Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the quarter and six months ended June 30, 2011. Weyerhaeuser operates as a real estate investment trust and reports Timberlands, Wood Products, Cellulose Fibers, Real Estate, and Corporate and Other activities. The filing was dated August 5, 2011.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales and revenues | $1,610 million | $1,641 million | $3,032 million | $2,924 million |
| Gross margin | $267 million | $327 million | $512 million | $508 million |
| Operating income | $127 million | $155 million | $363 million | $240 million |
| Net earnings attributable to common shareholders | $10 million | $14 million | $109 million | $(6) million |
| Basic and diluted EPS | $0.02 | $0.07 | $0.20 | $(0.03) |
| Net cash from operations | Not separately provided | Not separately provided | $7 million | $367 million |
Q2 gross margin was approximately 16.6% versus 19.9% in the prior-year quarter; operating margin was approximately 7.9% versus 9.4%. Six-month gross margin was approximately 16.9% versus 17.4%, while operating margin improved to approximately 12.0% from 8.2%, primarily reflecting the $152 million pretax gain on the sale of non-strategic timberlands.
- Cash and cash equivalents were $881 million at June 30, 2011, compared with $1.467 billion at December 31, 2010.
- Total long-term debt was $4.510 billion, including $4.192 billion in Forest Products and $318 million in Real Estate, versus $5.060 billion at year-end 2010. Fair value was $4.818 billion.
- The company repaid $550 million of debt during the first half and called approximately $518 million of 6.75% notes due in 2012. The related early-extinguishment charge was $26 million pretax.
- A new $1.0 billion four-year revolving credit facility was entered into in June 2011, expiring in June 2015. No borrowings were outstanding, and the company reported compliance with applicable covenants.
- First-half capital spending was $93 million; expected full-year 2011 net capital expenditures, excluding acquisitions, were approximately $250 million to $270 million.
- The quarterly dividend increased from $0.05 to $0.15 per share in February 2011. Cash dividends paid in the first half were $161 million.
Material changes versus the prior comparable period
- Q2 revenue decreased 2%, while six-month revenue increased 4%. Q2 earnings declined 29%; six-month earnings increased by $115 million from a prior-year loss.
- Timberlands contribution to earnings increased to $112 million from $70 million in Q2 and to $353 million from $151 million for the first half, benefiting from higher log prices, greater harvest volumes, land transactions, and the $152 million timberland-sale gain.
- Wood Products contribution declined to a $61 million loss from a $3 million loss in Q2 and to a $97 million loss from a $22 million loss for the first half. Lower OSB and structural lumber prices were the primary drivers, partly offset by cost reductions and higher operating rates.
- Cellulose Fibers contribution increased to $80 million from $74 million in Q2 and to $166 million from $93 million for the first half, principally due to higher pulp and liquid packaging board prices.
- Real Estate contribution declined to $8 million from $27 million in Q2 and to $7 million from $58 million for the first half. Six-month home closings fell to 822 from 1,018, although average home prices increased to $404,000 from $369,000.
- Discontinued operations generated a $13 million loss in Q2 and a $12 million loss for the first half, including environmental remediation charges and a $9 million impairment related to the hardwoods sale.
- Operating cash flow fell to $7 million from $367 million, principally because 2010 included $445 million of income-tax refunds while 2011 included $15 million of tax payments.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected significantly lower Timberlands earnings in Q3 because of lower Western selling prices and harvest volumes, higher seasonal silviculture and road expenses, and fewer non-strategic timberland dispositions.
- Management expected a comparable loss in Wood Products, excluding the hardwoods transaction, due to lower lumber and OSB prices and lower volumes, partly offset by lower log costs and modest cost improvements.
- Management expected significantly higher Cellulose Fibers earnings from lower maintenance costs and improved production, partly offset by lower pulp prices.
- Management expected slightly higher Real Estate earnings from seasonal home closings, with continued strong margins and flat to slightly lower selling prices.
- The hardwoods sale closed August 1, 2011, for expected consideration of $108 million, including a $25 million note receivable. The Westwood Shipping Lines sale was expected to provide $53 million in cash, subject to regulatory approval and working-capital adjustments.
- Environmental remediation accruals totaled $37 million. Management estimated reasonably possible additional remediation costs of up to $100 million over several years.
- Estimated spending to comply with industrial-boiler air-emission standards was reduced to $30 million to $45 million over the next several years, subject to regulatory reconsideration.
- The company faces an ERISA class-action complaint concerning management of its U.S. Retirement Plan assets and is contesting the claim.
- Key risks include housing and construction demand, lumber and OSB pricing, pulp markets, raw-material and energy costs, foreign exchange, weather and natural disasters, environmental regulation, litigation, pension performance, and regulatory or tax changes. Management stated that no significant risk-factor changes occurred from the 2010 Form 10-K.
Important facts for investors to verify
- Whether the expected Q3 segment outlook materialized, especially the projected Wood Products loss and Timberlands decline.
- The effect of lumber, OSB, pulp, log prices, harvest volumes, and housing closings on subsequent margins and cash flow.
- Final proceeds, working-capital adjustments, and accounting treatment for the hardwoods and Westwood transactions.
- Debt maturities, covenant compliance, revolver availability, and the effect of continued debt repayment on liquidity.
- Actual environmental remediation expenditures and any developments in the ERISA litigation.
- Whether operating cash flow recovered from the unusually low first-half 2011 level after the comparison benefit from 2010 tax refunds was eliminated.