Weyerhaeuser Company — Q1 2017 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser is a REIT principally engaged in timberlands, wood products, real estate, and energy and natural resources. The filing covers the unaudited quarter ended March 31, 2017, compared with March 31, 2016. Results include the Plum Creek operations acquired in February 2016. Former Cellulose Fibers operations were sold during 2016 and are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1.693 billion | $1.405 billion | +20% |
| Gross margin | $421 million | $302 million | +39% |
| Gross margin percentage | 24.9% | 21.5% | +3.4 points |
| Operating income | $293 million | $139 million | +111% |
| Operating margin | 17.3% | 9.9% | +7.4 points |
| Net earnings attributable to common shareholders | $157 million | $70 million | +124% |
| Diluted EPS | $0.21 | $0.11 | +$0.10 |
| Adjusted EBITDA | $454 million | $336 million | +35% |
| Net cash from operations | $35 million | $47 million | -$12 million |
Net earnings were $157 million, including no earnings from discontinued operations, versus $81 million in Q1 2016, which included $20 million from discontinued operations. Continuing-operations earnings attributable to common shareholders increased to $157 million from $50 million. Interest expense was $99 million versus $95 million, and income taxes were $24 million versus $11 million.
Segment net contribution to earnings was $148 million for Timberlands, $26 million for Real Estate & ENR, and $172 million for Wood Products. Unallocated items reduced earnings by $66 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $455 million at March 31, 2017, down from $676 million at December 31, 2016.
- Total debt, including current maturities, was $6.606 billion at carrying value and $7.567 billion at estimated fair value. Long-term debt included $6.263 billion, plus $511 million of nonrecourse debt held by variable interest entities.
- The company entered into a new $1.5 billion senior unsecured revolving credit facility expiring in March 2022, replacing a $1 billion facility. No credit-facility borrowings were outstanding during the quarter.
- The company was in compliance with debt covenants at March 31, 2017.
- Capital expenditures were $75 million, including $52 million for property and equipment and $23 million for timberland reforestation. Management expected 2017 net capital expenditures of approximately $435 million.
- Cash dividends paid were $233 million, or $0.31 per share. No shares were repurchased; $500 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Timberlands sales to unaffiliated customers increased $99 million to $486 million, primarily from higher delivered-log volumes and the inclusion of a full quarter of Plum Creek operations.
- Real Estate & ENR sales increased $14 million to $53 million, while segment contribution increased $11 million to $26 million.
- Wood Products sales increased $175 million to $1.154 billion. Higher lumber, oriented strand board, plywood and medium density fiberboard realizations and volumes drove segment contribution up $85 million to $172 million.
- Operating income benefited from a $98 million reduction in Plum Creek merger-related charges, partly offset by the absence of a $36 million headquarters-sale gain recorded in Q1 2016 and a $16 million unfavorable change in foreign-exchange results.
- Integration, restructuring, closure and impairment charges declined to $13 million from $111 million.
- Non-operating pension and postretirement costs changed from a $14 million credit to a $22 million cost, reducing pretax results by $36 million year over year.
- Operating cash flow declined despite higher segment earnings because Q1 2016 included $66 million of operating cash flow from discontinued operations and Q1 2017 had higher tax payments and working-capital uses.
Outlook, commentary, risks and unusual items
- Management expected 2017 U.S. housing starts of approximately 1.25 million to 1.30 million units and cited improving employment, consumer confidence and historically low mortgage rates. First-quarter housing starts averaged approximately 1.25 million units on a seasonally adjusted annual basis.
- Management expected North American lumber consumption to grow approximately 4% to 6% in 2017 and demand from China and Japan to be similar to or modestly better than 2016.
- The company was reviewing strategic alternatives for its Uruguay timberlands and manufacturing operations; those assets were not classified as held for sale.
- On April 24, 2017, the U.S. Department of Commerce announced a preliminary 19.88% countervailing-duty rate on Weyerhaeuser's Canadian softwood lumber shipments to the United States. Potential retroactive duties were not determinable at filing and the company did not expect them to be material. Potential antidumping duties were still pending.
- An IRS dispute related to Plum Creek's 2008 Timberland Venture transaction could require, if the company loses, recognition and distribution of approximately $600 million of gain and payment of approximately $100 million of built-in-gains tax, plus interest. No reserve was recorded.
- Environmental remediation accruals were approximately $48 million, and asset-retirement obligations were $31 million. Management did not identify any legal proceeding expected to have a material adverse effect on long-term consolidated results.
- Key operating risks include housing and wood-product demand, commodity prices, weather and natural disasters, manufacturing disruptions, raw-material and transportation costs, foreign exchange, trade restrictions, environmental regulation, pension performance, merger integration and tax litigation.
- The company adopted accounting guidance affecting intra-entity tax transfers and pension-cost presentation. Management stated that these changes did not materially affect net earnings; the revenue-recognition standard is expected to be adopted in 2018 with no material operating impact expected.
Important facts for investors to verify
- Assess how much of the year-over-year improvement reflects Plum Creek inclusion, higher product prices and volumes, and lower merger charges versus sustainable underlying growth.
- Monitor the final U.S. and Canadian softwood-lumber duty determinations, including any antidumping duties and retroactive assessments.
- Track the IRS tax proceeding and potential distribution, tax and interest exposure.
- Reconcile low quarterly operating cash flow with earnings, working-capital requirements, pension funding, dividends and planned 2017 capital spending.
- Review debt maturities, interest-rate exposure and the availability and covenant terms of the new revolving facility.
- Evaluate the impact of pension assumptions, particularly expected asset returns and actuarial-loss amortization, on future earnings.