UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No.: 000-51826

 

 

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Washington		47-0956945
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Suite 1120, 700 West Pender Street, Vancouver, British Columbia, Canada, V6C 1G8

(Address of office)

(604) 684-1099

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer		¨		Accelerated Filer		x
Non-Accelerated Filer		¨		Smaller Reporting Company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The Registrant had 55,815,704 shares of common stock outstanding as at May 2, 2013.

 

 

 

---

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(Unaudited)

 

FORM 10-Q

QUARTERLY REPORT - PAGE  2

---

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands of Euros)

 

		March 31,				December 31,
		2013				2012
ASSETS
Current assets
Cash and cash equivalents		€	110,664			€	104,239
Receivables			120,184				110,087
Inventories (Note 2)			112,908				118,300
Prepaid expenses and other			8,295				7,907
Deferred income tax			3,824				4,465
Total current assets			355,875				344,998
Long-term assets
Property, plant and equipment			802,959				808,878
Deferred note issuance and other			11,622				12,162
Deferred income tax			15,104				17,565
			829,685				838,605
Total assets		€	1,185,560			€	1,183,603
LIABILITIES
Current liabilities
Accounts payable and other		€	97,645			€	89,950
Pension and other post-retirement benefit obligations (Note 4)			818				813
Debt (Note 3)			55,081				45,662
Total current liabilities			153,544				136,425
Long-term liabilities
Debt (Note 3)			658,166				665,741
Unrealized interest rate derivative losses (Note 8)			45,513				50,678
Pension and other post-retirement benefit obligations (Note 4)			32,451				32,141
Capital leases and other			13,887				13,936
Deferred income tax			6,175				5,757
			756,192				768,253
Total liabilities			909,736				904,678
EQUITY
Shareholders’ equity
Share capital (Note 5)			248,757				248,371
Paid-in capital			(3,706	)			(3,547	)
Retained earnings			25,375				25,800
Accumulated other comprehensive income			21,570				25,181
Total shareholders’ equity			291,996				295,805
Noncontrolling interest (deficit)			(16,172	)			(16,880	)
Total equity			275,824				278,925
Total liabilities and equity		€	1,185,560			€	1,183,603

Commitments and contingencies (Note 10)

The accompanying notes are an integral part of these interim consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  3

---

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands of Euros, except per share data)

 

		Three Months Ended
		March 31,
		2013				2012
Revenues
Pulp		€	180,120			€	199,439
Energy and chemicals			18,152				18,919
			198,272				218,358
Costs and expenses
Operating costs			165,098				177,770
Operating depreciation and amortization			14,731				14,287
			18,443				26,301
Selling, general and administrative expenses			8,895				10,058
Operating income			9,548				16,243
Other income (expense)
Interest expense			(13,148	)			(14,133	)
Gain on derivative instruments (Note 8)			4,820				876
Other income (expense)			(70	)			(410	)
Total other income (expense)			(8,398	)			(13,667	)
Income before income taxes			1,150				2,576
Income tax benefit (provision)
Current			3,271				(56	)
Deferred			(4,138	)			(676	)
Net income			283				1,844
Less: net income attributable to noncontrolling interest			(708	)			(671	)
Net income (loss) attributable to common shareholders		€	(425	)		€	1,173
Net income (loss) per share attributable to common shareholders (Note 7)
Basic and diluted		€	(0.01	)		€	0.02

The accompanying notes are an integral part of these interim consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  4

---

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of Euros)

 

		Three Months Ended
		March 31,
		2013				2012
Net income		€	283			€	1,844
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustments, net of tax expense of €574 (2012—benefit of €90)			(3,528	)			2,147
Change in unrecognized losses and prior service costs related to defined benefit plans, net of tax benefit of €nil (2012—€nil)			(93	)			149
Change in unrealized losses on marketable securities, net of tax benefit of €nil (2012—€nil)			10				68
Other comprehensive income (loss), net of taxes			(3,611	)			2,364
Total comprehensive income (loss)			(3,328	)			4,208
Comprehensive income attributable to noncontrolling interest			(708	)			(671	)
Comprehensive income (loss) attributable to common shareholders		€	(4,036	)		€	3,537

INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

(Unaudited)

(In thousands of Euros)

 

		Three Months Ended March 31,
		2013				2012
Net income (loss) attributable to common shareholders		€	(425	)		€	1,173
Retained earnings, beginning of period			25,800				37,985
Retained earnings, end of period		€	25,375			€	39,158

The accompanying notes are an integral part of these interim consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  5

---

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands of Euros)

 

		Three Months Ended
		March 31,
		2013				2012
Cash flows from (used in) operating activities
Net income		€	283			€	1,844
Adjustments to reconcile net income to cash flows from operating activities
Unrealized gain on derivative instruments			(4,695	)			(876	)
Depreciation and amortization			14,794				14,350
Deferred income taxes			4,138				676
Stock compensation expense			267				868
Pension and other post-retirement expense, net of funding			121				(14	)
Other			1,183				793
Changes in working capital
Receivables			(9,704	)			2,685
Inventories			5,746				11,738
Accounts payable and accrued expenses			10,597				2,649
Other			(782	)			1,424
Net cash from (used in) operating activities			21,948				36,137
Cash flows from (used in) investing activities
Purchase of property, plant and equipment			(11,395	)			(8,465	)
Proceeds on sale of property, plant and equipment			13				226
Net cash from (used in) investing activities			(11,382	)			(8,239	)
Cash flows from (used in) financing activities
Repayment of debt			(20,545	)			(10,126	)
Proceeds from borrowings of debt			10,000				—
Repayment of capital lease obligations			(700	)			(611	)
Proceeds from credit facilities, net			5,968				3,759
Payment of note issuance costs			—				(1,621	)
Proceeds from government grants			730				630
Net cash from (used in) financing activities			(4,547	)			(7,969	)
Effect of exchange rate changes on cash and cash equivalents			406				(805	)
Net increase in cash and cash equivalents			6,425				19,124
Cash and cash equivalents, beginning of period			104,239				105,072
Cash and cash equivalents, end of period		€	110,664			€	124,196

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  6

---

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

(In thousands of Euros)

 

		Three Months Ended
		March 31,
		2013				2012
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest		€	2,750			€	4,827
Income taxes		€	665			€	2,608
Supplemental schedule of non-cash investing and financing activities
Acquisition of production and other equipment under capital lease obligations		€	170			€	—
Increase (decrease) in accounts payable and accrued purchases for property, plant and equipment		€	(2,899	)		€	463
Increase (decrease) in receivables of government grants for long-term assets		€	—			€	(638	)

The accompanying notes are an integral part of these interim consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  7

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements contained herein include the accounts of Mercer International Inc. (“Mercer Inc.”) and its wholly-owned and majority-owned subsidiaries (collectively the “Company”). The Company’s shares of common stock are quoted and listed for trading on both the NASDAQ Global Market and the Toronto Stock Exchange.

The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States (“GAAP”). The interim consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company’s latest annual report on Form 10-K for the fiscal year ended December 31, 2012. In the opinion of the Company, the unaudited interim consolidated financial statements contained herein contain all adjustments necessary to fairly present the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.

The Company has three pulp mills that are aggregated into one reportable business segment, market pulp. Accordingly, the results presented are those of the reportable business segment.

Certain prior period amounts in the interim consolidated financial statements have been reclassified to conform to the current period presentation. Beginning in the second quarter of 2012, the Company has presented revenue from the sale of chemicals within energy and chemicals revenue in the Interim Consolidated Statement of Operations. This revenue had previously been presented within operating costs. Chemical revenue for the three month period ended March 31, 2013 was €2,861 (2012 – €2,808).

