SECURITIES AND EXCHANGE COMMISSION ---------------------------- Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirteen weeks ended April 1, 2001 or 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 A Washington Corporation (IRS Employer Identification No. 91-0470860) Federal Way, Washington 98063-9777 Telephone (253) 924-2345 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered: - ---------------------------------- ------------------------------ Common Shares (1.25 par value) Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange Exchangeable Shares (no par value) Toronto Stock Exchange 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. Yes X No ---- ---- The number of shares outstanding of the registrant's class of common stock, as of May 4, 2001, was 215,165,261 common shares ($1.25 par value).
Weyerhaeuser Company - - 2 - WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirteen weeks ended April 1, 2001 Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings 3 Consolidated Balance Sheet 4-5 Consolidated Statement of Cash Flows 6-7 Notes to Financial Statements 8-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25-26 Part II. Other Information Item 1. Legal Proceedings 27 Item 2. Changes in Securities (not applicable) Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 28 The financial information included in this report has been prepared in conformity with accounting practices and methods reflected in the financial statements included in the annual report (Form 10-K) filed with the Securities and Exchange Commission for the year ended December 31, 2000. Though not examined by independent public accountants, the financial information reflects, in the opinion of management, all adjustments necessary to present a fair statement of results for the interim periods indicated. The results of operations for the thirteen-week period ending April 1, 2001, should not be regarded as necessarily indicative of the results that may be expected for the full year. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WEYERHAEUSER COMPANY By ------------------------------------ K. J. Stancato Duly Authorized Officer and Principal Accounting Officer May 11, 2001
Weyerhaeuser Company - - 2 - WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirteen weeks ended April 1, 2001 Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings 3 Consolidated Balance Sheet 4-5 Consolidated Statement of Cash Flows 6-7 Notes to Financial Statements 8-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25-26 Part II. Other Information Item 1. Legal Proceedings 27 Item 2. Changes in Securities (not applicable) Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 28 The financial information included in this report has been prepared in conformity with accounting practices and methods reflected in the financial statements included in the annual report (Form 10-K) filed with the Securities and Exchange Commission for the year ended December 31, 2000. Though not examined by independent public accountants, the financial information reflects, in the opinion of management, all adjustments necessary to present a fair statement of results for the interim periods indicated. The results of operations for the thirteen-week period ending April 1, 2001, should not be regarded as necessarily indicative of the results that may be expected for the full year. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WEYERHAEUSER COMPANY By /s/ K. J. Stancato ------------------------------------ K. J. Stancato Duly Authorized Officer and Principal Accounting Officer May 11, 2001
Weyerhaeuser Company - 3 - WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------ CONSOLIDATED STATEMENT OF EARNINGS For the thirteen-week periods ended April 1, 2001 and March 26, 2000 (Dollar amounts in millions except as noted and per share figures)/(Unaudited) <TABLE> <CAPTION> Thirteen weeks ended: April 1, March 26, 2001 2000 -------- -------- Net sales and revenues: <S> <C> <C> Weyerhaeuser $ 3,219 $ 3,647 Real estate and related assets 334 278 -------- -------- Total net sales and revenues 3,553 3,925 -------- -------- Costs and expenses: Weyerhaeuser: Costs of products sold 2,493 2,701 Depreciation, amortization and fee stumpage 207 206 Selling expenses 91 87 General and administrative expenses 171 171 Research and development expenses 13 12 Taxes other than payroll and income taxes 37 37 Other operating costs, net (9) 20 Support alignment costs (Note 13) 45 1 Charges for integration and closure of facilities (Note 14) 7 13 -------- -------- 3,055 3,248 -------- -------- Real estate and related assets: Costs and operating expenses 251 220 Depreciation and amortization 1 1 Selling expenses 12 9 General and administrative 13 13 Taxes other than payroll and income taxes 2 2 Other operating costs, net (1) (1) -------- -------- 278 244 -------- -------- Total costs and expenses 3,333 3,492 -------- -------- Operating income 220 433 Interest expense and other: Weyerhaeuser: Interest expense incurred 88 91 Less interest capitalized 4 4 Equity in income of affiliates (Note 4) 15 10 Interest income and other 6 18 Real estate and related assets: Interest expense incurred 19 19 Less interest capitalized 16 15 Equity in income of unconsolidated entities (Note 4) 14 14 Interest income and other 2 3 -------- -------- Earnings before income taxes 170 387 Income taxes (Note 6) 63 143 -------- -------- Net earnings $ 107 $ 244 ======== ======== Basic and diluted net earnings per share (Note 2): $ 0.49 $ 1.04 ======== ======== Weighted average shares outstanding (thousands): Basic 219,319 234,213 Dilutive effect of stock options 231 721 -------- -------- Diluted 219,550 234, 934 ======== ======== Dividends paid per share $ 0.40 $ 0.40 ======== ======== </TABLE> See Accompanying Notes to Financial Statements
Weyerhaeuser Company - - 4 - WEYERHAEUSER COMPANY AND SUBSIDIARIES -------------------------- CONSOLIDATED BALANCE SHEET April 1, 2001 and December 31, 2000 (Dollar amounts in millions) <TABLE> <CAPTION> April 1, Dec 31, 2001 2000 -------- -------- (Unaudited) <S> <C> <C> Assets - ------ Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 56 $ 115 Receivables, less allowances 1,261 1,247 Inventories (Note 7) 1,654 1,499 Prepaid expenses 432 427 -------- -------- Total current assets 3,403 3,288 Property and equipment (Note 8) 7,914 8,157 Construction in progress 670 574 Timber and timberlands at cost, less fee stumpage charged to disposals 1,704 1,696 Investments in and advances to equity affiliates (Note 4) 583 579 Goodwill, net of accumulated amortization 1,123 1,150 Other assets and deferred charges 783 716 -------- -------- 16,180 16,160 -------- -------- Real estate and related assets Cash and short-term investments 9 8 Receivables, less discounts and allowances 77 81 Mortgage-related financial instruments, less discounts and allowances 71 73 Real estate in process of development and for sale 648 621 Land being processed for development 949 917 Investments in unconsolidated entities, less reserves (Note 4) 66 205 Other assets 140 130 -------- -------- 1,960 2,035 -------- -------- Total assets $ 18,140 $ 18,195 ======== ======== </TABLE> See Accompanying Notes to Financial Statements
Weyerhaeuser Company - 5 - <TABLE> <CAPTION> April 1, Dec 31, 2001 2000 -------- -------- (Unaudited) <S> <C> <C> Liabilities and shareholders' interest - -------------------------------------- Weyerhaeuser Current liabilities: Notes payable and commercial paper $ 906 $ 645 Current maturities of long-term debt 75 88 Accounts payable (Note 1) 870 921 Accrued liabilities (Note 9) 972 1,050 -------- -------- Total current liabilities 2,823 2,704 Long-term debt (Note 11) 3,968 3,974 Deferred income taxes (Note 6) 2,385 2,377 Deferred pension, other postretirement benefits and other liabilities 764 784 Commitments and contingencies (Note 15) -------- -------- 9,940 9,839 -------- -------- Real estate and related assets Notes payable and commercial paper 724 778 Long-term debt (Note 11) 378 362 Other liabilities 329 384 Commitments and contingencies (Note 15) -------- -------- 1,431 1,524 -------- -------- Total liabilities 11,371 11,363 -------- -------- Shareholders' interest (Note 12) Common shares: $1.25 par value; authorized 400,000,000 shares; issued and outstanding: 214,742,272 and 213,897,744 268 268 Exchangeable shares: no par value; unlimited shares authorized; issued and held by nonaffiliates: 4,664,729 and 5,315,471 317 361 Other capital 2,576 2,532 Retained earnings 3,869 3,849 Cumulative other comprehensive income (expense) (261) (178) -------- -------- Total shareholders' interest 6,769 6,832 -------- -------- Total liabilities and shareholders' interest $ 18,140 $ 18,195 ======== ======== </TABLE>
