UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-4825
WEYERHAEUSER COMPANY
(Exact name of registrant as specified in its charter)
Washington
91-0470860
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
220 Occidental Avenue South
Seattle, Washington
98104-7800
(Address of principal executive offices)
(Zip Code)
(206) 539-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.25 per share
WY
New York 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 ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of July 22, 2019, 744,929,499 shares of the registrant’s common stock ($1.25 par value) were outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENT OF OPERATIONS
1
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2
CONSOLIDATED BALANCE SHEET
3
CONSOLIDATED STATEMENT OF CASH FLOWS
4
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
5
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
16
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
28
ITEM 4.
CONTROLS AND PROCEDURES
PART II
OTHER INFORMATION
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
ITEM 6.
EXHIBITS
29
SIGNATURE
30
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
(UNAUDITED)
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2019
JUNE 2018
Net sales (Note 3)
$
1,692
2,065
3,335
3,930
Costs of sales
1,390
1,447
2,712
2,795
Gross margin
302
618
623
1,135
Selling expenses
21
23
42
46
General and administrative expenses
80
169
158
Research and development expenses
Other operating costs, net (Note 15)
13
37
49
47
Operating income
186
476
360
880
Non-operating pension and other postretirement benefit costs
(10
)
(13
(480
(37
Interest income and other
11
Interest expense, net of capitalized interest
(91
(92
(198
(185
Earnings (loss) before income taxes
91
382
(302
681
Income taxes (Note 16)
(65
141
(95
Net earnings (loss)
128
317
(161
586
Earnings (loss) per share, basic and diluted (Note 4)
0.17
0.42
(0.22
0.77
Weighted average shares outstanding (in thousands) (Note 4):
Basic
745,486
757,829
746,041
757,317
Diluted
746,232
760,533
759,992
See accompanying Notes to Consolidated Financial Statements.
DOLLAR AMOUNTS IN MILLIONS
Other comprehensive income (loss):
Foreign currency translation adjustments
(16
25
(31
Changes in unamortized actuarial loss, net of tax expense of $9, $63, $120, and $82
199
373
253
Changes in unamortized net prior service credit, net of tax benefit of $0, $1, $0 and $1
(1
—
Total other comprehensive income
39
183
397
221
Total comprehensive income
167
500
236
807
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA
JUNE 30, 2019
DECEMBER 31, 2018
ASSETS
Current assets:
Cash and cash equivalents
212
334
Receivables, less discounts and allowances of $1 and $1
408
337
Receivables for taxes
157
137
Inventories (Note 5)
425
389
Prepaid expenses and other current assets
132
152
Current restricted financial investments held by variable interest entities (Note 6)
362
Total current assets
1,696
1,602
Property and equipment, less accumulated depreciation of $3,437 and $3,376
1,901
1,857
Construction in progress
134
136
Timber and timberlands at cost, less depletion
12,516
12,671
Minerals and mineral rights, less depletion
288
294
Deferred tax assets
33
15
Other assets
461
312
Restricted financial investments held by variable interest entities (Note 6)
Total assets
17,029
17,249
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt (Note 9)
Current debt (nonrecourse to the company) held by variable interest entities (Note 6)
Borrowings on line of credit (Note 9)
140
Accounts payable
271
222
Accrued liabilities (Note 8)
510
490
Total current liabilities
1,223
1,939
Long-term debt (Note 9)
6,153
5,419
Deferred tax liabilities
17
43
Deferred pension and other postretirement benefits (Note 7)
515
527
Other liabilities
275
Total liabilities
8,305
8,203
Commitments and contingencies (Note 11)
Equity:
Common shares: $1.25 par value; authorized 1,360 million shares; issued and outstanding: 744,905 thousand shares at June 30, 2019 and 746,391 thousand shares at December 31, 2018
931
933
Other capital
8,130
8,172
Retained earnings
418
1,093
Accumulated other comprehensive loss (Note 12)
(755
(1,152
Total equity
8,724
9,046
Total liabilities and equity
Cash flows from operations:
Noncash charges to earnings (loss):
Depreciation, depletion and amortization
247
239
Basis of real estate sold
81
34
Deferred income taxes, net
(166
Pension and other postretirement benefits (Note 7)
496
55
Share-based compensation expense
18
Change in:
Receivables, less allowances
(87
(101
Receivables and payables for taxes
(25
Inventories
(32
(36
Prepaid expenses
Accounts payable and accrued liabilities
45
(70
Pension and postretirement benefit contributions and payments
(27
Other
(8
Net cash from operations
733
Cash flows from investing activities:
Capital expenditures for property and equipment
(112
(144
Capital expenditures for timberlands reforestation
(34
Proceeds from note receivable held by variable interest entities (Note 6)
19
Net cash from (used in) investing activities
129
(149
Cash flows from financing activities:
Cash dividends on common shares
(507
(485
Net proceeds from issuance of long-term debt (Note 9)
739
Payments on long-term debt (Note 9)
(512
(62
Proceeds from borrowings on line of credit (Note 9)
385
Payments on line of credit (Note 9)
(670
Proceeds from exercise of stock options
48
Repurchases of common shares (Note 4)
(60
(12
Net cash used in financing activities
(633
Net change in cash and cash equivalents
(122
77
Cash and cash equivalents at beginning of period
824
Cash and cash equivalents at end of period
901
Cash paid during the period for:
Interest, net of amount capitalized of $2 and $6
187
172
Income taxes
51
58
Common shares:
Balance at beginning of period
946
944
Issued for exercised stock options and vested restricted stock units
(3
Balance at end of period
947
Other Capital:
8,121
8,466
8,439
Issued for exercise of stock options
22
(57
Shared-based compensation
9
Other transactions, net
(5
(7
8,496
Retained Earnings:
543
1,365
1,078
Dividends on common shares
(253
(243
Adjustments related to accounting pronouncements and other
262
1,441
Accumulated other comprehensive loss:
(794
(1,786
(1,562
Other comprehensive income (loss)
(262
Balance at end of period (Note 12)
(1,603
Total equity:
9,281
Dividends paid per common share
0.34
0.32
0.68
0.64
NOTE 1:
BASIS OF PRESENTATION
NOTE 2:
BUSINESS SEGMENTS
NOTE 3:
REVENUE RECOGNITION
8
NOTE 4:
NET EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES
NOTE 5:
INVENTORIES
NOTE 6:
VARIABLE INTEREST ENTITIES
10
NOTE 7:
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
NOTE 8:
ACCRUED LIABILITIES
NOTE 9:
LONG-TERM DEBT AND LINE OF CREDIT
NOTE 10:
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 11:
LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
NOTE 12:
ACCUMULATED OTHER COMPREHENSIVE LOSS
12
NOTE 13:
SHARE-BASED COMPENSATION
NOTE 14:
LEASES
NOTE 15:
OTHER OPERATING COSTS, NET
14
NOTE 16:
INCOME TAXES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS and YEARS-TO-DATE ENDED JUNE 30, 2019 AND 2018
NOTE 1: BASIS OF PRESENTATION
Our consolidated financial statements provide an overall view of our results of operations and financial condition. They include our accounts and the accounts of entities we control, including:
●
majority-owned domestic and foreign subsidiaries and
variable interest entities in which we are the primary beneficiary.
