Weyerhaeuser Company 10-Q Summary — Second Quarter 2015
Business context and reporting period
Weyerhaeuser is a real estate investment trust principally engaged in growing and harvesting timber and manufacturing, distributing and selling wood-based products. Its reporting segments are Timberlands, Wood Products and Cellulose Fibers. This unaudited Form 10-Q covers the quarter and year-to-date periods ended June 30, 2015, with comparisons to June 30, 2014. The former homebuilding and real estate development business, Weyerhaeuser Real Estate Company, was divested in July 2014 and is reported as discontinued operations for the prior-year comparison.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Net sales | $1,807 million | $1,964 million | $3,528 million | $3,700 million |
| Gross margin | $333 million | $465 million | $669 million | $840 million |
| Operating income | $243 million | $400 million | $443 million | $708 million |
| Net earnings attributable to common shareholders | $133 million | $280 million | $223 million | $463 million |
| Diluted EPS | $0.26 | $0.47 | $0.43 | $0.79 |
| Net cash from operations | Not separately provided | Not separately provided | $443 million | $431 million |
| Adjusted EBITDA | $358 million | $472 million | $691 million | $844 million |
Calculated margins declined materially. Gross margin was approximately 18.4% in Q2 2015 versus 23.7% in Q2 2014, operating margin was approximately 13.4% versus 20.4%, and common-shareholder net margin was approximately 7.4% versus 14.3%. Year-to-date gross margin was approximately 19.0% versus 22.7%, operating margin 12.6% versus 19.1%, and common-shareholder net margin 6.3% versus 12.5%.
- Segment contribution: Q2 net contribution was $127 million from Timberlands, $71 million from Wood Products and $27 million from Cellulose Fibers. Year-to-date contributions were $289 million, $133 million and $60 million, respectively.
- Cash flow and investment: Year-to-date operating cash flow was $443 million. Investing cash use was $211 million, including $170 million of property and equipment spending, $27 million of reforestation and $32 million for timberland acquisitions. Total reported capital spending was $197 million, compared with $159 million in the prior-year period.
- Liquidity: Cash and cash equivalents were $1.121 billion at June 30, 2015, down from $1.580 billion at December 31, 2014. The company had a $1 billion senior unsecured revolving credit facility expiring in September 2018, with no borrowings reported.
- Debt: Long-term debt was $4.891 billion, unchanged from year-end, plus $511 million of nonrecourse debt held by variable interest entities. There were no expected debt maturities during the next 12 months, and the company was in compliance with its debt covenants.
- Shareholder returns: Year-to-date common dividends paid were $301 million, reflecting the increase in the quarterly dividend from $0.22 to $0.29 per share. The company repurchased 12.2 million common shares for $407 million year-to-date and had $90 million of remaining authorization at June 30, 2015.
Material changes versus the prior comparable period
- Q2 net sales decreased 8% and year-to-date sales decreased 5%, primarily because of lower log, lumber, OSB and pulp realizations and weaker or lower-volume sales in several product categories.
- Q2 common-shareholder earnings decreased 53%, while year-to-date earnings decreased 52%. Diluted EPS declined $0.21 in Q2 and $0.36 year-to-date.
- Timberlands contribution declined $43 million in Q2 and $45 million year-to-date, driven principally by lower Western log realizations and volumes and fewer timberland exchanges.
- Wood Products contribution declined $31 million in Q2 and $33 million year-to-date, primarily from lower lumber and OSB pricing, partly offset by lower manufacturing, log and selling costs.
- Cellulose Fibers contribution declined $64 million in Q2 and $85 million year-to-date. Increased scheduled maintenance outages, the West Coast port slowdown and equity-affiliate losses were significant adverse factors.
- Prior-year results benefited from a $45 million Q2 and $90 million year-to-date pretax gain from a postretirement plan amendment, a $22 million year-to-date landfill-sale gain and earnings from discontinued operations of $22 million in Q2 and $32 million year-to-date.
- 2015 included a $13 million noncash impairment charge on a nonstrategic asset and higher noncash foreign-exchange losses related to Canadian debt. These items reduced comparability with 2014.
Guidance, outlook, commentary, risks and unusual items
- Management continued to expect approximately 1.1 million U.S. housing starts in 2015, supported by employment growth, improving consumer confidence and historically low mortgage rates.
- Management expected 2015 demand from China and Japan to be lower than in 2014 and did not expect the U.S. dollar to strengthen significantly further against developed-market currencies during the remainder of 2015.
- Net capital expenditures, excluding acquisitions, were expected to be approximately $500 million for 2015.
- The company did not anticipate a contribution to its U.S. qualified pension plan in 2015. Expected 2015 pension and postretirement contributions or payments totaled approximately $85 million across Canadian and U.S. plans.
- Key risks include housing and broader economic conditions, interest rates and mortgage availability, product demand and pricing, manufacturing disruptions, raw-material and energy costs, weather and natural disasters, competition, currency movements, export demand and trade restrictions, environmental regulation, litigation and pension-asset performance.
- New Clean Water Act regulations adopted June 29, 2015 may broaden federal jurisdiction over certain forestry activities and increase permitting requirements and costs. The company was evaluating the potential impact, while related litigation remained unresolved.
- Environmental accruals included approximately $28 million for site remediation and $38 million for asset-retirement obligations. Management stated that no pending legal proceeding was expected to have a material adverse effect on long-term consolidated financial position, results of operations or cash flows.
- The company’s disclosure controls were effective as of June 30, 2015, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Confirm the sustainability of demand, pricing and margins in lumber, OSB, logs, pulp and liquid packaging board.
- Track the effect of scheduled maintenance outages and operational disruptions on Cellulose Fibers results.
- Reconcile reported earnings with unusual items, including prior-year pension-plan and asset-disposition gains, the 2015 impairment charge and foreign-exchange losses.
- Monitor cash usage from dividends, share repurchases, capital expenditures and timberland acquisitions against operating cash flow and available liquidity.
- Verify progress toward the approximately $500 million 2015 net capital-expenditure expectation and the remaining $90 million share-repurchase authorization.
- Assess the impact of housing starts, international export demand, foreign-exchange rates and the new Clean Water Act regulations.