10-Q
 

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 September 30, 2016

OR

  [      ]                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File No.: 000-51826

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

 

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

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

(Address of office)

(604) 684-1099

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant has submitted electronically 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 ☒     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 ☐       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  ☒

 

      

The Registrant had 64,694,138 shares of common stock outstanding as at October 26, 2016.


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

 

FORM 10-Q

QUARTERLY REPORT - PAGE 2


MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands of U.S. dollars, except per share data)

 

    

    Three Months Ended    

September 30,

  

    Nine Months Ended    

September 30,

    

      2016      

  

      2015      

  

      2016      

  

      2015      

Revenues

           

Pulp

   $        215,835     $        249,141     $        644,519     $        729,924 

Energy and chemicals

   22,106     21,752     65,410     65,452 
  

 

  

 

  

 

  

 

   237,941     270,893     709,929     795,376 

Costs and expenses

           

Operating costs, excluding depreciation and amortization

   180,124     197,506     550,293     587,747 

Operating depreciation and amortization

   17,923     16,890     52,810     50,587 

Selling, general and administrative expenses

   10,073     12,465     32,128     35,530 
  

 

  

 

  

 

  

 

Operating income

   29,821     44,032     74,698     121,512 
  

 

  

 

  

 

  

 

           

Other income (expenses)

           

Interest expense

   (12,791)    (13,275)    (38,718)    (40,635)

Foreign exchange gain (loss) on intercompany debt

   21     (20)    304     (4,432)

Other expenses

   (16)    (398)    (649)    (868)
  

 

  

 

  

 

  

 

Total other expenses

   (12,786)    (13,693)    (39,063)    (45,935)
  

 

  

 

  

 

  

 

Income before provision for income taxes

   17,035     30,339     35,635     75,577 
           

Current income tax provision (Note 6)

   (1,766)    (2,789)    (6,891)    (9,290)

Deferred income tax provision (Note 6)

   (3,343)    (3,790)    (12,290)    (12,481)
  

 

  

 

  

 

  

 

Net income

   $          11,926     $          23,760     $          16,454     $          53,806 
  

 

  

 

  

 

  

 

           

Net income per common share (Note 8)

           

Basic

   $              0.18     $              0.37     $              0.25     $              0.84 

Diluted

   $              0.18     $              0.37     $              0.25     $              0.83 
           

Cash dividends declared per common share (Note 7)

   $            0.115     $            0.115     $            0.345     $            0.115 

 

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of U.S. dollars)

 

    

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

    

2016

  

2015

  

2016

  

2015

Net income

   $          11,926     $          23,760     $          16,454     $          53,806 

Other comprehensive income (loss), net of taxes

           

Foreign currency translation adjustment (net of tax effect of $nil in all periods)

   13,355     (14,106)    38,710     (94,866)

Change in unrecognized losses and prior service costs related to defined benefit plan (net of tax effect of $nil in all periods)

   291     273     870     732 

Change in unrealized gains/losses on marketable securities (net of tax effect of $nil in all periods)

   (6)    (34)    (4)    (112)
  

 

  

 

  

 

  

 

Other comprehensive income (loss), net of taxes

   13,640     (13,867)    39,576     (94,246)
  

 

  

 

  

 

  

 

Comprehensive income (loss)

   $          25,566     $            9,893     $          56,030     $         (40,440)
  

 

  

 

  

 

  

 

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 BALANCE SHEETS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

        September 30,            December 31,    
   

2016

  

2015

ASSETS

    

Current assets

    

Cash and cash equivalents

  $                141,401     $                99,629 

Restricted cash (Note 10)

  7,979     9,230 

Accounts receivable

  130,760     134,254 

Inventories (Note 2)

  143,623     141,001 

Prepaid expenses and other

  5,601     4,697 
 

 

  

 

Total current assets

  429,364     388,811 
    

Property, plant and equipment, net

  779,606     762,391 

Intangible and other assets

  7,922     8,461 

Deferred income tax

  16,519     23,154 
 

 

  

 

Total assets

  $             1,233,411     $            1,182,817 
 

 

  

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable and other (Note 3)

  $                118,193     $               103,450 

Pension and other post-retirement benefit obligations (Note 5)

  1,025     971 
 

 

  

 

Total current liabilities

  119,218     104,421 
    

Debt (Note 4)

  624,642     638,043 

Interest rate derivative liability (Note 10)

  2,957     6,533 

Pension and other post-retirement benefit obligations (Note 5)

  26,161     25,374 

Capital leases and other

  22,555     12,299 

Deferred income tax

  18,560     13,171 
 

 

  

 

Total liabilities

  814,093     799,841 
 

 

  

 

    

Shareholders’ equity

    

Common shares $1 par value; 200,000,000 authorized;

                            64,694,000 issued and outstanding (2015 – 64,502,000)

  64,656     64,424 

Additional paid-in capital

  331,641     329,246 

Retained earnings (Note 7)

  155,019     160,880 

Accumulated other comprehensive loss (Note 9)

  (131,998)    (171,574)
 

 

  

 

Total shareholders’ equity

  419,318     382,976 
 

 

  

 

Total liabilities and shareholders’ equity

  $             1,233,411     $            1,182,817 
 

 

  

 

    

Commitments and contingencies (Note 12)

    

Subsequent event (Note 7)

    

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 CASH FLOWS

(Unaudited)

(In thousands of U.S. dollars)

 

    

      Three Months Ended      

September 30,

  

      Nine Months Ended      

September 30,

    

        2016        

  

        2015        

  

        2016        

  

        2015        

Cash flows from (used in) operating activities

           

Net income

   $            11,926     $            23,760     $            16,454     $            53,806 

Adjustments to reconcile net income to cash flows from operating activities

        

Depreciation and amortization

   18,031     17,086     53,212     50,956 

Deferred income taxes

   3,343     3,790     12,290     12,481 

Foreign exchange (gain) loss on intercompany debt

   (21)    20     (304)    4,432 

Defined benefit pension plan and other post-retirement benefit plan expense

   446     533     1,320     1,627 

Stock compensation expense

   972     427     2,627     1,785 

Other

   1,598     1,109     2,857     2,377 
Defined benefit pension plan and other post-retirement benefit plan contributions    (421)    (431)    (1,305)    (1,344)

Changes in working capital

           

Accounts receivable

   (3,533)    10,623     8,968     (12,059)

Inventories

   (7,695)    (2,054)    3,293     (7,702)

Accounts payable and accrued expenses

   11,980     18,522     11,877     36,593 

Other

   (190)    (1,695)    (110)    (983)
  

 

  

 

  

 

  

 

Net cash from (used in) operating activities

   36,436     71,690     111,179     141,969 
  

 

  

 

  

 

  

 

           

Cash flows from (used in) investing activities

           

Purchase of property, plant and equipment

   (8,562)    (9,413)    (28,977)    (28,184)

