Mercer(MERC) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited interim statements show significant growth in revenue and net income, driven by strong sales realizations - The interim financial statements are prepared per U.S. GAAP and include all necessary adjustments for fair presentation[20] Interim Consolidated Statements of Operations Revenues and net income increased substantially in Q2 and H1 2022, driving significant growth in diluted EPS Q2 & H1 2022 vs 2021 Performance (in thousands USD, except per share data) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $572,326 | $401,832 | $1,165,067 | $814,552 | | Operating Income | $114,031 | $51,836 | $236,382 | $102,865 | | Net Income | $71,372 | $21,415 | $160,269 | $27,348 | | Diluted EPS | $1.07 | $0.32 | $2.41 | $0.41 | | Dividends Declared per Share | $0.075 | $0.065 | $0.150 | $0.130 | Interim Consolidated Balance Sheets Total assets and shareholders' equity grew as of June 30, 2022, supported by an increase in cash and equivalents Balance Sheet Comparison (in thousands USD) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,169,114 | $1,064,305 | | Cash and cash equivalents | $419,861 | $345,610 | | Total Assets | $2,415,716 | $2,351,232 | | Total Liabilities | $1,663,594 | $1,657,208 | | Long-term debt | $1,245,906 | $1,237,545 | | Total Shareholders' Equity | $752,122 | $694,024 | Interim Consolidated Statements of Cash Flows Net cash from operations more than doubled in H1 2022, driven by higher net income despite increased investing activities Cash Flow Summary - Six Months Ended June 30 (in thousands USD) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | $223,351 | $111,440 | | Net cash used in investing activities | ($148,344) | ($68,656) | | Net cash from (used in) financing activities | $5,189 | ($16,751) | | Net increase in cash | $74,251 | $23,436 | Notes to the Interim Consolidated Financial Statements Notes detail segment performance, debt structure, and significant subsequent events including a mill fire and a major acquisition - The company operates two reportable segments: Pulp and Wood Products[61] - On July 1, 2022, a fire occurred in the woodyard of the Stendal mill, with damages expected to be covered by insurance[82] - On July 22, 2022, the company agreed to acquire Holzindustrie Torgau (HIT) for €270 million, funded with cash and credit facilities[82] Management's Discussion and Analysis (MD&A) Strong Q2 results were driven by high sales realizations and a stronger USD, offsetting inflationary cost pressures - Operating EBITDA, a non-GAAP measure, increased 73% to $145.1 million in Q2 2022 from $83.8 million in Q2 2021[86][101][114] - The Q3 outlook anticipates stable pulp prices, attractive lumber prices, and strong German energy prices[95] Results of Operations Consolidated revenue and operating income grew significantly, driven by higher pricing and strong performance in both segments Segment Operating Income (in thousands USD) | Segment | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Pulp | $75,471 | $13,338 | $161,707 | $38,634 | | Wood Products | $45,853 | $42,314 | $86,332 | $70,291 | | Total Operating Income | $114,031 | $51,836 | $236,382 | $102,865 | - Costs and expenses in Q2 2022 increased by 31% to $458.3 million, driven by higher pulp sales volumes and inflationary pressure[108] Liquidity and Capital Resources The company maintains a robust liquidity position of approximately $771.1 million, sufficient for near-term capital needs Liquidity Position as of June 30, 2022 (in thousands USD) | Component | Amount | | :--- | :--- | | Cash and cash equivalents | $419,861 | | Term deposit | $75,000 | | Available under credit facilities | ~$276,200 | | Total Aggregate Liquidity | ~$771,100 | - Capital expenditures for the first six months of 2022 totaled $80.3 million, primarily for mill upgrades and optimization projects[161][166] Cyclical Nature of Business Pulp and lumber businesses are highly cyclical, with profitability sensitive to commodity prices and foreign exchange rates - Pulp and lumber markets are commodity-driven and cyclical, with competition based primarily on price[192] - A strengthening U.S. dollar is beneficial to operating margins as most costs are in euros and Canadian dollars[200] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate and foreign currency fluctuations, managed via internal policies - The company's primary market risks are interest rate changes and foreign currency fluctuations (USD vs EUR and CAD)[201] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures are effective[203] - There were no material changes in internal control over financial reporting during the quarter[205] PART II. OTHER INFORMATION Legal Proceedings The company is subject to routine litigation not expected to have a material adverse effect on its business - The company is cooperating with a European Commission cartel investigation into the wood pulp sector which began in 2021[83] Risk Factors Inflation is a key risk factor, as rising input costs could increase manufacturing expenses and reduce margins - A new material risk factor is continued inflationary pressures on production and transportation costs, which could adversely affect margins[208][209] Exhibits This section lists filed exhibits, including CEO/CFO certifications and iXBRL-formatted financial statements - Filed exhibits include Section 302 and 906 certifications by the CEO and CFO, and iXBRL data files for the financial statements[212]