Mercer International Inc. Reports Strong 2014 Third Quarter Results

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NEW YORK, Oct. 30, 2014 (GLOBE NEWSWIRE) -- Mercer International Inc. MERC MRI today reported results for the third quarter ended September 30, 2014. Operating EBITDA* in the third quarter of 2014 increased to $67.6 million from $32.8 million in the third quarter of 2013 and $41.9 million in the prior quarter of 2014. For the third quarter of 2014, we had record net income of $88.3 million, or $1.38 per basic and $1.37 per diluted share, compared to net loss of $3.0 million, or $0.05 per basic and diluted share, in the third quarter of 2013.

On October 1, 2013, we changed our reporting currency from the Euro to the U.S. dollar.

Summary Financial Highlights

  Q3 Q2 Q3 YTD YTD
  2014   2014   2013   2014   2013 
  (in millions, except per share amounts)
Pulp revenues $ 277.0 $ 259.5 $ 246.7 $ 814.9  $ 737.6
Energy and chemical revenues $ 24.7 $ 25.7 $ 22.6 $ 77.5  $ 68.1
Operating income $ 48.2 $ 22.0 $ 13.3 $ 109.5  $ 24.7
Operating EBITDA* $ 67.6 $ 41.9 $ 32.8 $ 168.5  $ 83.1
Gain on settlement of debt $ 31.9 $ ‑ $ ‑ $ 31.9  $ ‑
Gain on derivative instruments $ 3.4 $ 2.5 $ 2.6 $ 9.2  $ 15.9
Income tax benefit (provision) $ 29.2 $ (4.6) $ (1.2) $ 22.8  $ (3.2)
Net income (loss)(1) $ 88.3 $ 0.6 $ (3.0) $ 109.9  $ (16.5)
Net income (loss) per share(1)          
Basic $ 1.38 $ 0.01 $ (0.05) $ 1.79  $ (0.30)
Diluted $ 1.37 $ 0.01 $ (0.05) $ 1.78  $ (0.30)
Common shares outstanding at period end  64.3  64.3  55.9  64.3  55.9
           
(1) Attributable to common shareholders.          

Summary Operating Highlights

  Q3 Q2 Q3 YTD YTD
   2014   2014   2013   2014   2013 
Pulp production ('000 ADMTs)  375.7  353.8  369.0  1,111.3  1,079.7
Scheduled production downtime ('000 ADMTs)  10.1  17.7  9.4  27.8  25.4
Scheduled production downtime (days)  10  12  10  22  21
Pulp sales ('000 ADMTs)  386.9  356.8  356.6  1,125.1  1,081.6
Average NBSK pulp list price in Europe ($/ADMT)(1)  932  925  867  926  852
Average pulp sales realizations ($/ADMT)(2)  709  720  682  717  673
Energy production ('000 MWh)  472.0  446.2  444.2  1,384.5  1,274.4
Energy sales ('000 MWh)  207.4  197.1  185.4  606.0  526.6
Average Spot Currency Exchange Rates:          
$ / €(3)  1.3250  1.3716  1.3252  1.3555   1.3171
$ / C$(3)  0.9184  0.9169  0.9630  0.9141   0.9772
           
(1)  Source: RISI pricing report.
(2)  Sales realizations after discounts. Incorporates the effect of pulp price variations occurring between the order and shipment dates.
(3)  Average Federal Reserve Bank of New York noon spot rate over the reporting period.

* Operating EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States ("GAAP") and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. See page 12 of the financial tables included in this press release for a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA.

President's Comments

Mr. Jimmy S.H. Lee, President and Chairman, stated: "For the third quarter of 2014, our Operating EBITDA increased by approximately 106% to $67.6 million from $32.8 million in the comparative quarter of 2013, primarily as a result of lower per unit fiber costs, higher pulp pricing and the strengthening of the U.S. dollar relative to the Canadian dollar and the Euro. Compared to the prior quarter of 2014, our Operating EBITDA increased by approximately 61% from $41.9 million, primarily as a result of less lost production from scheduled maintenance downtime at our mills and the overall strengthening of the U.S. dollar relative to the Euro and the Canadian dollar."

Mr. Lee continued: "We had ten days of scheduled maintenance downtime at our Rosenthal mill, or approximately 10,100 ADMTs, in the current quarter which adversely impacted Operating EBITDA by approximately $5.6 million, comprised of approximately $4.4 million in direct out-of-pocket expenses and the balance for reduced production. Many of our competitors that report their financial results using "IFRS" capitalize their direct costs of maintenance shutdowns. Going forward, our Stendal mill has a two-day scheduled maintenance shutdown in the fourth quarter."

Mr. Lee continued: "In the current quarter, our mills performed very well, achieving near record pulp sales due to strong demand in Europe and China and record energy sales volumes. Energy production at our mills increased by approximately 6% compared to the same period in 2013. Energy and chemical revenues increased by approximately 9% in the current quarter from the same period of 2013. We currently expect energy and chemical production and revenues to remain generally consistent in the fourth quarter of 2014 due to fewer scheduled maintenance shutdown days, partially offset by some planned work at the Celgar mill related to its lime kiln."

Mr. Lee continued: "NBSK list prices were essentially flat during the third quarter of 2014 compared to the prior quarter due to steady demand, with a modest increase in Europe. At the end of the current quarter, the NBSK list price in North America and China was approximately $1,030 and $730 per ADMT, respectively, while the list price in Europe increased to $935 per ADMT. We currently expect list prices to remain flat during the fourth quarter although some analysts continue to predict that the new South American hardwood capacity will negatively affect NBSK demand and pricing." 

