ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of our operations for the years ended December 31, 2023 and 2022 is based upon and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report. Please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of our results of operations for 2021 and financial position as of December 31, 2021. This Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” and Item 1A. “Risk Factors”.
Results of Operations
General
We have two reportable operating segments:
•
Pulp – consists of the manufacture, sale and distribution of pulp, electricity and chemicals at our pulp mills.
•
Solid Wood – consists of the manufacture, sale and distribution of lumber, manufactured products (including CLT, glulam and finger joint lumber), wood pallets, electricity, biofuels and wood residuals at our sawmills and other facilities in Germany and our mass timber facilities in North America.
Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.
Markets for kraft pulp are global, cyclical and commodity based. Our financial performance depends on a number of variables that impact sales and production costs. Sales and production results for kraft pulp are influenced largely by the market price for kraft pulp, fiber costs and foreign currency exchange rates. Kraft pulp prices are highly cyclical and primarily determined by the balance between supply and demand. Pricing and demand are influenced by global macro-economic conditions, changes in consumption and industry capacity, the level of customer and producer inventories and fluctuations in exchange rates. The third party industry quoted average European list prices for NBSK pulp between 2014 and 2023 have fluctuated between a low of $790 per ADMT in 2016 to a high of $1,500 per ADMT in 2022. In the same period, third party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $820 per ADMT in 2016 to a high of $1,620 per ADMT in 2022.
Our pulp sales realizations are based on third party industry quoted list prices, net of customer discounts, rebates and other selling concessions. Our sales to China are closer to a net price with significantly lower or little discounts and rebates.
The market for lumber is cyclical and generally driven by macroeconomic conditions, producer inventories and fluctuations in exchange rates. As a key construction material, the pricing and demand for lumber is significantly influenced by the number of housing starts, especially in the U.S. In the U.S., third party industry quoted monthly average western spruce/pine/fir (“WSPF”) 2 x 4 #2&Btr prices between 2014 and 2023 have fluctuated between a low of $245 per Mfbm in 2015 to a high of $1,604 per Mfbm in 2021. Similarly, the demand for CLT is primarily driven by the wood construction market and increased government policies focused on a low-carbon economy.
European and U.S. lumber markets differ. In the European market, lumber is generally customized in terms of dimensions and finishing, whereas the U.S. market is driven primarily by demand from new housing starts
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and home renovation activities and dimensions and finishing are generally standardized and competition is primarily price driven.
Energy and chemical production and sales are key revenue sources for us. Further initiatives to increase our generation and sales of renewable energy, chemicals and other by-products will continue to be a key focus for us. Such further initiatives may require additional capital spending.
Energy and chemicals are by-products of our pulp and lumber production and the volumes generated and sold are primarily related to the rate of production. Prices for our energy and chemical sales are generally stable and unrelated to cyclical changes in pulp or lumber prices.
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, pulp logs, sawlogs and lumber. Wood chip, pulp log and sawlog costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber costs could affect producer profit margins if they are unable to pass along price increases to pulp, lumber, pallet and biofuel customers or purchasers of surplus energy.
Our financial performance is also impacted by changes in the dollar to euro and Canadian dollar exchange rates. Changes in currency rates affect our operating results because most of our operating costs at our German mills are incurred in euros and those at our Canadian mills are in Canadian dollars. These costs do not fluctuate with the dollar to euro or Canadian dollar exchange rates. Thus, an increase in the strength of the dollar versus the euro and the Canadian dollar decreases our operating costs and increases our operating margins and income from operations. Conversely, a weakening of the dollar against the euro and the Canadian dollar tends to increase our operating costs and decrease our operating margins and income from operations. Our energy, chemical, pallet, biofuel, wood residual and European lumber sales are made in local currencies and, as a result, decline in dollar terms when the dollar strengthens and increase when the dollar weakens.
As a corollary to changes in exchange rates between the dollar and the euro and Canadian dollar, a stronger dollar generally increases costs to our customers and results in downward pressure on pulp and lumber prices. Conversely, a weakening dollar generally supports higher pulp and lumber pricing. However, there is invariably a time lag between changes in currency exchange rates and prices. This lag can vary and is not predictable with any precision.
Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average per unit cost by spreading fixed costs over more units. Higher operating rates also permit us to increase our generation and sales of surplus renewable energy, chemicals and biofuels. Our production levels are also dependent on, among other things, the number of days of maintenance downtime at our mills.
Unexpected maintenance downtime can be particularly disruptive in our industry.
Selected 2023 Highlights
In 2023, we:
•
further grew our mass timber business with the acquisition of the Mercer Conway facility and the Mercer Okanagan facility, which increased both our production capacity and our product range to include glulam;
•
continued to ramp up operations, securing customer contracts and building up the order book of our mass timber business;
•
enhanced liquidity with the issue of $200.0 million 2028 Senior Notes and expanding availability under the German Revolving Facility by €70.1 million; and
•
completion of the Rosenthal lignin plant which has a production capacity of approximately 250 tonnes of lignin per year.
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Current Market Environment
We currently expect modestly increasing NBSK pulp prices in Europe in the first half of 2024 as a result of stronger demand due to the easing of inflationary pressures. For China and North America we currently expect prices to be generally stable in the first part of 2024, with reduced supply offset by continued weak demand. For NBHK pulp we currently expect stable prices in the first half of 2024.
In our solid wood segment, we currently expect a modest increase in U.S. lumber prices in the first half of 2024 driven by increased housing activity and low customer inventory levels. In Europe, we expect lumber prices to be relatively flat as demand remains weak due to continued high interest rates and economic uncertainty. We currently expect mass timber prices to be stable in the first half of 2024 due to continued strong demand for green alternative building products. Pallet prices are expected to be generally stable in the first half of 2024.
Summary Financial Highlights
Year Ended December 31,
(in thousands, other than percent and per share amounts)
Statement of Operations Data
Pulp segment operating income (loss) $ (48,262 ) $ 340,664
Solid wood segment operating income (loss) (87,663 ) 70,642
Corporate and other operating loss (52,849 ) (18,938 )
Pulp segment depreciation and amortization $ 114,151 $ 112,058
Solid wood segment depreciation and amortization 57,320 31,170
Corporate and other depreciation and amortization 1,031 925
Operating EBITDA margin(2) 1 % 24 %
Impairment of sandalwood business held for sale $ 33,734 $ —
Income tax recovery (provision) $ 27,767 $ (98,264 )
Net income (loss) per common share
Common shares outstanding at period end 66,525 66,167
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
See “Non-GAAP Financial Measures” for a description of Operating EBITDA and Operating EBITDA margin, their limitations and why we consider them to be useful measures. The following table provides a reconciliation of net income (loss) to operating income (loss) and Operating EBITDA for the years indicated:
Year Ended December 31,
(in thousands)
Add: Impairment of sandalwood business held for sale 33,734 —
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Selected Production, Sales and Other Data
Year Ended December 31,
Pulp Segment
Pulp production ('000 ADMTs)
Annual maintenance downtime ('000 ADMTs) 82.9 111.0
Annual maintenance downtime (days) 71 80
Pulp sales ('000 ADMTs)
Average NBSK pulp prices ($/ADMT)(2)
Average NBHK pulp prices ($/ADMT)(2)
Average pulp sales realizations ($/ADMT)(3)
Average energy sales realizations ($/MWh)(4) 107 214 (5)
Solid Wood Segment
Lumber
Average sales realizations ($/Mfbm) 435 703
Energy
Average sales realizations ($/MWh) 134 224 (5)
Manufactured products(6)
Average sales realizations ($/m3) 1,514 715
Pallets
Average sales realizations ($/unit) 11 14
Biofuels(7)
Average sales realizations ($/tonne) 281 355
Average Spot Currency Exchange Rates
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates.
(3)
Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates.
(4)
Does not include our 50% joint venture interest in the Cariboo mill, which is accounted for using the equity method.
(5)
Energy sales realizations for the year ended December 31, 2022 are net of the German energy windfall tax of $6.7 million for the pulp segment and $1.1 million for the solid wood segment.
(6)
Manufactured products primarily includes CLT, glulam and finger joint lumber.
(7)
Biofuels includes pellets and briquettes.
(8)
Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Consolidated – Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Total revenues in 2023 decreased by approximately 13% to $1,993.8 million from $2,280.9 million in 2022 primarily due to lower pulp, lumber and energy sales realizations partially offset by the inclusion of Torgau for a full year and higher sales volumes.
Costs and expenses in 2023 increased by approximately 16% to $2,182.6 million from $1,888.6 million in 2022 primarily as a result of the inclusion of Torgau for a full year, higher per unit fiber costs, a $33.7 million non-cash impairment recognized in connection with the classification of our sandalwood business as held for sale and higher sales volumes. These increases were partially offset by lower per unit energy and freight costs and the receipt of $46.4 million of insurance proceeds in 2023 relating to the 2021 turbine downtime at the Rosenthal mill and the July 2022 fire at the Stendal mill. In 2022, we received insurance proceeds of $17.3 million related to the Stendal fire.
