WEYERHAEUSER CO quarterly report, Q1 FY2015

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Weyerhaeuser Company — First-Quarter 2015 Form 10-Q

Business context and reporting period

Weyerhaeuser filed its unaudited quarterly report for the quarter ended March 31, 2015. The company operates as a REIT and is principally engaged in timberlands, wood products, and cellulose fibers. The former real estate and homebuilding business was divested in July 2014 and is reported as discontinued operations.

Financial results and key metrics

  • Net sales: $1.721 billion, down $15 million, or 1%, from $1.736 billion.
  • Operating income: $200 million, down $108 million from $308 million. Operating margin was approximately 11.6%, compared with 17.7% in the prior-year quarter.
  • Net earnings: $101 million, compared with $194 million. Earnings attributable to common shareholders were $90 million, compared with $183 million.
  • Earnings per diluted share: $0.17, compared with $0.31.
  • Gross margin: $336 million, compared with $375 million; gross margin percentage was approximately 19.5%, compared with 21.6%.
  • Adjusted EBITDA: $333 million, down from $372 million. Timberlands contributed $215 million, Wood Products $88 million, Cellulose Fibers $78 million, and Unallocated Items $(48) million.
  • Operating cash flow: $77 million, down from $109 million.
  • Investing cash flow: $(119) million, including $71 million of property and equipment spending, $18 million of reforestation, and $32 million for timberland acquisitions.
  • Financing cash flow: $(380) million, including $152 million of common dividends and $253 million of common-stock repurchases.
  • Cash and cash equivalents: $1.158 billion at March 31, 2015, down from $1.580 billion at year-end 2014.
  • Debt: $4.891 billion of long-term debt plus $511 million of nonrecourse debt held by variable interest entities. There were no debt payments during the quarter, no expected maturities within 12 months, and the company was in compliance with its covenants.
  • Liquidity: The company had a $1 billion senior unsecured revolving credit facility expiring in September 2018, with no borrowings during the quarter.

Material changes versus the prior comparable period

  • Timberlands sales declined $26 million, primarily from lower Western log realizations and export volumes. Segment contribution declined $2 million to $162 million.
  • Wood Products sales increased $25 million to $923 million because of higher shipment volumes and complementary building products sales. Contribution declined $2 million to $62 million as lower lumber and OSB realizations offset volume and cost improvements.
  • Cellulose Fibers sales declined $14 million to $447 million, while contribution fell $21 million to $33 million. Scheduled maintenance outages, lower productivity, and West Coast port disruption increased operating costs.
  • Unallocated Items deteriorated to a $54 million loss from a $35 million contribution, primarily because the prior-year period included a $45 million postretirement-plan amendment gain and a $22 million landfill-sale gain. First-quarter 2015 also included $29 million of foreign-exchange losses and a $13 million noncash impairment charge.
  • Income-tax expense declined to $19 million from $50 million, mainly because of lower earnings in the taxable REIT subsidiary.
  • First-quarter 2014 included $10 million of earnings from discontinued operations; there was no comparable contribution in 2015.
  • The company repurchased 7.3 million shares for $253 million during the quarter. Remaining authorization under the program was approximately $244 million at March 31, 2015.

Guidance, outlook, commentary, risks, and unusual items

  • Management continued to expect approximately 1.1 million U.S. housing starts in 2015, despite a slow first quarter caused by severe winter weather.
  • 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.
  • Net capital expenditures for 2015, excluding acquisitions, were expected to be approximately $500 million.
  • Expected 2015 pension and postretirement cash requirements included approximately $38 million for a Canadian registered plan, $3 million for Canadian nonregistered plans, $19 million for U.S. nonqualified pension plans, and $26 million for U.S. and Canadian other postretirement plans. No contribution to the U.S. qualified pension plan was anticipated.
  • Unusual first-quarter 2015 items included the $13 million noncash impairment charge, $29 million of foreign-exchange losses, and higher pension and postretirement costs. The prior-year quarter benefited from significant one-time gains and restructuring-related items.
  • Key risks include housing and construction demand, product prices and volumes, raw-material and energy costs, manufacturing disruptions, weather and natural disasters, foreign exchange, export markets and trade restrictions, environmental and forestry regulation, pension performance, taxation, litigation, and changes in accounting standards.
  • Management reported no legal proceeding expected to have a material adverse effect on long-term consolidated financial position, results, or cash flows. Environmental accruals were approximately $28 million for remediation and $38 million for asset-retirement obligations.
  • Disclosure controls were effective as of March 31, 2015, and no material changes in internal control were reported.

Important facts for investors to verify

  • Whether housing starts, lumber and OSB pricing, export demand, and seasonal construction conditions support management’s 2015 outlook.
  • The sustainability of cash generation after the increased dividend, $500 million expected capital expenditures, timberland acquisitions, and remaining share-repurchase authorization.
  • The effect of scheduled maintenance, port conditions, product pricing, and foreign exchange on Cellulose Fibers and Wood Products earnings.
  • The final valuation of pension plan assets expected in the second quarter and any resulting effect on pension expense.
  • The company’s leverage, debt fair value of approximately $5.991 billion versus $4.891 billion carrying value, covenant compliance, and availability under the revolving facility.
  • The effect of one-time gains and charges on year-over-year comparisons and on management’s Adjusted EBITDA measure.
  • The potential impact of the pending revenue-recognition standard, for which the company had not yet selected a transition method or determined the reporting effect.