Mercer Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

merc-10q_20200331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2020


☐	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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00 per share

MERC

NASDAQ Global Select Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "non-accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 65,799,946 shares of common stock outstanding as at April 29, 2020.

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020

(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 March 31,
	2020			2019
Revenues	$	350,599		$	483,950
Costs and expenses
Cost of sales, excluding depreciation and amortization		276,056			343,033
Cost of sales depreciation and amortization		32,911			30,136
Selling, general and administrative expenses		17,570			17,229
Operating income		24,062			93,552
Other income (expenses)
Interest expense		(20,084	)		(18,551	)
Other income (expenses)		(2,026	)		1,039
Total other expenses, net		(22,110	)		(17,512	)
Income before provision for income taxes		1,952			76,040
Provision for income taxes		(5,344	)		(24,424	)
Net income (loss)	$	(3,392	)	$	51,616
Net income (loss) per common share
Basic	$	(0.05	)	$	0.79
Diluted	$	(0.05	)	$	0.78
Dividends declared per common share	$	0.1375		$	0.1250

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of U.S. dollars)

	Three Months Ended March 31,
	2020			2019
Net income (loss)	$	(3,392	)	$	51,616
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustment		(74,994	)		(3,872	)
Change in unrecognized losses and prior service costs related to defined benefit pension plans, net of tax of $nil (2019 - $6)		6			60
Other comprehensive loss, net of taxes		(74,988	)		(3,812	)
Total comprehensive income (loss)	$	(78,380	)	$	47,804

See accompanying Notes to the 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)

	March 31,			December 31,
	2020			2019
ASSETS
Current assets
Cash and cash equivalents	$	286,526		$	351,085
Accounts receivable, net		221,921			208,740
Inventories		269,812			272,599
Prepaid expenses and other		10,294			12,273
Total current assets		788,553			844,697
Property, plant and equipment, net		1,020,345			1,074,242
Investment in joint ventures		48,188			53,122
Amortizable intangible assets, net		48,957			53,371
Operating lease right-of-use assets		11,866			13,004
Other long-term assets		32,848			26,038
Deferred income tax		1,232			1,246
Total assets	$	1,951,989		$	2,065,720
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and other	$	184,447		$	255,544
Pension and other post-retirement benefit obligations		696			768
Total current liabilities		185,143			256,312
Debt		1,136,454			1,087,932
Pension and other post-retirement benefit obligations		23,157			25,489
Finance lease liabilities		37,537			31,103
Operating lease liabilities		9,436			10,520
Other long-term liabilities		13,323			14,114
Deferred income tax		84,171			89,847
Total liabilities		1,489,221			1,515,317
Shareholders’ equity
Common shares $1 par value; 200,000,000 authorized; 65,800,000 issued and outstanding (2019 – 65,629,000)		65,769			65,598
Additional paid-in capital		344,753			344,994
Retained earnings		243,794			256,371
Accumulated other comprehensive loss		(191,548	)		(116,560	)
Total shareholders’ equity		462,768			550,403
Total liabilities and shareholders’ equity	$	1,951,989		$	2,065,720

Commitments and contingencies (Note 13)
Subsequent events (Note 7,14)

See accompanying Notes to the Interim Consolidated Financial Statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 4

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands of U.S. dollars)

	Common shares
	Number (thousands of shares)			Amount, at Par Value			Additional Paid -in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Three Months Ended March 31:
Balance as of December 31, 2019		65,629		$	65,598		$	344,994		$	256,371		$	(116,560	)	$	550,403
Shares issued on grants of performance share units		195			195			(195	)		—			—			—
Stock compensation recovery		—			—			(46	)		—			—			(46	)
Net loss		—			—			—			(3,392	)		—			(3,392	)
Dividends declared		—			—			—			(9,047	)		—			(9,047	)
Repurchase of common shares		(24	)		(24	)		—			(138	)		—			(162	)
Other comprehensive loss		—			—			—			—			(74,988	)		(74,988	)
Balance as of March 31, 2020		65,800		$	65,769		$	344,753		$	243,794		$	(191,548	)	$	462,768