In 2023, cost of sales depreciation and amortization increased by approximately 20% to $172.2 million from $144.1 million in 2022 primarily due to the inclusion of Torgau for a full year.
The dollar was 3% weaker against the euro in 2023 compared to 2022, which increased our euro denominated costs and expenses. In the same period, the dollar was 4% stronger against the Canadian dollar compared to 2022, which decreased our Canadian dollar denominated costs and expenses.
Selling, general and administrative expenses increased by approximately 16% to $123.2 million in 2023 from $105.8 million in 2022 primarily due to the inclusion of Torgau for a full year.
In 2023, we committed to a plan to seek the sale of our sandalwood business, which consists of sandalwood plantations and a processing and extraction plant in Western Australia. We have commenced a process to sell such business and currently anticipate it will be completed in the next 12 months. Accordingly, the assets and associated liabilities related to such business were valued at fair market value and classified as held for sale as at December 31, 2023, which resulted in our recognition of a $33.7 million impairment in 2023.
Our operating loss was $188.8 million in 2023 compared to operating income of $392.4 million in 2022. The decrease was primarily due to lower pulp, lumber and energy sales realizations, higher per unit fiber costs, and the impairment recognized in connection with the classification of our sandalwood business as held for sale, partially offset by lower per unit energy and freight costs and higher insurance proceeds received in 2023.
Interest expense in 2023 increased by approximately 23% to $88.2 million from $71.5 million in 2022 primarily as a result of higher borrowings on our revolving credit facilities, higher interest rates and the issuance of $200.0 million of senior notes in September 2023.
Other income decreased to $7.2 million in 2023 from $24.4 million in 2022. Other income in 2023 primarily consisted of interest earned on cash and in 2022 primarily consisted of foreign exchange gains on dollar denominated cash held at our operations, as the dollar strengthened in 2022.
In 2023, we had an income tax recovery of $27.8 million, or an effective tax rate of approximately 10%, as we do not recognize a tax recovery for certain entities for which we do not currently expect to realize a tax benefit. In 2022, the provision for income taxes was $98.3 million, or an effective tax rate of 28%.
In 2023, our net loss was $242.1 million, or $3.65 per share, compared to net income of $247.0 million, or $3.74 per basic share and $3.71 per diluted share in 2022.
In 2023, Operating EBITDA was $17.5 million compared to $536.5 million in 2022 primarily due to lower pulp, lumber and energy sales realizations and higher per unit fiber costs partially offset by lower per unit energy and freight costs and higher insurance proceeds received.
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Pulp Segment – Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Selected Financial Information
Year Ended December 31,
(in thousands)
Pulp segment revenues decreased by approximately 19% to $1,516.1 million in 2023 from $1,866.1 million in 2022 reflecting the overall weak pulp market and lower energy revenues.
Pulp revenues decreased by approximately 17% to $1,402.6 million in 2023 from $1,686.4 million in 2022 primarily due to lower sales realizations partially offset by modestly higher sales volumes.
Energy and chemical revenues decreased by approximately 37% to $113.5 million in 2023 from $179.7 million in 2022 primarily due to lower sales realizations partially offset by higher sales volumes.
Pulp production increased by approximately 5% to 1,965,581 ADMTs in 2023 compared to 1,878,612 ADMTs in 2022 driven by stable production at all of our mills. In 2023, our pulp mills had 132 days of downtime (approximately 152,500 ADMTs) which included a total of 71 days of annual maintenance downtime and 61 days for market curtailments at the Peace River, Cariboo and Celgar mills. In 2022, our pulp mills had 86 days of downtime (approximately 119,400 ADMTs) comprised of 80 days of annual maintenance downtime and an additional six days at our Celgar mill caused by slower than planned start up.
We estimate that annual maintenance downtime in 2023 adversely impacted our operating loss by approximately $62.0 million, comprised of approximately $45.6 million in direct out-of-pocket expenses and the balance in reduced production.
In 2024, we currently have scheduled maintenance downtime for our pulp mills of an aggregate of 48 days, or approximately 75,300 ADMTs, which will be comprised of 30 days in the second quarter and 18 days in the third quarter.
Pulp sales volumes modestly increased to 1,951,206 ADMTs in 2023 compared to 1,917,744 ADMTs in 2022.
In 2023, prices for NBSK pulp decreased from 2022, largely as a result of weaker demand. Third party industry quoted average list prices for NBSK pulp in Europe and North America were approximately $1,257 per ADMT and $1,448 per ADMT, respectively, in 2023 compared to approximately $1,427 per ADMT and $1,704 per ADMT, respectively, in 2022. Third party industry quoted average net prices for NBSK pulp in China were approximately $747 per ADMT in 2023 compared to approximately $949 per ADMT in 2022.
Third party industry quoted average list prices for NBHK pulp in North America were approximately $1,227 per ADMT in 2023 compared to approximately $1,514 per ADMT in 2022. Third party industry quoted average net prices for NBHK pulp in China were approximately $592 per ADMT in 2023 compared to approximately $794 per ADMT in 2022.
Average NBSK pulp sales realizations decreased by approximately 17% to $729 per ADMT in 2023 from $876 per ADMT in 2022 and NBHK pulp sales realizations decreased by approximately 28% to $627 per ADMT in 2023 from $869 per ADMT in 2022.
In 2023, we had a net negative impact of approximately $6.4 million on operating loss due to foreign exchange compared to 2022, primarily as a result of the negative effect of a weaker dollar on our euro denominated costs and expenses partially offset by the positive effect of a stronger dollar on our Canadian dollar denominated costs and expenses.
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In 2023, we recorded net inventory impairment charges of $58.6 million as a result of low pulp prices and high per unit fiber costs at our Canadian pulp mills.
Costs and expenses in 2023 modestly increased to $1,565.4 million from $1,525.5 million in 2022 primarily due to higher per unit fiber costs and higher pulp sales volumes partially offset by lower energy and freight costs and the receipt of $46.4 million of insurance proceeds in 2023 relating to the 2021 turbine downtime at the Rosenthal mill and the July 2022 fire at the Stendal mill. In 2022, we received insurance proceeds of $17.3 million related to the Stendal fire.
On average, in 2023, overall per unit fiber costs increased by approximately 15% from 2022 due to higher per unit fiber costs for all of our mills. Our German mills had higher per unit fiber costs as a result of strong demand from other wood consumers such as heating pellet manufacturers in response to energy shortages early in 2023 caused by the war in Ukraine. For our Canadian pulp mills, per unit fiber costs increased as a result of strong demand in the mills' fiber baskets and for our Celgar mill a decrease in the availability of wood chips because of regional sawmill curtailments. In 2024, we expect a modest decrease of per unit fiber costs due to a stable supply.
Transportation costs for our pulp segment decreased by approximately 12% to $154.9 million in 2023 from $176.2 million in 2022 driven by lower freight rates.
In 2023, depreciation and amortization modestly increased to $114.2 million from $112.1 million in 2022.
In 2023, our pulp segment had an operating loss of $48.3 million compared to operating income of $340.7 million in 2022 primarily as a result of lower pulp and energy sales realizations and higher per unit fiber costs partially offset by lower energy and freight costs and the receipt of insurance proceeds.
Solid Wood Segment – Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Selected Financial Information
Year Ended December 31,
(in thousands)
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
Manufactured products primarily includes CLT, glulam and finger joint lumber.
(3)
Biofuels includes pellets and briquettes.
In 2023, solid wood segment revenues increased by approximately 16% to $472.1 million from $408.5 million in the same period of 2022 primarily because of the inclusion of Torgau for a full year and the ramp-up of our mass timber operations partially offset by a decline in lumber and energy revenues.
In 2023, lumber revenues decreased by approximately 24% to $217.9million from $288.0 million in 2022, primarily due to lower sales realizations partially offset by higher sales volumes. In 2023, both U.S. and European realized lumber prices decreased as a result of lower demand caused by higher interest rates and an uncertain economic outlook compared to 2022. The U.S. market accounted for approximately 55% of our lumber revenues and approximately 48% of our lumber sales volumes in 2023. The majority of the balance of our lumber sales were to Europe.
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Energy and wood residuals revenues decreased by approximately 25% to $33.1 million in 2023 from $43.9 million in 2022 as a result of lower sales realizations.
In 2023, our mass timber business continued to ramp up operations and manufactured products revenues more than doubled to $58.9 million from $22.8 million in 2022.
In 2023, as a result of the inclusion of Torgau for the full year, pallet revenues and biofuel revenues increased to $121.4 million and $40.7 million, respectively, from$36.1 million and$17.7 million, respectively, in 2022.
Lumber production increased by approximately 5% to 462.3 MMfbm in 2023 from 442.2 MMfbm in 2022 as a result of the inclusion of Torgau for a full year and upgrades at the Friesau mill.
Lumber sales volumes increased by approximately 22% to 500.5 MMfbm in 2023 from 409.9 MMfbm in 2022 primarily because of higher production and the timing of sales.
Average lumber sales realizations decreased by approximately 38% to $435 per Mfbm in 2023 from $703 per Mfbm in 2022, primarily as a result of lower demand in both the U.S. and European markets. Demand was negatively impacted in 2023 by higher interest rates, inflationary pressures and an uncertain economic outlook.
