Weyerhaeuser Company: 2015 Q3 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser is a REIT principally engaged in timberlands, wood products, and cellulose fibers. The filing covers the quarter and year-to-date periods ended September 30, 2015, compared with the corresponding 2014 periods. The former real estate and homebuilding business was divested in July 2014 and is reported as discontinued operations.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Net sales | $1,820 million | $1,915 million | $5,348 million | $5,615 million |
| Gross margin | $375 million | $411 million | $1,044 million | $1,251 million |
| Gross margin percentage | 20.6% | 21.5% | 19.5% | 22.3% |
| Operating income | $259 million | $318 million | $702 million | $1,026 million |
| Operating margin | 14.2% | 16.6% | 13.1% | 18.3% |
| Earnings from continuing operations | $191 million | $198 million | $436 million | $651 million |
| Net earnings attributable to common shareholders | $180 million | $1,153 million | $403 million | $1,616 million |
| Diluted EPS | $0.35 | $2.15 | $0.77 | $2.83 |
| Adjusted EBITDA | $375 million | $414 million | $1,066 million | $1,258 million |
Q3 net sales declined 5% year over year, while operating income declined 19%. The company reported $88 million of net interest expense in the quarter and $259 million year to date. Continuing-operations income taxes were a $16 million benefit in Q3 and a $16 million expense year to date, primarily reflecting lower taxable REIT subsidiary earnings.
- Timberlands Q3 sales were $326 million and net contribution to earnings was $126 million, down $38 million and $10 million, respectively.
- Wood Products Q3 sales were $1,023 million and net contribution was $85 million, down $25 million and $20 million, respectively. Lower lumber and OSB realizations outweighed higher shipment volumes and cost reductions.
- Cellulose Fibers Q3 sales were $471 million, down $32 million, while net contribution increased $20 million to $79 million because of fewer scheduled maintenance outage days and lower translated Canadian costs.
Cash flow, liquidity, debt, and capital allocation
- Year-to-date operating cash flow was $725 million, compared with $784 million in 2014.
- Investing cash flow was an outflow of $324 million, compared with an inflow of $485 million in 2014, which benefited from $707 million of net real estate divestiture proceeds.
- Year-to-date capital spending was $309 million, including $276 million for property and equipment, $33 million for reforestation, and $34 million for timberland acquisitions. Management expected approximately $500 million of 2015 net capital expenditures, excluding acquisitions.
- Financing cash flow was an outflow of $933 million, including $460 million of common dividends, $22 million of preference dividends, and $484 million of common-stock repurchases.
- Cash and cash equivalents were $1.048 billion at September 30, 2015, down from $1.580 billion at December 31, 2014.
- Long-term debt was $4.891 billion, plus $511 million of nonrecourse debt held by variable interest entities. No debt maturities were expected within the following 12 months.
- The company had a $1 billion senior unsecured revolving credit facility expiring in September 2018, with no reported borrowings under the facility. Weyerhaeuser was in compliance with its debt covenants.
- The company completed its $700 million 2014 repurchase authorization and had a new $500 million authorization available as of September 30, 2015. It repurchased 3.3 million shares for $90 million during Q3.
- The quarterly common dividend increased to $0.31 per share in August 2015. The Q3 dividend paid was $0.31 per share.
Material changes versus the prior comparable period
- Net earnings attributable to common shareholders fell $973 million in Q3 and $1.213 billion year to date, primarily because 2014 included $966 million and $998 million, respectively, of discontinued-operation earnings from the real estate divestiture.
- Excluding discontinued operations, operating performance weakened because of lower lumber, OSB, and log sales realizations, lower timberland sales volumes, and higher year-to-date cellulose operating costs.
- 2014 included significant unusual benefits: a $23 million Q3 and $113 million year-to-date pretax gain from a postretirement plan amendment, plus a $22 million year-to-date gain on a landfill sale.
- 2015 included a $13 million noncash impairment charge on a nonstrategic asset, along with $16 million of year-to-date restructuring, closure, and impairment charges.
- Foreign-exchange losses increased, including a $24 million year-to-date increase associated with debt held by a Canadian entity.
- Share repurchases reduced common shares outstanding to approximately 511.0 million at September 30, 2015, from approximately 524.5 million at December 31, 2014.
Guidance, outlook, commentary, and risks
- Management continued to expect approximately 1.1 million U.S. housing starts in 2015, supported by employment growth, improving consumer confidence, and historically low mortgage rates.
- Management expected 2015 demand from China and Japan to be lower than in 2014 and did not expect the U.S. dollar to strengthen significantly further against developed-market currencies during the remainder of 2015.
- Expected 2015 pension and postretirement cash requirements included approximately $38 million for the Canadian registered plan, $3 million for Canadian nonregistered plans, $19 million for U.S. nonqualified plans, and $25 million for U.S. and Canadian postretirement plans. No contribution to the U.S. qualified pension plan was anticipated.
- Principal risks include housing and economic conditions, product demand and pricing, competition, raw-material and energy costs, manufacturing disruptions, weather and natural disasters, transportation and labor costs, foreign exchange, environmental regulation, pension performance, taxation, litigation, and accounting changes.
- New Clean Water Act regulations adopted in June 2015 could increase permitting requirements and costs for forestry activities. Litigation challenging the regulations was pending and the outcome was uncertain.
- Environmental reserves included approximately $39 million for site remediation and $34 million for asset-retirement obligations. Management stated that no current legal proceeding was expected to have a material adverse effect on long-term consolidated financial position, results of operations, or cash flows.
- Disclosure controls were effective as of September 30, 2015, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Assess normalized earnings and cash flow excluding the 2014 real estate-divestiture gain and other unusual items.
- Track lumber, OSB, pulp, liquid packaging board, and log prices and volumes, especially Western export demand.
- Evaluate whether the $500 million capital-spending expectation and planned share repurchases remain consistent with operating cash flow and liquidity.
- Monitor leverage, interest expense, debt fair value, covenant compliance, and the availability of the $1 billion revolving facility.
- Review foreign-exchange exposure, Canadian operations, environmental obligations, Clean Water Act litigation, and pension funding assumptions.
- Confirm the timing and effect of the planned adoption of new revenue-recognition, debt-issuance-cost, pension fair-value, and inventory accounting standards.