They do not include our intercompany transactions and accounts, which are eliminated.
Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we,” “the company” and “our” refer to the consolidated company.
The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain information and footnote disclosures normally included in our annual Consolidated Financial Statements have been condensed or omitted. These quarterly Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018. Results of operations for interim periods should not necessarily be regarded as indicative of the results that may be expected for the full year.
NOTE 2: BUSINESS SEGMENTS
We are principally engaged in growing and harvesting timber; manufacturing, distributing, and selling products made from trees; maximizing the value of every acre we own through the sale of higher and better use (HBU) properties; and monetizing reserves of minerals, oil, gas, coal, and other natural resources on our timberlands. Our business segments are categorized based primarily on products and services which includes:
Timberlands – logs, timber and leased recreational access;
Real Estate & ENR – sales of HBU properties, rights to explore for and extract hard minerals, construction materials, oil and gas production, wind, solar and coal; and
Wood Products – softwood lumber, engineered wood products, structural panels, medium density fiberboard and building materials distribution.
A reconciliation of our business segment information to the respective information in the Consolidated Statement of Operations is as follows:
Sales to unaffiliated customers:
Timberlands(1)
401
832
966
Real Estate & ENR
109
Wood Products(1)
1,210
1,531
2,304
2,855
Intersegment sales:
131
139
256
281
Total sales
1,823
2,204
3,591
4,211
Intersegment eliminations(1)
(131
(139
(256
(281
Total
Net contribution to earnings (loss):
Timberlands
102
161
350
35
90
Wood Products
329
150
599
218
512
462
996
Unallocated items(2)
(38
(566
(130
Net contribution to earnings (loss)
182
474
(104
866
(1)
In January 2019, we changed the way we report our Canadian Forestlands operations, which are primarily operated to supply Weyerhaeuser’s Canadian Wood Products manufacturing facilities. As a result, we no longer report related intersegment sales in the Timberlands segment and we will now record the minimal associated third-party log sales in the Wood Products segment. These collective transactions did not contribute any earnings to the Timberlands segment. We have conformed prior year presentations with the current year.
(2)
Unallocated items are gains or charges not related to, or allocated to, an individual operating segment. They include all or a portion of items such as share-based compensation, pension and postretirement costs, elimination of intersegment profit in inventory and LIFO, foreign exchange transaction gains and losses, interest income and other as well as legacy obligations.
NOTE 3: REVENUE RECOGNITION
A reconciliation of revenue recognized by our major products:
Net sales to unaffiliated customers:
Timberlands Segment
Delivered logs(1):
West
Domestic sales
104
205
273
Export grade sales
126
194
255
Subtotal West
399
528
South
156
315
North
20
Subtotal delivered logs sales
367
440
760
888
Stumpage and pay-as-cut timber
26
Recreational and other lease revenue
Other(2)
24
Net sales attributable to Timberlands segment
Real Estate & ENR Segment
Real estate
59
38
155
72
Energy and natural resources
44
Net sales attributable to Real Estate & ENR segment
Wood Products Segment
Structural lumber
495
939
1,250
Oriented strand board
277
316
509
Engineered solid section
250
268
Engineered I-joists
86
92
170
Softwood plywood
88
105
Medium density fiberboard
83
Complementary building products
160
304
297
Other(3)
168
166
Net sales attributable to Wood Products segment
Total net sales
In January 2019, we changed the way we report our Canadian Forestlands operations. We no longer report intersegment sales related to these operations in the Timberlands segment and now record the minimal associated third-party log sales within the Wood Products segment. Refer to Note 2: Business Segments for additional details.
Other Timberlands sales include seeds and seedlings from our nursery operations and chips.
(3)
Other Wood Products sales include chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.
NOTE 4: NET EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES
Our basic and diluted earnings (loss) per share were:
$0.17 during second quarter 2019 and $(0.22) during year-to-date 2019;
$0.42 during second quarter 2018 and $0.77 during year-to-date 2018.
Basic earnings (loss) per share is net earnings (loss) divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued. Diluted earnings (loss) per share is net earnings (loss) divided by the sum of the weighted average number of our outstanding common shares and the effect of our outstanding dilutive potential common shares.
SHARES IN THOUSANDS
Weighted average common shares outstanding – basic
Dilutive potential common shares:
Stock options
354
1,628
1,655
Restricted stock units
540
Performance share units
564
480
Total effect of outstanding dilutive potential common shares
746
2,704
2,675
Weighted average common shares outstanding – dilutive
We use the treasury stock method to calculate the dilutive effect of our outstanding stock options, restricted stock units and performance share units. Share-based payment awards that are contingently issuable upon the achievement of specified performance or market conditions are included in our diluted earnings per share calculation in the period in which the conditions are satisfied.
Potential Shares Not Included in the Computation of Diluted Earnings (Loss) per Share
The following shares were not included in the computation of diluted earnings per share because they were either antidilutive or the required performance or market conditions were not met. Some or all of these shares may be dilutive potential common shares in future periods.
2,490
2,848
359
999
486
1,074
Share Repurchase Program
On February 7, 2019, our board of directors approved and announced a new share repurchase program (the 2019 Repurchase Program) under which we are authorized to repurchase up to $500 million of outstanding shares. Concurrently, the board terminated the remaining repurchase authorization under the share repurchase program approved by the board in November 2015.
During year-to-date 2019, we repurchased over 2.3 million common shares for approximately $60 million under the 2019 Repurchase Program. As of June 30, 2019, we had remaining authorization of approximately $440 million for future share repurchases.
All common share purchases under the share repurchase program are expected to be made in open-market transactions. We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability for repurchases that have not yet been settled as of period end. There were no unsettled repurchases as of June 30, 2019 or December 31, 2018.
NOTE 5: INVENTORIES
Inventories include raw materials, work-in-process, finished goods, as well as materials and supplies.
LIFO inventories:
Logs
Lumber, plywood, panels and fiberboard
75
Other products
FIFO or moving average cost inventories:
Lumber, plywood, panels, fiberboard and engineered wood products
101
Materials and supplies
99
89
LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. locations. The FIFO – the first-in, first-out method – or moving average cost methods apply to the balance of our U.S. raw material and product inventories, all material and supply inventories and all foreign inventories. If we used FIFO for all LIFO inventories, our stated inventories would have been higher by $79 as of June 30, 2019, and December 31, 2018.
