UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the thirty-nine weeks ended September 25, 2005, 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:
Title of Each Class
Name of Each Exchange onWhich Registered:
Chicago Stock Exchange
New York Stock Exchange
Pacific 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s class of common stock, as of October 28, 2005, was 243,238,407 common shares ($1.25 par value).
Weyerhaeuser Company
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WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the thirty-nine weeks ended September 25, 2005
Part I.
Item 1.
Financial Statements
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Item 6.
Exhibits
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 26, 2004. Though not audited by an independent registered public accounting firm, the financial information reflects, in the opinion of management, all adjustments necessary to present a fair statement of results for the interim periods indicated. The results of operations for the thirty-nine week period ended September 25, 2005, 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.
/s/ Steven J. Hillyard
Steven J. Hillyard
Duly Authorized Officer and
Principal Accounting Officer
November 4, 2005
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CONSOLIDATED STATEMENT OF EARNINGS
For the periods ended September 25, 2005 and September 26, 2004
(Dollar amounts in millions except per-share data)
(Unaudited)
Net sales and revenues:
Weyerhaeuser
Real Estate and Related Assets
Total net sales and revenues
Costs and expenses:
Weyerhaeuser:
Costs of products sold
Depreciation, depletion and amortization
Selling expenses
General and administrative expenses
Research and development expenses
Taxes other than payroll and income taxes
Charges for integration and restructuring (Note 14)
Charges for closure of facilities, net (Note 15)
Other operating costs, net (Note 16)
Real Estate and Related Assets:
Costs and operating expenses
Depreciation and amortization
Other operating costs, net
Total costs and expenses
Operating income
Interest expense and other:
Interest expense incurred (Notes 7 and 12)
Less interest capitalized
Interest income and other (Notes 7 and 8)
Equity in income of affiliates (Note 8)
Interest expense incurred
Interest income and other
Equity in income of unconsolidated entities (Note 8)
Earnings from continuing operations before income taxes
Income taxes (Note 17)
Earnings from continuing operations
Discontinued operations (Note 19):
Earnings from discontinued operations
Income tax benefit (expense)
Net earnings
Basic net earnings per share (Note 5):
Continuing operations
Discontinued operations
Net earnings per share
Diluted net earnings per share (Note 5):
Dividends paid per share
See Accompanying Notes To Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEET
September 25, 2005 and December 26, 2004
(Dollar amounts in millions)
Assets
Current assets:
Cash and cash equivalents
Receivables, less allowances
Inventories (Note 10)
Prepaid expenses
Assets of business held for sale (Note 19)
Total current assets
Property and equipment, net
Construction in progress
Timber and timberlands at cost, less depletion charged to disposals
Investments in and advances to equity affiliates (Note 8)
Goodwill (Note 9)
Deferred pension and other assets
Restricted assets held by special purpose entities (Note 7)
Receivables, less discounts and allowances
Real estate in process of development and for sale
Land being processed for development
Investments in unconsolidated entities, less reserves (Note 8)
Other assets
Total assets
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Dec. 26,
2004
Liabilities and shareholders’ interest
Current liabilities:
Notes payable and commercial paper (Note 12)
Current maturities of long-term debt (Note 12)
Accounts payable
Accrued liabilities (Note 11)
Liabilities of business held for sale (Note 19)
Total current liabilities
Long-term debt (Note 12)
Deferred income taxes
Deferred pension, other postretirement benefits and other liabilities
Liabilities (nonrecourse to Weyerhaeuser) held by special purpose entities (Note 7)
Commitments and contingencies (Note 13)
Other liabilities
Total liabilities
Shareholders’ interest
Common shares: $1.25 par value; authorized 400,000,000 shares; issued and outstanding: 245,130,835 and 240,360,619 shares
Exchangeable shares: no par value; unlimited shares authorized; issued and held by nonaffiliates: 2,045,375 and 2,111,255 shares
Other capital
Retained earnings
Cumulative other comprehensive income
Total shareholders’ interest
Total liabilities and shareholders’ interest
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CONSOLIDATED STATEMENT OF CASH FLOWS
For the thirty-nine week periods ended September 25, 2005 and September 26, 2004
Cash flows from operations:
Noncash charges (credits):
Deferred income taxes, net
Pension and other postretirement benefits (Note 4)
Equity in income of affiliates and unconsolidated entities (Note 8)
Charges for litigation (Note 13)
Credit for reversal of hardboard siding reserve (Note 13)
Charges for impairment of long-lived assets (Notes 15 and 16)
Loss on early extinguishment of debt
Gain on sale of investment in equity affiliate (Note 8 )
Gain on disposition of assets (Note 16)
Gain on sale of B.C. Coastal Group operations (Note 19)
Gain on significant sale of nonstrategic timberlands (Notes 7 and 18)
Foreign exchange gains (Note 16)
Decrease (increase) in working capital, net of acquisitions:
Receivables
Inventories, real estate and land
Accounts payable and accrued liabilities
Other
Net cash from operations
Cash flows from investing activities:
Property and equipment
Timberlands reforestation
Acquisition of timberlands
Net distributions from equity affiliates
Investment in restricted assets held by special purpose entities
Proceeds from sale of:
Property, equipment and other assets
B.C. Coastal Group operations (Note 19)
Investment in equity affiliate (Note 8)
Significant nonstrategic timberlands (Note 18)
Intercompany advances
Net cash from investing activities
Cash flows from financing activities:
Issuances of debt
Notes, commercial paper borrowings, and revolving credit facility, net
Cash dividends
Intercompany return of capital
Payments on debt
Proceeds from common share offering
Exercise of stock options
Proceeds from liabilities (nonrecourse to Weyerhaeuser) held by special purpose entities
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid during the period for:
Interest, net of amount capitalized
Income taxes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the thirteen and thirty-nine week periods ended September 25, 2005 and September 26, 2004
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Weyerhaeuser Company and all of its majority-owned domestic and foreign subsidiaries and variable interest entities of which Weyerhaeuser Company or its subsidiaries are determined to be the primary beneficiary. Intercompany transactions and accounts are eliminated. Investments in and advances to unconsolidated equity affiliates over which the company has significant influence are accounted for using the equity method with taxes provided on undistributed earnings.
Certain of the consolidated financial statements and Notes to Consolidated Financial Statements are presented in two groupings: (1) Weyerhaeuser, 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. The term “company” refers to Weyerhaeuser Company, all of its majority-owned domestic and foreign subsidiaries and variable interest entities of which Weyerhaeuser Company or its subsidiaries are determined to be the primary beneficiary. The term “Weyerhaeuser” refers to the forest products-based operations and excludes the Real Estate and Related Assets operations.
The consolidated financial statements are unaudited; however, the consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to a fair presentation of the company’s financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed in the Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain disclosures normally provided in financial statements prepared under accounting principles generally accepted in the United States have been omitted in accordance with those rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the company’s Annual Report on Form 10-K for the year ended December 26, 2004.
Certain reclassifications have been made to conform comparative data to the current format.
Note 2: New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R), in December 2004. Statement 123R is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123R requires the fair value of employee awards issued, modified, repurchased or cancelled after implementation under share-based payment arrangements to be measured as of the grant dates. The resulting cost will then be recognized in the statement of earnings over the service period. The company will implement Statement 123R as of the beginning of fiscal year 2006, as permitted by a Securities and Exchange Commission Rule that was issued in April 2005. The company is not able to estimate at this time the effect that Statement 123R will have on its financial position, results of operations or cash flows when Statement 123R is adopted.
The FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs–An Amendment of ARB No. 43, Chapter 4 (Statement 151), in November 2004. Statement 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, Statement 151 requires that the allocation of fixed production overheads to the costs of conversions be based on normal capacity of the production facilities. Statement 151 is effective for fiscal years beginning after June 15, 2005, and is required to be adopted by the company in the first quarter of fiscal 2006. The company is currently evaluating the effect that the adoption of Statement 151 will have on its financial position and results of operations, but does not expect it to be material.
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The FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets–An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (Statement 153), in December 2004. Statement 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. Statement 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The company adopted the provisions of Statement 153 in the third quarter of fiscal 2005. Statement 153 did not have a material effect on the company’s financial position or results of operations.
The FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (Interpretation 47), in March 2005. Interpretation 47 clarifies that a liability must be recognized for a legal obligation to perform an asset retirement activity when the timing or method of settlement are conditional on future events that may or may not be within the control of the company if the fair value of the liability can be reasonably estimated. Interpretation 47 also clarifies when sufficient information to reasonably estimate the fair value of an asset retirement obligation exists. The company is required to adopt Interpretation 47 by the end of 2005. The company is not able to estimate at this time the effect that adoption of Interpretation 47 will have on its financial position or results of operations.
Note 3: Stock-Based Employee Compensation
The company continues to apply the intrinsic-value method for stock-based compensation to employees prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As described in Note 2: New Accounting Pronouncements, APB Opinion No. 25 will be superseded by Statement 123R effective as of the beginning of fiscal year 2006. Employee awards issued, modified, repurchased or cancelled after implementation of Statement 123R under share-based payment arrangements will be measured at fair value as of the grant dates and the resulting cost will be recognized in the statement of earnings over the service period.
The following table illustrates the effect on net earnings and net earnings per share as if the company had applied the fair-value-recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), to stock-based employee compensation. The company has consistently defined the past year as the service period for purposes of applying the fair value recognition provisions of Statement 123. As a result, stock-based employee compensation expense is reflected as of the option grant dates in the following table.