In these interim consolidated financial statements, unless otherwise indicated, all amounts are expressed in Euros (“€”). The term “U.S. dollars” and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.

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 accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  8

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 2. Inventories

 

		March 31, 2013				December 31, 2012
Raw materials		€	37,296			€	46,028
Finished goods			40,092				38,169
Spare parts and other			35,520				34,103
		€	112,908			€	118,300

Note 3. Debt

Debt consists of the following:

 

		March 31, 2013				December 31, 2012
Note payable to bank, included in a total loan credit facility of €827,950 to finance the construction related to the Stendal mill (a)		€	432,907			€	452,907
Senior notes, interest at 9.50% accrued and payable semi-annually, unsecured (b)			221,429				215,670
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (c)			10,735				4,574
Term bank facility for a project at the Stendal mill of €17,000 (d)			10,000				—
Loans payable to the noncontrolling shareholder of the Stendal mill (e)			37,088				36,620
Investment loan agreement with a lender with respect to a project at the Rosenthal mill of €4,351 (f)			1,088				1,632
Credit agreement with a bank with respect to a revolving credit facility of €25,000 (g)			—				—
Credit agreement with a bank with respect to a revolving credit facility of €3,500 (h)			—				—
			713,247				711,403
Less: current portion			(55,081	)			(45,662	)
Debt, less current portion		€	658,166			€	665,741

The Company made repayments under these facilities of €20,545 during the three month period ended March 31, 2013 (2012 – €10,126). As of March 31, 2013, the maturities of debt are as follows:

 

Matures		Amount
2013		€	32,908
2014			48,915
2015			44,000
2016			44,000
2017			543,424
Thereafter			—
		€	713,247

Certain of the Company’s debt instruments were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to specific exceptions. As at March 31, 2013, the Company was in compliance with the terms of the indenture.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  9

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 3. Debt (continued)

 

(a)

Note payable to bank, included in a total loan facility of €827,950 to finance the construction related to the Stendal mill (“Stendal Loan Facility”), interest at rates varying from Euribor plus 0.90% to Euribor plus 1.80% (rates on amounts of borrowing at March 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 €372,907 of 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 8 – 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.

On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan Facility. The amendment deferred approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017. The amendment also provided for a 100% cash sweep, referred to as the “Cash Sweep”, of any cash, in excess of a €15,000 working capital reserve and the Guarantee Amount, as discussed in Note 10(a) – 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 March 31, 2013, the DSRA balance was €32,986 and was not Fully Funded.

 

(b)

On November 17, 2010, the Company completed a private offering of $300.0 million in aggregate principal amount of senior notes due 2017 (“Senior Notes”). The Senior Notes were issued at a price of 100% of their principal amount. The Senior Notes will mature on December 1, 2017 and bear interest at 9.50% which is accrued and payable semi-annually.

In June 2012, the Company’s Board of Directors authorized the purchase of up to €50,000 in aggregate principal amount of the Company’s Senior Notes from time to time, over a period ending June 2013. During the three month period ended March 31, 2013, the Company did not purchase any of its outstanding Senior Notes. During the twelve month period ended December 31, 2012, the Company purchased $2.0 million of its outstanding Senior Notes.

The Senior Notes are general unsecured senior obligations of the Company. The Senior Notes rank equal in right of payment with all existing and future senior unsecured indebtedness of the Company and 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 borrowings of the Company’s restricted subsidiaries, including borrowings under the Company’s credit agreements which are secured by certain assets of its restricted subsidiaries.

The Company may redeem all or a part of the Senior Notes, upon not less than 30 days’ or more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) equal to 104.75% for the twelve month period beginning on December 1, 2014, 102.38% for the twelve month period beginning on December 1, 2015, and 100.00% beginning on December 1, 2016 and at any time thereafter, plus accrued and unpaid interest.

 

(c)

Credit agreement with respect to a revolving credit facility of up to C$40.0 million for the Celgar mill. The credit facility matures May 2013. Borrowings under the credit facility are collateralized by the mill’s inventory and receivables and are restricted by a borrowing base calculated on the mill’s inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 3.75% or Canadian prime plus 2.00%. U.S. dollar denominated amounts bear interest at LIBOR plus 3.75% or U.S. base plus 2.00%. As at March 31, 2013, this facility was accruing interest at a rate of approximately 5.00%, C$14.0 million of this facility was drawn, C$1.7 million was supporting letters of credit and approximately C$22.3 million was available. The Company is in the process of extending the maturity date of the facility.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  10

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 3. Debt (continued)

 

(d)

A €17,000 amortizing term facility to partially finance a project, referred to as “Project Blue Mill”, which is expected to increase the Stendal mill’s annual pulp production capacity by 30,000 air-dried metric tonnes and includes the installation of an additional 40 megawatt steam turbine. 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 and is available for disbursement up to August 31, 2013. 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 the Company. As at March 31, 2013, €10,000 had been drawn on this facility and was accruing interest at a rate of approximately 3.83%.

As part of the 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 March 31, 2013, the balance in the investment account was €2,894.

 

(e)

Loans of €26,760 payable by the Stendal mill to its noncontrolling shareholder bear interest at a rate of 7.00% per annum and are due in 2017, provided that the Project Blue Mill facility (Note 3(d)) and the Stendal Loan Facility (Note 3(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 €440, 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 March 31, 2013, accrued interest on these loans was €10,328. As at December 31, 2012, accrued interest on these loans was €9,860.

 

(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 €4,351 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 March 31, 2013, the balance outstanding was €1,088 and was accruing interest at a rate of 3.13%.

 

(g)

A €25,000 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 March 31, 2013, approximately €1,000 of this facility was supporting bank guarantees leaving approximately €24,000 available.

 

(h)

A €3,500 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 March 31, 2013, approximately €1,300 of this facility was supporting bank guarantees leaving approximately €2,200 available.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  11

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 4. Pension and Other Post-Retirement Benefit Obligations

Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and Rosenthal mills. The largest component of this obligation is with respect to the Celgar mill which maintains a defined benefit pension plan and post-retirement benefit plans for certain employees (“Celgar Plans”).

Pension benefits are based on employees’ earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions during the three month period ended March 31, 2013 totaled €497 (2012 – €501).

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 three month period ended March 31, 2013, the Company made contributions of €174 (2012 – €161) to this plan.

Information about the Celgar Plans, in aggregate for the three month periods ended March 31, 2013 and March 31, 2012 is as follows:

 

		Three Months ended March 31,
		2013								2012
		Pension Benefits				Post- Retirement Benefits				Pension Benefits				Post- Retirement Benefits
Service cost		€	26			€	146			€	27			€	138
Interest cost			355				214				373				214
Expected return on plan assets			(412	)			—				(401	)			—
Recognized net loss			278				23				276				1
Net periodic benefit cost		€	247			€	383			€	275			€	353

The Company participates in a multiemployer plan for hourly-paid employees at the Celgar mill. The contributions to this plan are determined based on an amount per hour worked pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three month period ended March 31, 2013, the Company made contributions of €381 (2012 – €477) to this plan.

Note 5. Share Capital

Common shares

The Company has authorized 200,000,000 common shares with a par value of $1 per share.

As at March 31, 2013 and December 31, 2012, the Company had 55,815,704 common shares issued and outstanding.

