Weyerhaeuser Company — First Quarter 2016 Form 10-Q
Business context and reporting period
Unaudited results for the quarter ended March 31, 2016. Weyerhaeuser is a REIT focused on timberlands, real estate and energy/natural resources, wood products, and cellulose fibers. The February 19, 2016 merger with Plum Creek materially expanded the company and affected year-over-year comparability; Plum Creek results are included from the merger date.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $1.835 billion | $1.727 billion | +$108 million, 6% |
| Gross margin | $360 million | $342 million | +$18 million |
| Operating income | $186 million | $200 million | -$14 million, 7% |
| Net earnings | $81 million | $101 million | -$20 million |
| Net earnings attributable to common shareholders | $70 million | $90 million | -$20 million |
| Basic and diluted EPS | $0.11 | $0.17 | -$0.06 |
| Adjusted EBITDA | $413 million | $343 million | +$70 million |
| Operating cash flow | $47 million | $87 million | -$40 million |
Gross margin was approximately 19.6% of sales versus 19.8% in the prior-year quarter. Operating margin was approximately 10.1% versus 11.6%; net margin attributable to common shareholders was approximately 3.8% versus 5.2%.
- Segment net contribution to earnings was $129 million for Timberlands, $15 million for Real Estate & ENR, $87 million for Wood Products, and $28 million for Cellulose Fibers.
- Cash and cash equivalents declined to $415 million from $1.012 billion at December 31, 2015.
- Total debt, including the note payable to the Timberland Venture, was approximately $8.638 billion at March 31, 2016, compared with $4.875 billion at year-end 2015. Long-term debt reported on the balance sheet was $7.803 billion, plus $835 million payable to the Timberland Venture.
- The company had a $1 billion revolving credit facility, with the full amount available at March 31, 2016, and reported compliance with all debt covenants.
- Capital expenditures were $73 million, and 2016 net capital expenditures excluding acquisitions were expected to be approximately $520 million.
- Common dividends paid were $241 million, or $0.31 per share. The company repurchased 31.4 million shares for $863 million during the quarter.
Material changes versus the prior comparable period
- Reported sales increased primarily because of the Plum Creek merger. Excluding $126 million of acquired Plum Creek sales, sales decreased $18 million, or 1%.
- Operating income included $110 million of Plum Creek merger-related integration and restructuring charges, compared with no such charge in Q1 2015. Total integration, restructuring, closure, and impairment charges were $117 million versus $14 million.
- A $36 million pretax gain from selling the Federal Way headquarters campus and a $42 million favorable change in foreign exchange effects on Canadian debt partly offset merger costs.
- Wood Products performance improved, with net contribution up $25 million to $87 million, supported by higher volumes and stronger OSB and engineered-product realizations.
- Timberlands contribution declined $10 million to $129 million, primarily due to lower log realizations and higher western operating costs.
- Cellulose Fibers contribution declined $5 million to $28 million as lower pulp and liquid packaging board realizations outweighed volume gains.
- Interest expense rose to $97 million from $83 million due largely to debt assumed or issued in connection with the merger.
Outlook, commentary, risks, and unusual items
- Management expected approximately 1.22 million U.S. housing starts in 2016, compared with 1.11 million in 2015, and cited improving employment, consumer confidence, and historically low mortgage rates. The filing states that Q1 housing starts were consistent with expected year-over-year growth.
- On May 1, 2016, after the reporting date, Weyerhaeuser agreed to sell five pulp mills and two modified fiber mills to International Paper for $2.2 billion in cash. Closing was expected in Q4 2016. The transaction excludes the liquid packaging board facility and the newsprint and publishing papers venture, whose review was ongoing.
- As of March 31, 2016, Cellulose Fibers had not qualified as held for sale, so its results remained in continuing operations.
- The acquired Plum Creek purchase-price allocation remained preliminary and could be materially adjusted during the measurement period.
- An IRS dispute involving the tax treatment of the 2008 Timberland Venture formation could result in approximately $100 million of built-in gains tax, interest and possible penalties, and could require distribution of up to $600 million of gain to shareholders if the IRS position is upheld. No tax accrual was recorded for this matter.
- Environmental remediation accruals totaled approximately $37 million, and asset-retirement obligations totaled $38 million. Management did not expect material losses from the Kalamazoo River administrative order.
- Key risks include housing and economic conditions, product demand and pricing, foreign exchange, raw-material and energy costs, weather and natural disasters, manufacturing disruptions, regulatory and environmental matters, merger integration, pension performance, taxation, and litigation.
Most important facts for investors to verify
- Progress, final purchase accounting, integration costs, and expected synergies from the Plum Creek merger.
- Completion terms, regulatory approvals, proceeds, and use of cash from the International Paper pulp-mill sale.
- Debt repayment plans, refinancing needs for the 2017 term loans, and liquidity after substantial share repurchases and dividends.
- Resolution and potential cash or distribution consequences of the IRS Timberland Venture tax dispute.
- Whether housing recovery, wood-product volumes, and pricing support the company’s 2016 operating expectations.
- Final pension asset valuations and any resulting changes to benefit costs or funding requirements.