NOTE 6: VARIABLE INTEREST ENTITIES
From 2002 through 2004, we sold certain nonstrategic timberlands. As a result of these sales, buyer-sponsored and monetization variable interest entities, or special purpose entities (SPEs), were formed. We are the primary beneficiary and consolidate the assets and liabilities of the SPEs involved in these transactions.
The assets of the buyer-sponsored SPEs are financial investments which consist of bank guarantees. These bank guarantees are in turn backed by bank notes, which are the liabilities of the monetization SPEs. Interest earned from the financial investments within the buyer-sponsored SPEs is used to pay interest accrued on the corresponding monetization SPE’s note.
During first quarter 2019, we received $253 million in proceeds related to our buyer-sponsored SPEs at maturity.
During fourth quarter 2018, we paid $209 million related to liabilities from our monetized SPEs at maturity.
The financial investment related to our remaining buyer-sponsored SPE is $362 million, which is scheduled to mature in first quarter 2020. We have classified this in current assets on our Consolidated Balance Sheet. The note related to our remaining monetization SPE is $302 million and is scheduled to mature in third quarter of 2019. We have classified this in current liabilities on our Consolidated Balance Sheet.
NOTE 7: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of net periodic benefit cost are:
PENSION
Service cost
Interest cost
40
119
Expected return on plan assets
(54
(100
(116
(200
Amortization of actuarial loss
52
113
Amortization of prior service cost
Settlement charge
(6
449
Total net periodic benefit cost - pension
492
OTHER POSTRETIREMENT BENEFITS
Amortization of prior service credit
(2
(4
Total net periodic benefit cost - other postretirement benefits
For the periods presented, service cost is included in “Costs of sales,” “Selling expenses,” and “General and administrative expenses” with the remaining components included in “Non-operating pension and other postretirement benefit costs” in our Consolidated Statement of Operations.
Actions to Reduce Pension Plan Obligations
As part of our continued efforts to reduce pension plan obligations, we transferred approximately $1.5 billion of U.S. qualified pension plan assets and liabilities to an insurance company through the purchase of a group annuity contract in January 2019. In connection with this transaction, we recorded a noncash pretax preliminary settlement charge of $455 million during first quarter 2019, accelerating the recognition of previously unrecognized losses in “Accumulated other comprehensive loss”, that would have otherwise been recorded in subsequent periods. In the second quarter, we finalized the prior year-end fair value of pension plan assets and obligations, which reduced the settlement charge by $6 million for a final settlement charge of $449 million. Refer to “Fair Value of Pension Plan Assets and Obligations” below.
The settlement triggered a remeasurement of plan assets and liabilities. We updated the discount rate used to measure our projected benefit obligation for the U.S. qualified pension plan as of January 31, 2019 and to calculate the related net periodic benefit cost for the remainder of 2019 to 4.30 percent from 4.40 percent as of December 31, 2018. All other assumptions remain unchanged. The net effect of the remeasurement was a $24 million reduction in funded status, primarily driven by the decrease in discount rate. This change in funded status was reflected in our first quarter 2019 Consolidated Balance Sheet.
Fair Value of Pension Plan Assets and Obligations
We estimate the fair value of pension plan assets based upon the information available during the year end reporting process. In some cases, primarily with regard to private equity funds, the information available consists of net asset values as of an interim date in addition to cash flows between the interim date and the end of the year and market events. We update the year end estimated fair value of pension plan assets to incorporate year end net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K.
During second quarter 2019, we recorded an increase to the beginning of year fair value of the pension assets of $16 million, or less than 1 percent. We also updated our census data that is used to estimate our beginning of the year projected benefit obligation for our pension plans, which resulted in a projected benefit obligation decrease of $6 million, or less than 1 percent. The net effect of these updates was a $22 million improvement in funded status as of December 31, 2018. This change in funded status was reflected in our second quarter 2019 Consolidated Balance Sheet.
Expected Funding and Benefit Payments
We do not anticipate being required to make a contribution to our U.S. qualified pension plan for 2019. For all other U.S. and Canadian pension and postretirement plans we expect to contribute or make benefit payments of approximately $40 million in 2019.
NOTE 8: ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
Compensation and employee benefit costs
192
Current portion of lease liabilities (Note 14)
Customer rebates, volume discounts and deferred income
116
Interest
Taxes payable
32
74
60
NOTE 9: LONG-TERM DEBT AND LINE OF CREDIT
In February 2019, we issued $750 million of 4.00 percent notes due in November 2029. The net proceeds after deducting the discount, underwriting fees and issuance costs were $739 million. In March 2019, a portion of the net proceeds were used to redeem our $500 million 7.38 percent note due in October 2019. A pretax charge of $12 million was included in "Interest expense, net of capitalized interest" in the Consolidated Statement of Operations in first quarter 2019, for make-whole premiums, unamortized debt issuance costs and unamortized debt discounts in connection with the early extinguishment of the $500 million note.
As of June 30, 2019 and December 31, 2018, we had $140 million and $425 million, respectively, of outstanding borrowings on our $1.5 billion five-year senior unsecured revolving credit facility. This credit facility expires in March 2022.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt and line of credit consisted of the following:
CARRYING
VALUE
FAIR VALUE
(LEVEL 2)
Long-term debt (including current maturities) and line of credit(1):
Fixed rate
5,928
6,995
5,694
6,345
Variable rate
365
650
Total debt
6,293
7,360
6,344
Excludes nonrecourse debt held by our Variable Interest Entities (VIEs).
To estimate the fair value of fixed rate long-term debt we used the market approach, which is based on quoted market prices we received for the same types and issues of our debt.
We believe that our variable rate long-term debt and line of credit instruments have net carrying values that approximate their fair values with only insignificant differences.
The inputs to these valuations are based on market data obtained from independent sources or information derived principally from observable market data. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at the measurement date.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
We believe that our other financial instruments, including cash and cash equivalents, short-term investments, mutual fund investments held in grantor trusts, receivables, and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments and the allowance for doubtful accounts.
NOTE 11: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceeding that management believes could have a material adverse effect on our Consolidated Balance Sheet, Consolidated Statement of Operations, or Consolidated Statement of Cash Flows.
Environmental Matters
Site Remediation
Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) – commonly known as the Superfund – and similar state laws, we:
are a party to various proceedings related to the cleanup of hazardous waste sites and
have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated.
As of June 30, 2019, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are potentially responsible was approximately $61 million. These amounts are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.
Asset Retirement Obligations
We have obligations associated with the future retirement of tangible long-lived assets consisting primarily of reforestation obligations related to forest management licenses in Canada and obligations to close and cap landfills. As of June 30, 2019, our accrued balance for these obligations was $32 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.
Some of our sites have materials containing asbestos. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when materials containing asbestos might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.