Share Repurchase Program

In July 2012, the Company’s Board of Directors authorized a share repurchase program (the “Program”) to repurchase up to approximately $14.4 million of the Company’s outstanding common shares from time to time over a period ending August 2013. During the three month period ended March 31, 2013 and the twelve month period ended December 31, 2012, the Company did not repurchase any of its common shares.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  12

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 5. Share Capital (continued)

 

Preferred shares

The Company has authorized 50,000,000 preferred shares 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 designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at March 31, 2013, no preferred shares had been issued by the Company.

Note 6. Stock-Based Compensation

The Company has a stock incentive plan (the “2010 Plan”) which provides for options, restricted stock rights, restricted shares, performance shares, performance share units (“PSUs”) and stock appreciation rights to be awarded to employees, consultants and non-employee directors. As at March 31, 2013, after factoring in all allocated shares, there remain approximately 1.1 million common shares available for grant pursuant to the 2010 Plan.

During the three month period ended March 31, 2013, 40,000 restricted shares vested.

Note 7. Net Income (Loss) Per Share Attributable to Common Shareholders

 

		Three Months Ended March 31,
		2013				2012
Net income (loss) attributable to common shareholders:
Basic and diluted		€	(425	)		€	1,173
Net income (loss) per share attributable to common shareholders:
Basic and diluted		€	(0.01	)		€	0.02
Weighted average number of common shares outstanding:
Basic(1)			55,632,982				55,554,830
Effect of dilutive instruments:
PSUs			—				277,676
Stock options			—				28,702
Diluted			55,632,982				55,861,208

 

(1)	The basic weighted average number of shares excludes 156,500 restricted shares which have been issued, but have not vested as at March 31, 2013 (2012 – 198,000 restricted shares).

 

FORM 10-Q

QUARTERLY REPORT - PAGE  13

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 7. Net Income (Loss) Per Share Attributable to Common Shareholders (continued)

 

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 they were anti-dilutive.

 

		Three Months Ended March 31,
		2013				2012
PSUs			786,129				—
Restricted shares			156,500				198,000
Stock options			175,000				45,000

Note 8. 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 and a small portion of its pulp sales price risk with the use of derivative instruments. The derivatives are measured at fair value with changes in fair value immediately recognized in gain on derivative instruments in the Interim Consolidated Statement of Operations.

Derivative assets are presented in prepaid expenses and other, and derivative liabilities are presented in unrealized interest rate derivative losses in the Consolidated Balance Sheet.

Interest Rate Derivative

During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €612,600 of the principal amount of the indebtedness under the Stendal Loan Facility. Under the remaining interest rate swap, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Currently, the contract has an aggregate notional amount of €357,576 at a fixed interest rate of 5.28% and it matures in October 2017 (which for the most part matches the maturity of the Stendal Loan Facility).

The interest rate derivative contract is with a bank that is part of a banking syndicate that holds the Stendal Loan Facility and the Company does not anticipate non-performance by the bank.

Pulp Price Derivatives

During November 2012, the Company entered into two fixed price pulp swap contracts with a bank. Under the terms of the contracts, 3,000 MT of pulp per month is fixed at prices which range from $880 to $890 per MT. The contracts expire in December 2013.

The following table shows our gains and losses by type of derivative recognized in gain on derivative instruments in the Consolidated Statement of Operations:

 

		Three Months Ended March  31,
		2013				2012
Interest rate derivative contract		€	5,165			€	876
Pulp price derivative contracts			(345	)			—
		€	4,820			€	876

 

FORM 10-Q

QUARTERLY REPORT - PAGE  14

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 9. Financial Instruments

The fair value of financial instruments is summarized as follows:

 

		March 31, 2013								December 31, 2012
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Cash and cash equivalents		€	110,664			€	110,664			€	104,239			€	104,239
Marketable securities			196				196				184				184
Receivables			120,184				120,184				110,087				110,087
Pulp price derivative contracts – asset			280				280				745				745
Accounts payable and other			97,645				97,645				89,950				89,950
Debt			713,247				709,622				711,403				700,001
Interest rate derivative contract – liability			45,513				45,513				50,678				50,678

The carrying value of cash and cash equivalents and accounts payable and other approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. The fair value of debt reflects recent market transactions and discounted cash flow estimates. 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 and interest rate derivative contract was determined.

Fair Value Measurement and Disclosure

The fair value methodologies and, as a result, the fair value of the Company’s investments and derivative instruments are determined based on the fair value hierarchy provided in the Fair Value Measurements and Disclosures topic of the 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 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 our interest rate and pulp price derivatives are multi-national financial institutions.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  15

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 9. Financial Instruments (continued)

 

The following table presents 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 measurements at March 31, 2013 using:
Description		Level 1				Level 2				Level 3				Total
Assets
Marketable securities		€	196			€	—			€	—			€	196
Pulp price derivative contracts			—				280				—				280
		€	196			€	280			€	—			€	476
Liabilities
Interest rate derivative contract		€	—			€	45,513			€	—			€	45,513
		Fair value measurements at December 31, 2012  using:
Description		Level 1				Level 2				Level 3				Total
Assets
Marketable securities		€	184			€	—			€	—			€	184
Pulp price derivative contracts			—				745				—				745
		€	184			€	745			€	—			€	929
Liabilities
Interest rate derivative contract		€	—			€	50,678			€	—			€	50,678

Note 10. Commitments and Contingencies

 

(a)

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 €10,000 (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 €10,000 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 March 31, 2013, the Company had Guarantee Amount proceeds of €1,768 remaining in accounts payable and other.

 

(b)

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. The court proceedings of our appeal commenced during the first quarter of 2013. A final court date for the appeal is scheduled during the second quarter of 2013. The outcome of this appeal process is uncertain. In addition, 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 claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  16

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 10. Commitments and Contingencies (continued)

 

(c)

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.

 

(d)	As at March 31, 2013, the Company had entered into capital commitments of approximately €11,200 at the Stendal mill as part of Project Blue Mill.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  17

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 11. Restricted Group Supplemental Disclosure

The terms of the indenture governing our Senior Notes require that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the three months ended March 31, 2013 and 2012, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.

Combined Condensed Balance Sheets

 

		March 31, 2013
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
ASSETS
Current assets
Cash and cash equivalents		€	52,032			€	58,632			€	—			€	110,664
Receivables			69,944				50,240				—				120,184
Inventories			72,073				40,835				—				112,908
Prepaid expenses and other			4,834				3,461				—				8,295
Deferred income tax			2,190				1,634				—				3,824
Total current assets			201,073				154,802				—				355,875
Long-term assets
Property, plant and equipment			340,459				462,500				—				802,959
Deferred note issuance and other			6,322				5,300				—				11,622
Deferred income tax			9,222				5,882				—				15,104
Due from unrestricted group			104,581				—				(104,581	)			—
Total assets		€	661,657			€	628,484			€	(104,581	)		€	1,185,560
LIABILITIES
Current liabilities
Accounts payable and other		€	52,688			€	44,957			€	—			€	97,645
Pension and other post-retirement benefit obligations			818				—				—				818
Debt			11,823				43,258				—				55,081
Total current liabilities			65,329				88,215				—				153,544
Long-term liabilities
Debt			221,430				436,736				—				658,166
Due to restricted group			—				104,581				(104,581	)			—
Unrealized interest rate derivative losses			—				45,513				—				45,513
Pension and other post-retirement benefit obligations			32,451				—				—				32,451
Capital leases and other			6,095				7,792				—				13,887
Deferred income tax			6,175				—				—				6,175
Total liabilities			331,480				682,837				(104,581	)			909,736
EQUITY
Total shareholders’ equity (deficit)			330,177				(38,181	)			—				291,996
Noncontrolling interest (deficit)			—				(16,172	)			—				(16,172	)
Total liabilities and equity		€	661,657			€	628,484			€	(104,581	)		€	1,185,560

