Weyerhaeuser Company — FY2010 Form 10-K Summary
Business context and reporting period
Weyerhaeuser is a forest products and real estate company operating in 10 countries. Its principal businesses are Timberlands, Wood Products, Cellulose Fibers, Real Estate, and Corporate and Other. The filing covers the fiscal year ended December 31, 2010; quarterly data includes fourth-quarter results. The company managed approximately 20.5 million forest acres and generated $6.6 billion of 2010 net sales and revenues.
For tax purposes, Weyerhaeuser converted to a real estate investment trust (REIT) effective January 1, 2010. Manufacturing, real estate development, homebuilding, and other non-qualifying activities remain primarily in taxable REIT subsidiaries.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales and revenues | $6.552 billion | $5.528 billion | +19% |
| Gross margin | $1.160 billion | $401 million | +189% |
| Operating income (loss) | $468 million | $(447) million | +$915 million |
| Earnings from continuing operations | $1.283 billion | $(568) million | Turned profitable |
| Net earnings attributable to common shareholders | $1.281 billion | $(545) million | Turned profitable |
| Basic/diluted EPS | $4.00/$3.99 | $(2.58)/$(2.58) | Improved |
| Cash from operations | $744 million | $(162) million | +$906 million |
| Capital expenditures | $234 million | $223 million | +$11 million |
| Long-term debt | $5.1 billion | $5.7 billion | Down approximately $627 million |
| Cash and cash equivalents | $1.467 billion | $1.869 billion | Down $402 million |
Reported gross margin was approximately 17.7% of sales, operating margin approximately 7.1%, and net margin attributable to common shareholders approximately 19.5%. The unusually high net margin was largely attributable to a $1.064 billion deferred tax liability reversal related to the REIT conversion and a $149 million tax benefit from cellulosic biofuel producer credits; it does not represent recurring operating profitability.
- Timberlands: Sales to unaffiliated customers increased 22% to $874 million, but net contribution to earnings declined 17% to $282 million. Higher western log prices and land-related revenues were offset by lower harvest volumes, higher operating costs, and the absence of a $163 million 2009 timberland-sale gain.
- Wood Products: Sales increased 16% to $2.591 billion and the loss narrowed to $310 million from $733 million. Improved lumber and OSB prices, operating efficiencies, cost reductions, and lower impairment charges helped results. The segment recorded $114 million of restructuring, closure, and impairment charges, including $92 million in the fourth quarter.
- Cellulose Fibers: Sales increased 26% to $1.911 billion, while earnings contribution decreased 7% to $412 million. Higher pulp and liquid packaging board prices were more than offset by the absence of $344 million of 2009 alternative fuel mixture credits and higher operating, freight, and Canadian-dollar costs.
- Real Estate: Sales increased 2% to $923 million and earnings contribution improved to $91 million from a $299 million loss. Home closings decreased to 2,125 from 2,177, but the average closing price increased to $396,000 from $382,000 and gross margin excluding impairments improved to 23.7% from 17.5%.
- Corporate and Other: Sales increased 53% to $253 million and earnings contribution improved to $71 million from a $107 million loss, helped by stronger shipping results, lower restructuring and impairment charges, and a $46 million gain on the sale of five short-line railroads.
Liquidity, debt, and capital resources
- Operating cash flow recovered to $744 million from cash used of $162 million in 2009. Cash inflows benefited from higher customer receipts and tax-related cash receipts, partly offset by higher payments to employees and suppliers and $233 million of pension contributions.
- Capital spending was $234 million, including $123 million in Cellulose Fibers. Management expected approximately $250 million of net 2011 capital expenditures, excluding acquisitions.
- Long-term debt was $5.060 billion in aggregate, consisting principally of $4.710 billion of Forest Products debt and $350 million of Real Estate debt. The company retired $682 million of debt during 2010 and recorded $50 million of pretax early-extinguishment charges.
- A $1.0 billion revolving credit facility was available through December 2011; there were no borrowings outstanding at year-end, and the company was in compliance with its covenants. Weyerhaeuser Company reported defined net worth of $5.0 billion and a defined debt-to-total-capital ratio of 48.8%.
- Cash dividends paid were $608 million, primarily reflecting the REIT-related distribution. The company announced expected 2011 quarterly dividends of $0.15 per share, or $0.60 annualized.
- The September 2010 Special Dividend totaled $5.6 billion, paid through approximately $560 million of cash and approximately 324 million newly issued common shares. This materially increased shares outstanding and affects EPS comparability.
Material changes versus the prior comparable period
- The company moved from a substantial 2009 loss to reported profitability in 2010, but the improvement was heavily influenced by nonrecurring tax benefits and lower impairment and restructuring charges.
- Housing remained depressed: U.S. housing starts were 586,000 units, new home sales were 321,000 units, and new home sales declined 14% from 2009. Wood Products and Real Estate remained exposed to excess housing inventory, foreclosures, weak employment, and limited mortgage availability.
- Restructuring, closure, and impairment charges fell to $149 million from $698 million. Real estate impairment and related charges attributable to shareholders fell to $21 million from $261 million.
- Five short-line railroads were sold in December 2010, and several Wood Products facilities were sold, permanently closed, or placed into indefinite closure.
- Foreign sales represented approximately 32% of total sales, or $2.088 billion, compared with 28% in 2009. China-related log demand increased materially, while the weaker U.S. dollar benefited pulp competitiveness.
Guidance, outlook, risks, and unusual items
- Management expected first-quarter 2011 Timberlands earnings to increase sequentially, excluding the effect of timberland dispositions, due to higher western log prices and seasonally higher harvest volumes. A subsequent sale of approximately 82,000 acres was expected to contribute approximately $150 million of pretax earnings.
- Wood Products was expected to post a smaller loss due to improved operating rates, higher selling prices, and continued cost reductions.
- Cellulose Fibers earnings were expected to decline because of increased scheduled maintenance outages.
- Real Estate was expected to report a small first-quarter loss from single-family operations because of fewer closings and lower margins.
- Principal risks include housing-market weakness, commodity price volatility, excess industry capacity, raw-material and energy costs, currency movements, transportation constraints, manufacturing disruptions, environmental and forestry regulation, natural disasters, litigation, pension funding, credit-market access, and potential loss of REIT status.
- Environmental remediation reserves totaled $29 million at year-end. The company estimated reasonably possible additional remediation costs of up to approximately $97 million over several years. Potential future spending to comply with final U.S. boiler and air-emission standards was estimated at $30 million to $100 million over several years.
- Defined benefit pension plans were underfunded by approximately $494 million, and other postretirement benefit plans were underfunded by approximately $496 million. Expected 2011 pension and postretirement contributions and benefit payments were material.
- Auditor KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Separate recurring operating performance from the $1.064 billion REIT tax reversal, $149 million cellulosic biofuel tax benefit, prior-year fuel credits, and other disposition-related gains.
- Reconcile reported EPS with pro forma EPS after the approximately 324 million shares issued in the Special Dividend; pro forma 2010 diluted EPS was $2.39 versus reported diluted EPS of $3.99.
- Review the sustainability of Wood Products and Real Estate results given continued weakness in housing, low operating rates, impairments, and the company’s first-quarter loss outlook for homebuilding.
- Assess debt maturities, including approximately $529 million of Forest Products debt and $188 million of Real Estate debt due in 2012, together with the December 2011 expiration of the revolving credit facility.
- Evaluate pension and postretirement funding requirements, environmental remediation exposure, potential air-emission compliance costs, legal contingencies, and the tax consequences of maintaining REIT qualification.