NOTE 12: ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in amounts included in our accumulated other comprehensive loss by component are:
PENSION(1)
(1,000
(2,002
(1,343
(1,810
Other comprehensive income (loss) before reclassifications
(14
Amounts reclassified from accumulated other comprehensive loss to earnings(2)
41
87
371
Reclassification of certain effects due to tax law changes(3)
(246
(972
(1,803
OTHER POSTRETIREMENT BENEFITS(1)
(18
(33
(19
Amounts reclassified from other comprehensive income (loss) to earnings(2)
Total other comprehensive income (loss)
TRANSLATION ADJUSTMENTS AND OTHER
224
249
210
Translation adjustments
Reclassification of accumulated unrealized gains on available-for-sale securities(4)
(9
235
233
Accumulated other comprehensive loss, end of period
Amounts presented are net of tax.
Amounts of actuarial loss and prior service (cost) credit are components of net periodic benefit cost (credit). See Note 7: Pension and Other Postretirement Benefit Plans.
We reclassified certain tax effects from tax law changes of $253 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet in accordance with ASU 2018-02 which we adopted in 2018.
(4)
We reclassified accumulated unrealized gains from available-for-sale securities of $9 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet in accordance with ASU 2016-01 which we adopted in 2018.
NOTE 13: SHARE-BASED COMPENSATION
Share-based compensation activity during year-to-date 2019 included the following:
GRANTED
VESTED
Restricted Stock Units (RSUs)
952
630
Performance Share Units (PSUs)
421
153
A total of 863 thousand shares of common stock were issued as a result of RSU vestings, PSU vestings and stock option exercises.
Restricted Stock Units
The weighted average fair value of the RSUs granted in 2019 was $25.75. The vesting provisions for RSUs granted in 2019 were consistent with prior year grants.
Performance Share Units
The weighted average grant date fair value of PSUs granted in 2019 was $29.66. The final number of shares granted in 2019 will range from 0 percent to 150 percent of each grant's target, depending upon actual company performance compared against the S&P 500 as well as an industry peer group. These measures are consistent with those utilized in prior year grants. The vesting provisions for PSUs granted in 2019 were consistent with prior year grants.
Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2019
PERFORMANCE SHARE UNITS
Performance period
1/1/2019 – 12/31/2021
Valuation date average stock price(1)
$25.83
Expected dividends
5.25%
Risk-free rate
2.43% – 2.55%
Expected volatility
22.50% – 27.40%
Calculated as an average of the high and low prices on grant date.
NOTE 14: LEASES
We account for leases in accordance with ASC Topic 842, Leases, which we adopted on January 1, 2019, using the modified retrospective transition approach at the beginning of the adoption period through a cumulative-effect adjustment to retained earnings. This adoption resulted in the recognition of right-of-use assets ("ROU assets") of $165 million and lease liabilities of $172 million, with the difference of $7 million recorded to "Retained earnings", on our Consolidated Balance Sheet on January 1, 2019.
The majority of our operating leases are related to our office and warehouse space, and the majority of our financing leases are related to vehicles and forklifts. Our leases have remaining lease terms of approximately 1 year to 25 years. Options to renew, extend or terminate a lease are reflected in our lease terms when we believe it is reasonably certain we will exercise that option. When our leases do not provide an implicit or an explicit interest rate, we use our incremental borrowing rate in determining the present value of lease payments.
Lease expense:
Operating lease costs
Financing lease costs(1)
Total lease costs
Supplemental cash flow information:
YEAR-TO-DATE
ENDED
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
Financing cash flow for financing leases(1)
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
Financing leases
Interest expense related to financing leases was immaterial during second quarter 2019 and year-to-date 2019.
Supplemental balance sheet information related to leases was as follows:
BALANCE SHEET CLASSIFICATION
Assets
Operating lease right-of-use assets
Financing lease right-of-use assets
Property and equipment, less accumulated depreciation
Total leased assets
159
Liabilities
Current:
Operating lease liabilities
Accrued liabilities
Financing lease liabilities
Noncurrent:
114
Total lease liabilities
Weighted average remaining lease term as of June 30, 2019:
11 years
3 years
Weighted average discount rate as of June 30, 2019:
4.2
%
3.0
Maturities of lease liabilities as of June 30, 2019
OPERATING
FINANCING
2019
2020
2021
2022
2023
Thereafter
Total lease payments
Less: interest
Total present value of lease liabilities
Our operating lease commitments as of December 31, 2018 were:
78
NOTE 15: OTHER OPERATING COSTS, NET
Other operating costs, net:
includes both recurring and occasional income and expense items and
can fluctuate from year to year.
Items Included in Other Operating Costs, Net
Charges for product remediation
Foreign exchange losses (gains), net
Litigation expense, net
Other, net
Total other operating costs, net
NOTE 16: INCOME TAXES
As a REIT, we generally are not subject to federal corporate income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our wholly-owned TRSs, which includes our Wood Products segment earnings and portions of our Timberlands and Real Estate & ENR segments' earnings.
The quarterly provision for income taxes is based on our current estimate of the annual effective tax rate and is adjusted for discrete taxable events that may occur during the quarter. Our 2019 estimated annual effective tax rate for our TRSs, excluding discrete items, is a 37.6 percent benefit. The estimated annual effective tax rate is a benefit due to a projected pretax loss at our TRSs and varies from the U.S. federal statutory tax rate of 21 percent, primarily due to state income tax benefits related to unitary state filings.
In 2019, we recorded as a discrete item a benefit of $109 million related to the tax effects of the noncash pretax settlement charge recorded in connection with our U.S. pension plan. Refer to Note 7: Pension and Other Postretirement Benefit Plans for additional details.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains statements concerning our future results and performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report. These forward-looking statements generally are identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” and expressions such as “will be,” “will continue,” “will likely result,” and similar words and expressions. Forward-looking statements are based on our current expectations and assumptions and are not guarantees of future performance. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from the content of these forward-looking statements. These risks and uncertainties include, but are not limited to:
the effect of general economic conditions, including employment rates, interest rate levels, housing starts, general availability of financing for home mortgages and the relative strength of the U.S. dollar;
market demand for the company's products, including market demand for our timberland properties with higher and better uses, which is related to, among other factors, the strength of the various U.S. business segments and U.S. and international economic conditions;
changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Japanese yen, the Chinese yuan, and the Canadian dollar, and the relative value of the euro to the yen;
restrictions on international trade and tariffs imposed on imports or exports;
the availability and cost of shipping and transportation;
economic activity in Asia, especially Japan and China;
performance of our manufacturing operations, including maintenance and capital requirements;
potential disruptions in our manufacturing operations;
the level of competition from domestic and foreign producers;
our operational excellence initiatives;
the successful and timely execution and integration of our strategic acquisitions, including our ability to realize expected benefits and synergies, and the successful and timely execution of our strategic divestitures, each of which is subject to a number of risks and conditions beyond our control including, but not limited to, timing and required regulatory approvals;
raw material availability and prices;
the effect of weather;
changes in global or regional climate conditions and governmental response to such changes;
the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters;
energy prices;
transportation and labor availability and costs;
federal tax policies;
the effect of forestry, land use, environmental and other governmental regulations;
legal proceedings;
performance of pension fund investments and related derivatives;
the effect of timing of employee retirements and changes in the market price of our common stock on charges for share-based compensation;
the accuracy of our estimates of costs and expenses related to contingent liabilities;
changes in accounting principles; and
other risks and uncertainties identified in our 2018 Annual Report on Form 10-K, which are incorporated herein by reference, as well as those set forth from time to time in our other public statements and other reports and filings with the SEC.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise.