Purchase of intangible assets

   (208)    (1,005)    (1,144)    (2,895)

Decrease in restricted cash

   —     —     1,595     — 

Other

   (678)    27     69     324 
  

 

  

 

  

 

  

 

Net cash from (used in) investing activities

   (9,448)    (10,391)    (28,457)    (30,755)
  

 

  

 

  

 

  

 

           

Cash flows from (used in) financing activities

           

Repurchase of notes and repayment of debt

   —     —     (23,079)    (10,763)

Dividend payments

   (7,440)    —     (22,293)    — 

Proceeds from (repayment of) revolving credit facilities, net

   7,662     (12,881)    7,662     (3,358)

Payment of interest rate derivative liability

   —     —     (5,852)    (7,015)

Other

   420     (578)    (583)    (1,199)
  

 

  

 

  

 

  

 

Net cash from (used in) financing activities

   642     (13,459)    (44,145)    (22,335)
  

 

  

 

  

 

  

 

           

Effect of exchange rate changes on cash and cash equivalents

   1,120     (1,419)    3,195     (4,763)
  

 

  

 

  

 

  

 

           

Net increase in cash and cash equivalents

   28,750     46,421     41,772     84,116 

Cash and cash equivalents, beginning of period

   112,651     90,867     99,629     53,172 
  

 

  

 

  

 

  

 

Cash and cash equivalents, end of period

   $          141,401     $          137,288     $          141,401     $          137,288 
  

 

  

 

  

 

  

 

           

Supplemental cash flow disclosure

           

Cash paid for interest

   $              1,396     $              1,138     $            26,031     $            27,043 

Cash paid for income taxes

   $              2,954     $                 412     $            12,265     $              1,227 

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

 

FORM 10-Q

QUARTERLY REPORT - PAGE 5


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

Note 1. The Company and Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

The interim consolidated financial statements contained herein include the accounts of Mercer International Inc. (“Mercer Inc.”) and all of its subsidiaries (collectively the “Company”). 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 United States Securities and Exchange Commission (the “SEC”). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States (“GAAP”). The 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, 2015. In the opinion of the Company, the unaudited interim consolidated financial statements contained herein contain all adjustments necessary for a fair statement of the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.

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.

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

Use of Estimates

Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-9, Revenue Recognition – Revenue from Contracts with Customers (“ASU 2014-9”) that requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods therein and requires expanded disclosures. The Company is currently assessing the impact, if any, the adoption of ASU 2014-9 will have on its consolidated financial statements.

In July 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”) which requires that inventory within the scope of this update, including inventory stated at average cost, be measured at the lower of cost and net realizable value. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016, with early adoption permitted as of the beginning of an interim or annual reporting period. The adoption of this accounting guidance will not materially impact the Company’s financial position.

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-2, Leases (“ASU 2016-2”) which requires lessees to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and liability. This update is effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of ASU 2016-2 will have on its consolidated financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 6


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 1. The Company and Summary of Significant Accounting Policies (continued)

 

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-9, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-9”) which simplifies several aspects of accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and accounting for forfeitures. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016. The Company is currently assessing the impact, if any, the adoption of ASU 2016-9 will have on its consolidated financial statements.

In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-15, Statement of Cash Flows (“ASU 2016-15”) which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This update is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact, if any, the adoption of ASU 2016-15 will have on its consolidated financial statements.

Note 2. Inventories

 

             September 30,                      December 31,        
    

2016

    

2015

Raw materials

   $                            58,203       $                          57,592 

Finished goods

   33,377       36,829 

Spare parts and other

   52,043       46,580 
  

 

    

 

   $                          143,623       $                        141,001 
  

 

    

 

Note 3. Accounts Payable and Other        
             September 30,                      December 31,        
    

2016

    

2015

Trade payables

   $                            27,274       $                          20,637 

Accrued expenses

   53,849       55,648 

Accrued interest payable

   15,706       4,050 

Interest rate derivative liability, current portion (Note 10)

   9,028       10,380 

Dividend payable (Note 7)

   7,440       7,418 

Other

   4,896       5,317 
  

 

    

 

   $                          118,193       $                        103,450 
  

 

    

 

Note 4. Debt        
     September 30,      December 31,
    

2016

    

2015

2019 Senior Notes, unsecured, $227,000 face value (a)

   $                          223,835       $                        245,689 

2022 Senior Notes, unsecured, $400,000 face value (a)

   393,183       392,354 

Revolving credit facilities

       

€75.0 million (b)

   —       — 

C$40.0 million (c)

   7,624       — 

€25.0 million (d)

   —       — 

€5.0 million (e)

   —       — 
  

 

    

 

   $                          624,642       $                        638,043 
  

 

    

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 7


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 4. Debt (continued)

 

As at September 30, 2016, the maturities of the principal portion of debt are as follows:

 

2016

   $                                   — 

2017

   — 

2018

   — 

2019

   234,624 

2020

   — 

Thereafter

   400,000 
  

 

   $                          634,624 
  

 

Certain of the Company’s debt instruments were issued under agreements which, among other things, may limit its ability and the ability of its subsidiaries to make certain payments, including dividends. These limitations are subject to specific exceptions. As at September 30, 2016, the Company is in compliance with the terms of its debt agreements.

 

(a)

On November 26, 2014, the Company issued $650,000 of senior notes consisting of $250,000 in aggregate principal amount of 7.00% senior notes which mature on December 1, 2019 (“2019 Senior Notes”) and $400,000 in aggregate principal amount of 7.75% senior notes which mature on December 1, 2022 (“2022 Senior Notes” and collectively with the 2019 Senior Notes, the “Senior Notes”). The Senior Notes were issued at a price of 100% of their principal amount. Upon their issuance the Senior Notes were recorded at $635,949 which included debt issuance costs of $14,051. These costs were proportionally allocated to the 2019 Senior Notes and the 2022 Senior Notes.

The Senior Notes are general unsecured senior obligations of the Company. They rank equal in right of payment with all existing and future unsecured senior indebtedness of the Company and are senior in right of payment to any current or future subordinated indebtedness of the Company. The Senior Notes are effectively junior in right of payment to all existing and future secured indebtedness, to the extent of the assets securing such indebtedness, and all indebtedness and liabilities of the Company’s 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) discussed below, plus accrued and unpaid interest to (but not including) the applicable redemption date. The 2019 Senior Notes redemption prices are equal to 103.50% for the twelve month period beginning on December 1, 2016, 101.75% for the twelve month period beginning on December 1, 2017, and 100.00% beginning on December 1, 2018 and at any time thereafter. The 2022 Senior Notes redemption prices are equal to 105.813% for the twelve month period beginning on December 1, 2017, 103.875% for the twelve month period beginning on December 1, 2018, 101.938% for the twelve month period beginning on December 1, 2019, and 100.00% beginning on December 1, 2020 and at any time thereafter.