Dollar amounts in millions
Net earnings as reported
Less incremental stock-based employee compensation expense determined under fair-value-based method, net of related tax effects
Pro forma net earnings
Net earnings per share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
Stock Option Exercise and Share Repurchase Program
On April 13, 2004, the company instituted a program to purchase shares from a limited number of employees who had been limited in their ability to sell shares issuable upon exercise of their stock options as a result of trading restrictions the company imposed on such employees. Under this program, the option holders were permitted to effect a cashless exercise of their stock options followed by an immediate sale to the company of the common shares issued on such cashless exercise, so that there would be no market transaction in connection with such exercises. Only those options granted to 21 participating employees on or prior to April 19, 1999, (representing options to purchase 578,486 common shares) were eligible to be exercised under the program. The program resulted in variable accounting treatment for the stock options included in the program through the program’s expiration. The program expired on April 1, 2005.
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Note 4: Pension and Other Postretirement Benefit Plans
The company recognized net pension and other postretirement benefit expense of $46 million and $134 million in the thirteen and thirty-nine weeks ended September 25, 2005, respectively, and $52 million and $144 million in the thirteen and thirty-nine weeks ended September 26, 2004, respectively. The components of net periodic benefit costs are:
Service cost
Interest cost
Expected return on plan assets
Amortization of loss
Amortization of prior service cost
Loss due to closure, sale, plan termination and other
The company is not required to make any contributions to its U.S. pension plans during 2005. The company contributed $35 million to its Canadian pension plans in the thirty-nine weeks ended September 25, 2005, and expects to contribute a total of approximately $42 million to its Canadian pension plans in 2005.
Qualified and Registered Pension Plan Investments
The strategy of the U.S. pension trust is to invest directly and via total return partnership swaps in a diversified mix of nontraditional strategies, including hedge funds, private equity, opportunistic real estate and other externally managed alternative investment funds. Various derivatives, such as S&P 500 swaps and fixed income futures, are used to supplement the market exposures embedded in such investments. The derivatives constitute indirect investments held by the U.S. pension trust that serve to increase the return and risk profile of the investment portfolio. The overall return earned by the pension trust is the aggregate of returns earned on direct investments and returns earned on the derivatives. The Canadian pension trust has a similar investment strategy. However, it concentrates direct investments into cash and cash equivalents while gaining return exposures through derivatives. The company has not established target allocations for the direct investment portfolio or the derivatives.
The qualified and registered plans are exposed to the risk of nonperformance by counterparties to the indirect investments but the company does not expect any counterparty to fail to meet its obligations. However, because there are no exchanges of principal on the indirect investments, only the amount of unsettled net receivables is at risk. The company manages this risk through selection of counterparties with a defined minimum credit quality, diversification, settlement provisions and documented agreements. Investments in hedge funds and private partnerships are controlled through selection and diversification of managers and strategies and use of limited liability vehicles. Portfolio risk is managed through diversification and by constraining the risk profile of the portfolio within defined boundaries.
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The allocation of assets by category for the qualified and registered plans as of December 26, 2004, and December 28, 2003, including the fair value of derivatives, is as follows:
Private equity and related funds
Real estate and related funds
Common stock and S&P total return index exposure
Fixed income
Hedge funds
Net receivables
Accrued liabilities
The approximate fair value of derivatives held by the qualified and registered plans as of December 26, 2004, and December 28, 2003, is as follows:
The total approximate notional amount of derivatives held by the qualified and registered plans as of December 26, 2004, and December 28, 2003, is as follows:
The expected return on plan assets assumption reflects the company’s best estimate regarding the long-term expected return on the U.S. portfolio. The expected return assumption is based on historical fund returns. The Canadian fund’s investment strategy has mirrored that of the U.S. plan since 1998. Over the 20-year period during which this investment strategy has been pursued, the U.S. fund has achieved a net compound annual return of 17.4 percent. The determination of the expected return on plan assets assumption requires a high degree of judgment and places weight on more recent pension plan asset performance. The expected return on plan assets assumption as of December 26, 2004, is:
Direct investments
Derivatives
Actual Return on Plan Assets
The composition of the actual return on plan assets in each of the years in the three-year period ended December 26, 2004, is as follows:
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Note 5: Net Earnings Per Share
Basic net earnings per share are based on the weighted average number of common and exchangeable shares outstanding during the respective periods. 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 respective periods, calculated using the treasury method.
Weighted average shares outstanding (thousands):
Basic
Dilutive effect of stock options
Diluted
Options to purchase 3,000 shares as of September 25, 2005, and 157,400 shares as of September 26, 2004, were not included in the computation of diluted earnings per share for both the thirteen and thirty-nine week periods then ended, because the option exercise prices were greater than the average market price of the company’s common shares during those periods.
Due to the differences in basic and diluted weighted average shares outstanding for the thirteen-week periods ended September 25, 2005, and September 26, 2004, as compared to the thirty-nine week periods then ended, earnings per share for the year-to-date 2005 and 2004 periods may not equal the sum of the respective earnings per share for the first three quarters of 2005 and 2004.
Note 6: Comprehensive Income
The company’s comprehensive income is as follows:
Other comprehensive income (expense):
Foreign currency translation adjustments
Net gains (losses) on derivatives, net of tax
Reclassification of net (gain) loss on derivatives, net of tax
Comprehensive income
During the first quarter of 2005, the company entered into foreign exchange contracts in connection with an agreement to sell its British Columbia Coastal Group (B.C. Coastal) operations. To the extent applicable, the foreign exchange contracts were designated as a hedge of the company’s net investment in B.C. Coastal. Upon the sale of the company’s B.C. Coastal operations on May 30, 2005, the gain related to this hedge was reclassified into earnings as part of the gain on the sale of the B.C. Coastal operations. See Note 19: Discontinued Operations. As of May 30, 2005, the company redesignated the entire amount of the foreign exchange contracts as a hedge of the company’s net investment in Weyerhaeuser Company Limited, the subsidiary that held the B.C. Coastal operations. The company settled these contracts in July 2005, for a net cash payment of approximately $1 million. As of September 25, 2005, cumulative other comprehensive income includes approximately $15 million of loss related to changes in the fair value of this hedge between the date of redesignation and the dates the contracts were settled.
The effects of the Canadian foreign exchange contracts on the accompanying consolidated financial statements are as follows:
Gain on contracts through May 30, 2005:
Contracts designated as hedge of investment in B.C. Coastal, included in gain on sale of B.C. Coastal
Contracts not designated as hedge, included in other operating costs, net
Loss on contracts from May 31, 2005, through July 28, 2005, included in cumulative other comprehensive income
Net cash paid in settlement of contracts
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Note 7: Consolidation of Variable Interest Entities
The company adopted the provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (Interpretation 46R), as of March 28, 2004. Interpretation 46R addresses consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
During 2002 through 2004, the company closed several significant sales of nonstrategic timberlands. Beginning with the financial statements included in the company’s Form 10-K for the year ended December 26, 2004, the company consolidated the assets and liabilities of the buyer-sponsored special purpose entities and the monetization special purpose entities (collectively “the SPEs”) involved in these transactions as the result of an interpretation of Interpretation 46R. However, because the SPEs are separate and distinct legal entities from the company, the assets of the SPEs are not available to satisfy the liabilities and obligations of the company and the liabilities of the SPEs are not liabilities or obligations of the company. Deferred gains on the sales of nonstrategic timberlands of $59 million as of December 26, 2004, were included in “Liabilities (nonrecourse to Weyerhaeuser) held by special purpose entities” on the accompanying consolidated balance sheet. During the second quarter of 2005, following a final determination regarding the interpretation of Interpretation 46R, the balance of these deferred gains was recognized in income, resulting in a $57 million pretax gain on previous timberlands sales.
Sales proceeds paid to buyer-sponsored SPEs are invested in restricted bank financial instruments of $909 million as of both September 25, 2005, and December 26, 2004. The monetization SPEs had long-term debt of $756 million as of September 25, 2005, and December 26, 2004. The monetization SPEs are exposed to credit-related losses in the event of nonperformance by the banks, but the company does not expect the banks to fail to meet their obligations. The accompanying consolidated statement of earnings includes interest expense on SPE debt of $10 million and $35 million in the thirteen and thirty-nine week periods ended September 25, 2005, respectively, and interest income on SPE investments of $10 million and $41 million in the thirteen and thirty-nine week periods then ended, respectively. No comparable activity is included in interest income or interest expense in the 2004 periods.
The company’s real estate development subsidiaries enter into options to acquire lots at fixed prices in the ordinary course of business, primarily for the purpose of building single-family homes. In addition, a subsidiary in the Real Estate and Related Assets segment provides subordinated financing to third-party developers and homebuilders. Both fixed-price purchase options and subordinated financing constitute variable interests under Interpretation 46R. The company’s real estate subsidiaries have consolidated three entities under Interpretation 46R, with estimated assets and liabilities of $21 million as of September 25, 2005, and $45 million as of December 26, 2004. As of September 25, 2005, the company’s real estate development subsidiaries have 16 lot option purchase agreements entered into prior to December 31, 2003, with deposits of approximately $38 million at risk. After exhaustive efforts, the company has not been able to obtain the information necessary to determine whether or not it is required to consolidate any of these entities under Interpretation 46R. The total amount that would be paid under these purchase options, if fully exercised, is approximately $168 million. In addition, as of September 25, 2005, the company’s real estate development subsidiaries have 15 lot option purchase agreements with entities created after December 30, 2003, with deposits of approximately $17 million at risk, where the company is not the primary beneficiary and is not required to consolidate the entities. The total amount that would be paid under these option purchase agreements, if fully exercised, is approximately $232 million. One of the company’s real estate subsidiaries has approximately $11 million in subordinated loans at risk at September 25, 2005, in 34 variable interest entities.
