Business Context and Reporting Period
Weyerhaeuser Company filed an unaudited Form 10-Q for the quarter ended March 31, 2010. The company reports two principal groups: Forest Products, including Timberlands, Wood Products and Cellulose Fibers, and Real Estate, including development, construction and homebuilding operations. Results are interim and are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales and revenues | $1.419 billion | $1.275 billion |
| Operating income (loss) | $84 million | $(330) million |
| Net loss attributable to common shareholders | $(20) million | $(264) million |
| Basic and diluted loss per share | $(0.10) | $(1.25) |
| Net cash from operations | $190 million | $(436) million |
| Capital expenditures and timberland investments | $68 million | $78 million |
| Cash from investing activities | $138 million | $(102) million |
Consolidated operating margin was approximately 5.9% in Q1 2010 versus negative 25.9% in Q1 2009. Net margin attributable to common shareholders was approximately negative 1.4% versus negative 20.7%.
- Segment revenue increased in Timberlands to $202 million, Wood Products to $604 million, and Cellulose Fibers to $410 million; Real Estate revenue declined to $151 million.
- Net contribution to earnings was $81 million for Timberlands, $(19) million for Wood Products, $19 million for Cellulose Fibers, $31 million for Real Estate and $12 million for Corporate and Other.
- Cash and cash equivalents totaled $2.160 billion at March 31, 2010, including $2.143 billion in Forest Products and $17 million in Real Estate.
- Total debt carrying value was approximately $5.674 billion, consisting of $5.284 billion for Forest Products and $390 million for Real Estate. Fair value of long-term debt was approximately $5.9 billion.
- Total liabilities were $11.118 billion and total equity was $4.057 billion at March 31, 2010.
- The company paid $11 million of dividends during the quarter, or $0.05 per share, compared with $53 million and $0.25 per share in Q1 2009.
Material Changes Versus the Prior Comparable Period
- Revenue increased 11%, primarily from stronger pulp markets, improved residential building-product pricing and higher Timberlands sales, partly offset by fewer home closings and lower average home prices.
- The net loss narrowed by $244 million, primarily because Q1 2009 included substantial restructuring, closure and impairment charges. Q1 2010 included $1 million of Forest Products impairment charges and $1 million of Real Estate impairment charges, compared with $18 million and $68 million, respectively, in Q1 2009.
- Wood Products revenue increased $62 million and its contribution improved by $247 million, but the segment remained unprofitable at $(19) million. Benefits included higher lumber and OSB realizations, improved volumes for engineered products, lower costs, and asset-sale gains.
- Timberlands contribution increased $41 million to $81 million, driven by stronger Western log prices and higher land and non-strategic timberland sales. Harvest and fee-depletion volumes declined.
- Cellulose Fibers revenue increased $46 million, but contribution declined $12 million to $19 million because higher pulp pricing and volumes were more than offset by maintenance, operating, fiber and energy costs.
- Real Estate revenue decreased $21 million, but contribution improved $127 million to $31 million. The improvement reflected lower impairment charges, higher homebuilding margins, cost reductions and $33 million of gains on commercial partnership interests.
- Operating cash flow improved primarily because the company received $576 million of income-tax refunds related to the 2009 net operating loss and alternative-fuel credits. The company also contributed $100 million to U.S. qualified pension plans during the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expected Q2 Timberlands operating earnings to be somewhat lower than Q1 excluding non-strategic timberland dispositions, as higher log prices would be offset by seasonal silviculture and road costs and lower Southern fee-timber harvest.
- Wood Products was expected to be profitable in Q2, supported by improved operating rates, sales realizations and volumes, partly offset by higher log costs.
- Cellulose Fibers earnings were expected to improve significantly, primarily from higher pulp price realizations, partly offset by higher freight and maintenance costs.
- Single-family homebuilding results were expected to be comparable to Q1, with more closings but lower average selling prices due to product mix. Management did not expect a repeat of the Q1 commercial-partnership gains.
- The company continued to evaluate conversion to a real estate investment trust, with 2010 viewed as the most likely conversion year. A potential special dividend of approximately $5.5 billion to $5.7 billion could be paid primarily in shares, with cash capped at approximately $550 million to $570 million. Management estimated a potential tax benefit of approximately $1 billion from reversing certain tax liabilities, but timing and completion remained subject to board and other conditions.
- Shareholders approved amendments after quarter-end to increase authorized shares to 1.36 billion and permit issuance of up to 960 million shares for the potential special dividend, while imposing a 9.8% ownership limitation.
- Remaining pension-trust receivables of $96 million were repaid in April 2010. The company estimated required 2010 pension contributions could be as much as $20 million, due by September 15, 2011.
- The company recorded a $28 million tax charge related to the loss of future Medicare Part D prescription-drug deductions beginning in 2013, plus a $3 million charge from state tax law and rate changes.
- Environmental remediation reserves were $29 million at March 31, 2010. Reasonably possible additional remediation costs could reach $95 million, including a $65 million increase in the estimated exposure during the quarter following the bankruptcy of a co-responsible party.
- The company had no borrowings under its credit facilities, $23 million of letters of credit outstanding, and was in compliance with covenants. A $400 million revolving facility expired in March 2010; a separate $1.0 billion facility remains available through December 2011.
- Key risks include housing demand and financing conditions, product prices and volumes, raw-material and energy costs, foreign exchange, pension performance, environmental and regulatory matters, litigation, weather and natural disasters.
Important Facts for Investors to Verify
- Whether the expected REIT conversion occurred, including the timing, structure and actual cash and share components of any special dividend.
- Whether improving Wood Products and Cellulose Fibers market conditions persisted beyond the quarter and translated into sustainable profitability.
- The recoverability of Real Estate inventories, land positions and investments given housing-market conditions and the company’s exposure to cancellations, foreclosures and short sales.
- The final valuation of pension assets and the amount and timing of future pension contributions.
- Actual environmental remediation costs and any litigation outcomes beyond recorded reserves.
- The company’s ability to maintain liquidity and comply with debt covenants while funding operations, pension obligations and any potential REIT-related distribution.