Balance as of December 31, 2018		65,202		$	65,171		$	342,438		$	301,990		$	(128,170	)	$	581,429
Shares issued on grants of performance share units		449			449			(449	)		—			—			—
Stock compensation recovery		—			—			(345	)		—			—			(345	)
Net income		—			—			—			51,616			—			51,616
Dividends declared		—			—			—			(8,206	)		—			(8,206	)
Other comprehensive loss		—			—			—			—			(3,812	)		(3,812	)
Balance as of March 31, 2019		65,651		$	65,620		$	341,644		$	345,400		$	(131,982	)	$	620,682

See accompanying Notes to the Interim Consolidated Financial Statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 5

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands of U.S. dollars)

	Three Months Ended March 31,
	2020			2019
Cash flows from (used in) operating activities
Net income (loss)	$	(3,392	)	$	51,616
Adjustments to reconcile net income (loss) to cash flows from operating activities
Depreciation and amortization		32,946			30,247
Deferred income tax provision (benefit)		(1,331	)		3,639
Inventory impairment		5,734			—
Defined benefit pension plans and other post-retirement benefit plan expense		762			856
Stock compensation recovery		(46	)		(345	)
Foreign exchange transaction gains		(6,144	)		(263	)
Other		(497	)		704
Defined benefit pension plans and other post-retirement benefit plan contributions		(915	)		(1,158	)
Changes in working capital
Accounts receivable		(20,926	)		(56,353	)
Inventories		(18,120	)		21,141
Accounts payable and accrued expenses		(57,660	)		(173	)
Other		(253	)		(7,725	)
Net cash from (used in) operating activities		(69,842	)		42,186
Cash flows from (used in) investing activities
Purchase of property, plant and equipment		(23,018	)		(19,389	)
Purchase of amortizable intangible assets		(438	)		(316	)
Other		51			(261	)
Net cash from (used in) investing activities		(23,405	)		(19,966	)
Cash flows from (used in) financing activities
Proceeds from (repayment of) revolving credit facilities, net		51,260			(33,672	)
Dividend payments		(9,047	)		—
Repurchase of common shares		(162	)		—
Payment of debt issuance costs		—			(509	)
Proceeds from government grants		—			6,320
Other		(9,801	)		(862	)
Net cash from (used in) financing activities		32,250			(28,723	)
Effect of exchange rate changes on cash and cash equivalents		(3,562	)		(754	)
Net decrease in cash and cash equivalents		(64,559	)		(7,257	)
Cash and cash equivalents, beginning of period		351,085			240,491
Cash and cash equivalents, end of period	$	286,526		$	233,234

Supplemental cash flow disclosure
Cash paid for interest	$	37,278	$	16,983
Cash paid for income taxes	$	12,974	$	23,613
Supplemental schedule of non-cash investing and financing activities:
Leased production equipment	$	8,994	$	—

See accompanying Notes to the Interim 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

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"). Mercer Inc. owns 100% of the economic interest in its subsidiaries with the exception of the 50% joint venture interest in the Cariboo mill with West Fraser Mills Ltd., which is accounted for using the equity method. The Company's shares of common stock are quoted and listed for trading on the NASDAQ Global Market.

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 unaudited 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, 2019. In the opinion of the Company, the unaudited Interim Consolidated Financial Statements contained herein have been prepared on a consistent basis (except for the change in policy referred to below) 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, 2019 and 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.

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, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

Impact of COVID-19 Pandemic

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption could have a material adverse effect on our business.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. As of the date of issuance of these Interim Consolidated Financial Statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

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

New Accounting Pronouncements

Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment method with a method that reflects expected credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which provides entities with targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. These updates were effective for financial statements issued after December 15, 2019. The Company adopted these updates on January 1, 2020 using the modified-retrospective approach. The adoption of these updates did not have an impact on the Interim Consolidated Financial Statements as the Company’s credit risk associated with its sales is currently managed through the purchase of credit insurance, letters of credit and setting credit limits prior to the sale. The Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality.

The Company’s exposure to credit losses may increase if its customers are adversely affected by the COVID-19 pandemic. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables if the cash flows of the Company’s customers are adversely impacted by the COVID-19 pandemic.

Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod tax allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. This update is effective for financial statements issued for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this update but believes it will not have a significant impact on the consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.