Note 8: Equity Affiliates
Investments in unconsolidated equity affiliates over which the company has significant influence are accounted for using the equity method with taxes provided on undistributed earnings.
Weyerhaeuser’s significant equity affiliates as of September 25, 2005, are:
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Unconsolidated financial information for affiliated companies, which are accounted for on the equity method, follows. Unconsolidated net sales and revenues, operating income and net income include the results of SCA Weyerhaeuser Packaging Holding Company Asia Ltd. for the periods prior to June 2004, when the company sold its interest in the joint venture.
Unconsolidated assets and liabilities as of December 26, 2004, include the balances of MAS Capital Management Partners, L.P. (MAS Capital), a limited partnership. Unconsolidated net sales and revenues, operating income and net income include the results of MAS Capital for periods prior to July 2005. In May 2005, the company exercised an option to put its interest in MAS Capital to the general partner. The transaction closed in July 2005. The company received net cash proceeds of approximately $115 million and recognized a pretax gain on the sale of its investment of approximately $115 million in the third quarter of 2005. This gain is included in interest income and other in the accompanying consolidated statement of earnings.
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net sales and revenues
Net income
Weyerhaeuser 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, Weyerhaeuser purchases finished product from certain of these entities. The aggregate total of these transactions is not material to Weyerhaeuser’s results of operations.
Unconsolidated financial information for entities that are accounted for by the equity method follows:
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Note 9: Goodwill
The changes in the carrying amount of goodwill for the thirty-nine weeks ended September 25, 2005, are as follows:
Wood
Products
Containerboard,
Packaging and
Recycling
Corporate
and Other
Balance as of December 26, 2004
Adjustment to income tax liability for prior business combinations
Effect of foreign currency translation and other adjustments
Balance as of September 25, 2005
Goodwill associated with the company’s B.C. Coastal operations was included in the carrying value of the net assets of B.C. Coastal and was written off in connection with the B.C. Coastal sale which occurred during the second quarter of 2005. See Note 19: Discontinued Operations. The balance of this goodwill as of December 26, 2004, was classified as “assets of business held for sale” in the accompanying consolidated balance sheet and is not included in the rollforward above. Both the Timberlands and Wood Products segments had goodwill associated with the B.C. Coastal operations.
Note 10: Inventories
Logs and chips
Lumber, plywood, panels and engineered lumber
Pulp and paper
Containerboard and packaging
Other products
Materials and supplies
Note 11: Accrued Liabilities
Payroll – wages and salaries, incentive awards, retirement and vacation pay
Taxes – Social Security and real and personal property
Current portion of product liability reserves
Interest
Note 12: Debt
During the third quarter of 2005, Weyerhaeuser recognized a pretax charge of $21 million in connection with the early extinguishment of debt. During the second quarter of 2004, Weyerhaeuser recognized a pretax charge of $21 million in connection with the early extinguishment of debt. These charges are classified as interest expense incurred on the Consolidated Statement of Earnings.
Weyerhaeuser Company had a short-term bank credit line of $1.2 billion under a 364-day revolving facility at December 26, 2004. The 364-day revolving line of credit expired in March 2005.
In March 2005, Weyerhaeuser Company and Weyerhaeuser Real Estate Company (WRECO) entered into a $1.2 billion 5-year revolving credit facility to replace the 364-day revolving credit facility that expired. The new 5-year facility expires March 2010. WRECO can borrow up to $400 million under this facility. Neither Weyerhaeuser Company nor WRECO is a guarantor of the borrowings of the other under this facility.
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In addition, Weyerhaeuser Company has a revolving credit facility agreement entered into with a group of banks that expires in March 2007 and that provided for borrowings up to a total amount of $1.3 billion, all of which was available to Weyerhaeuser Company. In August 2005, the company reduced the capacity under this facility to $800 million, all of which is available to Weyerhaeuser Company. Borrowings are at LIBOR plus a spread or other such interest rates mutually agreed to between the borrower and lending banks.
In April 2005, in conjunction with an appeal bond posted in the Paragon litigation (see Note 13: Legal Proceedings, Commitments and Contingencies), the company obtained $500 million in letters of credit against the March 2010 credit facility. Of the total committed bank facilities of $2.0 billion, $1.5 billion was available as of September 25, 2005, for incremental borrowings.
Note 13: Legal Proceedings, Commitments and Contingencies
Hardboard Siding Claims In June 2000, the company entered into a nationwide settlement of hardboard siding class action cases and recognized a charge of $130 million before taxes to cover the estimated cost of the settlement and related claims. 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. This is a claims-based settlement, which means the claims will be paid as submitted over a nine-year period. An independent adjuster reviews claims submitted and determines payment under the terms of the settlement agreement. In the third quarter of 2004, an adjustment was made to reduce the reserve by $20 million based upon a review of the activities and trends over the preceding four years. At the end of the third quarter of 2005, the company had approximately $53 million in reserves remaining for hardboard siding claims. The company believes the reserve balances established for these matters are adequate, but is unable to estimate at this time the amount of additional charges, if any that may be required for these matters in the future.
The following table presents an analysis of the claims activity related to the hardboard siding class action cases:
Number of claims filed during the period
Number of claims resolved
Number of claims unresolved at end of period
Number of damage awards paid
Average damage award paid
The lower average damage award paid in 2004 was due primarily to a lower number of awards for multi-family structures in 2004 than in 2003 or 2005.
The company has received $52 million in recoveries from its insurance carriers by way of negotiated settlements.
The company currently has no litigation pending with any person or entity that has opted out of the settlement. Individuals and entities that have opted out of the settlement may file lawsuits against the company in the future.
Linerboard Antitrust Litigation In May 1999, two civil antitrust lawsuits were filed against the company in U.S. District Court, Eastern District of Pennsylvania. Both suits named as defendants several other major containerboard and packaging producers. The complaint in the first case alleged 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 requested class certification for purchasers of corrugated containers during the period from October 1993 through November 1995. The complaint in the second case alleged that the company conspired to manipulate the price of linerboard and thereby the price of corrugated sheets. The suit requested class certification for purchasers of corrugated sheets during the period from October 1993 through November 1995.The company settled the two lawsuits and a pretax charge of $23 million was recognized in the third quarter of 2003. Approximately 165 members of the classes opted out of the class and filed thirteen lawsuits against the company and other producers. The company has settled three of the lawsuits and recognized a charge of $12 million in the first quarter of 2005. It is possible that additional class members that opted out may file lawsuits against the company in the future. The company has not recorded a reserve for the remaining opt-out cases and is unable to estimate at this time the amount of charges, if any, that may be required for this matter in the future.
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In March 2004, La Cie McCormick Canada Company filed a class action lawsuit in Superior Court of Justice, in Ontario, Canada against the company and other linerboard manufacturers on behalf of all Canadians who purchased corrugated products, including sheets and containers and/or linerboard, during the period of time from 1993 to at least the end of 1995. The allegations mirror the allegations in the U.S. cases. General damages of $25 million and punitive damages of $10 million are sought. At this stage, the company cannot calculate what portion of the damages requested would be argued as the company’s responsibility. Canadian law does not provide for a trebling of antitrust damages. The company has not recorded a reserve for the matter, and does not expect any future charges that may be taken for this matter to have a material adverse effect on the company’s results of operations, cash flows or financial position.
Alder Antitrust Litigation In December 2000, a lawsuit was filed against the company in U.S. District Court in Oregon (the Initial Alder Case) alleging from 1996 to the present, the company had monopoly power or attempted to gain monopoly power in the Pacific Northwest market for alder logs and finished alder lumber. A jury verdict of trebled damages of $79 million was appealed to the U.S. Court of Appeals for the Ninth Circuit where the decision was upheld. In September, 2005, the company asked for discretionary review of the Initial Alder Case by the U.S. Supreme Court.
In January 2005, the company received a copy of a “complaint in equity” filed in U.S. District Court in Oregon to set aside the judgment in the Initial Alder Case on behalf of a plaintiff who did not prevail in the trial. It alleged a fraud was committed on the court and requested judgment against the plaintiff be vacated and a new trial set on plaintiff’s claim of monopolization of the alder sawlog market. Trebled damages of $20 million are alleged. The company denies the allegations in the complaint and is actively defending the matter.
In June 2003, Washington Alder filed an antitrust lawsuit against the company in U.S. District Court in Oregon alleging monopolization of the alder log and lumber markets and seeking trebled damages of $36 million and divestiture of the company’s Northwest Hardwoods Division and alder sawmills in Oregon, Washington and British Columbia. A jury verdict of trebled damages of $16 million has been appealed to the U.S. Court of Appeals for the Ninth Circuit where argument is scheduled for November 2005.
In addition, the company has settled similar lawsuits filed against the company by seven hardwood mill owners in the U.S. District Court in Oregon.