Weyerhaeuser Company - - 6 - WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------ CONSOLIDATED STATEMENT OF CASH FLOWS For the thirteen-week periods ended April 1, 2001 and March 26, 2000 (Dollar amounts in millions) (Unaudited) <TABLE> <CAPTION> Consolidated ---------------------- April 1, March 26, 2001 2000 -------- -------- <S> <C> <C> Cash provided by (used for) operations: Net earnings $ 107 $ 244 Non-cash charges (credits) to income: Depreciation, amortization and fee stumpage 208 207 Deferred income taxes, net 28 35 Pension and other post retirement benefits (62) (36) Equity in income of affiliates and unconsolidated entities (29) (24) Charges for integration and closure of facilities (Note 14) 7 13 Charge for impairment of long-lived assets 20 -- Decrease (increase) in working capital: Receivables 3 (66) Inventories, real estate and land (211) (191) Prepaid expenses (7) 26 Mortgage-related financial instruments 1 2 Accounts payable and accrued liabilities (205) (176) Gain on disposition of assets (4) -- Other (15) (29) -------- -------- Net cash provided by (used for) operations (159) 5 -------- -------- Cash provided by (used for) investing activities: Property and equipment (179) (135) Timberlands reforestation (10) (9) Acquisition of timberlands (33) (8) Acquisition of businesses and facilities, net of cash acquired (Note 16) -- (594) Investments in and advances to equity affiliates 163 5 Proceeds from sale of: Property and equipment 12 -- Mortgage-related financial instruments 2 1 Intercompany advances -- -- Other 30 34 --------- -------- Net cash provided by (used for) investing activities (15) (706) --------- -------- Cash provided by (used for) financing activities: Issuances of debt 18 5 Notes and commercial paper borrowings, net 207 376 Cash dividends (87) (91) Intercompany cash dividends -- -- Payments on debt (21) (875) Repurchase of common shares -- (211) Exercise of stock options 9 8 Other (10) (58) --------- -------- Net cash provided by (used for) financing activities 116 (846) --------- -------- Net increase (decrease) in cash and short-term investments (58) (1,547) Cash and short-term investments at beginning of year 123 1,643 --------- -------- Cash and short-term investments at end of period $ 65 $ 96 ========= ======== Cash paid (received) during the period for: Interest, net of amount capitalized $ 152 $ 93 ========= ======== Income taxes $ 21 $ 68 ========= ======== </TABLE> See Accompanying Notes to Financial Statements
Weyerhaeuser Company - 7 - <TABLE> <CAPTION> Weyerhaeuser Real Estate and Related Assets -------------------- -------------------- April 1, March 26, April 1, March 26, 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> $ 63 $ 215 $ 44 $ 29 207 206 1 1 24 34 4 1 (60) (35) (2) (1) (15) (10) (14) (14) 7 13 -- -- 20 -- -- -- (1) (79) 4 13 (155) (151) (56) (40) (7) 26 -- -- -- -- 1 2 (140) (171) (65) (5) (4) -- -- -- (7) (24) (8) (5) -------- -------- -------- -------- (68) 24 (91) (19) -------- -------- -------- -------- (179) (126) -- (9) (10) (9) -- -- (33) (8) -- -- -- (594) -- -- 7 2 156 3 12 -- -- -- -- -- 2 1 (5) (3) 5 3 33 35 (3) (1) -------- -------- -------- -------- (175) (703) 160 (3) -------- -------- -------- -------- -- 5 18 -- 261 303 (54) 73 (87) (91) -- -- 30 -- (30) -- (19) (825) (2) (50) -- (211) -- -- 9 8 -- -- (10) (58) -- -- -------- -------- -------- -------- 184 (869) (68) 23 -------- -------- -------- -------- (59) (1,548) 1 1 115 1,640 8 3 -------- -------- -------- -------- $ 56 $ 92 $ 9 $ 4 ======== ======== ======== ======== $ 147 $ 88 $ 5 $ 5 ======== ======== ======== ======== $ (52) $ 68 $ 73 $ -- ======== ======== ======== ======== </TABLE>
Weyerhaeuser Company - - 8 - WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------ NOTES TO FINANCIAL STATEMENTS For the thirteen-week periods ended April 1, 2001 and March 26, 2000 (Unaudited) Note 1: Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of Weyerhaeuser Company and all of its majority-owned domestic and foreign subsidiaries. Investments in and advances to equity affiliates which are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings. Significant intercompany transactions and accounts are eliminated. Certain of the consolidated financial statements and notes to financial statements are presented in two groupings: (1) Weyerhaeuser (the company), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction and other real estate related activities. Nature of Operations The company's principal business segments, which account for the majority of sales, earnings and the asset base, are: . Timberlands, which is engaged in the management of 6.0 million acres of company-owned and .4 million acres of leased commercial forestland in North America. The company also has renewable long-term licenses on 31.6 million acres of forestland located in five provinces throughout Canada that are managed by our Canadian operations. . Wood products, which produces a full line of solid wood products that are sold primarily through the company's own sales organizations to wholesalers, retailers and industrial users in North America, the Pacific Rim and Europe. It is also engaged in the management of forestland in Canada under long-term licensing arrangements. . Pulp, paper and packaging, which manufactures and sells pulp, paper, paperboard and containerboard in North American, Pacific Rim and European markets and packaging products for the domestic markets, and which operates an extensive wastepaper recycling system that serves company mills and worldwide markets. Accounting Pronouncement Implemented Effective January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133. Statement 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133 also requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Implementation of Statement 133, as amended, as of January 1, 2001, increased assets by approximately $37 million and increased liabilities by approximately $24 million, with a net offsetting amount of $13 million recorded in cumulative other comprehensive income (expense). Derivatives The company utilizes well-defined financial contracts in the normal course of its operations as means to manage its foreign exchange, interest rate and commodity price risks. The vast majority of these contracts are fixed-price contracts for future purchases and sales of various commodities that meet the definition of "normal purchases or normal sales", and therefore, are not considered derivative instruments under Statement 133, as amended. Likewise, several of the company's financial and commodity contracts do not provide for net settlement, and therefore, are not considered derivative instruments under