In 2023, manufactured products sales realizations increased to $1,514 per m3 from $715 per m3 in 2022 as a result of higher CLT and glulam sales volumes which generate higher sales realizations relative to other manufactured products.
Fiber costs were approximately 75% of our lumber cash production costs in 2023. In 2023 per unit fiber costs for lumber were flat compared to the same period of 2022 as the availability of lower cost beetle damaged wood in Europe offset the impact of strong fiber demand in Germany.
In 2023, depreciation and amortization increased to $57.3 million from $31.2 million in 2022 primarily because of the inclusion of Torgau for a full year.
Transportation costs for our solid wood segment increased by approximately 33% to $60.5 million in 2023 from $45.6 million in 2022 primarily due to the inclusion of Torgau for a full year and higher lumber sales volumes.
In 2023, our solid wood segment had an operating loss of $87.7 million compared to operating income of $70.6 million in 2022 primarily because of lower sales realizations.
Sensitivities
The following sensitivity analysis provides only a limited point-in-time view of the pulp price, lumber price, fiber costs, foreign exchange rates and inflation discussed. The actual impact of the underlying price, rate and inflation changes may differ materially from that shown in the sensitivity analysis.
Our earnings are sensitive to, among other things, fluctuations in:
Pulp Price. Pulp is a global commodity that is priced in dollars, whose markets are highly competitive and cyclical in nature. As a result, our earnings are sensitive to pulp price changes. Based upon our 2023 sales volume and assuming all other factors remained constant, each $10.00 per tonne change in pulp third party industry quoted list prices yields a change in pulp revenues of approximately $14.7 million.
Lumber Price. Lumber markets are highly competitive and cyclical in nature. As a result, our earnings are sensitive to lumber price changes. Based upon our 2023 sales volume and assuming all other factors remain constant, each $10.00 per Mfbm change in lumber price yields a change in lumber revenues of approximately $5.0 million.
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Fiber Costs. Our main raw material is fiber in the form of wood chips, pulp logs, sawlogs and lumber. Fiber is a commodity and both prices and supply are cyclical. As a result, our operating costs are sensitive to fiber cost changes. For our pulp segment, based upon our 2023 fiber costs and assuming all other factors remained constant, each 1% change in per unit fiber cost yields a change in annual operating costs of approximately $6.3 million. For our solid wood segment, based upon our 2023 fiber costs and assuming all other factors remained constant, each 1% change in per unit fiber cost yields a change in annual operating costs of approximately $2.4 million.
Foreign Exchange. Our operating costs are in euros for our German mills and Canadian dollars for our Canadian mills. As a result, our operating costs will fluctuate with changes in the value of the dollar relative to the euro and Canadian dollar. Based on our 2023 operating costs and assuming all other factors remained constant, each $0.01 change in the value of the dollar relative to the Canadian dollar yields a total change in annual operating costs of approximately $9.7 million. Based on our 2023 operating costs and assuming all other factors remained constant, each $0.01 change in the value of the dollar relative to the euro yields a total change in annual operating costs of approximately $11.3 million.
Our energy, chemical, pallet, biofuel, wood residual and European lumber sales are made in local currencies and, as a result, will fluctuate with changes in the value of the dollar relative to the euro and Canadian dollar. Based on our 2023 energy, chemical, pallet, biofuel, wood residual and European lumber revenues and assuming all other factors remained constant, each $0.01 change in the value of the dollar relative to the euro yields a total change in revenues of approximately $3.3 million. Based on our 2023 energy and chemical revenues and assuming all other factors remained constant, each $0.01 change in the value of the dollar relative to the Canadian dollar yields a total change in energy and chemical revenues of approximately $0.2 million.
Inflation. Our key production input costs are for fiber, chemicals and energy. Other material costs in our business include labor and transportation. As a result, our operating costs are sensitive to inflation. For our pulp segment, based upon our 2023 cash production costs and assuming all other factors remained constant, each 1% change in per unit cash production cost yields a change in annual cash production costs of approximately $11.5 million. For our solid wood segment, based upon our 2023 cash production costs and assuming all other factors remained constant, each 1% change in per unit cash production cost yields a change in annual cash production costs of approximately $4.3 million.
Seasonal Influences. We are exposed to fluctuations in quarterly sales volumes and expenses due to seasonal factors. These factors are common in the pulp and lumber industries. We generally have weaker pulp demand in Europe during the summer holiday months and in China in the period relating to the lunar new year. We typically have a seasonal build-up in raw material inventories in the early winter months as the mills build up their fiber supply for the winter when there is reduced availability.
Liquidity and Capital Resources
Summary of Cash Flows
Year Ended December 31,
(in thousands)
Net cash from (used in) operating activities $ (69,005 ) $ 360,660
Effect of exchange rate changes on cash and cash equivalents 208 (8,526 )
Net increase (decrease) in cash and cash equivalents $ (40,040 ) $ 8,422
(1)
Includes results of the Torgau facility since September 30, 2022.
We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for fiber, labor, chemicals and debt service.
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Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and the payment of payables and expenses. Generally, finished goods inventories are increased prior to scheduled maintenance downtime to maintain sales volume while production is stopped. Our fiber inventories exhibit seasonal swings as we increase pulp log, sawlog and wood chip inventories to ensure adequate supply of fiber to our mills during the winter months. Changes in sales volume can affect the level of receivables and influence overall working capital levels. We believe our management practices with respect to working capital conform to common business practices.
Cash Flows from Operating Activities
Cash from (used in) operations includes:
•
cash received from customers;
•
cash paid to employees and suppliers;
•
cash paid for interest on our debt; and
•
cash paid or received for taxes.
Cash used in operating activities was $69.0 million in 2023 compared to cash provided of $360.7 million in 2022. A decrease in accounts receivable provided cash of $52.5 million in 2023 and an increase in accounts receivable used cash of $20.5 million in 2022. An increase in inventories used cash of $15.8 million, adjusting for net inventory impairments of $58.6 million, in 2023 and $63.2 million in 2022. A decrease in accounts payable and accrued expenses used cash of $98.2 million in 2023 and an increase in accounts payable and accrued expenses provided cash of $66.8 million in 2022.
Cash Flows from Investing Activities
Cash from (used in) investing activities includes:
•
acquisitions of property, plant and equipment and businesses;
•
proceeds from the sale of assets; and
•
purchases and sales of short-term investments.
Investing activities in 2023 used cash of $199.9 million primarily related to capital expenditures of $136.3 million and acquisition costs of $82.1 million for the Mercer Conway facility and Mercer Okanagan facility. In 2023, capital expenditures primarily related to costs to complete the rebuild of the wood chip conveying system at our Stendal mill and the Rosenthal lignin plant, upgrades to the wood rooms at our Canadian mills and maintenance and optimization projects at our German mills and the Mercer Spokane facility. In 2023, we received $12.2 million of property insurance proceeds for the July 2022 fire at our Stendal mill and we received $5.6 million of government grants mainly for the Peace River wood room project.
Investing activities in 2022 used cash of $424.6 million primarily related to the acquisition of Torgau for $256.6 million and capital expenditures of $178.7 million. In 2022, capital expenditures related primarily to upgrades to the wood rooms at our Canadian mills, capacity expansion projects and initial costs to rebuild the wood chip conveying systems at our Stendal mill and initial costs to construct the Rosenthal lignin plant. In 2022, we received property insurance proceeds of $8.6 million which included the final payment of $6.4 million for the Peace River recovery boiler claim and the initial payments of $2.2 million for the Stendal fire claim.
Cash Flows from Financing Activities
Cash from (used in) financing activities includes:
•
issuances and payments of debt;
•
borrowings and payments under revolving lines of credit; and
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•
payments of cash dividends and repurchases of stock.
In 2023, financing activities provided cash of $228.6 million primarily from the proceeds of the issuance of $200.0 million 2028 Senior Notes and borrowing approximately $61.3 million under our revolving credit facilities. In 2023, we paid dividends of $20.0 million and incurred aggregate debt issuance costs of $4.9 million related to the issuance of senior notes and the increase of borrowing capacity under our German Revolving Facility.
In 2022, financing activities provided cash of $80.9 million primarily from borrowings of approximately $115.3 million under our revolving credit facilities to partially finance the acquisition of Torgau. In 2022, we paid dividends of $19.8 million and incurred aggregate debt issuance costs of $3.9 million for the German Revolving Facility and Canadian Revolving Facility.
Balance Sheet Data
The following table is a summary of selected financial information for the dates indicated:
As of December 31,
(in thousands)
Sources and Uses of Funds
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand. Our principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our Senior Notes.
The following table sets out our total capital expenditures and interest expense for the periods indicated:
Year Ended December 31,
(in thousands)
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
Includes expenditures to rebuild the wood chip conveying systems at the Stendal mill which were damaged by a fire in 2022. The rebuild was financed with insurance proceeds, of which $12.2 million was received in 2023 and $2.2 million was received in 2022.
(3)
Amounts differ from interest expense which includes non-cash items. See supplemental disclosure of cash flow information from our Consolidated Statements of Cash Flows included in this report.
