SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the thirty-nine weeks ended September 30, 2001 or
For the transition period from ___________ to ___________
Commission File Number 1-4825
WEYERHAEUSER COMPANY
Federal Way, Washington 98063-9777
Telephone (253) 924-2345
Securities registered pursuant to Section 12(b) of the Act:
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 November 2, 2001, was 216,252,200 common shares ($1.25 par value).
TABLE OF CONTENTS
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q FilingFor the thirty-nine weeks ended September 30, 2001
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 thirty-nine week period ending September 30, 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.
November 14, 2001
See Accompanying Notes to Financial Statements
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:
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).
Prospective Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Statement 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. Under Statement 142, goodwill will no longer be subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. In addition, Statement 142 requires separate recognition for certain acquired intangible assets that will continue to be amortized over their useful lives. Implementation of Statement 142, which is effective for fiscal 2002, is currently expected
to increase the company’s annual net earnings by up to $40 million due to the cessation of goodwill amortization. This impact could be reduced by the identification of additional intangibles that will require separate recognition under Statement 142; however, the potential reduction is not expected to be significant. In addition, the company is currently evaluating whether any material impairment of goodwill will result from implementation of Statement 142. The company believes that implementation of this statement will not have a material impact on its financial position or cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement 143 will be effective for fiscal 2003. The company has not yet estimated the impact of implementation on its financial position, results of operations or cash flows.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and eliminates the exception to consolidation of a subsidiary for which control is likely to be temporary. Statement 144 supercedes Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. Implementation of Statement 144, which is effective for fiscal 2002, is not expected to have a material impact on the company’s financial position, results of operations or cash flows.
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 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 occur.
The following contracts have been formally designated as fair value hedges:
The following financial instruments have been formally designated as cash flow hedges:
In addition, the company has the following contracts that have not been designated as hedges:
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 the company’s derivative financial instruments are $285 million and $115 million at September 30, 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. Excluding the reclassification of net gains out of cumulative other comprehensive income (expense), the net earnings impact in the third quarter of 2001 resulting from the company’s use of derivative instruments was $3 million.
Cash and Cash Equivalents
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 $387 million and $417 million at September 30, 2001, and December 31, 2000, respectively. The balances of domestic raw material and product inventories, all materials and supplies inventories, and all foreign inventories are 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 $219 million and $227 million greater at September 30, 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 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 cashflows. As described in Prospective Accounting Pronouncements, the company’s accounting for goodwill will be modified upon implementation of FASB Statement 142 in fiscal 2002.
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 $168 million and $121 million at September 30, 2001, and December 31, 2000, respectively. 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 sheet.
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.
Pension Plans
The company has pension plans covering most of its employees. Both the U.S. and Canadian plans covering salaried employees provide 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. The benefit levels for these plans are typically collectively bargained with the unions. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). Contributions to Canadian plans are based on funding standards established by the applicable Provincial Pension Benefits Act and by the Income Tax Act.
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 FASB Statement 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. SeeNote 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.
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 859,861 shares at prices ranging from $54.06 to $68.41 per share were outstanding during the thirty-nine weeks ending September 30, 2001. Options to purchase 2,412,029 shares at prices ranging from $53.06 to $68.41 per share were outstanding during the thirty-nine weeks ending September 24, 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:
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 as of September 30, 2001 are:
Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, follows. Unconsolidated assets and liabilities as of December 31, 2000, also include Cedar River Paper Company, a joint venture that became wholly-owned by the company in July, 2001. See Note 17: Acquisitions. Revenues and income of Cedar River Paper Company for the periods prior to acquisition by the company are also included in the following information.
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.
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, liabilities and income. Such investments were liquidated during the first quarter of 2001.
Unconsolidated financial information for unconsolidated entities, which are accounted for by the equity method, is as follows:
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 nonrecurring items and, as a result, can fluctuate from year to year. Weyerhaeuser’s current quarter costs include $11 million in foreign currency transaction losses. There were no significant individual items in the third quarter of 2000. Year-to-date costs for 2001 also include $10 million of pretax charges related to Westwood Shipping Line’s transition to a new charter fleet. Year-to-date costs for 2000 include a $14 million charge for a judgment against the company resulting from the sale of Oregon assets in 1996.