 

FORM 10-Q

QUARTERLY REPORT - PAGE  18

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 11. Restricted Group Supplemental Disclosure (continued)

 

Combined Condensed Balance Sheets

 

		December 31, 2012
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
ASSETS
Current assets
Cash and cash equivalents		€	36,714			€	67,525			€	—			€	104,239
Receivables			61,212				48,875				—				110,087
Inventories			74,786				43,514				—				118,300
Prepaid expenses and other			5,811				2,096				—				7,907
Deferred income tax			2,188				2,277				—				4,465
Total current assets			180,711				164,287				—				344,998
Long-term assets
Property, plant and equipment			345,311				463,567				—				808,878
Deferred note issuance and other			6,607				5,555				—				12,162
Deferred income tax			9,179				8,386				—				17,565
Due from unrestricted group			102,311				—				(102,311	)			—
Total assets		€	644,119			€	641,795			€	(102,311	)		€	1,183,603
LIABILITIES
Current liabilities
Accounts payable and other		€	42,106			€	47,844			€	—			€	89,950
Pension and other post-retirement benefit obligations			813				—				—				813
Debt			5,662				40,000				—				45,662
Total current liabilities			48,581				87,844				—				136,425
Long-term liabilities
Debt			216,214				449,527				—				665,741
Due to restricted group			—				102,311				(102,311	)			—
Unrealized interest rate derivative losses			—				50,678				—				50,678
Pension and other post-retirement benefit obligations			32,141				—				—				32,141
Capital leases and other			6,073				7,863				—				13,936
Deferred income tax			5,757				—				—				5,757
Total liabilities			308,766				698,223				(102,311	)			904,678
EQUITY
Total shareholders’ equity (deficit)			335,353				(39,548	)			—				295,805
Noncontrolling interest (deficit)			—				(16,880	)			—				(16,880	)
Total liabilities and equity		€	644,119			€	641,795			€	(102,311	)		€	1,183,603

 

FORM 10-Q

QUARTERLY REPORT - PAGE  19

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 11. Restricted Group Supplemental Disclosure (continued)

 

Combined Condensed Statements of Operations

 

		Three months ended March 31, 2013
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
Revenues
Pulp		€	100,240			€	79,880			€	—			€	180,120
Energy and chemicals			7,090				11,062				—				18,152
			107,330				90,942				—				198,272
Operating costs			89,523				75,575				—				165,098
Operating depreciation and amortization			8,191				6,540				—				14,731
Selling, general and administrative expenses			5,716				3,179				—				8,895
			103,430				85,294				—				188,724
Operating income			3,900				5,648				—				9,548
Other income (expense)
Interest expense			(5,866	)			(8,930	)			1,648				(13,148	)
Gain (loss) on derivative instruments			(345	)			5,165				—				4,820
Other income (expense)			1,535				43				(1,648	)			(70	)
Total other income (expense)			(4,676	)			(3,722	)			—				(8,398	)
Income (loss) before income taxes			(776	)			1,926				—				1,150
Income tax benefit (provision)			(1,016	)			149				—				(867	)
Net income (loss)			(1,792	)			2,075				—				283
Less: net income attributable to noncontrolling interest			—				(708	)			—				(708	)
Net income (loss) attributable to common shareholders		€	(1,792	)		€	1,367			€	—			€	(425	)

 

		Three months ended March 31, 2012
		Restricted				Unrestricted								Consolidated
		Group				Subsidiaries				Eliminations				Group
Revenues
Pulp		€	109,889			€	89,550			€	—			€	199,439
Energy and chemicals			7,991				10,928				—				18,919
			117,880				100,478				—				218,358
Operating costs			98,336				79,434				—				177,770
Operating depreciation and amortization			7,640				6,647				—				14,287
Selling, general and administrative expenses			6,521				3,537				—				10,058
			112,497				89,618				—				202,115
Operating income			5,383				10,860				—				16,243
Other income (expense)
Interest expense			(5,810	)			(9,664	)			1,341				(14,133	)
Gain on derivative instruments			—				876				—				876
Other income (expense)			825				106				(1,341	)			(410	)
Total other income (expense)			(4,985	)			(8,682	)			—				(13,667	)
Income before income taxes			398				2,178				—				2,576
Income tax benefit (provision)			(715	)			(17	)			—				(732	)
Net income (loss)			(317	)			2,161				—				1,844
Less: net income attributable to noncontrolling interest			—				(671	)			—				(671	)
Net income (loss) attributable to common shareholders		€	(317	)		€	1,490			€	—			€	1,173

 

FORM 10-Q

QUARTERLY REPORT - PAGE  20

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 11. Restricted Group Supplemental Disclosure (continued)

 

Combined Condensed Statements of Cash Flows

 

		Three months ended March 31, 2013
		Restricted				Unrestricted				Consolidated
		Group				Subsidiaries				Group
Cash flows from (used in) operating activities
Net income (loss)		€	(1,792	)		€	2,075			€	283
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized loss (gain) on derivative instruments			470				(5,165	)			(4,695	)
Depreciation and amortization			8,254				6,540				14,794
Deferred income taxes			991				3,147				4,138
Stock compensation expense			267				—				267
Pension and other post-retirement expense, net of funding			121				—				121
Other			413				770				1,183
Changes in working capital
Receivables			(8,339	)			(1,365	)			(9,704	)
Inventories			3,067				2,679				5,746
Accounts payable and accrued expenses			10,505				92				10,597
Other(1)			(1,714	)			932				(782	)
Net cash from (used in) operating activities			12,243				9,705				21,948
Cash flows from (used in) investing activities
Purchase of property, plant and equipment			(2,645	)			(8,750	)			(11,395	)
Proceeds on sale of property, plant and equipment			13				—				13
Net cash from (used in) investing activities			(2,632	)			(8,750	)			(11,382	)
Cash flows from (used in) financing activities
Repayment of debt			(545	)			(20,000	)			(20,545	)
Proceeds from borrowings of debt			—				10,000				10,000
Repayment of capital lease obligations			(122	)			(578	)			(700	)
Proceeds from credit facilities, net			5,968				—				5,968
Proceeds from government grants			—				730				730
Net cash from (used in) financing activities			5,301				(9,848	)			(4,547	)
Effect of exchange rate changes on cash and cash equivalents			406				—				406
Net increase (decrease) in cash and cash equivalents			15,318				(8,893	)			6,425
Cash and cash equivalents, beginning of period			36,714				67,525				104,239
Cash and cash equivalents, end of period		€	52,032			€	58,632			€	110,664

 

(1)	Includes intercompany related transactions.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  21

---

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

 

Note 11. Restricted Group Supplemental Disclosure (continued)

 

Combined Condensed Statements of Cash Flows

 

