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 SEPTEMBER 30, 2021
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 October 25, 2021, 749,045 thousand 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)
15
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
28
ITEM 4.
CONTROLS AND PROCEDURES
PART II
OTHER INFORMATION
LEGAL PROCEEDINGS
29
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES – NOT APPLICABLE
MINE SAFETY DISCLOSURES – NOT APPLICABLE
ITEM 5.
OTHER INFORMATION – NOT APPLICABLE
ITEM 6.
EXHIBITS
31
SIGNATURES
32
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
(UNAUDITED)
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
SEPTEMBER 2021
SEPTEMBER 2020
Net sales (Note 3)
$
2,345
2,110
7,995
5,469
Costs of sales
1,589
1,390
4,602
4,055
Gross margin
756
720
3,393
1,414
Selling expenses
24
22
68
62
General and administrative expenses
98
96
283
254
Other operating costs (income), net (Note 15)
(15
)
92
8
105
Operating income
649
510
3,034
993
Non-operating pension and other post-employment benefit costs (Note 7)
(5
(9
(14
(28
Interest income and other
Interest expense, net of capitalized interest
(79
(111
(236
(299
Earnings before income taxes
566
392
2,788
671
Income taxes (Note 16)
(84
(109
(597
(166
Net earnings
482
2,191
505
Earnings per share, basic and diluted (Note 4)
0.64
0.38
2.92
0.68
Weighted average shares outstanding (in thousands) (Note 4):
Basic
750,105
746,996
749,657
746,809
Diluted
751,443
748,450
750,999
747,530
See accompanying Notes to Consolidated Financial Statements.
DOLLAR AMOUNTS IN MILLIONS
Other comprehensive income (loss):
Foreign currency translation adjustments
(25
11
(1
Changes in unamortized actuarial loss, net of tax expense of $10, $6, $55 and $30
19
170
86
Changes in unamortized net prior service credit, net of tax expense of $0, $0, $0 and $0
—
Total other comprehensive income
30
171
74
Total comprehensive income
487
313
2,362
579
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PAR VALUE
SEPTEMBER 30,
2021
DECEMBER 31,
2020
ASSETS
Current assets:
Cash and cash equivalents
2,326
495
Receivables, net
497
450
Receivables for taxes
72
82
Inventories (Note 5)
499
443
Prepaid expenses and other current assets
146
139
Total current assets
3,540
1,609
Property and equipment, less accumulated depreciation of $3,559 and $3,432
1,924
2,013
Construction in progress
169
73
Timber and timberlands at cost, less depletion
11,606
11,827
Minerals and mineral rights, less depletion
258
268
Deferred tax assets
52
120
Other assets
543
401
Total assets
18,092
16,311
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt (Note 9)
150
Accounts payable
264
204
Accrued liabilities (Note 8)
1,110
596
Total current liabilities
1,524
950
Long-term debt, net (Note 9)
5,100
5,325
Deferred tax liabilities
Deferred pension and other post-employment benefits (Note 7)
711
911
Other liabilities
360
370
Total liabilities
7,723
7,580
Commitments and contingencies (Note 11)
Equity:
Common shares: $1.25 par value; authorized 1,360 million shares; issued and outstanding: 749,037 thousand shares at September 30, 2021 and 747,385 thousand shares at
December 31, 2020
936
934
Other capital
8,242
8,208
Retained earnings
1,842
411
Accumulated other comprehensive loss (Note 12)
(651
(822
Total equity
10,369
8,731
Total liabilities and equity
Cash flows from operations:
Noncash charges (credits) to earnings:
Depreciation, depletion and amortization
356
355
Basis of real estate sold
136
Deferred income taxes, net
16
20
Pension and other post-employment benefits (Note 7)
46
55
Share-based compensation expense (Note 13)
23
Gain on sale of timberlands (Note 14)
(32
Timber casualty loss (Note 15)
80
Change in:
(47
(192
Receivables and payables for taxes
93
103
Inventories
(55
(21
Accounts payable and accrued liabilities
116
Pension and post-employment benefit contributions and payments
(56
Other
(27
12
Net cash from operations
2,665
1,085
Cash flows from investing activities:
Capital expenditures for property and equipment
(184
(158
Capital expenditures for timberlands reforestation
(39
(41
Acquisition of Alabama timberlands (Note 14)
(149
Proceeds from note receivable held by variable interest entities (Note 6)
362
Proceeds from sale of timberlands (Note 14)
261
145
Net cash from investing activities
(108
311
Cash flows from financing activities:
Cash dividends on common shares
(382
(254
Net proceeds from issuance of long-term debt (Note 9)
732
Payments on long-term debt (Note 9)
(225
(936
Proceeds from borrowings on line of credit (Note 9)
550
Payments on line of credit (Note 9)
(780
Proceeds from exercise of stock options
9
Repurchases of common shares (Note 4)
(26
(19
(16
Net cash from financing activities
(606
(695
Net change in cash, cash equivalents and restricted cash
1,951
701
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
2,446
840
Cash paid (received) during the period for:
Interest, net of amount capitalized of $3 and $3
237
278
Income taxes, net of refunds
494
Common shares:
Balance at beginning of period
937
933
932
Issued for exercise of stock options and vested units
Balance at end of period
Other capital:
8,258
8,166
8,152
Issued for exercise of stock options
44
Share-based compensation
Other transactions, net
(8
8,178
Retained earnings (accumulated deficit):
1,861
(37
(3
Dividends on common shares
(501
(760
(256
246
Accumulated other comprehensive loss:
(656
(860
(904
Other comprehensive income
Balance at end of period (Note 12)
(830
Total equity:
8,527
Dividends paid per common share
0.17
0.51
0.34
NOTE 1:
BASIS OF PRESENTATION
NOTE 2:
BUSINESS SEGMENTS
NOTE 3:
REVENUE RECOGNITION
NOTE 4:
NET EARNINGS PER SHARE AND SHARE REPURCHASES
NOTE 5:
INVENTORIES
NOTE 6:
VARIABLE INTEREST ENTITIES
NOTE 7:
PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
10
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
NOTE 13:
SHARE-BASED COMPENSATION
NOTE 14:
TIMBERLAND ACQUISITIONS AND DIVESTITURES
13
NOTE 15:
OTHER OPERATING COSTS (INCOME), NET
NOTE 16:
INCOME TAXES
14
NOTE 17:
RESTRICTED CASH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND YEAR-TO-DATE PERIODS ENDED SEPTEMBER 30, 2021 AND 2020
NOTE 1: BASIS OF PRESENTATION
Our consolidated financial statements provide an overall view of our results of operations, financial condition and cash flows. They include our accounts and the accounts of entities we control, including majority-owned domestic and foreign subsidiaries. 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, 2020. 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 the value of surface and subsurface assets through leases and royalties. Our business segments are categorized based primarily on products and services which include:
●
