WY-6.30.15-10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-4825
__________________________________________________
WEYERHAEUSER COMPANY
__________________________________________________
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| | |
Washington | | 91-0470860 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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33663 Weyerhaeuser Way South Federal Way, Washington | | 98063-9777 |
(Address of principal executive offices) | | (Zip Code) |
(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 July 24, 2015, 514,193,591 shares of the registrant’s common stock ($1.25 par value) were outstanding.
TABLE OF CONTENTS
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PART I | FINANCIAL INFORMATION | |
ITEM 1. | FINANCIAL STATEMENTS: | |
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ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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PART II | OTHER INFORMATION | |
ITEM 1. | | |
ITEM 1A. | | |
ITEM 2. | | |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | NA |
ITEM 4. | MINE SAFETY DISCLOSURES | NA |
ITEM 5. | OTHER INFORMATION | NA |
ITEM 6. | | |
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FINANCIAL INFORMATION
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Net sales | $ | 1,807 |
| | $ | 1,964 |
| | $ | 3,528 |
| | $ | 3,700 |
|
Cost of products sold | 1,474 |
| | 1,499 |
| | 2,859 |
| | 2,860 |
|
Gross margin | 333 |
| | 465 |
| | 669 |
| | 840 |
|
Selling expenses | 28 |
| | 27 |
| | 56 |
| | 55 |
|
General and administrative expenses | 71 |
| | 88 |
| | 145 |
| | 176 |
|
Research and development expenses | 6 |
| | 7 |
| | 11 |
| | 14 |
|
Charges for restructuring, closures and impairments (Note 12) | — |
| | 8 |
| | 14 |
| | 27 |
|
| (15 | ) | | (65 | ) | | — |
| | (140 | ) |
Operating income | 243 |
| | 400 |
| | 443 |
| | 708 |
|
Interest income and other | 2 |
| | 11 |
| | 5 |
| | 20 |
|
Interest expense, net of capitalized interest | (88 | ) | | (83 | ) | | (171 | ) | | (166 | ) |
Earnings before income taxes | 157 |
| | 328 |
| | 277 |
| | 562 |
|
| (13 | ) | | (59 | ) | | (32 | ) | | (109 | ) |
Earnings from continuing operations | 144 |
| | 269 |
| | 245 |
| | 453 |
|
Earnings from discontinued operations, net of income taxes (Note 3) | — |
| | 22 |
| | — |
| | 32 |
|
Net earnings | 144 |
| | 291 |
| | 245 |
| | 485 |
|
Dividends on preference shares | (11 | ) | | (11 | ) | | (22 | ) | | (22 | ) |
Net earnings attributable to Weyerhaeuser common shareholders | $ | 133 |
| | $ | 280 |
| | $ | 223 |
| | $ | 463 |
|
Earnings per share attributable to Weyerhaeuser common shareholders, basic (Note 4): | | | | | | | |
Continuing operations | $ | 0.26 |
| | $ | 0.44 |
| | $ | 0.43 |
| | $ | 0.73 |
|
Discontinued operations | — |
| | 0.04 |
| | — |
| | 0.06 |
|
Net earnings per share | $ | 0.26 |
| | $ | 0.48 |
| | $ | 0.43 |
| | $ | 0.79 |
|
Earnings per share attributable to Weyerhaeuser common shareholders, diluted (Note 4): | | | | | | | |
Continuing operations | $ | 0.26 |
| | $ | 0.43 |
| | $ | 0.43 |
| | $ | 0.73 |
|
Discontinued operations | — |
| | 0.04 |
| | — |
| | 0.06 |
|
Net earnings per share | $ | 0.26 |
| | $ | 0.47 |
| | $ | 0.43 |
| | $ | 0.79 |
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Dividends paid per share | $ | 0.29 |
| | $ | 0.22 |
| | $ | 0.58 |
| | $ | 0.44 |
|
Weighted average shares outstanding (in thousands) (Note 4): | | | | | | | |
Basic | 516,626 |
| | 586,061 |
| | 520,008 |
| | 585,491 |
|
Diluted | 519,804 |
| | 589,766 |
| | 523,595 |
| | 589,542 |
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See accompanying Notes to Consolidated Financial Statements.
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
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| | | | | | | | | | | | | | | |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Consolidated net earnings | $ | 144 |
| | $ | 291 |
| | $ | 245 |
| | $ | 485 |
|
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustments | 12 |
| | 21 |
| | (35 | ) | | (1 | ) |
Actuarial gains, net of tax expense of $24, $18, $50 and $33 | 44 |
| | 31 |
| | 106 |
| | 67 |
|
Prior service costs, net of tax expense (benefit) of $1, ($13), $1 and ($30) | — |
| | (14 | ) | | (2 | ) | | (43 | ) |
Unrealized gains on available-for-sale securities | — |
| | — |
| | 1 |
| | — |
|
Total other comprehensive income | 56 |
| | 38 |
| | 70 |
| | 23 |
|
Comprehensive income | $ | 200 |
| | $ | 329 |
| | $ | 315 |
| | $ | 508 |
|
See accompanying Notes to Consolidated Financial Statements.
WEYERHAEUSER COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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| | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | JUNE 30, 2015 | | DECEMBER 31, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,121 |
| | $ | 1,580 |
|
Receivables, less allowances of $3 and $3 | 537 |
| | 525 |
|
Receivables for taxes | 12 |
| | 25 |
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| 603 |
| | 595 |
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Prepaid expenses | 82 |
| | 80 |
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Deferred tax assets | 162 |
| | 228 |
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Total current assets | 2,517 |
| | 3,033 |
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Property and equipment, less accumulated depreciation of $6,378 and $6,324 | 2,557 |
| | 2,623 |
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Construction in progress | 171 |
| | 131 |
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Timber and timberlands at cost, less depletion charged to disposals | 6,531 |
| | 6,530 |
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Investments in and advances to equity affiliates | 176 |
| | 188 |
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Goodwill | 40 |
| | 40 |
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Deferred tax assets | 2 |
| | 8 |
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Other assets | 274 |
| | 289 |
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Restricted financial investments held by variable interest entities | 615 |
| | 615 |
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Total assets | $ | 12,883 |
| | $ | 13,457 |
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LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 343 |
| | $ | 331 |
|
| 576 |
| | 587 |
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Total current liabilities | 919 |
| | 918 |
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| 4,891 |
| | 4,891 |
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Long-term debt (nonrecourse to the company) held by variable interest entities | 511 |
| | 511 |
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Deferred income taxes | 196 |
| | 206 |
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Deferred pension and other postretirement benefits | 1,166 |
| | 1,319 |
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Other liabilities | 275 |
| | 308 |
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Total liabilities | 7,958 |
| | 8,153 |
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Equity: | | | |
Mandatory convertible preference shares, series A: $1.00 par value; $50.00 liquidation; authorized 40,000,000 shares; issued and outstanding: 13,799,711 and 13,800,000 shares | 14 |
| | 14 |
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Common shares: $1.25 par value; authorized 1,360,000,000 shares; issued and outstanding: 514,121,330 and 524,474,315 shares | 643 |
| | 656 |
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Other capital | 4,163 |
| | 4,519 |
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Retained earnings | 1,428 |
| | 1,508 |
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Cumulative other comprehensive loss (Note 10) | (1,323 | ) | | (1,393 | ) |
Total equity | 4,925 |
| | 5,304 |
|
Total liabilities and equity | $ | 12,883 |
| | $ | 13,457 |
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See accompanying Notes to Consolidated Financial Statements.
