NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 1. The Company and Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
The interim consolidated financial statements contained herein include the accounts of Mercer International Inc. (Mercer Inc.) and
all of its subsidiaries (collectively the Company). The Companys shares of common stock are quoted and listed for trading on both the NASDAQ Global Market and the Toronto Stock Exchange.
The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the SEC). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles
generally accepted for interim financial statements in the United States (GAAP). The interim consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in
the Companys latest annual report on
Form 10-K
for the fiscal year ended December 31, 2016. In the opinion of the Company, the unaudited interim consolidated financial statements contained
herein contain all adjustments necessary for a fair statement of the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.
In these interim consolidated financial statements, unless otherwise indicated, all amounts are expressed in United States dollars (U.S.
dollars or $). The symbol refers to euros and the symbol C$ refers to Canadian dollars.
Use of
Estimates
Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, pension and other post-retirement benefit
obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, the allocation of the purchase price in a business
combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
New Accounting Pronouncements
Accounting
Pronouncements Implemented
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11) which requires that inventory within the scope of this update, including inventory stated at average cost, be measured at the lower of cost and net realizable value.
This update is effective for financial statements issued for fiscal years beginning after December 15, 2016, with early adoption permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 did not impact
the Companys financial position.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee
Share-Based Payment Accounting (ASU 2016-09) which simplifies several aspects of accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, classification
on the statement of cash flows and accounting for forfeitures. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016. The adoption of ASU 2016-09 did not impact the Companys financial
position.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Accounting Pronouncements Not Yet Implemented
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue Recognition Revenue from Contracts with Customers (ASU
2014-09) that requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. In 2016 the FASB issued the following Accounting
Standards which further affect the guidance of ASU 2014-09:
|
|
|
March 2016: ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net);
|
|
|
|
April 2016: ASU 2016-10, Identifying Performance Obligations and Licensing;
|
|
|
|
May 2016: ASU 2016-12, Revenue from Contracts with Customers: Narrow Scope Improvements and Practical
Expedients; and
|
|
|
|
December 2016: ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers.
|
These standards are effective for annual reporting periods beginning on or after December 15, 2017 with
early adoption permitted at the beginning of an interim or annual reporting period beginning after December 15, 2016. Currently, the Company believes this new standard will not have a material impact on its consolidated financial statements,
however, its assessment of this standard is ongoing. The Company expects to adopt this standard as of January 1, 2018.
In February
2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02) which requires lessees to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and liability. This update is
effective for financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently assessing the impact the adoption of
ASU 2016-02 will have on its consolidated financial statements.
In October 2016, the FASB issued Accounting Standards Update 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16) which eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory until the transferred assets are sold to a third party or recovered
through use. This update is effective on a modified retrospective approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently assessing the impact the adoption of ASU
2016-16 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01,
Clarifying the Definition of a Business (ASU 2017-01) which revises the definition of a business. When substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the
asset acquired would not represent a business. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently assessing the impact the adoption of ASU 2017-01
will have on its consolidated financial statements.
In March 2017 the FASB issued Accounting Standards Update 2017-07, Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost (ASU 2017-07) which requires that an employer report the service cost component in the same line item or items as other compensation costs arising
from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from
operations. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and should be applied retrospectively to all periods presented. The Company believes this new standard will not have a
material impact on its consolidated financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 2. Acquisition
On April 12, 2017, the Company, through its wholly owned subsidiary Mercer Timber Products GmbH (MTP) acquired substantially
all of the assets of a German sawmill, and a bio-mass power plant, near Friesau, Germany (the Friesau Facility) for $61,627 cash. The acquisition of the Friesau Facility presents the Company with the opportunity to expand into the German
lumber market and grow its bio-mass energy profile.
The following summarizes the Companys preliminary allocation of the purchase
price to the fair value of the assets acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
|
|
Purchase Price
Allocation
|
Inventories
|
|
$
|
6,917
|
|
Property, plant and equipment
|
|
|
37,392
|
|
Amortizable intangible assets (a)
|
|
|
17,780
|
|
|
|
|
|
|
Total assets acquired
|
|
|
62,089
|
|
Liabilities assumed - accounts payable and other
|
|
|
462
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
61,627
|
|
|
|
|
|
|
(a) Amortizable intangible assets relate to an energy sales agreement, which has a fair value of $15,970 and
an amortization period of 11 years and enterprise resource planning software, which has a fair value of $1,810 and an amortization period of five years.