Weyerhaeuser Company - 9 - Statement 133, as amended. The company's current accounting treatment for the limited number of contracts considered derivative instruments follows: For derivatives designated as fair value hedges, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Changes in the fair value of all other derivative instruments not designated as hedges are also recognized in earnings in the period in which the changes occurred. The following contract has been formally designated as a fair value hedge: . Foreign currency futures contracts entered into in conjunction with the company's agreement to purchase equipment in a foreign denominated currency. The objective of the contracts is to hedge the company's future foreign denominated payments for the equipment purchase. The following financial instruments have been formally designated as cash flow hedges: . Foreign exchange contracts, the objective of which is to hedge the variability of future cash flows associated with foreign denominated accounts receivable and accounts payable due to changes in foreign currency exchange rates. Gains or losses recorded in other comprehensive income are reclassified into earnings at the contracts' respective settlement dates. . Variable-to-fixed interest rate swap agreement entered into with a major financial institution in which the company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The objective of this swap is to hedge the variability of future cash flows associated with changes in LIBOR. The gain or loss on this swap will be reclassified into earnings at the contract's settlement date. The premiums received by the company on the sale of its swaps are treated as deferred income and amortized against interest expense over the term of the agreements. . Commodity swap agreements designed to hedge against the variability of future cash flows arising from changes in natural gas spot rates. Gains or losses recorded in other comprehensive income are reclassified into earnings at the contracts' respective settlement dates. In addition, the company has the following contract that has not been designated as a hedge: . Variable rate swap agreement entered into with a major financial institution in which the company pays a floating rate based on LIBOR and receives a floating rate based on an investment fund index, with payments being calculated on a notional amount. The swap is an overlay to short-term investments and provides diversification benefits. The swap is settled quarterly, marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. The notional amounts of these derivative financial instruments are $233 million and $115 million at April 1, 2001, and December 31, 2000, respectively. These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on contractual terms. Other than the reclassification of net gains out of cumulative other comprehensive income (expense), there was no net earnings impact in the first quarter of 2001 resulting from the company's use of derivative instruments. The company estimates that approximately $4 million of net derivative gains recorded in cumulative other comprehensive income (expense) as of April 1, 2001 will be reclassified into earnings within the next 12 months. In addition to the contracts described above, the company is also involved in a very limited number of trading transactions designed to capitalize on the company's knowledge and understanding of the commodity lumber market. The company's open trading positions are marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. Trading activities to date have not had a material effect on the company's financial position, results of operations or cash flows.
Weyerhaeuser Company - - 10 - Cash and Short-Term Investments For purposes of cash flow and fair value reporting, short-term investments with original maturities of 90 days or less are considered as cash equivalents. Short-term investments are stated at cost, which approximates market. Inventories Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last-in, first-out (LIFO) method is used to cost approximately half of domestic raw materials, in process and finished goods inventories. LIFO inventories were $419 million and $417 million at April 1, 2001, and December 31, 2000, respectively. The balance of domestic raw material and product inventories, all materials and supplies inventories, and all foreign inventories is costed at either the first-in, first-out (FIFO) or moving average cost methods. Had the FIFO method been used to cost all inventories, the amounts at which product inventories are stated would have been $217 million and $227 million greater at April 1, 2001, and December 31, 2000, respectively. Property and Equipment The company's property accounts are maintained on an individual asset basis. Betterments and replacements of major units are capitalized. Maintenance, repairs and minor replacements are expensed. Depreciation is provided generally on the straight-line or unit-of-production method at rates based on estimated service lives. Amortization of logging railroads and truck roads is provided generally as timber is harvested and is based upon rates determined with reference to the volume of timber estimated to be removed over such facilities. The cost and related depreciation of property sold or retired is removed from the property and allowance for depreciation accounts and the gain or loss is included in earnings. Timber and Timberlands Timber and timberlands are carried at cost less fee stumpage charged to disposals. Fee stumpage is the cost of standing timber and is charged to fee timber disposals as fee timber is harvested, lost as the result of casualty or sold. Depletion rates used to relieve timber inventory are determined with reference to the net carrying value of timber and the related volume of timber estimated to be available over the growth cycle. Timber carrying costs are expensed as incurred. The cost of timber harvested is included in the carrying values of raw material and product inventories, and in the costs of products sold as these inventories are disposed of. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years, which is the expected period to be benefited. The unamortized carrying balance of goodwill is assessed for recoverability on a periodic basis. The measurement of possible impairment is based on the ability to recover the balance of goodwill from expected future operating cash flows. Accounts Payable The company's banking system provides for the daily replenishment of major bank accounts as checks are presented for payment. Accordingly, there were negative book cash balances of $121 million at both April 1, 2001, and December 31, 2000. Such balances result from outstanding checks that had not yet been paid by the bank and are reflected in accounts payable in the consolidated balance sheets. Income Taxes Deferred income taxes are provided to reflect temporary differences between the financial and tax bases of assets and liabilities using presently enacted tax rates and laws.
Weyerhaeuser Company - 11 - Pension Plans The company has pension plans covering most of its employees. The U.S. plan covering salaried employees provides pension benefits based on the employee's highest monthly earnings for five consecutive years during the final ten years before retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). Postretirement Benefits Other Than Pensions In addition to providing pension benefits, the company provides certain health care and life insurance benefits for some retired employees and accrues the expected future cost of these benefits for its current eligible retirees and some employees. All of the company's salaried employees and some hourly employees may become eligible for these benefits when they retire. Revenue Recognition The company's forest products-based operations recognize revenue from product sales upon shipment to their customers, except for those export sales where revenue is recognized when title transfers at the foreign port. The company's real estate operations recognize income from the sales of single-family housing units when construction has been completed, required down payments have been received and title has passed to the customer. Income from multi-family and commercial properties, developed lots and undeveloped land is recognized when required down payments are received and other income recognition criteria has been satisfied. Impairment of Long-Lived Assets to Be Disposed Of The company accounts for long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Assets to be disposed of are reported at the lower of the carrying value or fair value less cost to sell. Foreign Currency Translation Local currencies are considered the functional currencies for most of the company's operations outside the United States. Assets and liabilities are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenues and expenses are translated into U.S. dollars at average monthly exchange rates prevailing during the year. Comprehensive Income Comprehensive income consists of net income, foreign currency translation adjustments, additional minimum pension liability adjustments and fair value adjustments on derivative instruments designated as cash flow hedges. See Note 3: Comprehensive Income (Expense). Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to conform prior years' data to the current format.
