Weyerhaeuser Company — Q1 2018 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser, a real estate investment trust, operates through Timberlands, Real Estate & Energy and Natural Resources, and Wood Products. The filing covers the unaudited quarter ended March 31, 2018, compared with the quarter ended March 31, 2017.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,865 million | $1,693 million | +10% |
| Gross margin | $517 million | $421 million | +23% |
| Operating income | $404 million | $293 million | +38% |
| Net earnings | $269 million | $157 million | +71% |
| Basic and diluted EPS | $0.35 | $0.21 | +$0.14 |
| Net cash from operations | $136 million | $35 million | +$101 million |
| Adjusted EBITDA | $544 million | $454 million | +20% |
Gross margin was approximately 27.7% of sales versus 24.9% in the prior-year quarter. Operating margin was approximately 21.7% versus 17.3%, and net margin was approximately 14.4% versus 9.3%.
- Timberlands: Sales increased 4% to $505 million and net contribution to earnings increased 28% to $189 million, primarily due to higher Western log prices.
- Real Estate & ENR: Sales declined 4% to $51 million and net contribution declined 4% to $25 million. Acres sold increased, but the average price per acre decreased to $1,539 from $2,403.
- Wood Products: Sales increased 13% to $1.309 billion and net contribution increased 57% to $270 million, driven mainly by higher sales realizations for structural lumber and oriented strand board.
Cash and cash equivalents were $598 million at March 31, 2018, compared with $824 million at December 31, 2017. Total current assets were $1.919 billion and total current liabilities were $911 million. Long-term debt was $5.928 billion, excluding $302 million of nonrecourse debt held by variable-interest entities. The company had no borrowings under its $1.5 billion revolving credit facility, which expires in March 2022, and stated that it was in compliance with debt covenants.
First-quarter investing cash use was $76 million, including $61 million of property and equipment expenditures and $20 million of timberlands reforestation expenditures. Financing cash use was $286 million, including $242 million of dividends and repayment of a $62 million debenture. The company expects 2018 net capital expenditures of approximately $420 million.
Material changes versus the prior comparable period
- Sales increased $172 million, led by a $155 million increase in Wood Products sales and a $19 million increase in Timberlands sales.
- Operating income benefited from higher gross margin, $20 million of product-remediation insurance recoveries, lower general and administrative expenses, and reduced Plum Creek integration costs.
- Results were partially offset by a $28 million pretax environmental remediation charge related to the Kalamazoo River Superfund site.
- Interest expense declined to $93 million from $99 million, while income tax expense increased to $30 million from $24 million because of higher taxable REIT subsidiary earnings.
- The company paid its $62 million, 7.00% debenture at maturity and increased its quarterly dividend to $0.32 per share from $0.31.
- No shares were repurchased during the quarter; $500 million remained available under the repurchase authorization.
- The company adopted ASC Topic 606 with no material financial statement impact and adopted ASU 2018-02 and ASU 2016-01, resulting in aggregate reclassifications of $262 million from accumulated other comprehensive loss to retained earnings.
Guidance, outlook, risks and unusual items
Management expects U.S. housing starts of approximately 1.30 million units in 2018, representing an anticipated 8% increase from 2017, and expects North American lumber consumption to grow approximately 4%. Management expects 2018 capital expenditures of approximately $420 million. The filing does not provide formal earnings guidance.
The company received a $20 million insurance recovery related to the TJI Joists with Flak Jacket Protection remediation program. Approximately 2,400 homes were affected; $247 million had been paid through March 31, 2018, and the remaining accrual was $43 million. Management expects a significant portion of the total expense to be covered by insurance.
The company recorded a $28 million charge for its estimated share of past Kalamazoo River remediation costs. Total accruals for Superfund and other potentially responsible sites were approximately $72 million. Management does not expect material losses from the current administrative order but noted that future remediation costs could be incurred.
An IRS tax dispute concerning Plum Creek's 2008 transaction could require recognition and distribution of approximately $600 million of gain and payment of approximately $100 million of built-in gains tax, plus substantial interest, if the company is unsuccessful. No reserve has been recorded because management believes it will prevail.
Key risks include housing and remodeling demand, product prices and raw-material costs, trade restrictions and tariffs, weather and natural disasters, manufacturing disruptions, transportation and labor costs, environmental and forestry regulation, legal proceedings, pension investment performance, and tax-law changes. The filing states that there were no material changes to the risk factors in the 2017 Form 10-K.
Investor verification points
- Verify the sustainability of Wood Products margin expansion and the effect of lumber prices, log and fiber costs, and sales volumes.
- Track remaining TJI remediation obligations, insurance recoveries, and whether the $43 million accrual is sufficient.
- Assess potential exposure from the Kalamazoo River matter and other environmental contingencies.
- Monitor the IRS litigation, including the potential gain distribution, tax, and interest consequences.
- Reconcile cash generation with dividends, capital expenditures, debt maturities, and the planned $420 million 2018 capital program.
- Evaluate liquidity after the decline in cash to $598 million and confirm continued availability of the $1.5 billion revolving facility.
- Consider the effects of the Uruguay divestiture, seasonality of real estate sales, and the company’s stated housing and lumber-market outlook.