Mr. Lee continued: "The NBSK pulp market remained generally under-balanced at approximately 27 days' supply at the end of the current quarter. We believe the NBSK pulp market is generally balanced when supply is at approximately 30 days. During the quarter, world producer inventories increased by two days from the end of the second quarter of 2014. We currently expect demand to be steady through the fourth quarter of 2014 and going into 2015 as new tissue machines are expected to come online in China."

Mr. Lee continued: "On average, our per unit fiber costs for our German mills in the current quarter decreased by approximately 5% from the prior quarter of 2014 due to lower chip prices resulting from sawmills running at higher rates, a strong supply of logs and lower demand from pellet producers and board manufacturers. Our per unit fiber cost for our Celgar mill remained generally flat during the third quarter of 2014, compared to the prior quarter. For the next quarter of 2014, we currently expect our overall per unit fiber costs to increase marginally."

Mr. Lee continued: "Our Stendal mill successfully amended its senior project finance credit facility and its amortizing term facility in respect of Project Blue Mill to provide it with greater flexibility going forward. In connection therewith, we contributed $20.0 million to the capital of Stendal. We also acquired all of the shareholder loans and substantially all of the shares of the minority shareholder in our Stendal mill and other rights. As a result of these transactions, we now consolidate all of the economic interest in Stendal."

Mr. Lee concluded: "In connection with our acquisition of all of the shareholder loans of the minority shareholder in our Stendal mill, during the current quarter, we recorded a non-cash gain of $31.9 million on the settlement of such debt. During the current quarter, we also recorded a non-cash gain of $31.3 million as an income tax benefit on the deferred tax assets associated with our Stendal mill."

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Total revenues for the three months ended September 30, 2014 increased by approximately 12% to $301.6 million from $269.2 million in the same period in 2013, due to higher pulp revenues and higher energy and chemical revenues.

Pulp revenues for the three months ended September 30, 2014 increased by approximately 12% to $277.0 million from $246.7 million in the comparative quarter of 2013, due to higher sales volumes and higher pulp price realizations.

Energy and chemical revenues increased by approximately 9% to $24.7 million in the third quarter of 2014 from $22.6 million in the same quarter last year, primarily because of record energy sales volumes resulting from Project Blue Mill coming online at our Stendal mill at the end of 2013.

Pulp production increased by approximately 2% to 375,742 ADMTs in the current quarter from 369,011 ADMTs in the same quarter of 2013. We had an aggregate of ten days (approximately 10,100 ADMTs) of scheduled maintenance downtime at our Rosenthal mill in the third quarter of 2014. In the fourth quarter of 2014, our Stendal mill is scheduled to have a second two-day maintenance shutdown and our Celgar mill has some planned work related to its lime kiln which may cause it to run at a lower capacity for a short period and lower planned production by approximately 4,500 ADMTs.

Pulp sales volumes increased by approximately 9% to 386,944 ADMTs in the current quarter from 356,619 ADMTs in the comparative quarter, primarily due to strong demand in Europe.

Average pulp sales realizations increased by approximately 4% to $709 per ADMT from approximately $682 per ADMT in the same quarter last year primarily due to higher pulp prices.

Costs and expenses in the third quarter of 2014 decreased by approximately 1% to $253.4 million from $255.9 million in the comparative period of 2013, primarily due to lower per unit fiber costs and the impact of a stronger U.S. dollar on our Canadian dollar and Euro denominated expenses, partially offset by the impact of higher sales volumes.

Transportation costs increased marginally to $24.3 million in the current quarter of 2014 from $22.6 million in the comparative quarter of 2013 primarily due to higher sales volumes and marginally higher freight costs at our Celgar mill resulting from limitations on rail car availability.

On average, our overall per unit fiber costs in the current quarter decreased by approximately 12% from the same period in 2013, primarily as a result of a decrease in per unit fiber costs for our German mills due to lower chip prices resulting from sawmills running at higher rates, a strong supply of logs and lower demand from pellet producers and board manufacturers. Our per unit fiber costs for our Celgar mill decreased during the third quarter of 2014 compared to the same quarter last year due to the strong supply of pulpwood and residual chips, despite increased demand for fiber from coastal mills, and the impact of a stronger U.S. dollar on our Canadian dollar denominated expenses. For the next quarter of 2014, we currently expect our overall per unit fiber costs to increase marginally due to an expected slight reduction in German chip supply and increased demand for chips from British Columbia's coastal mills.

For the third quarter of 2014, our operating income increased by approximately 262% to $48.2 million from $13.3 million in the comparative quarter of 2013, primarily due to lower per unit fiber costs, higher pulp prices and the impact of a stronger U.S. dollar on our Canadian dollar and Euro denominated expenses.

Interest expense was $17.5 million in the third quarter of 2014, compared to $17.3 million in the comparative quarter of 2013.

The noncontrolling shareholder's interest in the Stendal mill's net income in the third quarter of 2014 was $3.5 million, compared to $0.6 million in the same quarter last year.

In the third quarter of 2014, Operating EBITDA increased to $67.6 million from $32.8 million in the third quarter of 2013. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool and should not be considered in isolation or as a substitute for our results as reported under GAAP. See page 12 of the financial tables included in the press release for a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA.

We recorded a non-cash derivative gain of $3.4 million on the mark to market adjustment of our Stendal mill's interest rate derivative in the third quarter of 2014, compared to a net derivative gain of $2.6 million in the same quarter of last year.

During the current quarter, we recorded a non-cash gain of $31.9 million on the settlement of debt as a result of our acquisition of all of the shareholder loans of the former noncontrolling shareholder in Stendal which had a net book value of $47.7 million for purchase consideration of $15.8 million.