In March 2016, the Company purchased $23,000 in aggregate principal amount of its 2019 Senior Notes. In connection with this purchase the Company recorded a loss on extinguishment of debt of $454 in other expenses in the Interim Consolidated Statement of Operations which included the write-off of certain unamortized debt issuance costs.

 

(b)

A €75.0 million revolving credit facility at the Stendal mill that matures in October 2019. Borrowings under the facility are collateralized by the mill’s inventory and accounts receivable and bear interest at Euribor plus 3.50%. As at September 30, 2016, approximately €75.0 million ($84,285) was available.

 

(c)

A C$40.0 million revolving credit facility at the Celgar mill that matures in May 2019. Borrowings under the facility are collateralized by the mill’s inventory and accounts receivable and are restricted by a borrowing base calculated on the mill’s inventory and accounts receivable. Canadian dollar denominated amounts bear interest at bankers acceptance plus 1.50% or Canadian prime. U.S. dollar denominated amounts bear interest at LIBOR plus 1.50% or U.S. base. As at September 30, 2016, approximately C$10.0 million ($7,624) was drawn and accruing interest at a rate of 2.38%, approximately C$1.7 million ($1,295) was supporting letters of credit and approximately C$28.3 million ($21,576) was available.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 8


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 4. Debt (continued)

 

(d)

A €25.0 million revolving credit facility at the Rosenthal mill that matures in October 2019. Borrowings under the facility are collateralized by the mill’s inventory and accounts receivable and bear interest at Euribor plus 2.95%. As at September 30, 2016, approximately €3.1 million ($3,440) of this facility was supporting bank guarantees leaving approximately €21.9 million ($24,655) available.

 

(e)

A €5.0 million revolving credit facility at the Rosenthal mill that matures in December 2018. Borrowings under this facility bear interest at the rate of the three-month Euribor plus 2.50% and are secured by certain land at the Rosenthal mill. As at September 30, 2016, approximately €3.2 million ($3,577) of this facility was supporting bank guarantees leaving approximately €1.8 million ($2,042) available.

Note 5. Pension and Other Post-Retirement Benefit Obligations

Defined Benefit Plans

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

Pension benefits are based on employees’ earnings and years of service. The Celgar Defined Benefit Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements.

The components of the net periodic benefit costs relating to the Celgar Defined Benefit Plans for the three and nine month periods ended September 30, 2016 and 2015 were as follows:

 

   

Three Months Ended September 30,

   

2016

    

2015

   

Pension

    

Other Post-

Retirement
Benefits

    

Pension

    

Other Post-

Retirement

Benefits

Service cost

  $                          23        $                        122        $                          29        $                        194  

Interest cost

  259        240        304        233  

Expected return on plan assets

  (489)       —        (500)       —  

Amortization of unrecognized items

  335        (44)       271        2  
 

 

    

 

    

 

    

 

Net periodic benefit cost

  $                        128        $                        318        $                        104        $                        429  
 

 

    

 

    

 

    

 

   

Nine Months Ended September 30,

   

2016

    

2015

   

Pension

    

Other Post-

Retirement
Benefits

    

Pension

    

Other Post-

Retirement
Benefits

Service cost

  $                          68        $                        363        $                          92        $                        607  

Interest cost

  756        711        1,028        731  

Expected return on plan assets

  (1,448)       —        (1,563)       —  

Amortization of unrecognized items

  1,002        (132)       726        6  
 

 

    

 

    

 

    

 

Net periodic benefit cost

  $                        378        $                        942        $                        283        $                     1,344  
 

 

    

 

    

 

    

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 9


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 5. Pension and Other Post-Retirement Benefit Obligations (continued)

 

Defined Contribution Plan

Effective December 31, 2008, the Celgar Defined Benefit Plans were closed to new members. In addition, the defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the three and nine month periods ended September 30, 2016, the Company made contributions of $200 and $509, respectively (2015 – $173 and $521), to this plan.

Multiemployer Plan

The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. Contributions during the three and nine month periods ended September 30, 2016 totaled $384 and $1,167, respectively (2015 – $399 and $1,249).

Note 6. Income Taxes

The income tax provision attributable to income before provision for income taxes in the Interim Consolidated Statement of Operations differs from the amounts computed by applying the U.S. Federal statutory income tax rate of 35% for the three and nine month periods ended September 30, 2016 and 2015 as a result of the following:

 

    

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

    

2016

  

2015

  

2016

  

2015

U.S. Federal statutory rate

   35%    35%    35%    35%
           

U.S. Federal statutory rate on income before income taxes

   $          (5,962)      $        (10,619)      $        (12,472)      $        (26,452)  

Tax differential on foreign income

   1,719       2,706       3,353       6,631   

Effect of foreign earnings

   1,750       —       (1,750)      (5,290)  

Valuation allowance

   (4,134)      (2,884)      (13,876)      (9,285)  

Tax benefit of partnership structure

   1,304       1,313       3,867       3,905   

Non-taxable foreign subsidies

   575       573       1,693       1,718   

True-up of prior year taxes

   (78)      1,421       (138)      6,024   

Other

   (283)      911       142       978   
  

 

  

 

  

 

  

 

   $          (5,109)      $          (6,579)      $        (19,181)      $        (21,771)  
  

 

  

 

  

 

  

 

           

Comprised of:

           

Current

   $          (1,766)      $          (2,789)      $          (6,891)      $          (9,290)  

Deferred

   (3,343)      (3,790)      (12,290)      (12,481)  
  

 

  

 

  

 

  

 

   $          (5,109)      $          (6,579)      $        (19,181)      $        (21,771)  
  

 

  

 

  

 

  

 

For the three and nine month periods ended September 30, 2016, the Company recorded an increase in its valuation allowance of $4,134 and $13,876 respectively (2015 – $2,884 and $9,285), related to its U.S. and Canadian entities where a full valuation allowance was recognized against net deferred income tax assets.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 10


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 7. Shareholders’ Equity

Dividends

During the nine month period ended September 30, 2016, the Company’s Board of Directors declared the following quarterly dividends:

 

Date Declared

  

Dividend Per Common Share

  

Amount

February 11, 2016

   $                                                       0.115     $                                                         7,435 

April 28, 2016

   0.115     7,440 

July 28, 2016

   0.115     7,440 
  

 

  

 

   $                                                       0.345     $                                                       22,315 
  

 

  

 

Dividends are paid in the quarter subsequent to the quarter in which they were declared.

In October 2016, the Company’s Board of Directors declared a quarterly dividend of $0.115 per common share. Payment of the dividend will be made on January 4, 2017 to all shareholders of record on December 22, 2016. Future dividends are subject to approval by the Board of Directors and may be adjusted as business and industry conditions warrant.

Stock Based Compensation

In June 2010, the Company adopted 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. During the nine months ended September 30, 2016, there were no issued and outstanding stock options, restricted stock rights, performance shares or stock appreciation rights. As at September 30, 2016, after factoring in all allocated shares, there remain approximately 1,013,112 common shares available for grant.