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED) |
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| YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 |
Cash flows from operations: | | | |
Net earnings | $ | 245 |
| | $ | 485 |
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Noncash charges (credits) to earnings: | | | |
Depreciation, depletion and amortization | 241 |
| | 252 |
|
Deferred income taxes, net | 16 |
| | 125 |
|
Pension and other postretirement benefits (Note 6) | 21 |
| | (91 | ) |
Share-based compensation expense | 16 |
| | 20 |
|
Charges for impairment of assets | 13 |
| | 1 |
|
Net gains on dispositions of assets(1) | (21 | ) | | (46 | ) |
Foreign exchange transaction losses (Note 13) | 21 |
| | 2 |
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Change in: | | | |
Receivables less allowances | (26 | ) | | (48 | ) |
Receivable for taxes | 14 |
| | 64 |
|
Inventories | (15 | ) | | (54 | ) |
Real estate and land | — |
| | (107 | ) |
Prepaid expenses | (2 | ) | | — |
|
Accounts payable and accrued liabilities | (25 | ) | | (97 | ) |
Deposits on land positions and other assets | — |
| | 8 |
|
Pension and postretirement contributions / benefit payments | (39 | ) | | (63 | ) |
Other | (16 | ) | | (20 | ) |
Net cash from operations | 443 |
| | 431 |
|
Cash flows from investing activities: | | | |
Property and equipment | (170 | ) | | (134 | ) |
Timberlands reforestation | (27 | ) | | (25 | ) |
Acquisition of timberlands | (32 | ) | | — |
|
Proceeds from sale of assets | 6 |
| | 20 |
|
Other | 12 |
| | — |
|
Cash from investing activities | (211 | ) | | (139 | ) |
Cash flows from financing activities: | | | |
Net proceeds from issuance of Weyerhaeuser Real Estate Company (WRECO) debt (Note 3) | — |
| | 887 |
|
Deposit of WRECO debt proceeds into escrow (Note 3) | — |
| | (887 | ) |
Cash dividends on common shares | (301 | ) | | (257 | ) |
Cash dividends on preference shares | (11 | ) | | (11 | ) |
Change in book overdrafts | — |
| | (6 | ) |
Exercises of stock options | 25 |
| | 54 |
|
| (407 | ) | | — |
|
Other | 3 |
| | 1 |
|
Cash from financing activities | (691 | ) | | (219 | ) |
Net change in cash and cash equivalents | (459 | ) | | 73 |
|
Cash and cash equivalents at beginning of period | 1,580 |
| | 835 |
|
Cash and cash equivalents at end of period | $ | 1,121 |
| | $ | 908 |
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Cash paid (received) during the period for: | | | |
Interest, net of amount capitalized of $3 and $10 | $ | 172 |
| | $ | 153 |
|
Income taxes | $ | 5 |
| | $ | (45 | ) |
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(1) | Includes gains on timberland exchanges. |
See accompanying Notes to Consolidated Financial Statements.
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1: | | |
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NOTE 2: | | |
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NOTE 3: | | |
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NOTE 4: | | |
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NOTE 5: | | |
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NOTE 6: | | |
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NOTE 7: | | |
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NOTE 8: | | |
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NOTE 9: | | |
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NOTE 10: | | |
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NOTE 11: | | |
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NOTE 12: | | |
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NOTE 13: | | |
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NOTE 14: | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND YEAR-TO-DATE ENDED JUNE 30, 2015 AND 2014
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. 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 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:
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• | majority-owned domestic and foreign subsidiaries and |
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• | variable interest entities in which we are the primary beneficiary. |
They do not include our intercompany transactions and accounts, which are eliminated, and noncontrolling interests are presented within 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.
Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we” and “our” refer to the consolidated company.
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, 2014. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.
RECLASSIFICATIONS
We have reclassified certain balances and results from the prior year to be consistent with our 2015 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on net earnings or equity. Our reclassifications present the results of operations discontinued in 2014 separately on our Consolidated Statement of Operations and in the related footnotes. Note 3: Discontinued Operations provides information about our discontinued operations.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, a comprehensive new revenue recognition model that requires an entity to recognize revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In July 2015, the FASB voted to defer the effective date of the ASU for an additional year. We plan to adopt the standard on January 1, 2018 and may use either the retrospective or cumulative effect transition method. We are evaluating the impact that ASU 2014-09 will have on our consolidated
financial statements and related disclosures. We have not yet selected a transition method nor determined the effect of the standard on our ongoing financial reporting.
In April 2015, FASB issued ASU 2015-03, which amends the presentation of debt issuance costs on the consolidated balance sheet. Under the new guidance, debt issuance costs are presented as a direct deduction from the carrying amount of the debt liability rather than as an asset. The new guidance is effective retrospectively for fiscal periods starting after December 15, 2015 and early adoption is permitted. We expect to adopt ASU 2015-03 on January 1, 2016 and have determined that its adoption will not have a material impact on our consolidated financial statements and related disclosures at that time.
In May 2015, FASB issued ASU 2015-07, which clarifies the presentation within the fair value hierarchy of certain investments held within our pension plan. The new guidance is effective retrospectively for fiscal periods starting after December 15, 2015 and early adoption is permitted. We have not yet determined an adoption date. This new guidance eliminates the requirement to categorize certain pension investments in the fair value hierarchy. These investments will be presented separately from the fair value hierarchy and reconciled to total investments in our consolidated financial statements and related disclosures.
In July 2015, FASB issued ASU 2015-11, which simplifies the measurement of inventories valued under most methods, including our inventories valued under FIFO – the first-in, first-out – and moving average cost methods. Inventories valued under LIFO – the last-in, first-out method – are excluded. Under this new guidance, inventories valued under these methods would be valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. The new guidance is effective prospectively for fiscal periods starting after December 15, 2016 and early adoption is permitted. We expect to adopt ASU 2015-11 on January 1, 2017 and are evaluating the impact on our consolidated financial statements and related disclosures.
NOTE 2: BUSINESS SEGMENTS
We are principally engaged in growing and harvesting timber and manufacturing, distributing and selling products made from trees. Our principal business segments are:
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• | Timberlands – which includes logs, timber, minerals, oil and gas, and international wood products; |
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• | Wood Products – which includes softwood lumber, engineered wood products, structural panels and building materials distribution; and |
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• | Cellulose Fibers – which includes pulp, liquid packaging board and an equity interest in a newsprint joint venture. |
We divested Weyerhaeuser Real Estate Company (WRECO) in July 2015 and that entity is excluded from the segment results below. See Note 3: Discontinued Operations for information regarding our discontinued operations.