During the current quarter, we recorded a net income tax benefit of $29.2 million, compared to a net income tax expense of $1.2 million in the same quarter of 2013, primarily due to the recognition of income tax loss carry-forwards associated with our Stendal mill.

We reported record net income attributable to common shareholders of $88.3 million, or $1.38 per basic and $1.37 per diluted share, for the third quarter of 2014. In the third quarter of 2013, the net loss attributable to common shareholders was $3.0 million, or $0.05 per basic and diluted share.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Total revenues for the nine months ended September 30, 2014 increased by approximately 11% to $892.5 million from $805.7 million in the same period in 2013, due to higher pulp revenues and higher energy and chemical revenues.

Pulp revenues for the nine months ended September 30, 2014 increased by approximately 10% to $814.9 million from $737.6 million in the comparative period of 2013, due to higher pulp price realizations and higher sales volumes.

Energy and chemical revenues increased by approximately 14% to $77.5 million for the nine months ended September 30, 2014 from $68.1 million in the same period last year, primarily because of record energy sales volumes resulting from Project Blue Mill coming online at our Stendal mill at the end of 2013.

Pulp production increased by approximately 3% to 1,111,330 ADMTs in the nine months ended September 30, 2014 from 1,079,677 ADMTs in the same period of 2013. We had an aggregate of 22 days (approximately 27,800 ADMTs) of scheduled maintenance downtime at our mills in the nine months ended September 30, 2014.

Pulp sales volumes increased by approximately 4% to 1,125,054 ADMTs in the nine months ended September 30, 2014 from 1,081,564 ADMTs in the comparative period of 2013, primarily due to strong demand in Europe.

Average pulp sales realizations increased by approximately 7% to $717 per ADMT from approximately $673 per ADMT in the same period last year, primarily due to higher pulp prices.

Costs and expenses in the nine months ended September 30, 2014 increased marginally to $783.0 million from $781.0 million in the comparative period of 2013, primarily due to higher sales volumes and the impact of a weaker U.S. dollar on our Euro denominated expenses, mostly offset by lower per unit fiber costs and the impact of a stronger U.S. dollar on our Canadian dollar denominated expenses.

Transportation costs marginally increased to $68.6 million in the nine months ended September 30, 2014 from $67.8 million in the comparative period of 2013.

On average, our overall per unit fiber costs in the nine months ended September 30, 2014 decreased by approximately 4% from the same period in 2013, primarily as a result of a decrease in per unit fiber costs for our German mills due to lower chip prices resulting from sawmills running at high rates, a stronger supply of logs and lower demand from pellet producers and board manufacturers. Our per unit fiber costs for our Celgar mill decreased during the nine months ended September 30, 2014 compared to the same period last year due to strong sawmill activity in the region and the impact of a stronger U.S. dollar on our Canadian dollar denominated expenses.

In the nine months ended September 30, 2014, our operating income increased to $109.5 million from $24.7 million in the comparative period of 2013, primarily due to higher pulp price realizations, lower per unit fiber costs and higher pulp and record energy sales volumes.

Interest expense in the nine months ended September 30, 2014 marginally increased to $52.1 million from $51.8 million in the comparative period of 2013.

In the nine months ended September 30, 2014, Operating EBITDA increased to $168.5 million from $83.1 million in the same period of 2013. See page 12 of the financial tables included in the press release for a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA.

We recorded a non-cash derivative gain of $9.2 million on the mark to market adjustment of our Stendal mill's interest rate derivative, compared to a net derivative gain of $15.9 million in the same period of last year.

During the nine months ended September 30, 2014, we recorded a non-cash gain on the settlement of debt of $31.9 million as a result of our acquisition of all of the shareholder loans of the former noncontrolling shareholder in Stendal.

During the nine months ended September 30, 2014, we recorded a net income tax benefit of $22.8 million, compared to a net income tax expense of $3.2 million in the same period of 2013, primarily due to the recognition of income tax loss carry-forwards associated with our Stendal mill.

We reported net income attributable to common shareholders of $109.9 million, or $1.79 per basic and $1.78 per diluted share, for the nine months ended September 30, 2014. In the nine months ended September 30, 2013, the net loss attributable to common shareholders was $16.5 million, or $0.30 per basic and diluted share.

Liquidity and Capital Resources

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

  As at
September 30,
  2014 
As at
December 31,
  2013 
  (in thousands)
Financial Position    
Cash and cash equivalents  $ 239,923  $ 147,728
Working capital  $ 409,409  $ 306,274
Total assets  $ 1,547,916  $ 1,548,559
Long-term liabilities  $ 928,079  $ 1,034,743
Total equity  $ 475,116  $ 348,317

As at September 30, 2014, we had approximately €28.4 million and C$38.3 million available under our Rosenthal and Celgar revolving credit facilities, respectively.

On September 25, 2014, we amended and restated our Stendal credit facilities to provide the mill with greater financial flexibility. As part of the amendments and restatements, we made a capital investment of $20.0 million in Stendal on such date. In October 2014, we amended the revolving credit facility for our Celgar mill to extend its maturity date to May 2019 and reduce the applicable margin on interest rates for Canadian and U.S. dollar denominated balances by 0.25%.