Note 6: Income Taxes
Provisions for income taxes include the following:
During the third quarter of 2001, a one-time reduction in the British Columbia provincial corporate income tax rate was enacted. During the second quarter of 2001, a phased-in reduction in Canadian income taxes was also enacted. These changes in tax law produced one-time benefits by reducing foreign deferred income taxes by $14 million in the third quarter and by $15 million in the second quarter due to the effect of the lower tax rates on the accumulated temporary differences of the company’s Canadian subsidiaries. The effect on foreign current income taxes is not significant.
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 period ended September 30, 2001, the company’s provision for income taxes as a percent of earnings before income taxes is less than the 35% federal statutory rate due principally to the effect of the second and third quarter changes in the Canadian tax rates. This reduction in the effective tax rate is partially offset by the effect of state income taxes. For the
period ended September 24, 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 the thirty-nine week periods ended September 30, 2001, and September 24, 2000, were 31.7 % and 36.5%, respectively.
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
Note 8: Property and Equipment
Note 9: Accrued Liabilities
Note 10: Short-Term Debt
Lines of Credit
The company had short-term bank credit lines of $920 million and $865 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at September 30, 2001, and December 31, 2000, respectively. No portions of these lines have been availed of by the company or WRECO at September 30, 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 September 30, 2001, and December 31, 2000. No portions of these lines have been availed of by the company at September 30, 2001, or December 31, 2000.
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 purchase of all of the outstanding Willamette shares pursuant to the current terms of the tender offer, are subject to certain conditions and expire in October 2002.
Note 11: Long-Term Debt
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 September 30, 2001, and December 31, 2000.
No portion of these lines has been availed of by the company at September 30, 2001, and December 31, 2000, except as noted.
The company’s compensating balance agreements were not significant.
During the third quarter of 2001, the company issued $840 million of long-term debt. On October 22, 2001, the company issued another $750 million of long-term debt. See Note 18: Subsequent Event.
Note 12: Shareholders’ Interest
Common Shares
A reconciliation of common share activity for the periods ending September 30, 2001, and December 31, 2000, is as follows:
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:
A reconciliation of Exchangeable Share activity for the periods ending September 30, 2001, and December 31, 2000, is as follows:
Cumulative Other Comprehensive Income (Expense)
The company’s cumulative other comprehensive income (expense) includes:
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 2001, the company has incurred $55 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 three quarters of 2000, the company incurred $11 million of costs in connection with the support alignment initiative.
Note 14: Charges for Integration and Closure of Facilities
In 2001, the company has incurred $16 million of pretax charges related to transition and integration of activities in connection with the MacMillan Bloedel and Trus Joist acquisitions. In the third quarter of 2001, the company also incurred $32 million in pretax charges associated with the announced closures of a containerboard machine in Springfield, Oregon and a fine paper machine and associated sheeter in Longview, Washington. These charges included $23 million for asset writedowns and $9 million for severance and other closure liabilities.
In 2000, the company incurred $43 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 $36 million of costs incurred for the transition and integration of activities.
Note 15: Charge for Settlement of Hardboard Siding Claims
In the second quarter of 2000, the company took a pretax charge of $130 million ($82 million net of income taxes) to cover estimated costs of a nationwide class action settlement and claims related to hardboard siding. The settlement was approved by the Superior Court, San Francisco County, California in December 2000. This is a claims-based settlement, which means that the claims will be paid as submitted over a nine-year period. An independent adjuster will review each claim submitted and determine if it qualifies for payment under the terms of the settlement agreement.
The company is currently reassessing the adequacy of these reserves and increased its reserves by an additional $43 million in the third quarter. In addition, the company has negotiated settlements with its insurance carriers for recovery of certain costs related to these claims and continues to negotiate with other carriers. As of the end of the third quarter, the company has received recoveries from insurance carriers in the amount of $4 million and has accrued an additional $39 million for insurance settlement receivables.
Note 16: 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, the expected expenditure level could be increased or decreased as a consequence of future economic conditions.
