Weyerhaeuser Company — 2Q 2013 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser is a REIT operating in timberlands, wood products, cellulose fibers, and real estate development and homebuilding. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Net sales | $2,141 million | $1,793 million | $4,092 million | $3,287 million |
| Gross margin | $477 million | $277 million | $895 million | $481 million |
| Operating income | $311 million | $176 million | $567 million | $277 million |
| Net earnings attributable to common shareholders | $196 million | $84 million | $340 million | $125 million |
| Diluted EPS | $0.35 | $0.16 | $0.61 | $0.23 |
| Net cash from operations | Not separately provided | Not separately provided | $313 million | $207 million |
- Gross margin increased to approximately 22.3% in Q2 from 15.5% in the prior-year quarter and to approximately 21.9% year-to-date from 14.6%.
- Operating margin increased to approximately 14.5% in Q2 from 9.8% and to approximately 13.9% year-to-date from 8.4%.
- Net margin attributable to common shareholders increased to approximately 9.2% in Q2 from 4.7% and to approximately 8.3% year-to-date from 3.8%.
- Cash from operations increased $106 million year-to-date, primarily reflecting higher customer receipts, partly offset by higher payments to employees, suppliers, and others.
- Cash and cash equivalents totaled $2,362 million at June 30, 2013, including $1,450 million designated for the Longview Timber purchase. Excluding the designated amount, cash and cash equivalents were $912 million.
- Year-to-date investing cash use was $71 million, including $82 million of property and equipment spending and $21 million for timberlands reforestation.
- Year-to-date financing cash inflow was $1,222 million, primarily from $781 million of common-share proceeds and $669 million of mandatory convertible preference-share proceeds, partly offset by $202 million of common dividends and $177 million of debt repayments.
- At June 30, Forest Products had $4,005 million of long-term debt including current maturities, and Real Estate had $109 million. Variable-interest entities had additional nonrecourse debt of $515 million. The $1.0 billion revolving credit facility was undrawn, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Sales increased 19% in Q2 and 24% year-to-date. Wood Products was the largest contributor, with sales up 37% in Q2 and 46% year-to-date, driven by higher prices and volumes.
- Wood Products net contribution to earnings increased $100 million in Q2 and $291 million year-to-date, primarily from improved price realizations. Higher log, manufacturing, and freight costs partially offset the gains.
- Timberlands net contribution increased $37 million in Q2 and $71 million year-to-date, reflecting higher log prices, stronger demand, and increased harvest volumes.
- Cellulose Fibers contribution increased $21 million in Q2 and $4 million year-to-date, mainly because of higher production and lower maintenance, fiber, chemical, and energy costs; lower selling-price realizations limited the improvement.
- Real Estate contribution was $14 million in Q2 versus $15 million in 2012, as higher home closings and margins were offset by lower land sales. Year-to-date contribution increased to $14 million from $7 million.
- Results benefited from the recovery in housing and wood-product markets. The prior-year periods also included pretax gains of $51 million in Q2 and $103 million year-to-date from a postretirement plan amendment, making the underlying improvement more significant than reported earnings alone indicate.
- The quarterly common dividend increased from $0.15 to $0.20 per share during the comparison period. Management intended, subject to Board approval, to increase it to $0.22 beginning with the third-quarter 2013 dividend.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2013 net capital expenditures, excluding acquisitions, of up to $300 million.
- Expected 2013 pension and benefit cash requirements included approximately $79 million of Canadian pension contributions, $19 million of U.S. nonqualified pension payments, and $37 million of U.S. and Canadian postretirement payments. No contribution to the U.S. qualified pension plan was anticipated.
- On July 23, 2013, after quarter-end, Weyerhaeuser completed the $2.65 billion acquisition of Longview Timber, including approximately $1.07 billion of assumed debt. Longview owns approximately 645,000 acres of timberlands in Oregon and Washington. Results will be included in Timberlands beginning in Q3 2013.
- The company expected to obtain approximately $1.1 billion of additional debt financing in Q3 2013 and repay the assumed Longview debt within 90 days after closing. This will materially change leverage and interest obligations.
- The Longview transaction was financed partly through 29 million common shares and 13.8 million mandatory convertible preference shares. The preference shares carry a 6.375% annual dividend rate and are scheduled to convert on July 1, 2016, subject to conversion terms. An additional 4.4 million common shares were issued on July 2, 2013 under an overallotment option.
- The company disclosed acquisition-integration risks, potential unanticipated liabilities and impairment charges, increased leverage, and the possibility that expected synergies and growth benefits may not be realized.
- A subsidiary acquired with Longview has elected REIT status; failure of that subsidiary to qualify could jeopardize Weyerhaeuser’s REIT status.
- The D.C. Circuit vacated an EPA biomass greenhouse-gas permitting deferral on July 12, 2013. The company stated that including biomass emissions in permitting could significantly increase regulatory burden and costs; more than 75% of operating energy is derived from biomass.
- Environmental accruals were approximately $30 million for remediation and $63 million for asset-retirement obligations. Management stated that litigation reserves were adequate for probable estimable losses, while noting that proceedings could materially affect results in a particular period.
- Up to $160 million of unrecognized tax benefits, primarily related to alternative-fuel-mixture credits, could be recognized within the following 12 months if tax examinations are completed favorably.
Most important facts for an investor to verify
- Post-acquisition leverage, debt refinancing, interest expense, and liquidity following the Longview Timber transaction.
- Whether wood-product pricing and housing demand remain strong enough to offset higher log, labor, manufacturing, and freight costs.
- Actual third-quarter impact of Longview Timber, including purchase-accounting adjustments, integration costs, and timberland operating results.
- The Board’s approval and sustainability of the proposed $0.22 quarterly common dividend and the required 6.375% preference-share dividends.
- Developments in biomass greenhouse-gas permitting and their potential effect on manufacturing operations and capital spending.
- Resolution of the disclosed tax examinations and realization of up to $160 million of potential tax benefits.