		Three months ended March 31, 2012
		Restricted				Unrestricted				Consolidated
		Group				Subsidiaries				Group
Cash flows from (used in) operating activities
Net income (loss)		€	(317	)		€	2,161			€	1,844
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized gain on derivative instruments			—				(876	)			(876	)
Depreciation and amortization			7,703				6,647				14,350
Deferred income taxes			676				—				676
Stock compensation expense			868				—				868
Pension and other post-retirement expense, net of funding			(14	)			—				(14	)
Other			58				735				793
Changes in working capital
Receivables			(2,110	)			4,795				2,685
Inventories			4,018				7,720				11,738
Accounts payable and accrued expenses			5,535				(2,886	)			2,649
Other(1)			(6,474	)			7,898				1,424
Net cash from (used in) operating activities			9,943				26,194				36,137
Cash flows from (used in) investing activities
Purchase of property, plant and equipment			(4,218	)			(4,247	)			(8,465	)
Proceeds on sale of property, plant and equipment			186				40				226
Net cash from (used in) investing activities			(4,032	)			(4,207	)			(8,239	)
Cash flows from (used in) financing activities
Repayment of debt			(543	)			(9,583	)			(10,126	)
Repayment of capital lease obligations			(186	)			(425	)			(611	)
Proceeds from credit facilities, net			3,759				—				3,759
Payment of note issuance costs			—				(1,621	)			(1,621	)
Proceeds from government grants			630				—				630
Net cash from (used in) financing activities			3,660				(11,629	)			(7,969	)
Effect of exchange rate changes on cash and cash equivalents			(805	)			—				(805	)
Net increase in cash and cash equivalents			8,766				10,358				19,124
Cash and cash equivalents, beginning of period			44,829				60,243				105,072
Cash and cash equivalents, end of period		€	53,595			€	70,601			€	124,196

  

 

(1)	Includes intercompany related transactions.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  22

---

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of March 31, 2013, unless otherwise stated; (iv) all references to monetary amounts are to “Euros”, the lawful currency adopted by most members of the European Union, unless otherwise stated; (v) “€” refers to Euros, “$” refers to U.S. dollars and “C$” refers to Canadian dollars; (vi) “ADMTs” refers to air-dried metric tonnes; (vii) “MW” refers to megawatts; and (viii) “MWh” refers to megawatt hours.

Results of Operations

General

We operate three northern bleached softwood kraft, referred to as “NBSK”, pulp mills through our wholly owned subsidiaries, Rosenthal and Celgar, and our 74.9% owned subsidiary, Stendal, which have a consolidated annual production capacity of approximately 1.5 million ADMTs.

The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2013 should be read in conjunction with our interim consolidated financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission, referred to as the “SEC”.

Current Market Environment

Pulp prices marginally increased in the first quarter of 2013. However, we believe that overall prices are still low given current projected supply and demand levels. At the end of the first quarter of 2013, list prices in Europe were approximately $840 per ADMT and in North America and China were approximately $900 and $700 per ADMT, respectively.

We currently expect strong demand from China as purchasers re-stock inventories which, along with annual maintenance shuts by producers, should cause NBSK pulp prices to continue to gradually increase in the medium term.

Summary Financial Highlights

 

		Three Months Ended March 31,
		2013				2012
		(in thousands, other than per share amounts)
Pulp revenues		€	180,120			€	199,439
Energy and chemical revenues			18,152				18,919
Operating income			9,548				16,243
Gain on derivative instruments			4,820				876
Income tax benefit (provision)			(867	)			(732	)
Net income (loss)(1)			(425	)			1,173
Net income (loss) per share(1)(2)		€	(0.01	)		€	0.02

 

(1)	Attributable to common shareholders.

(2)	Per share amounts are on a basic and diluted basis.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  23

---

Selected Production, Sales and Other Data

 

		Three Months Ended March  31,
		2013				2012
Consolidated
Pulp production (‘000 ADMTs)			361.2				380.3
Scheduled production downtime (‘000 ADMTs)			—				—
Scheduled production downtime (days)			—				—
Pulp sales (‘000 ADMTs)			356.7				384.8
Average NBSK pulp list prices in Europe ($/ADMT)(1)			832				837
Average NBSK pulp list prices in Europe (€/ADMT)			630				638
Average pulp sales realizations (€/ADMT)(2)			499				512
Energy production (‘000 MWh)			424.4				436.2
Energy sales (‘000 MWh)			173.6				182.4
Average energy sales realizations (€/MWh)			88				88
Average Spot Currency Exchange Rates
€ / $(3)			0.7580				0.7623
C$ / $(3)			1.0087				1.0009
C$ / €(4)			1.3319				1.3129

 

(1)	Source: RISI pricing report.

(2)	Sales realizations after discounts. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3)	Average Federal Reserve Bank of New York noon spot rate over the reporting period.

(4)	Average Bank of Canada noon spot rates over the reporting period.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Total revenues for the three months ended March 31, 2013 decreased by approximately 9% to €198.3 million from €218.4 million in the same period in 2012, due to lower pulp revenues and energy and chemical revenues and a weaker U.S. dollar relative to the Euro.

Pulp revenues for the three months ended March 31, 2013 decreased to €180.1 million from €199.4 million in the comparative quarter of 2012, primarily due to the combined effect of lower pulp sales volumes and average pulp sales realizations and a weaker U.S. dollar relative to the Euro. The U.S. dollar was approximately 1% weaker versus the Euro in the current quarter, compared to the same quarter of last year.

Energy and chemical revenues decreased by approximately 4% to €18.2 million in the first quarter from €18.9 million in the same quarter last year, primarily as a result of lower pulp production at our Celgar mill.

Average list prices for NBSK pulp in Europe were approximately $832 (€630) per ADMT in the current quarter, compared to approximately $837 (€638) per ADMT in the same quarter last year. In the first quarter of 2013, average pulp sales realizations decreased by approximately 3% to €499 per ADMT from approximately €512 per ADMT in the same quarter last year, primarily due to lower pulp prices and a weaker U.S. dollar relative to the Euro.

Pulp production decreased by approximately 5% to 361,164 ADMTs in the current quarter from 380,342 ADMTs in the same quarter of 2012, due to decreased pulp production at our Celgar and Stendal mills. We have 11 days (approximately 16,000 ADMTs) of maintenance downtime scheduled for our Celgar mill in the second quarter of 2013 in order to perform annual maintenance.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  24

---

Pulp sales volumes decreased by approximately 7% to 356,660 ADMTs in the current quarter from 384,826 ADMTs in the comparative quarter, primarily due to lower sales to China and the United States.

Costs and expenses in the first quarter of 2013 decreased by 7% to €188.7 million from €202.1 million in the comparative period of 2012, primarily due to lower pulp sales volumes and fiber costs, partially offset by higher natural gas costs at our German mills, resulting from higher usage and prices.

In the first quarter of 2013, operating depreciation and amortization marginally increased to €14.7 million from €14.3 million in the same quarter last year. Selling, general and administrative expenses were €8.9 million in the first quarter of 2013, compared to €10.1 million in the first quarter of 2012.

Transportation costs decreased to €16.8 million in the first quarter of 2013 from €18.0 million in the first quarter of 2012, primarily due to lower pulp sales volumes.

On average, our per unit fiber costs in the current quarter decreased by approximately 2% from the same period in 2012, primarily due to overall lower fiber prices. During the first quarter of 2013, fiber costs at our German mills were marginally lower than the comparative period in 2012, when fiber prices were near record highs. Increased demand from the European pellet and board producers, reduced wood supply because of longer than normal winter weather conditions and lower availability of trucking transportation kept fiber prices at relatively high levels in the current quarter. Fiber costs at our Celgar mill decreased as a result of increased sawmill activity in the region. The recent extreme weather conditions are expected to put upward pressure on fiber costs at our German mills in the short term, whereas, we expect fiber costs at our Celgar mill to continue to decrease in the short term.

For the first quarter of 2013, operating income decreased to €9.5 million from €16.2 million in the comparative quarter of 2012, primarily due to the combined effect of lower pulp prices and pulp sales volumes.