(4)
Interest on our 2026 Senior Notes is paid semi-annually in January and July of each year. Interest on our 2029 Senior Notes is paid semi-annually in February and August of each year. Interest on our 2028 Senior Notes is paid semi-annually in April and October of each year.
As of December 31, 2023, we had cash and cash equivalents of $314.0million and approximately $296.3million available under our revolving credit facilities providing us with aggregate liquidity of approximately $610.3million.
As of December 31, 2023, we had no material commitments to acquire assets or operating businesses.
In 2024, excluding amounts being financed through government grants, we currently expect capital expenditures to be approximately $75.0 million to $100.0 million.
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We currently consider the majority of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income tax has been provided on such earnings. However, if we were required to repatriate funds to the United States, we believe that we currently could repatriate the majority thereof without incurring any material amount of taxes as a result of our shareholder advances and U.S. tax reform. However, it is currently not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. Substantially all of our undistributed earnings are held by our foreign subsidiaries outside of the United States.
Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp and lumber 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.
Credit Facilities and Debt Covenants
We had the following principal amounts outstanding under our credit facilities and Senior Notes as of the dates indicated:
As of December 31,
(in thousands)
Rosenthal €2.6 million loan $ — $ —
(1)
In September 2022, replaced the prior €200.0 million facility for our German subsidiaries.
(2)
Issued in September 2023.
For a description of such indebtedness, see Item 1. “Business – Description of Certain Indebtedness”.
Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements.
Under the German Revolving Facility, the Obligors must not exceed a ratio of net debt to EBITDA of 3.50:1:00 in any 12 month period and maintain defined capital of not less than €500.0 million.
The Canadian Revolving Facility includes a covenant that so long as the excess amount under the facility is less than the greater of 10% of the line cap thereunder and C$14.0 million, in either case, for five consecutive days or less than the greater of 7.5% of the line cap and C$10.0 million, at any time, and which requires the borrowers to comply, on a combined basis, with a 1.00:1.00 fixed charge coverage ratio.
The German Revolving Facility is provided by a syndicate of six financial institutions and the Canadian Revolving Facility is provided by three financial institutions. To date we have not experienced any reductions in credit availability with respect to these credit facilities. However, if any of these financial institutions were to default on their commitment to fund, we could be adversely affected.
The indentures governing the Senior Notes do not contain any financial maintenance covenants and there are no scheduled principal payments until maturity.Interest on our 2026 Senior Notes is payable semi-annually
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in arrears on January 15 and July 15, at the rate of 5.50% and they mature in January 2026. Interest on our 2028 Senior Notes is payable semi-annually in arrears on April 1 and October 1, at the rate of 12.875% and they mature in October 2028. Interest on our 2029 Senior Notes is payable semi-annually in arrears on February 1 and August 1, at the rate of 5.125% and they mature in February 2029.
As of December 31, 2023, we were in full compliance with all of the covenants of our indebtedness.
Foreign Currency
Our reporting currency is the dollar. However, we hold certain assets and liabilities in euros and Canadian dollars and the majority of our expenditures are denominated in euros or Canadian dollars. Accordingly, 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 recognized in our other comprehensive income (loss) and do not affect our net earnings.
As a result of the weakening of the dollar versus the euro and Canadian dollar as of December 31, 2023, we recorded a non-cash increase of $49.5 million in the carrying value of our net assets denominated in euros and Canadian dollars, consisting primarily of our property, plant and equipment. This non-cash increase does not affect our net loss, Operating EBITDA or cash but is reflected in our other comprehensive income and as an increase to our total equity. As a result, our accumulated other comprehensive loss decreased to $126.7 million.
Based upon the exchange rate as of December 31, 2023, the dollar was approximately 4% weaker against the euro and 2% weaker against the Canadian dollar since December 31, 2022. See Item 7A. “Quantitative and Qualitative Disclosures about Market Risk”.
Credit Ratings of Senior Notes
We and our 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”. In September 2023, S&P lowered its outlook to negative from stable and downgraded its rating on our Senior Notes to B from B+. Its recovery rating decreased to “4” from “3”. Moody’s lowered its outlook to negative from stable and downgraded its rating on our Senior Notes to B2 from Ba3.
S&P and Moody’s base their assessment of the credit risk on our Senior Notes on the business and financial profile of Mercer Inc. and our restricted subsidiaries under the indentures governing the Senior Notes. As of December 31, 2023, all of our subsidiaries were restricted subsidiaries. Factors that may affect our credit rating include changes in our operating performance and liquidity. Credit rating downgrades can adversely impact, among other things, future borrowing costs and access to capital markets.
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 recording of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex.
Our significant accounting policies are disclosed in Note 1 to our audited annual consolidated financial statements included in Part IV of this Annual Report. While all of the significant accounting policies are
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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, future cash flows associated with impairment testing for goodwill and long-lived assets, depreciation and amortization, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, revenues under long-term contracts, inventory impairment, assets and liabilities classified as held for sale and the fair value of disposal groups and legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
The following accounting policies require management’s most difficult, subjective and complex judgments, and are subject to a fair degree of measurement uncertainty.
Goodwill
Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value. Application of the goodwill impairment test requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. The fair value of a reporting unit is estimated primarily through the use of a discounted cash flow model, using market participant assumptions, and requires us to make certain assumptions and estimates regarding industry economic factors and the future profitability of the reporting unit. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of the discount rate. The estimates used to calculate the fair value of a reporting unit may change from year to year based on operating results, market conditions, and other factors. Changes in these assumptions and estimates could materially affect the determination of fair value and goodwill impairment for each reporting unit.
Goodwill was assigned to the Torgau facility, the reporting unit which benefits from the synergies arising from the business combination. The annual goodwill impairment test conducted as of August 31, 2023, was based on the discounted cash flow methodology. Some of the more significant assumptions inherent in estimating fair value include the prospective cash flows which anticipates the impact of market cyclicality in the next five years and the terminal period, the terminal value growth rate which reflects modest long-term growth, in line with the outlook for inflation, and the selected discount rate based on the weighted average cost of capital which considers the risk and nature of the reporting unit’s cash flows and the rates of return market participants would expect when investing their capital in the reporting unit.
After completing our annual impairment reviews, we concluded that goodwill was not impaired. The fair value of the reporting unit exceeded its carrying value by approximately 6%. The carrying value of goodwill was approximately $35.4 million as of December 31, 2023.
As the fair value of the reporting unit tested is sensitive to market conditions, we will continue to monitor the key assumptions and other factors used in the August 31, 2023, impairment test. It is reasonably possible that changes in key assumptions such as the discount rate, long-term growth rates and forecasted cash flows could occur and as such, result in impairment charges in future periods. For example, a further weakening in the global economy may result in impairment charges in future periods and such charges may be material to our results of operations and financial condition.
Since the annual goodwill impairment test conducted on August 31, 2023, there have been no triggering events or circumstances that would, more likely than not, have reduced the fair value of the reporting unit and no interim goodwill impairment test was required.
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Long-Lived Assets
As of December 31, 2023, we had long-lived assets recorded in our Consolidated Balance Sheet of $1,462.6 million. These long-lived assets include property, plant and equipment, net and amortizable intangible assets, net. In 2023, we recorded depreciation and amortization of $172.5 million and no impairment charges. Depreciation and amortization and impairment charges are based on accounting estimates.
The calculation of depreciation and amortization of long-lived assets requires us to apply judgment in selecting the remaining useful lives of the assets. The remaining useful life of an asset must address both physical and economic considerations. The remaining economic life of a long-lived asset may be shorter than its physical life. The pulp industry has historically been characterized by considerable uncertainty in business conditions. Estimates of future economic conditions for our long-lived assets and therefore, their remaining useful economic life, require considerable judgment.
If our estimate of the remaining useful life changes, such a change is accounted for prospectively in our determination of depreciation and amortization. Actual depreciation and amortization charges for an individual asset may therefore be significantly accelerated if the outlook for its remaining useful life is shortened considerably.
The unit of accounting for impairment testing for long-lived assets is its “Asset Group”, which includes property, plant and equipment, net, amortizable intangible assets, net, and liabilities directly related to those assets. We evaluate an Asset Group for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable, such as continuing operating losses. When an indicator that the carrying value of an Asset Group may not be recoverable is triggered, we compare the carrying value of the Asset Group to its forecasted undiscounted future cash flows. If the carrying value of the Asset Group is greater than the undiscounted future cash flows an impairment charge is recorded based on the excess of the Asset Group’s carrying value over its fair value.
Impairment testing for long-lived assets requires us to apply judgment in estimating the future cash flows of the Asset Group. The significant estimates in the future cash flows include periods of operation, projections of product pricing, production levels, fiber and other production costs and maintenance spending. When performing impairment tests, we estimate the fair values of the assets using management’s best assumptions, which we believe would be consistent with the assumptions that a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated each period an impairment indicator is triggered.
Actual asset impairment losses could vary considerably from estimated impairment losses if actual results are not consistent with the assumptions and judgments used in estimating future cash flows.