Restricted Group

The following table is a summary of selected financial information for the Restricted Group (which, under the indenture for our 2017 9.5% Senior Notes, is comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills) as at the dates indicated:

  As at
September 30,
  2014 
As at
December 31,
  2013 
  (in thousands)
Financial Position    
Cash and cash equivalents  $ 137,218  $ 82,910
Working capital  $ 256,906  $ 211,749
Total assets  $ 872,428  $ 858,824
Long-term liabilities  $ 401,945  $ 394,821
Total equity  $ 410,007  $ 412,033

Earnings Release Call

In conjunction with this release, Mercer International Inc. will host a conference call, which will be simultaneously broadcast live over the Internet. Management will host the call, which is scheduled for Friday, October 31, 2014 at 10:00 AM (Eastern Daylight Time). Listeners can access the conference call live and archived through November 30, 2014, over the Internet at http://www.media-server.com/m/p/zarv37tk or through a link on the Company's home page at http://www.mercerint.com. Please allow 15 minutes prior to the call to visit the site and download and install any necessary audio software.

Mercer International Inc. is a global pulp manufacturing company. To obtain further information on the company, please visit its web site at http://www.mercerint.com.

The preceding includes forward looking statements which involve known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from forecasted results. Words such as "expects", "anticipates", "projects", "intends", "designed", "will", "believes", "estimates", "may", "could" and variations of such words and similar expressions are intended to identify such forward-looking statements. Among those factors which could cause actual results to differ materially are the following: the highly cyclical nature of our business, raw material costs, our level of indebtedness, competition, foreign exchange and interest rate fluctuations, our use of derivatives, expenditures for capital projects, environmental regulation and compliance, disruptions to our production, market conditions and other risk factors listed from time to time in our SEC reports.

-FINANCIAL TABLES FOLLOW-

MERCER INTERNATIONAL INC.
 
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
  September 30, December 31,
  2014 2013
ASSETS    
Current assets    
Cash and cash equivalents $ 239,923 $ 147,728
Receivables  139,326  135,893
Inventories  154,204  170,908
Prepaid expenses and other  10,052  10,918
Deferred income tax  10,625  6,326
Total current assets  554,130  471,773
     
Long-term assets    
Property, plant and equipment  923,993  1,038,631
Deferred note issuance costs and other  20,402  20,998
Deferred income tax  49,391  17,157
   993,786  1,076,786
Total assets $ 1,547,916 $ 1,548,559
     
LIABILITIES    
Current liabilities    
Accounts payable and other $ 111,151 $ 103,814
Pension and other post-retirement benefit obligations  1,262  1,330
Debt  32,308  60,355
Total current liabilities  144,721  165,499
     
Long-term liabilities    
Debt  815,145  919,017
Interest rate derivative liability  34,036  46,517
Pension and other post-retirement benefit obligations  32,999  35,466
Capital leases and other  21,170  19,293
Deferred income tax  24,729  14,450
   928,079  1,034,743
Total liabilities  1,072,800  1,200,242
     
EQUITY    
Shareholders' equity    
Share capital  386,338  328,549
Paid-in capital  4,221  (11,756)
Retained earnings  97,009  10,815
Accumulated other comprehensive income (loss)  (12,452)  31,470
Total shareholders' equity  475,116  359,078
Noncontrolling interest (deficit)  --  (10,761)
Total equity  475,116  348,317
Total liabilities and equity $ 1,547,916 $ 1,548,559
 
 
MERCER INTERNATIONAL INC.
 
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2014 2013 2014 2013
Revenues        
Pulp $ 276,959 $ 246,657 $ 814,947 $ 737,641
Energy and chemicals  24,651  22,561  77,540  68,062
   301,610  269,218  892,487  805,703
Costs and expenses        
Operating costs  222,831  220,160  689,600  682,507
Operating depreciation and amortization  19,314  19,394  58,784  58,111
   59,465  29,664  144,103  65,085
Selling, general and administrative expenses  11,279  12,505  34,653  36,488
Restructuring expenses  --  3,855  --  3,855
Operating income  48,186  13,304  109,450  24,742
         
Other income (expense)        
Interest expense  (17,456)  (17,254)  (52,071)  (51,784)
Gain on settlement of debt  31,851  --  31,851  --
Gain (loss) on derivative instruments  3,447  2,645  9,224  15,930
Other income (expense)  (3,408)  226  (3,484)  142
Total other income (expense)  14,434  (14,383)  (14,480)  (35,712)
Income (loss) before income taxes  62,620  (1,079)  94,970  (10,970)
Income tax benefit (provision)        
Current  (1,106)  (1,380)  (2,633)  2,664
Deferred  30,305  133  25,424  (5,871)
Net income (loss)  91,819  (2,326)  117,761  (14,177)
Less: net income attributable to noncontrolling interest  (3,482)  (640)  (7,812)  (2,365)
Net income (loss) attributable to common shareholders $ 88,337 $ (2,966)  $ 109,949 $ (16,542)
         
Net income (loss) per share attributable to common shareholders        
Basic $ 1.38 $ (0.05) $ 1.79 $ (0.30)
Diluted $ 1.37 $ (0.05) $ 1.78 $ (0.30)
 
 
MERCER INTERNATIONAL INC.
 