PSUs

PSUs comprise rights to receive common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally three years.

For the three and nine month periods ended September 30, 2016, the Company recognized an expense of $882 and $2,268, respectively, related to PSUs (2015 – $262 and $1,359).

The following table summarizes PSU activity during the period:

 

    

    Number of PSUs    

Outstanding at January 1, 2016

   1,255,919 

Granted

   997,863 

Vested and issued

   (154,242)
  

 

Outstanding at September 30, 2016

   2,099,540 
  

 

 

FORM 10-Q

QUARTERLY REPORT - PAGE 11


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 7. Shareholders’ Equity (continued)

 

Restricted Shares

Restricted shares generally vest at the end of one year; however, 200,000 restricted shares granted during the year ended December 31, 2011 vested in equal amounts over a five-year period commencing in 2012.

For the three and nine month periods ended September 30, 2016, the Company recognized an expense of $90 and $359, respectively, related to restricted shares (2015 – $165 and $426). As at September 30, 2016, the total remaining unrecognized compensation cost related to restricted shares amounted to approximately $243 which will be amortized over the remaining vesting periods.

The following table summarizes restricted share activity during the period:

 

    

Number of

    Restricted Shares    

Outstanding at January 1, 2016

   78,000 

Granted

   38,000 

Vested and issued

   (78,000)
  

 

Outstanding at September 30, 2016

   38,000 
  

 

Retained Earnings

The following table summarizes the changes in retained earnings during the period:

 

    

  Nine Months Ended  

September 30, 2016

Retained earnings at January 1, 2016

   $                        160,880 

Net income

   16,454 

Cash dividends declared ($0.345 per common share)

   (22,315)
  

 

Retained earnings at September 30, 2016

   $                        155,019 
  

 

Note 8. Net Income Per Common Share

 

    

    Three Months Ended    

September 30,

  

    Nine Months Ended    

September 30,

    

2016

  

2015

  

2016

  

2015

Net income

           

Basic and diluted

   $         11,926     $         23,760     $         16,454     $         53,806 
           

Net income per common share

           

Basic

   $             0.18     $             0.37     $             0.25     $             0.84 

Diluted

   $             0.18     $             0.37     $             0.25     $             0.83 
           

Weighted average number of common shares outstanding:

           

Basic(1)

   64,656,138     64,423,896     64,623,215     64,365,962 

Effect of dilutive shares:

           

PSUs

   495,663     330,353     397,447     333,937 

Restricted shares

   3,353     36,260     20,359     59,911 

Stock options

   —     —     —     5,136 
  

 

  

 

  

 

  

 

Diluted

   65,155,154     64,790,509     65,041,021     64,764,946 
  

 

  

 

  

 

  

 

(1)

For the three and nine month periods ended September 30, 2016, the basic weighted average number of common shares outstanding excludes 38,000 restricted shares which have been issued, but have not vested as at September 30, 2016 (2015 – 78,000 restricted shares).

 

FORM 10-Q

QUARTERLY REPORT - PAGE 12


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 8. Net Income Per Common Share (continued)

 

The calculation of diluted net income per common share does not assume the exercise of any instruments that would have an anti-dilutive effect on net income per common share. There were no anti-dilutive instruments for the three and nine months ended September 30, 2016 and 2015.

Note 9. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are as follows:

 

    

Foreign
Currency
Translation
    Adjustment    

  

Unrecognized
Losses and Prior
Service Costs
Related to
  Defined Benefit  
Plan

  

Unrealized
Gains (Losses)
  on Marketable  
Securities

  

        Total        

Balance at January 1, 2016

   $            (156,223)    $              (15,338)    $                     (13)    $            (171,574)
  

 

  

 

  

 

  

 

Other comprehensive income (loss) before reclassifications    38,710     —     (4)    38,706 
Amounts reclassified from accumulated other comprehensive loss    —     870     —     870 
  

 

  

 

  

 

  

 

Other comprehensive income (loss), net of taxes    38,710     870     (4)    39,576 
  

 

  

 

  

 

  

 

Balance at September 30, 2016

   $            (117,513)    $              (14,468)    $                     (17)    $            (131,998)
  

 

  

 

  

 

  

 

Note 10. 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 derivatives are measured at fair value with changes in fair value immediately recognized in other expenses in the Interim Consolidated Statement of Operations.

Interest Rate Swaps

During 2002, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €612.6 million of the principal amount of the indebtedness under the Stendal mill’s senior project finance facility, which was settled in November 2014. Under the remaining interest rate swaps, the Company pays a fixed rate and receives a floating rate with the derivative payments being calculated on a notional amount. As at September 30, 2016, the contract has a fair value of €10.7 million ($11,985; 2015 – $16,913) of which €8.0 million ($9,028; 2015 – $10,380) is classified as current within accounts payable and other and €2.7 million ($2,957; 2015 – $6,533) is classified as a long-term liability in the Interim Consolidated Balance Sheet. The contract has an aggregate notional amount of €161.0 million, a fixed interest rate of 5.28% and matures in October 2017.

The Company has pledged as collateral cash in the amount of 67% of the fair value of the interest rate swaps up to €8.5 million to the derivative counterparty. The calculation to determine the collateral is performed semi-annually, with the final calculation in October 2017. As at September 30, 2016, the collateral was €7.1 million ($7,979; 2015 – $9,230). This cash has been classified as restricted cash in the Interim Consolidated Balance Sheet.

During the three and nine month periods ended September 30, 2016 the Company recorded a gain on the interest rate swaps of $13 and a loss of $252, respectively (2015 – loss of $342 and $699), in other expenses in the Interim Statement of Operations.

The counterparty to the interest rate swaps is a bank that is a member of a banking syndicate that holds the Stendal €75.0 million revolving credit facility and the Company does not anticipate non-performance by the bank.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 13


MERCER INTERNATIONAL INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of U.S. dollars, except share and per share data)

 

Note 11. Fair Value Measurement and Disclosure

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable and other approximates their fair value.

The fair value of the interest rate derivative liability classified as Level 2 is determined using a discounted cash flow model that uses as its basis readily observable market inputs, such as forward interest rates and yield curves observable at specified intervals. The observable inputs reflect market data obtained from independent sources, including the Euribor rate provided by the counterparty to the interest rate derivative.

The fair value of the Senior Notes classified as Level 2 is determined using quoted prices in a dealer market, or using recent market transactions. The fair value of the revolving credit facilities classified as Level 2 reflects recent market transactions.