An analysis and reconciliation of our business segment information to the respective information in the Consolidated Financial Statements is as follows:
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| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Sales to unaffiliated customers: | | | | | | | |
Timberlands | $ | 336 |
| | $ | 397 |
| | $ | 687 |
| | $ | 774 |
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Wood Products | 1,004 |
| | 1,077 |
| | 1,927 |
| | 1,975 |
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Cellulose Fibers | 467 |
| | 490 |
| | 914 |
| | 951 |
|
| 1,807 |
| | 1,964 |
| | 3,528 |
| | 3,700 |
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Intersegment sales: | | | | | | | |
Timberlands | 187 |
| | 186 |
| | 415 |
| | 424 |
|
Wood Products | 22 |
| | 21 |
| | 41 |
| | 40 |
|
| 209 |
| | 207 |
| | 456 |
| | 464 |
|
Total sales | 2,016 |
|
| 2,171 |
| | 3,984 |
| | 4,164 |
|
Intersegment eliminations | (209 | ) | | (207 | ) | | (456 | ) | | (464 | ) |
Total | $ | 1,807 |
| | $ | 1,964 |
| | $ | 3,528 |
| | $ | 3,700 |
|
Net contribution to earnings: | | | | | | | |
Timberlands | $ | 127 |
| | $ | 170 |
| | $ | 289 |
| | $ | 334 |
|
Wood Products | 71 |
| | 102 |
| | 133 |
| | 166 |
|
Cellulose Fibers | 27 |
| | 91 |
| | 60 |
| | 145 |
|
| 225 |
| | 363 |
| | 482 |
| | 645 |
|
Unallocated Items(1) | 20 |
| | 48 |
| | (34 | ) | | 83 |
|
Net contribution to earnings from discontinued operations | — |
| | 29 |
| | — |
| | 45 |
|
Net contribution to earnings | 245 |
|
| 440 |
| | 448 |
| | 773 |
|
Interest expense, net of capitalized interest (continuing and discontinued operations) | (88 | ) | | (85 | ) | | (171 | ) | | (168 | ) |
Income before income taxes (continuing and discontinued operations) | 157 |
| | 355 |
| | 277 |
| | 605 |
|
Income taxes (continuing and discontinued operations) | (13 | ) | | (64 | ) | | (32 | ) | | (120 | ) |
Net earnings | 144 |
| | 291 |
| | 245 |
| | 485 |
|
Dividends on preference shares | (11 | ) | | (11 | ) | | (22 | ) | | (22 | ) |
Net earnings attributable to Weyerhaeuser common shareholders | $ | 133 |
| | $ | 280 |
| | $ | 223 |
| | $ | 463 |
|
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(1) | Unallocated Items are gains or charges not related to or allocated to an individual operating segment. They include a portion of items such as: share-based compensation, pension and postretirement costs, foreign exchange transaction gains and losses associated with financing and the elimination of intersegment profit in inventory and the LIFO reserve. |
NOTE 3: DISCONTINUED OPERATIONS
On July 7, 2014, we completed the divestiture of our homebuilding and real estate development business, pursuant to which WRECO became a wholly-owned subsidiary of TRI Pointe Homes, Inc. (TRI Pointe). At that time we distributed shares of WRECO to our shareholders in exchange for 59 million shares of our common stock and received net cash proceeds of $707 million. This transaction is referred to as the “Real Estate Divestiture”. Prior to the distribution of WRECO shares to our shareholders, WRECO was a wholly-owned subsidiary of Weyerhaeuser. Concurrent with the distribution to shareholders, WRECO ceased being a subsidiary. Discontinued operations relates to WRECO which was previously reported under the Real Estate segment and Unallocated Items.
The following table summarizes the components of net sales and net earnings from discontinued operations.
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| | | | | | | |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2014 | | JUNE 2014 |
Net sales from discontinued operations | $ | 317 |
| | $ | 565 |
|
Income from operations | $ | 27 |
| | $ | 43 |
|
Income taxes | (5 | ) | | (11 | ) |
Net earnings from discontinued operations | $ | 22 |
| | $ | 32 |
|
During June 2014, WRECO issued $450 million of unsecured and unsubordinated senior obligations bearing an interest rate of 4.375 percent due June 15, 2019 and $450 million of unsecured and unsubordinated senior obligations bearing an interest rate of 5.875 percent due June 15, 2024, which were transferred along with other WRECO assets and liabilities as part of the Real Estate Divestiture. The net proceeds after deducting the discount were $887 million.
NOTE 4: NET EARNINGS PER SHARE
Our basic earnings per share attributable to Weyerhaeuser shareholders were:
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• | $0.26 during second quarter and $0.43 during year-to-date 2015; and |
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• | $0.48 during second quarter and $0.79 during year-to-date 2014. |
Our diluted earnings per share attributable to Weyerhaeuser shareholders were:
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• | $0.26 during second quarter and $0.43 during year-to-date 2015; and |
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• | $0.47 during second quarter and $0.79 during year-to-date 2014. |
Basic earnings per share is net earnings available to common shareholders 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 available to common shareholders divided by the sum of the:
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• | weighted average number of our outstanding common shares and |
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• | the effect of our outstanding dilutive potential common shares. |
Dilutive potential common shares can include:
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• | outstanding stock options, |
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• | performance share units and |
We use the treasury stock method to calculate the effect of our outstanding stock options, restricted stock units and performance share units. 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.
We use the if-converted method to calculate the effect of our outstanding preference shares. In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be antidilutive. Preference shares are antidilutive whenever the amount of the dividend declared in or accumulated for the current period per common share obtainable on conversion exceeds diluted earnings per share exclusive of the preference shares.
Preference shares are evaluated for participation on a quarterly basis to determine whether two-class presentation is required. Preference shares are considered to be participating as of the financial reporting period end to the extent they would participate in dividends paid to common shareholders. Preference shares are not considered participating for the quarter and year-to-date periods ended June 30, 2015. Under the provisions of the two-class method, basic and diluted earnings per share would be presented for both preference and common shareholders.
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
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| | | | | | | | | | | |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
SHARES IN THOUSANDS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Stock options | 2,102 |
| | 4,551 |
| | 2,102 |
| | 4,551 |
|
Performance share units | 354 |
| | 453 |
| | 354 |
| | 453 |
|
Preference shares | 24,987 |
| | 24,865 |
| | 24,987 |
| | 24,865 |
|
STOCK REPURCHASE PROGRAM
On August 13, 2014, our Board of Directors approved the 2014 stock repurchase program under which we are authorized to repurchase up to $700 million of outstanding shares. During 2015, we repurchased 4,842,517 shares of common stock for $154 million during second quarter 2015 and 12,184,083 shares of common stock for $407 million during year-to-date 2015. All common stock purchases under the stock repurchase program were made in open-market transactions. As of June 30, 2015, we had remaining authorization of $90 million for future stock repurchases. In total, we have repurchased 18,247,076 shares of common stock for $610 million under the program authorized in 2014. We had 514 million shares of common stock outstanding as of June 30, 2015.
NOTE 5: INVENTORIES
Inventories include raw materials, work-in-process and finished goods.
|
| | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | JUNE 30, 2015 |
| DECEMBER 31, 2014 |
LIFO Inventories: |
|
|
|
|
|
Logs and chips | $ | 14 |
|
| $ | 9 |
|
Lumber, plywood and panels | 69 |
|
| 55 |
|
Pulp and paperboard | 110 |
|
| 122 |
|
Other products | 15 |
|
| 11 |
|
FIFO or moving average cost inventories: |
|
|
|
|
|
Logs and chips | 30 |
|
| 38 |
|
Lumber, plywood, panels and engineered wood products | 86 |
|
| 80 |
|
Pulp and paperboard | 31 |
|
| 35 |
|
Other products | 98 |
|
| 96 |
|
Materials and supplies | 150 |
|
| 149 |
|
Total | $ | 603 |
|
| $ | 595 |
|
LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. domestic locations. We began to use the LIFO method for domestic products in the 1940s as required to conform with the tax method elected. Subsequent acquisitions of entities added new products under the FIFO - the first-in, first-out method – or moving average cost methods that have continued under those methods. The FIFO or moving average cost methods applies to the balance of our domestic raw material and product inventories as well as for all material and supply inventories and all foreign inventories. If we used FIFO for all inventories, our stated inventories would have been higher by $118 million as of June 30, 2015 and $120 million as of December 31, 2014.