On April 29, 2004, a civil class action antitrust lawsuit was filed against the company in U.S. District Court in Oregon claiming that as a result of the company’s alleged monopolization of the alder sawlog market in the Pacific Northwest as determined in the Initial Alder Case the company monopolized the market for finished alder and charged monopoly prices for finished alder lumber. In December 2004, the judge issued an order certifying plaintiff as a class representative for all U.S. purchasers of finished alder lumber between April 28, 2000, and March 31, 2004, for purposes of awarding monetary damages. The company disagrees with the allegations in the lawsuit and is vigorously defending the case. In February 2005, class counsel notified the court that approximately 5 percent of the class members opted out of the class action lawsuit. The company has no litigation pending with any entity that has opted out of the class, but it is possible that entities who have opted out may file lawsuits against the company in the future.
Changes in the amount accrued for alder antitrust litigation matters follows:
Accrued at beginning of period
Charges for current year accruals
Payments
Reversal of accrual
Accrued at end of period
While the company believes the reserve established for the alder antitrust litigation is adequate, because of the uncertainties surrounding the litigation process, the company is unable to estimate what additional charges, if any, may be required in the future.
Paragon Trade Brands, Inc. Litigation In 1999, the Equity Committee (Committee) in the Paragon Trade Brands, Inc. (Paragon), bankruptcy proceeding commenced an adversary proceeding against the company in U.S. Bankruptcy Court for the Northern District of Georgia asserting the company breached certain warranties in agreements between Paragon and the company connected with Paragon’s public offering of common stock in February 1993. The Committee sought to recover
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damages sustained by Paragon in two patent infringement cases, one brought by Procter & Gamble and the other by Kimberly-Clark. In June 2002, the Bankruptcy Court held the company liable for breaches of warranty. In third quarter 2005 the Bankruptcy Court imposed approximately $470 million. The company appealed the liability and damages determinations to the U.S. District Court for the Northern District of Georgia and posted a bond of $500 million. The company has not established a reserve for this matter because, based upon the information currently available to the company, including management’s belief that an adverse result is not probable because the company will prevail on appeal, management does not believe the requirements of Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (Statement 5), for establishing a reserve in this matter have been met. However, there is no guarantee that management will not determine in the future that a charge for all or a portion of any damage award is required. Any such charge could materially and adversely affect the company’s results of operations or financial condition for the quarter or the year in which such a charge may be recognized.
Other Litigation The company is party to other matters generally incidental to its business in addition to the matters described above.
Summary Although the final outcome of any legal proceeding is subject to a great many variables and cannot be predicted with any degree of certainty, management currently believes that adequate reserves have been established for probable losses from litigation when the amounts could be reasonably determined. Management further believes that the ultimate outcome of these legal proceedings could materially adversely affect results of operations, cash flows or financial condition in any given quarter or year, but will not have a material adverse effect on the company’s long-term results of operations, cash flows or financial position.
Countervailing and Anti-dumping Duties
Softwood Lumber Imported into the United States from Canada
In April 2001, the Coalition for Fair Lumber Imports (Coalition) filed two petitions with the U.S. Department of Commerce (Department) and the International Trade Commission (ITC), claiming that production of softwood lumber in Canada was being subsidized by Canada and that imports from Canada were being “dumped” into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (CVD) and anti-dumping (AD) tariffs be imposed on softwood lumber imported from Canada.
In March 2002, the Department confirmed its preliminary finding that certain Canadian provinces were subsidizing logs by failing to collect full market price for stumpage. The Department established a final CVD rate of 18.79 percent. In the AD proceedings, the Department found that the six Canadian manufacturers examined, including the company, were engaged in sales at less than fair value and set cash deposit rates ranging from 2.18 percent to 12.44 percent. The company’s deposit rate was set at 12.39 percent. Because of statutory limitations that affected timing, the bonds covering duties following the preliminary determinations were released by the United States. The resulting reversal of accrued expenses was included in earnings during 2002.
In May 2002, the ITC confirmed its earlier ruling that U.S. industry is threatened by subsidized and dumped imports and the company began making cash deposits relating to the CVD and AD actions. As a result of subsequent administrative determinations, effective for the first quarter of 2005, the combined CVD and AD rate charged on Weyerhaeuser shipments of Canadian softwood lumber into the United States was reduced from 31.18 percent to 24.36 percent.
The CVD and AD tariffs are currently under review and challenge in several forums, including NAFTA panels, the ITC, and the WTO.
Since May 2002, the company has made cash deposits relating to the CVD and AD actions at a rate of approximately $20 million to $35 million a quarter. Through September 2005, the company has paid a cumulative total of $330 million in CVD and AD duties and $21 million in related costs on softwood lumber the company has imported into the United States from Canada. The deposits made against the CVD and AD duties have been expensed. It is difficult to predict the net effect final duties will have on the company. In the event that final rates differ from the depository rates, ultimate charges may be higher or lower than those recorded to date. The company is unable to estimate at this time the amount of additional charges or reversals that may be necessary for this matter in the future. The company believes there should be a negotiated settlement to the softwood lumber dispute and supports efforts to reach a long-term solution to resolve this matter. The U.S. and Canadian governments continue to discuss ways to settle the softwood lumber dispute, but there can be no assurance that they will be able to reach an agreement.
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Kraft Liner/Linerboard Exported from the United States into the People’s Republic of China
In January 2004, the Ministry of Commerce of the People’s Republic of China (MOC) received a petition requesting an anti-dumping investigation on imports of unbleached kraft liner/linerboard originating in the United States, Thailand, Korea and Taiwan. On March 31, 2004, the MOC announced it would conduct an investigation based on the allegations contained in the petition for the period from January 1, 2003, to December 31, 2003, and an investigation for injury to the Chinese industry for the period from January 1, 2001, to December 31, 2003. The announcement included Weyerhaeuser as one of five producers in the United States that are subject to the investigation. In May 2005, the MOC issued a preliminary determination setting Weyerhaeuser’s preliminary anti-dumping tariff at 16.0 percent, effective as of May 31, 2005. A final determination was issued on September 30, 2005, setting Weyerhaeuser’s anti-dumping tariff at 12.9 percent. The anti-dumping tariff is scheduled to expire on September 30, 2010. The company is currently reviewing its legal and administrative options in seeking the elimination or reduction of the anti-dumping duties. The company currently does not believe that such tariffs will have a material adverse effect on its results of operations, cash flows or financial condition.
Environmental Matters
In late 2002, the Environmental Protection Agency (EPA) issued a notice of violation (NOV) for alleged violations of the Clean Air Act at the company’s Hawesville, Kentucky, pulp and paper mill. Management of the company met with federal officials to resolve the matters alleged in the NOV. The company has reached a tentative settlement of the matter, which includes payment of a penalty of approximately $150,000.
In November 2004, the Oklahoma Department of Environmental Quality — Air Quality Division (DEQ) issued a NOV for alleged violations of the Clean Air Act at the company’s Wright City, Oklahoma, wood products facility. Management has been discussing the issues with the DEQ to resolve the matters alleged in the NOV and believes that settlement of the matter may include payment of a civil penalty of approximately $100,000.
In October 2005, the company notified the EPA and the Georgia Department of Natural Resources that a self-audit of its Flint River pulp mill in Oglethorpe, Ga. revealed certain areas that were not in compliance with the Clean Air Act. The company has submitted a remediation plan to both agencies that is designed to get the mill back into compliance as quickly as possible. No penalties have been assessed or paid related to this matter.
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. As of the end of the third quarter of 2005, the company has established reserves totaling $32 million for estimated remediation costs on all of the approximately 70 active sites across its operations. Environmental remediation reserves totaled $38 million at the end of 2004. The decrease in environmental remediation reserves reflects the incorporation of new information on all sites concerning remediation alternatives, updates on prior cost estimates and new sites, and the costs incurred to remediate these sites during this period. The company accrued remediation costs of $5 million and $6 million in the first thirty-nine weeks of 2005 and 2004, respectively. The company incurred remediation costs of $11 million and $7 million in the first thirty-nine weeks of 2005 and 2004, respectively, and charged these costs against the reserve. Based on currently available information and analysis, the company believes that it is reasonably possible that costs associated with all identified sites may exceed current accruals by up to $70 million, which may be incurred over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates upon which accruals are currently based, and utilizes assumptions less favorable to the company among the range of reasonably possible outcomes. In estimating both its current accruals for environmental remediation and the possible range of additional future costs, the company has assumed that it will not bear the entire cost of remediation of every site to the exclusion of other known potentially responsible parties who may be jointly and severally liable. The ability of other potentially responsible parties to participate has been taken into account, generally based on each party’s financial condition and probable contribution on a per-site basis. No amounts have been recorded for potential recoveries from insurance carriers.
Guarantees
Weyerhaeuser Company has guaranteed approximately $70 million of debt of unconsolidated entities and other parties. This includes a guarantee of $25 million of debt that has been legally defeased. In connection with the defeasance, Weyerhaeuser Company would be required to pay under the guarantee if the U.S. government securities set aside in an escrow account is insufficient to pay off the debt in 2005. The value of the assets in the escrow account as of September 2005 is approximately $27 million. The remaining debt guarantee of $45 million expires in 2006, but is subject to an annual extension.
As of September 25, 2005, the Real Estate and Related Assets segment has guaranteed approximately $22 million of debt of unconsolidated entities and has guaranteed performance under two operating leases with future lease payments of approximately $27 million. The debt guarantees expire as follows: $1 million in 2005, $9 million in 2007, $11 million in 2009, and $1 million in 2011. For each of the operating lease guarantees, which extend through 2041, the Real Estate and Related Assets segment would be required to perform if the obligor were to default.
