Weyerhaeuser Company — Q3 2017 Form 10-Q Summary
Business context and reporting period
Weyerhaeuser is a REIT focused on timberlands, wood products, real estate, energy and natural resources. The filing covers the unaudited quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Reportable segments are Timberlands, Real Estate & ENR, and Wood Products. The company completed the sale of its Uruguay timberlands and manufacturing operations for approximately $403 million on September 1, 2017.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Net sales | $1,872 million | $1,709 million | $5,373 million | $4,769 million |
| Gross margin | $498 million; 26.6% | $381 million; 22.3% | $1,391 million; 25.9% | $1,067 million; 22.4% |
| Operating income | $205 million; 11.0% | $261 million; 15.3% | $655 million; 12.2% | $648 million; 13.6% |
| Net earnings attributable to common shareholders | $130 million | $227 million | $311 million | $454 million |
| Diluted EPS | $0.17 | $0.30 | $0.41 | $0.64 |
| Adjusted EBITDA | $569 million | $434 million | $1,529 million | $1,183 million |
| Cash flow from operations | Not separately provided | Not separately provided | $847 million | $886 million |
Cash and cash equivalents were $497 million at September 30, 2017, down from $676 million at December 31, 2016. Total debt, including current maturities, was approximately $5.995 billion at September 30, 2017, compared with $6.610 billion at year-end 2016. The company also had a $1.5 billion senior unsecured revolving credit facility, with no borrowings outstanding, and was in compliance with its debt covenants.
Year-to-date capital expenditures were $259 million, including $213 million for property and equipment and $46 million for timberlands reforestation. Management expected 2017 net capital expenditures of approximately $435 million. Common dividends paid year-to-date were $699 million, or $0.93 per share; the quarterly dividend was $0.31 per share.
Material changes versus the prior comparable period
- Third-quarter sales increased 10%, primarily from higher Wood Products realizations and volumes, increased real estate sales, and higher Western timber realizations. Year-to-date sales increased 13%.
- Wood Products sales increased 10% in the quarter and 13% year-to-date, but segment contribution declined to $40 million from $170 million in the quarter and to $389 million from $413 million year-to-date.
- Wood Products results included $190 million of third-quarter and $240 million of year-to-date product-remediation charges related to certain TJI I-joists with Flak Jacket protection.
- Operating income declined $56 million in the quarter despite higher gross margin, principally because of the product-remediation charge. Excluding that charge, management stated that quarterly operating income increased $134 million.
- Year-to-date operating income increased only $7 million because higher gross margin and lower general and administrative costs were largely offset by product-remediation charges, a $147 million Uruguay impairment, and lower gains on asset sales.
- Timberlands third-quarter contribution increased $9 million, while year-to-date contribution decreased $109 million because of the $147 million noncash Uruguay impairment.
- Real Estate & ENR contribution increased $32 million in the quarter and $54 million year-to-date, driven mainly by higher real estate acreage sold.
- Interest expense declined to $98 million from $114 million in the quarter and to $297 million from $323 million year-to-date, reflecting lower average debt.
- 2016 results included $65 million of third-quarter and $123 million of year-to-date earnings from discontinued Cellulose Fibers operations; no such earnings remained in 2017.
- Cash from operations decreased $39 million year-to-date, while cash used in financing declined to $1.218 billion from $1.710 billion, largely because 2016 included $2.003 billion of share repurchases and merger-related financing activity.
Guidance, outlook, commentary, risks and unusual items
- Management expected approximately 1.21 million U.S. housing starts in 2017, approximately 3% above 2016, and continued improvement in wood-product demand. Remodeling activity was also expected to remain favorable.
- Management expected 2017 capital expenditures of approximately $435 million. No contribution to U.S. qualified pension plans was anticipated in 2017; expected Canadian contributions and benefit payments were separately disclosed.
- Canadian softwood lumber duties affected Wood Products. The applicable preliminary countervailing-duty rate was 19.88% and the anti-dumping rate was 6.87%. The company recorded $16 million of combined retroactive and prospective duties year-to-date.
- The product-remediation accrual was $179 million at September 30, 2017, after $61 million of payments. Approximately 2,400 homes were estimated to be affected. Management expected a significant portion of the expense to be covered by insurance, but no insurance recovery had been recorded.
- The company recorded a $147 million noncash impairment related to the sale of Uruguay operations and a $6 million impairment on a non-strategic Wood Products asset.
- A pending IRS dispute concerning Plum Creek’s 2008 Timberland Venture transaction could require approximately $600 million of gain to be recognized and distributed and approximately $100 million of built-in gains tax, plus substantial interest, if the company is unsuccessful. No reserve was recorded.
- Reported risks include housing and economic conditions, interest rates, product demand and pricing, raw-material and transportation costs, weather and natural disasters, fires, regulation, environmental matters, litigation, pension performance, currency movements, trade actions, manufacturing disruptions and merger-integration execution.
- The company stated that no legal proceeding was currently expected to have a material adverse effect on its long-term consolidated financial position, results of operations or cash flows. Superfund and other environmental remediation accruals totaled approximately $46 million.
- The company adopted pension presentation guidance and certain intra-entity tax guidance in 2017; management stated these changes did not affect net earnings. Revenue-recognition guidance was expected to be adopted January 1, 2018, with no material financial statement impact expected other than expanded disclosures.
Important facts for investors to verify
- Progress of Flak Jacket remediation, final affected-home counts, total costs, insurance recoveries and potential additional accruals.
- Final determinations and cash impact of Canadian softwood lumber duties.
- Outcome and timing of the IRS Plum Creek tax proceeding and potential distribution, tax and interest exposure.
- Sustainability of Wood Products profitability after removing remediation, duty and impairment items.
- Cash generation relative to the $699 million year-to-date common dividend, planned capital spending and debt obligations.
- Completion and economics of the announced Twin Creeks transactions, including the $108 million redemption, termination of management agreements and planned $203 million timberland sale.
- Housing starts, lumber and panel pricing, log volumes, real estate acreage sales and the effect of weather and market conditions on segment results.