Timberlands – Logs, timber, recreational leases and other products;
Real Estate, Energy and Natural Resources (Real Estate & ENR) – Real Estate (sales of timberlands) and ENR (rights to explore for and extract hard minerals, construction materials, natural gas, and wind and solar resources) and
Wood Products – Structural lumber, oriented strand board, engineered wood products 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
423
345
1,207
Real Estate & ENR
69
285
Wood Products
1,853
1,696
6,503
4,138
Intersegment sales:
129
107
399
350
Total sales
2,474
2,217
8,394
5,819
Intersegment eliminations
(129
(107
(399
(350
Total
Net contribution (charge) to earnings:
133
(11
354
45
17
174
517
2,695
859
695
572
3,223
1,100
Unallocated items(1)
(50
(69
(199
(130
Net contribution to earnings
645
503
3,024
970
Income taxes
(1)
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 post-employment 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:
West
Domestic sales
76
235
238
Export grade sales
83
414
281
Subtotal West
226
163
519
South
153
141
429
436
North
38
37
Subtotal delivered logs sales
317
1,116
992
Stumpage and pay-as-cut timber
Recreational and other lease revenue
48
47
Other(1)
21
Net sales attributable to Timberlands segment
Real Estate & ENR segment
Real estate
49
212
192
Energy and natural resources
54
Net sales attributable to Real Estate & ENR segment
Wood Products segment
Structural lumber
681
819
3,020
1,865
Oriented strand board
470
290
1,513
659
Engineered solid section
183
135
491
373
Engineered I-joists
128
315
231
Softwood plywood
Medium density fiberboard
143
124
Complementary building products
211
595
Other(2)
84
256
253
Net sales attributable to Wood Products segment
Total net sales
Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips.
(2)
Other Wood Products sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.
NOTE 4: NET EARNINGS PER SHARE AND SHARE REPURCHASES
Our basic and diluted earnings per share were:
$0.64 during third quarter 2021 and $2.92 during year-to-date 2021;
$0.38 during third quarter 2020 and $0.68 during year-to-date 2020.
Basic earnings per share is net earnings divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued. Diluted earnings per share is net earnings 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
293
318
Restricted stock units
730
570
709
297
Performance share units
483
178
Total effect of outstanding dilutive potential common shares
1,338
1,454
1,342
721
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.
Potential Shares Not Included in the Computation of Diluted Earnings 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.
789
2,260
1,067
729
Share Repurchase Program
On September 22, 2021, we announced that our board of directors approved a new share repurchase program (the 2021 Repurchase Program) under which we are authorized to repurchase up to $1 billion of outstanding shares. Concurrently, the board terminated the remaining repurchase authorization under the share repurchase program approved by the board in February 2019 (the 2019 Repurchase Program).
During year-to-date 2021, we repurchased 780,228 common shares for approximately $26 million under the 2019 Repurchase Program. As of September 30, 2021, we had remaining authorization of $1 billion for future share repurchases under the 2021 Repurchase Program. We did not repurchase shares during year-to-date 2020.
All common stock repurchases under the 2019 Repurchase Program were 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 September 30, 2021 or December 31, 2020.
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
64
59
Other products
Moving average cost or FIFO inventories:
Lumber, plywood, panels, fiberboard and engineered wood products
113
121
100
Materials and supplies
114
LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. locations. The moving average cost method or FIFO – the first-in, first-out method – applies to the balance of our U.S. raw material and product inventories, all material and supply inventories and all foreign inventories.
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 were the primary beneficiary and consolidated the assets and liabilities of the SPEs involved in these transactions.
The assets of the buyer-sponsored SPEs were financial investments which consisted of bank guarantees. These bank guarantees were in turn backed by bank notes, which were the liabilities of the monetization SPEs. Interest earned from the financial investments within the buyer-sponsored SPEs was used to pay interest accrued on the corresponding monetization SPE’s note.
During first quarter 2020, we received $362 million in proceeds from our final buyer-sponsored SPE at maturity. The corresponding $302 million in liabilities of this SPE was paid in third quarter 2019.
NOTE 7: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
The components of net periodic benefit cost are:
PENSION
Service cost
27
Interest cost
35
104
Expected return on plan assets
(51
(59
(153
(175
Amortization of actuarial loss
Amortization of prior service cost
Total net periodic benefit cost – pension
40
51
OTHER POST-EMPLOYMENT BENEFITS
Amortization of prior service credit
Total net periodic benefit cost – other post-employment 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 post-employment benefit costs” in the Consolidated Statement of Operations.
Fair Value of Pension Plan Assets and Obligations
In our year-end reporting process, we estimate the fair value of pension plan assets based upon the information available at that time. For certain assets, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year and market events. We update the year-end estimated fair value of pension plan assets in the second quarter of each year to incorporate final net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K.
During second quarter 2021, we recorded an increase to the beginning of the year fair value of the pension assets of $155 million, or 5 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 increase of $17 million, or less than 1 percent. The net effect of these updates was a $138 million improvement in funded status. This change in funded status was reflected on our Consolidated Balance Sheet as of June 30, 2021.
NOTE 8: ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
Compensation and employee benefit costs
207
Current portion of lease liabilities
26
Customer rebates, volume discounts and deferred income
177
111
Dividends payable
375
Interest
87
Taxes payable
165
75
79
NOTE 9: LONG-TERM DEBT AND LINE OF CREDIT
In October 2021, we repaid our $150 million 9.00 percent notes at maturity.
In May 2021, we repaid our $225 million variable-rate term loan that was scheduled to mature in July 2026.
