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Weyerhaeuser Company 10-Q 2011 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011 or
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-4825
WEYERHAEUSER COMPANY
(253) 924-2345 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No As of April 29, 2011, 538,583,173 shares of the registrant’s common stock ($1.25 par value) were outstanding.
Table of ContentsTABLE OF CONTENTS
The financial information included in this report has been prepared in conformity with accounting practices and methods reflected in the financial statements included in the annual report (Form 10-K) filed with the Securities and Exchange Commission for the year ended December 31, 2010. Though not audited by an independent registered public accounting firm, the financial information reflects, in the opinion of management, all adjustments necessary to present a fair statement of results for the interim periods indicated. The results of operations for the quarter ended March 31, 2011, should not be regarded as necessarily indicative of the results that may be expected for the full year. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Table of ContentsCONSOLIDATED STATEMENT OF OPERATIONS (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER-SHARE FIGURES) (UNAUDITED)
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES) (UNAUDITED)
See accompanying Notes to Consolidated Financial Statements 2
Table of ContentsCONSOLIDATED BALANCE SHEET (CONTINUED)
See accompanying Notes to Consolidated Financial Statements.
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Table of ContentsCONSOLIDATED STATEMENT OF CASH FLOWS (DOLLAR AMOUNTS IN MILLIONS) (UNAUDITED)
See accompanying Notes to Consolidated Financial Statements.
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Table of ContentsINDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS ENDED MARCH 31, 2011 AND MARCH 31, 2010 NOTE 1: BASIS OF PRESENTATION We are a real estate investment trust (REIT). As a REIT, we expect to derive most of our REIT income from investments in timberlands, including the sale of standing timber through pay-as-cut sales contracts. REIT income can be distributed to shareholders without first paying corporate level tax, substantially eliminating the double taxation on income. A significant portion of our timberland segment earnings receives this favorable tax treatment. We are, however, subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We also will continue to be required to pay federal corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which principally includes our manufacturing businesses, our real estate development business and our non-qualified timberland segment income. Our consolidated financial statements provide an overall view of our results and financial condition. They include our accounts and the accounts of entities we control, including:
They do not include our intercompany transactions and accounts, which are eliminated, and noncontrolling interests are presented as a separate component of equity. We account for investments in and advances to unconsolidated equity affiliates using the equity method, with taxes provided on undistributed earnings. This means that we record earnings and accrue taxes in the period earnings are recognized by our unconsolidated equity affiliates. We report our financial condition in two groups:
Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we” and “our” refer to the consolidated company, including both Forest Products and Real Estate. The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements; certain disclosures normally provided in accordance with accounting principles generally accepted in the United States have been omitted. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2010. RECLASSIFICATIONS We have reclassified certain balances and results from the prior year for consistency with our 2011 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on net earnings (loss) or Weyerhaeuser shareholders’ interest.
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Table of ContentsNOTE 2: BUSINESS SEGMENTS We are principally engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate development and construction. Our principal business segments are:
Corporate and Other includes results of our transportation operations, certain gains or charges that are not related to an individual operating segment and the portion of items such as share-based compensation, pension and postretirement costs, foreign exchange transaction gains and losses and other general and administrative expenses that are not allocated to the business segments. We sold our five short line railroads at the end of 2010 and transportation currently only consists of Westwood Shipping Lines. An analysis and reconciliation of our business segment information to the respective information in the Consolidated Financial Statements is as follows:
NOTE 3: NET EARNINGS (LOSS) PER SHARE Our basic earnings (loss) per share attributable to Weyerhaeuser shareholders were:
Our diluted earnings (loss) per share attributable to Weyerhaeuser shareholders were:
Basic earnings per share is net earnings divided by the weighted average number of our outstanding common shares. Diluted earnings per share is net earnings divided by the sum of the:
Dilutive potential common shares include:
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We use the treasury stock method to calculate the effect of our outstanding dilutive potential common shares. Share-based payment awards that are contingently issuable upon the achievement of specified performance or market conditions are included in our diluted earnings per share calculation in the period in which the conditions are satisfied. To implement our decision to be taxed as a REIT, we distributed our accumulated earnings and profits to our shareholders, determined under federal income tax provisions, as a “Special Dividend.” At the election of each shareholder, the Special Dividend was paid in cash or Weyerhaeuser common shares. The Special Dividend of $5.6 billion was paid September 1, 2010 and included approximately 324 million common shares. The stock portion of the Special Dividend was treated as the issuance of new shares for accounting purposes and affects our earnings (loss) per share only for periods after the distribution. Prior periods are not restated. The required treatment results in earnings (loss) per share that is less than would have been the case had the common shares not been issued. Reflected below are pro forma results giving effect to the common stock distribution for diluted earnings per common share for the quarter ended March 31, 2010, as if the common stock distribution had occurred at the beginning of the period.