NOTE 6: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of net periodic benefit costs (credits) are:
|
| | | | | | | | | | | | | | | |
| PENSION |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Service cost(1) | $ | 13 |
| | $ | 13 |
| | $ | 28 |
| | $ | 27 |
|
Interest cost | 68 |
| | 69 |
| | 133 |
| | 138 |
|
Expected return on plan assets | (121 | ) | | (116 | ) | | (239 | ) | | (232 | ) |
Amortization of actuarial loss | 47 |
| | 30 |
| | 91 |
| | 61 |
|
Amortization of prior service cost | 1 |
| | 2 |
| | 2 |
| | 3 |
|
Total net periodic benefit cost (credit) | $ | 8 |
| | $ | (2 | ) | | $ | 15 |
| | $ | (3 | ) |
| |
(1) | Service cost includes $1 million and $2 million for quarter and year-to-date ended 2014 for employees that were part of the Real Estate Divestiture. These charges are included in our results of discontinued operations. |
|
| | | | | | | | | | | | | | | |
| OTHER POSTRETIREMENT BENEFITS |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Interest cost | $ | 2 |
| | $ | 2 |
| | $ | 5 |
| | $ | 5 |
|
Amortization of actuarial loss | 3 |
| | 3 |
| | 5 |
| | 6 |
|
Amortization of prior service credit | (2 | ) | | (47 | ) | | (4 | ) | | (95 | ) |
Other | — |
| | — |
| | — |
| | (4 | ) |
Total net periodic benefit cost (credit) | $ | 3 |
| | $ | (42 | ) | | $ | 6 |
| | $ | (88 | ) |
During fourth quarter 2013, we decided to eliminate post-Medicare health funding for certain salaried retirees after 2014. We recognized a pretax gain of $45 million in second quarter 2014 and $90 million in year-to-date 2014 from this plan amendment. This gain is included in "Other operating income, net" in our Consolidated Statement of Operations and reflected in the amortization of prior service credit in the table above.
VALUATION OF PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS ASSETS AND OBLIGATION
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 revised the year-end estimated fair value of pension plan assets to incorporate year-end net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K. During second quarter 2015, we recorded an increase in the fair value of the pension assets of $57 million, or 1 percent. We also revised our census data that is used to estimate our projected benefit obligation for pension and other postretirement benefit plans. As a result of that update, during second quarter 2015, we recorded an increase to the projected benefit obligation of $25 million, or less than 1 percent. The net effect was a $32 million increase in the funded status.
EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS
We do not anticipate making a contribution to our U.S. qualified pension plan for 2015. In 2015 we expect to:
| |
• | be required to contribute approximately $38 million for our Canadian registered plan; |
| |
• | be required to contribute or make benefit payments for our Canadian nonregistered plans of $3 million; |
| |
• | make benefit payments of $19 million for our U.S. nonqualified pension plans; and |
| |
• | make benefit payments of $25 million for our U.S. and Canadian other postretirement plans. |
NOTE 7: ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
|
| | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | JUNE 30, 2015 | | DECEMBER 31, 2014 |
Wages, salaries and severance pay | $ | 118 |
| | $ | 161 |
|
Pension and other postretirement benefits | 47 |
| | 47 |
|
Vacation pay | 47 |
| | 47 |
|
Taxes – Social Security and real and personal property | 34 |
| | 24 |
|
Interest | 103 |
| | 105 |
|
Customer rebates and volume discounts | 39 |
| | 46 |
|
Deferred income | 82 |
| | 75 |
|
Other | 106 |
| | 82 |
|
Total | $ | 576 |
| | $ | 587 |
|
NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt consisted of the following:
|
| | | | | | | | | | | | | | | |
| JUNE 30, 2015 | | DECEMBER 31, 2014 |
DOLLAR AMOUNTS IN MILLIONS | CARRYING VALUE | | FAIR VALUE (LEVEL 2) | | CARRYING VALUE | | FAIR VALUE (LEVEL 2) |
Long-term debt (including current maturities) | $ | 4,891 |
| | $ | 5,752 |
| | $ | 4,891 |
| | $ | 5,922 |
|
To estimate the fair value of long-term debt, we used the following valuation approaches:
| |
• | market approach – based on quoted market prices we received for the same types and issues of our debt; or |
| |
• | income approach – based on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt. |
The inputs to these 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.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
We believe that our other financial instruments, including cash and cash equivalents, short-term investments, receivables, and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to:
| |
• | the short-term nature of these instruments, |
| |
• | carrying short-term investments at expected net realizable value and |
| |
• | the allowance for doubtful accounts. |
NOTE 9: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
This note provides details about our:
LEGAL PROCEEDINGS
We are party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceeding that management believes could have a material adverse effect on our long-term consolidated financial position, results of operations or cash flows.
ENVIRONMENTAL MATTERS
Our environmental matters include:
| |
• | asset retirement obligations. |
Site Remediation
Under the Comprehensive Environmental Response Compensation and Liability Act – commonly known as the Superfund – and similar state laws, we:
| |
• | are a party to various proceedings related to the cleanup of hazardous waste sites and |
| |
• | have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated. |
As of June 30, 2015, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately $28 million. These reserves are recorded in "Accrued liabilities" and "Other liabilities" in our Consolidated Balance Sheet. The accrual has not changed materially since the end of 2014.
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 June 30, 2015, our total accrual for these obligations was $38 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" in our Consolidated Balance Sheet. The accruals have not changed materially since the end of 2014. Some of our sites have materials containing asbestos. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when materials containing asbestos might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.
NOTE 10: CUMULATIVE OTHER COMPREHENSIVE INCOME (LOSS)
Changes in amounts included in our cumulative other comprehensive income (loss) by component are:
|
| | | | | | | | | | | | | | | | | | | | | |
| | PENSION | OTHER POSTRETIREMENT BENEFITS | | |
DOLLAR AMOUNTS IN MILLIONS | Foreign currency translation adjustments | Actuarial losses | Prior service costs | Actuarial losses | Prior service credits | Unrealized gains on available-for-sale securities | Total |
Beginning balance as of December 31, 2014 | $ | 304 |
| $ | (1,623 | ) | $ | (15 | ) | $ | (108 | ) | $ | 43 |
| $ | 6 |
| $ | (1,393 | ) |
Other comprehensive income (loss) before reclassifications | (35 | ) | 40 |
| 2 |
| 20 |
| (1 | ) | 1 |
| 27 |
|
Income taxes | — |
| (11 | ) | (1 | ) | (7 | ) | — |
| — |
| (19 | ) |
Net other comprehensive income (loss) before reclassifications | (35 | ) | 29 |
| 1 |
| 13 |
| (1 | ) | 1 |
| 8 |
|
Amounts reclassified from cumulative other comprehensive income (loss)(1) | — |
| 91 |
| 2 |
| 5 |
| (4 | ) | — |
| 94 |
|
Income taxes | — |
| (31 | ) | (1 | ) | (1 | ) | 1 |
| — |
| (32 | ) |
Net amounts reclassified from cumulative other comprehensive income (loss) | — |
| 60 |
| 1 |
| 4 |
| (3 | ) | — |
| 62 |
|
Total other comprehensive income (loss) | (35 | ) | 89 |
| 2 |
| 17 |
| (4 | ) | 1 |
| 70 |
|
Ending balance as of June 30, 2015 | $ | 269 |
| $ | (1,534 | ) | $ | (13 | ) | $ | (91 | ) | $ | 39 |
| $ | 7 |
| $ | (1,323 | ) |
|
NOTE 11: SHARE-BASED COMPENSATION
In year-to-date 2015, we granted 2,122,608 stock options, 433,469 restricted stock units, 238,662 performance share units and 58,373 stock appreciation rights. In addition, 364,576 outstanding restricted stock units and 241,734 outstanding performance share units vested during year-to-date 2015. A total of 1,626,146 shares of common stock were issued as a result of restricted stock unit vesting, performance share unit vesting and stock option exercises.