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2014 2013 2014 2013
Cash flows from (used in) operating activities        
Net income (loss) $ 91,819 $ (2,326) $ 117,761 $ (14,177)
Adjustments to reconcile net income (loss) to cash flows from operating activities        
Gain on settlement of debt  (31,851)  --  (31,851)  --
Unrealized loss (gain) on derivative instruments  (3,447)  (3,200)  (9,224)  (16,830)
Depreciation and amortization  19,397  19,476  59,035  58,363
Deferred income taxes  (30,305)  (133)  (25,424)  5,871
Stock compensation expense  592  821  923  1,573
Pension and other post-retirement expense, net of funding  (507)  165  (82)  602
Other  5,890  616  7,394  3,444
Changes in working capital        
Receivables  (14,439)  (870)  (17,254)  14,952
Inventories  (147)  (20,058)  5,186  (9,690)
Accounts payable and accrued expenses  19  11,973  14,199  23,831
Other  (172)  76  (2,846)  (8,449)
Net cash from (used in) operating activities  36,849  6,540  117,817  59,490
         
Cash flows from (used in) investing activities        
Purchase of property, plant and equipment  (9,418)  (9,298)  (22,135)  (38,692)
Purchase of intangible assets  (1,135)  --  (3,590)  --
Other  (418)  307  (145)  327
Net cash from (used in) investing activities  (10,971)  (8,991)  (25,870)  (38,365)
         
Cash flows from (used in) financing activities        
Repayment of debt  (14,683)  (29,994)  (45,224)  (56,414)
Proceeds from issuance of notes and borrowings of debt  --  52,250  --  74,473
Proceeds from issuance of shares  (84)  --  53,858  --
Repayment of capital lease obligations  (580)  (526)  (1,772)  (1,972)
Proceeds from sale and lease-back transactions  --  --  1,047  --
Proceeds from (repayment of) credit facilities, net  --  (16,094)  --  966
Payment of note issuance costs  (592)  (2,364)  (592)  (2,364)
Proceeds from government grants  2,028  --  6,086  5,413
Net cash from (used in) financing activities  (13,911)  3,272  13,403  20,102
         
Effect of exchange rate changes on cash and cash equivalents  (13,067)  5,865  (13,155)  2,917
         
Net increase (decrease) in cash and cash equivalents  (1,100)  6,686  92,195  44,144
Cash and cash equivalents, beginning of period  241,023  174,897  147,728  137,439
Cash and cash equivalents, end of period $ 239,923 $ 181,583 $ 239,923 $ 181,583


MERCER INTERNATIONAL INC.

RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Balance Sheets
(Unaudited)
(In thousands)

The terms of the indenture governing our 9.5% senior unsecured notes requires that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the "Restricted Group". As at and during the three and nine months ended September 30, 2014 and 2013, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.

  September 30, 2014
  Restricted Unrestricted   Consolidated
  Group Subsidiaries Eliminations Group
ASSETS        
Current assets        
Cash and cash equivalents $ 137,218 $ 102,705 $ -- $ 239,923
Receivables  73,567  65,759  --  139,326
Inventories  96,399  57,805  --  154,204
Prepaid expenses and other  6,553  3,499  --  10,052
Deferred income tax  3,645  6,980  --  10,625
Total current assets  317,382  236,748  --  554,130
         
Long-term assets        
Property, plant and equipment  380,964  543,029  --  923,993
Deferred note issuance costs and other  10,409  9,993  --  20,402
Deferred income tax  15,286  34,105  --  49,391
Due from unrestricted group  148,387  --  (148,387)  --
Total assets $ 872,428 $ 823,875 $ (148,387) $ 1,547,916
         
LIABILITIES        
Current liabilities        
Accounts payable and other $ 59,214 $ 51,937 $ -- $ 111,151
Pension and other post-retirement benefit obligations  1,262  --  --  1,262
Debt  --  32,308  --  32,308
Total current liabilities  60,476  84,245  --  144,721
         
Long-term liabilities        
Debt  335,995  479,150  --  815,145
Due to restricted group  --  148,387  (148,387)  --
Interest rate derivative liability  --  34,036  --  34,036
Pension and other post-retirement benefit obligations  32,999  --  --  32,999
Capital leases and other  8,222  12,948  --  21,170
Deferred income tax  24,729  --  --  24,729
Total liabilities  462,421  758,766  (148,387)  1,072,800
         
EQUITY        
Total shareholders' equity (deficit)  410,007  65,109  --  475,116
Total liabilities and equity  $ 872,428 $  823,875 $ (148,387) $ 1,547,916
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Balance Sheets
(Unaudited)
(In thousands)
 
  December 31, 2013
  Restricted Unrestricted   Consolidated
  Group Subsidiaries Eliminations Group
ASSETS        
Current assets        
Cash and cash equivalents $ 82,910 $ 64,818 $ -- $ 147,728
Receivables  75,987  59,906  --  135,893
Inventories  93,807  77,101  --  170,908
Prepaid expenses and other  7,742  3,176  --  10,918
Deferred income tax  3,273  3,053  --  6,326
Total current assets  263,719  208,054  --  471,773
         
Long-term assets        
Property, plant and equipment  420,373  618,258  --  1,038,631
Deferred note issuance costs and other  10,987  10,011  --  20,998
Deferred income tax  9,894  7,263  --  17,157
Due from unrestricted group  153,851  --  (153,851)  --
Total assets $ 858,824 $ 843,586 $ (153,851) $ 1,548,559
         
LIABILITIES        
Current liabilities        
Accounts payable and other $ 49,891  $ 53,923 $ -- $ 103,814
Pension and other post-retirement benefit obligations  1,330  --  --  1,330
Debt  749  59,606  --  60,355
Total current liabilities  51,970  113,529  --  165,499
         
Long-term liabilities        
Debt  336,382  582,635  --  919,017
Due to restricted group  --  153,851  (153,851)  --
Interest rate derivative liability  --  46,517  --  46,517
Pension and other post-retirement benefit obligations  35,466  --  --  35,466
Capital leases and other  8,523  10,770  --  19,293
Deferred income tax  14,450  --  --  14,450
Total liabilities  446,791  907,302  (153,851)  1,200,242
         
