Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Weyerhaeuser reported unaudited results for the quarter and year-to-date periods ended June 30, 2020, compared with the same 2019 periods. The company operates through Timberlands, Real Estate & ENR, and Wood Products. Operations were affected by COVID-19, although the forest products industry was classified as essential critical infrastructure.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Net sales | $1,631 million | $1,692 million | $3,359 million | $3,335 million |
| Gross margin | $348 million | $302 million | $694 million | $623 million |
| Operating income | $243 million | $186 million | $483 million | $360 million |
| Net earnings (loss) | $72 million | $128 million | $222 million | $(161) million |
| Basic and diluted EPS | $0.10 | $0.17 | $0.30 | $(0.22) |
| Cash from operations | Not separately provided | Not separately provided | $477 million | $382 million |
Q2 gross margin was approximately 21.3% of sales versus 17.8% in the prior-year quarter; operating margin was approximately 14.9% versus 11.0%. Net margin was approximately 4.4% versus 7.6%, principally because of higher taxes and interest expense. YTD gross margin was approximately 20.7% versus 18.7%, and operating margin was approximately 14.4% versus 10.8%.
- Q2 Adjusted EBITDA was $386 million, up from $343 million; YTD Adjusted EBITDA was $799 million, up from $708 million.
- Q2 segment net contribution was $75 million for Timberlands, $19 million for Real Estate & ENR, and $159 million for Wood Products.
- YTD segment net contribution was $180 million for Timberlands, $55 million for Real Estate & ENR, and $293 million for Wood Products.
- Cash and cash equivalents were $643 million at June 30, 2020, compared with $139 million at December 31, 2019.
- Total debt was $6.299 billion, compared with $6.377 billion at year-end 2019. Long-term debt was $6.299 billion and there were no borrowings under the $1.5 billion revolving credit facility.
- Total assets were $16.254 billion and total equity was $8.202 billion at June 30, 2020.
- Capital expenditures and timberlands reforestation spending totaled $134 million YTD, compared with $143 million in 2019.
Material changes versus the prior comparable period
- Q2 sales declined 4%, primarily from lower Timberlands and Real Estate & ENR sales. Timberlands sales decreased $42 million and Real Estate & ENR sales decreased $16 million.
- Q2 operating income increased 31%, supported by a $46 million increase in gross margin and an $8 million product-remediation insurance recovery.
- Q2 net earnings declined 44% because income taxes changed from a $37 million benefit to a $60 million expense and interest expense increased by $12 million.
- Wood Products Q2 contribution increased 96% to $159 million, benefiting from stronger structural lumber and oriented strand board pricing and lower costs. YTD contribution increased 95% to $293 million.
- Timberlands Q2 contribution decreased 26% to $75 million, reflecting lower log volumes and pricing. YTD contribution decreased 19% to $180 million.
- Real Estate & ENR Q2 contribution decreased 46% to $19 million, while acres sold declined to 31,337 from 47,031. The average price per acre increased to $1,501 from $1,063.
- YTD results benefited significantly from the absence of the $449 million noncash pension settlement charge recorded in 2019. YTD 2020 also included a $12 million legal benefit and an $8 million product-remediation recovery.
- The company completed the sale of 630,000 Montana timberland acres for $145 million in cash in March 2020, with no material gain or loss recorded.
Liquidity, debt, outlook, and risks
- In March 2020, Weyerhaeuser issued $750 million of 4.00% notes due 2030, generating $732 million of net proceeds. In May, it redeemed $569 million of 4.70% notes due 2021 and recorded an $11 million pretax early-extinguishment charge.
- The board temporarily suspended the quarterly cash dividend in May 2020 to preserve liquidity. The company paid $254 million of dividends during the first half of 2020, compared with $507 million in the prior-year period. The timing of any reinstatement remains subject to business and market conditions.
- Management reduced expected 2020 capital expenditures by approximately $90 million and operating expenses by approximately $55 million. Expected 2020 net capital expenditures were approximately $270 million.
- Management expects Southern timber harvest volumes for full-year 2020 to be approximately 10% below 2019 levels. No specific earnings or revenue guidance was provided.
- Management stated that Q2 market conditions exceeded expectations, driven by strong repair-and-remodel demand, housing activity, and commodity wood-product pricing. However, conditions for the second half of 2020 remained highly uncertain due to COVID-19, unemployment, government stimulus, and possible renewed restrictions.
- Management believed liquidity was sufficient for foreseeable cash requirements and expected continued compliance with debt covenants. The company had $1.5 billion of revolving-credit availability and was in compliance with covenants at June 30, 2020.
- Principal risks include COVID-19 impacts, housing and remodeling demand, trade restrictions and tariffs, foreign exchange, transportation and labor costs, raw-material availability, weather and natural disasters, wildfire, environmental regulation, pension investment performance, legal proceedings, and changes in tax or accounting rules.
- Environmental accruals were approximately $61 million for remediation obligations, and the asset-retirement-obligation reserve was $32 million. Management reported no legal proceeding expected to have a material adverse effect on the financial statements.
Important facts for investors to verify
- Whether the temporary dividend suspension is extended or reversed, and the effect on shareholder returns.
- The sustainability of elevated lumber and oriented strand board pricing and whether demand weakens as COVID-19 effects persist.
- Progress against the approximately $270 million 2020 capital-spending plan and the expected 10% reduction in Southern harvest volumes.
- Future leverage, refinancing requirements, interest expense, and the company’s ability to maintain covenant compliance.
- The magnitude and duration of COVID-19-related disruptions to housing, remodeling, exports, manufacturing, supply chains, and employment.
- The effect of the Montana timberland divestiture and prior Michigan timberland sale on future Timberlands volumes and earnings.
- Potential recognition of previously unrecognized tax benefits in the third quarter of 2020 following final IRS regulations; the filing states this should improve tax receivables without affecting the effective tax rate.