Weyerhaeuser Company 2013 Form 10-K Summary
Business context and reporting period
Weyerhaeuser reported for the fiscal year ended December 31, 2013, with fourth-quarter data included. The company is a timberland owner and forest-products manufacturer operating through Timberlands, Wood Products, Cellulose Fibers and Real Estate. It owns or controls approximately 6.9 million acres of timberlands, manages additional Canadian licensed timberlands, and operates as a real estate investment trust (REIT).
The U.S. housing recovery supported Wood Products, Timberlands and homebuilding demand, although housing activity remained below historical peak levels. Approximately 29% of 2013 sales were to customers outside the United States.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $8.529 billion | $7.059 billion | Up 21% |
| Operating income | $747 million | $735 million | Up 2% |
| Net earnings attributable to common shareholders | $540 million | $385 million | Up 40% |
| Diluted EPS | $0.95 | $0.71 | Up $0.24 |
| Cash from operations | $1.004 billion | $581 million | Up $423 million |
| Capital expenditures | $293 million | $285 million | Up $8 million |
| Long-term debt | $4.891 billion | $4.291 billion | Up $600 million |
| Cash and cash equivalents | $835 million | $898 million | Down $63 million |
Gross margin was $1.820 billion, or approximately 21.3% of sales, compared with approximately 17.7% in 2012. Operating margin was approximately 8.8%, and net margin attributable to common shareholders was approximately 6.3%. The company recorded a $129 million income tax benefit in 2013, including a $193 million benefit related to previously unrecognized tax benefits and a $21 million charge related to repatriation of Canadian earnings.
- Timberlands: Sales to unaffiliated customers were $1.343 billion, up 25%; contribution to earnings was $470 million, up 46%. Western log demand, pricing, volumes and the Longview Timber acquisition were key drivers.
- Wood Products: Sales were $4.009 billion, up 31%; contribution to earnings was $441 million versus $120 million in 2012. Higher lumber, OSB and engineered-product prices and volumes materially improved results.
- Cellulose Fibers: Sales were $1.902 billion, up 3%; contribution to earnings was $200 million, down 10%, as higher volumes were offset by lower pulp and liquid-packaging-board realizations.
- Real Estate: Sales were $1.275 billion, up 19%; contribution to earnings was a $231 million charge versus a $105 million contribution in 2012, primarily because of the Coyote Springs impairment.
Liquidity included $835 million of cash and a $1 billion senior unsecured revolving credit facility with no borrowings outstanding at year-end. The company reported compliance with its debt covenants, including a defined debt-to-total-capital ratio of 41.3%. There were no scheduled debt maturities in the following twelve months.
Material changes versus the prior comparable period
- Weyerhaeuser acquired Longview Timber on July 23, 2013, for $1.58 billion of cash and assumed $1.07 billion of debt, for an aggregate purchase price of $2.65 billion. The acquisition added approximately 645,000 acres of Oregon and Washington timberlands.
- The acquisition was financed with common-share issuances, $669 million of mandatory convertible preference shares and new debt, increasing common shares outstanding to approximately 583.5 million at year-end from 542.4 million.
- Fourth-quarter operating income was a $97 million loss, compared with $256 million of operating income in the fourth quarter of 2012. The quarter included a $356 million non-cash impairment charge for the Coyote Springs Property.
- Real Estate entered into an agreement to be divested through a Reverse Morris Trust transaction with TRI Pointe Homes. The company expected closing in the second quarter of 2014; Coyote Springs was excluded from the transaction.
- Net pension and postretirement liabilities declined substantially, primarily because of higher discount rates and increased pension asset values. Pension and postretirement obligations nevertheless remained material.
Outlook, commentary, risks and unusual items
Management expected 2014 net capital expenditures, excluding acquisitions, to approximate $390 million. Expected 2014 pension and postretirement cash requirements included approximately $53 million for the Canadian registered plan, $3 million for Canadian nonregistered plans, $20 million for U.S. nonqualified pension plans and $35 million for other postretirement plans.
- Results remain sensitive to U.S. housing starts, mortgage availability, interest rates, employment, consumer confidence and home prices.
- Commodity pricing, industry supply, raw-material and energy costs, transportation, foreign exchange and international demand can materially affect margins.
- Environmental, forestry, endangered-species, water, greenhouse-gas and certification requirements may increase costs or restrict harvesting and manufacturing activities.
- The company identified potential environmental remediation costs of up to $101 million above its $30 million recorded reserve over several years, although the upper range was described as less certain.
- Expected environmental-compliance capital expenditures were approximately $10 million in 2014, while additional potential spending of $25 million to $45 million over several years could be required for U.S. industrial-boiler and process-heater standards.
- The Longview Timber acquisition carries integration, liability, impairment and expected-synergy risks. The TRI Pointe transaction was subject to financing, shareholder, regulatory, tax and other closing conditions.
- The REIT structure provides favorable tax treatment for qualifying income, but manufacturing, homebuilding and other activities conducted through taxable REIT subsidiaries remain subject to corporate income taxes. Failure to maintain REIT qualification could have significant tax consequences.
Important facts for investors to verify
- Reconcile the $540 million of common-shareholder earnings to reported EPS, including dilution from the mandatory convertible preference shares.
- Assess the sustainability of improved Wood Products and Timberlands margins under changing housing demand, log costs and commodity prices.
- Review the final economics, timing and tax treatment of the TRI Pointe/WRECO divestiture and the treatment of Coyote Springs.
- Evaluate Longview Timber acquisition financing, integration progress, incremental debt and expected contribution to cash flow.
- Review pension assumptions, asset concentration and required future contributions, particularly the significant Level 3 pension assets.
- Quantify potential environmental, legal, tax and regulatory exposures beyond recorded reserves.
- Confirm 2014 capital spending, dividend policy and liquidity after acquisitions, debt service, pension funding and other commitments.