Business Context and Reporting Period
Weyerhaeuser Company filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company is a REIT with operations in Timberlands, Wood Products, Cellulose Fibers and Real Estate. The filing states that the company had not filed all reports required under Sections 13 or 15(d) during the preceding 12 months, although its disclosure controls were deemed effective as of June 30, 2012.
Financial Results and Key Metrics
| Dollar amounts in millions, except per-share data | Q2 2012 | Q2 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Net sales and revenues | $1,793 | $1,610 | $3,287 | $3,032 |
| Gross margin | $277 | $267 | $481 | $512 |
| Operating income | $176 | $127 | $277 | $363 |
| Net earnings attributable to common shareholders | $84 | $10 | $125 | $109 |
| Diluted EPS | $0.16 | $0.02 | $0.23 | $0.20 |
| Net cash from operations | Not separately presented | Not separately presented | $207 | $27 |
- Q2 revenue increased 11%; first-half revenue increased 8%.
- Approximate gross margin was 15.4% in Q2 2012 versus 16.6% in Q2 2011, and 14.6% for the first half versus 16.9% in the prior-year period.
- Approximate operating margin was 9.8% in Q2 2012 versus 7.9% in Q2 2011, and 8.4% for the first half versus 12.0% in the prior-year period.
- Cash and cash equivalents totaled $861 million at June 30, 2012, compared with $953 million at December 31, 2011.
- Total debt, including current maturities, was approximately $4.47 billion: $4.19 billion in Forest Products and $283 million in Real Estate. The reported fair value of this debt was approximately $5.21 billion.
- The company paid $161 million in dividends during the first half, or $0.30 per share.
- First-half capital spending was $139 million, and 2012 net capital expenditures were expected to be approximately $290 million, excluding acquisitions.
Material Changes Versus the Prior Comparable Period
- Wood Products revenue rose $171 million in Q2 and $279 million year to date, driven by higher volumes and improved lumber, oriented strand board and plywood pricing. Segment contribution to earnings improved by $98 million in Q2 and $117 million year to date.
- Cellulose Fibers revenue declined $67 million in Q2 and $100 million year to date, primarily because pulp price realizations fell. Segment contribution declined $49 million in Q2 and $93 million year to date.
- Timberlands contribution declined $41 million in Q2 and $212 million year to date. The year-to-date comparison was affected by the $152 million pretax gain from the 2011 sale of 82,000 acres of non-strategic timberlands.
- Real Estate revenue increased $105 million in Q2 and $82 million year to date, primarily due to the sale of a 3,200-acre master-planned community in Houston. Single-family gross margin declined to 19.5% from 22.4% in Q2 and to 18.6% from 22.0% year to date.
- Net earnings benefited from a $51 million second-quarter and $103 million year-to-date pretax gain from amendments to postretirement benefit plans.
- Interest expense declined to $86 million in Q2 from $117 million and to $173 million year to date from $210 million, reflecting lower debt levels and the absence of substantial 2011 early-debt-extinguishment charges.
- 2011 included losses from discontinued operations related primarily to the sold hardwoods and Westwood Shipping Lines businesses; no discontinued-operations loss was reported in 2012.
Guidance, Outlook, Risks and Unusual Items
- For the third quarter, management expected comparable Timberlands earnings, with higher earnings from non-strategic timberland dispositions offset by lower Western log prices and weaker Southern log price realizations.
- Wood Products was expected to remain solidly profitable but below Q2 levels, with flat to slightly lower volumes, seasonally softer pricing and lower Western log costs.
- Cellulose Fibers earnings were expected to be substantially higher, supported by improved productivity, lower maintenance and input costs, and higher pulp volumes, despite continued downward pressure on pulp prices.
- Real Estate expected slightly higher single-family earnings, higher closings, slightly lower average selling prices and gross margins of approximately 20%.
- Key risks include housing and economic conditions, product demand and pricing, foreign exchange, export markets, raw material, energy and transportation costs, weather and natural disasters, environmental and forestry regulation, litigation, pension investment performance and tax changes.
- Environmental remediation accruals were approximately $33 million and asset-retirement-obligation accruals were approximately $65 million at June 30, 2012.
- The company expected 2012 pension contributions of approximately $107 million and other postretirement benefit payments of approximately $42 million. Following June 2012 legislation, management no longer expected a previously estimated $60 million U.S. qualified-plan contribution due by September 2013.
- Approximately $182 million of long-term debt was scheduled to mature in the third quarter, including $174 million of Real Estate debt. The company also expected to fund approximately $97 million of debt for a monetization special-purpose entity and receive approximately $110 million in the fourth quarter when the related instrument matured.
- The company had no borrowings under its $1.0 billion revolving credit facility and was in compliance with its covenants. Weyerhaeuser reported a defined debt-to-total-capital ratio of 46.2%, while WRECO reported 50.0%.
Important Facts for Investors to Verify
- Reconcile reported earnings growth with the nonrecurring $103 million postretirement-plan gain, discontinued operations and the 2011 timberland-sale gain.
- Assess sustainability of Wood Products improvement and the effect of potentially softer seasonal pricing and higher Canadian log costs.
- Monitor pulp prices, global demand, foreign exchange and the Cellulose Fibers segment’s expected recovery.
- Review upcoming debt maturities, special-purpose-entity cash flows, liquidity and covenant calculations.
- Evaluate real estate earnings quality, including the timing of land sales, backlog, cancellation rates and declining home gross margins.
- Consider pension, postretirement, environmental remediation and asset-retirement obligations, including their potential cash-funding requirements.
- Investigate the filing’s statement that required Exchange Act reports had not all been filed during the preceding 12 months.