The following tables present a summary of the Company’s outstanding financial instruments and their estimated fair values under the fair value hierarchy:

 

    

Fair value measurements as at September 30, 2016 using:

Description   

Level 1

  

Level 2

  

Level 3

  

Total

Interest rate derivative liability

   $                       —     $                11,985     $                       —     $                11,985 

Debt

           

Senior Notes

   —     658,161     —     658,161 

Revolving credit facilities

   —     7,624     —     7,624 
  

 

  

 

  

 

  

 

   $                       —     $              677,770     $                       —     $              677,770 
  

 

  

 

  

 

  

 

    

Fair value measurements as at December 31, 2015 using:

Description   

Level 1

  

Level 2

  

Level 3

  

Total

Interest rate derivative liability

   $                       —     $                16,913     $                       —     $                16,913 

Debt

           

Senior Notes

   —     654,625     —     654,625 
  

 

  

 

  

 

  

 

   $                       —     $              671,538     $                       —     $              671,538 
  

 

  

 

  

 

  

 

Note 12. Commitments and Contingencies

 

(a)

The Company is involved in legal actions and claims arising in the ordinary course of business. While the outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claims which are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

 

(b)

In 2012, as a result of a regular tax field audit for the Stendal mill, German public authorities commenced a preliminary investigation into past managers of the mill relating to whether certain settlement amounts received by the Stendal mill in 2007, 2010 and 2011 from the main contractor under the contract for the construction of the Stendal mill should have reduced the assessment base for the original investment subsidies granted to the mill by German public authorities. In March 2016, the German public authorities closed its investigation of the past managers of the mill, with no action taken against them or the Company.

 

(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.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 14


NON-GAAP FINANCIAL MEASURES

This quarterly report on Form 10-Q contains “non-GAAP financial measures”, that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with the generally accepted accounting principles in the United States, referred to as “GAAP”. Specifically, we make use of the non-GAAP measure “Operating EBITDA”.

Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. We use Operating EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs, and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, or as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA is an internal measure and therefore may not be comparable to other companies.

Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (v) the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 15


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of September 30, 2016, unless otherwise stated; (iv) our reporting currency is dollars and references to “€” mean euros and “C$” mean Canadian dollars; (v) “ADMTs” refers to air-dried metric tonnes; and (vi) “MW” refers to megawatts and “MWh” refers to megawatt hours.

Results of Operations

General

We operate in the pulp business and our operations are located in Germany and Western Canada. Our mills have a current combined annual production capacity of approximately 1.5 million ADMTs of northern bleached softwood kraft pulp, referred to as “NBSK pulp”, and 305 MW of electrical generation.

The following discussion and analysis of our results of operations and financial condition for the three and nine months ended September 30, 2016 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, 2015 filed with the Securities and Exchange Commission, referred to as the “SEC”.

Current Market Environment

In 2016 to date, a generally overall strong dollar has benefited our costs and expenses as they are primarily incurred in euros and Canadian dollars. However, overall dollar strength tends to increase costs to our customers primarily in Europe and China and pressure pulp prices.

In the third quarter of 2016, pulp prices in Europe and North America were marginally higher than the prior quarter while prices in China decreased by about 4% compared to the prior quarter of 2016 due to the seasonal summer slowdown. As a result, our average pulp sales realizations were largely unchanged from the prior quarter of 2016.

At the end of the current quarter, list prices in Europe, China and North America were approximately $810, $590 and $995 per ADMT, respectively. Currently, the NBSK pulp market is generally balanced with world producer inventories at about 30 days’ supply. Looking forward, we currently expect overall steady pulp demand and stable pricing in the fourth quarter of 2016 in Europe and China.

In the last quarter of 2016, our only scheduled annual maintenance downtime is 12 days at our Stendal mill.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 16


Summary Financial Highlights

 

     Three Months Ended
September 30,
         Nine Months Ended
September 30,
     2016     2015          2016    

2015

     (in thousands, other than per share amounts)

Pulp revenues

   $     215,835      $     249,141         $     644,519      $        729,924 

Energy and chemical revenues

   $       22,106      $       21,752         $       65,410      $          65,452 

Operating income

   $       29,821      $       44,032         $       74,698      $        121,512 

Operating EBITDA(1)

   $       47,852      $       61,118         $     127,910      $        172,468 

Foreign exchange gain (loss) on intercompany debt

   $              21      $           (20      $            304      $          (4,432)

Income tax provision

   $     (5,109   $      (6,579      $   (19,181   $        (21,771)

Net income

   $       11,926      $     23,760         $       16,454      $          53,806 

Net income per common share

           

Basic

   $           0.18      $           0.37         $           0.25      $              0.84 

Diluted

   $           0.18      $           0.37         $           0.25      $              0.83 

Common shares outstanding at period end

     64,694        64,502           64,694      64,502 

 

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

     Three Months Ended
September 30,
         Nine Months Ended
September 30,
     2016     2015          2016    

2015

     (in thousands)

Net income

   $       11,926      $       23,760         $       16,454      $           53,806

Income tax provision

     5,109        6,579           19,181      21,771

Interest expense

     12,791        13,275           38,718      40,635

Foreign exchange (gain) loss on intercompany debt

     (21     20           (304   4,432

Other expenses

     16        398           649      868
  

 

 

   

 

 

      

 

 

   

 

Operating income

     29,821        44,032           74,698      121,512

Add: Depreciation and amortization

     18,031        17,086           53,212      50,956
  

 

 

   

 

 

      

 

 

   

 

Operating EBITDA

   $       47,852      $       61,118         $     127,910      $         172,468
  

 

 

   

 

 

      

 

 

   

 

Selected Production, Sales and Other Data            
     Three Months Ended
September 30,
         Nine Months Ended
September 30,
     2016     2015          2016    

2015

Pulp production (‘000 ADMTs)

     361.8        369.5           1,078.1      1,091.0

Annual maintenance downtime (‘000 ADMTs)

     10.2        11.1           39.8      50.9

Annual maintenance downtime (days)

     10        11           31      36

Pulp sales (‘000 ADMTs)

     359.8        390.2           1,083.6      1,111.3

Average NBSK pulp list prices in Europe ($/ADMT)(1)

     810        843           800      862

Average NBSK pulp list prices in China ($/ADMT)(1)

     595        638           601      657

Average NBSK pulp list prices in North America ($/ADMT)(1)

     998        967           974      981

Average pulp sales realizations ($/ADMT)(2)

     593        632           588      650

Energy production (‘000 MWh)

     473.8        475.5           1,380.8      1,380.9

Energy sales (‘000 MWh)

     208.4        214.8           606.0      610.5

Average energy sales realizations ($/MWh)

     92        91           90      92
           

Average Spot Currency Exchange Rates

           

$ / €(3)

     1.1163        1.1119           1.1166      1.1143

$ / C$(3)

     0.7663        0.7642           0.7578      0.7943

 

(1)

Source: RISI pricing report.

(2)

Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3)

Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 17


Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Total revenues for the three months ended September 30, 2016 decreased by approximately 12% to $237.9 million from $270.9 million in the same quarter of 2015, primarily due to lower pulp revenues.

Pulp revenues in the third quarter of 2016 decreased by approximately 13% to $215.8 million from $249.1 million in the same quarter of 2015, due to lower sales volumes and lower pulp sales realizations.