Pension and Other Post-Retirement Benefit Obligations
We maintain defined benefit pension plans and an other post-retirement benefit plan for certain employees of our Peace River mill and our Celgar mill which are funded based on actuarial estimates and requirements and are non-contributory. We recognize the net funded status of the plans and we record net periodic benefit costs associated with these net obligations. As of December 31, 2023, we had pension and other post-retirement benefit obligations aggregating $96.5 million and accumulated pension plan assets with a fair value of $88.8 million. Our 2023 net periodic pension and other post-retirement benefit cost was $5.2 million. The amounts recorded for the net pension and other post-retirement obligations include various judgments and uncertainties.
The following inputs are used to determine our net obligations and our net periodic benefit costs each year and the determination of these inputs requires judgment:
•
discount rate – used to determine the net present value of our pension and other post-retirement benefit obligations and to determine the interest cost component of our net periodic pension and other post-retirement benefit costs;
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•
return on assets – used to estimate the growth in the value of invested assets that are available to satisfy pension obligations and to determine the expected return on the plan assets component of our net periodic pension costs;
•
mortality rate – used to estimate the impact of mortality on pension and other post-retirement benefit obligations;
•
rate of compensation increase – used to calculate the impact future pay increases will have on pension benefit obligations; and
•
health care cost trend rate – used to calculate the impact of future health care costs on other post-retirement benefit obligations.
For the discount rate, we use the rates available on high-quality corporate bonds with a duration that is expected to match the timing of expected pension and other post-retirement benefit obligations. High-quality corporate bonds are those with a rating of “AA” or better.
In determining the expected return on assets, we consider the historical long-term returns, expected asset mix and the active management premium.
For the mortality rate we use actuarially-determined mortality tables that are consistent with our historical mortality experience and future expectations for mortality of the employees who participate in our pension and other post-retirement benefit plans.
In determining the rate of compensation increase, we review historical compensation increases and promotions, while considering current industry conditions, the terms of collective bargaining agreements with employees and the outlook for the industry.
For the health care cost trend rate, we consider historical trends for these costs, as well as recently enacted health care legislation. We also compare our health care rate to those of our industry.
Variations in assumptions described above could have a significant effect on the pension and other post-retirement benefits, net periodic benefit cost and obligation reported in our consolidated financial statements. For example, a one-percentage point change in any one of the following assumptions would have increased (decreased) our 2023 net periodic benefit cost and our accrued benefit obligation as follows:
Net periodic benefit cost Accrued benefit obligation
1%increase 1%decrease 1%increase 1%decrease
(in thousands)
Assumptions
Return on assets $ (870 ) $ 880 $ — $ —
Deferred Taxes
As of December 31, 2023, we had $97.3 million in deferred tax liabilities and a $0.7 million deferred tax asset, resulting in a net deferred tax liability of $96.7 million. Our tax assets are net of a $78.7 million valuation allowance. Our deferred tax assets are comprised primarily of tax loss and interest carryforwards and deductible temporary differences, all of which will reduce taxable income in the future. We assess the realization of these deferred tax assets at each reporting period to determine whether it is more likely than not that the deferred tax assets will be realized. Our assessment includes a review of all available positive and negative evidence, including, but not limited to, the following:
•
the history of the tax loss carryforwards and their expiry dates;
•
future reversals of temporary differences;
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•
our historical and projected earnings; and
•
tax planning opportunities.
Significant judgment is required when evaluating the positive and negative evidence, specifically the Company’s estimates of future earnings. The weight given to negative and positive evidence is commensurate with the extent to which it can be objectively verified. Operating results during the most recent three-year period are generally given more weight than expectations of future profitability, which are inherently uncertain. A cumulative loss position during the most recent three-year period is considered significant negative evidence in assessing the realizability of deferred income tax assets that is difficult to overcome.
Once our evaluation of the evidence is complete, if we believe that it is more likely than not that some of the deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is recorded against the deferred tax assets.
If market conditions improve or tax planning opportunities arise in the future, we may reduce our valuation allowance, resulting in future tax benefits. If market conditions deteriorate in the future, we may increase our valuation allowance, resulting in future tax expenses. Any change in tax laws may change the valuation allowances in future periods.
Business Combination
We allocate the total purchase price of the assets acquired and liabilities assumed based on their estimated fair values as of the business combination date. In developing estimates of fair values for long-lived assets, including identifiable intangible assets, we utilize a variety of inputs including forecasted cash flows, discount rates, estimated replacement costs and depreciation and obsolescence factors. Determining the fair value for specifically identified intangible assets, such as contracts, involves significant judgment. We may refine our estimates and make adjustments to the assets acquired and liabilities assumed over a measurement period, not to exceed one year. Upon the conclusion of the measurement period or the final determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are charged to earnings. Subsequent actual results of the underlying business activity supporting the specifically identified intangible assets could change, requiring us to record impairment charges or accelerate the remaining useful life.
Revenues Under Long-Term Contracts
We have revenue from long-term contracts which is recognized over the contract term as the work progresses. The timing of revenue recognition involves a judgmental process of estimating costs and profit for the performance obligation. Cost of sales is recognized as incurred. The amount we report as revenues is determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. We recognize revenue as costs are incurred as this provides an objective measure of progress and thereby best depicts the extent of transfer of control to the customer. Estimating cost to complete requires us to apply judgment and is largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Factors that influence these estimates may include inflationary trends, internal and supplier performance, asset utilization, amongst others. Actual costs to complete could vary considerably from the estimated costs to complete and have a significant impact on the revenue we recognize.
Revenue and cost estimates for all significant long-term contract performance obligations are reviewed quarterly. Changes in estimated revenues, cost of sales and the related effect on operating income (loss) are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on the contract’s percentage-of-completion.
Inventories
Inventories of raw materials, finished goods and work in progress are valued at the lower of cost, using the weighted-average cost method, or net realizable value and are released from inventory on the same basis.
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Estimating net realizable value requires us to apply judgment and is based on current and expected selling prices in the ordinary course of business, less reasonably predictable costs of completion.
Assets and Liabilities Classified as Held For Sale
Assets (and disposal groups) are classified as held for sale if their carrying amount will be recovered primarily through a sale as opposed to continued use by the Company. The classification of assets (and disposal groups) as held for sale requires us to apply judgment in determining when the held for sale criteria are met, including whether a future sale is probable.
When the held for sale criteria are met, assets or disposal groups are measured at the lower of its carrying amount and fair value less cost to sell. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. The fair value of assets (and disposal groups) held for sale are estimated based on preliminary indicative offers from third parties or through the use of a discounted cash flow model. The estimates used to calculate the fair value of assets (and disposal groups) classified as held for sale may change from period over period based on operating results, market conditions, and other factors. Changes in these assumptions and estimates could materially affect the determination of fair value and if applicable, the preliminary impairment charges recognized.
Contingent Liabilities
We are subject to lawsuits, investigations and other claims related to environmental, product and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. We disclose contingent liabilities when there is a reasonable possibility that an ultimate loss may occur and we record contingent liabilities when it becomes probable that we will have to make payments and the amount of loss can be reasonably estimated.
Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including, but not limited to, the following:
•
historical experience;
•
judgments about the potential actions of third-party claimants and courts; and
•
recommendations of legal counsel.
Contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges. These exposures and proceedings can be significant and the ultimate negative outcomes could be material to our operating results or liquidity in any given quarter or year.
New Accounting Standards
See Note 1 to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks associated with fluctuations in:
•
foreign currency exchange rates;
•
prices for the products we manufacture;
•
fiber costs;
•
credit risk;
•
inflation; and
•
interest rates.
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For a discussion of our earnings sensitivities to foreign exchange rates, pulp and lumber prices, fiber costs and inflation, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Sensitivities” on page 63 hereof.
Foreign Currency Exchange Risk
We compete with producers from around the world, particularly Europe and North America, in our product lines. We sell our principal product, pulp, mainly in transactions denominated in dollars but sell certain other products including energy, chemicals, pallets, biofuels, wood residuals and European lumber in local currencies, being euros and Canadian dollars. Changes in the relative strength or weakness of the dollar versus the euro and the Canadian dollar affect our operating costs and margins. A stronger dollar lowers our operating costs but can in turn increase the cost of pulp to our customers and thereby create downward pressure on prices. On the other hand, a weaker dollar tends to increase our operating costs but tends to support higher pulp prices.
We are particularly sensitive to changes in the value of the dollar versus the euro and Canadian dollar. We expect exchange rate fluctuations to continue to impact costs and revenues, but we cannot predict the magnitude or direction of this effect for any period, and there can be no assurance of any future effects.
Furthermore, certain of our assets and liabilities are denominated in euros and Canadian dollars. A depreciation of these currencies against the dollar will decrease the fair value of such financial instrument assets and an appreciation of these currencies against the dollar will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against the dollar will increase the fair value of such financial instrument assets and a depreciation of these currencies against the dollar will decrease the fair value of financial instrument liabilities, thereby increasing our fair value. As a result, our earnings can be subject to the potentially significant effect of foreign currency translation gains or losses in respect of these euros and Canadian dollar items.