Weyerhaeuser Company - - 12 - Real Estate and Related Assets Real estate held for sale is stated at the lower of cost or fair value less costs to sell. The determination of fair value is based on appraisals and market pricing of comparable assets, when available, or the discounted value of estimated future cash flows from these assets. Real estate held for development is stated at cost to the extent it does not exceed the estimated undiscounted future net cash flows, in which case, it is carried at fair value. Mortgage-related financial instruments include mortgage loans receivable, mortgage-backed certificates and other financial instruments. Note 2: Net Earnings Per Share Basic net earnings per share are based on the weighted average number of common and exchangeable shares outstanding during the period. Diluted net earnings per share are based on the weighted average number of common and exchangeable shares outstanding and stock options outstanding at the beginning of or granted during the period. Options to purchase 4,236,333 shares at prices ranging from $52.66 to $68.41 per share were outstanding during the thirteen weeks ending April 1, 2001. Options to purchase 213,150 shares at prices ranging from $65.56 to $68.41 per share were outstanding during the thirteen weeks ending March 26, 2000. These options were not included in the computation of diluted earnings per share for the respective periods because the option exercise prices were greater than the average market prices of common shares during those periods. Note 3: Comprehensive Income (Expense) The company's comprehensive income (expense) is as follows: <TABLE> <CAPTION> Thirteen weeks ended --------------------- April 1, March 26, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Net earnings $ 107 $ 244 -------- -------- Other comprehensive income (expense): Foreign currency translation adjustments, net of taxes of $21 and ($9) (92) (46) Cash flow hedges: Net derivative gains, net of taxes of ($6) and $0 11 -- Reclassification adjustments, net of taxes of $1 and $0 (2) -- -------- -------- (83) (46) -------- -------- Comprehensive income $ 24 $ 198 ======== ======== </TABLE> Note 4: Equity Affiliates Weyerhaeuser The company's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. The company's significant equity affiliates are: . Cedar River Paper Company - A 50 percent owned joint venture in Cedar Rapids, Iowa, that manufactures liner and medium containerboard from recycled fiber. . ForestExpress, LLC - A 28 percent owned joint venture formed during 2000 to develop and operate a global, web-enabled, business-to-business marketplace for the forest products industry. Other equity members of the joint venture, which is headquartered in Atlanta, Georgia, include Boise Cascade Corporation, Georgia-Pacific Corporation, International Paper, The Mead Corporation, Morgan Stanley Dean Witter, and Willamette Industries. . Nelson Forests Joint Venture - An investment in which the company owns a 51 percent financial interest and has a 50 percent voting interest, which holds Crown Forest License cutting rights and freehold land on the South Island of New Zealand.
Weyerhaeuser Company - 13 - . North Pacific Paper Corporation - A 50 percent owned joint venture that has a newsprint manufacturing facility in Longview, Washington. . RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint venture with institutional investors to make investments in timberlands and related assets outside the United States. The primary focus of this partnership is in pine forests in the Southern Hemisphere. . SCA Weyerhaeuser Packaging Holding Company Asia Ltd. - A 50 percent owned joint venture formed to build or buy containerboard packaging facilities to serve manufacturers of consumer and industrial products in Asia. Two facilities are in operation in China. . Wapawekka Lumber LP - A 51 percent owned limited partnership in Saskatchewan, Canada, that commenced the operation of a sawmill during 1999. Substantive participating rights by the minority partner preclude the consolidation of this partnership by the company. . Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North Carolina, which supplies full-service, value-added turnkey packaging solutions to assist product manufacturers in the areas of retail marketing and distribution. Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, is as follows: <TABLE> <CAPTION> April 1, Dec. 31, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Current assets $ 223 $ 232 Noncurrent assets 1,473 1,444 Current liabilities 193 207 Noncurrent liabilities 563 593 </TABLE> <TABLE> <CAPTION> Thirteen weeks ended -------------------- April 1, March 26, 2001 2000 -------- -------- <S> <C> <C> Net sales and revenues $ 228 $ 212 Operating income 31 25 Net income 24 16 </TABLE> The company provides goods and services to these affiliates, which vary by entity, in the form of raw materials, management and marketing services, support services and shipping services. Additionally, the company purchases finished product from certain of these entities. The aggregate total of these transactions is not material to the results of operations of the company. Real Estate and Related Assets Investments in unconsolidated entities that are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings as appropriate. As of December 31, 2000, these investments included minor holdings in non-real estate partnerships that had significant assets and income. Such investments were liquidated during the first quarter of 2001.
Weyerhaeuser Company - - 14 - Unconsolidated financial information for unconsolidated entities, which are accounted for by the equity method, is as follows: <TABLE> <CAPTION> April 1, Dec. 31, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Current assets $ 7 $ 11,296 Noncurrent assets 283 271 Current liabilities 11 9,864 Noncurrent liabilities 136 140 </TABLE> <TABLE> <CAPTION> Thirteen weeks ended -------------------- April 1, March 26, 2001 2000 -------- -------- <S> <C> <C> Net sales and revenues $ 331 $ 259 Operating income 155 123 Net income 125 99 </TABLE> The company may charge management and/or development fees to these unconsolidated entities. The aggregate total of these transactions is not material to the results of operations of the company. Note 5: Other Operating Costs, Net Other operating costs, net, is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. There were no significant individual items in the first quarter of 2001 or 2000. Note 6: Income Taxes Provisions for income taxes include the following: <TABLE> <CAPTION> Thirteen weeks ended -------------------- April 1, March 26, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Federal: Current $ 26 $ 56 Deferred 26 21 -------- -------- 52 77 -------- -------- State: Current 3 6 Deferred 2 2 -------- -------- 5 8 -------- -------- Foreign: Current 6 46 Deferred -- 12 -------- -------- 6 58 -------- -------- $ 63 $ 143 ======== ======== </TABLE>
Weyerhaeuser Company - 15 - Income tax provisions for interim periods are based on the current best estimate of the effective tax rate expected to be applicable for the full year. The effective tax rate reflects anticipated tax credits, foreign taxes and other tax planning alternatives. For the periods ended April 1, 2001 and March 26, 2000, the company's provision for income taxes as a percent of earnings before income taxes is greater than the 35% federal statutory rate due principally to the effect of state income taxes. The effective tax rate for each of the thirteen-week periods ended April 1, 2001 and March 26, 2000, was 37%. Deferred taxes are provided for the temporary differences between the financial and tax bases of assets and liabilities, applying presently enacted tax rates and laws. The major sources of these temporary differences include depreciable and depletable assets, real estate, and pension and retiree health care liabilities. Note 7: Inventories <TABLE> <CAPTION> April 1, Dec. 31, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Logs and chips $ 239 $ 216 Lumber, plywood, panels and engineered wood 497 415 Pulp and paper 231 205 Containerboard, paperboard and packaging 175 166 Other products 193 177 Materials and supplies 319 320 -------- -------- $ 1,654 $ 1,499 ======== ======== </TABLE> Note 8: Property and Equipment <TABLE> <CAPTION> April 1, Dec. 31, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Property and equipment, at cost: Land $ 233 $ 235 Buildings and improvements 2,155 2,172 Machinery and equipment 11,318 11,391 Rail and truck roads 597 661 Other 154 181 -------- -------- 14,457 14,640 Less allowance for depreciation and amortization 6,543 6,483 -------- -------- $ 7,914 $ 8,157 ======== ======== </TABLE> Note 9: Accrued Liabilities <TABLE> <CAPTION> April 1, Dec. 31, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 387 $ 418 Taxes - Social Security and real and personal property 54 51 Product warranties 11 12 Interest 41 104 Income taxes 46 -- Other 433 465 -------- -------- $ 972 $ 1,050 ======== ======== </TABLE>