Energy and chemical revenues in the third quarter of 2016 increased marginally to $22.1 million from $21.8 million in the same quarter of 2015, primarily due to higher chemical sales.

Pulp production decreased by approximately 2% to 361,800 ADMTs in the current quarter from 369,473 ADMTs in the same quarter of 2015. In the current quarter, we had an aggregate of 10 days (approximately 10,200 ADMTs) of annual maintenance downtime at our Rosenthal mill compared to 11 days (approximately 11,100 ADMTs) at such mill in the comparative quarter of 2015.

We estimate that annual maintenance downtime in the current quarter adversely impacted our Operating EBITDA by approximately $6.7 million, comprised of approximately $5.0 million in direct out-of-pocket expenses and the balance in reduced production. Many of our competitors that report their financial results using International Financial Reporting Standards (“IFRS”) capitalize their direct costs of maintenance downtime.

Pulp sales volumes decreased by approximately 8% to 359,791 ADMTs in the current quarter from 390,216 ADMTs in the same quarter of 2015, primarily due to lower sales to China as our Stendal mill allocated certain volumes to Europe as a result of better realizations, managed inventories ahead of its fourth quarter scheduled maintenance downtime and, in the comparative quarter, had near record sales.

In the current quarter of 2016, list prices for NBSK pulp in Europe and China declined from the same quarter of 2015, largely as a result of the strong dollar. Average list prices for NBSK pulp in Europe were approximately $810 per ADMT in the third quarter of 2016, compared to approximately $843 per ADMT in the same quarter of 2015. Average list prices for NBSK pulp in China and North America were approximately $595 per ADMT and $998 per ADMT, respectively, in the third quarter of 2016, compared to approximately $638 per ADMT and $967 per ADMT, respectively, in the same quarter of 2015.

Average pulp sales realizations decreased by approximately 6% to $593 per ADMT in the third quarter of 2016 from approximately $632 per ADMT in the same quarter last year, primarily due to lower list prices largely resulting from the overall strength of the dollar which increases the cost of pulp for our customers primarily in Europe and China.

The impact of changes in the exchange rates for the dollar to the euro and the Canadian dollar on our dollar-denominated cash balances and receivables held at the mills reduced our operating income by $5.1 million when compared to the same quarter of the prior year.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 18


Costs and expenses in the current quarter decreased by approximately 8% to $208.1 million from $226.9 million in the third quarter of 2015, primarily due to lower pulp sales volumes and fiber prices.

In the third quarter of 2016, operating depreciation and amortization was $17.9 million, compared to $16.9 million in the same quarter of 2015.

Selling, general and administrative expenses decreased to $10.1 million in the third quarter of 2016 from $12.5 million in the same quarter of 2015 due to lower costs associated with our completed NAFTA claim, for which we are awaiting a decision.

Transportation costs decreased by approximately 13% to $17.5 million in the current quarter from $20.0 million in the same quarter of 2015 primarily due to lower pulp sales volumes.

On average, in the current quarter overall fiber prices decreased by approximately 7% from the same quarter of 2015, primarily as a result of a balanced wood market and strong sawmilling activity in both Germany and the Celgar mill’s fiber basket. In the current quarter, in euro terms, average fiber prices in Germany were approximately 10% lower than the comparative quarter. In the current quarter, in Canadian dollar terms, average fiber prices for our Celgar mill were marginally lower than the comparative quarter.

In the third quarter of 2016, our operating income decreased by approximately 32% to $29.8 million from $44.0 million in the same quarter of 2015, primarily due to lower pulp sales realizations and sales volumes, partially offset by lower fiber prices.

Interest expense in the current quarter decreased to $12.8 million from $13.3 million in the same quarter of 2015, primarily as a result of lower indebtedness.

During the third quarter of 2016, income tax expense decreased to $5.1 million from $6.6 million in the same quarter of 2015 due to lower taxable income for our German subsidiaries.

For the third quarter of 2016, we had net income of $11.9 million, or $0.18 per basic and diluted share, compared to net income of $23.8 million, or $0.37 per basic and diluted share, in the same quarter of 2015.

In the third quarter of 2016, Operating EBITDA decreased by approximately 22% to $47.9 million from $61.1 million in the same quarter of 2015, primarily due to lower pulp sales realizations and sales volumes, partially offset by lower fiber prices.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Total revenues for the nine months ended September 30, 2016 decreased by approximately 11% to $709.9 million from $795.4 million in the same period of 2015, primarily due to lower pulp revenues.

Pulp revenues in the nine months ended September 30, 2016 decreased by approximately 12% to $644.5 million from $729.9 million in the same period of 2015 due to lower pulp sales realizations and sales volumes.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 19


Energy and chemical revenues remained essentially flat at $65.4 million in the nine months ended September 30, 2016 compared to $65.5 million in the same period of 2015.

Pulp production decreased marginally to 1,078,057 ADMTs in the nine months ended September 30, 2016 from 1,090,963 ADMTs in the same period of 2015. In the nine months ended September 30, 2016, we had annual maintenance downtime of a total of 31 days (approximately 39,800 ADMTs), 25 days of which were scheduled and 6 days of which were unscheduled to effect additional work at our Celgar mill. In the comparative period of 2015, we had scheduled annual maintenance downtime of 36 days (approximately 50,900 ADMTs).

We estimate that such maintenance downtime in the nine months ended September 30, 2016 adversely impacted our Operating EBITDA by approximately $27.3 million, comprised of approximately $20.3 million in direct out-of-pocket expenses and the balance in reduced production. Many of our competitors that report their financial results using IFRS capitalize their direct costs of maintenance downtime.

Pulp sales volumes decreased marginally to 1,083,570 ADMTs in the nine months ended September 30, 2016 compared to 1,111,257 ADMTs in the same period of 2015.

In the nine months ended September 30, 2016, list prices for NBSK pulp declined from the same period of 2015, largely as a result of the strong dollar and the impact of weakening hardwood pulp prices on NBSK pricing. Average list prices for NBSK pulp in Europe were approximately $800 per ADMT in the nine months ended September 30, 2016, compared to approximately $862 per ADMT in the same period of 2015. Average list prices for NBSK pulp in China and North America were approximately $601 per ADMT and $974 per ADMT, respectively, in the nine months ended September 30, 2016, compared to approximately $657 per ADMT and $981 per ADMT, respectively, in the same period of 2015.

Average pulp sales realizations decreased by approximately 10% to $588 per ADMT in the nine months ended September 30, 2016 from approximately $650 per ADMT in the same period last year primarily due to lower list prices.

In the nine months ended September 30, 2016, the dollar weakened by approximately 3% against the euro, compared to December 31, 2015, which reduced our dollar-denominated cash and receivables held by our German mills and contributed to the negative impact due to foreign exchange of approximately $4.7 million when compared to the same period of the prior year.