STOCK OPTIONS
The weighted average exercise price of all of the stock options granted in 2015 was $35.41. The vesting and post-termination vesting terms for stock options granted in 2015 were as follows:
| |
• | vest ratably over four years; |
| |
• | vest or continue to vest in the event of death while employed, disability or retirement at an age of at least 62; |
| |
• | continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant; |
| |
• | continue to vest for one year in the event of involuntary termination when the retirement criteria has not been met; and |
| |
• | stop vesting for all other situations including early retirement prior to age 62. |
Weighted Average Assumptions Used in Estimating the Value of Stock Options Granted in 2015
|
| | | |
| OPTIONS |
Expected volatility | 25.92 | % |
Expected dividends | 3.28 | % |
Expected term (in years) | 4.77 |
|
Risk-free rate | 1.54 | % |
Weighted average grant date fair value | $ | 5.85 |
|
RESTRICTED STOCK UNITS
The weighted average fair value of the restricted stock units granted in 2015 was $35.41. The vesting provisions for restricted stock units granted in 2015 were as follows:
| |
• | vest ratably over four years; |
| |
• | immediately vest in the event of death while employed or disability; |
| |
• | continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant; |
| |
• | continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and |
| |
• | will be forfeited upon termination of employment in all other situations including early retirement prior to age 62. |
PERFORMANCE SHARE UNITS
The weighted average grant date fair value of performance share units granted in 2015 was $34.75.
The final number of shares granted in 2015 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:
| |
• | our relative total shareholder return (TSR) ranking measured against the S&P 500 over a three year period and |
| |
• | our relative TSR ranking measured against an industry peer group of companies over a three year period. |
The vesting provisions for performance share units granted in 2015 were as follows:
| |
• | vest 100 percent on the third anniversary of the grant date as long as the individual remains employed by the company; |
| |
• | fully vest in the event the participant dies or becomes disabled while employed; |
| |
• | continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant; |
| |
• | continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met and the employee has met the second anniversary of the grant date; and |
| |
• | will be forfeited upon termination of employment in all other situations including early retirement prior to age 62. |
Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2015
|
| | | | | | |
| Performance Share Units |
Performance period | 1/1/2015 – 12/31/2017 | |
Valuation date closing stock price | $ | 35.41 | |
Expected dividends | 3.26 | % |
Risk-free rate | 0.05 | % | – | 1.07 | % |
Expected volatility | 16.04 | % | – | 20.89 | % |
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 June 30, 2015.
Weighted Average Assumptions Used to Remeasure the Value of Stock Appreciation Rights as of June 30, 2015
|
| | | |
| JUNE 30, 2015 |
Expected volatility | 19.36 | % |
Expected dividends | 3.56 | % |
Expected term (in years) | 1.97 |
|
Risk-free rate | 0.64 | % |
Weighted average fair value | $ | 9.17 |
|
The vesting and post-termination vesting terms for stock appreciation rights granted in 2015 are the same as for stock options described above.
NOTE 12: CHARGES FOR RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS
Items Included in Our Restructuring, Closure and Asset Impairment Charges
|
| | | | | | | | | | | | | | | |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Restructuring and closure charges: |
|
| | | | | | |
Termination benefits | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 23 |
|
Other restructuring and closure costs | — |
| | 1 |
| | 1 |
| | 3 |
|
Charges for restructuring and closures | — |
|
| 7 |
|
| 1 |
|
| 26 |
|
Impairments of long-lived assets | — |
| | 1 |
| | 13 |
| | 1 |
|
Total charges for restructuring, closures and impairments | $ | — |
|
| $ | 8 |
|
| $ | 14 |
|
| $ | 27 |
|
During 2015, we recognized a noncash impairment charge of $13 million in first quarter 2015 related to a nonstrategic asset held in Unallocated Items that was sold in second quarter 2015. The fair value of the asset was determined using significant unobservable inputs (level 3) based on discounted cash flow model. During 2014, our restructuring and closure charges were primarily related to our selling, general and administrative cost reduction initiative to support achieving our competitive performance goals.
Changes in accrued severance related to restructuring during the year-to-date period ended June 30, 2015 were as follows:
|
| | | |
DOLLAR AMOUNTS IN MILLIONS |
Accrued severance as of December 31, 2014 | $ | 10 |
|
Charges | — |
|
Payments | (7 | ) |
Accrued severance as of June 30, 2015 | $ | 3 |
|
The majority of the accrued severance balance as of June 30, 2015, is expected to be paid within one year.
NOTE 13: OTHER OPERATING INCOME, NET
Other operating income, net:
| |
• | includes both recurring and occasional income and expense items and |
| |
• | can fluctuate from year to year. |
Items Included in Other Operating Income, Net
|
| | | | | | | | | | | | | | | |
| QUARTER ENDED | | YEAR-TO-DATE ENDED |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | JUNE 2015 | | JUNE 2014 |
Gain on postretirement plan amendment (Note 6) | $ | — |
| | $ | (45 | ) | | $ | — |
| | $ | (90 | ) |
Gain on disposition of nonstrategic assets | (4 | ) | | (1 | ) | | (6 | ) | | (24 | ) |
Foreign exchange losses (gains), net | (8 | ) | | (12 | ) | | 21 |
| | 2 |
|
Land management income | (10 | ) | | (9 | ) | | (18 | ) | | (16 | ) |
Other, net | 7 |
| | 2 |
| | 3 |
| | (12 | ) |
Total other operating income, net | $ | (15 | ) | | $ | (65 | ) | | $ | — |
| | $ | (140 | ) |
Gain on disposition of nonstrategic assets in 2014 included a $22 million pretax gain recognized in first quarter 2014 on the sale of a landfill in Washington State.
Foreign exchange losses (gains) result from changes in exchange rates on transactions, primarily related to our Canadian operations.
Land management income includes income from recreational activities, land permits, grazing rights, firewood sales and other miscellaneous income related to land management activities.
NOTE 14: 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 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 TRS, which includes our manufacturing businesses and the portion of our Timberlands segment income included in the TRS.
The 2015 provision for income taxes is based on the current estimate of the annual effective tax rate. Our 2015 estimated annual effective tax rate for our TRS is approximately 30 percent, which is lower than the statutory federal tax rate primarily due to permanent tax deductions and lower foreign tax rates applicable to foreign earnings, partially offset by state income taxes.
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:
| |
• | are based on various assumptions we make and |
| |
• | may not be accurate because of risks and uncertainties surrounding the assumptions that we make. |
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
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often use words such as expects, may, should, will, believes, anticipates, estimates, projects, intends, plans, targets and approximately. They may use the positive or negative or other variation of those and similar words.