The purchase price allocation was based upon a preliminary valuation for all items and may be revised as a result of additional information
obtained regarding assets acquired and liabilities assumed, and revisions of provisional estimates of fair value, including, but not limited to, the completion of valuations related to property, plant and equipment and intangible assets. The
purchase price allocation will be finalized during the 12 month measurement period following the acquisition date.
The Friesau Facility
is a business under GAAP, accordingly the Company began consolidating the results of operations, financial position and cash flows of the Friesau Facility in the Interim Consolidated Financial Statements as of the acquisition date. The amount of the
Friesau Facilitys revenues and net loss included in the Interim Consolidated Statements of Operations for both the three and six month periods ended June 30, 2017 was $17,291 and $773, respectively. In the six month period ended
June 30, 2017, $868 of acquisition related costs were recognized in selling, general and administrative expenses in the Interim Consolidated Statement of Operations.
The following unaudited pro forma information for the three and six month periods ended June 30, 2016, represents the Companys
results of operations as if the acquisition of the Friesau Facility had occurred on January 1, 2016. This proforma information does not purport to be indicative of the results that would have occurred for the periods presented or that may be
expected in the future.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2016
|
|
Revenues
|
|
$
|
257,302
|
|
|
$
|
549,401
|
|
Net income (loss)
|
|
$
|
(2,171
|
)
|
|
$
|
8,621
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 8
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 3. Inventories
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Raw materials
|
|
$
|
50,214
|
|
|
$
|
50,056
|
|
Finished goods
|
|
|
33,510
|
|
|
|
33,510
|
|
Spare parts and other
|
|
|
61,340
|
|
|
|
49,885
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,064
|
|
|
$
|
133,451
|
|
|
|
|
|
|
|
|
|
|
Note 4. Accounts Payable and Other
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Trade payables
|
|
$
|
45,327
|
|
|
$
|
28,815
|
|
Accrued expenses
|
|
|
68,109
|
|
|
|
39,903
|
|
Interest payable
|
|
|
9,417
|
|
|
|
3,916
|
|
Interest rate derivative liability
|
|
|
3,007
|
|
|
|
6,522
|
|
Dividends payable
|
|
|
7,477
|
|
|
|
7,440
|
|
Other
|
|
|
8,269
|
|
|
|
5,537
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,606
|
|
|
$
|
92,133
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 9
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 5. Debt
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
2022 Senior Notes, unsecured, $400,000 face value (a)
|
|
$
|
394,012
|
|
|
$
|
393,460
|
|
2024 Senior Notes, unsecured, $250,000 face value (a)
|
|
|
245,020
|
|
|
|
|
|
2019 Senior Notes (a)
|
|
|
|
|
|
|
224,085
|
|
Revolving credit facilities
|
|
|
|
|
|
|
|
|
75.0 million (b)
|
|
|
|
|
|
|
|
|
C$40.0 million (c)
|
|
|
|
|
|
|
|
|
70.0 million (d)
|
|
|
28,530
|
|
|
|
|
|
5.0 million (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
667,562
|
|
|
$
|
617,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2017, the maturities of the principal portion of debt are as follows:
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
$
|
|
|
2018
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
678,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678,530
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 10
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Certain of the Companys debt instruments were issued under agreements which, among
other things, may limit its ability and the ability of its subsidiaries to make certain payments, including dividends. These limitations are subject to specific exceptions. As at June 30, 2017, the Company was in compliance with the terms of
its debt agreements.
(a)
|
On February 3, 2017, the Company issued $225,000 in aggregate principal amount of 6.50% senior notes
which mature on February 1, 2024 (2024 Senior Notes). The 2024 Senior Notes were issued at a price of 100% of their principal amount. The net proceeds of the offering were $220,240, after deducting the underwriters discount
and offering expenses. The net proceeds, together with cash on hand, were used to purchase $227,000 of remaining aggregate principal amount of outstanding 2019 Senior Notes (herein defined below). In connection with this purchase the Company
recorded a loss on settlement of debt of $10,696 recorded in the Interim Consolidated Statement of Operations.
|
On March 16, 2017, the Company issued an additional $25,000 in aggregate principal amount of its 2024 Senior Notes. The
additional notes were priced at 100% plus accrued interest from February 3, 2017. The net proceeds from the offering were $24,471, net of the underwriters discounts, offering expenses and accrued interest. The net proceeds, together with
cash on hand, were used to finance the Companys acquisition of the Friesau Facility and for general working capital purposes.