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Warranties
WRECO provides warranties on homes closed that vary depending on state and local laws. The reserves for these warranties are determined by applying the provisions of Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. The liability was approximately $17 million and $14 million at September 25, 2005, and December 26, 2004, respectively.
Note 14: Charges for Integration and Restructuring
Weyerhaeuser incurred the following charges for integration and restructuring;
Change-in-control agreements
Severance and outplacement costs
Pension curtailment and benefit enhancement
As of September 25, 2005, Weyerhaeuser accrued liabilities include approximately $9 million of severance accruals related to integration and restructuring charges recognized from 2003 through September 25, 2005. These accruals are associated with the termination of approximately 250 employees that have not yet occurred.
Note 15: Charges for Closure of Facilities
Weyerhaeuser incurred the following charges for the closure of facilities:
Impairments of long-lived assets
Pension settlement
Other closure costs
Reversal of closure charges recorded in prior years
The thirteen and thirty-nine week periods ended September 25, 2005, include charges of $28 million recognized in connection with the decision to close the Cosmopolis, Washington specialty pulp mill. The date operations will cease will be determined in 2006, based on customer contracts.
Changes in accrued severance during the thirty-nine weeks ended September 25, 2005, were as follows:
Accrued severance as of December 26, 2004
Cost incurred and charged to expense
Other adjustments
Accrued severance as of September 25, 2005
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Note 16: 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 period to period. Weyerhaeuser’s other operating costs, net, includes the following pretax items:
Gain on significant sales of nonstrategic timberlands (Notes 7 and 18)
Gain on disposition of assets
Asset impairment charges not related to closures
Charges for (reversals of) antitrust litigation reserves (Note 13)
Reversal of hardboard siding reserve (Note 13)
Casualty losses from hurricane damage
Foreign exchange gains
Other, net
Included in gain on disposition of assets for the thirty-nine weeks ended September 26, 2004, is a net pretax gain of $34 million recognized in connection with the sale of operating facilities. This includes a pretax gain of $33 million that was recognized in the first quarter of 2004 on the sale of an oriented strand board mill in Slave Lake, Alberta.
Foreign exchange gains and losses result from changes in exchange rates, primarily related to Weyerhaeuser’s Canadian and New Zealand operations.
Note 17: Income Taxes
During the third quarter of 2005, the company recognized a one-time tax benefit of $14 million resulting from a change in the Ohio state income tax law.
On October 22, 2004, the American Jobs Creation Act (AJCA) became law. The AJCA includes a deduction of 85 percent of certain foreign earnings that are repatriated, as defined by the AJCA. Based on this legislation and 2005 guidance by the Department of Treasury, the company repatriated $1.1 billion of foreign earnings in July 2005. A charge of $44 million related to the repatriation was accrued in the second quarter of 2005 and is included in income taxes (from continuing operations) in the accompanying consolidated statement of earnings.
The company previously disclosed that the Internal Revenue Service (IRS) has asserted that approximately $322 million of solid waste disposal revenue bonds do not qualify as tax-exempt. The company has settled this dispute with the IRS with respect to $150 million of the bonds, and continues to contest the assertion with respect to the remaining bonds, none of which are outstanding. The remaining tax issues are at various stages in the appeals and litigation process. The company does not expect any future charges related to this matter to have a material adverse affect on its results of operations, cash flows or financial position.
Note 18: Significant Sale of Nonstrategic Timberlands
In September 2004, Weyerhaeuser sold approximately 270,000 acres of Georgia timberlands for net proceeds of $384 million. Weyerhaeuser recognized a pretax gain of $271 million on the sale of the timberlands. See Note 7: Consolidation of Variable Interest Entities.
Note 19: Discontinued Operations
B.C. Coastal sale
On May 30, 2005, the company sold its B.C. Coastal operations to Coastal Acquisition Ltd., a wholly-owned subsidiary of Brascan Corporation of Toronto, Canada for approximately $1.2 billion (Canadian) plus working capital. The sale included 635,000 acres (258,000 hectares) of private timberlands and the annual harvesting rights to 3.6 million cubic meters of timber subject to public timber leases. The sale also included five softwood sawmills, with a combined annual production of 690 million board feet, and two remanufacturing facilities. Prior to the sale, the company’s B.C. Coastal operations were included in both the Timberlands and Wood Products segments.
The company recognized a gain on the sale of $110 million, including a tax benefit of $46 million, in the second quarter of 2005. The company recognized a pretax charge of $1 million in the third quarter of 2005 related to the termination of the pension plans associated with these operations. The net pretax gain of $63 million is included in contribution to earnings of the Corporate and Other segment for the thirty-nine week period ended September 25, 2005. The company received net
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proceeds of approximately $1.1 billion (U.S.) from the sale, including working capital. The sale agreement provides for subsequent adjustment of the sale price for certain matters such as working capital.
The following table summarizes the U.S. dollar components of net earnings from discontinued operations for the thirteen and thirty-nine week periods ended September 25, 2005, and September 26, 2004:
Net sales
Depreciation, depletion, and amortization
Charges for closure of facilities
Income from operations
Income tax expense
Net earnings from operations
Gain on sale of B.C. Coastal operations
Income tax benefit
Net gain on sale of B.C. Coastal operations
Earnings from discontinued operations, net of tax
The income tax benefit recognized upon the sale of the B.C. Coastal operations includes a deferred tax benefit of $185 million resulting from the rollout of temporary differences on the assets sold and a current tax expense of $139 million on the taxable gain. Current taxes reflect the benefit of favorable capital gains treatment applicable to the sale of timberlands in Canada.
The following table summarizes the U.S. dollar carrying values of the assets and liabilities of the discontinued operations as of December 26, 2004:
Timber and timberlands
Goodwill
Total assets of discontinued operations
Total liabilities of discontinued operations
Net assets of discontinued operations
Note 20: Subsequent Events
On October 21, 2005, the company announced that its board of directors had authorized the repurchase of up to 18 million shares, or 7.4 percent of its outstanding common stock.
In October 2005, the company announced the indefinite closure of its pulp and paper mill located in Prince Albert, Saskatchewan. The company expects to recognize charges of $350 million to $375 million in its Cellulose Fiber and White Papers segment in the fourth quarter of 2005 for employee severance and the impairment of assets at the Prince Albert mill.
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In addition, the company expects to recognize a charge of approximately $25 million in its Wood Products segment in the fourth quarter of 2005 for the impairment of assets at the Big River sawmill. The Big River sawmill sells chips and hog fuel to the Prince Albert pulp and paper mill and is not expected to have a market for such residuals if the Prince Albert facility were to close.
In October 2005, the company announced the closure of its plywood mill in Wright City, Oklahoma The company expects to recognize a charge of approximately $24 million in the fourth quarter of 2005 in connection with this closure.
In October 2005, the company also announced it had reached a definitive agreement to sell its French composite panels businesses to Financiera Maderera S.A. (FINSA). The transaction is subject to regulatory approvals, but is expected to be complete during the fourth quarter of 2005.
Note 21: Business Segments
The company is principally engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate development and construction. The company’s business segments are:
As disclosed in Note 19: Discontinued Operations, the company closed on the sale of its B.C. Coastal operations in the second quarter of 2005. The segment data presented in the table below includes the activities of the B.C. Coastal operations in the Timberlands and Wood Products segments and includes the pretax gain on the sale of $63 million in Corporate and Other.
Information previously reported as the Pulp and Paper segment is now reported as the Cellulose Fiber and White Papers segment. This is a change in segment name only. There were no organizational changes and there has been no recasting of financial information as a result of this change.
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An analysis and reconciliation of the company’s business segment information to the respective information in the consolidated financial statements is as follows:
Sales to and revenues from unaffiliated customers:
Timberlands
Wood Products
Cellulose Fiber and White Papers
Containerboard, Packaging and Recycling
Corporate and Other
Less sales of discontinued operations (Note 19)
Intersegment sales:
Total sales and revenues
Intersegment eliminations
Contribution (charge) to earnings:
Interest expense (Weyerhaeuser only)
Less capitalized interest (Weyerhaeuser only)
Earnings before income taxes
Income taxes (continuing and discontinued operations)
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
Some information included in this report contains statements concerning the company’s future results and performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements can be identified by the use of forward-looking terminology such as “expects,” “may,” “will,” “believes,” “should,” “approximately,” anticipates,” “estimates,” and “plans,” and the negative or other variations of those terms or comparable terminology or by discussions of strategy, plans or intentions. In particular, some of these forward-looking statements deal with expectations regarding the company’s markets in the fourth quarter; expected earnings and performance of the company’s business segments during the fourth quarter, demand and pricing for the company’s products in the fourth quarter, raw material, energy and transportation costs, hurricane salvage costs, seasonal slowdowns in timber harvest in the fourth quarter, facility closings and related charges, new home sales, capital expenditures and related matters. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those projected, including, but not limited to:
The company is also a large exporter and is affected by changes in economic activity in Europe and Asia, particularly Japan, and by changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Euro and the Canadian dollar, and restrictions on international trade or tariffs imposed on imports, including the countervailing and anti-dumping duties imposed on the company’s softwood lumber shipments from Canada to the United States. These and other factors could cause or contribute to actual results differing materially from such forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any of them occurs, what effect they will have on the company’s results of operations or financial condition. The company expressly declines any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date of this report.