In September 2020, we redeemed our $325 million 3.25 percent notes due in March 2023. A pretax charge of $23 million was included in “Interest expense, net of capitalized interest” in the Consolidated Statement of Operations in third quarter 2020 for the make-whole premium in connection with the early extinguishment of the $325 million notes.
In March 2020, we issued $750 million of 4.00 percent notes due in April 2030. The net proceeds after deducting the discount, underwriting fees and issuance costs were $732 million. In May 2020, a portion of the net proceeds was used to redeem our $569 million 4.70 percent notes due in March 2021. A net pretax charge of $11 million was included in “Interest expense, net of capitalized interest” in the Consolidated Statement of Operations in second quarter 2020 for the make-whole premium in connection with the early extinguishment of the $569 million notes, partially offset by the write-off of an unamortized fair value step-up adjustment.
In January 2020, we refinanced and extended our $1.5 billion five-year senior unsecured revolving credit facility, which expires in January 2025. Borrowings are at LIBOR plus a spread or at other interest rates mutually agreed upon between the borrower and the lending banks. We had no outstanding borrowings on our credit facility as of September 30, 2021 and December 31, 2020.
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:
Fixed rate
5,250
6,467
6,718
Variable rate
225
Total debt
5,475
6,943
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, and 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 Statement of Operations, Consolidated Balance Sheet or Consolidated Statement of Cash Flows.
Environmental Matters
Site Remediation
Under the federal 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 September 30, 2021, our total accrual for future estimated remediation costs on active Superfund sites and other sites for which we are potentially responsible was approximately $64 million. These amounts are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.
NOTE 12: ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in amounts included in our accumulated other comprehensive loss by component are:
Pension(1)
(924
(1,060
(1,064
(1,128
Other comprehensive income (loss) before reclassifications
(6
102
Amounts reclassified from accumulated other comprehensive loss to earnings(2)
67
18
(895
(1,042
Other Post-Employment Benefits(1)
(10
(12
Translation Adjustments and Other
236
Translation adjustments
Total other comprehensive income (loss)
222
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 Post-Employment Benefit Plans.
NOTE 13: SHARE-BASED COMPENSATION
Share-based compensation activity during year-to-date 2021 included the following:
GRANTED
VESTED
Restricted stock units (RSUs)
784
781
Performance share units (PSUs)
229
A total of 2.4 million 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 2021 was $34.38. The vesting provisions for RSUs granted in 2021 were consistent with prior year grants.
Performance Share Units
The weighted average grant date fair value of PSUs granted in 2021 was $38.50. The final number of shares granted in 2021 will vest between a range of 0 percent to 150 percent of each grant's target, depending upon actual company performance compared against an industry peer group. PSUs granted in 2021 will vest at a maximum of 100 percent of target value in the event of negative absolute company total shareholder return.
Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2021
PERFORMANCE SHARE UNITS
Performance period
2/11/2021 – 12/31/2023
Valuation date average stock price(1)
$34.14
Expected dividends
1.99%
Risk-free rate
0.02% – 0.20%
Expected volatility
32.87% – 52.82%
Calculated as an average of the high and low prices on grant date.
NOTE 14: TIMBERLAND ACQUISITIONS AND DIVESTITURES
Washington Divestiture
On April 30, 2021, we announced an agreement to sell 145 thousand acres of timberlands in the North Cascades region of Washington. On July 7, 2021, we completed the sale for $261 million in cash proceeds, which is net of purchase price adjustments and closing costs. This transaction was structured as a like-kind exchange along with the Alabama acquisition discussed below. As a result of the sale, a gain of $32 million was recorded in the Timberlands segment in our third quarter 2021 Consolidated Statement of Operations.
This divestiture is not considered a strategic shift that has, or will have, a major effect on our operations or financial results and therefore does not meet the requirements for presentation as discontinued operations.
Alabama Acquisition
On February 25, 2021, we announced an agreement to purchase 69 thousand acres of southwest Alabama timberlands for approximately $149 million. We completed the purchase on April 27, 2021 and recorded $148 million of timberland assets in “Timber and timberlands at cost, less depletion” and $1 million of related assets in “Property and equipment, net” on our Consolidated Balance Sheet. As discussed above, this transaction was structured as a like-kind exchange.
Montana Divestiture
On December 17, 2019, we announced an agreement to sell 630 thousand acres of Montana timberlands, which was part of our Timberlands business segment. On March 26, 2020, we completed the sale for $145 million in cash proceeds, which is net of purchase price adjustments and closing costs. Due to the impairment recorded during fourth quarter 2019, no material gain or loss was recorded as a result of this sale.
The divestiture was not considered a strategic shift that had, or will have, a major effect on our operations or financial results and therefore did not meet the requirements for presentation as discontinued operations.
NOTE 15: OTHER OPERATING COSTS (INCOME), NET
Other operating costs (income), net were comprised of the following:
Foreign exchange losses (gains), net
(2
Gain on sale of timberlands
Litigation expense, net
Product remediation recovery
Research and development expenses
Timber casualty loss
Other, net
Total other operating costs (income), net
Timber Casualty Loss
In September 2020, forest fires in the state of Oregon, commonly referred to as the Holiday Farm, Beachie Creek, Riverside, and Archie Creek fires, spread from adjacent lands onto portions of our Oregon timberland properties. We recorded a timber casualty loss of $80 million in third quarter 2020 which represented the estimated book value of timber and related assets that could not be salvaged based on information available at that time. The loss was attributable to our Timberlands segment and was recorded within “Other operating costs (income), net” in the Consolidated Statement of Operations. During year-to-date 2021, we have harvested a substantial majority of our planned salvage volume in Oregon. The additional information obtained from our salvage operations has not resulted in a change to the estimated loss previously recorded.
NOTE 16: INCOME TAXES
As a real estate investment trust (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 Taxable REIT Subsidiaries (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 have occurred during the year. Our 2021 estimated annual effective tax rate, excluding discrete items, differs from the U.S. federal statutory tax rate of 21 percent primarily due to state and foreign income taxes and tax benefits associated with our nontaxable REIT earnings.