Costs and expenses in the nine months ended September 30, 2016 decreased by approximately 6% to $635.2 million from $673.9 million in the same period of 2015, primarily due to lower fiber prices, lower sales volumes and the reversal of a $7.2 million wastewater fee accrual at our Rosenthal mill.

In the nine months ended September 30, 2016, operating depreciation and amortization was $52.8 million, compared to $50.6 million in the same period of 2015.

Selling, general and administrative expenses decreased to $32.1 million in the nine months ended September 30, 2016 from $35.5 million in the same period of 2015 due to lower costs associated with our completed NAFTA claim.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 20


Transportation costs decreased by approximately 11% to $50.8 million in the nine months ended September 30, 2016 from $57.4 million in the same period of 2015 primarily due to lower pulp shipments to China.

On average, in the nine months ended September 30, 2016, overall fiber prices decreased by approximately 7% from the same period of 2015, primarily as a result of a balanced wood market in both Germany and the Celgar mill’s fiber basket. In the nine months ended September 30, 2016, in euro terms, average fiber prices in Germany were approximately 9% lower than the comparative period of 2015. In the nine months ended September 30, 2016, in Canadian dollar terms, average fiber prices for our Celgar mill were marginally lower than the comparative period of 2015.

In the nine months ended September 30, 2016, our operating income decreased by approximately 39% to $74.7 million from $121.5 million in the same period of 2015, primarily due to lower pulp sales realizations, partially offset by lower fiber prices and the reversal of a wastewater fee accrual at our Rosenthal mill.

Interest expense in the nine months ended September 30, 2016 decreased to $38.7 million from $40.6 million in the same period of 2015, primarily as a result of lower indebtedness.

As a result of a weakening of the dollar versus the euro and Canadian dollar in the nine months ended September 30, 2016, we recorded a non-cash gain on the foreign exchange translation of certain intercompany debt between Mercer Inc. and its wholly owned subsidiaries, which increased our net income by $0.3 million.

In the nine months ended September 30, 2016, we had other expenses of $0.6 million which included a loss of $0.5 million due to the write-off of certain deferred financing costs associated with our repurchase and cancellation of $23.0 million of our 2019 Senior Notes.

During the nine months ended September 30, 2016, income tax expense decreased to $19.2 million from $21.8 million in the same period of 2015 due to lower taxable income for our German subsidiaries.

For the nine months ended September 30, 2016, we reported net income of $16.5 million, or $0.25 per basic and diluted share compared to net income of $53.8 million, or $0.84 per basic and $0.83 per diluted share, in the same period of 2015.

In the nine months ended September 30, 2016, Operating EBITDA decreased by approximately 26% to $127.9 million from $172.5 million in the same period of 2015, primarily as a result of lower pulp sales realizations, partially offset by lower fiber prices and the reversal of a wastewater fee accrual.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 21


Liquidity and Capital Resources

Summary of Cash Flows

 

   

 Nine Months Ended September 30, 

   

2016

     

2015

    (in thousands)

Net cash from operating activities

  $        111,179      $        141,969 

Net cash used in investing activities

  (28,457)     (30,755)

Net cash used in financing activities

  (44,145)     (22,335)

Effect of exchange rate changes on cash and cash equivalents

  3,195      (4,763)
 

 

   

 

Net increase in cash and cash equivalents

  $          41,772      $          84,116 
 

 

   

 

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 revenues and the payment of payables and expenses.

Cash provided by operating activities decreased to $111.2 million in the nine months ended September 30, 2016 from $142.0 million in the comparative period of 2015 due to lower operating income. A decrease in accounts receivable provided cash of $9.0 million in the nine months ended September 30, 2016, compared to an increase in accounts receivable using cash of $12.1 million in the same period of 2015. An increase in accounts payable and accrued expenses provided cash of $11.9 million in the nine months ended September 30, 2016, and $36.6 million in the same period of 2015. A decrease in inventories, excluding non-cash items, provided cash of $3.3 million in the nine months ended September 30, 2016, compared to an increase in inventories using cash of $7.7 million in the comparative period of 2015.

Cash Flows from Investing Activities. Investing activities in the nine months ended September 30, 2016 used cash of $28.5 million, primarily related to capital expenditures of $29.0 million, partially offset by a decrease in restricted cash of $1.6 million. In the nine months ended September 30, 2016, capital expenditures primarily related to new wood harvesting equipment and a logistics and reload facility for our Celgar mill, a rail car acceptance system for logs and lime kiln retrofit at our Rosenthal mill and various other smaller projects. In the same period of 2015, investing activities used cash of $30.8 million.

Cash Flows from Financing Activities. In the nine months ended September 30, 2016, financing activities used cash of $44.1 million, including $23.1 million to repurchase and cancel $23.0 million of our 2019 Senior Notes, $22.3 million for the payment of dividends and $5.9 million for a scheduled payment in respect of our interest rate derivative, partially offset by $7.7 million of borrowings on our Celgar revolving credit facility. In the same period of 2015, financing activities used cash of $22.3 million.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 22


Balance Sheet Data

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

 

     September 30,           December 31,  
     2016           2015  
     (in thousands)  

Financial Position

        

Cash and cash equivalents

   $         141,401          $           99,629   

Total current assets

   $         429,364          $         388,811   

Total current liabilities

   $         119,218          $         104,421   

Working capital

   $         310,146          $         284,390   

Total assets

   $      1,233,411          $      1,182,817   

Debt

   $         624,642          $         638,043   

Total liabilities

   $         814,093          $         799,841   

Total equity

   $         419,318          $         382,976   

As a result of the weakening of the dollar versus the euro and the Canadian dollar as at September 30, 2016, we recorded a non-cash increase in the carrying value of our net assets, consisting primarily of our fixed assets, denominated in euros and Canadian dollars. This non-cash increase of approximately $38.7 million does not affect our net income, Operating EBITDA or cash flows but is reflected in our other comprehensive income (loss) and as an increase to our total equity.

Sources and Uses of Funds

Our principal sources of funds are cash flows from operations, cash and cash equivalents on hand and our revolving credit facilities. Our principal uses of funds consist of operating expenses, capital expenditures and semi-annual interest payments on our outstanding 7.0% Senior Notes due 2019 and 7.75% Senior Notes due 2022.

The following table sets out our total capital expenditures and interest expense for the periods indicated:

 

       Nine Months Ended September 30,    
     2016           2015  
     (in thousands)  

Capital expenditures

   $           28,977          $           28,184   

Cash paid for interest(1)

   $           26,031          $           27,043   

Interest expense(2)

   $           38,718          $           40,635   

 

 

(1)

Amounts differ from interest expense which includes non-cash items. See supplemental disclosure of cash flow information from our Interim Consolidated Statement of Cash Flows included in this report.

(2)

Interest on our 2019 Senior Notes and 2022 Senior Notes is paid semi-annually in June and December of each year.

