Business Context and Reporting Period
Weyerhaeuser Company filed an unaudited Form 10-Q for the quarter and year-to-date periods ended June 30, 2019. The company operates through Timberlands, Real Estate & Energy and Natural Resources, and Wood Products. As of July 22, 2019, 744.9 million common shares were outstanding.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net sales | $1,692 million | $2,065 million | $3,335 million | $3,930 million |
| Gross margin | $302 million | $618 million | $623 million | $1,135 million |
| Operating income | $186 million | $476 million | $360 million | $880 million |
| Net earnings (loss) | $128 million | $317 million | $(161) million | $586 million |
| Basic and diluted EPS | $0.17 | $0.42 | $(0.22) | $0.77 |
| Adjusted EBITDA | $343 million | $637 million | $708 million | $1,181 million |
- Q2 gross margin was approximately 17.8% of sales versus 29.9% in the prior-year quarter; operating margin was approximately 11.0% versus 23.1%; net margin was approximately 7.6% versus 15.4%.
- Year-to-date gross margin was approximately 18.7% versus 28.9%; operating margin was approximately 10.8% versus 22.4%. The year-to-date net loss included a significant pension settlement charge.
- Segment net contribution to earnings for Q2 was Timberlands $102 million, Real Estate & ENR $35 million, Wood Products $81 million, and unallocated items $(36) million. Wood Products Adjusted EBITDA fell to $128 million from $385 million.
- Year-to-date cash provided by operations was $382 million, down from $733 million. Investing activities provided $129 million, including $253 million from maturity of a variable-interest-entity investment. Capital expenditures were $143 million, and management expected approximately $380 million of net capital expenditures for full-year 2019.
- Financing activities used $633 million, including $507 million of dividends, $512 million of long-term debt repayments, and $60 million of share repurchases, partly offset by $739 million of new debt issuance.
- Cash and cash equivalents were $212 million at June 30, 2019, down from $334 million at December 31, 2018. The company had $140 million outstanding under its $1.5 billion revolving credit facility, which expires in March 2022.
- Carrying value of long-term debt and the line of credit was $6.293 billion, excluding nonrecourse debt held by variable interest entities. Reported fair value was $7.360 billion.
- Total assets were $17.029 billion and total equity was $8.724 billion at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- Q2 sales declined $373 million, or 18%, primarily from a $321 million decrease in Wood Products sales and a $75 million decrease in Timberlands sales. Real Estate & ENR sales increased $23 million.
- Wood Products sales decreased 21% in Q2, with structural lumber realizations down 28% and oriented strand board realizations down 42%. Segment earnings contribution declined 75% to $81 million.
- Timberlands sales declined 16%, primarily because Western log prices fell 21% and volumes fell 6%. Segment earnings contribution declined 37% to $102 million.
- Real Estate & ENR contribution increased 59% to $35 million, driven by increased acres sold. Acres sold rose to 47,031 from 16,290, while average price per acre declined to $1,063 from $2,258.
- Year-to-date results included a $449 million noncash pension settlement charge related to transferring approximately $1.5 billion of U.S. qualified pension assets and liabilities to an insurer. The charge reduced earnings but generated a $109 million tax benefit.
- In February 2019, the company issued $750 million of 4.00% notes due in 2029 and used part of the proceeds to redeem $500 million of 7.38% notes due in 2019. A $12 million pretax debt-extinguishment charge was recorded.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing $165 million of right-of-use assets and $172 million of lease liabilities at adoption.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year U.S. housing starts to increase slightly from 2018 levels and expected 2019 demand from China and Japan to be similar to 2018. Management also cited lower mortgage rates, employment growth and consumer confidence as supportive factors.
- Management expected approximately $380 million of 2019 net capital expenditures, subject to change. It did not anticipate a required contribution to the U.S. qualified pension plan for 2019 and expected approximately $40 million of contributions or benefit payments for other U.S. and Canadian plans.
- Key market risks include housing demand, lumber and panel pricing, export demand, tariffs and trade restrictions, foreign exchange rates, weather, fires and other natural disasters, raw-material and transportation costs, manufacturing disruptions, environmental and forestry regulation, litigation, pension investment performance, and changing tax or accounting rules.
- The remaining variable-interest-entity investment was $362 million and was scheduled to mature in the first quarter of 2020; related nonrecourse debt of $302 million was scheduled to mature in the third quarter of 2019.
- Environmental remediation accruals were approximately $61 million, and asset-retirement obligations were $32 million. Management stated that no pending legal proceeding was expected to have a material adverse effect on the financial statements.
- The company identified no material changes to the risk factors in its 2018 Form 10-K. Disclosure controls were deemed effective as of June 30, 2019.
Important Facts for Investors to Verify
- Whether weak Wood Products pricing and Timberlands realizations persist and how they affect margins, cash flow and covenant headroom.
- The company’s ability to maintain dividends and planned capital expenditures while operating cash flow is below the prior-year level.
- The maturity and refinancing or repayment of the $302 million nonrecourse VIE debt and the $362 million related investment.
- The effect of the pension-risk transfer, remaining pension obligations and future benefit costs; the year-to-date loss was substantially affected by the noncash $449 million settlement charge.
- Progress under the $500 million 2019 share-repurchase authorization; approximately $60 million had been used and approximately $440 million remained authorized at June 30, 2019.
- Exposure to housing activity, lumber and OSB prices, export markets, tariffs, currency movements, weather and environmental or legal contingencies.