SHARES EXCLUDED FROM DILUTIVE EFFECT The following shares were not included in the computation of diluted earnings per share for the quarter ended March 31, 2011 because they were either antidilutive or the required performance or market conditions were not met. For the quarter ended March 31, 2010, the following shares were not included in the computation of diluted loss per share due to our net loss position. Some or all of these shares may be dilutive potential common shares in future periods. Potential Shares Not Included in the Computation of Diluted Earnings (Loss) per Share
The higher number of options in 2011 is primarily due to our Long-Term Incentive Compensation Plan requiring outstanding stock options to be adjusted as a result of the Special Dividend. During 2011, performance share units were granted under our performance share plan. These are disclosed in the above table at the potential maximum amount of shares that may be issued, which is 150 percent of the granted shares. See Note 4: Share-Based Compensation for more information on this plan. NOTE 4: SHARE-BASED COMPENSATION In first quarter 2011, we granted 1,941,686 stock options, 720,120 restricted stock units, 325,736 performance share units, and 52,869 stock appreciation rights. In addition, 272,671 outstanding restricted stock unit awards vested during first quarter 2011. A total of 2,459,392 shares of common stock were issued as a result of restricted stock unit vesting and stock option exercises. STOCK OPTIONS The weighted average exercise price of all of the stock options granted in first quarter 2011 was $24.16. The vesting and post-termination vesting terms for stock options granted in the first quarter of 2011 were as follows:
Weighted Average Assumptions Used in Estimating the Value of Stock Options Granted in First Quarter 2011
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Table of ContentsRESTRICTED STOCK UNITS The weighted average fair value of the restricted stock units granted in first quarter 2011 was $23.94. The vesting provisions for restricted stock units granted in 2011 were as follows:
PERFORMANCE SHARE UNITS As part of a new long-term incentive compensation strategy in 2011, intended to tie executive compensation more closely to company performance, we granted a target number of performance share units to executives in first quarter 2011. Performance share units will be converted into shares of Weyerhaeuser stock – to the extent earned – at the end of a four-year timeframe that combines performance and market conditions with vesting requirements. The final number of shares awarded will range from 0 percent to 150 percent of each grant’s target, depending upon actual company performance. The ultimate number of Performance Share Units earned is based on two measures:
At the end of the performance period, performance share unit payouts would be in shares of our stock. Performance share units granted in 2011 and that are earned vest as follows:
The weighted average grant date fair value of the performance share units was $25.52. Since the award contains a market condition, the effect of the market condition is reflected in the grant date fair value which is estimated using a Monte Carlo simulation model. This model estimates the TSR ranking of the company among the S&P 500 index over the 2 year performance period. Compensation expense is based on the estimated probable number of earned awards and recognized over the four-year vesting period on an accelerated basis. Generally, compensation expense would be reversed if the performance condition is not met unless the requisite service period has been achieved. Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in First Quarter 2011
STOCK APPRECIATION RIGHTS Stock appreciation rights are remeasured to reflect the fair value at each reporting period. The following table shows the weighted average assumptions applied to all outstanding stock appreciation rights as of March 31, 2011. Weighted Average Assumptions Used to Remeasure the Value of Stock Appreciation Rights as of March 31, 2011
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Table of ContentsNOTE 5: OTHER OPERATING INCOME, NET Other operating income, net:
Items Included in Other Operating Income, Net
Foreign exchange gains result from changes in exchange rates primarily related to our Canadian operations. The $152 million pretax gain on sale of non-strategic timberlands resulted from the sale of 82,000 acres in southwestern Washington. First quarter 2010 included a pretax gain of $40 million from the sale of certain British Columbia forest licenses and associated rights. NOTE 6: INVENTORIES Forest Products inventories include raw materials, work-in-process and finished goods.