The following table provides information about our exposure to foreign currency exchange rate fluctuations for the carrying amount of financial instruments sensitive to such fluctuations as of December 31, 2023 and expected cash flows from these instruments:
Expected maturity date
(in thousands)
Financial Instruments
in euros
in Canadian dollars
Product Price Risk
Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for our principal products, being kraft pulp and lumber. In general, our products are commodities that are widely available from other producers
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and, because these products have few distinguishing qualities from producer to producer, competition is based primarily on price which is determined by supply relative to demand. The overall levels of demand for the products we manufacture, and consequently our sales and profitability, reflect fluctuations in end user demand.
Fiber Price Risk
Fiber in the form of wood chips, pulp logs, sawlogs and lumber represents our largest operating cost. Fiber is a market-priced commodity and, as such, is subject to fluctuations in prices based on supply and demand. Increases in the prices of fiber will tend to increase our operating costs and reduce our operating margins.
Inflation Risk
Our key production input costs are for fiber, chemicals and energy. Other material costs in our business include labor and transportation. As a result, our operating costs are sensitive to inflation. Increases in inflation will tend to increase our operating costs and reduce our operating margins.
Interest Rate Risk
Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate financial instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. We may seek to manage our interest rate risks through the use of interest rate derivatives.
The following table provides information about our exposure to interest rate fluctuations for the financial instruments sensitive to such fluctuations as of December 31, 2023 and expected cash flows from these instruments:
Expected maturity date
(in thousands other than percentages)
Liabilities
Long-term debt:
(1)
2026 Senior Notes bearing interest at 5.50%, principal amount $300.0 million.
(2)
2028 Senior Notes bearing interest at 12.875%, principal amount $200.0 million.
(3)
2029 Senior Notes bearing interest at 5.125%, principal amount $875.0 million.
(4)
The German Revolving Facility bearing interest by way of: Euribor plus a variable margin ranging from 1.40% to 2.35% dependent on conditions including but not limited to a prescribed leverage ratio. The facility is sustainability linked whereby the interest rate margin is subject to upward or downward adjustments of up to 0.05% per annum if the Company achieves, or fails to achieve, certain specified sustainability targets.
(5)
The Canadian Revolving Facility bearing interest by way of: (i) Canadian denominated advances, which bear interest at a designated prime rate per annum; (ii) banker’s acceptance equivalent loans, which bear interest at the applicable Canadian dollar banker’s acceptance plus 1.20% to 1.45% per annum; (iii) dollar denominated base rate advances at the greater of the federal funds rate plus 0.50%, an Adjusted Term SOFR for a one month tenor plus 1.00% and the bank’s applicable reference rate for U.S. dollar loans; and (iv) dollar SOFR advances, which bear interest at Adjusted Term SOFR plus 1.20% to 1.45% per annum.
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Credit Risk
Our credit risk is primarily attributable to cash held in bank accounts and accounts receivable. We maintain cash balances in foreign financial institutions in excess of insured limits. We limit our credit exposure on cash held in bank accounts by periodically investing cash in excess of short-term operating requirements and debt obligations in low risk government bonds, or similar debt instruments. Our credit risk associated with our sales is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of credit is received prior to shipping the product. We review new customers’ credit history before granting credit and conduct regular reviews of existing customers’ credit. Concentrations of credit risk are with customers and agents based primarily in Germany, China and the U.S.
Risk Management and Derivatives
We seek to manage these risks through internal risk management policies as well as, from time to time, through the periodic use of derivatives. We may also from time to time use derivatives to reduce or limit our exposure to interest rate and currency risks. We may also use derivatives to reduce or limit our exposure to fluctuations in pulp and lumber prices. We may 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.
The principal derivatives we have periodically previously used are interest rate derivatives, pulp price derivatives, energy derivatives and foreign exchange derivatives.
Many of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our management’s expectations of future events. However, these strategies may not be effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize is not effective, we may incur significant losses.
As of December 31, 2023 and December 31, 2022, we had no outstanding derivatives.
However, in the future, we may from time to time use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from euros or Canadian dollars to dollars as our principal product is priced in dollars. We have also converted some of our costs to dollars by issuing long-term dollar-denominated debt in the form of our Senior Notes. We may also from time to time use pulp or lumber derivatives to fix price realizations and interest rate derivatives to fix the rate of interest on indebtedness.
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.
We are exposed to modest credit related risks in the event of non-performance by counterparties to derivative contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required with respect to this Item 8, and as listed in Item 15 of this Annual Report on Form 10-K, are included in this Annual Report on Form 10-K commencing on page 84.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Mercer’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Mercer;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Mercer’s internal control over financial reporting as of December 31, 2023. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework, as issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2023.
The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their attestation report which appears in this Annual Report on Form 10-K.
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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 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Chairman, Chief Executive Officer and Directors
We are governed by a board of directors, referred to as the “Board”, each member of which is elected annually. The following sets forth information relating to our directors and executive officers.
Jimmy S.H. Lee, Executive Chairman and Director, age 66, has served as a director since May 1985, as Executive Chairman since July 2015 and as President and Chief Executive Officer from 1992 to 2015. Mr. Lee was a director of Golden Valley Mines Ltd. from 2016 to 2021. Previously, during the period when MFC Bancorp Ltd. was our affiliate, he served as a director from 1986 and President from 1988 to December 1996 when it was spun out. During Mr. Lee’s tenure with Mercer, we acquired the Rosenthal mill and converted it to the production of kraft pulp, constructed and commenced operations at the Stendal mill and acquired the Celgar mill, the Friesau mill, the Peace River mill, the Mercer Mass Timber facility and the Torgau facility. He holds a Bachelor of Science degree in Chemical Engineering from the University of British Columbia, Canada. Mr. Lee possesses particular knowledge and experience in our business as a “founder” and as our Chief Executive Officer for over 25 years. He also has broad knowledge and experience in finance and banking, credit markets, international pulp markets, derivative risk management and capital allocation.
Juan Carlos Bueno, Chief Executive Officer, President and Director, age 55, has served as Chief Executive Officer and President and as a director since May 2022. His previous roles included from 2018 to March 2022 serving as the Chairman of the Board and co-founder of Global Energy which produces novel green energy generation devices. Prior to that, from 2011 to 2017, Mr. Bueno was Executive Vice President and Divisional CEO, Biomaterials, for Stora Enso, a manufacturer of pulp, paper and other forest products. At Stora Enso he designed and led their new biomaterials division, growing sales and profitability. The business included six manufacturing sites and a team of approximately 2,000 employees. Mr. Bueno created a vision and strategy to expand into new sectors such as lignin and hemicellulose. He also has broad experience in investor relations, board interaction and other key CEO functions. Prior to that, Mr. Bueno served in executive positions including Vice President, Crop Protection, President Agar Cross, Commercial Manager, Global Financial Analyst and Business Consultant with EI DuPont de Nemours & Company in Brazil, UK, Argentina, Colombia and USA. EI Dupont de Nemours & Company merged with the Dow Chemical Company to create DowDuPont. Mr. Bueno holds, among other things, a BSc., Industrial Engineering degree and a graduate degree in Negotiation & International Relations. Mr. Bueno has extensive global industrial and product experience and a proven track record of achieving commercial and operational excellence over a 30-year career.
William D. McCartney, age 68, has served as a director since January 2003 and Lead Director since May 28, 2021. He has been the President and Chief Executive Officer of Pemcorp Management Inc., a corporate finance and management consulting firm, since its inception in 1990. From 1984 to 1990, he was a founding partner of Davidson & Company, Chartered Accountants, where he specialized in business advisory services. He has been involved with numerous capital restructuring and financing events involving several public companies and brings substantial knowledge relating to the financial accounting and auditing processes. He is a chartered professional accountant and has been a member of the Chartered Professional Accountants of Canada since 1980. He holds a Bachelor of Arts degree in Business Administration from Simon Fraser University. Mr. McCartney has extensive experience in accounting, financial and capital markets.
James Shepherd, age 71, has served as a director since June 2011. Mr. Shepherd was President and Chief Executive Officer of Canfor Corporation from 2004 to 2007 and Slocan Forest Products Ltd. from 1999 to 2004. He is also the former President of Crestbrook Forest Industries Ltd. and Finlay Forest Industries Limited and the former Chairman of the Forest Products Association of Canada. Mr. Shepherd has previously served as a director of Conifex Timber Inc., Canfor Corporation and Canfor Pulp Income Fund (now Canfor Pulp Products Inc.). Mr. Shepherd holds a degree in Mechanical Engineering from Queen’s University. Mr. Shepherd has also held several chief executive officer leadership and other senior positions in the forest industry.
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Alan Wallace, age 64, has served as a director since June 2018. Mr. Wallace is currently the Chief Executive Officer of Peloton Advisors Inc., a corporate financial advisory firm. Since 2021, Mr. Wallace has served as a director and is the chair of the board of directors of Swiss Water Decaffeinated Coffee Inc. He is based in Vancouver, British Columbia. Mr. Wallace was the Vice Chairman, Investment Banking, CIBC World Markets Inc. from 1987 to 2013 where he was also the Co-Head of its Paper and Forest Products Group from 1995 to 2013. Mr. Wallace holds a Master of Business Administration from the University of Chicago and a Bachelor of Applied Science (Mech) from the University of Toronto. Mr. Wallace has significant capital markets and mergers and acquisitions experience, including relating to debt and equity financings, corporate credit facilities and financial advisory assignments. He also has extensive forest products experience relating to financings and strategic transactions in the industry.
