Weyerhaeuser Company — Q1 2019 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter ended March 31, 2019, compared with the quarter ended March 31, 2018. Weyerhaeuser operates through Timberlands, Real Estate & Energy and Natural Resources (ENR), and Wood Products. The company is organized as a REIT and generally pays corporate income taxes on taxable income generated by its wholly owned taxable REIT subsidiaries.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,643 million | $1,865 million | Down $222 million, 12% |
| Gross margin | $321 million | $517 million | Down $196 million |
| Operating income | $174 million | $404 million | Down $230 million, 57% |
| Net earnings (loss) | $(289) million | $269 million | Down $558 million |
| Basic and diluted EPS | $(0.39) | $0.35 | Down $0.74 |
| Adjusted EBITDA | $365 million | $544 million | Down $179 million, 33% |
| Net cash from (used in) operations | $(14) million | $136 million | Down $150 million |
Gross margin was approximately 19.5% of sales versus approximately 27.7% in the prior-year quarter. The net loss included a $455 million noncash pension settlement charge, a $20 million legal charge, and a $12 million debt extinguishment charge. The pension charge generated a $110 million discrete tax benefit.
- Timberlands: Sales to unaffiliated customers were $431 million, down $59 million. Net contribution to earnings was $120 million, down $69 million, primarily because Western log realizations declined 19% and volumes declined 5%.
- Real Estate & ENR: Sales were $118 million, up $67 million, and net contribution to earnings was $55 million, up $30 million. Real estate sales benefited from higher acreage sold and a higher average price per acre.
- Wood Products: Sales were $1,094 million, down $230 million, and net contribution to earnings was $69 million, down $201 million. Structural lumber and oriented strand board were particularly affected by lower realizations and volumes.
Cash and cash equivalents were $259 million at March 31, 2019, compared with $334 million at December 31, 2018. Current assets were $1.774 billion and current liabilities were $1.201 billion. The balance sheet included $362 million of restricted investments related to variable interest entities and $302 million of related nonrecourse debt; the investment is scheduled to mature in the first quarter of 2020 and the debt in the third quarter of 2019.
Total debt, excluding nonrecourse VIE debt, was $6.401 billion at carrying value, including $245 million drawn on the $1.5 billion revolving credit facility, which expires in March 2022. The company issued $750 million of 4.00% notes due in 2029 and used part of the proceeds to redeem $500 million of 7.38% notes due in 2019. Management stated that the company was in compliance with its debt covenants.
Investing activities provided $212 million, including $253 million received from buyer-sponsored VIEs. Financing activities used $273 million, including $254 million of dividends and $60 million of share repurchases. The quarterly dividend increased to $0.34 per share from $0.32. Capital expenditures were $59 million, and management expected approximately $400 million of net capital expenditures for full-year 2019.
Material changes versus the prior comparable period
- Sales declined 12%, primarily because of lower Wood Products and Western Timberlands sales; Real Estate & ENR partially offset the decline.
- Wood Products contribution fell 74% because of weaker lumber and panel pricing and lower volumes.
- Non-operating pension and postretirement costs increased by $446 million, principally due to the pension settlement charge.
- Other operating costs increased to $36 million from $10 million, including a $25 million litigation expense versus $5 million in the prior-year quarter.
- Interest expense increased to $107 million from $93 million, including the $12 million charge for early debt extinguishment.
- The company adopted ASC 842 for leases on January 1, 2019, recognizing $165 million of right-of-use assets and $172 million of lease liabilities, with a $7 million reduction to retained earnings.
- A new $500 million share repurchase authorization was approved. The company repurchased 2.35 million shares for approximately $60 million during the quarter, leaving approximately $440 million authorized.
Guidance, outlook, commentary and risks
Management expected U.S. housing starts to improve in 2019 to slightly below 1.3 million units, approximately 4% above 2018. It expected remodeling activity to increase and anticipated demand from China and Japan to be similar to 2018 levels. Management also expected approximately $400 million of 2019 net capital expenditures and approximately $40 million of 2019 contributions or benefit payments for non-U.S.-qualified pension and postretirement plans; no contribution to the U.S. qualified pension plan was expected to be required in 2019.
The filing identifies risks related to housing and economic conditions, interest rates, mortgage financing, product demand and pricing, trade restrictions and tariffs, currency movements, weather and natural disasters, raw-material and energy costs, transportation and labor availability, manufacturing disruptions, environmental and forestry regulation, legal proceedings, pension investment performance, tax policy, and changes in accounting standards.
Environmental remediation accruals were approximately $62 million at March 31, 2019, and asset-retirement obligations were $32 million. Management stated that no pending legal proceeding was expected to have a material adverse effect on the consolidated financial statements and that there had been no material change in previously disclosed risk factors.
Important facts for investors to verify
- Assess the extent to which the quarterly loss reflects the unusual, noncash $455 million pension settlement charge versus recurring operating weakness.
- Monitor Wood Products pricing, volumes, housing starts, remodeling demand, and the recovery of Timberlands log realizations.
- Review liquidity after the $254 million dividend, $60 million repurchase, negative operating cash flow, and upcoming VIE debt maturity.
- Verify the effect of the 2029 debt issuance and 2019 note redemption on future interest expense and leverage.
- Track the $20 million litigation charge, environmental contingencies, and any changes to the approximately $62 million remediation accrual.
- Confirm the timing and final amount of the pension settlement adjustment expected in the second quarter after pension asset and obligation values are finalized.