STATEMENTS
We make forward-looking statements in this report concerning our plans, strategies, intentions and expectations, including with respect to estimated taxes and tax rates, expectations relating to shares, share repurchases, share compensation, dilution and dividends, expected results of legal proceedings and the sufficiency of litigation reserves, expected uses of cash, expectations relating to pension contributions and benefit payments, and our expectations relating to the U.S. housing market, economic conditions, strength of the U.S. dollar and demand for our products.
We base our forward-looking statements on a number of factors, including the expected effect of:
| |
• | adverse litigation outcomes and the adequacy of reserves, |
| |
• | changes in accounting principles, |
| |
• | contributions to pension plans, |
| |
• | projected benefit payments, |
| |
• | projected tax treatment, rates and credits, and |
You should understand that it is not possible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. Should other risks or uncertainties materialize, or should our underlying assumptions prove inaccurate, actual results could differ materially from past results as well as from our estimated or projected results.
RISKS, UNCERTAINTIES AND ASSUMPTIONS
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:
| |
• | the effect of general economic conditions, including employment rates, interest rate levels, housing starts, availability of financing for home mortgages and strength of the U.S. dollar; |
| |
• | market demand for our products, which is related to the strength of the various U.S. business segments and U.S. and international economic conditions; |
| |
• | performance of our manufacturing operations, including maintenance requirements; |
| |
• | potential disruptions in our manufacturing operations; |
| |
• | the level of competition from domestic and foreign producers; |
| |
• | raw material availability and prices; |
| |
• | the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters; |
| |
• | the successful execution of our internal plans and strategic initiatives; |
| |
• | transportation and labor availability and costs; |
| |
• | the effect of forestry, land use, environmental and other governmental regulations; |
| |
• | performance of pension fund investments and related derivatives; |
| |
• | the effect of timing of retirements and changes in the market price of our common stock on charges for share-based compensation; |
| |
• | changes in accounting principles; and |
| |
• | other factors described under “Risk Factors” in our 2014 Annual Report on Form 10-K. |
EXPORTING ISSUES
We are a large exporter, affected by:
| |
• | economic activity in Europe and Asia, especially Japan and China; |
| |
• | currency exchange rates – particularly the relative value of the U.S. dollar, Canadian dollar, euro and yen; and |
| |
• | restrictions on international trade or tariffs imposed on imports. |
RESULTS OF OPERATIONS
In reviewing our results of operations, it is important to understand these terms:
| |
• | Sales realizations refer to net selling prices – this includes selling price plus freight, minus normal sales deductions. |
| |
• | Net contribution to earnings refers to earnings (loss) attributable to Weyerhaeuser shareholders before interest expense and income taxes. |
In reviewing our results of operations, it is important to understand net sales and operating income included in Consolidated Results and individual segment discussions below exclude the results of discontinued operations. Refer to Note 3: Discontinued Operations. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, sales realizations, shipment volumes, and net contributions to earnings are based on the quarter and year-to-date periods ended June 30, 2015, compared to the quarter and year-to-date periods ended June 30, 2014.
ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS
The strength of the U.S. housing market strongly affects our Wood Products and Timberlands segments. As published by the U.S. Census Bureau, total housing starts for 2014 were slightly above 1,000,000 units. Despite the slow start in the first quarter, as severe winter weather disrupted construction activity, we continue to expect U.S. housing starts of approximately 1,100,000 units in 2015 as a result of employment growth, improving consumer confidence and continued historically low mortgage rates.
Demand for logs from our Timberlands segment is affected by production levels of wood-based building products. Our Western holdings are also affected by export demand. We expect demand from China and Japan in 2015 to be lower than 2014.
Cellulose Fibers is primarily affected by global supply and demand factors and the relative strength of the U.S. dollar. The euro declined in 2014 and early 2015 relative to the U.S. dollar to the lowest level in recent years. We do not expect the U.S. dollar to continue to strengthen significantly relative to developed currencies during the rest of 2015.
CONSOLIDATED RESULTS
How We Did in Second Quarter and Year-to-Date 2015
NET SALES / OPERATING INCOME / NET EARNINGS – WEYERHAEUSER COMPANY
Here is a comparison of net sales, operating income and net earnings for the quarters and year-to-date periods ended June 30, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| QUARTER ENDED |
| AMOUNT OF CHANGE |
| YEAR-TO-DATE ENDED |
| AMOUNT OF CHANGE |
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES | JUNE 2015 |
| JUNE 2014 |
| 2015 VS. 2014 |
| JUNE 2015 |
| JUNE 2014 |
| 2015 VS. 2014 |
Net sales | $ | 1,807 |
| | $ | 1,964 |
| | $ | (157 | ) | | $ | 3,528 |
| | $ | 3,700 |
| | $ | (172 | ) |
Operating income | $ | 243 |
| | $ | 400 |
| | $ | (157 | ) | | $ | 443 |
| | $ | 708 |
| | $ | (265 | ) |
Earnings of discontinued operations, net of tax | $ | — |
| | $ | 22 |
| | $ | (22 | ) | | $ | — |
| | $ | 32 |
| | $ | (32 | ) |
Net earnings attributable to Weyerhaeuser common shareholders | $ | 133 |
| | $ | 280 |
| | $ | (147 | ) | | $ | 223 |
| | $ | 463 |
| | $ | (240 | ) |
Basic earnings per share attributable to Weyerhaeuser common shareholders | $ | 0.26 |
| | $ | 0.48 |
| | $ | (0.22 | ) | | $ | 0.43 |
| | $ | 0.79 |
| | $ | (0.36 | ) |
Diluted earnings per share attributable to Weyerhaeuser common shareholders | $ | 0.26 |
| | $ | 0.47 |
| | $ | (0.21 | ) | | $ | 0.43 |
| | $ | 0.79 |
| | $ | (0.36 | ) |
Comparing Second Quarter 2015 with Second Quarter 2014
Net sales
Net sales decreased $157 million – 8 percent – primarily due to the following:
| |
• | Wood Products segment sales decreased $73 million, primarily due to lower average sales realizations for structural lumber and oriented strand board (OSB), and lower shipment volumes of structural lumber and engineered I-joists. These decreases were partially offset by higher OSB volumes and higher sales from complementary building products. |
| |
