Mercer International Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; this is an annual report, not a standalone fourth-quarter report. Mercer is a global forest products company with Pulp and Solid Wood segments. Results are in U.S. dollars unless noted.
Financial and operating performance
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $1,993.8 million | $2,280.9 million |
| Operating income (loss) | $(188.8) million | $392.4 million |
| Operating EBITDA (non-GAAP) | $17.5 million; 1% margin | $536.5 million; 24% margin |
| Net income (loss) | $(242.1) million; $(3.65) per share | $247.0 million; $3.74 basic per share |
| Cash from (used in) operating activities | $(69.0) million | $360.7 million |
| Cash and cash equivalents at year-end | $314.0 million | $354.0 million |
| Working capital at year-end | $806.5 million | $800.1 million |
| Long-term debt on balance sheet | $1,609.4 million | $1,346.5 million |
Operating EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow. Year-end liquidity, including cash and available revolving credit, was approximately $610.3 million. Capital expenditures were $136.3 million; cash interest paid was $79.6 million. The company paid $0.30 per share in dividends during 2023.
Segment results and key drivers
- Pulp: Revenue was $1,516.1 million, down from $1,866.1 million; operating loss was $48.3 million versus income of $340.7 million. Pulp production rose about 5% to 1.97 million ADMTs, while sales rose modestly. Average sales realizations declined to $729/ADMT for NBSK from $876 and to $627/ADMT for NBHK from $869. Energy and chemical revenue fell to $113.5 million from $179.7 million.
- Solid Wood: Revenue increased to $472.1 million from $408.5 million, largely reflecting a full year of Torgau results and the mass timber ramp-up; operating loss was $87.7 million versus income of $70.6 million. Lumber realizations fell about 38% to $435/Mfbm. Manufactured-products revenue increased to $58.9 million, and pallet and biofuel revenue rose with Torgau included for a full year.
Material changes versus 2022
- Total revenue fell about 13%, while costs and expenses rose about 16%. Lower pulp, lumber and energy realizations, higher fiber costs and impairments drove the swing from profit to loss.
- The company recorded $58.6 million of net inventory impairment charges, primarily at its Canadian pulp mills, and a $33.7 million non-cash impairment after classifying its sandalwood business as held for sale.
- Operating cash flow declined to a $69.0 million outflow. Working-capital movements included a $98.2 million cash use from lower accounts payable and accrued expenses.
- Interest expense increased to $88.2 million from $71.5 million, reflecting higher borrowings and rates and issuance of $200 million of 12.875% senior notes due 2028.
- Mercer acquired the Structurlam mass timber assets, including facilities in Arkansas and British Columbia, for approximately $82.1 million in June 2023. Torgau was included for a full year in 2023 but only from September 30 in 2022, affecting comparisons.
Outlook, commentary and risks
- Management expects 2024 capital expenditures of approximately $75 million to $100 million, principally maintenance, excluding amounts financed through government grants. Scheduled pulp-mill maintenance is 48 days, or approximately 75,300 ADMTs.
- For the first half of 2024, management expects modestly higher NBSK prices in Europe; generally stable NBSK prices in China and North America and stable NBHK prices. It expects a modest increase in U.S. lumber prices, relatively flat European lumber prices, and stable mass timber and pallet prices. These are expectations, not guarantees.
- Management expects a modest decrease in per-unit fiber costs in 2024, citing anticipated stable supply. Fiber represented about 55% of pulp cash production costs and 75% of lumber cash production costs in 2023.
- Management stated that cash from operations, cash on hand and available credit should fund business needs, planned capital spending and the quarterly dividend over the next 12 months, based on current expectations. The quarterly dividend declared in February 2024 was $0.075 per share.
- Key risks include cyclical pulp and lumber markets, announced net pulp capacity additions of about 3.5 million ADMTs expected in 2024, fiber availability and cost, foreign exchange and interest rates, inflation, geopolitical and energy-market disruption, and environmental or climate-related impacts. German energy-market revenue caps were extended through January 2025; Stendal’s special tariff expires in December 2024.
- Senior debt ratings were downgraded in September 2023, with negative outlooks: S&P to B from B+ and Moody’s to B2 from Ba3. Mercer reported compliance with debt covenants at year-end.
- The sandalwood sale process is underway, with completion anticipated within 12 months. The $33.7 million impairment is preliminary and based on Level 3 fair-value inputs, including indicative third-party offers. Routine litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether pulp and lumber prices, volumes and fiber costs improve sufficiently to restore operating profitability and cash generation.
- How the $58.6 million inventory impairment, insurance proceeds of $46.4 million, and sandalwood impairment affect the assessment of recurring performance.
- Mass timber utilization, order conversion, project margins and integration progress at the acquired Structurlam facilities.
- Debt-service capacity and refinancing options, particularly given the $200 million 2028 notes’ 12.875% coupon, higher year-end debt and credit-rating downgrades.
- Progress and sale proceeds for the sandalwood business, and any change to the preliminary impairment estimate.
- Execution of 2024 capex and maintenance plans, fiber availability, German energy pricing and tariff changes, and compliance with revolving-facility covenants.
PwC issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2023. The auditor identified the Torgau goodwill impairment assessment as a critical audit matter; no goodwill impairment was recorded, and estimated fair value exceeded carrying value by approximately 6%.