Linda Welty, age 68, has served as a director since June 2018. Ms. Welty is currently an independent director of Huber Engineered Materials, a global manufacturer of engineered specialty ingredients, a portfolio company of J.M. Huber Corporation and has served in that role since 2014. From 2020 to September 2022, Ms. Welty was also elected as a director of GCP Applied Technologies Inc. which is a global provider of construction products technologies. She is the President and Chief Executive Officer of Welty Strategic Consulting, LLC, an advisory firm focused on the development and execution of value creation strategies. She formerly served as chairman and a director of the Atlanta Chapter of the National Association of Corporate Directors, whose mission is to advance excellence in corporate governance. From 2010 to 2011 she served as a director and member of the special committee of Massey Energy Company. She served as an independent director of Vertellus Specialties, Inc. from 2007 to 2016. Ms. Welty was President and Chief Operating Officer of Flint Ink Corp., a global producer of printing inks for packaging and publication from 2003 to 2005. From 1998 to 2003, she served as President of the Specialty Group of H.B. Fuller Company, a global manufacturer of adhesives, sealants and coatings. She also served for over twenty years in global leadership roles for Hoechst AG and its former U.S. subsidiary, Celanese. She holds a Bachelor of Science in Chemical Engineering from the University of Kansas.
Rainer Rettig, age 64, has served as a director since February 2020. Mr. Rettig has served as Senior Vice-President of the Circular Economy Program at Covestro AG (formerly known as Bayer Material Science, a subgroup of Bayer AG), one of the world’s leading manufacturers of high-tech polymer materials. Mr. Rettig brings significant experience in sales, marketing and strategy development in the field of chemicals and plastics. He had several senior leadership roles in Germany, Japan, Hong Kong and China. He holds a Ph.D in polymer chemistry and polymer processing from the Technical University of Darmstadt in Germany.
Alice Laberge, age 67, has served as a director since February 2021. Ms. Laberge is currently a director of NutrienLtd., an agriculture products and services company, and Russel Metals Inc., a metal distribution company, and has served in such roles since 2018 and 2007, respectively. Ms. Laberge is also a director of the Canadian Public Accountability Board. She most recently retired from the board of the Royal Bank of Canada in January 2021, on which she served for over 15 years. She formerly served as President and Chief Executive Officer of Fincentric Corporation, a global provider of software solutions to financial institutions, until 2005, and was previously Chief Financial Officer and Senior Vice-President, Finance for MacMillan Bloedel Ltd. Ms. Laberge is a Fellow of the Institute of Corporate Directors, and holds an MBA from the University of British Columbia and a Bachelor of Science from the University of Alberta. Ms. Laberge brings to the Board extensive senior executive experience relevant to our operations and an understanding of the forest products business. She also brings significant corporate governance and public company board experience from a wide variety of companies. Ms. Laberge also has extensive knowledge in financial and accounting matters.
Janine North, age 63, has served as a director since February 2021. Ms. North is currently a director of Conifex Timber Inc., a forest products company, and Imperial Metals Corporation, a Canadian mining company. She is also a director of the Fraser Basin Council and formerly a director of the BC Ferry Services Corp. Ms. North retired from the Northern Development Initiative Trust in 2016 after serving 11 years as the founding Chief Executive Officer. Ms. North holds a Diploma in Management Studies from the Executive MBA Program at Simon Fraser University and a Bachelor of Science from the University of Alberta. Ms. North brings with her significant public company board experience, and in particular, with companies involved in the resource sector. In particular, she has extensive knowledge and experience relevant to the
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Company's operations in the forest products industry, including financings and strategic transactions in the industry, as well as corporate governance and talent management.
Torbjörn Lööf, age 59, has served as a director since May 2023. Mr. Lööf is currently a director of Essity AB, a leading global hygiene and health company, listed on Nasdaq Stockholm, Husqvarna Group, a Swedish manufacturer of outdoor power products listed on the Nasdaq Stockholm, and AB Blåkläder, a family-owned company within the workwear industry. He was Chief Executive Officer of Inter IKEA Holding (The Netherlands) from 2016 to 2020 and Chief Executive Officer of Inter IKEA Systems, the world-wide IKEA franchisor and owner of the IKEA concept and brand, from 2013 to 2016. From 1989 to 2013 he held a number of leading positions and roles in different areas at IKEA in Sweden and in Italy, including Managing Director, IKEA of Sweden as of 2007. His role also included different board assignments both as Chairman and member for different IKEA companies, as well as being a member of IKEA Group Management. Mr. Lööf led the acquisition and transaction of 70 companies consisting of 26,000 employees in 30 different countries within two years. He developed and launched a new IKEA direction, Three Roads Forward, which is valid until 2025 and constitutes a major strategic shift for IKEA. In addition, he developed and implemented a new strategy which resulted in a complete restructuring for IKEA with the goal to become a global leader in furniture production with world class development and innovation capabilities. Torbjörn Lööf graduated from a Technical Industry program in Sweden and completed his financial education at MCE Management Centre Europe, Brussels.
Thomas Kevin Corrick, age 68, has served as a director since May 2023. Mr. Corrick served as Chief Executive Officer for Boise Cascade, one of the largest producers of engineered wood products and plywood in North America and a leading U.S. wholesale distributor of building products, from 2015 to 2020. Mr. Corrick began his Boise Cascade career in 1980 in finance, including roles in audit, treasury, and planning, and then moved into several leadership roles with the Wood Products manufacturing division. Under his leadership as Vice President, then Senior Vice President, the engineered wood products business grew to a market leadership position and became one of the key growth and profit engines for the company. He led the acquisition of several mills to fill product and geography gaps and nearly doubled the size of the company’s existing operations. He also focused on the supply chain, and doubled the capacity of the feeder mills supporting the business. Key accomplishments as CEO include implementing a systematic, company-wide focus on mission and values, significantly expanding leadership development and succession planning activities, with a focus on diversity and inclusion, and leading an initiative to create an owner-focused capital allocation strategy and mindset across the company. During his tenure as CEO, the company substantially improved its competitive position by expanding core capacity, selling and closing non-strategic assets, and strengthening its balance sheet by refinancing its entire debt portfolio. Mr. Corrick has served on several advisory committees and boards. He currently serves as a board member for the Treasure Valley YMCA and the St. Luke’s Health System. Previously he served as a director for the Salt Lake City branch of the Federal Reserve Bank of San Francisco and the American Wood Council (AWC), where he served as chair. He received both his bachelor's and master's degrees in business administration from Texas Christian University.
Other Executive Officers
Richard Short, age 56, has served as Chief Financial Officer and Secretary since June 2023 and was previously the Vice President, Controller since February 2014 and as Controller from November 2010 to February 2014, prior to which he served as Director, Corporate Finance since joining Mercer in 2007. Previous roles include Controller, Financial Reporting from 2006 to 2007 and Director, Corporate Finance from 2004 to 2006 with Catalyst Paper Corporation and Assistant Controller at The Alderwoods Group Inc. Mr. Short holds a Bachelor of Arts in Psychology from the University of British Columbia and has been a member of the Chartered Professional Accountants of Canada since 1993.
Adolf Koppensteiner, age 62, has been Chief Operating Officer since January 1, 2018 and has served as Managing Director, Operations and Technical of the Stendal mill since October 2013. Previously, he served as Mill Manager at the Rosenthal mill since joining Mercer in 2007. In the past, Mr. Koppensteiner was Managing Director of Kvaerner Central Europe, where he was responsible for sales and service for fifteen years. His whole career has been in the pulp and paper industry, where he has held a variety of positions building up significant experience in engineering, project work, and pulp mill start-ups, as well as the development and optimization of operating processes.
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Wolfram Ridder, age 62, has served as Vice President of Business Development since 2005, prior to which he served as Managing Director at Mercer’s Stendal mill from 2001 to 2005. Mr. Ridder also served as Vice President Pulp Operations, Assistant to CEO from 1999 to 2005 and Assistant Managing Director at the Rosenthal mill from 1995 to 1998. Prior to joining Mercer, Mr. Ridder worked as a Scientist for pulping technology development at the German Federal Research Center for Wood Science and Technology in Hamburg from 1988 to 1995. Mr. Ridder has a Master of Business Administration and a Master of Wood Science and Forest Product Technology from Hamburg University.
Leonhard Nossol, age 66, has served as our Group Controller for Europe since August 2005. He was also Managing Director of Rosenthal from 1997 until March 2023. In October 2023, he was appointed Managing Director of our Celgar mill. Before joining Mercer, Mr. Nossol was Director, Finance and Administration for a German household appliance producer from 1992 to 1997. Prior to this, he was Operations Controller at Grundig AG (consumer electronics) in Nürnberg. Mr. Nossol holds a Political Science degree from Freie Universität Berlin and a degree in Business Management from the University of Applied Sciences in Berlin.