Interest expense in the first quarter of 2013 decreased to €13.1 million from €14.1 million in the comparative quarter of 2012, primarily due to lower debt levels associated with the Stendal mill.

We recorded a net derivative gain of €4.8 million, which includes a €0.3 million loss related to fixed price pulp swap contracts entered into in the fourth quarter of 2012 and an unrealized gain of approximately €5.1 million on the mark to market adjustment of our Stendal mill’s interest rate derivative, compared to an unrealized derivative gain of €0.9 million in the same quarter of last year.

During the current quarter, we recorded a net income tax expense of €0.9 million, compared to an expense of €0.7 million in the same quarter of 2012.

Noncontrolling shareholder’s interest in the Stendal mill’s income in each of the first quarters of 2013 and 2012 was €0.7 million.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  25

---

We reported a net loss attributable to common shareholders of €0.4 million, or €0.01 per basic and diluted share, for the first quarter of 2013, which included a total net non-cash unrealized gain of €4.7 million on the fixed price pulp swaps and Stendal interest rate derivative, partially offset by a non-cash charge for stock compensation of €0.3 million. In the first quarter of 2012, net income attributable to common shareholders was €1.2 million, or €0.02 per basic and diluted share, which included a non-cash unrealized gain of €0.9 million, or €0.02 per basic share, on the Stendal interest rate derivative, offset by a non-cash charge for stock compensation of €0.9 million.

Operating EBITDA in the first quarter of 2013 was €24.3 million, compared to €30.6 million in the first quarter of 2012. 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 (loss) as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss) attributable to common shareholders, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America, referred to as “GAAP”, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity.

Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) noncontrolling interests on our Stendal mill operations; (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 operational 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 interim 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 operational performance and relying primarily on our GAAP financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  26

---

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

 

		Three Months Ended March 31,
		2013				2012
		(in thousands)
Net income (loss) attributable to common shareholders		€	(425	)		€	1,173
Net income attributable to noncontrolling interest			708				671
Income tax provision (benefit)			867				732
Interest expense			13,148				14,133
Gain on derivative instruments			(4,820	)			(876	)
Other expense (income)			70				410
Operating income			9,548				16,243
Add: Depreciation and amortization			14,794				14,350
Operating EBITDA		€	24,342			€	30,593

Liquidity and Capital Resources

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

 

		As at March 31,				As at December 31,
		2013				2012
		(in thousands)
Financial Position
Cash and cash equivalents		€	110,664			€	104,239
Working capital			202,331				208,573
Total assets			1,185,560				1,183,603
Long-term liabilities			756,192				768,253
Total equity			275,824				278,925

As at March 31, 2013, our cash and cash equivalents increased to €110.7 million from €104.2 million and working capital had decreased to €202.3 million from €208.6 million at the end of 2012.

Sources and Uses of Funds

Our principal sources of funds are cash flows from operations, cash and cash equivalents on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of funds consist of operating expenditures, payments of principal and interest on the project loan facilities relating to our development of the Stendal mill, referred to as “Stendal Loan Facility”, and for its Project Blue Mill, capital expenditures and interest payments on our outstanding 9.5% Senior Notes, referred to as the “Senior Notes”.

Debt Covenants

Our long-term obligations contain various financial tests and covenants customary to these types of arrangements.

As at March 31, 2013, we were in compliance with all of the covenants of our indebtedness.

Our Stendal mill has established the Stendal Loan Facility and a project loan facility for Project Blue Mill, collectively referred to as the “Facilities”, which require Stendal to maintain a similar leverage ratio of total debt thereunder to EBITDA, referred to as the “Stendal Ratio”. An aggregate of 80% of the principal amount of the tranches under the Facilities are severally guaranteed by German federal and state governments, and the Facilities are without recourse to the “Restricted Group” which is comprised of Mercer Inc., the Rosenthal and Celgar mills, and certain holding subsidiaries.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  27

---

Because of, among other things, volatility in foreign exchange rates and pulp prices, currently we cannot assure that the Stendal mill will be in compliance with the Stendal Ratio as of June 30, 2013. We have entered into discussions with the Stendal mill’s lenders with respect to a satisfactory amendment or waiver, if required. Additionally, we have the right to cure any breach of the Stendal Ratio by providing additional equity to Stendal within 20 business days of being notified of such breach by the lenders. In the event that the Stendal mill is not in compliance with the Stendal Ratio, we are not able to acquire a satisfactory amendment or waiver of such covenant and we do not undertake to cure the breach by providing additional capital to Stendal, it would constitute an Event of Default under the Facilities. If such Event of Default occurs and after careful consideration of the reasonable concerns of Stendal or if the stipulated majority of the lenders have reasonably determined that such default has caused Stendal’s ability to perform its obligations under the Facilities to be materially impaired, the lenders may provide notice cancelling and accelerating the Facilities and demanding full payment of all amounts outstanding thereunder. In the current circumstances, we do not believe Stendal’s lenders would be permitted to accelerate and cancel the Facilities; however, we cannot assure you of the same. If Stendal’s lenders did accelerate and cancel the Facilities, this would have a material adverse effect on the Stendal mill, our business and our consolidated results of operations.

Cash Flow Analysis

Cash Flows from Operating Activities. We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber and chemicals.

Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and the payment of payables and expenses.

Cash provided by operating activities decreased to €21.9 million in the three months ended March 31, 2013 from €36.1 million in the comparative period of 2012, primarily due to an increase in receivables, which used cash of €9.7 million in the current quarter, compared to a decrease providing cash of €2.7 million in the same period of 2012. An increase in accounts payable and accrued expenses provided cash of €10.6 million, compared to €2.6 million in the same period of 2012. A decrease in inventories provided cash of €5.7 million in the three months ended March 31, 2013, compared to a decrease in inventories providing cash of €11.7 million in the same period of 2012.

Cash Flows from Investing Activities. Investing activities in the three months ended March 31, 2013 used cash of €11.4 million, compared to using cash of €8.2 million in the same period of 2012. Capital expenditures in the three months ended March 31, 2013 used cash of €11.4 million, compared to €8.5 million in the same period of 2012. Capital expenditures related to Project Blue Mill used cash of €8.7 million in the current quarter.

Cash Flows from Financing Activities. In the three months ended March 31, 2013, financing activities used cash of €4.5 million, compared to using cash of €8.0 million in the same period of 2012. In the current quarter, principal repayments under the Stendal Facility used cash of €20.0 million, compared to €9.6 million in the same period of 2012. During the current quarter, borrowing under the loan facility for Project Blue Mill provided cash of €10.0 million. Net borrowing from our revolving credit facilities provided cash of €6.0 million in the current quarter, compared to €3.8 million in the same period of 2012. In the three months ended March 31, 2013 and 2012, proceeds of government grants provided cash of €0.7 million and €0.6 million respectively.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  28

---

Capital Commitments and Future Liquidity

As at March 31, 2013, we had approximately €11.2 million of capital commitments related to our €40.0 million Project Blue Mill at the Stendal mill and deposited €2.9 million in a separate investment account to manage Project Blue Mill’s costs and funding. Project Blue Mill has also received an investment decree, determining that it qualifies for up to €12.0 million in governmental grants, comprised of €9.2 million of investment incentives and €2.8 million of tax grants. The actual receipt of such grants is subject to the Stendal mill satisfying all governmental rules including verification. The investment decree is a condition of our accessing the Project Blue Mill loan facility. As at March 31, 2013, the Stendal mill, based on expenditures to date, had applied for €4.4 million in grants and was awaiting approval and receipt of €3.7 million.

