Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2014. Weyerhaeuser operates primarily through Timberlands, Wood Products and Cellulose Fibers and is taxed as a real estate investment trust. The filing presents continuing operations separately from the homebuilding and real estate development business classified as discontinued operations.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Net sales | $1,964 million | $1,874 million | $3,700 million | $3,629 million |
| Gross margin | $465 million | $421 million | $840 million | $804 million |
| Operating income | $400 million | $293 million | $708 million | $546 million |
| Net earnings attributable to common shareholders | $280 million | $196 million | $463 million | $340 million |
| Diluted EPS | $0.47 | $0.35 | $0.79 | $0.61 |
| Net cash from operations | Not separately provided | Not separately provided | $431 million | $313 million |
Gross margin increased to approximately 23.7% of sales in Q2 2014 from 22.5%; operating margin increased to approximately 20.4% from 15.6%; and net earnings attributable to common shareholders represented approximately 14.3% of sales versus 10.5%.
At June 30, 2014, cash and cash equivalents were $845 million, total assets were $15.7 billion and total equity was $7.1 billion. Long-term debt was $4.891 billion, with an additional $511 million of nonrecourse debt held by variable interest entities. The company had a $1 billion senior unsecured revolving credit facility expiring in September 2018, no debt maturities in the next 12 months, and was in compliance with its debt covenants.
Year-to-date investing cash outflows were $139 million, including $159 million of capital spending. Management expected 2014 net capital expenditures, excluding acquisitions, to approximate $400 million. Common dividends paid year-to-date were $257 million, or $0.44 per share.
Material changes versus the prior comparable period
- Q2 sales increased 5% and year-to-date sales increased 2%.
- Q2 operating income increased $107 million, while year-to-date operating income increased $162 million.
- Q2 and year-to-date net earnings attributable to common shareholders increased 43% and 36%, respectively.
- Timberlands net contribution to earnings rose to $170 million in Q2 from $114 million and to $334 million year-to-date from $218 million, supported by higher log prices, volumes, timberland exchanges and the Longview Timber acquisition.
- Wood Products contribution declined to $102 million in Q2 from $136 million and to $166 million year-to-date from $314 million, mainly because of lower OSB and structural lumber realizations.
- Cellulose Fibers contribution increased to $91 million in Q2 from $57 million and to $145 million year-to-date from $88 million, primarily from higher pulp and liquid packaging board realizations and lower maintenance costs.
- Other operating income included a $45 million pretax gain in Q2 and a $90 million gain year-to-date from a postretirement plan amendment. The company also recognized a $22 million pretax gain on a landfill sale in the first quarter.
- Year-to-date restructuring and impairment charges were $27 million, including $23 million of termination benefits. Approximately $10 million of additional charges were expected through early 2015.
Outlook, unusual items, risks and contingencies
On July 7, 2014, after the reporting date, Weyerhaeuser completed the Real Estate Divestiture. The transactions transferred the homebuilding and real estate development business to TRI Pointe Homes, Inc., distributed WRECO shares to Weyerhaeuser shareholders in exchange for 59 million common shares, and generated $712 million of cash proceeds. Management expected to record an approximate $1 billion net gain in the third quarter of 2014. WRECO had issued $900 million of senior obligations in June 2014; those obligations were transferred with the discontinued operations.
Management identified exposure to housing and economic conditions, product demand and prices, raw-material and energy costs, weather and natural disasters, transportation, currency and export markets, environmental and forestry regulation, litigation, pension asset performance, accounting changes and integration of Longview Timber. The filing states that no legal proceeding was then expected to have a material adverse effect on long-term financial position, results or cash flows.
Environmental accruals were approximately $31 million for remediation and $45 million for asset-retirement obligations. The company expected 2014 pension and postretirement contributions or benefit payments totaling approximately $111 million, while anticipating no contribution to its U.S. qualified pension plan.
The Supreme Court of Canada’s June 2014 Tsilhqot’in First Nation decision could affect future timber operations if similar claims succeed in Weyerhaeuser’s Princeton, British Columbia, operating area; management did not expect a significant effect on 2014 harvests or production.
Facts investors should verify
- Whether the approximately $1 billion Real Estate Divestiture gain was recorded as expected in Q3 2014 and how the transaction affected share count, cash and debt.
- The sustainability of Timberlands and Cellulose Fibers gains versus continued weakness in OSB and structural lumber pricing.
- Actual 2014 capital expenditures compared with the approximately $400 million expectation and related free cash flow.
- Progress and final cost of the selling, general and administrative restructuring program, including the expected additional $10 million of charges.
- Postretirement plan amendment benefits, pension funding requirements and the effect of future market performance on other comprehensive income.
- Potential effects of Canadian Aboriginal title claims, environmental obligations, export markets, currency movements and other disclosed operating risks.