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Weyerhaeuser Company 10-Q 2012 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________________________ FORM 10-Q __________________________________________________
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012 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 o 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 o 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 o Non-accelerated filer o Smaller reporting company o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No As of October 26, 2012, 541,532,100 shares of the registrant’s common stock ($1.25 par value) were outstanding. TABLE OF CONTENTS
FINANCIAL INFORMATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
See accompanying Notes to Consolidated Financial Statements. 1 CONSOLIDATED BALANCE SHEET (UNAUDITED)
See accompanying Notes to Consolidated Financial Statements 2 CONSOLIDATED BALANCE SHEET (CONTINUED)
See accompanying Notes to Consolidated Financial Statements. 3 CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
See accompanying Notes to Consolidated Financial Statements. 4 INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS ENDED SEPTEMBER 30, 2012 AND 2011 NOTE 1: BASIS OF PRESENTATION We are a corporation that has elected to be taxed as a real estate investment trust (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 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. 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, 2011. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year. 6 RECLASSIFICATIONS We have reclassified certain balances and results from the prior year to be consistent with our 2012 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on net earnings or Weyerhaeuser shareholders’ interest. The reclassifications include the following:
NOTE 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:
We have disposed of various businesses and operations that are excluded from the segment results below. See Note 4: Discontinued Operations for information regarding our discontinued operations. 7 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 PER SHARE Our basic and diluted earnings 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, including stock equivalent units where there is no circumstance under which those shares would not be issued. Diluted earnings per share is net earnings divided by the sum of the:
8 Dilutive potential common shares can include:
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. SHARES EXCLUDED FROM DILUTIVE EFFECT The following shares were not included in the computation of diluted earnings per share because they were either antidilutive or the required performance or market conditions were not met. 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 per Share
During third quarter 2011, we repurchased 1,199,800 shares of common stock for $20 million under the 2008 stock repurchase program. On August 11, 2011, our board of directors replaced the 2008 stock repurchase program and approved the 2011 stock repurchase program under which we are authorized to repurchase up to $250 million of outstanding shares. During third quarter 2011, we repurchased 589,824 shares of common stock for $9 million under the 2011 program. Cash settlements of $5 million occurred at the beginning of the fourth quarter. All common stock purchases under the programs were made in open-market transactions. As of September 30, 2012, we had remaining authorization of $233 million for future share repurchases. NOTE 4: DISCONTINUED OPERATIONS There are no operations classified as discontinued for the quarter and year-to-date periods ended September 30, 2012. Discontinued operations for the quarter and year-to-date periods ended September 30, 2011 include our hardwoods and Westwood Shipping Lines operations, both of which were sold in third quarter 2011. The following table summarizes the components of net sales and net earnings from discontinued operations. 9
Results of discontinued operations exclude certain general corporate overhead costs that have been allocated to and are included in contribution to earnings for the operating segments. Other discontinued operations relate to gains or losses recognized in the period for businesses we have divested in prior years and are included in Unallocated Items. During second quarter 2011 we increased our reserve for estimated future environmental remediation costs and recognized an $11 million charge associated with discontinued operations. SALE OF HARDWOODS On August 1, 2011, we completed the sale of our hardwoods operations to American Industrial Partners for consideration of $109 million, of which $25 million was a note receivable. During second quarter 2011, we reduced our hardwoods assets to their fair value less selling costs which resulted in the recognition of a $9 million charge. An additional $10 million pension curtailment charge was recognized in third quarter 2011 when the transaction closed. Total pre-tax charges on the sale of $22 million were recorded in our Wood Products segment. We recognized a tax benefit on the sale of $8 million resulting in a year-to-date net loss of $14 million. SALE OF WESTWOOD SHIPPING LINES On September 30, 2011, we completed the sale of Westwood Shipping Lines to J-WesCo of Japan for $58 million in cash. We recognized a pre-tax gain of $49 million in Unallocated and recorded tax expense of $18 million, resulting in a net gain of $31 million. NOTE 5: SHARE-BASED COMPENSATION In 2012, we granted 1,915,486 stock options, 749,333 restricted stock units, 344,237 performance share units, and 52,304 stock appreciation rights. In addition, 374,458 outstanding restricted stock unit awards vested during year-to-date 2012. A total of 4,200,554 shares of common stock were issued as a result of restricted stock unit vesting and stock option exercises. 10 STOCK OPTIONS The weighted average exercise price of all of the stock options granted in 2012 was $20.42. The vesting and post-termination vesting terms for stock options granted in 2012 were as follows:
Weighted Average Assumptions Used in Estimating the Value of Stock Options Granted in 2012
RESTRICTED STOCK UNITS The weighted average fair value of the restricted stock units granted in 2012 was $20.44. The vesting provisions for restricted stock units granted in 2012 were as follows:
PERFORMANCE SHARE UNITS The weighted average grant date fair value of performance share units granted in 2012 was $21.73. The vesting provisions for performance share units granted in 2012 and that are earned were as follows:
11 Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2012
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 September 30, 2012. Weighted Average Assumptions Used to Remeasure the Value of Stock Appreciation Rights as of September 30, 2012
The vesting and post-termination vesting terms for stock appreciation rights granted in 2012 are the same as for stock options described above. DEFERRED COMPENSATION STOCK EQUIVALENT UNITS During first quarter 2012, the directors' deferred compensation plan was amended to allow the directors to elect to receive payments of amounts deferred into stock equivalent units in cash or stock. Elections to receive these deferred amounts in stock resulted in the issuance of 40,889 shares. The number of common shares to be issued in the future to directors who elected common share payments is 495,147. NOTE 6: CHARGES FOR RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS Charges for restructuring, closures and asset impairments for the quarters and year-to-date periods ended September 30, 2012 and 2011, include:
12 Asset impairments in 2012 are primarily related to unutilized assets held in Unallocated Items that were sold or are currently held for sale. Asset impairments in third quarter 2011 included $29 million of impairment charges in the Wood Products segment primarily related to the decision to permanently close four engineered lumber facilities that had been previously indefinitely closed. The fair values of the facilities were determined using significant unobservable inputs (Level 3) based on liquidation values. NOTE 7: OTHER OPERATING COSTS (INCOME), NET Other operating costs (income), net:
Items Included in Other Operating Costs (Income), Net
The $152 million pretax gain on sale of non-strategic timberlands resulted from the sale of 82,000 acres in southwestern Washington. Timberland exchanges and smaller dispositions are included in our net sales and revenue and cost of products sold. Foreign exchange losses (gains) result from changes in exchange rates, primarily related to our Canadian operations. Land management income consists primarily of income derived from leasing, renting and granting easement and rights of way on our timberlands. NOTE 8: 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, pulp and paperboard. 13 NOTE 9: ACCRUED LIABILITIES Forest Products accrued liabilities were comprised of the following:
NOTE 10: 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. We recognized a pretax charge in year-to-date 2011 of $26 million, which included early retirement premiums, unamortized debt issuance costs and other miscellaneous charges in connection with the early extinguishment of debt. This charge is included in interest expense in our Consolidated Statement of Operations. 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:
14 NOTE 11: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The components of net periodic benefit costs (credits) are:
During fourth quarter 2011, we ratified amendments to our postretirement medical and life insurance benefit plans for U.S. salaried employees that reduced or eliminated certain benefits that were available to both past and present employees. The company recognized a gain of $103 million in year-to-date 2012 due to these benefit changes. This gain is included in other operating income and reflected in the amortization of prior service credit in the table above. The benefit related to the fourth quarter 2011 amendments was fully recognized in first and second quarter 2012. Loss due to curtailment and special termination benefits includes charges of $11 million related to the sale of our hardwoods and Westwood Shipping Lines operations in third quarter 2011. These charges are included in our results of discontinued operations. FAIR VALUE OF PENSION PLAN ASSETS We estimate the fair value of pension plan assets based upon the information available during the year-end reporting process. In some cases, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year and market events. We revise the year-end estimated fair value of pension plan assets to incorporate year-end net asset values reflected in audited financial statements received after we have filed our Annual Report on Form 10-K. The fair value of pension assets as of December 31, 2011 were $15 million higher than we estimated at year end. We recorded the following adjustment during second quarter 2012 to reflect updated participant information as of the beginning of the year, which was partially offset by the increase in the pension assets:
15 EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, and updated for events occurring in 2012, we expect to:
Congress passed legislation in June 2012 that changed the way the discount rate is computed for purposes of determining minimum pension contribution funding. Based upon this legislation, we do not have a required contribution to our U.S. qualified plan, which we previously estimated to be $60 million due by September 2013. NOTE 12: VARIABLE INTEREST ENTITIES In third quarter 2012, we repaid a $97 million note related to one of our timber monetization special-purpose entities (SPEs) undertaken in 2002. We will receive approximately $110 million in fourth quarter 2012 when the related financial investment matures. As a result of dissolving one of our SPEs, the deferred tax liability related to our SPEs was reduced to $240 million as of September 30, 2012, compared to $277 million as of December 31, 2011. More information about these entities, which were formed in connection with the sale of nonstrategic timberlands in 2002-2004, can be found in our annual reports on Form 10-K for 2011 and 2002-2004. NOTE 13: CUMULATIVE OTHER COMPREHENSIVE LOSS Items included in our cumulative other comprehensive loss are:
The change in prior service credit not yet recognized in earnings includes the amortization of a $103 million gain recognized in 2012, as the result of previously announced benefit changes. See Note 11: Pension and Other Postretirement Benefit Plans. NOTE 14: 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:
16 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:
ENVIRONMENTAL 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:
As of September 30, 2012, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately $34 million. The accrual has not changed materially since the end of 2011. 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. As of September 30, 2012, our total accruals for these obligations was $62 million. The accruals have not changed materially since the end of 2011. 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. NOTE 15: INCOME TAXES As a REIT, we generally are 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 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 2012 provision for income taxes is based on the year-to-date effective tax rate that applies to our TRS. Our 2012 estimated annual effective tax rate, excluding discrete items, is 55.6 percent and differs from the U.S. statutory rate, primarily due to losses from non-U.S. results where no tax benefit is accrued because it is more likely than not that a benefit will not be realized. The tax rate for the quarter differs from the estimated annual effective tax rate, primarily due to a different mix of earnings or losses in the quarter relative to the annual period and a catch up in the fourth quarter for the estimated change in our effective tax rate. During third quarter 2012, as a result of reaching agreements with taxing authorities, we reduced our unrecognized tax benefits and recognized a tax provision reduction of $7 million. 17 Discrete items excluded from the calculation of our effective income tax rates include:
18 MANAGEMENT’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 within the meaning of 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 significantly 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 other variations of those terms. STATEMENTS We make forward-looking statements of our expectations regarding fourth quarter 2012, including:
We base our forward-looking statements on a number of factors, including the expected effect of:
19 RISKS, UNCERTAINTIES AND ASSUMPTIONS The major risks and uncertainties – and assumptions that we make – that affect our business and may cause actual results to differ from these forward-looking statements include, but are not limited to:
EXPORTING ISSUES We are a large exporter, affected by changes in:
20 RESULTS OF OPERATIONS In reviewing our results of operations, it is important to understand these terms:
In reviewing our results of operations, it is important to understand net sales and revenues and operating income included in Consolidated Results and individual segment discussions below exclude the results of discontinued operations. Refer to Note 4: Discontinued Operations. 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 and year-to-date periods ended September 30, 2012, compared to the quarter and year-to-date periods ended September 30, 2011. CONSOLIDATED RESULTS How We Did in Third Quarter and Year-to-Date 2012 NET SALES AND REVENUES / OPERATING INCOME / NET EARNINGS – WEYERHAEUSER COMPANY Here is a comparison of net sales and revenues to unaffiliated customers, operating income and net earnings for the quarters and year-to-date periods ended September 30, 2012 and 2011:
Comparing Third Quarter 2012 with Third Quarter 2011 Net sales and revenues Net sales and revenues increased $203 million – 13 percent – primarily due to the following:
These increases were partially offset by a decrease of $44 million in Cellulose Fibers segment sales, primarily due to lower pulp price realizations. 21 Net earnings attributable to Weyerhaeuser common shareholders Our net earnings attributable to Weyerhaeuser common shareholders decreased $40 million – 25 percent – primarily from:
These decreases in our net earnings were partially offset by:
Comparing Year-to-Date 2012 with Year-to-Date 2011 Net sales and revenues Net sales and revenues increased $458 million – 10 percent – primarily due to the following:
These increases were partially offset by a $144 million decrease in Cellulose Fibers segment sales, primarily due to lower pulp price realizations. Net earnings attributable to Weyerhaeuser common shareholders Our net earnings attributable to Weyerhaeuser common shareholders decreased $24 million – 9 percent – primarily from:
These decreases in our net earnings were partially offset by:
22 TIMBERLANDS How We Did Third Quarter and Year-to-Date 2012 Here is a comparison of net sales and revenues to unaffiliated customers, intersegment sales, and net contribution to earnings for the quarters and year-to-date periods ended September 30, 2012 and 2011: NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – TIMBERLANDS
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