On November 26, 2014, the Company issued $650,000 of senior notes consisting of $250,000 in aggregate principal amount of
7.00% senior notes which were to mature on December 1, 2019 (2019 Senior Notes) and $400,000 in aggregate principal amount of 7.75% senior notes which mature on December 1, 2022 (2022 Senior Notes). The 2019 Senior
Notes and 2022 Senior Notes were issued at a price of 100% of their principal amount. Upon their issuance the 2019 Senior Notes and 2022 Senior Notes were recorded at $635,949 which included debt issuance costs of $14,051. These costs were
proportionally allocated to the 2019 Senior Notes and the 2022 Senior Notes.
In March 2016, the Company purchased $23,000
in aggregate principal amount of its 2019 Senior Notes. In connection with this purchase the Company recorded a loss on settlement of debt of $454 in the Interim Consolidated Statement of Operations.
The 2022 Senior Notes and 2024 Senior Notes are general unsecured senior obligations of the Company. They rank equal in right
of payment with all existing and future unsecured senior indebtedness of the Company and are senior in right of payment to any current or future subordinated indebtedness of the Company. They are effectively junior in right of payment to all
existing and future secured indebtedness, to the extent of the assets securing such indebtedness, and all indebtedness and liabilities of the Companys subsidiaries.
The Company may redeem all or a part of the 2022 Senior Notes and 2024 Senior Notes, upon not less than 30 days or more
than 60 days notice, at the redemption prices (expressed as percentages of principal amount) discussed below, plus accrued and unpaid interest to (but not including) the applicable redemption date. The 2022 Senior Notes redemption prices are
equal to 105.813% for the twelve month period beginning on December 1, 2017, 103.875% for the twelve month period beginning on December 1, 2018, 101.938% for the twelve month period beginning on December 1, 2019, and 100.000%
beginning on December 1, 2020 and at any time thereafter. The 2024 Senior Notes redemption prices are equal to 103.250% for the twelve month period beginning on February 1, 2020, 101.625% for the twelve month period beginning on
February 1, 2021, and 100.000% beginning on February 1, 2022 and at any time thereafter.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
(b)
|
A 75.0 million revolving credit facility at the Stendal mill that matures in October 2019.
Borrowings under the facility are collateralized by the mills inventory and accounts receivable and bear interest at Euribor plus 3.50%. As at June 30, 2017, 75.0 million ($85,590) was available.
|
(c)
|
A C$40.0 million revolving credit facility at the Celgar mill that matures in May 2019. Borrowings under the
facility are collateralized by the mills inventory and accounts receivable and are restricted by a borrowing base calculated on the mills inventory and accounts receivable. Canadian dollar denominated amounts bear interest at bankers
acceptance plus 1.50% or Canadian prime. U.S. dollar denominated amounts bear interest at LIBOR plus 1.50% or U.S. base. As at June 30, 2017, approximately C$1.7 million ($1,309) was supporting letters of credit and approximately C$38.3 million
($29,515) was available.
|
(d)
|
In April 2017, in connection with the acquisition of the Friesau Facility, the Company replaced the
25.0 million revolving credit facility with a new 70.0 million joint revolving credit facility that matures in April 2022. The Rosenthal mill has full access to the available amount under the facility and MTP has access to a
maximum of 45.0 million. Borrowings under the facility are collateralized by the borrowers inventory and accounts receivable and bear interest at Euribor plus 2.95%. As at June 30, 2017, approximately 25.0 million ($28,530) of
this facility was drawn and accruing interest at a rate of 2.95% and approximately 3.1 million ($3,493) of this facility was supporting bank guarantees leaving approximately 41.9 million ($47,861) available.
|
(e)
|
A 5.0 million revolving credit facility at the Rosenthal mill that matures in December 2018.
