Weyerhaeuser Company — 2016 Third-Quarter Form 10-Q Summary
Business context and reporting period
Quarterly period ended September 30, 2016. Weyerhaeuser operates as a REIT across Timberlands, Real Estate & Energy and Natural Resources, and Wood Products. The February 19, 2016 merger with Plum Creek materially expanded the company’s timberland and manufacturing operations and limits direct comparability with 2015, which does not include pre-merger Plum Creek results.
Key financial metrics
| Dollar amounts in millions, except per-share data | Q3 2016 | Q3 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Net sales | $1,709 | $1,355 | $4,769 | $3,980 |
| Gross margin | $395 | $282 | $1,108 | $857 |
| Operating income | $274 | $166 | $685 | $516 |
| Continuing operations earnings | $162 | $132 | $353 | $325 |
| Net earnings attributable to common shareholders | $227 | $180 | $454 | $403 |
| Diluted EPS | $0.30 | $0.35 | $0.64 | $0.77 |
| Adjusted EBITDA | $434 | $245 | $1,183 | $777 |
Q3 gross margin was approximately 23.1% versus 20.8% in the prior-year quarter; operating margin was approximately 16.0% versus 12.3%. The decline in EPS despite higher earnings primarily reflects the substantially higher share count following the Plum Creek merger. Q3 included $65 million of after-tax earnings from discontinued operations, including a $41 million after-tax-equivalent gain component related to the liquid packaging board divestiture.
- Q3 segment net contribution to earnings: Timberlands $122 million, Real Estate & ENR $15 million, Wood Products $170 million, and unallocated items $(9) million.
- YTD segment net contribution: Timberlands $376 million, Real Estate & ENR $42 million, Wood Products $413 million, and unallocated items $(91) million.
- Cash from operations was $886 million YTD, compared with $736 million in 2015.
- Cash from investing activities was $591 million, benefiting from $440 million received in the Twin Creeks timberland contribution, $287 million from the liquid packaging board sale, and $92 million from nonstrategic asset sales.
- Cash used in financing activities was $1.710 billion, including $700 million of common dividends and $2.003 billion of share repurchases, partly offset by $1.698 billion of new debt issuance.
- Cash and cash equivalents were $769 million at September 30, 2016, compared with $1.011 billion at December 31, 2015.
- Total long-term debt, including current maturities, was $8.310 billion carrying value, compared with $4.787 billion at year-end 2015. The company had $1.981 billion of debt scheduled to mature within the next 12 months.
- The $1 billion revolving credit facility was undrawn and fully available. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Q3 sales increased 26% and operating income increased 65%, primarily due to Plum Creek-related volume additions and stronger Wood Products pricing and volumes.
- Wood Products net contribution doubled to $170 million in Q3 and increased 89% YTD, supported by higher oriented strand board, lumber, plywood, and acquired medium-density fiberboard sales, as well as lower resin and manufacturing costs per unit.
- Timberlands sales rose 56% in Q3 and 40% YTD, mainly from acquired Plum Creek acreage and higher log volumes. Higher acquisition-accounting depletion and increased silviculture costs limited earnings growth.
- Real Estate & ENR sales increased substantially, but net contribution declined because of higher costs and allocated corporate overhead.
- Interest expense increased to $114 million in Q3 and $323 million YTD from $87 million and $254 million, respectively, due to debt assumed in the merger and new term loans.
- Income tax expense increased to $22 million in Q3 and $64 million YTD, reflecting higher taxable REIT subsidiary earnings and exhaustion of federal tax credits and net operating loss carryforwards.
- The company repurchased 67.8 million shares for approximately $2.0 billion YTD, leaving approximately $500 million of authorization at September 30. All outstanding mandatory convertible preference shares converted into 23.2 million common shares on July 1, 2016.
Guidance, outlook, risks and unusual items
- Management expected 2016 U.S. housing starts of approximately 1.18 million units, with first-nine-month activity consistent with 7% to 8% year-over-year growth. The company also cited expected remodeling expenditure growth of 8.6%.
- 2016 net capital expenditures, excluding acquisitions, were expected to be approximately $540 million. Approximately $30 million of anticipated 2016 pulp-mill expenditures was expected to be reimbursed after completion of the International Paper transaction.
- The company expected to complete the $2.2 billion cash sale of its Cellulose Fibers pulp business to International Paper in the fourth quarter of 2016, subject to customary closing conditions and regulatory review. It also expected to complete the sale of its printing papers joint venture in the fourth quarter. After-tax divestiture proceeds were expected to be used for debt repayment.
- Q3 included $16 million of integration, restructuring, closure, and impairment charges; YTD charges were $141 million, including $132 million related to the Plum Creek merger.
- The company was exploring strategic alternatives for its Uruguay timberlands and manufacturing operations, including continued ownership or a sale.
- A significant contingency involves an IRS challenge to the tax treatment of the 2008 Timberland Venture transaction. If unsuccessful, the company estimates potential gain recognition and shareholder distribution of approximately $600 million, built-in gains tax of approximately $100 million, and substantial interest; no reserve was recorded.
- Principal risks include housing and product demand, pricing and competition, interest rates, foreign exchange, weather and natural disasters, manufacturing disruptions, timber and environmental regulation, divestiture and merger execution, pension performance, litigation, and tax matters.
- Environmental remediation accruals were approximately $37 million, and asset-retirement obligations were $28 million. Management did not expect current legal proceedings to have a material adverse effect on long-term consolidated results.
Investor verification points
- Verify the final closing dates, proceeds, regulatory approvals, and debt-repayment application for the pending Cellulose Fibers and printing papers transactions.
- Assess post-merger earnings quality by separating acquired volume growth from pricing, depletion, integration costs, and other nonrecurring items.
- Monitor the $1.981 billion of debt maturities within 12 months, refinancing plans, interest-rate exposure, and remaining revolver availability.
- Track the IRS Timberland Venture litigation and the potential tax, distribution, and interest consequences if the company’s position is unsuccessful.
- Reconcile reported EPS with the enlarged share base, share repurchases, preference-share conversion, and the company’s $500 million remaining repurchase authorization.
- Review the preliminary Plum Creek purchase-price allocation, particularly timberlands and mineral valuations, which remained subject to further adjustments.