• | Timberlands segment sales decreased $61 million, primarily due to lower average log sales realizations and sales volumes in the West, and lower timberlands exchanges. |
| |
• | Cellulose Fibers segment sales decreased $23 million, primarily due to lower average sales realizations for pulp and liquid packaging board, and lower sales volumes for pulp and other products. These decreases were partially offset by higher sales volumes for liquid packaging board. |
Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders decreased $147 million – 53 percent – primarily due to the following:
| |
• | lower gross margin – $132 million – primarily due to increased scheduled maintenance outage days in our Cellulose Fibers segment, lower average log sales realizations and timberlands exchanges in our Timberlands segment, and lower average sales realizations in lumber and OSB in our Wood Products segment; |
| |
• | lower other operating income – $50 million – primarily due to a $45 million pretax gain recognized in 2014 related to a previously announced postretirement plan amendment; and |
| |
• | earnings from discontinued operations recognized in 2014 – $22 million. There were no earnings from discontinued operations in 2015. |
These decreases were partially offset by:
| |
• | lower tax expense primarily due to lower earnings in our Taxable REIT Subsidiary (TRS) – $46 million; and |
| |
• | lower selling, general and administrative expenses – $16 million. |
Comparing Year-to-Date 2015 with Year-to-Date 2014
Net sales
Net sales decreased $172 million – 5 percent – primarily due to the following:
| |
• | Timberlands segment sales decreased $87 million, primarily due to lower average log sales realizations and export sales volumes in the West. |
| |
• | Wood Products segment sales decreased $48 million, primarily due to lower average sales realizations for structural lumber and OSB, partially offset by higher shipment volumes of structural lumber and OSB and higher sales from complementary building products. |
| |
• | Cellulose Fibers segment sales decreased $37 million, primarily due to lower sales volumes for all products and lower liquid packaging board average sales realizations. |
Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders decreased $240 million – 52 percent – primarily due to the following:
| |
• | lower gross margin – $171 million – primarily due to increased scheduled maintenance outage days in our Cellulose Fibers segment, lower average log sales realizations and sales volumes in our Timberlands segment and lower average sales realizations in lumber and OSB in our Wood Products segment; |
| |
• | lower other operating income – $140 million – primarily due to a $90 million pretax gain recognized in 2014 related to a previously announced postretirement plan amendment, a $22 million pretax gain recognized in 2014 on the sale of a landfill in Washington State and an $18 million increase in 2015 in noncash foreign exchange losses on debt held by our Canadian entity; and |
| |
• | earnings from discontinued operations recognized in 2014 – $32 million. There were no earnings from discontinued operations in 2015. |
These decreases were partially offset by:
| |
• | lower tax expense primarily due to lower earnings in our TRS – $77 million; and |
| |
• | lower selling, general and administrative expenses – $30 million. |
TIMBERLANDS
How We Did Second Quarter and Year-to-Date 2015
Here is a comparison of net sales to unaffiliated customers, intersegment sales, and net contribution to earnings for the quarters and year-to-date periods ended June 30, 2015 and 2014:
NET SALES / NET CONTRIBUTION TO EARNINGS – TIMBERLANDS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| QUARTER ENDED | | AMOUNT OF CHANGE | | YEAR-TO-DATE ENDED | | AMOUNT OF CHANGE |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 | | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 |
Net sales to unaffiliated customers: | | | | | | | | | | | |
Logs: | | | | | | | | | | | |
West | $ | 221 |
| | $ | 261 |
| | $ | (40 | ) | | $ | 431 |
| | $ | 518 |
| | $ | (87 | ) |
South | 58 |
| | 60 |
| | (2 | ) | | 116 |
| | 122 |
| | (6 | ) |
Canada | 3 |
| | 1 |
| | 2 |
| | 11 |
| | 7 |
| | 4 |
|
Subtotal logs sales | 282 |
| | 322 |
| | (40 | ) | | 558 |
| | 647 |
| | (89 | ) |
Chip sales | 4 |
| | 2 |
| | 2 |
| | 8 |
| | 5 |
| | 3 |
|
Timberlands exchanges(1) | 5 |
| | 28 |
| | (23 | ) | | 30 |
| | 32 |
| | (2 | ) |
Higher and better-use land sales(1) | 3 |
| | 7 |
| | (4 | ) | | 5 |
| | 10 |
| | (5 | ) |
Minerals, oil and gas | 5 |
| | 8 |
| | (3 | ) | | 12 |
| | 15 |
| | (3 | ) |
Products from international operations(2) | 25 |
| | 26 |
| | (1 | ) | | 49 |
| | 50 |
| | (1 | ) |
Other products | 12 |
| | 4 |
| | 8 |
| | 25 |
| | 15 |
| | 10 |
|
Subtotal net sales to unaffiliated customers | 336 |
| | 397 |
| | (61 | ) | | 687 |
| | 774 |
| | (87 | ) |
Intersegment sales: | | | | | | | | | | | |
United States | 139 |
| | 143 |
| | (4 | ) | | 288 |
| | 286 |
| | 2 |
|
Other | 48 |
| | 43 |
| | 5 |
| | 127 |
| | 138 |
| | (11 | ) |
Subtotal intersegment sales | 187 |
| | 186 |
| | 1 |
| | 415 |
|
| 424 |
| | (9 | ) |
Total sales | $ | 523 |
| | $ | 583 |
| | $ | (60 | ) | | $ | 1,102 |
| | $ | 1,198 |
| | $ | (96 | ) |
Net contribution to earnings | $ | 127 |
| | $ | 170 |
| | $ | (43 | ) | | $ | 289 |
| | $ | 334 |
| | $ | (45 | ) |
| |
(1) | Significant dispositions of higher and better-use timberland and some nonstrategic timberlands are made through subsidiaries. |
| |
(2) | Includes logs, plywood and hardwood lumber harvested or produced by our international operations. Includes sales of our operations in Uruguay and Brazil (sold in third quarter 2014). |
Comparing Second Quarter 2015 with Second Quarter 2014
Net sales – unaffiliated customers
Net sales to unaffiliated customers decreased $61 million – 15 percent – primarily due to a $40 million decrease in Western log sales as a result of lower average sales realizations and sales volumes, and a $23 million decrease in sales from timberlands exchanges.
Net contribution to earnings
Net contribution to earnings decreased $43 million – 25 percent – primarily due to the following:
| |
• | lower average log sales realizations in the West – $35 million and |
| |
• | lower timberlands exchanges – $19 million. |
These decreases were partially offset by:
| |
• | higher average sales realizations in the South – $5 million; and |
| |
• | lower operating costs primarily due to lower logging costs in the South – $5 million. |
Comparing Year-to-Date 2015 with Year-to-Date 2014
Net sales – unaffiliated customers
Net sales to unaffiliated customers decreased $87 million – 11 percent – due to a decrease in Western log sales as a result of lower average sales realizations and export sales volumes.
Intersegment sales
Intersegment sales decreased $9 million – 2 percent – primarily due to an $11 million decrease in Canada as a result of lower log and chip sales volumes.