Borrowings under this facility bear interest at the rate of the three-month Euribor plus 2.50% and are secured by certain land at the Rosenthal mill. As at June 30, 2017 approximately 3.3 million ($3,780) of this facility was
supporting bank guarantees leaving approximately 1.7 million ($1,926) available.
|
FORM 10-Q
QUARTERLY REPORT - PAGE 12
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 6. Pension and Other Post-Retirement Benefit Obligations
Defined Benefit Plans
Included in
pension and other post-retirement benefit obligations are amounts related to the Companys Celgar and Rosenthal mills. The largest component of these obligations is with respect to the Celgar mill which maintains a defined benefit pension plan
and other post-retirement benefit plans for certain employees (the Celgar Defined Benefit Plans).
Pension benefits are based
on employees earnings and years of service. The Celgar Defined Benefit Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements.
The components of the net benefit costs relating to the Celgar Defined Benefit Plans for the three and six month periods ended June 30,
2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
Service cost
|
|
$
|
23
|
|
|
$
|
141
|
|
|
$
|
23
|
|
|
$
|
124
|
|
Interest cost
|
|
|
324
|
|
|
|
229
|
|
|
|
236
|
|
|
|
220
|
|
Expected return on plan assets
|
|
|
(486
|
)
|
|
|
|
|
|
|
(494
|
)
|
|
|
|
|
Amortization of unrecognized items
|
|
|
270
|
|
|
|
39
|
|
|
|
333
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
131
|
|
|
$
|
409
|
|
|
$
|
98
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
|
Pension
|
|
Other Post-
Retirement
Benefits
|
Service cost
|
|
$
|
46
|
|
|
$
|
284
|
|
|
$
|
45
|
|
|
$
|
241
|
|
Interest cost
|
|
|
652
|
|
|
|
461
|
|
|
|
497
|
|
|
|
471
|
|
Expected return on plan assets
|
|
|
(979
|
)
|
|
|
|
|
|
|
(959
|
)
|
|
|
|
|
Amortization of unrecognized items
|
|
|
527
|
|
|
|
75
|
|
|
|
667
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
$
|
246
|
|
|
$
|
820
|
|
|
$
|
250
|
|
|
$
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Contribution Plan
Effective December 31, 2008, the Celgar Defined Benefit Plans were closed to new members. In addition, the defined benefit service
accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the three and six month periods ended June 30,
2017, the Company made contributions of $192 and $459, respectively (2016 $146 and $309), to this plan.
Multiemployer Plan
The Company participates in a multiemployer plan for the hourly-paid employees at the Celgar mill. The contributions to the plan are
determined based on a percentage of pensionable earnings pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three and six month periods
ended June 30, 2017, the Company made contributions of $568 and $1,046, respectively (2016 $407 and $783), to this plan.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 7. Income Taxes
The income tax provision attributable to income before provision for income taxes in the Interim Consolidated Statement of Operations differs
from the amounts computed by applying the U.S. Federal statutory income tax rate of 35% for the three and six month periods ended June 30, 2017 and 2016 as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
U.S. Federal statutory rate
|
|
|
35%
|
|
|
|
35%
|
|
|
|
35%
|
|
|
|
35%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal statutory rate on income before income taxes
|
|
$
|
(1,988
|
)
|
|
$
|
(1,271
|
)
|
|
$
|
(8,010
|
)
|
|
$
|
(6,510
|
)
|
Tax differential on foreign income
|
|
|
550
|
|
|
|
149
|
|
|
|
2,967
|
|
|
|
1,634
|
|
Effect of foreign earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,500
|
)
|
Change in undistributed earnings
|
|
|
(2,983
|
)
|
|
|
|
|
|
|
(5,465
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(5,200
|
)
|
|
|
(10,005
|
)
|
|
|
(9,354
|
)
|
|
|
(11,418
|
)
|
Tax benefit of partnership structure
|
|
|
1,230
|
|
|
|
1,364
|
|
|
|
2,446
|
|
|
|
2,563
|
|
Non-taxable foreign subsidies
|
|
|
550
|
|
|
|
545
|
|
|
|
1,109
|
|
|
|
1,118
|
|
True-up of prior year taxes
|
|
|
(490
|
)
|
|
|
558
|
|
|
|
(110
|
)
|
|
|
(60
|
)
|
Foreign exchange on valuation allowance
|
|
|
926
|
|
|
|
63
|
|