The LIFO – the last-in, first-out method – inventory reserve applies to major inventory products held at our U.S. domestic locations. These inventory products include grade and fiber logs, chips, lumber, plywood, oriented strand board, hardwood lumber, pulp and paperboard. NOTE 7: ACCRUED LIABILITIES Forest Products accrued liabilities were comprised of the following:
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Table of ContentsNOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values and carrying values of our long-term debt consisted of the following:
To estimate the fair value of long-term debt, we used the following valuation approaches:
The inputs to the valuations are based on market data obtained from independent sources or information derived principally from observable market data. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at the measurement date. Subsequent to quarter end, we exercised our right to call approximately $518 million of 6.75 percent notes due in 2012. We expect the debt to be retired in June of 2011. FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS We believe that our other financial instruments, including cash, short-term investments, receivables, and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to:
NOTE 9: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The components of net periodic benefit credits (costs) are:
FAIR VALUE OF PENSION PLAN ASSETS As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, the value reported for our pension plan assets at the end of 2010 was estimated. Additional information regarding the year-end values generally becomes available to us during the first half of the following year. We expect to complete the valuation of our pension plan assets during second quarter 2011. The final adjustments could affect net pension benefit (expense) depending on the magnitude of the adjustment. EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, during 2011 we expect to:
Based on revised plan participant information and actuarial assumptions, we no longer expect to have a required contribution to the U.S. qualified plan in 2011.
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Table of ContentsNOTE 10: COMPREHENSIVE INCOME (LOSS) Items included in our comprehensive income consisted of the following:
Cumulative Other Comprehensive Loss Items included in our cumulative other comprehensive loss are:
NOTE 11: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES This note provides details about our:
LEGAL PROCEEDINGS We are party to legal matters generally incidental to our business. The ultimate outcome of any legal proceeding:
However, whenever probable losses from litigation could reasonably be determined – we believe that we have established adequate reserves. In addition, we believe the ultimate outcome of the legal proceedings:
First Quarter Claim On April 25, 2011, a complaint was filed in the United States District Court for the Western District of Washington on behalf of a person alleged to be a participant in the Company’s U.S. Retirement Plan for salaried employees. The complaint alleges violations of the Employee Retirement Security Act (ERISA) with respect to the management of the plan’s assets. The defendants include:
The complaint seeks:
The Company believes that its pension plans have been consistently managed in full compliance with established fiduciary standards and intends to vigorously contest the claim.
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Table of ContentsENVIRONMENTAL MATTERS Our environmental matters include:
Site Remediation Under the Comprehensive Environmental Response Compensation and Liability Act – commonly known as the Superfund – and similar state laws, we:
We accrued $28 million as of March 31, 2011, of estimated remediation costs on the active Superfund sites and other sites for which we are responsible for. We change our accrual to reflect:
There have not been material changes to the accrual since the end of 2010. We believe it is reasonably possible – based on currently available information and analysis – that remediation costs for all identified sites may exceed our accrual by up to $100 million. That estimate – in which those additional costs may be incurred over several years – is the upper end of the range of reasonably possible additional costs. The estimate:
In estimating our current accruals and the possible range of additional future costs, we:
We have not recorded any amounts for potential recoveries from insurance carriers. Asset Retirement Obligations We have obligations associated with the retirement of tangible long-lived assets consisting primarily of reforestation obligations related to forest management licenses in Canada and obligations to close and cap landfills. We accrued $68 million for these obligations as of March 31, 2011. The accruals have not changed materially since the end of 2010. Some of our sites have asbestos containing materials. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when asbestos containing materials might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated. Regulation of Air Emissions in the U.S. In March, the United States Environmental Protection Agency (EPA) published a set of final rules that require use of maximum achievable control technology (MACT) for industrial boilers. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, we had previously estimated that we might spend as much as $30 million to $100 million over the next few years to comply with the MACT standards as they were described in the proposed rule. After reviewing the final rules, we now estimate that we might spend as much as $30 million to $45 million over the next few years to comply with the MACT standards. The EPA has stated that they intend to reconsider portions of the final rules in the coming months. Depending on the final outcome of the reconsideration process, our cost projection may change. NOTE 12: INCOME TAXES As a REIT, we are generally not subject to corporate level tax on income of the REIT that is distributed to shareholders. We will, however, be subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We also will continue to be required to pay federal corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which principally includes our manufacturing businesses, our real estate development business and the portion of our timberlands segment income included in the TRS. The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the quarter. Our 2011 income tax rate excluding discrete items is lower than the statutory rate, primarily due to the tax benefits of being a REIT. Our 2010 income tax rate is higher than the statutory rate, primarily due to the effect of state and foreign income taxes on a low pretax earnings base. Tax benefits of being a REIT were not reflected in our first quarter 2010 income tax rate. Our effective income tax rates excluding discrete items were:
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Table of ContentsItems excluded from the calculation of our effective income tax rates include:
Due to the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, we will no longer be able to claim an income tax deduction for prescription drug benefits provided to retirees and reimbursed under the Medicare Part D subsidy beginning in 2013. Accounting rules required the effect of the change to be recorded in first quarter 2010, the period that the law was enacted.