RESULTS OF OPERATIONS
In reviewing our results of operations, it is important to understand these terms:
Sales realizations for Timberlands and Wood Products refer to net selling prices. This includes selling price plus freight, minus normal sales deductions. Real Estate transactions are presented at the contract sales price before commissions and closing costs, net of any credits.
Net contribution to earnings does not include interest expense or income taxes.
ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS
The demand for grade logs within our Timberlands segment is directly affected by production levels of domestic wood-based building products. The strength of the U.S. housing market strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Our Timberlands segment, specifically the Western region, is also affected by export demand and trade policy. Japanese housing starts are a key driver of export log demand in Japan. The demand for pulpwood from our Timberlands segment is directly affected by the production of pulp, paper and OSB as well as the demand for biofuels, such as pellets made from pulpwood.
In second quarter 2019, housing starts averaged approximately 1.26 million total units on a seasonally adjusted annual basis according to the U.S Census Bureau. This was a 5 percent gain over first quarter 2019. Multifamily units increased to 406 thousand on a seasonally adjusted annual basis, an improvement of 20 percent from first quarter 2019 and 15 percent over the same period in 2018. Single family units accounted for 67 percent of total housing starts in second quarter 2019 and averaged 842 thousand on a seasonally adjusted annual basis, which was 3 percent lower than first quarter 2019 and 6 percent lower than second quarter 2018. Severe weather in second quarter 2019 was a contributing factor to the decline in starts compared with second quarter 2018. As weather moderates, we continue to expect full year U.S. housing starts to increase slightly over 2018. We attribute this continued improvement primarily to ongoing employment growth, strong consumer confidence and mortgage rates, which have declined significantly since peaking in late 2018 and remain affordable on a historic basis.
According to the Joint Center for Housing of Harvard University, the Leading Indicator of Remodeling Activity (LIRA) projects that the year-over-year change in residential remodeling expenditures was an average increase of 7.2 percent during 2018 and an expected average increase of 5.8 percent during 2019.
In U.S. wood product markets, second quarter 2019 prices for most products retreated from first quarter 2019. The price of the framing lumber composite averaged $344/MBF in second quarter 2019, a 3 percent decline from first quarter 2019. Douglas fir lumber was an exception with prices for certain products increasing during second quarter 2019, such as Douglas fir 2X4 green lumber which increased 9 percent. Oriented Strand Board price slipped 12 percent to $187/MSF for the North Central 7/16 inch indicator. According to Forest Economic Advisors, LLC, U.S. lumber consumption is expected to rise 3 percent in the second half of 2019 versus the same period in 2018.
Domestic log markets in the west improved modestly, rising 2 percent over first quarter 2019 for Douglas fir sawlogs and was directionally consistent with the rise in lumber prices. In the South, weather was closer to seasonal norms and delivered sawlogs posted a small increase of 1 percent over first quarter 2019.
The quarterly average export prices posted small declines over first quarter 2019 pricing, falling 2 percent for China logs and 5 percent for Japan grade logs. Log inventories in Chinese ports increased 1.5 percent in June 2019 compared to May 2019 as reported by International Wood Markets China Bulletin. Despite this overall increase, there was a decline in North American Hemlock and Douglas fir volumes which were 13.7 percent below May levels in the month of June. Exchange rates also affect our export business to China. A weaker yuan relative to the U.S. dollar reduces the competitiveness of U.S. logs relative to those imported from other countries whose currencies have not appreciated in a similar manner. In second quarter 2019 the yuan continued to decrease slightly relative to the U.S. dollar, falling from 6.75 yuan per U.S. dollar in first quarter 2019 to 6.82 yuan per US dollar in second quarter 2019.
In Japan, total housing starts for April and May 2019 are down 5.7 percent and 8.7 percent, respectively, compared to the same months in 2018. However, in the key Post and Beam segment, starts were flat overall, rising 2.8 percent in April to fall back a similar 3.1 percent in May compared to April and May 2018.
We expect demand from China and Japan in 2019 to be similar to 2018 levels.
Our Real Estate & ENR segment is affected by the health of the U.S. economy and especially the U.S. housing sector of the economy. According to the Realtors Land Institute (RLI) of the National Association of Realtors (NAR), the dollar volume of rural properties sold, including timber, grew 2 percent in 2018, and per acre prices were also up 2 percent on average. Additionally, RLI expects these trends to continue with prices and volumes of land transactions forecast to rise 3 percent in 2019.
CONSOLIDATED RESULTS
How We Did Second Quarter 2019 and Year-to-Date 2019
AMOUNT OF
CHANGE
2019 VS.
2018
Net sales
(373
(595
(83
(290
(520
(189
(747
Earnings (loss) per share, basic and diluted
(0.25
(0.99
Comparing Second Quarter 2019 with Second Quarter 2018
Net sales decreased $373 million – 18 percent – primarily due to:
a $321 million decrease in Wood Products sales to unaffiliated customers, primarily attributable to decreased sales realizations across the majority of our product lines and
a $75 million decrease in Timberlands sales to unaffiliated customers, primarily attributable to decreased sales realizations and volumes in the West.
These decreases were partially offset by a $23 million increase in Real Estate & ENR net sales to unaffiliated customers, which was primarily attributable to increased acres sold.
Costs of sales decreased $57 million – 4 percent – primarily due to decreased sales volumes within our Wood Products and Timberlands segments, partially offset by an increase in acres sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Timberlands, Real Estate, Energy and Natural Resources and Wood Products discussions below.
Operating income decreased $290 million – 61 percent – primarily due to a $316 million decrease in consolidated gross margin, as described above. This was partially offset by a $24 million decrease in other operating costs, primarily attributable to a $20 million product remediation charge recorded in second quarter 2018 with no similar charge in the second quarter 2019.
Net earnings
Net earnings decreased $189 million – 60 percent – primarily due to a $290 million decrease in operating income, as described above. This was partially offset by a $102 million change in income taxes resulting from a $37 million income tax benefit in second quarter 2019 compared to a $65 million income tax charge in second quarter 2018 (refer to Income Taxes).
