Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Weyerhaeuser filed an unaudited Form 10-Q for the quarter ended March 31, 2011. The company operates as a real estate investment trust, with principal activities in Timberlands, Wood Products, Cellulose Fibers and Real Estate. Results are compared with the quarter ended March 31, 2010.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales and revenues | $1.578 billion | $1.419 billion |
| Gross margin | $254 million | $187 million |
| Gross margin percentage | 16.1% | 13.2% |
| Operating income | $238 million | $84 million |
| Operating margin | 15.1% | 5.9% |
| Net earnings attributable to common shareholders | $99 million | $(20) million |
| Diluted earnings per share | $0.18 | $(0.10) |
| Net cash from operations | $(109) million | $178 million |
| Capital spending | $47 million | $63 million |
| Cash and cash equivalents at March 31 | $1.463 billion | $2.160 billion |
- Net sales increased 11%, primarily from higher pulp prices and volumes, higher western log prices and volumes, and increased sales of certain residential building products.
- The reported earnings improvement was significantly affected by a $152 million pretax gain on the sale of 82,000 acres of non-strategic timberlands in southwestern Washington.
- Total assets were $13.580 billion at March 31, 2011, compared with $13.429 billion at December 31, 2010.
- Long-term debt was $4.710 billion in Forest Products and $348 million in Real Estate, or approximately $5.058 billion combined. Debt fair value was approximately $5.391 billion.
- The company paid $81 million of dividends during the quarter, including a quarterly dividend of $0.15 per share. The board declared another $0.15 per-share dividend payable June 1, 2011.
Material changes versus the prior comparable period
- Timberlands net contribution to earnings increased to $241 million from $81 million, primarily because of the timberland-sale gain, higher western log prices and higher harvest volumes.
- Wood Products revenue increased 3% to $624 million, but the segment loss widened to $36 million from $19 million. Higher log costs and the absence of a $40 million prior-year gain offset manufacturing and selling-cost reductions.
- Cellulose Fibers revenue increased 23% to $506 million, while net contribution to earnings increased to $86 million from $19 million, primarily because pulp price realizations increased 20%.
- Real Estate revenue increased to $160 million from $151 million, but net contribution declined to a $1 million loss from $31 million of earnings. The prior year included gains on sales of partnership interests.
- Corporate and Other contribution declined to a $41 million loss from $12 million of earnings, primarily due to higher pension and postretirement costs, increased share-based compensation and lower foreign-exchange gains.
- Operating cash flow declined by $287 million year over year. The comparison was heavily affected by a $444 million income-tax refund received in Q1 2010; Q1 2011 included $2 million of income-tax payments.
- The quarterly dividend increased from $0.05 to $0.15 per share, and the share count was substantially higher following the $5.6 billion special dividend paid in September 2010, which included approximately 324 million common shares.
Guidance, outlook, risks and unusual items
- Management expected slightly higher second-quarter Timberlands earnings excluding the timberland disposition, supported by modestly higher western log prices and harvest volumes, partly offset by fuel, road and silviculture costs.
- Wood Products was expected to post a smaller loss, with positive segment cash flow and no additional working-capital build anticipated.
- Cellulose Fibers was expected to produce higher earnings from higher selling prices, partly offset by increased scheduled maintenance costs.
- Real Estate was expected to generate a small second-quarter profit from seasonal home closings, despite lower margins and average sales prices.
- Management forecast 2011 net capital expenditures, excluding acquisitions, of approximately $250 million to $270 million.
- Subsequent to quarter end, the company exercised its right to call approximately $518 million of 6.75% notes due in 2012, with retirement expected in June 2011.
- The company had no borrowings under its $1.0 billion revolving credit facility and was in compliance with its covenants. Weyerhaeuser Company reported a defined debt-to-total-capital ratio of 48.5%; WRECO reported 52%.
- Environmental remediation accruals were $28 million, with reasonably possible additional costs estimated at up to $100 million over several years. Asset-retirement obligations were accrued at $68 million.
- Estimated spending to comply with EPA industrial-boiler MACT standards was reduced to $30 million to $45 million from the prior estimate of $30 million to $100 million, although the estimate could change following EPA reconsideration.
- An ERISA class-action complaint was filed on April 25, 2011 concerning management of the company’s U.S. salaried retirement plan assets. The company intends to contest the claim; the filing does not provide a quantified exposure.
- Key risks include housing-market weakness, foreclosure inventories, unemployment, product demand, raw-material and energy costs, foreign exchange, weather and natural disasters, environmental regulation, litigation, pension performance and tax matters. Management stated that the Japan earthquake and tsunami were not expected to have a material effect on 2011 results, but the situation remained evolving.
- The company stated that interim results should not necessarily be viewed as indicative of full-year results.
Important facts for investors to verify
- Separate recurring operating performance from the $152 million pretax timberland-sale gain and other nonrecurring items.
- Assess whether the improvement in Cellulose Fibers pricing and Timberlands pricing can persist after commodity and export-market conditions change.
- Monitor Wood Products losses, housing demand, backlog, cancellation rates and cash generation.
- Verify the timing and funding effect of the planned $518 million debt retirement and the remaining debt maturity profile.
- Evaluate liquidity after negative first-quarter operating cash flow, dividends, capital expenditures and pension contributions.
- Track pension-asset valuation updates, benefit costs and required contributions.
- Review potential environmental remediation costs, EPA boiler-rule requirements and the ERISA litigation as information develops.