-8212 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 thereunderDenotes management contract or any offering memorandum, unless the Company specifically incorporates them by reference therein.compensatory plan or arrangement. |
|