NOTE 17: RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on our Consolidated Balance Sheet that sum to the total of the amounts shown in the Consolidated Statement of Cash Flows:
787
Restricted cash included in other assets(1)
53
Total cash, cash equivalents and restricted cash
Amounts included in restricted cash as of September 30, 2021 are comprised of proceeds held by a qualified intermediary that are intended to be reinvested in timber and timberlands through a like-kind exchange transaction. Amounts included in restricted cash as of September 30, 2020 were primarily comprised of proceeds held by a qualified intermediary that were subsequently reinvested in timber and timberlands through a like-kind exchange transaction, as well as additional funds held in escrow related to that transaction.
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. These include, without limitation, statements relating to: our expected future financial and operating performance; our plans, strategies, intentions and expectations; estimated taxes and tax provision; our capital structure and the sufficiency of our liquidity position to meet future cash requirements; future debt maturities, compliance with our debt agreements and the effect on our financial position of the expected discontinuation of LIBOR; expected results of litigation and other legal proceedings and contingent liabilities, and the sufficiency of litigation and other contingent liability reserves and related accruals; expected uses of cash, including future dividends and expected capital expenditures; expected effects of certain acquisitions and divestitures on our operations and financial results; market and general economic conditions, including related influencing factors such as trends in U.S. housing activity, inflation, interest rates, the nature and extent of future government stimulus, and the timing of when, and the extent to which, COVID-related restrictions are lifted; laws and regulations relevant to our businesses; assumptions used in valuing incentive compensation and related expense; and our expectations relating to returns on invested pension plan assets and expected benefit payments.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often involve use of words such as “anticipate,” “believe,” “committed,” "continue,” “estimate,” “expect,” “foreseeable,” “future,” “intend,” “maintain,” “may,” “plan,” “potential,” “project,” “will,” and “would,” or similar words or terminology. They may use the positive, negative or another variation of those and similar words. These forward-looking statements are based on our current expectations and assumptions and are not guarantees of future events or 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 those described in the 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, inflation, housing starts, general availability of financing for home mortgages and the relative strength of the U.S. dollar;
the effect of COVID-19 and other viral or disease outbreaks, including but not limited to any related regulatory restrictions or requirements, and their potential effects on our business, results of operations, cash flows, financial condition and future prospects;
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;
the successful execution of our internal plans and strategic initiatives, including restructuring and cost reduction 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 or the occurrence of any event, change or other circumstances that could give rise to a termination of any acquisition or divestiture transaction under the terms of the governing transaction agreements;
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 and the accuracy of our estimates of charges related to casualty losses;
changes in accounting principles; and
other risks and uncertainties described in this report under Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and in our 2020 Annual Report on Form 10-K, as well as those set forth from time to time in our other public statements, reports, registration statements, prospectuses, information statements and other filings with the SEC.
It is not possible to predict or identify all risks and uncertainties that might affect the accuracy of our forward-looking statements and, consequently, our descriptions of such risks and uncertainties should not be considered exhaustive. There is no guarantee that any of the events anticipated by these forward-looking statements will occur, and if any of the events do occur, there is no guarantee what effect they will have on the company's business, results of operations, cash flows, financial condition and future prospects.
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 (charge) to earnings does not include interest expense or income taxes.
ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS
Overview
In March 2020, COVID-19 was officially declared a global pandemic by the World Health Organization, and a national emergency was declared by the United States. The immediate economic effects of the pandemic were severe, as U.S. gross domestic product (GDP) declined 31 percent in the second quarter of 2020 and the national unemployment rate soared to a record-high of nearly 15 percent in April 2020 driven by the restrictions imposed in response to the pandemic. Since that time the unemployment rate has fallen steadily, and U.S. GDP has rebounded significantly as states have continued to reopen their economies and loosen restrictions. Although market conditions across our businesses deteriorated rapidly in late first quarter and early second quarter 2020, they quickly rebounded as demand for housing and wood products proved resilient. Growth in repair and remodel demand and new residential construction activity resulted in increased demand for wood products. As a result, benchmark prices rose to record levels through May 2021 for most lumber products and into early July for oriented strand board (OSB). During the second quarter, lumber prices, followed by OSB, began a substantial correction as demand from the repair and remodel segment lessened during the summer months. Later in the third quarter, prices bottomed and began to rebound. Looking ahead to the remainder of 2021, our market conditions and the strength of the broader U.S. economy will continue to be influenced by the trajectory of U.S. housing activity, repair and remodel activity, the ongoing pace of reopening economic activities from COVID-related restrictions, inflation trends, interest rates, and the nature and extent of future government stimulus including the proposed infrastructure bill.
We have taken proactive steps to safeguard the health of our employees and preserve business continuity from the beginning of the pandemic. These actions have included detailed cleaning and disinfecting procedures, strict processes around masking, social distancing and personal hygiene, clear communication with our employees, contractors, vendors and visitors about our safety protocols, comprehensive guidance for response to any COVID-19 diagnoses or exposures in our operations, and a directive that employees work from home if feasible. In light of adjustments to federal, state and local health and safety restrictions, we began a phased-in approach to return some of our employees who have been working from home back to their work locations. We remain vigilant about employee safety and will continue to monitor developments, including but not limited to the spread of disease variants and their impact on local health systems.
Business Outlook
The demand for sawlogs within our Timberlands segment is directly affected by domestic production of wood-based building products. The strength of the U.S. housing market, especially new residential construction, strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Seasonal weather patterns impact the level of construction activity in the U.S., which in turn affects demand for our logs and wood products. In the third quarter of 2021, wet weather constrained some harvest operations for producers in the U.S. South. In the West, wildfire activity resulted in some harvest restrictions in the third quarter. 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. The Timberlands segment is also influenced by the availability of harvestable timber. In general, Western log markets are highly tensioned while Southern log markets have more available supply. However, additional mill capacity being added in the U.S. South has led to some tightening of markets in certain geographies.
On a seasonally adjusted annual basis, as reported by the U.S. Census Bureau, housing starts for third quarter 2021 averaged 1.57 million units, a 1 percent decline from second quarter 2021. Single family starts averaged 1.1 million units, a 1 percent decline from second quarter 2021 but a 5 percent improvement over third quarter 2020. Multi-family starts averaged 475 thousand units in third quarter 2021, which was 1 percent lower than second quarter 2021 but 19 percent higher than third quarter 2020. Sales of newly built, single family homes averaged a seasonally adjusted annual rate of 738 thousand units for third quarter 2021, in line with the previous quarter’s sales and a 24 percent decline from third quarter 2020. After weakening during the summer months, sales in September strengthened to a seasonally adjusted annual rate of 800 thousand units.