Comparing Year-to-Date 2019 with Year-to-Date 2018
Net sales decreased $595 million – 15 percent – primarily due to:
a $551 million decrease in Wood Products sales to unaffiliated customers, primarily attributable to decreased sales realizations as well as decreased sales volumes across the majority of our product lines and
a $134 million decrease in Timberlands sales to unaffiliated customers, primarily attributable to decreased sales realizations and volumes in the West.
These decreases were partially offset by a $90 million increase in Real Estate & ENR net sales to unaffiliated customers, which was primarily attributable to increased acres sold.
Costs of sales decreased $83 million – 3 percent – primarily due to decreased sales volumes within our Wood Products and Timberlands segments, partially offset by an increase in acres sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Timberlands, Real Estate, Energy and Natural Resources and Wood Products discussions below.
Operating income decreased $520 million – 59 percent – primarily due to a $512 million decrease in consolidated gross margin, as described above.
Net earnings decreased $747 million – 127 percent – primarily due to:
a $520 million decrease in operating income, as discussed above;
a $449 million increase in non-operating pension and other postretirement benefit costs related to the pension settlement charge (refer to Note 7: Pension and Other Postretirement Benefit Plans) and
a $13 million increase in interest expense (refer to Interest Expense).
This was partially offset by a $236 million change in income taxes resulting from a $141 million income tax benefit for year-to-date 2019 compared to a $95 million income tax charge for year-to-date 2018 (refer to Income Taxes).
TIMBERLANDS
Delivered logs:
(68
(129
(73
(128
Other(1)
Subtotal net sales to unaffiliated customers
(75
(134
Intersegment sales
532
615
1,088
1,247
(159
405
431
(26
818
853
(35
Operating income and Net contribution to earnings
(59
Other Timberlands sales includes seeds and seedlings from our nursery operations and chips.
Net sales to unaffiliated customers
Net sales to unaffiliated customers decreased $75 million – 16 percent – primarily due to a $68 million decrease in Western log sales, attributable to a 21 percent decrease in log prices as well as a 6 percent decrease in sales volumes.
Intersegment sales decreased $8 million – 6 percent – primarily due to a decrease in Western log prices, as discussed above.
Costs of sales decreased $26 million – 6 percent – primarily due to a decrease in Western log sales volumes, as discussed above, as well as a decrease in sales volumes in the South and North.
Operating income and net contribution to earnings decreased $59 million – 37 percent – primarily due to the change in gross margin, as discussed above.
Net sales to unaffiliated customers decreased $134 million – 14 percent – primarily due to a $129 million decrease in Western log sales, attributable to a 20 percent decrease in log prices as well as a 5 percent decrease in sales volumes.
Intersegment sales decreased $25 million – 9 percent – primarily due to a decrease in Western log prices, as discussed above.
Costs of sales decreased $35 million – 4 percent – primarily due to a decrease in Western log sales volumes, as discussed above, as well as a decrease in sales volumes in the South.
Operating income and net contribution to earnings decreased $128 million – 37 percent – primarily due to the change in gross margin, as discussed above.
Third-Party Log Sales Volumes and Fee Harvest Volumes
VOLUMES IN THOUSANDS
Third party log sales – tons:
West(1)
1,864
1,984
(120
3,784
4,003
(219
4,400
4,560
(160
8,899
9,070
(171
263
313
(50
757
717
6,527
6,857
(330
13,440
13,790
(350
Fee harvest volumes – tons:
2,455
2,360
95
4,840
4,803
6,367
6,630
(263
12,859
13,381
(522
378
423
(45
1,005
972
9,200
9,413
(213
18,704
19,156
(452
Western logs are primarily transacted in thousand board feet (MBF) but are converted to ton equivalents for external reporting purposes.
REAL ESTATE, ENERGY AND NATURAL RESOURCES
Net sales:
Net contribution to earnings
The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability to obtain entitlements, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding. In any period, the average sales price per acre will vary based on the location and physical characteristics of parcels sold.
Net sales increased $23 million – 40 percent – primarily due to increased acres sold, partially offset by decreased average price per acre.
Costs of sales increased $9 million – 30 percent – primarily due to increased acres sold, as discussed above.
Net contribution to earnings increased $13 million – 59 percent – primarily due to the increase in gross margin, as discussed above.
Net sales increased $90 million – 83 percent – primarily due to increased acres sold, partially offset by a slight decrease in average price per acre.
Costs of sales increased $46 million – 94 percent – primarily due to increased acres sold, as discussed above.
Net contribution to earnings increased $43 million – 91 percent – primarily due to increased gross margin, as discussed above.
REAL ESTATE SALES STATISTICS
Acres sold
47,031
16,290
30,741
85,865
38,061
47,804
Average price per acre
1,063
2,258
(1,195
1,678
1,847
(169
WOOD PRODUCTS
(186
(311
(121
(193
(11
(17
Other products produced(1)
(321
(551
1,070
1,125
(55
2,037
2,145
(108
(248
(449
Other products produced includes sales of chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.
Net sales decreased $321 million – 21 percent – primarily due to:
a $186 million decrease in structural lumber sales attributable to a 28 percent decrease in realizations, partially offset by a 1 percent increase in sales volumes;
a $121 million decrease in oriented strand board sales attributable to a 42 percent decrease in realizations, as well as a 3 percent decrease in sales volumes;
an $11 million decrease in softwood plywood sales attributable to an 18 percent decrease in realizations, as well as a 3 percent decrease in sales volumes;
a $6 million decrease in engineered I-joists sales attributable to a 9 percent decrease in sales volumes, partially offset by a 2 percent increase in realizations and
a $5 million decrease in engineered solid section sales attributable to a 5 percent decrease in sales volumes, partially offset by a 3 percent increase in realizations.
These decreases were partially offset by a $7 million increase in sales for complementary building products.
Costs of sales decreased $55 million – 5 percent – primarily due to lower sales volumes across most product lines, as discussed above.
Operating income and net contribution to earnings decreased $248 million – 75 percent – primarily due to the change in gross margin, as discussed above.
Net sales decreased $551 million – 19 percent – primarily due to:
a $311 million decrease in structural lumber sales primarily attributable to a 25 percent decrease in realizations;
a $193 million decrease in oriented strand board sales attributable to a 36 percent decrease in realizations as well as a 3 percent decrease in sales volumes;
an $18 million decrease in engineered solid section sales attributable to a 10 percent decrease in sales volumes, partially offset by a 4 percent increase in realizations;
a $17 million decrease in softwood plywood sales attributable to a 15 percent decrease in realizations as well as a 1 percent decrease in sales volumes;
a $14 million decrease in engineered I-joists sales attributable to a 12 percent decrease in sales volumes, partially offset by a 5 percent increase in realizations and
a $7 million decrease in medium density fiberboard sales attributable to a 7 percent decrease in sales volumes.
