Weyerhaeuser Company — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser is a timberlands owner and forest-products company operating through Timberlands, Real Estate & Energy and Natural Resources, and Wood Products segments. This unaudited Form 10-Q covers the quarter and year-to-date periods ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net sales | $1,671 million | $1,910 million | $5,006 million | $5,840 million |
| Gross margin | $272 million | $458 million | $895 million | $1,593 million |
| Operating income | $202 million | $337 million | $562 million | $1,217 million |
| Net earnings (loss) | $99 million | $255 million | $(62) million | $841 million |
| Diluted EPS | $0.13 | $0.34 | $(0.08) | $1.11 |
| Adjusted EBITDA | $308 million | $505 million | $1,016 million | $1,686 million |
Calculated margins declined materially: Q3 gross margin was approximately 16.3% versus 24.0%, operating margin was 12.1% versus 17.6%, and net margin was 5.9% versus 13.4%. Year-to-date gross margin was approximately 17.9% versus 27.3%, and operating margin was 11.2% versus 20.8%.
- Q3 segment net contribution: Timberlands $72 million, Real Estate & ENR $32 million, Wood Products $143 million, and unallocated items $(54) million.
- YTD segment net contribution: Timberlands $294 million, Real Estate & ENR $122 million, Wood Products $293 million, and unallocated items $(620) million.
- YTD operating cash flow was $674 million, down from $820 million. Capital expenditures were $241 million, including $199 million for property and equipment and $42 million for timberlands reforestation.
- Cash and cash equivalents were $153 million at September 30, 2019, compared with $334 million at December 31, 2018.
- Total debt carrying value, including the line of credit, was approximately $6.59 billion; fair value was $7.71 billion. Long-term debt was $6.15 billion and revolving-credit borrowings were $440 million.
- The company had $1.06 billion of current financial investments held by variable interest entities and other current assets, including $362 million scheduled to mature in the first quarter of 2020. These investments correspond to nonrecourse obligations of the variable interest entities.
- Common dividends paid year-to-date were $760 million, or $1.02 per share. The company repurchased approximately $60 million of shares in the first quarter and made no repurchases in the second or third quarters.
Material changes versus the prior comparable period
- Q3 sales declined $239 million, or 13%, primarily from lower Wood Products sales of $151 million, lower Timberlands sales of $61 million, and lower Real Estate & ENR sales of $27 million.
- YTD sales declined $834 million, or 14%, driven mainly by a $702 million decline in Wood Products sales and a $195 million decline in Timberlands sales. Real Estate & ENR sales increased $63 million.
- Wood Products Q3 contribution declined $70 million to $143 million. Structural lumber realizations declined 21% and oriented strand board realizations declined 33%, partially offset by higher sales volumes.
- Timberlands Q3 contribution declined $54 million to $72 million, primarily because Western log prices declined 21% and volumes declined 9%.
- YTD results include a $449 million noncash pension settlement charge related to transferring approximately $1.5 billion of U.S. qualified pension assets and liabilities to an insurance company. The after-tax impact included in special-item analysis was $340 million.
- Q3 operating income included a $68 million insurance recovery related to prior product-remediation efforts and $25 million of litigation expense. YTD operating results included $35 million of legal charges.
- The company issued $750 million of 4.00% notes due November 2029, receiving net proceeds of $739 million, and used part of the proceeds to redeem a $500 million 7.38% note due October 2019.
- Adjusted EBITDA declined 39% in Q3 and 40% year-to-date, reflecting lower Timberlands and Wood Products performance.
Guidance, outlook, risks and unusual items
- Management continued to expect full-year 2019 U.S. housing starts to increase slightly from 2018, supported by employment growth, consumer confidence, and relatively low mortgage rates.
- Management expected approximately $380 million of net capital expenditures for full-year 2019.
- On September 16, 2019, the company agreed to sell 555,000 Michigan timberland acres for $300 million in cash. The transaction was expected to close in the fourth quarter of 2019, subject to customary conditions. Related assets of $251 million were classified as held for sale at September 30.
- The company did not anticipate a required contribution to its U.S. qualified pension plan for 2019 and expected approximately $40 million of contributions or benefit payments for other U.S. and Canadian plans.
- Key operating risks include housing and remodeling demand, wood-product and log prices, export demand and tariffs, currency movements, transportation and labor costs, weather and natural disasters, fires and pests, environmental and forestry regulation, manufacturing disruptions, litigation, pension investment performance, and changes in tax or accounting rules.
- Environmental remediation accruals were approximately $62 million, and asset-retirement obligations were $29 million. Management stated that no current legal proceeding was expected to have a material adverse effect on the consolidated financial statements.
- The company adopted ASC 842 leases on January 1, 2019, recognizing right-of-use assets of $165 million and lease liabilities of $172 million, with a $7 million adjustment to retained earnings.
- The company noted that LIBOR may be discontinued after 2021 but did not expect the transition to have a material adverse effect.
Important facts for investors to verify
- Whether lower lumber, oriented strand board, and Western log realizations persist and how they affect Wood Products and Timberlands margins.
- Completion and proceeds of the Michigan timberland sale and the treatment of any resulting gain or loss.
- Liquidity after the $760 million dividend payment, $440 million of revolver borrowings, and the $362 million variable-interest-entity investment maturity in early 2020.
- The comparability of reported earnings given the $449 million pension settlement charge, $68 million remediation recovery, legal charges, and debt-extinguishment costs.
- Progress toward the approximately $380 million full-year capital-spending expectation and the company’s ability to fund dividends and capital requirements from operating cash flow.
- Exposure to housing activity, trade restrictions, export markets, currency changes, environmental obligations, litigation, and natural-disaster risks.