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 will be adequate to meet our liquidity needs in the next 12 months.

Other than commitments relating to Project Blue Mill, we currently have no material commitments to acquire assets or operating businesses. We anticipate that there may be acquisitions or commitments to capital projects in the future. To achieve the long-term goals of expanding our assets and earnings, additional capital resources may be required. Depending on the size of a transaction or project, 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.

Contractual Obligations and Commitments

There were no material changes outside the ordinary course to any of our material contractual obligations during the three months ended March 31, 2013.

The collective agreement with our hourly workers at our Rosenthal mill expires on May 31, 2013. We consider the relationships with our employees at our Rosenthal mill to be good and, although no assurance can be provided, we currently expect to enter into a new labor agreement with our Rosenthal mill’s employees without any significant work stoppage.

Foreign Currency

Our reporting currency is the Euro as the majority of our business transactions are denominated in Euros. However, we hold certain assets and liabilities in U.S. dollars and Canadian dollars. Further, the majority of our sales are in products quoted in U.S. dollars, whereas most of our operating costs and expenses are incurred in Euros and, to a lesser extent, Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  29

---

We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in our Consolidated Statement of Comprehensive Income (Loss) and impact shareholders’ equity on the Consolidated Balance Sheet but do not affect our net income.

In the three months ended March 31, 2013, accumulated other comprehensive income decreased by €3.6 million to €21.6 million, primarily due to the foreign currency translation adjustment.

Based upon the exchange rate at March 31, 2013, the U.S. dollar has weakened by approximately 4% in value against the Euro since March 31, 2012. See “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.

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 11 of our Interim Consolidated Financial Statements included herein.

Summary Financial Highlights for the Restricted Group

 

		Three Months Ended March 31,
		2013				2012
		(in thousands)
Pulp revenues		€	100,240			€	109,889
Energy and chemical revenues			7,090				7,991
Operating income			3,900				5,383
Loss on derivative instruments			(345	)			—
Income tax benefit (provision)			(1,016	)			(715	)
Net loss			(1,792	)			(317	)

 

FORM 10-Q

QUARTERLY REPORT - PAGE  30

---

Selected Production, Sales and Other Data for the Restricted Group

 

		Three Months Ended March  31,
		2013				2012
Consolidated
Pulp production (‘000 ADMTs)			205.6				218.6
Scheduled production downtime (‘000 ADMTs)			—				—
Scheduled production downtime (days)			—				—
Pulp sales (‘000 ADMTs)			199.3				213.5
Average NBSK pulp list prices in Europe ($/ADMT)(1)			832				837
Average NBSK pulp list prices in Europe (€/ADMT)			630				638
Average pulp sales realizations (€/ADMT)(2)			503				514
Energy production (‘000 MWh)			230.4				240.2
Energy sales (‘000 MWh)			79.9				88.8
Average energy sales realizations (€/MWh)			89				90
Average Spot Currency Exchange Rates
€ / $(3)			0.7580				0.7623
C$ / $(3)			1.0087				1.0009
C$ / €(4)			1.3319				1.3129

 

(1)	Source: RISI pricing report.

(2)	Sales realizations after discounts. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3)	Average Federal Reserve Bank of New York noon spot rate over the reporting period.

(4)	Average Bank of Canada noon spot rates over the reporting period.

Restricted Group Results — Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Total revenues for the Restricted Group decreased by approximately 9% to €107.3 million in the first quarter of 2013, compared to €117.9 million in the first quarter of 2012, primarily due to lower pulp and energy and chemical revenues and a weaker U.S. dollar relative to the Euro. The U.S. dollar was approximately 1% weaker versus the Euro in the first quarter of 2013, compared to the first quarter of 2012.

Pulp revenues for the Restricted Group for the three months ended March 31, 2013 decreased to €100.2 million from €109.9 million in the comparative period of 2012, primarily due to the combined effect of lower pulp sales volumes and average pulp sales realizations and a weaker U.S. dollar relative to the Euro. Energy revenues decreased by approximately 11% in the current quarter to €7.1 million from €8.0 million in the same period last year, primarily as a result of lower pulp production at our Celgar mill.

Average list prices for NBSK pulp in Europe were approximately $832 (€630) per ADMT in the current quarter, compared to $837 (€638) per ADMT in the same quarter last year. In the first quarter of 2013, average pulp sales realizations for the Restricted Group decreased by approximately 2% to €503 per ADMT from €514 per ADMT in the same period last year due to lower pulp prices and a weaker U.S. dollar relative to the Euro.

Pulp production for the Restricted Group decreased by approximately 6% to 205,550 ADMTs in the first quarter of 2013 from 218,620 ADMTs in the same period of 2012, primarily due to decreased pulp production at our Celgar mill. We have 11 days (approximately 16,000 ADMTs) of maintenance downtime scheduled for our Celgar mill in the second quarter of 2013 in order to perform annual maintenance.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  31

---

Pulp sales volumes of the Restricted Group decreased by approximately 7% to 199,325 ADMTs in the first quarter of 2013 from 213,472 ADMTs in the comparative period of 2012, primarily due to lower sales to the United States, partially offset by increased sales to Europe.

Costs and expenses for the Restricted Group in the first quarter of 2013 decreased by approximately 8% to €103.4 million from €112.5 million in the comparative period of 2012, primarily due to lower pulp sales volumes and fiber costs at our mills.

In the first quarter of 2013, operating depreciation and amortization for the Restricted Group was €8.2 million, compared to €7.6 million in the same quarter last year. Selling, general and administrative expenses for the Restricted Group were €5.7 million, compared to €6.5 million in the same period of 2012.

Transportation costs for the Restricted Group decreased to €11.6 million in the first quarter of 2013 from €12.9 million in the same quarter last year primarily due to lower pulp sales volumes.

Overall, per unit fiber costs of the Restricted Group in the first quarter of 2013 decreased by approximately 5%, compared to the same period in 2012. During the first quarter of 2013, fiber costs at our Rosenthal mill were marginally lower than the comparative period in 2012, when fiber prices were near record highs. Increased demand from the European pellet and board producers, reduced wood supply because of longer than normal winter weather conditions and lower availability of trucking transportation kept fiber prices at relatively high levels in the current quarter. Fiber costs at our Celgar mill decreased as a result of increased sawmill activity in the region. The recent extreme weather conditions are expected to put upward pressure on fiber costs at our Rosenthal mill in the short term, whereas, we expect fiber costs at our Celgar mill to continue to decrease in the short term.

In the first quarter of 2013, the Restricted Group reported operating income of €3.9 million, compared to €5.4 million in the first quarter of 2012, primarily due to the combined effect of lower pulp prices and pulp sales volumes.

Interest expense for the Restricted Group increased marginally to €5.9 million in the first quarter of 2013 from €5.8 million in the same quarter last year, primarily due to increased borrowings at the Celgar mill.

In the first quarter of 2013, the Restricted Group also recorded a loss on derivative instruments of approximately €0.3 million related to two fixed price pulp swap contracts entered into in the fourth quarter of 2012.

During the first quarter of 2013, the Restricted Group recorded €1.0 million of income tax expense, compared to income tax expense of €0.7 million in the same period last year.

The Restricted Group reported a net loss for the first quarter of 2013 of €1.8 million, compared to a net loss of €0.3 million in the same period last year.