|
|
1,163
|
|
|
|
1,676
|
|
Foreign exchange on settlement of debt
|
|
|
|
|
|
|
658
|
|
|
|
550
|
|
|
|
870
|
|
Other
|
|
|
(379
|
)
|
|
|
66
|
|
|
|
(561
|
)
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,784
|
)
|
|
$
|
(7,873
|
)
|
|
$
|
(15,265
|
)
|
|
$
|
(14,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax provision
|
|
$
|
(3,588
|
)
|
|
$
|
(3,372
|
)
|
|
$
|
(6,860
|
)
|
|
$
|
(5,125
|
)
|
Deferred income tax provision
|
|
|
(4,196
|
)
|
|
|
(4,501
|
)
|
|
|
(8,405
|
)
|
|
|
(8,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,784
|
)
|
|
$
|
(7,873
|
)
|
|
$
|
(15,265
|
)
|
|
$
|
(14,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 14
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 8. Net Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2,104)
|
|
|
$
|
(4,241)
|
|
|
$
|
7,622
|
|
|
$
|
4,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.03)
|
|
|
$
|
(0.07)
|
|
|
$
|
0.12
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
|
64,945,675
|
|
|
|
64,628,160
|
|
|
|
64,857,300
|
|
|
|
64,606,572
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Share Units (PSUs)
|
|
|
|
|
|
|
|
|
|
|
438,204
|
|
|
|
348,339
|
|
Restricted shares
|
|
|
|
|
|
|
|
|
|
|
22,539
|
|
|
|
28,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
64,945,675
|
|
|
|
64,628,160
|
|
|
|
65,318,044
|
|
|
|
64,983,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the three and six month periods ended June 30, 2017, the basic weighted average number of common
shares outstanding excludes 43,635 restricted shares which have been issued, but have not vested as at June 30, 2017 (2016 38,000 restricted shares).
|
The calculation of diluted net income (loss) per common share does not assume the exercise of any instruments that would have an anti-dilutive
effect on net income (loss) per common share. The following table summarizes the instruments excluded from the calculation of net income (loss) per common share because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
PSUs
|
|
|
1,953,308
|
|
|
|
2,099,540
|
|
|
|
|
|
|
|
|
|
Restricted shares
|
|
|
43,635
|
|
|
|
38,000
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 15
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 9. Shareholders Equity
Dividends
During the six month period
ended June 30, 2017, the Companys Board of Directors declared the following quarterly dividends:
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Dividend Per
Common Share
|
|
Amount
|
February 9, 2017
|
|
$
|
0.115
|
|
|
$
|
7,472
|
|
April 27, 2017
|
|
|
0.115
|
|
|
|
7,477
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.230
|
|
|
$
|
14,949
|
|
|
|
|
|
|
|
|
|
|
Dividends are paid in the quarter subsequent to the quarter in which they were declared.
In July 2017, the Companys Board of Directors declared a quarterly dividend of $0.115 per common share. Payment of the dividend will be
made on October 4, 2017 to all shareholders of record on September 27, 2017. Future dividends are subject to approval by the Board of Directors and may be adjusted as business and industry conditions warrant.
Stock Based Compensation
In June 2010,
the Company adopted a stock incentive plan which provides for options, restricted stock rights, restricted shares, performance shares, PSUs and stock appreciation rights to be awarded to employees, consultants and non-employee directors. During the
six months ended June 30, 2017, there were no issued or outstanding options, restricted stock rights, performance shares or stock appreciation rights. In May 2017, the shareholders of the Company approved an additional 2.3 million common
shares be available for grant pursuant to the 2010 Plan. As at June 30, 2017, after factoring in all allocated shares, there remain approximately 3.1 million common shares available for grant.
PSUs
PSUs comprise rights to receive
common shares at a future date that are contingent on the Company and the grantee achieving certain performance objectives. The performance objective period is generally three years. For the three and six month periods ended June 30, 2017, the
Company recognized an expense of $804 and $555, respectively related to PSUs (2016 - $649 and $1,386).
