WEYERHAEUSER CO quarterly report, Q3 FY2009

Weyerhaeuser Company — 2009 Q3 Form 10-Q

Reporting period: Quarter ended September 30, 2009, and year-to-date period ended September 30, 2009. Comparative 2008 periods ended September 28, 2008. The 2009 quarter had 92 days versus 91 days in 2008. Financial statements are unaudited.

Business Context

Weyerhaeuser operates through Timberlands, Wood Products, Cellulose Fibers, Real Estate, and Corporate and Other. Results were affected by the continuing U.S. housing downturn, weak construction-product demand, lower pulp prices, reduced timber harvests, facility closures, cost reductions, and the absence of significant businesses sold in 2008.

Key Financial Metrics

Metric	Q3 2009	Q3 2008	YTD 2009	YTD 2008
Net sales and revenues	$1,407 million	$2,107 million	$4,073 million	$6,323 million
Operating earnings (loss)	$123 million	$(356) million	$(269) million	$(1,020) million
Net earnings (loss) attributable to common shareholders	$0 million	$280 million	$(370) million	$36 million
EPS attributable to common shareholders	$0.00	$1.33	$(1.75)	$0.17
Cash from operations	Not separately provided	Not separately provided	$(276) million	$(139) million

Q3 revenue declined 33%; year-to-date revenue declined 36%.
Calculated operating margin was approximately 8.7% in Q3 2009 versus negative 16.9% in Q3 2008; year-to-date operating margin was approximately negative 6.6% versus negative 16.1%.
Q3 continuing-operations loss was $5 million. The 2008 quarter included $480 million of after-tax discontinued-operations earnings, primarily from divestitures.
Cash and cash equivalents totaled $1.628 billion at September 30, 2009, compared with $2.294 billion at December 31, 2008. Short-term investments totaled $47 million.
Forest Products long-term debt, including current maturities, totaled $5.191 billion; Real Estate long-term debt totaled $404 million. The fair value of total long-term debt was approximately $5.3 billion.
Total assets were $15.365 billion, total liabilities were $11.000 billion, and total equity was $4.365 billion at September 30, 2009.
Capital expenditures excluding Real Estate were $152 million year-to-date. Management anticipated approximately $200 million for full-year 2009, excluding acquisitions and Real Estate.

Material Changes Versus the Prior Comparable Period

Timberlands revenue to unaffiliated customers decreased 24% in Q3, while net contribution to earnings increased to $219 million from $107 million. The improvement included a $163 million pretax gain on the sale of 140,000 acres of Oregon timberlands.
Wood Products revenue fell 42% in Q3 to $588 million, reflecting lower prices and shipment volumes across all major product lines. Its loss improved to $97 million from $146 million, primarily due to cost reductions, closures, and lower raw-material costs.
Cellulose Fibers revenue declined 13% to $390 million, but net contribution to earnings increased to $166 million from $78 million. The improvement included $122 million of alternative fuel mixture credits.
Real Estate revenue declined 40% to $196 million, while the loss improved to $64 million from $316 million because impairment charges were substantially lower. Home closings fell 30% to 506, and the average closing price fell 13% to $366,000.
Corporate and Other generated an $81 million loss versus a $1.369 billion contribution in Q3 2008. The prior-year period included pretax gains of approximately $1.17 billion from the Containerboard, Packaging and Recycling sale and $217 million from Australian operations.
Forest Products restructuring and closure charges were $67 million in Q3 and $195 million year-to-date. Asset impairment charges were $36 million in Q3 and $74 million year-to-date.
Real Estate impairments and related charges were $46 million in Q3 and $141 million year-to-date, compared with $240 million and $664 million, respectively, in the prior-year periods.

Liquidity, Debt, Outlook, and Risks

Operating cash flow was negative $276 million year-to-date, while investing activities provided $200 million and financing activities used $590 million. The company paid $422 million of debt year-to-date and $116 million of dividends.
On October 1, 2009, the company issued $500 million of unsecured senior notes due October 1, 2019, bearing interest at 7.375%. Net proceeds were $491 million.
At September 30, 2009, no borrowings were outstanding under the revolving credit facilities, $33 million of letters of credit were drawn, and the company stated that it was in compliance with covenants. Available commitments were $1.0 billion through December 2011 and $400 million through March 2010.
Weyerhaeuser reported defined net worth of $4.4 billion and a defined debt-to-total-capital ratio of 54.2%, versus covenant limits of $3.0 billion and 65%, respectively.
Alternative fuel mixture credits totaled $229 million year-to-date, including $177 million received in cash and a $52 million receivable. The credit was scheduled to expire December 31, 2009, creating a material fourth-quarter risk.
Management expected fourth-quarter Timberlands earnings to be lower than Q3 because of additional harvest deferrals and seasonally higher silviculture costs. No significant non-strategic land sales were anticipated.
Management expected a higher fourth-quarter operating loss in Wood Products due to seasonally lower volumes and reduced prices.
Excluding alternative fuel mixture credits, Cellulose Fibers fourth-quarter operating earnings were expected to be comparable with Q3; improved pulp prices were expected to be offset by maintenance and fiber costs.
Real Estate expected slightly improved fourth-quarter homebuilding results from seasonally higher closings and was considering land sales to monetize tax benefits.
Key risks include housing and construction demand, pulp and timber prices, foreign exchange, raw-material and energy costs, pension performance, environmental and legal matters, asset impairments, covenant compliance, and the expiration or modification of the alternative fuel credit.

Unusual Items and Contingencies

A $60 million noncash pension settlement charge was recorded in Q3 2009 following lump-sum distributions. Pension and postretirement remeasurements also reduced pension and postretirement liabilities by $53 million.
The company recorded a $20 million reserve for the alder antitrust settlement and paid the settlement on October 1, 2009. Potential claims by parties that opted out of the class were not reserved because the amount could not be estimated.
The hardboard siding claims reserve was $5 million at September 30, 2009; management could not estimate any additional future charges.
Environmental remediation reserves were $29 million for 53 active sites. Reasonably possible additional costs could be as high as $35 million over several years.
The company controlled approximately 64,000 real-estate lots under option. Third-quarter impairment reviews covered approximately one-third of 118 projects, with 12 projects impaired.
Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.

Investor Verification Checklist

Verify whether the alternative fuel mixture credit expired or was extended after December 31, 2009, and quantify its recurring versus nonrecurring earnings impact.
Assess fourth-quarter and subsequent housing, wood-product, timber, and pulp pricing and volume trends.
Reconcile reported earnings with impairment, restructuring, timberland-sale, pension, and other unusual items.
Monitor cash burn, debt maturities, the March 2010 revolving facility, covenant headroom, and the impact of the October 2009 debt issuance.
Review pension funding requirements, plan asset performance, and the $285 million receivable from the pension trust.
Evaluate potential additional hardboard, alder antitrust, environmental, and other litigation costs not covered by recorded reserves.