Costs of sales decreased $108 million – 5 percent – primarily due to lower sales volumes across most product lines, as discussed above.
Operating income and net contribution to earnings decreased $449 million – 75 percent – primarily due to the change in gross margin, as discussed above.
Third-Party Sales Volumes
VOLUMES IN MILLIONS(1)
Structural lumber – board feet
1,274
1,261
2,407
2,401
Oriented strand board – square feet (3/8”)
754
(21
1,450
1,493
(43
Engineered solid section – cubic feet
6.1
6.4
(0.3
11.3
12.6
(1.3
Engineered I-joists – lineal feet
57
93
106
Softwood plywood – square feet (3/8”)
115
118
230
Medium density fiberboard – square feet (3/4”)
Sales volumes include sales of internally produced products and products purchased for resale primarily through our distribution business.
PRODUCTION AND OUTSIDE PURCHASE VOLUMES
Outside purchase volumes are primarily purchased for resale through our distribution business. Production volumes are produced for sale through our own sales organizations and through our distribution business. Production of oriented strand board and engineered solid section are also used to manufacture engineered I-joists.
VOLUMES IN MILLIONS
Structural lumber – board feet:
Production
1,193
1,180
2,338
2,340
Outside purchase
96
1,251
1,229
2,451
2,436
Oriented strand board – square feet (3/8”):
736
747
1,465
1,481
110
(22
(41
857
1,634
1,691
Engineered solid section – cubic feet:
6.0
(0.4
11.9
12.7
(0.8
0.2
0.1
1.1
(0.9
6.2
6.5
12.1
13.8
(1.7
Engineered I-joists – lineal feet:
108
50
56
Softwood plywood – square feet (3/8”):
202
123
125
237
242
Medium density fiberboard – square feet (3/4"):
61
107
UNALLOCATED ITEMS
Net Contribution to Earnings – Unallocated Items
Unallocated corporate function and variable compensation expense
Liability classified share-based compensation
Foreign exchange loss
Elimination of intersegment profit in inventory and LIFO
(20
(56
Operating income (loss)
(102
(443
(436
Unallocated Items net contribution to earnings increased $2 million – 5 percent – primarily due to small fluctuations such as, a $7 million decrease in unallocated corporate function and variable compensation expense and an $8 million decrease in elimination of intersegment profit in inventory and LIFO.
Unallocated Items net contribution to earnings decreased $436 million – 335 percent – primarily due to an increase in non-operating pension and other postretirement benefit costs, which is primarily attributable to the $449 million noncash pretax pension settlement charge recorded during year-to-date 2019. The settlement charge is related to the transfer of pension assets and liabilities through the purchase of a group annuity contract (refer to Note 7: Pension and Other Postretirement Benefit Plans for further details).
INTEREST EXPENSE
Our interest expense, net of capitalized interest, was:
$91 million for second quarter 2019 and $198 million year-to-date 2019
$92 million for second quarter 2018 and $185 million year-to-date 2018.
Interest expense decreased by $1 million compared to second quarter 2018 primarily due to the decreased weighted average interest rate on our debt portfolio, partially offset by an increase in average long-term debt principal outstanding (refer to Note 9: Long-Term Debt and Line of Credit for further details).
Interest expense increased by $13 million compared to year-to-date 2018, primarily due to a $12 million charge related to the early extinguishment of debt recorded in first quarter 2019. The remaining change is a result of interest expense related to our line of credit during year-to-date 2019, as there was no related activity in 2018. Refer to Note 9: Long-Term Debt and Line of Credit for further details.
Our provision for income taxes was:
a $37 million benefit for second quarter 2019 and a $141 million benefit year-to-date 2019;
a $65 million expense for second quarter 2018 and a $95 million expense year-to-date 2018.
Our provision for income taxes is primarily driven by earnings (losses) generated by our TRSs. During 2019, a noncash pretax settlement charge of $449 million was recorded related to the transfer of pension assets and liabilities through the purchase of a group annuity contract. As a result of this charge, we recognized a tax provision benefit of approximately $109 million in 2019. Overall performance results for our business segments can be found in Consolidated Results.
Refer to Note 16: Income Taxes and Note 7: Pension and Other Postretirement Benefit Plans for additional information.
LIQUIDITY AND CAPITAL RESOURCES
We are committed to maintaining an appropriate capital structure that provides flexibility and enables us to protect the interests of our shareholders and lenders and maintain access to all major financial markets.
CASH FROM OPERATIONS
Consolidated net cash provided by our operations was:
$382 million for year-to-date 2019 and
$733 million for year-to-date 2018.
Net cash from operations decreased $351 million, primarily due to:
decreased cash flows from our business segments and
cash used in working capital changes.
CASH FROM (USED IN) INVESTING ACTIVITIES
Consolidated net cash used in or provided by investing activities was:
$129 million cash provided by investing activities for year-to-date 2019 and
$149 million cash used in investing activities for year-to-date 2018.
Net cash from investing activities increased $278 million, primarily due to:
$253 million of cash proceeds received related to our buyer-sponsored SPEs during first quarter 2019 and
a $32 million decrease in cash outflow for property and equipment capital expenditures.
Summary of Capital Spending by Business Segment
120
Unallocated Items
143
178
We expect our net capital expenditures for 2019 will be approximately $380 million. The amount we spend on capital expenditures could change.
CASH USED IN FINANCING ACTIVITIES
Consolidated net cash used in financing activities was:
$633 million for year-to-date 2019 and
$507 million for year-to-date 2018.
Net cash used in financing activities increased $126 million, primarily due to:
a $450 million increase in cash used for payments of long-term debt;
a $285 million net cash outflow related to borrowings on our line of credit, with no similar activity during year-to-date 2018;
a $60 million cash outflow for the repurchase of common shares, with no similar activity during year-to-date 2018;
a $44 million decrease in cash received from exercise of stock options and
a $22 million increase in cash used for payment of dividends on common shares.
These increases in cash used were partially offset by $739 million cash proceeds received from the issuance of long-term debt.
Line of Credit
Refer to Note 9: Long-Term Debt and Line of Credit for further information.
Long-Term Debt
In February 2019, we issued $750 million of 4.00 percent notes due in November 2029. The net proceeds after deducting the discount, underwriting fees, and issuance costs were $739 million. In March 2019, a portion of the net proceeds were used to redeem our outstanding $500 million 7.38 percent note due in October 2019. A pretax charge of $12 million was included in "Interest expense, net of capitalized interest" in the Consolidated Statement of Operations in first quarter 2019, for make-whole premiums, unamortized debt issuance costs and unamortized debt discounts in connection with the early extinguishment of debt.
