Weyerhaeuser Company — FY2017 Form 10-K Summary
Business context and reporting period
Weyerhaeuser is a timberlands, real estate and wood products company organized as a real estate investment trust (REIT). It owns or controls approximately 12.4 million U.S. timberland acres, manages approximately 14.0 million Canadian acres under long-term licenses, and operates 35 wood products facilities. Reported results cover the fiscal year ended December 31, 2017, with fourth-quarter information included in the annual filing.
The company reports three segments: Timberlands; Real Estate, Energy and Natural Resources (Real Estate & ENR); and Wood Products. The 2017 results include the post-merger Plum Creek platform for a full year, while 2016 included only part of the combined operations, limiting comparability.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $7.196 billion | $6.365 billion | +13% |
| Operating income | $1.131 billion | $822 million | +$309 million |
| Earnings from continuing operations | $582 million | $415 million | +40% |
| Net earnings attributable to common shareholders | $582 million | $1.005 billion | -42% |
| Diluted EPS | $0.77 | $1.39 | -$0.62 |
| Net cash from operations | $1.201 billion | $735 million | +$466 million |
| Capital expenditures | $419 million | $510 million | -$91 million |
| Long-term debt, including current portion | $5.992 billion | $6.610 billion | -$618 million |
| Cash and cash equivalents | $824 million | $676 million | +$148 million |
Operating margin was approximately 15.7% in 2017, compared with approximately 12.9% in 2016. Adjusted EBITDA increased to $2.080 billion from $1.583 billion. Segment Adjusted EBITDA was $936 million for Timberlands, $241 million for Real Estate & ENR, and $1.017 billion for Wood Products.
- Timberlands: Unaffiliated sales were $1.942 billion, up 8%; contribution to earnings was $532 million, up 7%. Higher Western log prices and increased Southern and other log volumes were partly offset by a $147 million noncash impairment related to the Uruguay divestiture.
- Real Estate & ENR: Unaffiliated sales were $280 million, up 24%; contribution to earnings was $146 million, up from $55 million. Results benefited from higher real estate acreage sales, royalties and improved sales mix.
- Wood Products: Sales were $4.974 billion, up 15%; contribution to earnings was $569 million, up 11%. Higher lumber and oriented strand board prices, as well as volume growth in engineered products and MDF, drove the increase.
Cash flow supported $941 million of common dividends, or $1.25 per share. No common shares were repurchased in 2017; $500 million remained available under the repurchase authorization at year-end.
Material changes versus the prior comparable period
- Net earnings and EPS declined year over year because 2016 included $612 million of after-tax discontinued-operations earnings, largely from the Cellulose Fibers divestitures. Excluding discontinued operations, 2017 earnings attributable to common shareholders increased $189 million, or 48%.
- Gross margin increased by $513 million, reflecting improved wood products pricing and volume, stronger timberlands results and favorable product mix.
- 2017 operating income included a $290 million product-remediation charge, a $147 million Uruguay impairment, a $99 million gain on the sale of Southern timberlands to Twin Creeks, and $42 million of environmental remediation insurance recoveries.
- Interest expense declined to $393 million from $431 million, primarily because average indebtedness decreased.
- The company completed the sale of its Uruguay timberlands and manufacturing operations for $403 million on September 1, 2017, and terminated its Twin Creeks management arrangements at year-end.
- The company prepaid a $550 million variable-rate term loan, repaid a $281 million debenture, and issued a new $225 million variable-rate term loan maturing in 2026.
Liquidity, debt and financial position
At December 31, 2017, total assets were $18.059 billion and shareholders’ equity was $8.899 billion. The company had no borrowings outstanding under its new $1.5 billion senior unsecured revolving credit facility, which expires in March 2022, and was in compliance with its covenants. Defined debt-to-total-capital was 36.65% under the applicable covenant calculation.
Scheduled principal maturities include $62 million in 2018, $500 million in 2019, $719 million in 2021 and $4.675 billion thereafter. Contractual obligations totaled $9.776 billion, including principal, interest, operating leases, purchase obligations and employee-related obligations.
Guidance, outlook, risks and unusual items
- Management expected U.S. housing starts to increase 4% to 10% in 2018 and anticipated similar to slightly higher wood product prices, assuming continued housing and remodeling growth.
- Expected 2018 net capital expenditures were approximately $420 million, broadly comparable with 2017.
- Management expected a 2018 effective tax rate of 11% to 13%, following the Tax Cuts and Jobs Act and the reduction in the corporate tax rate to 21%. The 2017 tax provision included a $74 million deferred-tax remeasurement charge.
- Product remediation relates to TJI Joists with Flak Jacket protection manufactured after December 1, 2016. Approximately 2,400 homes were estimated to be affected. The company recorded $290 million of pretax charges, paid $192 million by year-end and retained a $98 million accrual. Potential insurance recoveries had not been recorded.
- Environmental remediation reserves were $48 million. The company spent approximately $15 million in 2017 and expected to spend approximately $14 million in 2018. Reasonably possible additional remediation costs could reach up to $150 million beyond recorded reserves.
- Canadian softwood lumber duties were assessed at final published rates of 14.19% countervailing and 6.04% anti-dumping. The company expensed $7 million in 2017 and reversed $9 million of previously accrued retroactive duties.
- Key risks include cyclical housing and commodity markets, log and wood product oversupply, raw material and energy costs, transportation and labor availability, weather, fire and pests, environmental and endangered-species regulation, Canadian trade duties, pension obligations, litigation, cybersecurity and the risk of losing REIT status.
- An IRS matter involving the former Plum Creek Timber Venture could, if resolved adversely, require 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 because management believes its position is supportable.
Important facts for investors to verify
- Reconcile continuing-operations performance with reported net income and EPS, given the large 2016 discontinued-operations gain.
- Assess the sustainability of Wood Products pricing and margins and the sensitivity of results to housing starts, remodeling activity and commodity prices.
- Track the remaining $98 million product-remediation accrual and potential insurance recoveries.
- Review debt maturities, interest-rate exposure and the effect of pension underfunding, including the $1.487 billion deferred pension and postretirement liability.
- Evaluate environmental exposure, including the $48 million reserve and potential additional costs of up to $150 million.
- Monitor the IRS Plum Creek tax proceeding and the potential effect on cash distributions and liquidity.
- Confirm 2018 capital spending, tax-rate and housing-market assumptions against subsequent filings and actual results.