Weyerhaeuser Company 10-Q Summary
Business Context and Reporting Period
Weyerhaeuser Company, a real estate investment trust, filed its unaudited Form 10-Q for the quarter ended March 31, 2013. Operations comprise Timberlands, Wood Products, Cellulose Fibers and Real Estate. The company had 547.7 million common shares outstanding as of April 26, 2013.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,951 million | $1,494 million | +31% |
| Gross margin | $418 million | $204 million | +105% |
| Gross margin percentage | 21.4% | 13.7% | +7.7 percentage points |
| Operating income | $256 million | $101 million | +$155 million |
| Operating margin | 13.1% | 6.8% | +6.3 percentage points |
| Net earnings attributable to common shareholders | $144 million | $41 million | +$103 million |
| Basic and diluted EPS | $0.26 | $0.08 | +$0.18 |
| Dividends per share paid | $0.17 | $0.15 | +$0.02 |
| Net cash used in operations | $61 million | $60 million | Comparable use |
Net margin increased to approximately 7.4% from 2.7%. Interest expense declined to $82 million from $87 million. Income tax expense was $41 million in 2013 versus a $15 million tax benefit in 2012; the 2013 estimated annual effective tax rate for the taxable REIT subsidiary was 34.7%, excluding discrete items.
At March 31, 2013, cash and cash equivalents were $639 million, compared with $898 million at December 31, 2012. Total debt carrying value was approximately $4.135 billion, consisting primarily of $4.026 billion in Forest Products debt and $109 million in Real Estate debt. The company had no borrowings under its $1.0 billion revolving credit facility, which expires in June 2015, and was in compliance with its covenants.
Total assets were $12.510 billion and total liabilities were $8.234 billion at quarter-end. Capital spending was $48 million year to date, and management expected 2013 net capital expenditures, excluding acquisitions, of up to $300 million.
Material Changes Versus the Prior Comparable Period
- Wood Products sales increased 56% to $988 million, and net contribution to earnings improved to $178 million from a $13 million loss. Higher lumber, oriented strand board and plywood prices were the principal drivers.
- Timberlands sales increased 17% to $293 million, while net contribution to earnings rose 49% to $104 million, supported by higher log prices, increased demand and higher harvest volumes.
- Cellulose Fibers sales were essentially flat at $474 million, but contribution to earnings declined 35% to $31 million because of lower pulp and liquid packaging board price realizations.
- Real Estate sales increased 43% to $196 million, and contribution to earnings improved to break-even from an $8 million loss. Home closings increased to 463 from 349, while the average closing price rose to $394,000 from $376,000.
- Unallocated items reduced earnings by $46 million versus a $16 million contribution in the prior year. The comparison was affected by a $52 million postretirement-plan-amendment gain recognized in Q1 2012.
- Operating cash flow remained negative at $61 million, principally because increased receivables, inventories, real estate and other working-capital needs absorbed cash as business activity expanded.
Guidance, Outlook, Risks and Unusual Items
- Timberlands earnings, excluding nonstrategic timberland dispositions, were expected to be comparable in Q2 2013; improved Western log prices were expected to offset seasonally higher silviculture costs.
- Wood Products earnings were expected to be comparable, with higher volumes offset by somewhat lower lumber and OSB prices and higher raw-material costs.
- Cellulose Fibers earnings were expected to increase significantly, supported by lower fiber, energy and maintenance costs and slightly higher pulp realizations.
- Real Estate expected approximately 600 Q2 single-family closings, a slight profit, comparable margins and higher selling-related expenses.
- In Q2 2013, the company expected to pay approximately $162 million related to a timber monetization special-purpose entity and receive approximately $184 million when the related investment matured.
- Debt maturities during the next twelve months included $21 million in Q2 2013, $163 million in Q3 2013 and $69 million in Q4 2013; no maturities were scheduled for Q1 2014.
- Moody’s upgraded the company’s senior unsecured note rating to Baa3 from Ba1 on April 22, 2013, with a stable outlook.
- The company expected approximately $88 million of Canadian pension contributions and $56 million of U.S. and Canadian benefit payments during 2013, and did not anticipate a contribution to its U.S. qualified pension plan.
- Up to $160 million of unrecognized tax benefits, primarily related to alternative fuel mixture credits, could be recognized within twelve months if tax examinations are completed favorably.
- Environmental remediation accruals were approximately $31 million and asset-retirement obligations were $65 million at March 31, 2013. Management stated that legal matters could materially affect a particular quarter or year but were not expected to materially affect long-term results.
- Key risks included housing and economic conditions, product demand and pricing, raw-material and energy costs, manufacturing performance, weather and natural disasters, foreign exchange, export markets, regulation, litigation, pension performance and tax policy.
Important Facts for Investors to Verify
- Confirm that the strong earnings improvement is sustainable after considering the unusually weak Q1 2012 comparison and the absence of the prior-year $52 million postretirement gain.
- Monitor Wood Products pricing, log costs and freight costs, which drove much of the earnings improvement and could reverse.
- Assess liquidity after the scheduled debt repayments, the $162 million special-purpose-entity payment, dividends and expected pension obligations.
- Track negative operating cash flow and working-capital growth, particularly receivables, inventories and real estate assets.
- Verify the timing and resolution of up to $160 million in potential tax-benefit recognition.
- Evaluate housing closings, cancellation rates, backlog, margins and input costs in the Real Estate segment.
- Review pension-asset valuation updates expected in Q2 2013 and their potential effect on pension expense.