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 2. Inventories

Inventories as of March 31, 2020 and December 31, 2019, were comprised of the following:

	March 31,		December 31,
	2020		2019
Raw materials	$	86,198	$	99,754
Finished goods		88,915		77,815
Spare parts and other		94,699		95,030
	$	269,812	$	272,599

For the three months ended March 31, 2020, as a result of low pulp prices and high fiber costs for the Canadian mills, the Company recorded inventory impairment charges of $5,734 at certain Canadian mills (2019 – $nil). These charges were recorded in “Cost of sales, excluding depreciation and amortization” in the Interim Consolidated Statements of Operations. As of March 31, 2020, $3,681 of the write-down was recorded in raw materials inventory and $2,053 of the write-down was recorded in finished goods inventory. As of December 31, 2019, the Company recorded a $3,500 write-down in raw materials inventory and a $5,700 write-down in finished goods inventory.

Note 3. Accounts Payable and Other

Accounts payable and other as of March 31, 2020 and December 31, 2019, was comprised of the following:

	March 31,		December 31,
	2020		2019
Trade payables	$	62,652	$	73,721
Accrued expenses		87,091		111,696
Interest payable		14,902		33,198
Income tax payable		10,337		28,080
Other

Price	12.46	EPS	1
Shares	66	P/E	13
MCap	822	P/FCF	4
Net Debt	735	EBIT	161
TEV	1,557	TEV/EBIT	10
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-04-30
10-K	2019-12-31	Filed 2020-02-13
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-01
10-Q	2019-03-31	Filed 2019-05-02
10-K	2018-12-31	Filed 2019-02-14
10-Q	2018-09-30	Filed 2018-10-25
10-Q	2018-06-30	Filed 2018-07-26
10-Q	2018-03-31	Filed 2018-05-03
10-K	2017-12-31	Filed 2018-02-16
10-Q	2017-09-30	Filed 2017-10-26
10-Q	2017-06-30	Filed 2017-07-27
10-Q	2017-03-31	Filed 2017-04-28
10-K	2016-12-31	Filed 2017-02-10
10-Q	2016-09-30	Filed 2016-10-27
10-Q	2016-06-30	Filed 2016-07-28
10-Q	2016-03-31	Filed 2016-04-28
10-K	2015-12-31	Filed 2016-02-12
10-Q	2015-09-30	Filed 2015-10-29
10-Q	2015-06-30	Filed 2015-07-30
10-Q	2015-03-31	Filed 2015-04-30
10-K	2014-12-31	Filed 2015-02-13
10-Q	2014-09-30	Filed 2014-10-31
10-Q	2014-06-30	Filed 2014-08-01
10-Q	2014-03-31	Filed 2014-05-02
10-K	2013-12-31	Filed 2014-02-21
10-Q	2013-09-30	Filed 2013-11-01
10-Q	2013-06-30	Filed 2013-08-02
10-Q	2013-03-31	Filed 2013-05-03
10-K	2012-12-31	Filed 2013-02-15
10-Q	2012-09-30	Filed 2012-11-02
10-Q	2012-06-30	Filed 2012-08-03
10-Q	2012-03-31	Filed 2012-05-07
10-K	2011-12-31	Filed 2012-02-21
10-Q	2011-09-30	Filed 2011-11-07
10-Q	2011-06-30	Filed 2011-08-04
10-Q	2011-03-31	Filed 2011-05-09
10-K	2010-12-31	Filed 2011-02-17
10-Q	2010-09-30	Filed 2010-11-04
10-Q	2010-06-30	Filed 2010-08-05
10-Q	2010-03-31	Filed 2010-05-04
10-K	2009-12-31	Filed 2010-02-26

8-K	2020-06-22
8-K	2020-05-29
8-K	2020-05-15
8-K	2020-03-31
8-K	2020-02-13
8-K	2019-10-31
8-K	2019-10-03
8-K	2019-09-19
8-K	2019-09-19
8-K	2019-08-01
8-K	2019-05-31
8-K	2019-05-02
8-K	2019-04-16
8-K	2019-02-14
8-K	2018-12-19
8-K	2018-12-10
8-K	2018-12-07
8-K	2018-11-29
8-K	2018-11-28
8-K	2018-10-25
8-K	2018-10-03
8-K	2018-07-26
8-K	2018-06-01
8-K	2018-05-25
8-K	2018-05-03
8-K	2018-02-15
8-K	2018-01-01

EX-31.1	merc-ex311_7.htm
EX-31.2	merc-ex312_9.htm
EX-32.1	merc-ex321_6.htm
EX-32.2	merc-ex322_8.htm

MERC 10Q Quarterly Report

Mercer Earnings 2020-03-31