Weyerhaeuser Company — 2012 Q3 Form 10-Q Summary
Reporting period: Quarter and year-to-date ended September 30, 2012, compared with the corresponding 2011 periods. Weyerhaeuser operates as a REIT with Timberlands, Wood Products, Cellulose Fibers, and Real Estate businesses.
Key Financial Metrics
| Dollar amounts in millions, except per-share data | Q3 2012 | Q3 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Net sales and revenues | $1,772 | $1,569 | $5,059 | $4,601 |
| Gross margin | $348 | $286 | $829 | $798 |
| Operating income | $202 | $100 | $479 | $463 |
| Net earnings attributable to common shareholders | $117 | $157 | $242 | $266 |
| Diluted EPS | $0.22 | $0.29 | $0.45 | $0.49 |
| Net cash from operations | — | — | $329 | $144 |
Margins: Q3 gross margin was approximately 19.6%, versus 18.2% in 2011; operating margin was approximately 11.4%, versus 6.4%. Year-to-date gross margin was approximately 16.4%, versus 17.3%, and operating margin was approximately 9.5%, versus 10.1%.
- Liquidity: Cash and cash equivalents were $608 million at September 30, 2012, down from $953 million at year-end 2011. The company had no borrowings under its $1.0 billion revolving credit facility, which expires in June 2015.
- Debt: Consolidated debt carrying value was approximately $4.3 billion, including $340 million of current maturities. Debt repayments were $187 million year-to-date, including $176 million of Real Estate debt maturities.
- Cash uses: Year-to-date financing cash outflows were $393 million, including $242 million of dividends and $187 million of debt repayments. Capital spending was $219 million; 2012 net capital expenditures were expected to be approximately $290 million.
- Dividend: The board declared a quarterly dividend of $0.17 per share on October 11, 2012, a 13% increase from the prior quarterly dividend.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 13%, led by a $213 million increase in Wood Products revenue and higher Real Estate and Timberlands revenue. Cellulose Fibers revenue declined $44 million.
- Third-quarter operating income doubled to $202 million, primarily because of improved Wood Products results, lower impairment and restructuring charges, and higher other operating income.
- Net earnings declined 25% because 2011 included $24 million of discontinued-operation earnings and an $83 million tax benefit, while 2012 reflected higher taxes, increased selling and administrative expenses, and no discontinued-operation gains.
- Year-to-date revenue increased 10%, but net earnings declined 9%. The comparison was affected by a $152 million pretax gain on non-strategic timberland sales in 2011 and a $103 million pretax gain from a postretirement plan amendment in 2012.
- Wood Products net contribution to earnings improved to $82 million year-to-date from a $166 million loss, benefiting from higher lumber, OSB, and plywood prices and volumes.
- Cellulose Fibers net contribution declined to $162 million from $316 million year-to-date, primarily because of lower pulp price realizations and higher operating costs.
- Timberlands net contribution declined to $227 million from $420 million year-to-date, principally because 2011 included the $152 million timberland-sale gain.
- Real Estate revenue increased to $663 million from $562 million year-to-date, helped by a 3,200-acre Houston-area land sale. Homes closed increased to 1,472 from 1,330, but the average closing price fell to $374,000 from $403,000.
Guidance, Outlook, Risks, and Unusual Items
- Fourth-quarter outlook: Timberlands earnings were expected to be comparable, with improved Western log prices offset by higher silviculture costs. Wood Products earnings were expected to decline seasonally. Cellulose Fibers earnings were expected to be comparable despite lower fluff-pulp prices. Real Estate expected slightly lower single-family earnings because of lower margins and higher selling expenses.
- Pension and benefits: Expected 2012 contributions included approximately $87 million to Canadian pension plans, $20 million to U.S. nonqualified plans, and $42 million of other postretirement benefit payments. Legislation eliminated the previously estimated $60 million required contribution to the U.S. qualified plan due in 2013.
- Variable-interest entities: The company repaid a $97 million note in the third quarter and expected to receive approximately $110 million when the related investment matured in the fourth quarter.
- Taxes: The estimated 2012 annual effective tax rate, excluding discrete items, was 55.6%. A third-quarter tax settlement reduced tax expense by $7 million.
- Contingencies: Accrued environmental remediation costs were approximately $34 million and asset-retirement obligations were $62 million. Management stated that litigation could materially affect a particular period, although it was not expected to have a material long-term effect.
- Principal risks: Housing activity, mortgage financing, product demand and prices, foreign exchange, energy and raw-material costs, weather and natural disasters, environmental and forestry regulation, export markets, pensions, taxes, litigation, and manufacturing performance.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting or risk factors from the 2011 Form 10-K.
Investor Verification Items
- Verify the sustainability of Wood Products’ price and volume improvements and the effect of expected seasonal fourth-quarter weakness.
- Assess exposure to pulp-price declines, global demand, foreign exchange, and maintenance costs in Cellulose Fibers.
- Review debt maturities of $156 million in Q1 2013, $21 million in Q2 2013, and $163 million in Q3 2013, as well as available liquidity.
- Reconcile reported earnings with unusual items, including the $103 million postretirement-plan gain, prior-year timberland-sale gain, discontinued operations, impairments, and tax settlements.
- Monitor housing closings, backlog, cancellation rates, average selling prices, and margins in Real Estate.
- Evaluate pension obligations, environmental accruals, litigation exposure, and the effects of REIT and taxable REIT subsidiary taxation.