The following table summarizes PSU activity
during the period:
|
|
|
|
|
|
|
Number of PSUs
|
Outstanding as at January 1, 2017
|
|
|
2,068,174
|
|
Granted
|
|
|
542,788
|
|
Vested and issued
|
|
|
(279,515
|
)
|
Forfeited
|
|
|
(378,139
|
)
|
|
|
|
|
|
Outstanding as at June 30, 2017
|
|
|
1,953,308
|
|
|
|
|
|
|
Restricted Shares
Restricted shares generally vest at the end of one year. For the three and six month periods ended June 30, 2017, the Company recognized
an expense of $108 and $196, respectively related to restricted shares (2016 $115 and $269). As at June 30, 2017, the unrecognized compensation cost related to restricted shares was approximately $472 which will be amortized over the
remaining vesting periods.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
The following table summarizes restricted share activity during the period:
|
|
|
|
|
|
|
Number of
Restricted Shares
|
Outstanding at January 1, 2017
|
|
|
38,000
|
|
Granted
|
|
|
43,635
|
|
Vested
|
|
|
(38,000
|
)
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
43,635
|
|
|
|
|
|
|
Settlement of Short Swing Profit Claim
In March 2017, the Company and a shareholder entered into a settlement agreement pursuant to which the shareholder paid $3,000 (net $2,450
after costs) to the Company to settle a claim by the Company for short swing profits under Section 16(b) in the Exchange Act. The net settlement was classified as additional paid-in-capital.
Retained Earnings
The following table summarizes the
changes to retained earnings during the period:
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
Retained earnings at January 1, 2017
|
|
$
|
166,068
|
|
Net income
|
|
|
7,622
|
|
Cash dividends declared
|
|
|
(14,949
|
)
|
|
|
|
|
|
Retained earnings at June 30, 2017
|
|
$
|
158,741
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
|
Defined Benefit
Pension and
Other Post-
Retirement
Benefit Items
|
|
Unrealized
Gains / Losses
on Marketable
Securities
|
|
Total
|
Balance as at January 1, 2017
|
|
$
|
(170,592
|
)
|
|
$
|
(14,663
|
)
|
|
$
|
(14
|
)
|
|
$
|
(185,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
69,640
|
|
|
|
|
|
|
|
5
|
|
|
|
69,645
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of taxes
|
|
|
69,640
|
|
|
|
602
|
|
|
|
5
|
|
|
|
70,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at June 30, 2017
|
|
$
|
(100,952
|
)
|
|
$
|
(14,061
|
)
|
|
$
|
(9
|
)
|
|
$
|
(115,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 17
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 10. Segment Disclosures
The Company is managed based on the primary products it manufactures: pulp and wood products. Accordingly, the Companys three pulp mills
are aggregated into the pulp business segment, and the Friesau Facility is a separate reportable business segment, wood products.
None of
the income or loss items following operating income in the Companys Interim Consolidated Statement of Operations are allocated to the segments, since those items are reviewed separately by management.
Revenues between segments are accounted for at prices that approximate fair value. These include revenues from the sale of residual fiber from
the wood products segment to the pulp segment for use in the pulp production process.
For the three and six month periods ended
June 30, 2016 there was only one reportable business segment, pulp, as the Friesau Facility was acquired on April 12, 2017. The following table shows information by reportable business segments for the three and six month periods ended
June 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
|
Pulp
|
|
Wood
Products
|
|
Corporate
and Other
|
|
Elimination
Adjustment
|
|
Consolidated
|
Revenues from external customers
|
|
$
|
265,886
|
|
|
$
|
17,291
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
283,177
|
|
Revenues from other segments
|
|
$
|
|
|
|
$
|
2,986
|
|
|
$
|
|
|
|
$
|
(2,986
|
)
|
|
$
|
|
|
Operating income (loss)
|
|
$
|
20,693
|
|
|
$
|
81
|
|
|
$
|
(2,287
|
)
|
|
$
|
|
|
|
$
|
18,487
|
|
Operating depreciation and amortization
|
|
$
|
19,387
|
|
|
$
|
1,134
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,521
|
|
Purchase of property, plant and equipment
|
|
$
|
17,896
|
|
|
$
|
1,845
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
19,743
|
|
Six months ended June 30, 2017
|
|
Pulp
|
|
Wood
Products
|
|
Corporate
and Other
|
|
Elimination
Adjustment
|
|
Consolidated
|
Revenues from external customers
|
|
$
|
508,670
|
|
|
$
|
17,291
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
525,961
|
|
Revenues from other segments
|
|
$
|
|
|
|
$
|
2,986
|
|
|
$
|
|
|
|
$
|
(2,986
|
)
|
|
$
|
|
|
Operating income (loss)
|
|
$
|
62,693
|
|
|
$
|
81
|
|
|
$
|
(3,301
|
)
|
|
$
|
|
|
|
$
|
59,473
|
|
Operating depreciation and amortization
|
|
$
|
38,503
|
|
|
$
|
1,134
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39,637
|
|
Purchase of property, plant and equipment
|
|
$
|
26,060
|
|
|
$
|
1,845
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
27,907
|
|
Total assets
|
|
$
|
1,186,412
|
|
|
$
|
105,265
|
|
|
$
|
36,705
|
|
|
$
|
|
|
|
$
|
1,328,382
|
|
For the three and six month periods ended June 30, 2016 the Company had a corporate and other operating
loss of $2,017 and $3,790, respectively.