Weyerhaeuser Company - - 16 - Note 10: Short-Term Debt Lines of Credit The company had short-term bank credit lines of $925 million and $865 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at April 1, 2001, and December 31, 2000, respectively. No portions of these lines have been availed of by the company or WRECO at April 1, 2001, or December 31, 2000. None of the entities referred to above is a guarantor of the borrowing of the other. In addition, the company has short- term bank credit lines that provide for the borrowings of up to $700 million at both April 1, 2001, and December 31, 2000. No portions of these lines have been availed of by the company. The company has received funding commitments from banks in connection with its cash tender offer for all of the outstanding shares of common stock of Willamette Industries, Inc. The funding commitments, which are sufficient to cover the approximate $5.7 billion equity value of the tender offer, are subject to certain conditions and expire in October 2001. Note 11: Long-Term Debt Lines of Credit The company's lines of credit include a five-year revolving credit facility agreement entered into in 1997 with a group of banks that provides for borrowings of up to the total amount of $400 million, all of which is available to the company. Borrowings are at LIBOR plus a spread or other such interest rates mutually agreed to between the borrower and lending banks. To the extent that these credit commitments expire more than one year after the balance sheet date and are unused, an equal amount of commercial paper is classifiable as long-term debt. Weyerhaeuser reclassified $400 million at April 1, 2001, and December 31, 2000. No portion of these lines has been availed of by the company at April 1, 2001, and December 31, 2000. The company's compensating balance agreements were not significant. Note 12: Shareholders' Interest Common Shares A reconciliation of common share activity for the periods ending April 1, 2001, and December 31, 2000, is as follows: <TABLE> <CAPTION> April 1, Dec. 31, In thousands 2001 2000 -------- -------- <S> <C> <C> Balance at beginning of year 213,898 226,039 New issuance -- 45 Retraction of exchangeable shares 650 3,688 Repurchase of common shares -- (16,182) Stock options exercised 194 308 -------- -------- Balance at end of period 214,742 213,898 ======== ======== </TABLE>
Weyerhaeuser Company - 17 - Exchangeable Shares Exchangeable Shares issued by Weyerhaeuser Company Ltd., a wholly owned Canadian subsidiary of the company, are, as nearly as practicable, the economic equivalent of the company's common shares; i.e., they have the following rights: . The right to exchange such shares for Weyerhaeuser common shares on a one-to-one basis. . The right to receive dividends, on a per-share basis, in amounts that are the same as, and are payable at the same time as, dividends declared on Weyerhaeuser common shares. . The right to vote at all shareholder meetings at which Weyerhaeuser shareholders are entitled to vote on the basis of one vote per Exchangeable Share. . The right to participate upon a Weyerhaeuser liquidation event on a pro-rata basis with the holders of Weyerhaeuser common shares in the distribution of assets of Weyerhaeuser. A reconciliation of Exchangeable Share activity for the periods ending April 1, 2001, and December 31, 2000, is as follows: <TABLE> <CAPTION> April 1, Dec. 31, In thousands 2001 2000 -------- -------- <S> <C> <C> Balance at beginning of year 5,315 8,810 New issuance -- 193 Retraction (650) (3,688) -------- -------- Balance at end of period 4,665 5,315 ======== ======== </TABLE> Cumulative Other Comprehensive Income (Expense) The company's cumulative other comprehensive income (expense) includes: <TABLE> <CAPTION> April 1, Dec. 31, Dollar amounts in millions 2001 2000 -------- -------- <S> <C> <C> Foreign currency translation adjustments $ (262) $ (170) Minimum pension liability adjustment (8) (8) Cash flow hedge fair value adjustments 9 -- -------- -------- $ (261) $ (178) ======== ======== </TABLE> Note 13: Support Alignment Costs In the fourth quarter of 1999, the company announced an initiative to streamline and improve delivery of internal support services that is expected to result in $150 million to $200 million in annual savings. The company began implementation of these plans during the first quarter of 2000, a process that may take up to three years to complete. Because implementation plans are still under review, the specific number of employees affected, exact timing of the implementation and associated costs have not been finalized. In the first quarter of 2001, the company incurred $45 million of pretax charges related to the support alignment initiative. These costs include $41 million recognized in conjunction with the company's decision to outsource certain information technology services, $20 million of which relates to the impairment of information technology assets to be disposed of. Other support alignment costs include severance, relocation and other outsourcing costs. In the first quarter of 2000, the company incurred $1 million of costs in connection with the support alignment initiative.
Weyerhaeuser Company - - 18 - Note 14: Charges for Integration and Closure of Facilities In the 2001 first quarter, the company incurred $7 million of pretax charges related to transition and integration of activities in connection with the MacMillan Bloedel and Trus Joist acquisitions. In the 2000 first quarter, the company incurred $13 million of pretax charges related to the MacMillan Bloedel and Trus Joist acquisitions. These expenditures included a $7 million accrual for the closure of a Weyerhaeuser containerboard packaging plant and $6 million of costs incurred for the transition and integration of activities. Note 15: Commitments and Contingencies The company's capital expenditures, excluding acquisitions and real estate and related assets, were $852 million in 2000, and are expected to be approximately $765 million in 2001; however, that expenditure level could be increased or decreased as a consequence of future economic conditions. The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. Note 16: Acquisitions TJ International On January 6, 2000, the company acquired a controlling interest in TJ International (TJI), a 51 percent owner and managing partner of Trus Joist MacMillan (TJM), through a successful tender offer that represented more than 90 percent of the total number of outstanding shares. The company had acquired a 49 percent interest in TJM through its acquisition of MacMillan Bloedel, completed in November 1999. On January 21, 2000, the company completed the acquisition through the filing of a short-term merger document. This acquisition was completed under the terms of an offer by the company to purchase all outstanding shares of TJ International for $42 per share and stock option cash-outs of certain TJI management personnel. The total purchase price, including assumed debt of $142 million, was $874 million. The company accounted for the transaction using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired company were included in the Consolidated Balance Sheet and the operating results were included in the Consolidated Statement of Earnings beginning January 6, 2000. The purchase price, plus estimated direct transaction costs and expenses, and the deferred tax effect of applying purchase accounting at January 6, 2000, was calculated as follows: Dollar amounts in millions Purchase price of tender offer and stock option cash-out $ 732 Direct transaction costs and expenses 20 Deferred tax effect of applying purchase accounting 120 Less: historical net assets (261) --------- Total excess costs $ 611 ========= The excess purchase price was allocated as follows: Dollar amounts in millions Property, plant and equipment $ 288 Goodwill 323 --------- Total excess costs $ 611 =========
Weyerhaeuser Company - 19 - Property, plant and equipment are being depreciated over not more than 20 years. Goodwill is being amortized on a straight-line basis over 40 years. Note 17: Business Segments The company is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products. The company's principal business segments are timberlands (including logs, chips and timber); wood products (including softwood lumber, plywood and veneer; composite panels; oriented strand board; hardwood lumber; treated products; engineered wood; raw materials; and building materials distribution); pulp, paper and packaging (including pulp, paper, containerboard, packaging, paperboard and recycling); and real estate and related assets. The timber-based businesses involve a high degree of integration among timber operations; building materials conversion facilities; and pulp, paper, containerboard and paperboard primary manufacturing and secondary conversion facilities. This integration includes extensive transfers of raw materials, semi-finished materials and end products between and among these groups. The company's accounting policies for segments are the same as those described in Note 1: Summary of Significant Accounting Policies. Management evaluates segment performance based on the contributions to earnings of the respective segments. Accounting for segment profitability in integrated manufacturing sites involves allocation of joint conversion and common facility costs based upon the extent of usage by the respective product lines at that facility. Transfer of products between segments is accounted for at current market values.
