Weyerhaeuser Company — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2016. Weyerhaeuser is a REIT focused on timberlands, real estate and energy/natural resources, and wood products. The company completed its merger with Plum Creek Timber Company on February 19, 2016; Plum Creek results are included from the merger date forward. The reporting segments are Timberlands, Real Estate & ENR, and Wood Products. The former Cellulose Fibers segment is classified as discontinued operations.
Financial performance and position
| Dollar amounts in millions, except per-share data | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Net sales | $1,655 | $1,345 | $3,060 | $2,625 |
| Gross margin | $397 | $288 | $713 | $575 |
| Operating income | $258 | $200 | $411 | $350 |
| Income from continuing operations | $130 | $125 | $191 | $193 |
| Net earnings attributable to common shareholders | $157 | $133 | $227 | $223 |
| Basic and diluted EPS | $0.21 | $0.26 | $0.33 | $0.43 |
| Adjusted EBITDA | $413 | $278 | $749 | $532 |
- Q2 sales increased 23% and year-to-date sales increased 17%, substantially reflecting the Plum Creek merger. Excluding acquired Plum Creek operations, sales increased 6% in Q2 and 3% year to date.
- Gross margin was approximately 24.0% in Q2 versus 21.4% in the prior-year quarter; year-to-date gross margin was approximately 23.3% versus 21.9%.
- Operating margin was approximately 15.6% in Q2 versus 14.9%; year-to-date operating margin was approximately 13.4% versus 13.3%.
- Wood Products was the strongest operating contributor, with net contribution of $156 million in Q2 and $243 million year to date, compared with $71 million and $133 million in the comparable periods.
- Timberlands contributed $125 million in Q2 and $254 million year to date. Real Estate & ENR contributed $12 million and $27 million, respectively.
- Discontinued operations contributed $38 million after tax in Q2 and $58 million year to date, compared with $19 million and $52 million, respectively.
- Net cash provided by operations was $539 million year to date, compared with $454 million in 2015. Investing activities generated $374 million, including $440 million received from the Twin Creeks timberland contribution. Financing activities used $1.433 billion.
- Cash and cash equivalents totaled $485 million at June 30, 2016, compared with $1.011 billion at December 31, 2015. The company had a fully available $1 billion revolving credit facility.
- Total long-term debt, including the Note Payable to Timberland Venture, was approximately $8.843 billion at carrying value. Debt fair value was approximately $9.979 billion. The company reported compliance with all debt covenants and no debt maturities within the next 12 months.
Material changes versus the prior comparable period
- The Plum Creek merger added substantial timberland, real estate, natural-resource and wood-products assets, increased shares outstanding, and increased debt and interest expense. Plum Creek contributed $243 million of Q2 sales and $369 million year to date, but generated a pretax loss of $4 million in Q2 and $35 million year to date under acquisition accounting.
- Interest expense increased to $114 million in Q2 from $85 million and to $209 million year to date from $167 million, primarily because of debt assumed or issued in connection with the merger.
- Merger-related integration and restructuring charges were $8 million in Q2 and $118 million year to date. Total integration, restructuring, closure and impairment charges were $14 million in Q2 and $125 million year to date.
- Year-to-date results included a $36 million pretax gain on the sale of the Federal Way headquarters campus and a $34 million favorable change in noncash foreign-exchange effects on Canadian debt.
- The company repurchased 26.7 million common shares for $832 million in Q2 and 58.0 million shares for $1.695 billion year to date. Remaining authorization was $806 million at June 30, 2016. The $1.695 billion cash outflow materially contributed to the decline in cash.
- All outstanding Series A mandatory convertible preference shares converted on July 1, 2016 into approximately 23.2 million common shares, creating potential additional common-share dilution.
Guidance, outlook, commentary and risks
- Management expected approximately 1.2 million U.S. housing starts in 2016, representing roughly 8% to 10% year-over-year growth, and cited improving employment, consumer confidence and historically low mortgage rates. Management also expected 2016 net capital expenditures of approximately $540 million, excluding acquisitions.
- The company agreed to sell its Cellulose Fibers pulp business to International Paper for $2.2 billion and its liquid packaging board business to Nippon Paper Industries for $285 million. The transactions were expected to close in the fourth and third quarters of 2016, respectively, subject to customary conditions and regulatory approvals. After-tax proceeds were expected to be used to repay long-term debt.
- Management announced plans to permanently close a lumber facility and a softwood plywood facility in Columbia Falls, Montana, during the third quarter of 2016, with production expected to be aligned with available log supply and shifted toward Kalispell facilities.
- A significant tax contingency relates to an IRS challenge involving Plum Creek REIT’s 2008 Timberland Venture transaction. If the company loses, it estimates a possible shareholder gain distribution of approximately $600 million, built-in gains tax of approximately $100 million, and substantial interest. No reserve was recorded because management believes it will prevail.
- Other risks include housing and economic conditions, product demand and pricing, interest rates, foreign exchange, raw-material availability, weather and natural disasters, manufacturing disruptions, environmental and forestry regulation, legal proceedings, pension performance, merger integration and realization of expected synergies.
- The company reported no legal proceeding expected by management to have a material adverse effect on long-term consolidated financial position, results or cash flows. Environmental remediation accruals were approximately $36 million, and asset-retirement obligations were $32 million at June 30, 2016.
- Disclosure controls were effective as of June 30, 2016, although integration of Plum Creek operations into the company’s internal control environment was still in process.
Important facts for investors to verify
- Completion timing, regulatory approvals and final proceeds from the International Paper and Nippon Paper transactions, and the resulting debt reduction.
- Final purchase-price allocation for the Plum Creek merger, which remained preliminary and could be subject to material adjustments.
- Progress and total cost of Plum Creek integration, including the $118 million of year-to-date charges and expected synergies.
- Liquidity after share repurchases, dividends, capital spending and the planned use of divestiture proceeds.
- Refinancing and repayment plans for the $1.4 billion of variable-rate debt maturing in 2017 and the $830 million Timberland Venture note due in 2018, subject to its extension option.
- Outcome of the IRS tax proceeding and potential exposure to distribution, tax and interest obligations.
- Actual housing starts, lumber and panel pricing, log costs, energy and natural-resource prices, and the performance of the Wood Products and Timberlands segments.