During first quarter 2018, we paid our $62 million 7.00 percent debenture at maturity.
Our 2017 revolving credit agreement and our 2017 term loan agreement utilize the London Inter-bank Offered Rate (LIBOR) as a basis for one of the interest rate options available to the company. We expect that the LIBOR rate will be discontinued at some point during 2021. We expect to work with our lenders to identify a suitable replacement rate and amend our debt agreements to reflect this new reference rate accordingly. We do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense.
Debt Covenants
During year-to-date 2019, there have been no significant changes to the debt covenants presented in our 2018 Annual Report on Form 10-K for our existing long-term debt instruments.
Option Exercises
We received cash proceeds from the exercise of stock options of:
$4 million for year-to-date 2019 and
$48 million for year-to-date 2018.
Our average stock price was $25.30 and $35.94 for year-to-date 2019 and 2018, respectively.
Dividend Payments
We paid cash dividends on common shares of:
$507 million for year-to-date 2019 and
$485 million for year-to-date 2018.
The increase in dividends paid is primarily due to an increase in our dividends from 64 cents per share for year-to-date 2018 to 68 cents per share for year-to-date 2019.
Share Repurchases
During year-to-date 2019, we repurchased over 2.3 million common shares for approximately $60 million under the 2019 Repurchase Program. There were no unsettled repurchases as of June 30, 2019 or December 31, 2018. Refer to Note 4: Net Earnings (Loss) Per Share and Share Repurchases for further information.
PERFORMANCE MEASURES
We use Adjusted Earnings before Interest, Taxes, Depreciation, Depletion and Amortization (Adjusted EBITDA) as a key performance measure to evaluate the performance of the consolidated company and our business segments. This measure should not be considered in isolation from, and is not intended to represent an alternative to, our results reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, we believe Adjusted EBITDA provides meaningful supplemental information for investors about our operating performance, better facilitates period to period comparisons, and is widely used by analysts, lenders, rating agencies and other interested parties.
Our definition of Adjusted EBITDA may be different from similarly titled measures reported by other companies. Adjusted EBITDA, as we define it, is operating income adjusted for depreciation, depletion, amortization, basis of real estate sold, and special items.
Adjusted EBITDA by Segment
Adjusted EBITDA by Segment:
175
240
368
508
(140
71
177
(257
243
671
(428
374
672
(298
788
1,267
(479
(80
(86
Adjusted EBITDA
343
637
(294
708
1,181
(473
We reconcile Adjusted EBITDA by segment to "Net earnings" for the consolidated company and to "Operating income" for the business segments, as those are the most directly comparable U.S. GAAP measures for each. The table below reconciles Adjusted EBITDA for the quarter ended June 30, 2019:
Real Estate &
ENR
Wood
Products
Unallocated
Items
Non-operating pension and other postretirement benefit costs(1)
73
124
Special items included in operating income (loss)
Non-operating pension and other postretirement benefit costs includes a pretax special item consisting of a $6 million benefit from finalizing the noncash settlement charge incurred in first quarter 2019 related to the transfer of pension assets and liabilities through the purchase of a group annuity contract.
The table below reconciles Adjusted EBITDA for the quarter ended June 30, 2018:
65
79
36
Special items included in operating income (loss)(1)
Operating income (loss) includes pretax special items consisting of $25 million of product remediation charges, partially offset by $5 million of insurance recoveries.
The table below reconciles Adjusted EBITDA for the year-to-date period ended June 30, 2019:
Interest expense, net of capitalized interest(1)
198
(141
Non-operating pension and other postretirement benefit costs(2)
146
Special items included in operating income (loss)(3)
Interest expense, net of capitalized interest includes a pretax special item of $12 million related to a charge for the early extinguishment of debt.
Non-operating pension and other postretirement benefit costs includes a pretax special item consisting of a $449 million noncash settlement charge related to the transfer of approximately $1.5 billion of U.S. qualified pension plan assets and liabilities to an insurance company through the purchase of a group annuity contract.
Operating income (loss) includes a pretax special item consisting of a $20 million legal charge.
The table below reconciles Adjusted EBITDA for the year-to-date period ended June 30, 2018:
Real Estate
& ENR
185
(23
Operating income (loss) includes pretax special items consisting of $25 million of product remediation insurance recoveries; $25 million of product remediation charges; and $28 million of environmental remediation expense.
27
CRITICAL ACCOUNTING POLICIES
There have been no significant changes during year-to-date 2019 to the critical accounting policies presented in our 2018 Annual Report on Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
LONG-TERM INDEBTEDNESS OBLIGATIONS
The following summary of our long-term indebtedness obligations includes:
scheduled principal repayments for the next five years and after;
weighted average interest rates for debt maturing in each of the next five years and after; and
estimated fair values of outstanding obligations.
We estimate the fair value of our debt instruments using quoted market prices we received for the same types and issues of our debt or on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt. Changes in market rates of interest affect the fair value of our fixed-rate debt.
Summary of Long-Term Indebtedness Principal Obligations as of June 30, 2019
THEREAFTER
TOTAL(1)(2)
Fixed-rate debt
719
1,876
3,324
5,919
Average interest rate
5.58
4.91
6.69
5.99
N/A
Variable-rate debt(3)
225
4.00
Excludes $9 million of unamortized discounts, capitalized debt expense and business combination fair value adjustments.
Does not include nonrecourse debt held by our Variable Interest Entities (VIEs). See Note 6: Variable Interest Entities for further information on our VIEs and the related nonrecourse debt.
Excludes borrowings under our line of credit of $140 million as of June 30, 2019. Our line of credit expires in 2022, at which time all outstanding amounts must be repaid. The timing of the repayment of the current outstanding balance is uncertain. See Note 9: Long-Term Debt and Line of Credit for further information on our line of credit.
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
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 rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. The company’s principal executive officer and principal financial officer have concluded that the company’s disclosure controls and procedures were effective as of June 30, 2019, based on an evaluation of the company’s disclosure controls and procedures as of that date.
CHANGES IN INTERNAL CONTROLS
No changes occurred in the company’s internal control over financial reporting during year-to-date 2019 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to Note 11: Legal Proceedings, Commitments and Contingencies.
Item 1A. RISK FACTORS
There have been no material changes with respect to the risk factors disclosed in our 2018 Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On February 7, 2019, our board of directors approved and announced a new share repurchase program under which we are authorized to repurchase up to $500 million of outstanding shares. Concurrently, the board terminated the remaining repurchase authorization under the share repurchase program approved by the board in November 2015.
There were no share repurchases during second quarter 2019.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Item 6. EXHIBITS
31
Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
Certification pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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 thereunto duly authorized.
(Registrant)
Date: July 26, 2019
By:
/s/ David M. Wold
David M. Wold
Vice President and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Officer)