In the first quarter of 2013, the Restricted Group reported Operating EBITDA of €12.2 million, compared to Operating EBITDA of €13.1 million in the comparative quarter of 2012. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our consolidated results for the three months ended March 31, 2013 for additional information relating to such limitations of Operating EBITDA.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  32

---

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

 

		Three Months Ended March 31,
		2013				2012
		(in thousands)
Restricted Group(1)
Net loss		€	(1,792	)		€	(317	)
Income tax provision (benefit)			1,016				715
Interest expense			5,866				5,810
Loss on derivative instruments			345				—
Other expense (income)			(1,535	)			(825	)
Operating income			3,900				5,383
Add: Depreciation and amortization			8,254				7,703
Operating EBITDA		€	12,154			€	13,086

 

(1)	See Note 11 of the interim consolidated financial statements included elsewhere herein for a reconciliation to our consolidated results.

Liquidity and Capital Resources of the Restricted Group

The following table is a summary of selected financial information for the Restricted Group at the dates indicated:

 

		As at March 31,				As at December 31,
		2013				2012
		(in thousands)
Restricted Group Financial Position(1)
Cash and cash equivalents		€	52,032			€	36,714
Working capital			135,744				132,130
Total assets			661,657				644,119
Long-term liabilities			266,151				260,185
Total equity			330,177				335,353

 

(1)	See Note 11 of the interim consolidated financial statements included elsewhere herein for a reconciliation to our consolidated results.

At March 31, 2013, cash and cash equivalents for the Restricted Group increased to €52.0 million from €36.7 million at the end of 2012.

We currently expect the Restricted Group to meet its interest and debt service obligations and meet the working and maintenance capital requirements for its operations for the next 12 months with cash flow from operations, cash on hand and available borrowings.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  33

---

Critical Accounting Policies

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

Our significant accounting policies are disclosed in Note 1 to our annual report on Form 10-K for the fiscal year ended December 31, 2012. 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 the accounting for, among other things doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

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

For information about both our significant and critical accounting policies, see our annual report on Form 10-K for the fiscal year ended December 31, 2012.

Cautionary Statement Regarding Forward-Looking Information

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

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

 

•

the highly cyclical nature of our business;

 

•

our level of indebtedness could negatively impact our financial condition and results of operations;

 

FORM 10-Q

QUARTERLY REPORT - PAGE  34

---

•

a weakening of the global economy could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;

 

•

cyclical fluctuations in the price and supply of our raw materials could adversely affect our business;

 

•

we operate in highly competitive markets;

 

•

we are exposed to currency exchange rate and interest rate fluctuations;

 

•

we use derivatives to manage certain risks which has caused significant fluctuations in our operating results;

 

•

we are subject to extensive environmental regulation and we could have environmental liabilities at our facilities;

 

•

our business is subject to risks associated with climate change and social government responses thereto;

 

•

our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such requirements;

 

•

future acquisitions may result in additional risks and uncertainties in our business;

 

•

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;

 

•

Project Blue Mill might not generate the results we expect;

 

•

we are subject to risks related to our employees;

 

•

we rely on German federal and state government grants and guarantees and participate in European statutory programs;

 

•

we are dependent on key personnel;

 

•

we may experience material disruptions to our production;

 

•

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; and

 

•

the price of our common stock may be volatile.

Given these uncertainties, you should not place undue reliance on our forward-looking statements. The forgoing review of important factors is not exhaustive or necessarily in order of importance and should be read in conjunction with the risks and assumptions including those set forth 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, 2012. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  35

---

Cyclical Nature of Business

Revenues

The pulp business is highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn affects 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.

Demand for pulp has historically been determined primarily by general global macro-economic conditions and has been closely tied to overall business activity. From 2006 to mid-2008, pulp prices steadily improved. However, the global economic crisis in the latter half of 2008 resulted in a sharp decline of pulp prices from a high of €900 per ADMT to €635 per ADMT at the end of 2008. Pulp prices began to increase in the second half of 2009 and continued to increase to record levels through June of 2010, before declining slightly in the fourth quarter of 2010. Pulp prices again rebounded to record levels in the first half of 2011 but declined sharply in the latter part of the year, primarily due to economic uncertainty in Europe and credit tightening in China. Economic uncertainty in Europe and China, respectively, impacted both demand and prices. In 2012, list prices were on average approximately 15% lower than 2011. Demand and pulp prices increased during the first quarter of 2013, and as at March 31, 2013, list prices for NBSK pulp were approximately $840 in Europe, $900 in North America and $700 in China.

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 could be materially adversely affected.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  36

---

Costs

Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips 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 cyclical. 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. The state of lumber markets affects both the amount of sawmill residuals, such as chips, produced as a by-product of lumber and the level of timber harvesting, which provides us with pulp logs. Production costs also depend on the total volume of production. Lower operating rates during periods of cyclically low demand result in higher average production costs and lower margins.

Currency

The majority of our sales are in products quoted in U.S. dollars while most of our operating costs and expenses, other than those of the Celgar mill, are incurred in Euros. In addition, all of the products sold by the Celgar mill are quoted in U.S. dollars and the Celgar mill costs are primarily incurred in Canadian dollars. Our results of operations and financial condition are reported in Euros. As a result, our revenues are adversely affected by a decrease in the value of the U.S. dollar relative to the Euro and to the Canadian dollar. Such shifts in currencies relative to the Euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  37

---

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

All of our derivatives are marked to market at the end of each reporting period, and all unrealized gains and losses are recognized in earnings for a reporting period. We determine market valuations based primarily upon observable inputs including applicable yield curves.

During the three months ended March 31, 2013, we recorded an unrealized gain of approximately €5.1 million on our outstanding interest rate derivative, compared to €0.9 million in the same period of 2012.

In November 2012, we entered into two fixed price pulp swap contracts with a bank. Under the terms of these contracts, 3,000 ADMTs of pulp per month is fixed at prices which range from $880 to $890 per ADMT. These contracts expire in December 2013.

We recorded a loss of approximately €0.3 million related to these swap contracts in the three months ended March 31, 2013.

We are also subject to some energy price risk, primarily for the natural gas and the electricity that our operations purchase.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  38

---

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Changes in Internal Controls

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

 

FORM 10-Q

QUARTERLY REPORT - PAGE  39

---

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

We are subject to routine litigation incidental to our business, including those described in our latest annual report on Form 10-K for the fiscal year ended December 31, 2012. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.

 

ITEM 1A.

RISK FACTORS

Other than as listed above, there have been no material changes to the factors disclosed in Item 1A. Risk Factors in our latest annual report on Form 10-K for the fiscal year ended December 31, 2012.

 

ITEM 2.

UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

None.

 

ITEM 5.

OTHER INFORMATION

None.

 

ITEM 6.

EXHIBITS

 

Exhibit No.		Description
31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32.1*		Section 906 Certification of Chief Executive Officer
32.2*		Section 906 Certification of Chief Financial Officer
101		The following financial statements from the Company’s Form 10-Q for the fiscal quarter ended March 31, 2013, formatted in XBRL: (i) Interim Consolidated Balance Sheets; (ii) Interim Consolidated Statements of Operations; (iii) Interim Consolidated Statements of Retained Earnings; (iv) Interim Consolidated Statements of Comprehensive Income; (v) Interim Consolidated Statements of Cash Flows; and (vi) Notes to Interim Consolidated Financial Statements.

 

*

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 Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company’s registration statements filed under the Securities Act of 1933, as amended for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein.

 

FORM 10-Q

QUARTERLY REPORT - PAGE  40

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 3, 2013

 

FORM 10-Q

QUARTERLY REPORT - PAGE  41