Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Weyerhaeuser is a REIT focused on timberlands, wood products, real estate, energy and natural resources. Reportable segments are Timberlands, Real Estate & ENR, and Wood Products. The company continues integrating the 2016 Plum Creek merger.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Net sales | $1,808 million | $1,655 million | $3,501 million | $3,060 million |
| Gross margin | $472 million | $384 million | $893 million | $686 million |
| Gross margin percentage | 26.1% | 23.2% | 25.5% | 22.4% |
| Operating income | $157 million | $248 million | $450 million | $387 million |
| Operating margin | 8.7% | 15.0% | 12.9% | 12.6% |
| Net earnings attributable to common shareholders | $24 million | $157 million | $181 million | $227 million |
| Diluted EPS | $0.03 | $0.21 | $0.24 | $0.33 |
| Adjusted EBITDA | $506 million | $413 million | $960 million | $749 million |
| Cash from operations | Not separately provided | Not separately provided | $524 million | $539 million |
- Q2 sales increased 9%, led by a $147 million increase in Wood Products sales. Year-to-date sales increased 14%.
- Wood Products generated $177 million of Q2 net contribution to earnings, up from $156 million, while year-to-date contribution rose 44% to $349 million.
- Real Estate & ENR Q2 contribution increased to $23 million from $12 million; year-to-date contribution increased to $49 million from $27 million.
- Timberlands Q2 contribution was a loss of $12 million versus income of $125 million, primarily because of a $147 million noncash impairment charge related to the planned sale of the Uruguayan operations. Year-to-date contribution was $136 million versus $254 million.
- Cash and cash equivalents were $701 million at June 30, 2017, compared with $676 million at December 31, 2016. Total assets were $18.99 billion and total liabilities were $9.90 billion.
- Debt carrying value, including current maturities and variable-rate debt held by variable-interest entities, was approximately $7.12 billion. The company had $6.60 billion of long-term debt including current maturities, excluding the separate $511 million nonrecourse debt balance.
- A new $1.5 billion senior unsecured revolving credit facility expires in March 2022; no borrowings were outstanding under the facility during the period. The company reported compliance with debt covenants.
- Common dividends paid year-to-date were $466 million, or $0.62 per share. No share repurchases occurred during the quarter or year-to-date; $500 million remained under the repurchase authorization.
- Year-to-date capital expenditures were $162 million. Management expected 2017 net capital expenditures of approximately $435 million.
Material changes versus the prior comparable period
- Q2 operating income declined $91 million despite higher sales and gross margin because of the Uruguayan impairment, a $50 million product-remediation accrual, and $11 million of retroactive and prospective Canadian softwood lumber duties.
- Excluding those identified Q2 charges, management stated that operating income increased approximately $117 million.
- Q2 net earnings attributable to common shareholders declined 85%, partly because 2016 included $38 million of earnings from discontinued Cellulose Fibers operations. Excluding discontinued operations, management stated that Q2 net earnings declined $95 million.
- Year-to-date operating income increased 16%, while common-shareholder earnings declined 20%; excluding 2016 discontinued operations, management stated that earnings increased $12 million.
- Adjusted EBITDA increased 23% in Q2 and 28% year-to-date, reflecting stronger Wood Products and Real Estate & ENR performance and excluding specified special items.
- Interest expense declined to $100 million in Q2 and $199 million year-to-date, primarily because average debt was lower than in 2016.
- The company adopted accounting guidance affecting the presentation of pension costs and intra-entity transfer taxes. Management reported no material impact on net earnings from these adoptions.
Guidance, outlook, commentary and risks
- Management expected U.S. housing starts of approximately 1.25 million units in 2017, up about 7% from 2016, and expected North American lumber consumption to grow 4% to 5%.
- The company agreed to sell its Uruguayan timberlands and manufacturing operations for $403 million in cash, subject to purchase-price adjustments, regulatory review and customary closing conditions. Closing was expected in the second half of 2017. The business was classified as held for sale but not discontinued operations.
- The company estimated total remediation or replacement costs for affected Flak Jacket-coated I-joists at $50 million to $60 million and had accrued $50 million as of June 30, 2017.
- Canadian softwood lumber duties applicable to Weyerhaeuser were reported at 19.88% countervailing and 6.87% antidumping rates, subject to ongoing governmental and trade proceedings.
- Following quarter-end, the company prepaid a $550 million variable-rate term loan using cash and proceeds from a new $225 million term loan maturing in 2026. The transaction increased current maturities classified at June 30, 2017 by $325 million.
- A pending IRS matter related to the Plum Creek merger could require approximately $600 million of gain recognition and distribution and approximately $100 million of built-in-gains tax, plus substantial interest, if the company is unsuccessful. No reserve was recorded.
- Other principal risks include housing and product demand, lumber prices and duties, raw-material and energy costs, weather and natural disasters, fires and pests, environmental obligations, legal proceedings, pension performance, currency movements, regulations, manufacturing disruptions and merger integration.
- Management stated that no legal proceeding was currently expected to have a material adverse effect on long-term consolidated financial position, results of operations or cash flows. Superfund and other environmental remediation accruals totaled approximately $47 million.
Most important facts for investors to verify
- Whether the Uruguayan sale closes on the expected terms and timing, including final purchase-price adjustments and regulatory approvals.
- The ultimate cost and scope of the Flak Jacket product remediation, currently estimated at $50 million to $60 million.
- The final outcome of the Canadian softwood lumber duty proceedings and their effect on Wood Products margins and cash flow.
- The status and potential financial consequences of the IRS Plum Creek tax matter, for which no reserve was recorded.
- Post-quarter-end debt refinancing, current maturities, interest expense and liquidity after the $550 million term-loan prepayment.
- Whether improved housing demand, lumber realizations and Wood Products profitability persist after excluding special items.
- The distinction between GAAP results and management’s Adjusted EBITDA, including the $210 million of Q2 special items excluded from that measure.