Following the expiration of a five-year agreement between the United States and Canada, on April 2, 2001, the Coalition for Fair Lumber Imports filed a petition with the United States Department of Commerce (“Department”) and the International Trade Commission (“ITC”), claiming that imports of softwood lumber from Canada were being subsidized by Canada and were being “dumped” into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (“CVD”) and anti-dumping tariffs be imposed on softwood lumber imported from Canada. In August 2001, the Department issued a preliminary finding that certain Canadian provinces were subsidizing logs by collecting below market stumpage payments and declared a preliminary CVD rate of 19.3 percent retroactive to May 18, 2001. The company has accrued for the estimated cost of the CVD. The Department also requested that Weyerhaeuser and five other Canadian companies provide data for the anti-dumping investigation. In its preliminary ruling issued on October 31, 2001, the Department found that the company had engaged in dumping and set a preliminary “dumping margin” for the company of 11.93 percent. The company intends to contest the Department’s finding that it has engaged in dumping, but will now post a bond or cash to cover the estimated amount for the duties that would be collected in the event it is finally determined that dumping did occur. A final ruling on both the CVD and anti-dumping cases, which is expected during the second quarter of 2002, will contain the determination of whether to make the CVD and anti-dumping duties final and, if so, at what levels. The Department of Commerce would then conduct periodic reviews over the following five years to determine whether the company had engaged in dumping and whether Canada continued to subsidize softwood logs, and, if so, the dumping margin and CVD to impose. At the end of five years both the countervailing duty and anti-dumping orders would be automatically reviewed in a “sunset” proceeding to determine whether dumping or a countervailing subsidy would be likely to continue or recur. The company believes that the controversy has created some volatility and uncertainty in the marketplace, but has not had a material adverse effect on our results of operations. There can be no assurance, however, that if a permanent CVD or anti-dumping duty is imposed, it will not have a material adverse effect on the company’s results of operations in the future.
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 17: 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 TJI 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 was calculated as follows:
The excess purchase price was allocated as follows:
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 through 2001, after which amortization will cease and goodwill will be accounted for in accordance with FASB Statement 142, Goodwill and Other Intangibles. See Prospective Accounting Pronouncements within Note 1: Summary of Significant Accounting Policies.
Australian Sawmills and Distribution Capabilities
During the second quarter of 2000, the company completed the acquisition of two sawmills and related assets in Australia from CSR Ltd. of Australia.
Weyerhaeuser paid approximately US $48 million in cash and assumed $7 million in debt to acquire:
Cedar River Paper Company
On July 2, 2001, the company acquired the remaining 50 percent interest in Cedar River Paper Company (CRPC), a joint venture in Cedar Rapids, Iowa that manufactures liner and medium containerboard from recycled fiber. Prior to July 2, 2001, the company held a 50 percent interest in CRPC, which was reported as an investment in equity affiliates.
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 July 2, 2001. Weyerhaeuser paid $261 million, net of cash acquired, to purchase the remaining interest in CRPC and pay down all outstanding CRPC debt.
Note 18: Subsequent Event
On October 22, 2001, the company issued $750 million of 5.95 percent, seven-year notes payable.
Note 19: 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 inNote 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.
An analysis and reconciliation of the company’s business segment information to the respective information in the consolidated financial statements is as follows:
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.
Results of Operations
Consolidated Results
Consolidated net earnings for the third quarter were $91 million, or $0.41 basic and diluted earnings per share, a decrease of 54 percent from 2001 third quarter earnings of $199 million, or $0.90 basic and diluted earnings per share.
Net earnings for the 2001 third quarter include an after-tax charge of $20 million, or $0.09 per share, associated with the company’s announced closures of one containerboard machine in Springfield, Oregon and a fine paper machine and associated sheeter in Longview, Washington. Third quarter 2001 results also include a $14 million, or $0.06 per share, tax benefit resulting from a one-time reduction in deferred income taxes due to recently enacted legislation reducing the British Columbia provincial corporate income tax rate. Excluding the nonrecurring after-tax items in both years, third-quarter earnings in 2001 were $97 million, or $0.44 per share, compared with $199 million, or $0.90 per share, for 2000.
Consolidated net sales and revenues for the third quarter were $3.7 billion in 2001, a decrease of 5 percent from $3.9 billion reported in the same period last year.