Repair and remodeling expenditures declined by 3.5 percent from second quarter to third quarter 2021 according to the Census Bureau Advance Retail Spending report. A decrease in do-it-yourself activity contributed to lower sales at home improvement centers offset in part by a transition to larger projects undertaken by professional contractors.
In U.S. wood product markets, demand slowed during most of third quarter 2021 as dealers kept a watchful eye on inventory levels and continued to work through existing inventories. In turn, third quarter 2021 prices for lumber continued a sharp decline from record high prices reported in the second quarter, and OSB prices fell during the quarter as well. By the end of the quarter, prices for both lumber and OSB had bottomed and were increasing to levels more in line with historical demand and supply factors. The Random Lengths Framing Lumber Composite price averaged $493/MBF and the OSB Composite averaged $780/MSF in third quarter 2021.
In Western log markets, Douglas fir sawlog prices slightly increased by 1 percent in third quarter 2021 compared with second quarter 2021 as reported by RISI Log Lines. The strength in Western log prices was supported by multiple factors including continued demand in export markets. In the South, sawlog prices increased by 3 percent from second quarter 2021 and 17 percent from third quarter 2020 as reported by TimberMart-South. While weather events contributed to some of this increase, transportation constraints and additional mill demand also contributed to more tensioned log markets.
Exchange rates, available supply from other countries and trade policy affect our export businesses. During third quarter 2021, continued disruptions in global shipping, diversion of European log and lumber supply to other markets, and bans on Australian log imports to China generally had a positive impact on China’s demand for logs imported from the U.S. In Japan, total housing starts increased 4.7 percent year to date through August compared to the same period in 2020, while the key Post and Beam segment saw an 8.5 percent increase. Decreased lumber imports from Europe to Japan have continued to be favorable to our Japanese log export business.
Governments and businesses across the globe are taking action on climate change and are making significant commitments towards reducing greenhouse gas emissions to net zero. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts. We believe we are uniquely positioned to help entities achieve these commitments through natural climate solutions, including forest carbon sequestration and carbon capture and storage activities.
CONSOLIDATED RESULTS
How We Did Third Quarter 2021 and Year-to-Date 2021
AMOUNT OF
CHANGE
2021 VS.
Net sales
2,526
199
547
2,041
1,686
Earnings per share, basic and diluted
0.26
2.24
Comparing Third Quarter 2021 with Third Quarter 2020
Net sales increased $235 million – 11 percent – primarily due to a $157 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations across most product lines, as well as a $78 million increase in Timberlands sales to unaffiliated customers attributable to increased sales realizations in the Western and Southern regions.
Costs of sales increased $199 million – 14 percent – primarily due to increased freight costs and increased sales volumes for structural lumber within our Wood Products segment and increased sales volumes within our Timberlands segment, partially offset by decreased real estate acres sold in our Real Estate & ENR segment.
Operating income increased $139 million – 27 percent – primarily due to an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires, as well as a $36 million increase in consolidated gross margin (see discussion of components above).
Net earnings increased $199 million – 70 percent – primarily due to the $139 million increase in operating income discussed above, as well as a $32 million decrease in interest expense and a $25 million decrease in income tax expense (refer to Income Taxes and Interest Expense).
Comparing Year-to-Date 2021 with Year-to-Date 2020
Net sales increased $2,526 million – 46 percent – primarily due to a $2,365 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations across all product lines.
Costs of sales increased $547 million – 13 percent – primarily due increased freight costs and increased sales volumes within our Wood Products segment, as well as increased freight costs and third-party log purchases within our Timberlands segment, partially offset by decreased real estate acres sold in our Real Estate & ENR segment.
Operating income increased $2,041 million – 206 percent – primarily due to a $1,979 million increase in consolidated gross margin (see discussion of components above), as well as an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires.
Net earnings increased $1,686 million – 334 percent – primarily due to the $2,041 million increase in operating income discussed above.
The increase was partially offset by a $431 million increase in income tax expense (refer to Incomes Taxes).
TIMBERLANDS
63
130
(7
Subtotal net sales to unaffiliated customers
78
122
Intersegment sales
552
452
1,606
1,435
428
358
70
1,218
Operating income (loss) and Net contribution (charge) to earnings
144
185
Net sales to unaffiliated customers
Net sales to unaffiliated customers increased $78 million – 23 percent – primarily due to a $63 million increase in Western log sales attributable to a 34 percent increase in sales realizations and a 4 percent increase in sales volumes, as well as a $12 million increase in Southern log sales attributable to a 6 percent increase in sales realizations and a 3 percent increase in sales volumes.
Intersegment sales increased $22 million – 21 percent – primarily due to a 14 percent increase in sales realizations, as well as a 6 percent increase in sales volumes.
Costs of sales increased $70 million – 20 percent – primarily due to increased sales volumes, as discussed above, as well as increased freight costs and third-party log purchases.
Operating income and Net contribution to earnings
Operating income and net contribution to earnings increased $144 million primarily due to an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires, a $32 million gain on the sale of timberlands in the North Cascades region of Washington recorded in third quarter 2021 and the change in the components of gross margin discussed above.
Net sales to unaffiliated customers increased $122 million – 11 percent – primarily due to a $130 million increase in Western log sales attributable to a 30 percent increase in sales realizations. The increase was partially offset by a $10 million decrease in other product sales.
Intersegment sales increased $49 million – 14 percent – primarily due to a 14 percent increase in sales realizations.
Costs of sales increased $102 million – 9 percent – primarily due to increased freight costs and third-party log purchases, partially offset by decreased fee harvest volumes.
Operating income and net contribution to earnings increased $185 million – 109 percent – primarily due to an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires, the change in the components of gross margin discussed above and a $32 million gain on the sale of timberlands in the North Cascades region of Washington recorded in third quarter 2021.
Third-Party Log Sales Volumes and Fee Harvest Volumes
VOLUMES IN THOUSANDS
Third-party log sales – tons:
West(1)
1,555
1,489
66
4,702
4,887
(185
4,304
4,185
119
12,236
12,857
(621
195
234
571
631
(60
6,054
5,908
17,509
18,375
(866
Fee harvest volumes – tons:
1,930
1,911
6,130
6,457
(327
5,912
5,596
316
17,144
17,640
(496
321
(57
800
901
(101
8,106
7,828
24,074
24,998
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:
(4
39
156
(63
The volume 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 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 remained consistent due to a $4 million decrease in real estate sales attributable to a decrease in real estate acres sold, partially offset by an increase in the average price per real estate acre sold. The decrease was offset by an equal increase in energy and natural resources sales of $4 million.
Costs of sales decreased $28 million – 61 percent – primarily due to decreased real estate acres sold.
Operating income and net contribution to earnings increased $28 million – 165 percent – primarily due to the change in the components of gross margin, as discussed above.
Net sales increased $39 million – 16 percent – primarily due to an increase in the average price per real estate acre sold, as well as an increase in mitigation bank sales, higher natural gas prices and an increase in production volumes of natural gas and construction materials, partially offset by decreased real estate acres sold.
Costs of sales decreased $63 million – 40 percent – primarily due to decreased real estate acres sold.
Operating income and net contribution to earnings increased $102 million – 142 percent – primarily due to the change in the components of gross margin, as discussed above.
REAL ESTATE SALES STATISTICS
Acres sold
11,037
34,917
(23,880
48,907
111,228
(62,321
Average price per acre
4,005
1,381
2,624
3,632
1,662
1,970
WOOD PRODUCTS
(138
1,155
180
854
118
42
90
Other products produced(1)
157
2,365
1,270
1,075
3,623
3,112
511
(49
1,836
Other products produced sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.
Net sales increased $157 million – 9 percent – due to:
a $180 million increase in oriented strand board sales attributable to a 75 percent increase in sales realizations, partially offset by a 7 percent decrease in sales volumes;
a $48 million increase in engineered solid section sales attributable to a 45 percent increase in sales realizations, partially offset by a 6 percent decrease in sales volumes;
a $45 million increase in engineered I-joists sales attributable to a 59 percent increase in sales realizations, partially offset by a 4 percent decrease in sales volumes;
a $28 million increase in complementary building products sales attributable to increased sales realizations and
a $5 million increase in medium density fiberboard sales attributable to a 9 percent increase in sales realizations.
These increases were partially offset by a $138 million decrease in structural lumber sales due to a 23 percent decrease in sales realizations, partially offset by a 9 percent increase in sales volumes, as well as a $10 million decrease in softwood plywood sales.
Costs of sales increased $195 million – 18 percent – primarily due to increased freight costs and increased sales volumes for structural lumber, partially offset by decreased sales volumes across most other products.
Operating income and net contribution to earnings decreased $49 million – 9 percent – primarily due to the change in the components of gross margin, as discussed above.
Net sales increased $2,365 million – 57 percent – primarily due to:
a $1,155 million increase in structural lumber sales attributable to a 60 percent increase in sales realizations, as well as a 1 percent increase in sales volumes;
an $854 million increase in oriented strand board sales attributable to a 151 percent increase in sales realizations, partially offset by a 9 percent decrease in sales volumes;
a $118 million increase in engineered solid section sales attributable to a 23 percent increase in sales realizations, as well as a 7 percent increase in sales volumes;
a $90 million increase in complementary building products sales attributable to increased sales realizations;
an $84 million increase in engineered I-joists sales attributable to a 28 percent increase in sales realizations, as well as a 6 percent increase in sales volumes;
a $42 million increase in softwood plywood sales attributable to a 75 percent increase in sales realizations, partially offset by a 24 percent decrease in sales volumes and
a $19 million increase in medium density fiberboard sales attributable to a 10 percent increase in sales volumes, as well as a 5 percent increase in sales realizations.
Costs of sales increased $511 million – 16 percent – primarily due to increased freight costs and increased sales volumes for most products, as discussed above.
Operating income and net contribution to earnings increased $1,836 million – 214 percent – primarily due to the change in the components of gross margin, as discussed above.
Third-Party Sales Volumes
VOLUMES IN MILLIONS(1)
Structural lumber – board feet
1,320
1,216
3,717
3,663
Oriented strand board – square feet (3/8”)
736
2,058
2,253
(195
Engineered solid section – cubic feet
5.9
6.3
(0.4
18.7
17.4
1.3
Engineered I-joists – lineal feet
149
140
Softwood plywood – square feet (3/8”)
(38
240
(75
Medium density fiberboard – square feet (3/4”)
162
147
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
1,222
1,170
3,667
3,487
Outside purchase
56
160
164
1,278
1,225
3,827
3,651
176
Oriented strand board – square feet (3/8”):
715
759
(44
2,140
2,278
77
201
228
777
836
2,341
2,506
(165
Engineered solid section – cubic feet:
5.8
5.4
0.4
18.0
16.8
1.2
0.2
0.7
0.3
6.0
5.6
17.2
1.5
Engineered I-joists – lineal feet:
43
Softwood plywood – square feet (3/8”):
61
94
(33
203
267
(64
241
314
(73
Medium density fiberboard – square feet (3/4"):
57
148
UNALLOCATED ITEMS
Net Charge to Earnings – Unallocated Items
Unallocated corporate function and variable compensation expense
(36
(94
(78
Liability classified share-based compensation
Foreign exchange gain (loss)
Elimination of intersegment profit in inventory and LIFO
(29
(62
(23
Operating loss
(46
(189
(82
Non-operating pension and other post-employment benefit costs
Net charge to earnings
Net charge to earnings decreased $19 million – 28 percent – primarily due to a $21 million decrease in elimination of intersegment profit in inventory and LIFO.
Net charge to earnings increased $69 million – 53 percent – primarily due to:
a $29 million increase in elimination of intersegment profit in inventory and LIFO;
a $16 million increase in unallocated corporate function and variable compensation expense and
a $12 million legal benefit recognized in first quarter 2020.
INTEREST EXPENSE
Our interest expense, net of capitalized interest, was:
$79 million for third quarter 2021 and $236 million year-to-date 2021;
$111 million for third quarter 2020 and $299 million year-to-date 2020.
Interest expense decreased by $32 million compared to third quarter 2020 and by $63 million compared to year-to-date 2020. The decreases were primarily due to $23 million and $34 million in charges related to the early extinguishment of debt recorded in third quarter and year-to-date 2020, respectively, with no similar activity in third quarter and year-to-date 2021, as well as a decrease in average outstanding debt in third quarter and year-to-date 2021.
Refer to Note 9: Long-Term Debt and Line of Credit for further information.
Our provision for income taxes was:
an $84 million expense for third quarter 2021 and a $597 million expense year-to-date 2021;
a $109 million expense for third quarter 2020 and a $166 million expense year-to-date 2020.
Our provision for income taxes is primarily driven by earnings generated by our TRSs. Income tax expense increased by $431 million compared to year-to-date 2020 primarily due to an increase in our TRS earnings in 2021.
Refer to Note 16: Income Taxes for further 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 meet our obligations to our lenders, while also maintaining access to all major financial markets. As of September 30, 2021, we had over $2.3 billion in cash and cash equivalents and $1.5 billion of availability on our line of credit, which expires in January 2025. We believe we have sufficient liquidity to meet our cash requirements for the foreseeable future.
CASH FROM OPERATIONS
Consolidated net cash from operations was:
$2,665 million for year-to-date 2021 and
$1,085 million for year-to-date 2020.
Net cash from operations increased $1,580 million, primarily due to:
increased cash inflows from our business operations and
decreased cash used for interest payments.
These changes were partially offset by a $448 million increase in cash paid for income taxes.
CASH FROM INVESTING ACTIVITIES
Consolidated net cash from investing activities was:
$(108) million for year-to-date 2021 and
$311 million for year-to-date 2020.
Net cash from investing activities decreased $419 million, primarily due to:
a $362 million decrease in proceeds received from variable interest entities and
a $149 million increase in cash paid for timberlands acquisitions.
These changes were partially offset by a $116 million increase in proceeds from the sale of timberlands.
Summary of Capital Spending by Business Segment
Unallocated Items
223
We anticipate our capital expenditures for 2021 will be slightly below $460 million as a result of supply chain and contract labor constraints.
CASH FROM FINANCING ACTIVITIES
Consolidated net cash from financing activities was:
$(606) million for year-to-date 2021 and
$(695) million for year-to-date 2020.
Net cash from financing activities increased $89 million, primarily due to a $230 million decrease in net cash paid related to borrowings on our line of credit and a $37 million increase in cash received from exercise of stock options.
These changes were partially offset by:
a $128 million increase in cash paid for dividends;
a $26 million increase in cash used for repurchases of common shares and
a $21 million increase in net cash used for payments on long-term debt.
Line of Credit
We had no outstanding borrowings on our $1.5 billion five-year senior unsecured revolving credit facility as of September 30, 2021 or December 31, 2020. This credit facility expires in January 2025.
Long-Term Debt
In September 2020, we redeemed our $325 million 3.25 percent notes due in March 2023.
In March 2020, we issued $750 million of 4.00 percent notes due in April 2030. The net proceeds after deducting the discount, underwriting fees and issuance costs were $732 million. In May 2020, a portion of the net proceeds was used to redeem our $569 million 4.70 percent notes due in March 2021.
Our revolving credit agreement utilizes the London Inter-bank Offered Rate (LIBOR) as a basis for one of the interest rate options available to the company to apply to outstanding borrowings. Publication of USD LIBOR is expected to cease between January 1, 2022 and July 1, 2023. We plan to transition our revolving credit facility to an alternate reference rate in 2022. We have included provisions in our revolving credit agreement that specifically contemplate the transition from LIBOR to a replacement benchmark rate.
Debt Covenants
As of September 30, 2021, Weyerhaeuser Company was in compliance with its debt covenants. There have been no significant changes to the debt covenants presented in our 2020 Annual Report on Form 10-K for our existing long-term debt instruments, and we expect to remain in compliance with our debt covenants for the foreseeable future.
Option Exercises
We received cash proceeds from the exercise of stock options of:
$46 million for year-to-date 2021 and
$9 million for year-to-date 2020.
Our average stock price was $35.41 and $24.67 for year-to-date 2021 and 2020, respectively.
Dividend Payments
We paid cash dividends on common shares of:
$382 million for year-to-date 2021 and
$254 million for year-to-date 2020.
On September 22, 2021, our board of directors declared an interim supplemental dividend of $0.50 per share that was paid on October 19, 2021. As a result, we recorded dividends payable of $375 million within “Accrued liabilities” on our Consolidated Balance Sheet as of September 30, 2021. In accordance with our dividend framework, we expect to pay a significant supplemental dividend based on our 2021 annual results to shareholders in first quarter 2022.
Share Repurchases
We repurchased over 780 thousand shares for approximately $26 million (including transaction fees) during third quarter 2021 under the 2019 Repurchase Program. We did not repurchase shares in 2020. There were no unsettled repurchases as of September 30, 2021 or December 31, 2020. Refer to Note 4: Net Earnings Per Share and Share Repurchases for further information.
PERFORMANCE MEASURES
Adjusted EBITDA by Segment
We use 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.
25
Adjusted EBITDA by Segment:
60
247
218
565
615
2,840
997
1,843
790
805
3,604
1,658
1,946
(114
(70
Adjusted EBITDA
746
745
3,420
1,544
1,876
We reconcile Adjusted EBITDA to net earnings for the consolidated company and to operating income (loss) 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 September 30, 2021:
Real Estate &
ENR
Wood
Products
Unallocated
Items
Net contribution (charge) to earnings
Operating income (loss)
Special items included in operating income (loss)(1)
Operating income (loss) includes a pretax special item consisting of a $32 million gain on the sale of timberlands.
The table below reconciles Adjusted EBITDA for the quarter ended September 30, 2020:
Interest expense, net of capitalized interest(1)
109
115
Special items included in operating income (loss)(2)
Interest expense, net of capitalized interest includes a pretax special item of $23 million related to a charge for the early extinguishment of debt.
Operating income (loss) includes a pretax special item consisting of an $80 million timber casualty loss.
The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2021:
597
The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2020:
Real Estate
& ENR
299
166
194
Interest expense, net of capitalized interest includes pretax special items of $34 million related to charges for the early extinguishment of debt.