The pulp segment includes revenues from the sale of pulp and energy and chemical by-products.
The wood products segment includes revenues from the sale of lumber and energy and other wood residual by-products.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
The Companys revenues from external customers by product are as follows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Pulp
|
|
$
|
244,684
|
|
|
$
|
198,055
|
|
|
$
|
465,496
|
|
|
$
|
428,684
|
|
Lumber
|
|
|
13,593
|
|
|
|
|
|
|
|
13,593
|
|
|
|
|
|
Other wood residuals
|
|
|
1,053
|
|
|
|
|
|
|
|
1,053
|
|
|
|
|
|
Energy and chemical
|
|
|
23,847
|
|
|
|
20,090
|
|
|
|
45,819
|
|
|
|
43,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
283,177
|
|
|
$
|
218,145
|
|
|
$
|
525,961
|
|
|
$
|
471,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents revenues from external customers by geographic area based on location of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Germany
|
|
$
|
115,074
|
|
|
$
|
99,176
|
|
|
$
|
213,099
|
|
|
$
|
203,572
|
|
China
|
|
|
74,779
|
|
|
|
48,158
|
|
|
|
133,676
|
|
|
|
111,046
|
|
Other European Union countries
|
|
|
57,542
|
|
|
|
37,415
|
|
|
|
106,401
|
|
|
|
86,586
|
|
Italy
|
|
|
12,995
|
|
|
|
15,861
|
|
|
|
24,485
|
|
|
|
29,326
|
|
Other Asia
|
|
|
11,403
|
|
|
|
7,173
|
|
|
|
25,622
|
|
|
|
16,803
|
|
U.S.
|
|
|
6,337
|
|
|
|
7,344
|
|
|
|
11,118
|
|
|
|
16,783
|
|
Other countries
|
|
|
5,047
|
|
|
|
3,018
|
|
|
|
11,560
|
|
|
|
7,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
283,177
|
|
|
$
|
218,145
|
|
|
$
|
525,961
|
|
|
$
|
471,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Derivative Transactions
The Company is exposed to certain market risks relating to its ongoing business. The Company seeks to manage these risks through internal risk
management policies as well as, from time to time, the use of derivatives. The derivatives are measured at fair value with changes in fair value immediately recognized in other income (expenses) in the Interim Consolidated Statement of Operations.
Interest Rate Swaps
During 2002,
the Company entered into certain variable-to-fixed interest rate swaps, referred to as the Stendal Interest Rate Swap Contract in connection with its long-term indebtedness relating to the Stendal mill to fix the interest rate. Under the
Stendal Interest Rate Swap Contract, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The interest rate swaps were left in place following the refinancing of the debt in
November 2014. As at June 30, 2017, the contract had a fair value of 2.6 million ($3,007; 2016 $6,522) which was classified as current within accounts payable and other in the Interim Consolidated Balance Sheet. The contract
has an aggregate notional amount of 94.3 million, a fixed interest rate of 5.28% and matures in October 2017.
The Company has
pledged as collateral cash in the amount of 67% of the fair value of the interest rate swap up to 8.5 million to the derivative counterparty. The calculation to determine the collateral is performed semi-annually, with the final
calculation in October 2017. As at June 30, 2017, the collateral was 1.8 million ($2,054; 2016 $4,327). This cash has been classified as restricted cash in the Interim Consolidated Balance Sheet.
