Weyerhaeuser Company — 2010 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter and year-to-date periods ended September 30, 2010, compared with September 30, 2009. Weyerhaeuser operates in Timberlands, Wood Products, Cellulose Fibers, Real Estate, and Corporate and Other. The company completed a major REIT-conversion process during 2010 and paid a $5.6 billion special dividend on September 1, 2010, partly in cash and partly in approximately 324 million common shares.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net sales and revenues | $1.664 billion | $1.407 billion | $4.888 billion | $4.073 billion |
| Operating income (loss) | $167 million | $123 million | $415 million | $(269) million |
| Net earnings attributable to common shareholders | $1.116 billion | — | $1.110 billion | $(370) million |
| Diluted EPS | $3.50 | — | $4.48 | $(1.75) |
| Net cash from operations | Not separately provided | Not separately provided | $551 million | $(276) million |
Operating margin was approximately 10.0% in Q3 2010 versus 8.7% in Q3 2009, and approximately 8.5% year-to-date versus negative 6.6% in the prior-year period. The reported earnings improvement was dominated by a $1.043 billion REIT-related deferred tax benefit; therefore, net income and EPS are not representative of recurring operating performance.
- Segment net contribution to earnings in Q3 was $75 million for Timberlands, $(100) million for Wood Products, $181 million for Cellulose Fibers, $20 million for Real Estate, and $10 million for Corporate and Other.
- Year-to-date segment net contribution was $226 million for Timberlands, $(122) million for Wood Products, $274 million for Cellulose Fibers, $78 million for Real Estate, and $30 million for Corporate and Other.
- Cash and cash equivalents totaled $1.368 billion at September 30, 2010, compared with $1.869 billion at December 31, 2009.
- Forest Products long-term debt, including current maturities, was $4.734 billion at September 30, 2010, versus $5.284 billion at year-end 2009. Real Estate long-term debt was $390 million versus $402 million.
- Debt retired during the first nine months was $571 million, including approximately $548 million of debt due in 2012. The company recorded a $49 million pretax early-extinguishment charge in Q2.
- No borrowings were outstanding under the $1.0 billion revolving credit facility, and the company reported compliance with its covenants. Weyerhaeuser Company’s defined debt-to-total-capital ratio was 49.8%; WRECO’s was 53.8%.
- Capital expenditures were $145 million year-to-date, and management expected full-year 2010 capital expenditures to exceed $200 million.
Material changes versus the prior comparable period
- Revenue increased 18% in Q3 and 20% year-to-date, primarily from stronger pulp pricing, higher Western log prices, improved building-product pricing, increased shipping revenue, and higher average home prices.
- Timberlands revenue increased, but earnings declined because the prior-year period included a $163 million pretax gain on the sale of 140,000 acres of Oregon timberlands, while 2010 experienced lower harvest volumes and higher operating costs.
- Wood Products remained loss-making in Q3 at $(100) million, although year-to-date losses improved substantially from $(525) million to $(122) million as pricing, cost reductions, lower impairments, and lower restructuring charges offset higher log costs.
- Cellulose Fibers earnings increased in Q3 on substantially higher pulp and liquid-packaging-board prices. Year-to-date earnings declined because the $229 million of 2009 alternative-fuel-mixture credits did not recur.
- Real Estate shifted from a $(64) million Q3 loss to a $20 million contribution, supported by improved homebuilding margins and lower impairment charges. Year-to-date contribution improved from $(210) million to $78 million.
- Operating cash flow improved by $827 million year-over-year, reflecting higher customer receipts and tax refunds, partly offset by higher payments to employees and suppliers and $191 million of pension contributions.
- Share count increased materially following the stock portion of the special dividend. Reported diluted weighted-average shares were 318.4 million in Q3; pro forma shares assuming the distribution at the beginning of the period were 536.9 million. Pro forma diluted EPS was $2.08 for Q3 and $2.07 year-to-date.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected Q4 Timberlands operating earnings to decline from Q3, excluding nonstrategic timberland dispositions, due to lower Western log prices, seasonally lower harvest volumes, and higher silviculture costs.
- Wood Products was expected to post a Q4 loss comparable to Q3, with seasonally lower volumes and modestly lower prices. The capacity review could result in additional closures, restructuring charges, or impairments.
- Cellulose Fibers earnings were expected to decline in Q4 because of lower average pulp prices and scheduled maintenance.
- Real Estate expected slightly lower Q4 homebuilding earnings, with more closings offset by lower margins and no significant land or lot sales anticipated.
- The company anticipated recognizing a potential $240 million cellulosic biofuel producer credit, or approximately $149 million net of tax, in Q4 2010. The company was still evaluating the optimal treatment of alternative-fuel and cellulosic-biofuel credits.
- The REIT conversion reduced corporate taxes on qualifying income, but the company remains subject to taxes on built-in gains for certain real-property sales during the first 10 years and on taxable REIT subsidiary earnings.
- Environmental remediation reserves were $28 million for 54 active sites. Reasonably possible additional remediation costs could reach $94 million above recorded reserves.
- Legal outcomes are uncertain. Management believes reserves are adequate for probable estimable losses and that litigation could materially affect a particular quarter or year, but is not expected to materially affect long-term results.
- Other key risks include housing demand, employment, mortgage financing, product prices, raw-material and energy costs, foreign exchange, weather and natural disasters, regulation, litigation, pension investment performance, tax-law changes, and market demand in Europe and Asia.
- The financial statements were unaudited, and management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Separate recurring operating earnings from the $1.043 billion REIT-related tax benefit and other gains, credits, impairments, and restructuring items.
- Confirm the company’s final REIT election and the continuing tax treatment of timberlands, built-in gains, and taxable REIT subsidiary income.
- Track the outcome of the Wood Products capacity review and any Q4 closure, restructuring, or impairment charges.
- Evaluate whether pulp and building-product pricing can offset expected seasonal volume and price declines.
- Verify the timing and realizability of the potential cellulosic biofuel tax credit.
- Assess post-special-dividend per-share results using the substantially higher share count and the company’s planned recurring dividend level.
- Monitor liquidity, debt maturities, the December 2011 revolving-credit-facility expiration, pension funding needs, and potential environmental remediation costs.