Net contribution to earnings
Net contribution to earnings decreased $45 million – 13 percent – primarily due to the following:
| |
• | lower average log sales realizations in the West – $60 million and |
| |
• | lower sales volumes in the West and South – $25 million. |
These decreases were partially offset by:
| |
• | higher average sales realizations in the South – $11 million; |
| |
• | lower operating costs primarily due to lower logging costs in the South and lower log purchases in the West – $19 million; and |
| |
• | lower selling, general and administrative expenses – $7 million. |
THIRD-PARTY LOG SALES VOLUMES AND FEE HARVEST VOLUMES
|
| | | | | | | | | | | | | | | | | |
| QUARTER ENDED | | AMOUNT OF CHANGE | | YEAR-TO-DATE ENDED | | AMOUNT OF CHANGE |
VOLUMES IN THOUSANDS | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 | | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 |
Third party log sales – cubic meters: | | | | | | | | | | | |
West | 2,330 |
| | 2,390 |
| | (60 | ) | | 4,450 |
| | 4,636 |
| | (186 | ) |
South | 1,295 |
| | 1,339 |
| | (44 | ) | | 2,566 |
| | 2,724 |
| | (158 | ) |
Canada | 75 |
| | 30 |
| | 45 |
| | 320 |
| | 186 |
| | 134 |
|
International | 179 |
| | 139 |
| | 40 |
| | 329 |
| | 286 |
| | 43 |
|
Total | 3,879 |
| | 3,898 |
| | (19 | ) | | 7,665 |
| | 7,832 |
| | (167 | ) |
Fee harvest volumes – cubic meters: | | | | | | | | | | | |
West | 2,811 |
| | 2,888 |
| | (77 | ) | | 5,722 |
| | 5,763 |
| | (41 | ) |
South | 2,912 |
| | 2,715 |
| | 197 |
| | 5,644 |
| | 5,581 |
| | 63 |
|
International | 219 |
| | 249 |
| | (30 | ) | | 458 |
| | 498 |
| | (40 | ) |
Total | 5,942 |
| | 5,852 |
| | 90 |
| | 11,824 |
| | 11,842 |
| | (18 | ) |
WOOD PRODUCTS
How We Did Second Quarter and Year-to-Date 2015
Here is a comparison of net sales to unaffiliated customers and net contribution to earnings for the quarters and year-to-date periods ended June 30, 2015 and 2014:
NET SALES / NET CONTRIBUTION TO EARNINGS – WOOD PRODUCTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| QUARTER ENDED | | AMOUNT OF CHANGE | | YEAR-TO-DATE ENDED | | AMOUNT OF CHANGE |
DOLLAR AMOUNTS IN MILLIONS | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 | | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 |
Net sales: | | | | | | | | | | | |
Structural lumber | $ | 450 |
| | $ | 515 |
| | $ | (65 | ) | | $ | 884 |
| | $ | 942 |
| | $ | (58 | ) |
Engineered solid section | 113 |
| | 114 |
| | (1 | ) | | 207 |
| | 204 |
| | 3 |
|
Engineered I-joists | 76 |
| | 81 |
| | (5 | ) | | 137 |
| | 140 |
| | (3 | ) |
Oriented strand board | 147 |
| | 159 |
| | (12 | ) | | 284 |
| | 307 |
| | (23 | ) |
Softwood plywood | 36 |
| | 35 |
| | 1 |
| | 69 |
| | 65 |
| | 4 |
|
Other products produced | 48 |
| | 45 |
| | 3 |
| | 96 |
| | 87 |
| | 9 |
|
Complementary building products | 134 |
| | 128 |
| | 6 |
| | 250 |
| | 230 |
| | 20 |
|
Total | $ | 1,004 |
| | $ | 1,077 |
| | $ | (73 | ) | | $ | 1,927 |
|
| $ | 1,975 |
| | $ | (48 | ) |
Net contribution to earnings | $ | 71 |
| | $ | 102 |
| | $ | (31 | ) | | $ | 133 |
| | $ | 166 |
| | $ | (33 | ) |
Comparing Second Quarter 2015 with Second Quarter 2014
Net sales
Net sales decreased $73 million – 7 percent – primarily due to the following:
| |
• | Structural lumber average sales realizations decreased 10 percent and shipment volumes decreased 3 percent, |
| |
• | OSB average sales realizations decreased 15 percent, and |
| |
• | Engineered I-joists shipment volumes decreased 9 percent. |
These items were partially offset by:
| |
• | a 9 percent increase in OSB shipment volumes and |
| |
• | a 5 percent increase in complementary building products. |
Net contribution to earnings
Net contribution to earnings decreased $31 million – 30 percent – primarily due to lower average sales realizations in lumber and OSB – $76 million. This decrease was mostly offset by:
| |
• | lower unit manufacturing costs due to lower energy costs and lower translated Canadian operating costs due to the strengthening U.S. dollar – $21 million; |
| |
• | lower log costs due to decreasing log prices – $16 million; and |
| |
• | lower selling, general and administrative expenses – $4 million. |
Comparing Year-to-Date 2015 with Year-to-Date 2014
Net sales
Net sales decreased $48 million – 2 percent – primarily due to the following:
| |
• | Structural lumber average sales realizations decreased 8 percent and |
| |
• | OSB average sales realizations decreased 15 percent. |
These items were partially offset by:
| |
• | a 9 percent increase in OSB shipment volumes, |
| |
• | a 3 percent increase in structural lumber shipment volumes, and |
| |
• | a 9 percent increase in complementary building products. |
Net contribution to earnings
Net contribution to earnings decreased $33 million – 20 percent – primarily due to lower average sales realizations in lumber and OSB – $129 million. This decrease was mostly offset by:
| |
• | higher average sales realizations in engineered wood products – $9 million; |
| |
• | lower unit manufacturing costs due to lower energy costs, higher operating rates, and lower translated Canadian operating costs due to the strengthening U.S. dollar – $49 million; |
| |
• | lower log costs due to decreasing log prices – $18 million; and |
| |
• | lower selling, general and administrative expenses – $16 million. |
THIRD-PARTY SALES VOLUMES
|
| | | | | | | | | | | | | | | | | |
| QUARTER ENDED | | AMOUNT OF CHANGE | | YEAR-TO-DATE ENDED | | AMOUNT OF CHANGE |
VOLUMES IN MILLIONS(1) | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 | | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 |
Structural lumber – board feet | 1,175 |
| | 1,206 |
| | (31 | ) | | 2,250 |
| | 2,195 |
| | 55 |
|
Engineered solid section – cubic feet | 5.6 |
| | 5.8 |
| | (0.2 | ) | | 10.4 |
| | 10.4 |
| | — |
|
Engineered I-joists – lineal feet | 50 |
| | 55 |
| | (5 | ) | | 91 |
| | 95 |
| | (4 | ) |
Oriented strand board – square feet (3/8”) | 771 |
| | 706 |
| | 65 |
| | 1,471 |
| | 1,347 |
| | 124 |
|
Softwood plywood – square feet (3/8”) | 101 |
| | 102 |
| | (1 | ) | | 190 |
| | 192 |
| | (2 | ) |
| |
(1) | Sales volumes include sales of internally produced products and products purchased for resale primarily through our distribution business. |
PRODUCTION AND OUTSIDE PURCHASE VOLUMES
Outside purchase volumes are primarily purchased for resale through our distribution business. Production volumes are produced for sale through our own sales organizations and through our distribution business. Production of OSB and engineered solid section are also used to manufacture engineered I-joists.
|
| | | | | | | | | | | | | | | | | |
| QUARTER ENDED | | AMOUNT OF CHANGE | | YEAR-TO-DATE ENDED | | AMOUNT OF CHANGE |
VOLUMES IN MILLIONS | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 | | JUNE 2015 | | JUNE 2014 | | 2015 VS. 2014 |
Structural lumber – board feet: | | | | | | | | | | | |
Production | 1,087 |
| | 1,081 |
| | 6 |
| | 2,130 |
| | 2,090 |
| | 40 |
|
Outside purchase | 98 |
| | 82 |
| | 16 |
| | 187 |
| | 160 |
| | 27 |
|
Total | 1,185 |
| | 1,163 |
| | 22 |
| | 2,317 |
| | 2,250 |
| | 67 |
|
Engineered solid section – cubic feet: | | | | | | | | | | | |
Production | 5.6 |
| | 5.7 |
| | (0.1 | ) | | 10.6 |
| | 10.6 |
| | — |
|
Outside purchase | — |
| | 0.5 |
| | (0.5 | ) | | — |
| | 2.3 |
| | (2.3 | ) |
Total | 5.6 |
| | 6.2 |
| | (0.6 | ) | | 10.6 |
| | 12.9 |
| | (2.3 | ) |
Engineered I-joists – lineal feet: | | | | | | | | | | | |
Production | 48 |
| | 55 |
| | (7 | ) | | 91 |
| | 99 |
| | (8 | ) |
Outside purchase | 1 |
| | 3 |
| | (2 | ) | | 2 |
| | 4 |
| | (2 | ) |
Total | 49 |
| | 58 |
| | (9 | ) | |