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Table of ContentsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”) FORWARD-LOOKING STATEMENTS This report contains statements concerning our future results and performance that are forward-looking statements according to the Private Securities Litigation Reform Act of 1995. These statements:
Factors listed in this section – as well as other factors not included – may cause our actual results to differ from our forward-looking statements. There is no guarantee that any of the events anticipated by our forward-looking statements will occur. Or if any of the events occur, there is no guarantee what effect they will have on our operations or financial condition. We will not update our forward-looking statements after the date of this report. FORWARD-LOOKING TERMINOLOGY Some forward-looking statements discuss our plans, strategies and intentions. They use words such as expects, may, will, believes, should, approximately, anticipates, estimates, and plans. In addition, these words may use the positive or negative or a variation of those terms. STATEMENTS We make forward-looking statements of our expectations regarding second quarter 2011, including:
We base our forward-looking statements on a number of factors, including the expected effect of:
RISKS, UNCERTAINTIES AND ASSUMPTIONS The major risks and uncertainties – and assumptions that we make – that affect our business include, but are not limited to:
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EXPORTING ISSUES We are a large exporter, affected by changes in:
RESULTS OF OPERATIONS In reviewing our results of operations, it is important to understand these terms:
In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, price realizations, shipment volumes, and net contributions to earnings are based on the quarter ended March 31, 2011, compared to the quarter ended March 31, 2010. The periods are also referred to as 2011 and 2010. CONSOLIDATED RESULTS How We Did in First Quarter 2011 NET SALES AND REVENUES / OPERATING INCOME / NET EARNINGS (LOSS) – WEYERHAEUSER COMPANY
Comparing 2011 with 2010 In 2011:
Net sales and revenues Net sales and revenues increased primarily due to the following:
Net earnings (loss) attributable to Weyerhaeuser common shareholders Our net earnings attributable to Weyerhaeuser common shareholders increased primarily due to the following:
These increases in our earnings were partially offset by the following:
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Table of ContentsTIMBERLANDS How We Did in First Quarter 2011 Here is a comparison of net sales and revenues to unaffiliated customers, intersegment sales, and net contribution to earnings for the quarters ended March 31, 2011, and March 31, 2010: NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – TIMBERLANDS
Comparing 2011 with 2010 In 2011:
Net sales and revenues – unaffiliated customers The $28 million increase in net sales and revenues to unaffiliated customers resulted primarily from the following:
The above items were partially offset by a $15 million decrease in land exchanges and higher and better-use land sales. Intersegment sales The $20 million increase in intersegment sales resulted primarily from the following:
Net contribution to earnings The $160 million increase in net contribution to earnings resulted primarily from the following:
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Table of ContentsThe above items were partially offset by:
Our Outlook Excluding the disposition of non-strategic timberlands, we expect slightly higher earnings in the second quarter compared with the first. The company anticipates modestly improved selling prices for western logs and higher harvest volumes to be largely offset by higher fuel expenses and seasonally higher road and silviculture costs. THIRD-PARTY LOG SALES VOLUMES AND FEE HARVEST VOLUMES
WOOD PRODUCTS How We Did in First Quarter 2011 Here is a comparison of net sales and revenues to unaffiliated customers and net contribution to earnings for the quarters ended March 31, 2011, and March 31, 2010: NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – WOOD PRODUCTS
Comparing 2011 with 2010 In 2011:
Net sales and revenues The $20 million increase in net sales and revenues was primarily due to the following:
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These increases were partially offset by the following:
Net contribution to earnings The $17 million decrease in net contribution to earnings was primarily due to the following:
These decreases were partially offset by the following:
Our Outlook We anticipate a smaller loss from the segment in second quarter due to seasonally higher sales volumes and improved operating rates. We expect Wood Products cash flow to be positive in second quarter and do not expect to build additional working capital. THIRD-PARTY SALES VOLUMES
TOTAL PRODUCTION VOLUMES
CELLULOSE FIBERS How We Did in First Quarter 2011 Here is a comparison of net sales and revenues to unaffiliated customers and net contribution to earnings for the quarters ended March 31, 2011, and March 31, 2010: NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – CELLULOSE FIBERS
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Table of ContentsComparing 2011 with 2010 In 2011:
Net sales and revenues Net sales and revenues increased $96 million primarily due to the following:
Net contribution to earnings Net contribution to earnings increased $67 million primarily due to the following:
Partially offsetting these increases in earnings is a $15 million increase in operating costs, freight, and the effect on Canadian operating costs of the weakening U.S. dollar compared to the Canadian dollar. Our Outlook We expect higher earnings from the Cellulose Fibers segment in second quarter. The company anticipates higher selling prices, partially offset by increased maintenance costs due to an increase in the number of scheduled annual maintenance outages. THIRD-PARTY SALES VOLUMES
TOTAL PRODUCTION VOLUMES
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Table of ContentsREAL ESTATE How We Did in First Quarter 2011 Here is a comparison of net sales and revenues and net contribution to earnings for the quarters ended March 31, 2011, and March 31, 2010: NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – REAL ESTATE
Here is a comparison of key statistics related to our single-family operations for the quarters ended March 31, 2011, and March 31, 2010: SUMMARY OF SINGLE-FAMILY STATISTICS
Comparing 2011 with 2010 In 2011:
Markets for new homes are highly differential across our operations with uneven demand patterns. Buyers in lower price points have been attracted by housing affordability, partially due to low mortgage rates, but tight mortgage qualification requirements remain a challenge for many first-time buyers. In addition, tax credits available to many buyers in 2010 are no longer available in 2011. Although the supply of new homes has stabilized, most of our markets have been affected by high levels of foreclosure inventories, high unemployment and low consumer confidence. We experienced decreased market activity in first quarter 2011 compared to first quarter 2010, as reflected by lower levels of traffic and fewer new orders. Net sales and revenues The $9 million increase in net sales and revenues resulted primarily from:
Net contribution to earnings The $32 million decrease in net contribution to earnings resulted primarily from:
Our Outlook We anticipate a small profit from single-family homebuilding operations in second quarter due to a seasonal increase in home sale closings.
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Table of ContentsCORPORATE AND OTHER Corporate and Other includes results of our transportation operations, certain gains or charges that are not related to an individual operating segment and the portion of items such as share-based compensation, pension and postretirement costs, foreign exchange transaction gains and losses and other general and administrative expenses that are not allocated to the business segments. We sold our five short line railroads at the end of 2010 and transportation currently only consists of Westwood Shipping Lines. How We Did in First Quarter 2011 Here is a comparison of net sales and revenues and net contribution to earnings for the quarters ended March 31, 2011, and March 31, 2010: NET SALES AND REVENUES / NET CONTRIBUTIONS TO EARNINGS – CORPORATE AND OTHER
Comparing 2011 with 2010 In 2011:
Net sales and revenues Westwood revenues increased as a result of higher volumes and prices. First quarter 2011 does not include revenues of five short line railroads that we sold at the end of 2010. Net contribution to earnings Net contribution to earnings decreased $53 million, due primarily to the following:
INTEREST EXPENSE Our net interest expense incurred was:
Interest expense incurred decreased $13 million, primarily due to second quarter 2010 reductions in our debt. INCOME TAXES As a REIT, we are generally not subject to corporate level tax on income of the REIT that is distributed to shareholders. We will, however, be subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We also will continue to be required to pay federal corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which principally includes our manufacturing businesses, our real estate development business and the portion of our timberlands segment income included in the TRS. The provision for income taxes is based on the current estimate of the annual effective tax rate adjusted to reflect the tax impact of items discrete to the quarter. Our 2011 income tax rate excluding discrete items is lower than the statutory rate, primarily due to the tax benefits of being a REIT. Our 2010 income tax rate is higher than the statutory rate, primarily due to the effect of state and foreign income taxes on a low pretax earnings base. Tax benefits of being a REIT were not reflected in our first quarter 2010 income tax rate. Our effective income tax rates excluding discrete items were:
Items excluded from the calculation of our effective income tax rates include:
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Table of ContentsDue to the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act, we will no longer be able to claim an income tax deduction for prescription drug benefits provided to retirees and reimbursed under the Medicare Part D subsidy beginning in 2013. Accounting rules required the effect of the change to be recorded in first quarter 2010, the period that the law was enacted. LIQUIDITY AND CAPITAL RESOURCES We are committed to maintaining a sound and conservative capital structure which enables us to:
Two important elements of our policy governing capital structure include:
The amount of debt and equity for Forest Products and Real Estate will reflect the following:
CASH FROM OPERATIONS Cash from operations includes:
Consolidated net cash (used in) provided by our operations in first quarter was:
Comparing 2011 with 2010 Net cash from operations decreased $287 million in 2011 as compared with first quarter 2010:
CASH FROM INVESTING ACTIVITIES Cash from investing activities can include:
In first quarter 2010, the pension trust repaid $50 million of short-term loans made in 2008 and 2009. Summary of Capital Spending by Business Segment
We anticipate that our net capital expenditures for 2011 – excluding acquisitions – will be approximately $250 million to $270 million. However, that range could change due to:
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Table of ContentsProceeds from the Sale of Nonstrategic Assets Proceeds received from the sale of nonstrategic assets were $193 million in 2011. This included $192 million for the sale of 82,000 acres of non-strategic timberlands in southwestern Washington. Proceeds received from the sale of nonstrategic assets were $115 million in 2010. This included:
CASH FROM FINANCING ACTIVITIES Cash from financing activities can include:
Debt We repaid debt of:
Subsequent to quarter end, we exercised our right to call approximately $518 million of 6.75 percent notes due in 2012. We expect the debt to be retired in June of 2011. Long-term debt and revolving credit facilities Weyerhaeuser Company and Weyerhaeuser Real Estate Company (WRECO) have a $1.0 billion 5-year revolving credit facility that expires in December 2011. WRECO can borrow up to $200 million under this facility. Neither of the entities is a guarantor of the borrowing of the other under this credit facility. There were no net proceeds from the issuance of debt or from borrowings (repayments) under our available credit facility in the first quarters of 2011 or 2010. Debt covenants As of March 31, 2011 Weyerhaeuser Company and WRECO:
Weyerhaeuser Company Covenants: Key covenants related to Weyerhaeuser Company include the requirement to maintain:
Weyerhaeuser Company’s defined net worth is comprised of:
Total Weyerhaeuser Company capitalization is comprised of:
As of March 31, 2011, Weyerhaeuser Company had:
Weyerhaeuser Real Estate Company Covenants Key covenants related to WRECO revolving credit facility and medium-term notes include the requirement to maintain:
WRECO’s defined net worth is:
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Total WRECO defined debt is:
Total WRECO capitalization is defined as:
As of March 31, 2011, WRECO had:
Option Exercises We received cash proceeds of $34 million from the exercise of stock options in first quarter 2011. Paying dividends We paid dividends of:
The increase in dividends paid is primarily due to the increase in our quarterly dividend from 5 cents to 15 cents in February 2011 and the increase in the number of our common shares outstanding as a result of the Special Dividend. On April 14, 2011, our board of directors declared a regular quarterly dividend of 15 cents per share payable June 1, 2011, to shareholders of record at the close of business May 13, 2011. OTHER RELATED DISCLOSURES Japan Earthquake and Tsunami The recent earthquakes and tsunami that struck the northeast coast of Japan has created uncertainty regarding the effect on general economic and market conditions in Japan. A number of our businesses supply products or services to Japanese customers and approximately 2 percent of our revenues are from sales of products or services to customers that have facilities located in the disaster area. The immediate effect of the disaster was an increase in demand for some products and services (such as newsprint, liquid packaging board and shipping), and a decrease in demand for some other products (such as lumber and logs), which was offset by increased exports to other areas of Asia. Longer-term, there may be increased demand for products such as lumber and logs needed in the rebuilding effort. This is an evolving situation; we are in contact with our customers and are continuing to assess the effect on our businesses. We currently believe that these events will not have a material effect on our results of operations in the second quarter or in 2011. CRITICAL ACCOUNTING POLICIES There have been no significant changes during first quarter 2011 to our critical accounting policies presented in our 2010 Annual Report on Form 10-K.
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Table of ContentsQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No changes occurred during first quarter 2011 that had a material effect on the information relating to quantitative and qualitative disclosures about market risk that was provided in the company’s Annual Report on Form 10-K for the year ended December 31, 2010. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls are controls and other procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. The company’s principal executive officer and principal financial officer have concluded that the company’s disclosure controls and procedures were effective as of March 31, 2011, based on an evaluation of the company’s disclosure controls and procedures as of that date. CHANGES IN INTERNAL CONTROLS No changes occurred in the company’s internal control over financial reporting during first quarter that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting. LEGAL PROCEEDINGS Refer to “Notes to Consolidated Financial Statements – Note 11: Legal Proceedings, Commitments and Contingencies.” RISK FACTORS There have been no significant changes during first quarter 2011 to risk factors presented in the company’s 2010 Annual Report on Form 10-K. EXHIBITS
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