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Results of Operations
The term “company” refers to Weyerhaeuser Company and all of its majority-owned domestic and foreign subsidiaries and variable interest entities of which Weyerhaeuser Company or its subsidiaries are determined to be the primary beneficiary. The term “Weyerhaeuser” refers to the forest products-based operations and excludes the Real Estate and Related Assets operations. The term “price realizations” refers to net selling prices, which include freight and are net of normal sales deductions. The term “contribution to earnings” refers to segment earnings before interest and taxes.
Consolidated Results
A summary of consolidated results for the thirteen and thirty-nine week periods ended September 25, 2005, and September 26, 2004, follows:
Dollar amounts in millions, except per-share data
Net earnings per share, basic
Net earnings per share, diluted
Net sales and revenues for the third quarter of 2005 decreased $75 million, or 1 percent, as compared to the third quarter of 2004. This decrease was primarily due to lower price realizations for softwood lumber and structural panels. Net sales and revenues increased $528 million, or 3 percent, for the thirty-nine weeks ended September 25, 2005, as compared to the thirty-nine weeks ended September 26, 2004. Decreases in year-to-date sales of lumber and structural panels were more than offset by increased sales of pulp, paper, containerboard, packaging and real estate. Net earnings for the third quarter of 2005 of $285 million, was less than half of net earnings for third quarter of 2004. Net earnings for the thirty-nine weeks ended September 25, 2005 were $140 million less than for the same period of 2004. The decrease in earnings is primarily due to lower price realizations for lumber and structural panels and higher raw material and manufacturing costs across the segments in the thirteen and thirty-nine weeks periods ended September 25, 2005. In addition, gains on sales of nonstrategic timberlands were significantly higher in the thirteen and thirty-nine week periods ended September 26, 2004, than in the same periods in 2005.
The results presented in the table above exclude the results of the company’s British Columbia Coastal Group (B.C. Coastal) operations, which were sold in May 2005. The B.C. Coastal operations are presented as discontinued operations in the accompanying consolidated financial statements. See Note 19 of Notes to Consolidated Financial Statements. Net sales and revenues and operating income of the B.C. Coastal operations for the thirteen and thirty-nine week periods ended September 25, 2005, and September 26, 2004 were as follows:
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Items that Affected Results
A summary of some significant items that are included in operating income and net earnings follows:
(Charge) benefit:
Gain on sales of nonstrategic timberlands
Gain on British Columbia tenure reallocation agreement
Facility closures or sales
Countervailing and antidumping charges
Reversal of hardboard siding reserve
Gain on sale of investment in equity affiliate
Early extinguishment of debt
Income tax benefit of change in Ohio state income tax law
Integration and restructuring
Antitrust litigation
Income tax expense on repatriation of foreign earnings
These and other factors that affected the quarterly and year-to-date comparison of operating income and net earnings are discussed in the segment analyses that follow. The Timberlands and Wood Products segment analyses include the results of the company’s B.C. Coastal operations through the date of sale at the end of May 2005.
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Contribution to earnings
Third-party log sales volumes and fee harvest volumes for Timberlands for the thirteen and thirty-nine week periods ended September 25, 2005, and September 26, 2004, are as follows:
Volumes in thousands
Third-party log sales — cunits (100 cubic feet)
Fee harvest — cunits (100 cubic feet)
Net sales and revenues increased $5 million, or 2 percent, for the thirteen-week period ended September 25, 2005, compared to the same period in 2004. Changes in third quarter net sales and revenues, which substantially offset one another, included the following:
Net sales and revenues were relatively flat in the thirty-nine week periods ended September 25, 2005, and September 26, 2004. Changes in net sales and revenues for the thirty-nine week periods, which substantially offset one another, included the following:
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Timberlands’ contribution to earnings for the thirteen and thirty-nine weeks ended September 26, 2004, includes a $271 million pretax gain on the sale of Georgia timberlands. Excluding this gain, contribution to earnings for the segment increased $12 million and $62 million for the thirteen and thirty-nine weeks ended September 25, 2005, respectively, compared to the thirteen and thirty-nine weeks ended September 26, 2004. Items that affected the quarterly and year-to-date comparison of Timberlands’ contribution to earnings include the following:
The company expects fourth quarter earnings for the segment to be lower than the third quarter, reflecting normal seasonal slowdowns and expected lower domestic sales prices. Export log markets are expected to remain firm. Costs are expected to increase due to hurricane salvage operations in the south.
Despite continued strong demand for building products, plentiful available supply throughout the thirteen-week period ended September 25, 2005, resulted in average price realizations for structural panels remaining below the levels during the same period in 2004. Average price realizations for structural panels for the thirty-nine weeks ended September 25, 2005, were also below the levels during the same period in 2004. Pricing for lumber products was mixed, with higher prices for southern yellow pine offset by lower prices for lumber produced in Canada and the western U.S. The Random Lengths North Central 7/16” indicator price for oriented strand board averaged $291 per thousand square feet for the thirteen weeks ended September 25, 2005, down from $353 per thousand square feet for the same period in 2004. The same indicator averaged $319 per thousand square feet for the first thirty-nine weeks of 2005, compared to $406 per thousand square feet for the same period in 2004.
Net sales and revenues decreased $300 million, or 11 percent, for the thirteen-week period ended September 25, 2005, compared to the thirteen-week period ended September 26, 2004. The overall decrease is primarily the result of lower prices for softwood lumber and structural panels due to market factors described above. The significant changes in third quarter net sales and revenues from the same period in 2004 include the following:
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Net sales and revenues decreased $405 million, or 5 percent, in the first thirty-nine weeks of 2005, compared to the first thirty-nine weeks of 2004. The significant changes in year-to-date net sales and revenues include the following:
Segment contribution to earnings was $124 million in the thirteen weeks ended September 25, 2005, down from $362 million in the thirteen weeks ended September 26, 2004. The year-to-date contribution to earnings was $459 million for 2005, down from $983 million for 2004. The following factors affected the quarterly and year-to-date comparison of segment contribution to earnings:
Normal seasonal slowing is expected to result in price decreases in commodity building products and reduced shipment volumes in the fourth quarter. Costs for energy, resin and transportation are expected to increase. As a result, fourth quarter earnings are expected to be lower than third quarter. In addition, the segment will be affected by an estimated $25 million pretax charge associated with the Big River sawmill in Saskatchewan, and an estimated $24 million pretax charge associated with the closure of the plywood mill in Wright City, Oklahoma.
Third party sales and total production volumes for the major products in the Wood Products segment for the thirteen and thirty-nine week periods ended September 25, 2005, and September 26, 2004, are as follows:
Third party sales volumes (millions, except logs)
Softwood lumber — board feet
Plywood — square feet (3/8”)
Veneer — square feet (3/8”)
Composite panels — square feet (3/4”)
Oriented strand board — square feet (3/8”)
Hardwood lumber — board feet
Engineered I-Joists — lineal feet
Engineered solid section — cubic feet
Logs — in thousands of cunits (100 cubic feet)
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Total production volumes (millions)
Veneer — square feet (3/8”) (1)
Engineered I-Joists – lineal feet
Cellulose Fiber and White Papers (formerly Pulp and Paper)
Contribution (charge) to earnings
Net sales and revenues increased $25 million, or 2 percent, for the thirteen-week period ended September 25, 2005, compared to the thirteen-week period ended September 26, 2004. The increase was primarily due to the following:
Net sales and revenues increased $199 million, or 7 percent, for the thirty-nine weeks ended September 25, 2005, compared to the thirty-nine weeks ended September 26, 2004. The significant changes in net sales and revenues included the following:
The third quarter 2005 contribution to earnings was a loss of $2 million compared to a contribution of $80 million in the same period of 2004. The segment had a contribution to earnings of $33 million in the thirty-nine week period ended September 25, 2005, compared to a $69 million contribution in the thirty-nine week period ended September 26, 2004. The following factors affected the comparison of segment contribution to earnings for the thirteen and thirty-nine week periods ended September 25, 2005, as compared to the thirteen and thirty-nine week periods ended September 26, 2004:
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The company expects fourth quarter results to decline due to lower fine paper prices, seasonally lower shipments, and higher transportation, chemical and energy costs. In addition, the segment will be affected by an estimated $350 to $375 million pretax charge associated with the previously announced indefinite closure of the Prince Albert pulp and paper facility as the company continues the portfolio improvement strategy in this segment.
Third party sales and total production volumes for major Cellulose Fiber and White Papers products follow:
Third party sales volumes (thousands)
Pulp — air-dry metric tons
Paper — tons(1)
Coated groundwood — tons
Liquid packaging board — tons
Paper converting — tons
Total production volumes (thousands)
Pulp — air-dry metric tons(2)
Paper — tons (3)
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Net sales and revenues increased $9 million, or 1 percent, in the thirteen weeks ended September 25, 2005, compared to the thirteen weeks ended September 26, 2004. The significant changes in net sales and revenues included the following:
Net sales and revenues increased $188 million, or 6 percent, in the thirty-nine weeks ended September 25, 2005, as compared to the thirty-nine weeks ended September 26, 2004. The significant changes in net sales and revenues included the following:
Contribution to earnings decreased $46 million in the thirteen weeks ended September 25, 2005, compared to the thirteen weeks ended September 26, 2004. Contribution to earnings increased $15 million in the thirty-nine weeks ended September 25, 2005, compared to the thirty-nine weeks ended September 26, 2004. The change in contribution to earnings between the periods was primarily attributable to the following:
Declines in average price realizations for containerboard in the third quarter of 2005, as compared to the third quarter of 2004, negatively affected the contribution to earnings in the thirteen weeks ended September 25, 2005, by approximately $5 million compared to the same period in 2004. Average price realization increases for corrugated packaging positively affected the year-to-date 2005 contribution to earnings by approximately $150 million when compared to the same period of 2004. Average price realization increases for containerboard increased the segment’s earnings by
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approximately $22 million in the thirty-nine weeks ended September 25, 2005, compared to the thirty-nine weeks ended September 26, 2004.