In the nine months ended September 30, 2016, we expended $23.1 million to repurchase and cancel $23.0 million of our 2019 Senior Notes and $22.3 million to pay three quarterly dividends of $0.115 per common share each.

As at September 30, 2016, our cash and cash equivalents increased to $141.4 million from $99.6 million at the end of 2015 and our working capital increased to $310.1 million from $284.4 million at the end of 2015.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 23


As at September 30, 2016, we had approximately $132.6 million available under our revolving credit facilities.

As at September 30, 2016, we had no material commitments to acquire assets or operating businesses.

Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facilities, will be adequate to finance the capital requirements for our business including the payment of our quarterly dividend during the next 12 months.

In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.

Debt Covenants

Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. See our annual report on Form 10-K for the fiscal year ended December 31, 2015.

As at September 30, 2016, we were in full compliance with all of the covenants of our indebtedness.

Off-Balance Sheet Arrangements

At September 30, 2016, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Contractual Obligations and Commitments

There were no material changes outside the ordinary course to any of our material contractual obligations during the nine months ended September 30, 2016.

Foreign Currency

As a majority of our assets, liabilities and expenditures are held or denominated in euros or Canadian dollars, our consolidated financial results are subject to foreign currency exchange rate fluctuations.

We translate foreign denominated assets and liabilities into dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in other comprehensive income (loss) and do not affect our net earnings.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 24


As a result of the weakening of the dollar versus the euro and Canadian dollar as at September 30, 2016, we recorded a non-cash increase of $38.7 million in the carrying value of our net assets, consisting primarily of our fixed assets, denominated in euros and Canadian dollars which primarily resulted in our accumulated other comprehensive loss decreasing to $132.0 million.

Based upon the exchange rate as at September 30, 2016, the dollar has weakened by approximately 3% and 6% in value against the euro and the Canadian dollar, respectively, since December 31, 2015. See “Quantitative and Qualitative Disclosures about Market Risk”.

Credit Ratings

We and our 2019 and 2022 Senior Notes are rated by Standard & Poor’s Rating Services, referred to as “S&P”, and Moody’s Investors Service, Inc., referred to as “Moody’s”. On October 13, 2016, Moody’s upgraded its current rating on our 2019 and 2022 Senior Notes to B1 from B2 and upgraded our corporate family rating to Ba3 from B1, maintaining its outlook as “stable”. On October 20, 2016, S&P upgraded its current rating on our 2019 and 2022 Senior Notes to BB- from B+ and upgraded our long-term corporate credit rating to BB- from B+, maintaining its outlook as “stable”.

Factors that may affect our credit rating include changes in our operating performance and liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing costs and access to capital markets.

Credit ratings are not recommendations to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Critical Accounting Policies

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

Our significant accounting policies are disclosed in Note 1 to our audited annual financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2015. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 25


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, 2015.

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:

 

   

our business is highly cyclical;

 

   

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

 

   

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

 

   

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

 

   

we face intense competition in our markets;

 

   

we are exposed to currency exchange rate fluctuations;

 

   

we are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations;

 

   

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

 

   

our new ERP system may cost more than expected, be delayed, fail to perform as planned and interrupt operational transactions during and following the implementation, which could adversely affect our operations and results of operations;

 

   

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

 

FORM 10-Q

QUARTERLY REPORT - PAGE 26


   

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

 

   

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

 

   

changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities;

 

   

we rely on government grants and participate in German statutory energy programs;

 

   

we are subject to risks related to our employees;

 

   

we are dependent on key personnel;

 

   

we may experience material disruptions to our production (including as a result of, among other things, planned and unplanned maintenance downtime);

 

   

if our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations;

 

   

we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters;

 

   

our insurance coverage may not be adequate;

 

   

we rely on third parties for transportation services;

 

   

failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business;

 

   

the price of our common stock may be volatile;

 

   

a small number of our shareholders could significantly influence our business;

 

   

our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations; and

 

   

we are exposed to interest rate fluctuations.

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, 2015. 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 27


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 can materially affect prices. Pulp markets are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro-economic conditions and levels of industry capacity. Pulp is a commodity that is generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.

Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their NBSK pulp production on the market, if market conditions, prices and trends warrant such actions.

Demand for pulp has historically been determined primarily by general global macroeconomic conditions and has been closely tied to overall business activity. NBSK pulp prices have been and are likely to continue to be volatile and can fluctuate widely over time. Between 2005 and 2015, European list prices for NBSK pulp have fluctuated between a low of approximately $575 per ADMT in 2009 to a high of $1,030 per ADMT in 2011.

A producer’s actual pulp sales realizations are list prices net of customer discounts, rebates and other selling concessions. Over the last three years, these have increased as producers compete for customers and sales. Our pulp sales realizations may also be affected by NBSK price movements between the order and shipment dates.

Accordingly, prices for pulp are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the price for pulp, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations and cash flows could be materially adversely affected.

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 highly cyclical. Over the last three years, the demand and competition for fiber has also been impacted by renewable energy producers in Germany, particularly by wood pellet producers. Higher fiber prices could affect producer profit margins if they are unable to pass along price increases to pulp customers or purchasers of surplus energy.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 28


Currency

We have manufacturing operations in Germany and Canada. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Celgar mill in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such 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 29


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

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

For additional information, please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our annual report on Form 10-K for the fiscal year ended December 31, 2015.

We record unrealized gains and losses on our outstanding derivatives when they are marked to market at the end of each reporting period and realized gains or losses on them when they are settled. We determine market valuations based primarily upon valuations provided by our counterparties.

During the nine months ended September 30, 2016, we recorded a derivative loss of approximately $0.3 million on our outstanding interest rate derivative, compared to a derivative loss of approximately $0.7 million in the same period of 2015.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 30


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 31


PART II.        OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are subject to routine litigation incidental to our business, including that which is described in our latest annual report on Form 10-K for the fiscal year ended December 31, 2015. 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

As of September 30, 2016, 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, 2015.

 

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.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 32


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 period ended September 30, 2016, formatted in XBRL: (i) Interim Consolidated Statements of Operations; (ii) Interim Consolidated Statements of Comprehensive Income (Loss); (iii) Interim Consolidated Balance Sheets; (iv) Interim Consolidated Statements of Cash Flows; and (v) Notes to Interim Consolidated Financial Statements.

                                         

* In accordance with Release No. 33-8212 of the SEC, these Certifications: (i) are “furnished” to the SEC and are not “filed” for the purposes of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company’s registration statements filed under the Securities Act of 1933, as amended, for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein.

 

FORM 10-Q

QUARTERLY REPORT - PAGE 33


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.

 

  MERCER INTERNATIONAL INC.
  By:  

        /s/ David M. Gandossi

 
            David M. Gandossi  
            Chief Executive Officer and President  

Date: October 27, 2016

 

FORM 10-Q

QUARTERLY REPORT - PAGE 34