Weyerhaeuser Company — Q1 2014 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser, a REIT focused on timberlands, forest products, cellulose fibers, and real estate, reported unaudited results for the quarter ended March 31, 2014. The company had 585.0 million common shares outstanding as of April 25, 2014. Results include Longview Timber, acquired in July 2013, within Timberlands.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,984 million | $1,951 million | +$33 million, +2% |
| Gross margin | $428 million | $418 million | +$10 million |
| Gross margin percentage | 21.6% | 21.4% | +0.2 percentage points |
| Operating income | $324 million | $256 million | +$68 million, +27% |
| Operating margin | 16.3% | 13.1% | +3.2 percentage points |
| Net earnings | $194 million | $144 million | +$50 million |
| Net earnings attributable to common shareholders | $183 million | $144 million | +$39 million, +27% |
| Basic and diluted EPS | $0.31 | $0.26 | +$0.05 |
| Net cash from operations | $109 million | $(61) million | +$170 million |
| Capital expenditures and reforestation | $65 million | $48 million | +$17 million |
| Cash dividends on common shares | $129 million | $93 million | +$36 million |
Cash and cash equivalents were $780 million at March 31, 2014, compared with $835 million at December 31, 2013. Long-term debt was $4.891 billion, unchanged from year-end, and nonrecourse debt held by variable interest entities was $516 million. The company reported no debt maturities in the following 12 months and remained in compliance with its debt covenants. A $1 billion senior unsecured revolving credit facility is available through September 2018.
Total assets were $14.505 billion and total liabilities were $7.620 billion at quarter-end. The company’s estimated 2014 effective tax rate for its taxable REIT subsidiary was approximately 34%.
Material changes versus the prior comparable period
- Timberlands: Sales increased $84 million to $377 million and net contribution to earnings increased $60 million to $164 million. Results benefited from higher log prices, stronger export demand, higher volumes, and the Longview Timber acquisition.
- Wood Products: Sales declined $90 million to $898 million and net contribution to earnings fell $114 million to $64 million. Lower OSB and lumber realizations, lower shipment volumes, higher log costs, adverse weather, and startup costs at the Evergreen, Alabama facility pressured results.
- Cellulose Fibers: Sales declined $13 million to $461 million, but net contribution to earnings rose $23 million to $54 million due mainly to improved pulp realizations, lower maintenance and freight costs, productivity improvements, and favorable currency effects.
- Real Estate: Sales increased $52 million to $248 million and net contribution to earnings increased $12 million to $12 million. Home closings rose 10% to 508, the average closing price increased to $476,000 from $394,000, and gross margin improved to 20.9% from 19.5%.
- Cash flow: Operating cash flow improved to $109 million from an operating cash use of $61 million, primarily from higher customer receipts and tax refunds.
- Shareholder distributions: The common dividend was $0.22 per share in Q1 2014 versus $0.17 in Q1 2013. Mandatory convertible preference shares generated $11 million of dividends in Q1 2014.
Guidance, outlook, commentary, risks, and unusual items
- The company expects 2014 net capital expenditures, excluding acquisitions, to approximate $400 million.
- Management expects an additional $10 million to $15 million of restructuring and closure charges through early 2015, primarily related to selling, general and administrative cost reductions. Q1 2014 included $21 million of restructuring, closure, and impairment charges, including $17 million of termination benefits.
- Other operating income included a $45 million pretax gain from a postretirement plan amendment and a $22 million gain from the sale of a Washington landfill. These gains materially benefited operating income and earnings.
- The company expects to complete the divestiture of Weyerhaeuser Real Estate Company to TRI Pointe Homes through a Reverse Morris Trust transaction in early Q3 2014, subject to transaction conditions, approvals, and anticipated tax treatment.
- The company expects 2014 pension and postretirement payments and contributions totaling approximately $111 million, including $53 million for a Canadian registered pension plan, $3 million for Canadian nonregistered plans, $20 million for U.S. nonqualified plans, and $35 million for other postretirement plans. No contribution to the U.S. qualified pension plan is anticipated.
- Key risks include housing and economic conditions, demand and pricing for wood products and pulp, raw-material and energy costs, weather and natural disasters, foreign exchange, environmental and forestry regulations, pension performance, litigation, integration of Longview Timber, and completion of the TRI Pointe transaction.
- Management stated that no material legal proceeding was expected to adversely affect long-term financial position, results of operations, or cash flows. Environmental remediation accruals were approximately $31 million, and asset-retirement obligation accruals were $45 million.
- Disclosure controls were effective as of March 31, 2014, and no material changes occurred in internal controls. The filing states that there were no material changes to previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- Whether the $45 million postretirement-plan gain and $22 million landfill gain are properly treated as nonrecurring when assessing sustainable earnings.
- The extent to which Timberlands earnings growth depends on Longview Timber, export demand, and elevated log prices.
- Whether Wood Products pricing, particularly OSB and lumber, recovers from the Q1 decline and whether startup and weather-related costs moderate.
- Completion timing, approvals, tax consequences, and proceeds or liabilities associated with the planned TRI Pointe/WRECO transaction.
- Progress against the expected $400 million 2014 capital-spending plan and the additional $10 million to $15 million restructuring-cost estimate.
- Liquidity availability under the $1 billion revolving credit facility, debt maturities, pension funding requirements, and the company’s ability to sustain dividend payments.