Year-to-date earnings for 2001 were $369 million, or $1.68 basic and diluted earnings per share, down 43 percent from $646 million, or $2.84 basic earnings per share ($2.83 diluted) for the same period in 2000. In addition to the third quarter impacts of the Springfield and Longview machine closures and the British Columbia provincial corporate tax rate, year-to-date 2001 results include nonrecurring after-tax charges of $26 million, or $0.12 per share, associated with the company’s decision to outsource certain information technology services as part of the company’s program to streamline support services and $6 million, or $0.03 per share for costs associated with Westwood Shipping Line’s transition to a new charter fleet. Current year-to-date results also include a $15 million, or $0.07 per share, tax benefit resulting from a one-time reduction in deferred taxes due to a lower Canadian corporate tax rate enacted during the second quarter. Year-to-date earnings for 2000 include an after-tax charge of $82 million, or $0.36 per share, to cover estimated costs of a nationwide class action settlement and claims related to hardboard siding. Year-to-date net earnings before these nonrecurring items were $392 million, or $1.79 per share, in 2001, compared to $728 million, or $3.20 per share, in 2000.
Consolidated net sales and revenues for the first nine months of 2001 were $11.1 billion, a decrease of 7 percent from 2000 net sales and revenues of $11.9 billion.
Operating results for 2001 include $177 million in net pension income compared with $145 million in 2000.
Timberlands
Third quarter operating earnings for the timberlands segment were $97 million, down 13 percent from $111 million reported last year. Year-to-date operating earnings were $367 million, a 16 percent reduction from prior year earnings of $437 million.
Third quarter sales to unaffiliated customers were $245 million, down 7 percent from $264 million in the third quarter of 2000. Intersegment sales were $190 million as compared to $212 million for the same period a year ago. Soft domestic and Japanese markets for lumber resulted in lower log prices compared with the same quarter last year. The company expects pricing to be weaker in the fourth quarter with harvest volumes seasonally higher.
Wood Products
The wood products segment reported operating earnings of $57 million for the 2001 third quarter, up slightly from $55 million in 2000. Year-to-date operating earnings of $134 million include $30 million in charges accrued for countervailing duties, $20 million of which relates to the third quarter. Year-to-date 2000 operating earnings of $187 million included a $130 million pretax charge to cover estimated costs of the nationwide class action settlement and claims related to hardboard siding. Excluding the prior year charge for hardboard siding claims, results of $134 million for the first nine months of 2001 were 58 percent below results of $317 for the same period last year, primarily due to poor wood products markets experienced in the first quarter of 2001.
Third quarter sales were $1.7 billion in 2001, up slightly from $1.6 billion in 2000. Prices weakened during the period and were approaching first quarter levels by the end of September. Uncertainty around the countervailing duty and anti-dumping proceedings continued to put pressure on the company’s operations in Canada. Engineered wood products continued to be a strong performer, but order intake fell off sharply after September 11. Normal seasonal conditions are expected to slow demand for wood products during the fourth quarter. The company plans to curtail a number of its wood products facilities during the fourth quarter due to market conditions.
Third party sales and total production volumes for the major products in the timberlands and wood products segments for the thirteen and thirty-nine weeks ended September 30, 2001, and September 24, 2000, are as follows:
Pulp, Paper and Packaging
Third quarter operating earnings for the segment were $41 million in 2001, 84 percent below prior year earnings of $252 million. Current quarter operating earnings before the effect of machine closures, were $73 million, down 71 percent from the prior year level. Excluding the charge for machine closures, year-to-date segment operating earnings were $335 million in 2001, only half of the $675 million of earnings for the first nine months of 2000.
Third quarter sales were $1.4 billion, 15 percent below prior year sales of $1.6 billion. Slowing economic conditions resulted in lower volume in most product lines compared with the third quarter last year. While pulp prices have stabilized, economic weakness is expected to result in further price erosion in most major product lines during the fourth quarter.
Third party sales and total production volumes for the major products in this segment for the thirteen and thirty-nine weeks ended September 30, 2001, and September 24, 2000, are as follows:
The segment earned $75 million in the quarter, up 39 percent from prior year earnings of $54 million. Year-to-date operating earnings of $206 million are 14 percent higher than last year’s earnings of $181 million, which included a gain of $21 million on the sale of assets within a real estate joint venture. The increased earnings are primarily due to additional single family closings, higher single family margins and a $9 million profit contribution from the sale of a multi-family project that closed in the 2001 third quarter.