Cindy Alekson, age 50, has served as Vice President, Controller since April 2023. Before this, she held the position of Director, External Reporting since joining Mercer in November 2011. Her previous roles include management positions responsible for financial reporting for public companies across several industries, including mining, high-tech and consumer products. Ms. Alekson holds a Bachelor of Science degree from the University of British Columbia and is a member of the Chartered Professional Accountants of British Columbia.
Genevieve Stannus, age 53, has served as Vice President, Treasurer since February 2021 and as Treasurer from July 2005 to February 2021, prior to which she served as Senior Financial Analyst since joining Mercer in August 2003. Prior to her role at Mercer, Ms. Stannus held Senior Treasury Analyst positions with Catalyst Paper Corporation and Pacifica Papers Inc. Ms. Stannus has over twenty years of experience in the forest products industry. She is a member of the Chartered Professional Accountants of Canada.
Brian Merwin, age 50, has served as Senior Vice President, Mass Timber since June 2023 and was previously the Vice President, Corporate Development, since February 2019, and Vice President, Strategic Initiatives since February 2009. Mr. Merwin previously held roles within Mercer such as Director, Strategic and Business Initiatives, and Business Analyst. Mr. Merwin has a Master of Business Administration from the Richard Ivey School of Business in Ontario, Canada and a Bachelor of Commerce degree from the University of British Columbia, Canada. He has over 18 years of industry experience, including M&A, corporate development, strategy, capital projects, innovation and business integration.
Dr. Carsten Merforth, age 57, has served as Chief Operating Officer, Wood Products since August 2022, prior to which he was the Managing Director of the Friesau mill since April 2017. Dr. Merforth was previously the managing director of several high-capacity sawmills for Rettenmeier Holding AG from 2000 to 2010 and from 2013 to 2014 and Pfeifer Holz GmbH from 2010 to 2012. Dr. Merforth serves as a board member of the German Sawmill Association DeSH and is the Vice President of the Main Association of the German Wood Industry HDH. He is also the spokesperson for the Raw Wood Working Group. He holds a Master of Forestry from Georg August University and a Doctorate of Forestry Economics from Albert Ludwigs University.
Wolfgang Beck, age 50, has served as Senior Vice President, Global Product Sourcing since September 1, 2022. Mr. Beck has served in different leading functions in Mercer’s German wood business since 2005, and most recently, he was Managing Director of Mercer Holz since 2016. In the past, Mr. Beck worked for a German state forest organization and in the German financial sector at the beginning of his career. He has been Managing Director of wood2M since 2016, a Joint Venture Company of Mercer and another Pulp and Paper Manufacturer. Mr. Beck is a committee chairman or member of various wood industry associations.
Guy Arguin, age 59, has served as Chief Human Resources Officer since January 2022, prior to which he was Senior Vice President, Human Resources for the Global Resources sector of SNC-Lavalin and Senior Vice President Human Resources and Human Resources Director roles with British American Tobacco across the Middle East, Northern Europe, France and Canada. Mr. Arguin started his professional career with Domtar in Montreal. Mr. Arguin has diverse Human Resources experiences across several sectors, such as
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Engineering and Consulting Services, Oil & Gas, Mining, Consumer Products and Pulp and Paper. Mr. Arguin holds a Master’s Degree in Industrial Relations and Human Resources from the Universite du Quebec en Outaouais and a Bachelor of Arts in Industrial Relations from McGill University. He is also a Certified Human Resources Professional and a certified Executive Coach from the Academy of Executive Coaching in the U.K.
We also have experienced mill managers at all of our mills who have operated through multiple business cycles in the pulp industry.
Code of Business Conduct and Ethics and Anti-Corruption Policy
The Board has adopted a Code of Business Conduct and Ethics that applies to our directors, employees and executive officers and an Anti-Corruption Policy. The code and the policy are available on our website at www.mercerint.com/our-company/governance/. Copies of the code and the policy may also be obtained without charge upon request to Investor Relations, Mercer International Inc., Suite 1120, 700 West Pender Street, Vancouver, British Columbia, Canada V6C 1G8 (Telephone: (604) 684-1099).
The remaining information required by this Item 10 is incorporated herein by reference to the sections entitled “Proposal 1 - Election of Directors”, “Share Ownership of Certain Beneficial Owners”, “Corporate Governance and Board Matters” and “Corporate Governance and Board Matters – Delinquent Section 16(a) Insider Reports” in our proxy statement relating to our annual meeting to be held in 2024.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2024.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2024.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference to the section entitled “Corporate Governance and Board Matters – Review and Approval of Related Party Transactions” of our proxy statement relating to our annual meeting to be held in 2024.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated by reference from the section entitled “Independent Registered Public Accounting Firm – Fees of Independent Registered Public Accounting Firm” of our proxy statement relating to our annual meeting to be held in 2024.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 271) 86
Consolidated Statements of Operations 89
Consolidated Statements of Comprehensive Income (Loss) 89
Consolidated Balance Sheets 90
Consolidated Statements of Changes in Shareholders’ Equity 91
Consolidated Statements of Cash Flows 92
Notes to the Consolidated Financial Statements 93
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
Exhibits that are not filed herewith have been previously filed with the SEC and are incorporated herein by reference.
Exhibit No. Description of Exhibit
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21.1* List of Subsidiaries of Registrant.
23.1* Consent of PricewaterhouseCoopers LLP.
31.1* Section 302 Certificate of Chief Executive Officer.
31.2* Section 302 Certificate of Chief Financial Officer.
32.1* Section 906 Certificate of Chief Executive Officer.
32.2* Section 906 Certificate of Chief Financial Officer.
* Filed herewith.
† Denotes management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Mercer International Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Mercer International Inc. and its subsidiaries (together, the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill impairment assessment for the Torgau reporting unit
As described in Note 10 to the consolidated financial statements, the Company’s goodwill balance was $35.4 million as of December 31, 2023, which fully relates to Torgau. Goodwill is tested for impairment annually as of August 31, or more frequently if events or changes in circumstances indicate the existence of potential impairment loss. Management has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment assessment. Management performed a quantitative goodwill impairment test for Torgau as of August 31, 2023, which involves the comparison of the fair value of the reporting unit to its carrying value. If the estimated fair value of the reporting unit is less than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds the estimated fair value. Management estimated the fair value of the reporting unit by using a discounted cash flow model. This required management to make significant estimates and assumptions related to future estimated sales volumes, selling prices and costs, capital expenditures and the discount rate. No impairment was recorded as a result of the annual impairment test.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for Torgau is a critical audit matter are (i) the significant judgment by management when developing the estimated fair value of Torgau; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to future estimated sales volumes, selling prices and costs, capital expenditures and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These
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procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of Torgau. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow model used by management; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to future estimated sales volumes, selling prices and costs, capital expenditures and the discount rate. Evaluating management’s assumptions related to future estimated sales volumes, selling prices and costs and capital expenditures involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of Torgau; (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit, as applicable. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the discount rate.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants
Vancouver, CanadaFebruary 15, 2024
We have served as the Company’s auditor since 2007.
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share data)
For the Year Ended December 31,
Costs and expenses
Impairment of sandalwood business held for sale 33,734 — —
Other income (expenses)
Loss on early extinguishment of debt — — (30,368 )
Net income (loss) per common share
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars)
For the Year Ended December 31,
Other comprehensive income (loss)
Gain related to defined benefit pension plans, net of tax 3,811 8,399 14,721
See accompanying Notes to the Consolidated Financial Statements.
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MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data)
December 31,
ASSETS
Current assets
Assets classified as held for sale 35,125 —
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Pension and other post-retirement benefit obligations 826 755
Liabilities associated with assets held for sale 6,625 —
Pension and other post-retirement benefit obligations 12,483 12,178
Shareholders’ equity
Commitments and contingencies (Note 23)
Subsequent event (Note 16)
See accompanying Notes to the Consolidated Financial Statements.
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands of U.S. dollars)
Common shares
Shares issued on grants of restricted shares 49 68 (68 ) — — —
Shares issued on grants of performance share units 120 120 (120 ) — — —
Stock compensation expense — — 2,394 — — 2,394
Other comprehensive loss — — — — (63,218 ) (63,218 )
Shares issued on grants of restricted shares 35 49 (49 ) — — —
Shares issued on grants of performance share units 95 95 (95 ) — — —
Stock compensation expense — — 6,737 — — 6,737
Other comprehensive loss — — — — (89,169 ) (89,169 )
Shares issued on grants of restricted shares 54 35 (35 ) — — —
Shares issued on grants of performance share units 254 254 (254 ) — — —
Shares issued on grants of restricted share units 50 50 (50 ) — — —
Stock compensation expense — — 5,341 — — 5,341
See accompanying Notes to the Consolidated Financial Statements.
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
For the Year Ended December 31,
Cash flows from (used in) operating activities
Inventory impairment 58,600 — —
Impairment of sandalwood business held for sale 33,734 — —
Loss on early extinguishment of debt — — 30,368
Changes in working capital