Operating income (loss) includes pretax special items consisting of a $12 million noncash legal benefit within Unallocated Items, an $8 million product remediation insurance recovery within Wood Products and an $80 million timber casualty loss within Timberlands.
Net Earnings and Net Earnings per Diluted Share Before Special Items
We use net earnings before special items and net earnings per diluted share before special items as key performance measures to evaluate the performance of the consolidated company. These measures should not be considered in isolation from, and are not intended to represent an alternative to, our results reported in accordance with U.S. GAAP. However, we believe the measures provide meaningful supplemental information for investors about our operating performance, better facilitate period to period comparisons and are widely used by analysts, lenders, rating agencies and other interested parties.
Net Earnings Before Special Items
Early extinguishment of debt charges
34
Legal benefit
Net earnings before special items
386
2,159
601
Net Earnings per Diluted Share Before Special Items
Net earnings per diluted share
0.03
0.05
(0.04
(0.02
(0.01
0.11
Net earnings per diluted share before special items
0.60
0.52
2.88
0.81
CRITICAL ACCOUNTING POLICIES
There have been no significant changes during year-to-date 2021 to the critical accounting policies presented in our 2020 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 September 30, 2021
2022
2023
2024
2025
THEREAFTER
TOTAL(1)
Fixed-rate debt
1,051
3,638
5,275
Average interest rate
9.00
%
5.56
8.33
5.94
6.15
N/A
Excludes $25 million of unamortized discounts, capitalized debt expense and business combination fair value adjustments.
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 September 30, 2021, 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 2021 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. SEC regulations require us to disclose certain information about proceedings arising under federal, state or local environmental provisions if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. In accordance with these regulations, the company uses a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required pursuant to this item.
Item 1A. RISK FACTORS
The following supplements and updates the risk factors in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020. If any of the risks discussed below or in our Annual Report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.
Catastrophic events may adversely affect the markets for our products and our business, results of operations, cash flows and financial condition.
We are subject to the risk of various catastrophic events, including but not limited to the occurrence of significant fires on one or more of our properties, severe regional or local weather events or trends, major earthquakes, significant geopolitical conditions or developments such as significant international trade disputes, terrorist attacks, armed conflict, domestic political unrest and regional health epidemics or global health pandemics. Any one or more of these events or conditions, or other catastrophic events or developments, could significantly affect our ability to operate our businesses and adversely affect domestic and global general economic conditions and thus market demand for our products.
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID-19”) a global pandemic. In response, federal, state and local governments in the United States, as well as governments throughout the world, declared states of emergency and ordered preventative measures to contain and mitigate the spread of the virus. These measures, which have included shelter-in-place and similar mandates for individuals and closure or significant curtailment of many businesses, have caused significant economic disruption and uncertainty as well as disruption and volatility in global capital markets. As a result, there have been periodic adverse effects on the demand for our timber and wood products and disruptions to our supply chain and the manufacturing, distribution and export of our timber and wood products, all of which could worsen in the future. Any one or more of these consequences of COVID-19, as well as other unpredictable events, could materially adversely affect our business, results of operations, cash flows and financial condition. The COVID-19 outbreak continues to rapidly evolve, with periods of improvement followed by periods of higher infection rates in various geographical locations throughout the world. The extent to which COVID-19 may further affect our business, results of operations, cash flows and financial condition, as well as our plans and decisions relating to various capital expenditures, other discretionary items and capital allocation priorities, including the timing and amount of our dividends to shareholders, are therefore highly uncertain and will depend on future developments, which cannot be predicted with confidence. Such developments include, but are not limited to: the future rate of occurrence or further mutation of COVID-19 or the outbreak of another virulent disease; continuation of or changes in governmental responses to disease outbreak, including without limitation the impact of any future vaccine mandates and testing requirements and employee and company contractor responses to such mandates and requirements; the duration of disease outbreak and consequential restrictions and business disruptions; the effectiveness of responsive government actions to contain and manage the disease; and the timing and effectiveness of treatment and testing options, including the ongoing efficacy and availability of vaccines.
The impacts of the COVID-19 outbreak and related restrictions have led to significant periodic increases in national unemployment since the outset of the pandemic. An extended continuation or worsening of domestic unemployment may adversely affect demand for our products and thus negatively impact our business, results of operations, cash flows and financial condition. In addition, the impact of COVID-19 or other virulent disease may also trigger the occurrence, or exacerbate, other risks discussed herein, any one of which could have a material adverse effect on our business, results of operations, cash flows and financial condition. For more discussion on the current effects of COVID-19 on our business and operations, see our discussion under Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) – Economic and Market Conditions Affecting our Operations.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases of common stock made by the company during third quarter 2021:
COMMON SHARE REPURCHASES DURING THIRD QUARTER
TOTAL NUMBER
OF SHARES
PURCHASED
AVERAGE PRICE
PAID PER SHARE
PURCHASED AS
PART OF PUBLICLY
ANNOUNCED
PROGRAMS
APPROXIMATE
DOLLAR VALUE
OF SHARES THAT
MAY YET BE
UNDER THE
July 1 - July 31
440,016,723
August 1 - August 31
741,132
33.81
414,960,812
September 1 - September 30
39,096
33.99
1,000,000,000
780,228
33.82
On February 7, 2019, we announced that our board of directors had authorized a share repurchase program under which we were authorized to repurchase up to $500 million of outstanding shares (the 2019 Repurchase Program). During third quarter 2021, we repurchased 780,228 common shares for approximately $26 million (including transaction fees) under the 2019 Repurchase Program in open-market transactions. Transaction fees incurred for repurchases are not counted as use of funds authorized for repurchases under the 2019 Repurchase Program.
On September 22, 2021, we announced that our board had approved a new share repurchase program (the 2021 Repurchase Program) under which we are authorized to repurchase up to $1 billion of outstanding shares. Concurrently, the board terminated the remaining repurchase authorization under the 2019 Repurchase Program.
Item 6. EXHIBITS
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2
Certification of Chief Financial Officer 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
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, has been formatted in Inline XBRL.
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: October 29, 2021
By:
/s/ David M. Wold
David M. Wold
Vice President and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Officer)