Third quarter revenues were $392 million, a 15 percent increase over revenues of $341 million in the same period of 2000. Strong demand for housing in the markets in which the company operates contributed to the increase. Although new orders slowed following events on September 11, most planned closings occurred. There is concern that economic uncertainty will slow new order activity. However, due to a backlog of orders, which are anticipated to close as planned, the company expects good performance from this segment in the fourth quarter.
Costs and Expenses
Weyerhaeuser’s third quarter costs and expenses of $3.2 billion, which include $32 million in nonrecurring pretax charges associated with the announced machine closures in Springfield and Longview, are comparable to $3.3 billion in the same period last year. Year-to-date costs and expenses were $9.5 billion in 2001 compared to $10.0 billion in 2000. Current year-to-date costs include the third quarter charges associated with machine closures and pretax charges of $41 million in one-time costs associated with information systems outsourcing and $10 million related to Westwood Shipping Line’s transition to a new charter fleet. Year-to-date 2000 costs include a pretax charge of $130 million for settlement of hardboard siding claims. Excluding these nonrecurring items, 2001 costs and expenses were $9.4 billion, 4 percent below 2000 costs and expenses of $9.9 billion.
Weyerhaeuser’s costs of products sold, as a percentage of net sales, was 79 percent for the current quarter as compared to 77 percent for the third quarter of 2000, primarily due to lower sales prices in the current quarter. As of the end of the third quarter of 2001, the company has achieved an annualized run rate of $197 million in pre-tax synergies related to the integration of MacMillan Bloedel and Trus Joist, while incurring one-time costs of $80 million since the acquisition. The company expects to achieve its goal of $200 million in pre-tax synergies before the end of the year, well ahead of its 2002 goal.
Real estate and related assets costs and expenses were $329 million in the current quarter, up 11 percent from $296 million in the 2000 third quarter. Year-to-date costs were $920 million, a 12 percent increase over $822 million in the prior year. The
increase in the real estate and related assets segment’s costs and expenses can be attributed to increased sales volumes over the same period last year.
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:
Operations
Year-to-date consolidated net cash provided by operations was $704 million in 2001, an increase of $116 million over $588 million provided in the first nine months of 2000. Current year cash provided by operations before net changes in working capital was $813 million, down 39 percent from $1,326 million provided in 2000. The decrease is primarily due to a $277 million decrease in current year net earnings in addition to the $130 million ($82 million after-tax) noncash charge for settlement of hardboard siding claims that reduced 2000 net earnings.
Cash required for Weyerhaeuser working capital was $34 million for the first nine months of 2001, compared to $656 million for the same period last year. Current year cash was provided by $89 million of reductions in accounts receivable and prepaid expenses, offset by cash requirements of $19 million for increases in inventory and $104 million for reductions in accounts payable and accrued liabilities. Inventory increases were primarily in wood products and other products, with reductions occurring in logs and chips, pulp, paper and packaging inventories. The inventory turnover rate was 9.4 in the current quarter as compared to 9.1 in the second quarter of 2001 and 11.2 in the third quarter of 2000. Cash used for accounts payable and accrued liabilities include reductions in both accounts payable and accrued interest.
Current year real estate and related assets cash outflows for working capital included $79 million for increases in inventory, primarily for the acquisition and development of land and residential lots.
Year-to-date earnings before interest expense and income taxes plus noncash charges for the principal business segments were:
Investing
Capital expenditures, excluding acquisitions and real estate and related assets, for the first nine months were $503 million compared to $552 million a year ago. 2001 capital spending by segment was $43 million for timberlands, $138 million for wood products, $304 million for pulp, paper and packaging, and $18 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.
During the third quarter of 2001, the company expended $261 million, net of cash acquired, to purchase the remaining interest in Cedar River Paper Company from its joint venture partner and pay down the outstanding debt of the partnership. Year-to-date 2001, the company has also expended $92 million for acquisitions of additional timberlands assets and $33 million for additional investments in equity affiliates.