Weyerhaeuser Company - - 20 - An analysis and reconciliation of the company's business segment information to the respective information in the consolidated financial statements is as follows: <TABLE> <CAPTION> Thirteen weeks ended -------------------- April 1, March 26, 2001 2000 Dollar amounts in millions -------- -------- <S> <C> <C> Sales to and revenues from unaffiliated customers: Timberlands $ 271 $ 282 Wood products 1,380 1,747 Pulp, paper and packaging 1,527 1,572 Real estate and related assets 334 278 Corporate and other 41 46 -------- -------- 3,553 3,925 -------- -------- Intersegment sales: Timberlands 225 119 Wood products 63 79 Pulp, paper and packaging 64 45 Corporate and other 4 3 -------- -------- 356 246 -------- -------- Total sales and revenues 3,909 4,171 Intersegment eliminations (356) (246) -------- -------- $ 3,553 $ 3,925 ======== ======== Approximate contribution (charge) to earnings (1): Timberlands $ 141 $ 166 Wood products (33) 138 Pulp, paper and packaging 167 186 Real estate and related assets (1) 69 47 Corporate and other (90) (63) -------- -------- 254 474 Interest expense (88) (91) Less capitalized interest 4 4 -------- -------- Earnings before income taxes 170 387 Income taxes (63) (143) -------- -------- $ 107 $ 244 ======== ======== </TABLE> There were no material changes from year-end 2000 in total assets, basis of segmentation or basis for measuring segment profit or loss. Certain reclassifications have been made to conform prior year's data to the current format. (1) Interest expense of $3 million and $4 million in the thirteen weeks ended April 1, 2001, and March 26, 2000, respectively, is included in the determination of approximate contributions to earnings and excluded from interest expense for financial services businesses.
Weyerhaeuser Company - 21 - WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated Results Consolidated net earnings for the first quarter were $107 million, or $0.49 basic and diluted earnings per share. This included an after-tax nonrecurring charge of $26 million associated with the decision to outsource certain information technology services as part of the company's program to streamline support services. Excluding these charges, earnings for the first quarter of 2001 were $133 million, or $0.61 basic and diluted earnings per share, a 45 percent decrease from 2000 first quarter earnings of $244 million, or $1.04 basic and diluted earnings per share. Consolidated net sales and revenues were $3.6 billion in the quarter, down nine percent from $3.9 billion for the same period last year. Operating results for 2001 include $66 million in net pension income compared with $41 million in 2000. Timberlands First quarter operating earnings were $141 million, a decrease of 15 percent from $166 million reported in 2000. Sales to unaffiliated customers were $271 million compared to $282 million a year ago. Intersegment sales were $225 million for the quarter, up from $119 million a year ago. Lower domestic log prices and increased competitive pressure on export log markets contributed to the decrease in third party sales. Late in the quarter, domestic log prices began to improve due to seasonal demand and slightly stronger lumber prices. The company expects the export log market to remain under competitive pressure throughout the second quarter. Wood Products This segment reported an operating loss of $33 million for the first quarter compared to operating earnings of $138 million last year. Sales were $1.4 billion, down 21 percent from sales of $1.7 billion during the same period in 2000. Lumber and oriented strand board (OSB) prices reached 10-year lows during the first quarter of 2001, but improved slightly late in the quarter due to seasonal factors. During the quarter, Weyerhaeuser took downtime at many of its lumber mills and at all of its OSB facilities to balance inventories with demand. The company expects these mills to continue operating at less than full capacity during the second quarter. Market conditions for engineered wood products remained stable during the quarter.
Weyerhaeuser Company - - 22 - Third party sales and total production volumes for the major products in the timberlands and wood products segments for the thirteen weeks ended April 1, 2001 and March 26, 2000, are as follows: <TABLE> <CAPTION> Third Party Sales Total Production -------------------- -------------------- Thirteen weeks ended Thirteen weeks ended -------------------- -------------------- April 1, March 26, April 1, March 26, Products (in millions) 2001 2000 2001 2000 - --------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> Timberlands: Raw Materials-cubic feet 140 145 -- -- Logs-cubic feet -- -- 174 183 Wood Products: Softwood lumber-board feet 1,667 1,657 1,417 1,411 Softwood plywood and veneer-square feet (3/8") 449 504 285 331 Composite panels-square feet (3/4") 65 122 24 55 Oriented strand board-square feet (3/8") 871 890 783 898 Hardwood lumber-board feet 106 97 111 95 Raw materials-cubic feet 87 95 -- -- Logs-cubic feet -- -- 180 146 </TABLE> Pulp, Paper and Packaging Operating earnings for the first quarter were $167 million, down 10 percent from $186 million in the first quarter of 2000. Sales for the quarter were $1.5 billion compared to sales of $1.6 billion reported for the same period last year. Declining pulp prices and lower containerboard packaging volumes contributed to the decreased earnings. Pulp prices came under pressure during the first quarter, a trend that is expected to continue into the second quarter. The company also took significant downtime in a number of pulp, paper and containerboard mills during the first quarter to perform maintenance and balance inventories with demand. Weyerhaeuser expects the slowing global economy to result in weaker demand for products in all its major pulp, paper and packaging product lines that will result in additional production curtailments in the second quarter. Third party sales and total production volumes for the major products in this segment for the thirteen weeks ended April 1, 2001 and March 26, 2000, are as follows: <TABLE> <CAPTION> Third Party Sales Total Production -------------------- -------------------- Thirteen weeks ended Thirteen weeks ended -------------------- -------------------- April 1, March 26, April 1, March 26, Products (in thousands) 2001 2000 2001 2000 - --------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> Pulp-air-dry metric tons 480 541 549 587 Paper-tons 393 387 400 395 Paperboard-tons 60 62 52 57 Containerboard-tons 218 294 875 994 Packaging-MSF 12,690 13,359 13,355 14,117 Recycling-tons 826 760 1,192 1,112 </TABLE> Real Estate and Related Assets First quarter operating earnings of $69 million exceeded last year's earnings of $47 million by 47 percent. Sales and revenues were $334 million, up 20 percent from $278 million a year ago. Increased closings and higher operating margins contributed to the increase. Given the strong six-month backlog of existing orders and favorable mortgage rates, the company expects its real estate business to continue to perform well in the second quarter.
Weyerhaeuser Company - 23 - Costs and Expenses Weyerhaeuser's first quarter costs and expenses were $3.1 billion compared to $3.2 billion in the same quarter last year. Included in Weyerhaeuser's 2001 costs are nonrecurring pretax charges of $45 million in support alignment costs and $7 million in integration and closure costs related to the MacMillan Bloedel and Trus Joist acquisitions. Costs and expenses for 2000 include $1 million for support alignment and $13 million in noncash charges for integration and closure of facilities. Excluding these nonrecurring charges, 2001 costs and expenses were $3.0 billion, seven percent below the prior year amount of $3.2 billion. The 2001 support alignment costs include $41 million recognized in conjunction with the company's decision to outsource certain information technology services, $20 million of which relates to the impairment of information technology assets to be disposed of. Weyerhaeuser's cost of products sold, as a percentage of sales, was 77 percent for the current quarter compared to 74 percent in the 2000 first quarter, due to lower sales prices in the current quarter. As of the end of first quarter 2001, the company has achieved $173 million in synergies associated with the integration of the MB and TJ acquisitions, of which $33 million was achieved in the current quarter. The increase in real estate and related assets segment's costs and expenses can be attributed to increased sales volumes over the same period last year. Other operating costs, net, is an aggregation of both recurring and nonrecurring items and, as a result, can fluctuate from year to year. There were no significant individual items in the first quarter of 2001 or 2000. Liquidity and Capital Resources General The company is committed to the maintenance of a sound capital structure. This commitment is based upon two considerations: the obligation to protect the underlying interests of its shareholders and lenders and the desire to have access, at all times, to all major financial markets. The important elements of the policy governing the company's capital structure are as follows: . To view separately the capital structures of Weyerhaeuser Company, Weyerhaeuser Real Estate Company and related subsidiaries, given the very different nature of their assets and business activities. The amount of debt and equity associated with the capital structure of each will reflect the basic earnings capacity, real value and unique liquidity characteristics of the assets dedicated to that business. . The combination of maturing short-term debt and the structure of long-term debt will be managed judiciously to minimize liquidity risk. Operations Consolidated net cash used for operations in the first quarter of 2001 was $159 million, down from $5 million net cash provided by operations during the same quarter last year. Net cash from operations, before net changes in working capital, of $260 million was offset by an increased use of funds for working capital. Cash provided by net earnings of $107 million was net of noncash charges of $208 million for depreciation, amortization and fee stumpage, $28 million in deferred taxes and $20 million for an asset impairment charge. This was offset by noncash credits of $62 million for pension and post retirement benefits and $29 million of equity in earnings in affiliates. Cash required for working capital by Weyerhaeuser was $303 million in the first quarter of 2001, a decrease of $72 million or 19 percent from 2000. Requirements for 2001 included $155 million for increases in inventories and $140 million for reductions in accounts payable and accrued liabilities. The inventory increase was across all product lines, with the inventory turnover rate dropping from 10.9 turns in the 2000 first quarter to 8.2 turns in the current quarter. Real estate and related assets cash outflows for working capital included $56 million for the acquisition and development of land and residential lots for development in excess of products sold and $65 million in reductions of accounts payable and accrued liabilities, $63 million of which related to a tax settlement paid to Weyerhaeuser.
Weyerhaeuser Company - - 24 - Earnings before interest expense and income taxes plus noncash charges for the principal business segments were: . Timberlands - $159 million, a decrease of $25 million from $184 million in 2000. Operating earnings for this segment were $25 million lower than last year. . Wood products - $31 million compared to $206 million in 2000. Operating earnings declined $171 million from the same period last year and depreciation and amortization charges decreased by $4 million. . Pulp, paper and packaging - $277 million in the current quarter compared to $294 million a year ago. The $19 million decline in operating earnings included a $2 million increase in depreciation and amortization. Investing Capital expenditures for the first quarter, excluding acquisitions and real estate and related assets, were $189 million in 2001 compared to $144 million in 2000. Current year capital spending by segment was $18 million for timberlands, $50 million for wood products, $117 million for pulp, paper and packaging and $4 million for corporate and other. The company currently anticipates capital expenditures, excluding acquisitions and real estate and related assets, to approximate $765 million for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. Cash provided by investments in equity affiliates for real estate and related assets reflects distributions from equity investments that were liquidated by the company during the current quarter. Financing During the quarter, Weyerhaeuser increased its interest bearing debt by $242 million. This was primarily due to additional borrowings of $261 million offset by debt payments of $19 million. The company's debt to total capital ratio was 36 percent at the end of the first quarter, comparable to the 34 percent ratio at the end of the 2000 first quarter. The real estate and related assets segment reduced third party debt by $38 million. This reflects a $54 million reduction in notes and commercial paper borrowings and $2 million of debt repayments offset by $18 million in new issuances of debt. During the first quarter, the company paid $87 million in cash dividends compared to $91 million in cash dividends paid during the 2000 first quarter. The decrease in dividends paid is reflective of the reduction of outstanding shares resulting from the share repurchase program initiated during the first quarter of 2000. Environmental Matters The company has established reserves for remediation costs on all of the approximately 127 active sites across its operations as of the end of first quarter 2001 in the aggregate amount of $61 million, down from $67 million at the end of 2000. This decrease reflects the incorporation of new information on all sites concerning remediation alternatives, updates on prior cost estimates and new sites (none of which were significant) less the costs incurred to remediate these sites during this period. The company accrued $7 million of remediation costs into this reserve in the first three months of 2000. The company incurred remediation costs of $2 million in both 2001 and 2000, and charged these costs against the reserve. Legal Proceedings The company announced in June 2000 it had entered into a proposed nationwide settlement of its hardboard siding class action cases and, as a result, took an after-tax charge of $82 million to cover the estimated cost of the settlement and related claims. The court approved the settlement in December 2000. Two named intervenors and objectors have filed a notice of appeal from the order granting approval of the settlement.
Weyerhaeuser Company - 25 - Other In late 1999, the company announced a new initiative to streamline and improve delivery of internal support services that is expected to result in $150 million to $200 million in annual savings. The company began implementation of these plans during the first quarter of 2000, a process that may take up to three years to complete. Because implementation plans are still under review, the specific number of employees affected, exact timing of the implementation and associated costs have not been finalized. To date, the company has captured $43 million in savings while incurring $62 million of costs, such as severance, relocation and outsourcing. Included in these costs is a charge of $41 million ($26 million after tax) in the first quarter of 2001 for costs associated with the decision to outsource certain information technology services to a third party. Contingencies The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period such proceedings or matters could have a material effect on results of operations. Quantitative and Qualitative Disclosures About Market Risk As part of the company's financing activities, derivative securities are sometimes used to achieve the desired mix of fixed versus floating rate debt and to manage the timing of finance opportunities. The company also utilizes well-defined financial contracts in the normal course of its operations as means to manage its foreign exchange and commodity price risks. For those limited number of contracts that are considered derivative instruments, the company has formally designated most as hedges of specific and well-defined risks. These contracts include: . Foreign currency futures contracts entered into in conjunction with the company's agreement to purchase equipment in a foreign denominated currency. The objective of the contracts, which have been designated as fair value hedges, is to fix the company's U.S. dollar cost of the equipment purchased in EUROs. At April 1, 2001, the company had a long position in EUROs, with both a fair value and a notional amount of $11 million. The contracts expire monthly through August 2002. . Foreign exchange contracts, which the company has designated as cash flow hedges, the objective of which is to hedge the variability of future cash flows associated with foreign denominated accounts receivable and accounts payable due to changes in foreign currency exchange rates. These contracts generate gains or losses that are recorded in other comprehensive income until the contracts' respective settlement dates, at which time they are reclassified into earnings. At April 1, 2001, the company had a long position in Canadian dollars, with a fair value of $9 million and a corresponding notional amount of $10 million. The contracts expire monthly through June 2003. . Variable-to-fixed interest rate swap agreement entered into with a major financial institution in which the company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The company has designated this swap as a cash flow hedge, the objective of which is to hedge the variability of future cash flows associated with changes in LIBOR. At April 1, 2001, the company had one interest rate swap with a maturity date of November 6, 2001, and a notional amount of $75 million with a fixed interest rate of 6.85 percent. The variable rate at April 1, 2001, based on the 30-day LIBOR, was 5.01 percent, with the fair value of the swap being a loss of $2.6 million. The amount of the obligation under this swap is based on the assumption that it had terminated at the end of the fiscal period and provides for the netting of amounts payable by and to the counterparty. In each case, the amount of such obligation is the net amount so determined. . Commodity swap agreements designed to hedge against the variability of future cash flows arising from changes in natural gas spot rates. The company has designated these agreements as cash flow hedges. These agreements generate gains or losses that are recorded in other comprehensive income until the contracts' respective settlement dates, at which time they are reclassified into earnings. As of April 1, 2001, the company had open positions in connection with four natural gas swap agreements, which are settled monthly through October 2002. The notional amount of these contracts was $9 million, with a fair value representing a gain of $8 million.
Weyerhaeuser Company - - 26 - . Variable rate swap agreement entered into with a major financial institution in which the company pays a floating rate based on LIBOR and receives a floating rate based on an investment fund index, with payments being calculated on a notional amount. The swap is an overlay to short-term investments and provides diversification benefits. The swap is settled quarterly, marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. At April 1, 2001, the company had one swap with a maturity date of December 31, 2003, and a notional amount of $128 million. Both parties have the right to terminate this swap with short notice. The fair value of the swap approximates zero as of April 1, 2001. In addition to the contracts described above, the company is also involved in a very limited number of trading transactions designed to capitalize on the company's knowledge and understanding of the commodity lumber market. The company's open trading positions are marked to market at each reporting date and all unrealized gains and losses are recognized in income. Trading activities to date have not had a material effect on the company's financial position, results of operations or cash flows. As of April 1, 2001, the company's net open position within its trading operations was immaterial. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations.
Weyerhaeuser Company - 27 - Part II. Other Information Item 1. Legal Proceedings The company entered into a class action settlement of hardboard siding claims against the company which was approved by the Superior Court, San Francisco County, California in December 2000. The settlement class consists of all persons who own or owned structures in the United States on which the company's hardboard siding had been installed from January 1, 1981 through December 31, 1999. In February 2001, two named intervenors and objectors filed a notice of appeal from the order granting final approval to the class action settlement. The company took an after-tax charge of $82 million in the second quarter of 2000 to cover the estimated cost of the settlement and related costs. Because the nationwide class action settlement has been approved, other cases seeking class certification in Oregon, Texas, Washington, South Carolina and Iowa have been dismissed. At the end of the first quarter the company is a defendant in 17 non-class hardboard siding cases involving primarily multi-family structures and residential developments, six of which are settled but awaiting final judicial approval. The company anticipates that some of the individuals and entities who have opted out of the settlement may file lawsuits against the company. In May 1999, two civil antitrust lawsuits were filed against the company in U.S. District Court, Eastern District of Pennsylvania. Both suits name as defendants several other major containerboard and packaging producers. The complaint in the first case alleges the defendants conspired to fix the price of linerboard and that the alleged conspiracy had the effect of increasing the price of corrugated containers. The suit purports to be a class action on behalf of purchasers of corrugated containers during the period October 1993 through November 1995. The complaint in the second case alleges that the company conspired to manipulate the price of linerboard and thereby the price of corrugated sheets. The suit purports to be a class action on behalf of purchasers of corrugated sheets during the period October 1993 through November 1995. Both suits seek damages, including treble damages, under the antitrust laws. In October 2000, the court denied motions to dismiss the suits that had been filed by the company and the other defendants. Discovery has commenced in both suits and the plaintiffs have filed motions to certify a class in both cases. In May 1999, the Equity Committee ("the Committee") in the Paragon Trade Brands, Inc. bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the company in the name of the debtor's estate. Specifically, the Committee seeks to assert that the company breached certain warranties in agreements entered into between Paragon and the company in connection with Paragon's public offering of common stock in January 1993. The Committee seeks to recover damages sustained by Paragon as a result of two patent infringement cases, one brought by Procter & Gamble and the other by Kimberly-Clark. In September 1999, the court authorized the Committee to commence an adversary proceeding against the company. The Committee commenced this proceeding in October 1999, seeking damages in excess of $420 million against the company. Both the Committee and the company have filed motions for summary judgment, which have not yet been heard. In April 2000, the Environmental Protection Agency (Region X) (EPA) issued a notice of violation (NOV) and proposed penalty of $194 thousand to the company's Mountain Pine, Arkansas, manufacturing facility. The NOV alleges the facility was in violation of its Title V operating permit because it had reported multiple instances in which the mill's two boilers had exceeded pressure drop and scrubber flow rate requirements in its permits. The company appealed the penalty and in January 2001 the parties entered into a consent agreement whereby Weyerhaeuser agreed to pay a $40 thousand civil penalty and upgrade the particulate controls on the boiler. The company is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," and similar state laws. The EPA and/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that any ultimate outcome resulting from these proceedings and matters, or all of them combined, would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations.
Weyerhaeuser Company - - 28 - Item 2. Changes in Securities not applicable Item 3. Defaults upon Senior Securities not applicable Item 4. Submission of Matters to a Vote of Security Holders not applicable Item 5. Other Information not applicable Item 6. Exhibits and Reports on Form 8-K Exhibits None Reports on Form 8-K The registrant filed reports on Form 8-K dated January 26 and April 20, 2001, reporting information under Item 5, Other Events.