The counterparty to the interest rate derivative is a bank that is a member of a banking syndicate that holds the Stendal
75.0 million revolving credit facility and the Company does not anticipate non-performance by the bank.
FORM 10-Q
QUARTERLY REPORT - PAGE 19
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Credit Risk
The Companys credit risk is primarily attributable to cash held in bank accounts and accounts receivable. The Company maintains cash
balances in foreign financial institutions in excess of insured limits. The Company limits its 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. The Companys credit risk associated with the sale of pulp and wood products is managed through setting credit limits, the purchase of credit insurance and for certain customers a letter of
credit is received prior to shipping its product. Concentrations of credit risk on the sale of pulp and wood products are with customers and agents based primarily in Germany, China and Italy.
The carrying amount of cash and cash equivalents of $142,589, restricted cash of $2,054 and accounts receivable of $177,707 recorded in the
Interim Consolidated Balance Sheet, net of any allowances for losses, represents the Companys maximum exposure to credit risk.
Note 12. Fair
Value Measurement and Disclosure
Due to their short-term maturity, the carrying amounts of cash and cash equivalents, restricted
cash, accounts receivable and accounts payable and other approximates their fair value.
The fair value of the interest rate derivative
liability classified as Level 2 was determined using a discounted cash flow model that uses as its basis readily observable market inputs, such as forward interest rates and yield curves observable at specified intervals. The observable inputs
reflect market data obtained from independent sources, including the Euribor rate provided by the counterparty to the interest rate derivative.
The fair value of the 2022 Senior Notes, 2024 Senior Notes and 2019 Senior Notes classified as Level 2 was determined using quoted prices in a
dealer market, or using recent market transactions.
The following tables present a summary of the Companys outstanding financial
instruments and their estimated fair values under the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as at June 30, 2017 using:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate derivative liability
|
|
$
|
|
|
|
$
|
3,007
|
|
|
$
|
|
|
|
$
|
3,007
|
|
Debt
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
|
|
|
|
28,530
|
|
|
|
|
|
|
|
28,530
|
|
2022 Senior Notes and 2024 Senior Notes
|
|
|
|
|
|
|
689,548
|
|
|
|
|
|
|
|
689,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
721,085
|
|
|
$
|
|
|
|
$
|
721,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as at December 31, 2016 using:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Interest rate derivative liability
|
|
$
|
|
|
|
$
|
6,522
|
|
|
$
|
|
|
|
$
|
6,522
|
|
2019 Senior Notes and 2022 Senior Notes
|
|
|
|
|
|
|
654,378
|
|
|
|
|
|
|
|
654,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
660,900
|
|
|
$
|
|
|
|
$
|
660,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 20
MERCER INTERNATIONAL INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands
of U.S. dollars, except share and per share data)
Note 13. Commitments and Contingencies
(a)
|
The Company is involved in legal actions and claims arising in the ordinary course of business. While the
outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claims which are pending or threatened, either individually or on a combined basis, will not have a material
adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.
|
(b)
|
The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed
manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on
buildings and in building insulation throughout older facilities. The Companys obligation for the proper removal and disposal of asbestos products from the Companys mills is a conditional asset retirement obligation. As a result of the
longevity of the Companys mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a
result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate
its fair value.
|
FORM 10-Q
QUARTERLY REPORT - PAGE 21
NON-GAAP FINANCIAL MEASURES
This quarterly report on Form 10-Q contains non-GAAP financial measures, that is, financial measures that either exclude or
include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with the generally accepted accounting principles in the United States, referred to as GAAP. Specifically,
we make use of the non-GAAP measure Operating EBITDA.
Operating EBITDA is defined as operating income (loss) plus
depreciation and amortization and non-recurring capital asset impairment charges. We use Operating EBITDA as a benchmark measurement of our own operating results and as a benchmark relative to our competitors. We consider it to be a meaningful
supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs, and depreciation expense varies widely from company to company in a manner
that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial
performance.
Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing
costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance,
or as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA is an internal measure and therefore may not be comparable to other companies.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash
requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) the impact of realized or marked to market changes
in our derivative positions, which can be substantial; and (v) the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure
and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from
Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 22