Weyerhaeuser Company — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2013. Weyerhaeuser is a REIT with operations in Timberlands, Wood Products, Cellulose Fibers and Real Estate, including homebuilding and land development. The financial statements are unaudited and include reclassified prior-period amounts for comparability.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Net sales | $2,181 million | $1,772 million | $6,273 million | $5,059 million |
| Gross margin | $453 million | $348 million | $1,348 million | $829 million |
| Operating income | $277 million | $202 million | $844 million | $479 million |
| Net earnings attributable to common shareholders | $157 million | $117 million | $497 million | $242 million |
| Diluted EPS | $0.27 | $0.22 | $0.88 | $0.45 |
| Net cash from operations | Not separately provided | Not separately provided | $656 million | $329 million |
Q3 gross margin was approximately 20.8% of sales versus 19.6% in the prior-year quarter; operating margin was approximately 12.7% versus 11.4%; and net margin attributable to common shareholders was approximately 7.2% versus 6.6%. Year-to-date gross margin was approximately 21.5% versus 16.4%, operating margin was approximately 13.5% versus 9.5%, and net margin was approximately 7.9% versus 4.8%.
At September 30, 2013, cash and cash equivalents were $1,397 million, including $494 million designated for the Longview Timber purchase and repayment of acquired debt. Total assets were $15,609 million and total liabilities were $9,492 million. Forest Products long-term debt was $5,459 million and Real Estate long-term debt was $109 million. The company had a new $1 billion revolving credit facility, with no reported borrowings under available credit facilities at quarter-end, and was in compliance with debt covenants.
Year-to-date cash used in investing was $1,718 million, including $1,581 million for the Longview Timber acquisition. Financing provided $1,561 million, primarily from common-share issuance, mandatory convertible preference shares and debt financing. Common dividends paid were $330 million, compared with $242 million in the prior-year period.
Material changes versus the prior comparable period
- Q3 net sales increased 23% and operating income increased 37%; year-to-date sales increased 24% and operating income increased 76%.
- Wood Products was the largest contributor to improvement: Q3 sales increased $214 million and segment contribution increased $20 million; year-to-date contribution increased $311 million, primarily from higher realizations and volumes.
- Timberlands Q3 contribution increased $38 million and year-to-date contribution increased $109 million, reflecting stronger log prices, higher volumes and the Longview Timber acquisition.
- Cellulose Fibers weakened: Q3 contribution declined $31 million and year-to-date contribution declined $27 million, driven by lower sales realizations, maintenance outages and higher operating costs.
- Real Estate benefited from higher home closings and prices. Q3 closings increased to 768 from 615, and average price increased to $397,000 from $372,000. Year-to-date closings increased to 1,867 from 1,472.
- Q3 interest expense included an $11 million charge for unused bridge-loan fees related to Longview Timber. A further $25 million pretax debt-extinguishment charge was expected in Q4 2013.
- Common shares outstanding increased materially following the issuance of 33.4 million common shares to help finance Longview Timber. The company also issued 13.8 million mandatory convertible preference shares with $669 million of net proceeds.
Guidance, outlook, risks and unusual items
- On July 23, 2013, Weyerhaeuser acquired Longview Timber for $1.58 billion in cash and assumed debt of approximately $1.07 billion, for an aggregate purchase price of approximately $2.65 billion. The acquisition added approximately 645,000 acres of timberlands in Oregon and Washington.
- The company expected 2013 net capital expenditures, excluding acquisitions, to be approximately $300 million.
- Weyerhaeuser expected approximately $79 million of Canadian pension contributions, $19 million of U.S. nonqualified pension benefit payments and $37 million of other postretirement benefit payments in 2013.
- After quarter-end, the company borrowed $550 million under its new seven-year term loan facility and repaid approximately $1.118 billion of Longview Timber debt on October 15, 2013. The company expected a $25 million pretax charge related to the early extinguishment.
- On November 4, 2013, Weyerhaeuser announced an agreement to divest Weyerhaeuser Real Estate Company through a Reverse Morris Trust transaction with TRI Pointe Homes. Certain assets would be excluded, including a Nevada master-planned community with a book value of approximately $360 million; the filing warned that this asset could incur a substantial impairment.
- Up to $160 million of unrecognized tax benefits, primarily related to alternative fuel mixture credits, could be recognized within the following 12 months, subject to tax examinations.
- The company faced uncertainty regarding greenhouse-gas permitting requirements for biomass emissions. Because more than 75% of operating energy came from biomass, inclusion of biomass emissions could materially increase permitting burdens and costs.
- Legal matters included an ERISA pension-plan claim for which the damages claim had been dismissed but injunctive relief remained active. Environmental accruals were approximately $30 million for remediation and $56 million for asset-retirement obligations.
- Key operating risks included housing demand, product prices and volumes, raw-material and energy costs, weather and natural disasters, foreign exchange, environmental regulation, litigation, pension performance and completion of the TRI Pointe transaction.
Important facts for investors to verify
- Completion terms, timing, tax treatment and excluded assets of the TRI Pointe transaction, including any impairment of the Nevada property.
- Post-quarter-end debt balances, interest costs and the actual Q4 charge from refinancing and retiring Longview Timber debt.
- Integration progress and final purchase-price allocations for Longview Timber.
- Sustainability of Wood Products pricing and margins and the effect of higher log, freight, maintenance and labor costs.
- Cellulose Fibers pricing, outage frequency, operating costs and the ramp-up of the Poland facility.
- Cash generation after acquisition spending, dividends, pension obligations and planned capital expenditures.
- Resolution of biomass-emissions permitting requirements and the potential impact on manufacturing operations.
- Potential recognition of the disclosed tax benefits and developments in the ERISA and environmental matters.