Weyerhaeuser Company — 2011 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly and year-to-date results for the periods ended September 30, 2011, compared with September 30, 2010. Weyerhaeuser operates as a REIT through Timberlands, Wood Products, Cellulose Fibers and Real Estate businesses. The company sold its hardwoods operations on August 1, 2011, and Westwood Shipping Lines on September 30, 2011; both are reported as discontinued operations.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Net sales and revenues | $1,569 million | $1,514 million | $4,601 million | $4,438 million |
| Gross margin | $286 million | $321 million | $798 million | $829 million |
| Operating income | $100 million | $160 million | $463 million | $400 million |
| Net earnings attributable to common shareholders | $157 million | $1,116 million | $266 million | $1,110 million |
| Diluted EPS | $0.29 | $3.50 | $0.49 | $4.48 |
| Cash from operations | Not separately provided | Not separately provided | $144 million | $464 million |
Q3 gross margin was approximately 18.2%, versus 21.2% in the prior-year quarter; operating margin was approximately 6.4%, versus 10.6%. Year-to-date gross margin was approximately 17.3%, versus 18.7%, and operating margin was approximately 10.1%, versus 9.0%.
- Q3 sales increased 4%, but operating income declined $60 million because of lower gross margin and higher restructuring, closure and impairment charges.
- Year-to-date sales increased 4% and operating income increased $63 million, aided by timberland gains and lower selling, general and administrative expense.
- Q3 net earnings included $24 million from discontinued operations, including a $31 million after-tax gain on the Westwood sale partly offset by losses and charges related to hardwoods.
- Cash and cash equivalents totaled $971 million at September 30, 2011, compared with $1,467 million at December 31, 2010.
- Total debt carrying value was approximately $4.51 billion, consisting of $4.19 billion for Forest Products and $318 million for Real Estate. Total liabilities were $8.04 billion and equity was $4.80 billion.
- The company repaid $550 million of debt year-to-date, including approximately $518 million of 6.75% notes due in 2012. Net interest expense declined to $296 million from $356 million.
- Year-to-date investing cash flow was $188 million, including $353 million of asset-sale proceeds. Capital spending was $159 million; full-year 2011 net capital expenditures were expected to be approximately $250 million to $270 million.
- The company paid $242 million in dividends and repurchased 1.79 million shares for approximately $29 million during the quarter. Remaining repurchase authorization was approximately $241 million.
Material changes versus the prior comparable period
- Reported net earnings declined sharply because Q3 2010 included a $1.043 billion deferred-tax benefit from the REIT conversion. Q3 2011 included an $83 million foreign-tax-credit benefit.
- Q3 restructuring, closure and impairment charges increased to $41 million from $16 million, including $29 million for the permanent closure of four previously idled engineered-lumber facilities.
- Timberlands year-to-date contribution increased to $415 million from $226 million, including a $152 million pretax gain on the sale of 82,000 acres of non-strategic timberlands. Q3 contribution declined because of fewer land exchanges and higher costs.
- Wood Products remained loss-making, with a Q3 contribution of negative $93 million including discontinued operations, but improved from negative $100 million. Year-to-date contribution deteriorated to negative $190 million from negative $122 million.
- Cellulose Fibers Q3 contribution declined 25% to $135 million as lower pulp prices and volumes combined with higher fiber, chemical, maintenance, energy and freight costs. Year-to-date contribution increased 10% to $301 million.
- Real Estate year-to-date revenue declined 9% to $562 million and contribution declined 78% to $17 million, mainly because home closings fell to 1,330 from 1,519 and land-sale activity was lower.
- Cash from operations fell $320 million, primarily because 2010 included $444 million of tax refunds while 2011 reflected $21 million of taxes paid.
Guidance, outlook, risks and unusual items
- Management expected lower fourth-quarter Timberlands earnings, excluding timberland-disposition gains, due to reduced fee harvest volumes, lower Western log prices and seasonally higher road and silviculture costs.
- Wood Products was expected to report a larger loss from continuing operations because of weaker seasonal markets, lower lumber and OSB prices, lower volumes and reduced operating rates.
- Cellulose Fibers was expected to have slightly lower fourth-quarter earnings, with lower pulp prices and slightly higher shipment volumes.
- Real Estate was expected to benefit from seasonally higher home closings, although no significant land parcels were under contract at the filing date.
- Liquidity included a new $1.0 billion revolving credit facility expiring in June 2015; there were no borrowings outstanding and the company reported compliance with covenants. Weyerhaeuser’s defined debt-to-total-capital ratio was 46.0%; WRECO’s was 52.2%.
- Environmental remediation accruals were $36 million, with reasonably possible additional costs estimated at up to $100 million. Asset-retirement obligations were $59 million.
- Potential future compliance costs under industrial boiler air-emission rules were estimated at $30 million to $45 million, subject to regulatory reconsideration. Additional Clean Water Act permitting requirements could also increase costs.
- The company was contesting an ERISA class-action claim involving its U.S. salaried retirement plan. Management stated that legal outcomes could materially affect a particular period but were not expected to materially affect long-term results.
- Key operating risks included housing demand and mortgage availability, lumber and pulp pricing, export markets and foreign exchange, energy and raw-material costs, weather and natural disasters, environmental regulation, pension performance and litigation.
Important facts for investors to verify
- Separate recurring operating performance from the significant REIT tax benefit in 2010, the 2011 foreign-tax-credit benefit and asset-disposition gains.
- Assess whether Wood Products impairments and facility closures represent further structural capacity reductions or potential future charges.
- Review liquidity after debt repayments, dividends, share repurchases and the expected $30 million fourth-quarter litigation settlement.
- Evaluate pension funding requirements, actuarial losses and the stated 2011 contribution expectations.
- Monitor environmental remediation exposure, possible additional costs of up to $100 million and future air- and water-regulation requirements.
- Confirm the sustainability of the quarterly $0.15 dividend and the remaining share-repurchase authorization in light of reduced operating cash flow.