Fourth quarter earnings for the segment are expected to decrease to near break-even levels due to a continued decline in box prices resulting from earlier declines in containerboard prices, a seasonal decline in box shipments and higher energy costs, partially offset by lower costs for old corrugated containers. The company’s recently announced containerboard and box price increases are not expected to materially affect earnings in the fourth quarter.
Third party sales and total production volumes for major Containerboard, Packaging and Recycling products follow:
Containerboard — tons
Packaging — MSF
Recycling — tons
Kraft bags and sacks — tons
Total production volumes (in thousands)
Containerboard — tons(1)
Recycling — tons(2)
Net sales and revenues for the thirteen weeks ended September 25, 2005, were comparable to net sales and revenues for the thirteen weeks ended September 26, 2004. Net sales and revenues for the thirty-nine weeks ended September 25, 2005, increased $315 million, compared to the thirty-nine weeks ended September 26, 2004.
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Contribution to earnings for the Real Estate and Related Assets segment decreased $10 million in the third quarter of 2005 compared with the same period of 2004. Contribution to earnings increased $91 million in the thirty-nine weeks ended September 25, 2005, compared with the thirty-nine weeks ended September 26, 2005.
The backlog of homes sold, but not closed, represents slightly more than six months’ sales. The company expects fourth quarter earnings for the segment to be significantly higher than third quarter due to seasonally stronger single-family closings, which are expected to exceed the fourth quarter of 2004.
Sept. 25,
2005
Corporate and Other includes marine transportation (Westwood Shipping Lines, a wholly owned subsidiary); timberlands, distribution and converting facilities located outside North America; and general corporate support activities. Corporate and Other’s contribution (charge) to earnings included the following:
Interest Expense
Interest expense incurred by Weyerhaeuser was $568 million in the thirty-nine weeks ended September 25, 2005, compared to $597 million in the thirty-nine weeks ended September 26, 2004. Interest expense included $10 million and $35 million in the thirteen and thirty-nine week periods ended September 25, 2005, respectively, of interest incurred by special purpose entities the company has consolidated (see Note 7 of Notes to Consolidated Financial Statements). Interest expense for both the thirteen and thirty-nine weeks ended September 25, 2005, included a $21 million pretax charge for early extinguishment
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of debt. Interest expense for the thirty-nine weeks ended September 26, 2004, also included a $21 million pretax charge for the early extinguishment of debt. Excluding the interest expense of the special purpose entities, which is substantially offset by interest income of consolidated special purposes entities, and excluding the losses on early extinguishment of debt, interest expense decreased $22 million and $64 million in the thirteen and thirty-nine week periods ended September 25, 2005, respectively, as compared to the same periods of 2004. The net decrease in interest expense is primarily due to repayment of approximately $3.4 billion of long-term debt since the beginning of 2004.
Income Taxes
The company’s effective income tax rate applicable to continuing operations is estimated to be 34.4 percent for 2005. Through the second quarter of 2005, the company’s effective income tax rate applicable to continuing operations was estimated to be 35.0 percent. The company’s effective tax rate for 2004 was 34.0 percent. The company’s effective income tax rate is affected by state income taxes and the benefits of tax credits.
During the second quarter of 2005, the company recognized a $46 million income tax benefit in connection with the sale of the company’s B.C. Coastal operations. See Note 19 of Notes to Consolidated Financial Statements. The income tax benefit recognized upon the sale of the B.C. Coastal operations included a deferred tax benefit of $185 million resulting from the rollout of temporary differences on the assets sold and a current tax expense of $139 million on the taxable gain. Current taxes reflect the benefit of favorable capital gains treatment applicable to the sale of timberlands in Canada. Also during the second quarter of 2005, the company recognized a charge of $44 million for the accrual of income taxes associated with the repatriation of approximately $1.1 billion of foreign earnings. See Note 17 of Notes to Consolidated Financial Statements.
Under current tax law, the ability to use tax credits from the production of non-conventional fuel would be phased out ratably if the average annual domestic wellhead price published by the Department of Energy (DOE) is $51 to $64 per barrel (in 2004 dollars) and would be fully phased out if the top end of the price range is reached. The year-to-date average annual domestic wellhead price published by the DOE is below the phase-out range. Accordingly, the company has not lost the ability to use tax credits from the production of non-conventional fuel. The company estimates that it will generate approximately $24 million in tax credits from the production of non-conventional fuel in 2005.
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
Consolidated net cash provided by operations was $864 million in the thirty-nine weeks ended September 25, 2005, a decrease of $467 million from the $1.3 billion of net cash provided by operations in the thirty-nine weeks ended September 26, 2004. The primary components of the change follow:
Weyerhaeuser cash received from customers, net of cash paid to employees, suppliers and others, decreased approximately $472 million in the thirty-nine weeks ended September 25, 2005, compared to the thirty-nine weeks ended September 26, 2004. This was partially attributable to the decline in sales prices for lumber, plywood and oriented strand board, which had been a significant source of cash flows in the first three quarters of 2004. Increased raw material and manufacturing costs across the segments also used additional cash in 2005. These effects were partially offset by
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additional cash provided by higher selling prices for engineered lumber, fine paper and packaging products in the first three quarters of 2005, as compared to the same period in 2004.
Investing
Weyerhaeuser’s capital expenditures for the thirty-nine weeks ended September 25, 2005, excluding acquisitions and Real Estate and Related Assets, were $557 million, compared to $275 million in the same period of 2004. Capital spending by segment for the thirty-nine weeks ended September 25, 2005, was as follows: $44 million for Timberlands; $98 million for Wood Products; $207 million for Cellulose Fiber and White Papers; $118 million for Containerboard, Packaging and Recycling; and $90 million for Corporate and Other. Weyerhaeuser currently anticipates capital expenditures, excluding acquisitions and Real Estate and Related Assets, to approximate $850 million for the year; however, this expenditure level could increase or decrease as a consequence of a number of factors, including future economic conditions and weather.
On May 30, 2005, Weyerhaeuser closed on the sale of its B.C. Coastal operations to Coastal Acquisition Ltd., a wholly-owned subsidiary of Brascan Corporation of Toronto, Canada. In the second quarter of 2005, the company received net cash proceeds from the sale of approximately $1.1 billion (U.S.), including working capital. See Note 19 of Notes to Consolidated Financial Statements.
In July 2005, Weyerhaeuser sold its interest in MAS Capital Management Partners, L.P., an equity investment, for net cash proceeds of $115 million. See Note 8 of Notes to Consolidated Financial Statements.
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Financing
During the thirty-nine weeks ended September 25, 2005, the company, including Real Estate and Related Assets, repaid $1.6 billion of long-term debt. Total interest-bearing debt as of September 25, 2005, was $9.0 billion, down from $10.6 billion as of December 26, 2004. The company paid dividends of $342 million during the first thirty-nine weeks of 2005, compared to dividends of $276 million during the same period of 2004. Effective with the second quarter of 2005, the company increased its quarterly dividend from $0.40 per share to $0.50 per share. The increase in dividends paid year-to-date is also partially due to the issuance of 16,675,000 common shares in May 2004. The company received net proceeds from the offering, after deduction of the underwriting discount and other transaction costs, of $954 million during the second quarter of 2004. Proceeds from the issuance of stock options were $150 million in the first thirty-nine weeks of 2005 compared to $141 million in the first thirty-nine weeks of 2004.
Weyerhaeuser Company and Weyerhaeuser Real Estate Company (WRECO) have established two multi-year revolving lines of credit in the maximum aggregate amount of $2.0 billion as of September 25, 2005. The $800 million multi-year revolving line of credit expires in March 2007 and the $1.2 billion multi-year revolving line of credit expires in March 2010. WRECO can borrow up to $400 million under the March 2010 facility. Neither of the entities is a guarantor of the borrowing of the other under either of these credit facilities. As of September 25, 2005, $1.5 billion was available under these bank facilities for incremental borrowings.
The company’s debt-to-total capital ratio is as follows:
Notes payable and commercial paper:
Long-term debt:
Capital lease obligations:
Total debt
Minority interest:
Deferred income taxes:
Total capital
Debt-to-total-capital ratio
Excluding the Real Estate and Related Assets amounts disclosed above and excluding Weyerhaeuser’s investment in Real Estate and Related Assets of $1.4 billion as of September 25, 2005, and $1.1 billion as of December 26, 2004, Weyerhaeuser’s debt-to-total-capital ratio was 38.6 percent and 43.6 percent as of September 25, 2005, and December 26, 2004, respectively.
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Critical Accounting Policies
Pension and Postretirement Benefit Plans
The company sponsors several pension and postretirement benefit plans for its employees. Key assumptions used to determine the amounts recorded in the company’s financial statements include the discount rate, the expected return on plan assets, anticipated trends in health care costs, assumed increases in salaries, mortality rates, and other factors. These assumptions are reviewed with external advisors at the end of each fiscal year and are updated as appropriate. Actual experience that differs from the assumptions could have a significant effect on the company’s financial position, results from operations or cash flows. Other factors that affect the level of net periodic benefit income or expense that is recognized in a given year include actual pension fund performance, plan changes, and changes in plan participation or coverage.