During the first nine months of 2000, the company expended $48 million to acquire two sawmills and distribution capabilities in Australia and $595 million to complete its tender offer for the stock of TJI.
Net cash provided by real estate and related assets investing activities in the current year includes $169 million provided by real estate and related assets distributions from equity affiliates.
The cash needed to meet capital expenditures, investments and other requirements was generated principally from internal cash flows.
Financing
Year to date, Weyerhaeuser has increased its interest-bearing debt by $328 million. During the third quarter, the company issued $840 million in long-term debt. This was offset by year-to-date payments on long-term debt obligations of $106 million and net reductions in commercial paper borrowings of $406 million. The company’s debt to total capital ratio was 37 percent at the end of the quarter. This is comparable to 37 percent at the end of the 2000 third quarter and 35 percent at year end 2000.
The real estate and related assets segment reduced third party debt by $109 million. This reflects $484 million of reductions in commercial paper and other borrowings and $45 million in scheduled note payments, offset by $400 million in issuances of new debt and $20 million of noncash increases to debt for notes issued in connection with property purchases.
Cash dividends of $263 million were paid in the first nine months of 2001 compared to $274 million in 2000. The decrease in dividends is reflective of the reduction of outstanding shares resulting from the share repurchase program initiated during the first quarter of 2000.
During the first nine months of 2000, the company expended $808 million to purchase 16.2 million of its common shares. This completed the 12 million share repurchase program authorized by the board of directors in January 2000 and commenced a second program authorized in June 2000 to repurchase an additional 10 million shares.
Environmental Matters
The company has established reserves for remediation costs on all of the approximately 126 active sites across our operations as of the end of the 2001 third quarter in the aggregate amount of $60 million, compared to $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 has accrued remediation costs of $1 million and $23 million in the first nine months of 2001 and 2000, respectively. The company incurred remediation costs of $8 million and $7 million year to date in 2001 and 2000, respectively, 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.
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 $79 million in savings while incurring $75 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:
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.
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 has established reserves to cover the estimated cost of the settlement and related costs. At the end of the third quarter of 2001, the company is a defendant in eight cases that were filed before the settlement was approved involving primarily multi-family structures and residential developments. Seven additional cases have been filed after the settlement. The company anticipates that other individuals and entities that 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 court has granted class action status to 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 court granted class action status to 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. The company and other defendants have appealed the class certification decision to the 3rd Circuit Court of Appeals.
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 are pending.
Following the expiration of a five-year agreement between the United States and Canada, on April 2, 2001, the Coalition for Fair Lumber Imports filed a petition with the United States Department of Commerce (“Department”) and the International Trade Commission (“ITC”), claiming that imports of softwood lumber from Canada were being subsidized by Canada and were being “dumped” into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (“CVD”) and anti-dumping tariffs be imposed on softwood lumber imported from Canada. In August 2001, the Department issued a preliminary finding that certain Canadian provinces were subsidizing logs by collecting below market stumpage payments and declared a preliminary CVD rate of 19.3 percent retroactive to May 18, 2001. The company has accrued for the estimated cost of the CVD. The Department also requested that Weyerhaeuser and five other Canadian companies provide data for the anti-dumping investigation. In its preliminary ruling issued on October 31, 2001, the Department found that the company had engaged in dumping and set a preliminary “dumping margin” for the company of 11.93 percent. The company intends to contest the Department’s finding that it has engaged in dumping, but will now post a bond or cash to cover the estimated amount for the duties that would be collected in the event it is finally determined that dumping did occur. A final ruling on both the CVD and anti-dumping cases, which is expected during the second quarter of 2002, will contain the determination of whether to make the CVD and anti-dumping duties final and, if so, at what levels. The Department of Commerce would then conduct periodic reviews over the following five years to determine whether the company had engaged in dumping and whether Canada continued to subsidize softwood logs, and, if so, the dumping margin and CVD to impose. At the end of five years both the countervailing duty and anti-dumping orders would be automatically reviewed in a “sunset” proceeding to determine whether dumping or a countervailing subsidy would be likely to continue or recur.
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.
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, April 20, July 27, August 1, October 3, and October 25, 2001, reporting information under Item 5, Other Events.