EQUITY        
Total shareholders' equity (deficit)  412,033  (52,955)  --  359,078
Noncontrolling interest (deficit)  --  (10,761)  --  (10,761)
Total liabilities and equity $ 858,824 $ 843,586 $ (153,851) $ 1,548,559
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Statements of Operations
(Unaudited)
(In thousands)
 
  Three Months Ended September 30, 2014
  Restricted Unrestricted   Consolidated
  Group Subsidiaries Eliminations Group
Revenues        
Pulp $ 151,050  $ 125,909  $ -- $ 276,959 
Energy and chemicals  8,119   16,532   --  24,651 
   159,169   142,441   --  301,610 
Operating costs  119,790   103,041   --  222,831 
Operating depreciation and amortization  10,507   8,807   --  19,314 
Selling, general and administrative expenses  6,748   4,531   --  11,279 
   137,045   116,379   --  253,424 
Operating income  22,124   26,062   --  48,186 
         
Other income (expense)        
Interest expense  (8,559)  (9,032)  135   (17,456)
Gain on settlement of debt  --  31,851   --  31,851 
Gain (loss) on derivative instruments  --  3,447   --  3,447 
Other income (expense)  (3,457)  184   (135)  (3,408)
Total other income (expense)  (12,016)  26,450   --  14,434 
Income (loss) before income taxes  10,108   52,512   --  62,620 
Income tax benefit (provision)  (1,136)  30,335   --  29,199 
Net income (loss)  8,972   82,847   --  91,819 
Less: net income attributable to noncontrolling interest  --  (3,482)  --  (3,482)
Net income (loss) attributable to common shareholders $ 8,972  $ 79,365  $ -- $ 88,337 
   
  Three Months Ended September 30, 2013
  Restricted Unrestricted   Consolidated
  Group Subsidiaries Eliminations Group
Revenues        
Pulp $ 140,193   $ 106,464  $ -- $ 246,657 
Energy and chemicals  7,871   14,690   --  22,561 
   148,064   121,154   --  269,218 
Operating costs  120,408   99,752   --  220,160 
Operating depreciation and amortization  10,777   8,617   --  19,394 
Selling, general and administrative expenses  7,433   5,072   --  12,505 
Restructuring expenses  3,855   --    3,855 
   142,473   113,441   --  255,914 
Operating income  5,591   7,713   --  13,304 
         
Other income (expense)        
Interest expense  (8,204)  (11,232)  2,182   (17,254)
Gain (loss) on derivative instruments  (1,400)  4,045   --  2,645 
Other income (expense)  2,371   37   (2,182)  226 
Total other income (expense)  (7,233)  (7,150)  --  (14,383)
Income (loss) before income taxes  (1,642)  563   --  (1,079)
Income tax benefit (provision)  (1,439)  192   --  (1,247)
Net income (loss)  (3,081)  755   --  (2,326)
Less: net income attributable to noncontrolling interest  --  (640)  --  (640)
Net income (loss) attributable to common shareholders $ (3,081) $ 115  $ -- $ (2,966)
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Statements of Operations
(Unaudited)
(In thousands)
 
  Nine Months Ended September 30, 2014
  Restricted
Group
Unrestricted
Subsidiaries

Eliminations
Consolidated
Group
Revenues        
Pulp $ 428,479  $ 386,468  $ -- $ 814,947 
Energy and chemicals  24,649   52,891   --  77,540 
   453,128   439,359   --  892,487 
Operating costs  353,201   336,399   --  689,600 
Operating depreciation and amortization  31,712   27,072   --  58,784 
Selling, general and administrative expenses  21,846   12,807   --  34,653 
   406,759   376,278   --  783,037 
Operating income  46,369   63,081   --  109,450 
         
Other income (expense)        
Interest expense  (25,625)  (26,861)  415   (52,071)
Gain on settlement of debt  --  31,851   --  31,851 
Gain (loss) on derivative instruments  --  9,224   --  9,224 
Other income (expense)  (3,319)  250   (415)  (3,484)
Total other income (expense)  (28,944)  14,464   --  (14,480)
Income (loss) before income taxes  17,425   77,545   --  94,970 
Income tax benefit (provision)  (6,921)  29,712   --  22,791 
Net income (loss)  10,504   107,257   --  117,761 
Less: net income attributable to noncontrolling interest  --  (7,812)  --  (7,812)
Net income (loss) attributable to common shareholders $ 10,504  $ 99,445  $ -- $ 109,949 
   
  Nine Months Ended September 30, 2013
  Restricted Unrestricted   Consolidated
  Group Subsidiaries Eliminations Group
Revenues        
Pulp $ 410,500  $ 327,141  $ -- $ 737,641 
Energy and chemicals  25,118   42,944   --  68,062 
   435,618   370,085   --  805,703 
Operating costs  374,033   308,474   --  682,507 
Operating depreciation and amortization  32,383   25,728   --  58,111 
Selling, general and administrative expenses  22,355   14,133   --  36,488 
Restructuring expenses  3,855   --  --  3,855 
   432,626   348,335   --  780,961 
Operating income  2,992   21,750   --  24,742 
         
Other income (expense)        
Interest expense  (23,634)  (34,662)  6,512   (51,784)
Gain (loss) on derivative instruments  (2,407)  18,337   --  15,930 
Other income (expense)  6,516   138   (6,512)  142 
Total other income (expense)  (19,525)  (16,187)  --  (35,712)
Income (loss) before income taxes  (16,533)  5,563   --  (10,970)
Income tax benefit (provision)  (3,576)  369   --  (3,207)
Net income (loss)  (20,109)  5,932   --  (14,177)
Less: net income attributable to noncontrolling interest  --  (2,365)  --  (2,365)
Net income (loss) attributable to common shareholders $ (20,109) $ 3,567  $ -- $ (16,542)
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
 
  Three Months Ended September 30, 2014
  Restricted Unrestricted Consolidated
  Group Subsidiaries Group
Cash flows from (used in) operating activities      
Net income (loss) $ 8,972 $ 82,847 $ 91,819
Adjustments to reconcile net income (loss) to cash flows from operating activities      
Gain on settlement of debt  --  (31,851)  (31,851)
Unrealized loss (gain) on derivative instruments  --  (3,447)  (3,447)
Depreciation and amortization  10,590  8,807  19,397
Deferred income taxes  980  (31,285)  (30,305)
Stock compensation expense  592  --  592
Pension and other post-retirement expense, net of funding  (507)  --  (507)
Other  3,400  2,490  5,890
Changes in working capital      
Receivables  (8,241)  (6,198)  (14,439)
Inventories  1,732  (1,879)  (147)
Accounts payable and accrued expenses  1,333  (1,314)  19
Other(1)  (4,034)  3,862  (172)
Net cash from (used in) operating activities  14,817  22,032  36,849
       
Cash flows from (used in) investing activities      
Purchase of property, plant and equipment  (8,450)  (968)  (9,418)
Capital contribution  (20,000)  20,000  --
Purchase of intangible assets  (688)  (447)  (1,135)
Other  (417)  (1)  (418)
Net cash from (used in) investing activities  (29,555)  18,584  (10,971)
       
Cash flows from (used in) financing activities      
Repayment of debt  --  (14,683)  (14,683)
Proceeds from issuance of shares  (84)  --  (84)
Repayment of capital lease obligations  (187)  (393)  (580)
Payment of note issuance costs  --  (592)  (592)
Proceeds from government grants  --  2,028  2,028
Net cash from (used in) financing activities  (271)  (13,640)  (13,911)
       
Effect of exchange rate changes on cash and cash equivalents  (5,191)  (7,876)  (13,067)
Net increase (decrease) in cash and cash equivalents  (20,200)  19,100  (1,100)
Cash and cash equivalents, beginning of period  157,418  83,605  241,023
Cash and cash equivalents, end of period $ 137,218 $ 102,705 $ 239,923
       
(1) Includes intercompany working capital related transactions. 
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
 
  Three Months Ended September 30, 2013
  Restricted Unrestricted Consolidated
  Group Subsidiaries Group
Cash flows from (used in) operating activities      
Net income (loss) $ (3,081) $ 755 $ (2,326)
Adjustments to reconcile net income (loss) to cash flows from operating activities      
Unrealized loss (gain) on derivative instruments  845  (4,045)  (3,200)
Depreciation and amortization  10,859  8,617  19,476
Deferred income taxes  (145)  12  (133)
Stock compensation expense  821  --  821
Pension and other post-retirement expense, net of funding  165  --  165
Other  102  514  616
Changes in working capital      
Receivables  (4,373)  3,503  (870)
Inventories  (7,037)  (13,021)  (20,058)
Accounts payable and accrued expenses  3,350  8,623  11,973
Other(1)  (3,537)  3,613  76
Net cash from (used in) operating activities  (2,031)  8,571  6,540
       
Cash flows from (used in) investing activities      
Purchase of property, plant and equipment  (2,917)  (6,381)  (9,298)
Acquisition of noncontrolling interest  (20,000)  20,000  --
Other  256  51  307
Net cash from (used in) investing activities  (22,661)  13,670  (8,991)
       
Cash flows from (used in) financing activities      
Repayment of debt  (721)  (29,273)  (29,994)
Proceeds from issuance of notes and borrowings of debt  52,250  --  52,250
Repayment of capital lease obligations  (162)  (364)  (526)
Proceeds from (repayment of) credit facilities, net  (16,094)  --  (16,094)
Payment of note issuance costs  (1,721)  (643)  (2,364)
Net cash from (used in) financing activities  33,552  (30,280)  3,272
       
Effect of exchange rate changes on cash and cash equivalents  2,371  3,494  5,865
Net increase (decrease) in cash and cash equivalents  11,231  (4,545)  6,686
Cash and cash equivalents, beginning of period  90,376  84,521  174,897
Cash and cash equivalents, end of period $ 101,607 $ 79,976 $ 181,583
       
(1) Includes intercompany working capital related transactions.
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
 
  Nine Months Ended September 30, 2014
  Restricted
Group
Unrestricted
Subsidiaries
Consolidated
Group
Cash flows from (used in) operating activities      
Net income (loss) $ 10,504 $ 107,257 $ 117,761
Adjustments to reconcile net income (loss) to cash flows from operating activities      
Gain on settlement of debt  --  (31,851)  (31,851)
Unrealized loss (gain) on derivative instruments  --  (9,224)  (9,224)
Depreciation and amortization  31,963  27,072  59,035
Deferred income taxes  5,861  (31,285)  (25,424)
Stock compensation expense  923  --  923
Pension and other post-retirement expense, net of funding  (82)  --  (82)
Other  3,983  3,411  7,394
Changes in working capital      
Receivables  (3,529)  (13,725)  (17,254)
Inventories  (8,610)  13,796  5,186
Accounts payable and accrued expenses  13,619  580  14,199
Other(1)  (10,597)  7,751  (2,846)
Net cash from (used in) operating activities  44,035  73,782  117,817
       
Cash flows from (used in) investing activities      
Purchase of property, plant and equipment  (16,981)  (5,154)  (22,135)
Capital contribution  (20,000)  20,000  --
Purchase of intangible assets  (1,891)  (1,699)  (3,590)
Other  (202)  57  (145)
Net cash from (used in) investing activities  (39,074)  13,204  (25,870)
       
Cash flows from (used in) financing activities      
Repayment of debt  (744)  (44,480)  (45,224)
Proceeds from issuance of shares  53,858  --  53,858
Repayment of capital lease obligations  (661)  (1,111)  (1,772)
Proceeds from sale and lease-back transactions  1,047  --  1,047
Payment of note issuance costs  --  (592)  (592)
Proceeds from government grants  832  5,254  6,086
Net cash from (used in) financing activities  54,332  (40,929)  13,403
       
Effect of exchange rate changes on cash and cash equivalents  (4,985)  (8,170)  (13,155)
Net increase (decrease) in cash and cash equivalents  54,308  37,887  92,195
Cash and cash equivalents, beginning of year  82,910  64,818  147,728
Cash and cash equivalents, end of year $ 137,218 $ 102,705 $ 239,923
       
(1) Includes intercompany working capital related transactions. 
 
 
MERCER INTERNATIONAL INC.
 
RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE
Combined Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
 
  Nine Months Ended September 30, 2013
  Restricted Unrestricted Consolidated
  Group Subsidiaries Group
Cash flows from (used in) operating activities      
Net income (loss) $ (20,109) $ 5,932 $ (14,177)
Adjustments to reconcile net income (loss) to cash flows from operating activities      
Unrealized loss (gain) on derivative instruments  1,507  (18,337)  (16,830)
Depreciation and amortization  32,635  25,728  58,363
Deferred income taxes  1,725  4,146  5,871
Stock compensation expense  1,573  --  1,573
Pension and other post-retirement expense, net of funding  602  --  602
Other  1,025  2,419  3,444
Changes in working capital      
Receivables  9,451  5,501  14,952
Inventories  3,958  (13,648)  (9,690)
Accounts payable and accrued expenses  14,681  9,150  23,831
Other(1)  (14,886)  6,437  (8,449)
Net cash from (used in) operating activities  32,162  27,328  59,490
       
Cash flows from (used in) investing activities      
Purchase of property, plant and equipment  (9,810)  (28,882)  (38,692)
Acquisition of noncontrolling interest  (20,000)  20,000  --
Other  273  54  327
Net cash from (used in) investing activities  (29,537)  (8,828)  (38,365)
       
Cash flows from (used in) financing activities      
Repayment of debt  (1,457)  (54,957)  (56,414)
Proceeds from issuance of notes and borrowings of debt  52,250  22,223  74,473
Repayment of capital lease obligations  (482)  (1,490)  (1,972)
Proceeds from (repayment of) credit facilities, net  966  --  966
Payment of note issuance costs  (1,721)  (643)  (2,364)
Proceeds from government grants  --  5,413  5,413
Net cash from (used in) financing activities  49,556  (29,454)  20,102
       
Effect of exchange rate changes on cash and cash equivalents  1,019  1,898  2,917
Net increase (decrease) in cash and cash equivalents  53,200  (9,056)  44,144
Cash and cash equivalents, beginning of period  48,407  89,032  137,439
Cash and cash equivalents, end of period $ 101,607 $ 79,976 $ 181,583
       
(1) Includes intercompany working capital related transactions.

MERCER INTERNATIONAL INC.

COMPUTATION OF OPERATING EBITDA
(Unaudited)
(In thousands)

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

Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), 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, nor as an alternative to net cash from operating activities as a measure of liquidity. The following tables set forth the net income (loss) attributable to common shareholders to Operating EBITDA for both the consolidated group and our Restricted Group:

  Three Months Ended
  September 30, 
Nine Months Ended
  September 30, 
    2014    2013    2014    2013 
Net income (loss) attributable to common shareholders  $ 88,337  $ (2,966)  $ 109,949  $ (16,542)
Net income attributable to noncontrolling interest   3,482  640  7,812  2,365
Income tax (benefit) provision   (29,199)  1,247   (22,791)  3,207
Interest expense   17,456  17,254  52,071   51,784
(Gain) loss on settlement of debt  (31,851)  ‑  (31,851)  ‑
(Gain) loss on derivative instruments   (3,447)  (2,645)  (9,224)  (15,930)
Other (income) expense   3,408   (226)   3,484   (142)
Operating income  48,186  13,304  109,450  24,742
Add: Depreciation and amortization   19,397   19,476   59,035   58,363
Operating EBITDA  $ 67,583  $ 32,780  $ 168,485  $ 83,105
     
  Three Months Ended
  September 30, 
Nine Months Ended
  September 30, 
    2014    2013    2014    2013 
Restricted Group        
Net income (loss)  $ 8,972  $ (3,081)  $ 10,504  $ (20,109)
Income tax provision   1,136  1,439   6,921   3,576
Interest expense   8,559  8,204   25,625   23,634
Loss on derivative instruments   ‑   1,400   ‑   2,407
Other (income) expense   3,457   (2,371)   3,319   (6,516)
Operating income   22,124  5,591   46,369   2,992
Add: Depreciation and amortization   10,590   10,859   31,963   32,635
Operating EBITDA  $ 32,714  $ 16,450  $ 78,332  $ 35,627
CONTACT: APPROVED BY: Jimmy S.H. Lee Chairman, CEO & President (604) 684-1099 David M. Gandossi Executive Vice-President, Chief Financial Officer & Secretary (604) 684-1099

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Posted In: Press Releases
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