The company’s expected rate of return on plan assets reflects the company’s best estimate regarding the long-term rate of return on plan assets based on the information that was available as of the measurement date, including historical returns for the last 20 years. As of December 26, 2004, the company is using an expected rate of return on pension plan assets assumption of 9.5 percent. This assumption, which is being used in the determination of the 2005 net periodic benefits costs, is the same assumption that was used for 2004 and 2003. Each 0.5 percent reduction in the expected return on plan assets would increase the 2005 pension plan expense by approximately $17 million for the company’s U.S. qualified pension plans and by approximately $4 million for the company’s Canadian registered pension plans.
The discount rate is based on rates of interest on long-term corporate bonds. As of December 26, 2004, the company reduced the discount rate from 6.25 percent to 6.00 percent for both the U.S. and Canadian plans to reflect decreases in the benchmark rates of interest. Pension and postretirement benefit expenses for 2005 will be based on the 6.00 percent assumed discount rate for U.S. and Canadian plans. Future discount rates may differ. Each 0.5 percent reduction in the assumed discount rate would increase pension expense by approximately $36 million for the company’s U.S. qualified pension plans and by approximately $6 million for the company’s Canadian registered pension plans.
The company was not required to and did not make any contributions to its U.S. plans during 2004. The company contributed approximately $40 million to its Canadian pension plans in 2004, which includes approximately $9 million of contributions made in connection with the sale of its oriented strand board facility in Slave Lake, Alberta; the terminations of the pension plans at its operations in Sturgeon Falls, Ontario and Grande Cache, Alberta; and an early retirement incentive program at its operations in Dryden, Ontario.
The company expects it will not be required to make contributions to the U.S. plans during 2005 and will contribute a total of approximately $42 million to its Canadian plans during 2005.
Long-Lived Assets and Goodwill
The company reviews the carrying value of its long-lived assets and goodwill when events and changes in circumstances indicate that the carrying value of an asset group may not be recoverable through future operations. To determine whether the carrying value of an asset group is impaired, the company estimates the cash flows that could be generated after considering the range and likelihood of possible outcomes. If the carrying value of an asset group is not recoverable through the weighted average cash flows under the possible outcomes, it is considered impaired. When necessary, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. Estimated fair value is based on market comparisons, when available, or discounted cash flows under the possible outcomes.
The valuation of goodwill is assessed annually. If goodwill is considered impaired, the company is required to estimate the fair values of the assets and liabilities of the reporting unit carrying the goodwill, similar to the fair value allocation under the purchase method of accounting for a business combination. The excess of the fair value of the reporting unit over the fair value of the assets and liabilities of the reporting unit equals the implied value of goodwill. When necessary, an impairment charge is recognized to the extent the carrying value of goodwill of the reporting unit exceeds its implied fair value.
The company has grown substantially through acquisitions in recent years. A large portion of the net book value of the company’s property and equipment and timber and timberlands represent amounts allocated to those assets as part of the allocation of the purchase price of recent acquisitions. Due to these allocations, a large portion of the company’s long-term assets are valued at relatively current amounts. In addition, the company had goodwill of $3.0 billion as of September 25, 2005, which represented approximately 10 percent of the company’s consolidated assets.
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In order to determine the amount and timing of impairment charges for these assets, the company is required to estimate future cash flows, residual values and fair values of the related assets, and the probability of alternative outcomes. In addition, the company must make assumptions regarding product pricing, raw material costs, volumes of product sold, and discount rates to analyze the future cash flows for goodwill impairment assessments. Management believes that the estimates of future cash flows and fair values are reasonable; however, changes in estimates of such cash flows, changes in the likelihood of alternative outcomes, and changes in estimates of fair value could affect the evaluations.
Legal, Environmental and Product Liability Reserves
Contingent liabilities, principally for legal, environmental and product liability matters, are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. However, litigation is inherently unpredictable, and excessive verdicts do occur. As disclosed in Note 13 of Notes to Consolidated Financial Statements, the company’s legal exposures are significant and the ultimate outcome of these legal proceedings could be material to operating results or cash flows in any given quarter or year.
Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. The company determines these estimates after a detailed evaluation of each site. In establishing its accruals for environmental remediation, the company has assumed that it will not bear the entire cost of remediation of every site to the exclusion of other known potentially responsible parties who may be jointly and severally liable. The ability of other potentially responsible parties to participate has been taken into account, based generally on each party’s financial condition and probable contribution on a per-site basis. The company does not record amounts for recoveries from insurance carriers until a binding agreement has been reached between the company and the carrier.
Additionally, as discussed in Note 13 of the Notes to Consolidated Financial Statements, reserves for future claims settlements relating to hardboard siding cases require judgments regarding projections of future claims rates and amounts.
Depletion
Depletion, or costs attributed to timber harvested, is recorded as trees are harvested. Depletion rates are adjusted annually. Depletion rates are computed by dividing the original cost of the timber less previously recorded depletion by the total timber volume that is estimated to be harvested over the harvest cycle. The length of the harvest cycle varies by geographic region and species of timber. The depletion rate calculations do not include an estimate for future silviculture costs associated with existing stands, future reforestation costs associated with a stand’s final harvest, or future volume in connection with the replanting of a stand subsequent to its final harvest.
Significant estimates and judgments are required to determine the volume of timber available for harvest over the harvest cycle. Some of the factors affecting the estimates are changes in weather patterns, the effect of fertilizer and pesticide applications, changes in environmental regulations and restrictions that may limit the company’s ability to harvest certain timberlands, changes in harvest plans, the scientific advancement in seedling and growing technology, and changes in harvest cycles.
During the first quarter of 2005, the company entered into foreign exchange contracts in connection with an agreement to sell its B.C. Coastal operations. To the extent applicable, the foreign exchange contracts were designated as a hedge of the company’s net investment in B.C. Coastal. Upon the sale of the company’s B.C. Coastal operations on May 30, 2005, the gain related to this hedge was reclassified from cumulative other comprehensive income into earnings as part of the gain on the sale of the B.C. Coastal operations. Prior to May 30, 2005, foreign exchange contracts in excess of the company’s net investment in B.C. Coastal were not designated as hedges and changes in the fair value of the contracts were recognized in earnings in the period the change occurred. As of May 30, 2005, the company redesignated the entire amount of the foreign exchange contracts as a hedge of the company’s net investment in Weyerhaeuser Company Limited, the subsidiary that held the B.C. Coastal operations. The company settled these contracts in July 2005, for a net cash payment of approximately $1 million. As of September 25, 2005, cumulative other comprehensive income includes approximately $15 million of loss related to changes in the fair value of this hedge between the date of redesignation and the dates the contracts settled.
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Loss on contracts from May 31, 2005 through July 28, 2005, included in cumulative other comprehensive income
Evaluation of Disclosure Controls and Procedures
The company’s principal executive officer and principal financial officer have evaluated the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Disclosure controls are controls and other procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on their evaluation, the company’s principal executive officer and principal financial officer believe the controls and procedures in place are effective to ensure that information required to be disclosed complies with the SEC’s rules and forms.
Changes in Internal Controls
In the first quarter of 2005, the company began the first phase of implementation in a multi-year effort to upgrade the technology supporting the company’s financial systems. As part of this effort, the following changes were made during the third quarter of 2005:
These implementations included new hardware and software and resulted in certain changes to business processes and internal controls impacting financial reporting. In addition, certain accounting processes are being centralized in connection with the upgrade of the technology supporting the company’s financial systems. Management is taking the necessary steps to monitor and maintain appropriate internal controls during this period of change. These steps include providing training related to business process changes and the new system software to individuals using the new systems to carry out their job responsibilities as well as those who rely on the financial information. Additionally, oversight activities have increased during the transition period and a support organization has been established to monitor system operations, answer user questions, resolve issues in a timely manner, and report trends to management.
No other changes occurred in the company’s internal control over financial reporting during the third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
See discussion in Note 13 of Notes to Consolidated Financial Statements.
Natural Resource and Environmental Matters
On May 30, 2005, the company sold almost all of its forest licenses and privately held timberland in western British Columbia (B.C.) to Brascan Corporation of Toronto, Canada. The transaction included 258,000 hectares (635,000 acres) of private timberlands and the annual harvesting rights to 3.6 million cubic meters of timber that is subject to public timber leases. The sale also included five softwood sawmills, with a combined annual production of 690 million board feet, and two remanufacturing facilities. Weyerhaeuser maintains a significant presence in Canada and British Columbia following the sale, and will continue to employ about 7,000 Canadian employees. As a result of the sale, Brascan assumed responsibility with respect to an objection brought by the Lyackson First Nation to a proposed subdivision by the company of privately owned lands on Valdes Island in B.C on the basis that the Lyackson First Nations’ aboriginal interests had not been sufficiently addressed. Also as a result of the sale, Brascan assumed responsibility with respect to a petition by the Hupacasath First Nation for a declaration that the province had failed to meaningfully consult with them before deciding to remove private lands formerly owned by the company from a company Tree Farm License, and that they have aboriginal interests in these lands.
Item 6. Exhibits
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EXHIBITS INDEX
Exhibits: