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, 2022
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 25, 2022, 740,315 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)
14
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
26
ITEM 4.
CONTROLS AND PROCEDURES
27
PART II
OTHER INFORMATION
LEGAL PROCEEDINGS
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
28
SIGNATURES
29
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
(UNAUDITED)
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2022
JUNE 2021
Net sales (Note 3)
$
2,973
3,144
6,085
5,650
Costs of sales
1,789
1,583
3,436
3,013
Gross margin
1,184
1,561
2,649
2,637
Selling expenses
23
24
46
44
General and administrative expenses
102
95
194
185
Other operating costs, net (Note 13)
12
13
18
Operating income
1,047
1,429
2,391
2,385
Non-operating pension and other post-employment benefit costs (Note 6)
(11
)
(1
(26
(9
Interest income and other
—
Interest expense, net of capitalized interest
(65
(78
(137
(157
Loss on debt extinguishment (Note 8)
(276
Earnings before income taxes
972
1,352
1,952
2,222
Income taxes (Note 14)
(184
(324
(393
(513
Net earnings
788
1,028
1,559
1,709
Earnings per share, basic and diluted (Note 4)
1.06
1.37
2.09
2.28
Weighted average shares outstanding (in thousands) (Note 4):
Basic
744,542
750,127
746,017
749,429
Diluted
745,582
751,508
747,194
750,773
See accompanying Notes to Consolidated Financial Statements.
DOLLAR AMOUNTS IN MILLIONS
Other comprehensive income (loss):
Foreign currency translation adjustments
(25
15
Changes in unamortized actuarial loss, net of tax expense of $24, $38, $29 and $45
77
121
90
141
Changes in unamortized net prior service credit, net of tax expense of $0, $1, $1 and $0
Total other comprehensive income
52
136
81
166
Total comprehensive income
840
1,164
1,640
1,875
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PAR VALUE
JUNE 30,
2022
DECEMBER 31,
2021
ASSETS
Current assets:
Cash and cash equivalents
1,723
1,879
Receivables, net
547
507
Receivables for taxes
Inventories (Note 5)
571
520
Prepaid expenses and other current assets
165
205
Total current assets
3,012
3,135
Property and equipment, less accumulated depreciation of $3,673 and $3,592
2,000
2,057
Construction in progress
233
175
Timber and timberlands at cost, less depletion
11,706
11,510
Minerals and mineral rights, less depletion
248
255
Deferred tax assets
11
17
Other assets
370
503
Total assets
17,580
17,652
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
283
281
Accrued liabilities (Note 7)
658
673
Total current liabilities
941
954
Long-term debt, net (Note 8)
5,053
5,099
Deferred tax liabilities
83
Deferred pension and other post-employment benefits (Note 6)
347
440
Other liabilities
340
346
Total liabilities
6,764
6,885
Commitments and contingencies (Note 10)
Equity:
Common shares: $1.25 par value; authorized 1,360 million shares; issued and outstanding: 741,738 thousand shares at June 30, 2022 and 747,301 thousand shares at December 31, 2021
927
934
Other capital
7,954
8,181
Retained earnings
2,333
2,131
Accumulated other comprehensive loss (Note 11)
(398
(479
Total equity
10,816
10,767
Total liabilities and equity
Cash flows from operations:
Noncash charges (credits) to earnings:
Depreciation, depletion and amortization
241
238
Basis of real estate sold
70
51
Deferred income taxes, net
19
Pension and other post-employment benefits (Note 6)
30
Share-based compensation expense (Note 12)
276
Change in:
(40
(252
Receivables and payables for taxes
236
Inventories
(58
(51
(3
Accounts payable and accrued liabilities
(15
65
Pension and post-employment benefit contributions and payments
(14
(33
Other
(20
Net cash from operations
2,103
2,006
Cash flows from investing activities:
Capital expenditures for property and equipment
(121
(93
Capital expenditures for timberlands reforestation
(30
(32
Acquisition of timberlands (Note 16)
(283
(149
Net cash from investing activities
(433
(273
Cash flows from financing activities:
Cash dividends on common shares
(1,352
(255
Net proceeds from issuance of long-term debt (Note 8)
881
Payments on long-term debt (Note 8)
(1,203
(225
Proceeds from exercise of stock options
45
Repurchases of common shares (Note 4)
(259
(19
(16
Net cash from financing activities
(1,938
(451
Net change in cash, cash equivalents and restricted cash
(268
1,282
Cash, cash equivalents and restricted cash at beginning of period
1,999
495
Cash, cash equivalents and restricted cash at end of period
1,731
1,777
Cash paid (received) during the period for:
Interest, net of amount capitalized of $3 and $2
149
154
Income taxes, net of refunds
354
263
Common shares:
Balance at beginning of period
932
936
Issued for exercise of stock options and vested units
(5
Balance at end of period
937
Other capital:
8,076
8,222
8,208
Issued for exercise of stock options
43
(133
(250
Share-based compensation
9
8
Other transactions, net
(7
(8
8,258
Retained earnings:
1,679
962
411
Dividends on common shares
(134
(129
(1,357
1,861
Accumulated other comprehensive loss:
(450
(792
(822
Other comprehensive income
Balance at end of period (Note 11)
(656
Total equity:
10,400
Dividends paid per common share
0.18
0.17
1.81
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:
PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
10
NOTE 7:
ACCRUED LIABILITIES
NOTE 8:
LONG-TERM DEBT AND LINE OF CREDIT
NOTE 9:
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 10:
LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
NOTE 11:
ACCUMULATED OTHER COMPREHENSIVE LOSS
NOTE 12:
SHARE-BASED COMPENSATION
NOTE 13:
OTHER OPERATING COSTS, NET
NOTE 14:
INCOME TAXES
NOTE 15:
RESTRICTED CASH
NOTE 16:
TIMBERLAND ACQUISITIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND YEAR-TO-DATE PERIODS ENDED JUNE 30, 2022 AND 2021
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, 2021. 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
515
405
980
784
Real Estate & ENR
117
110
245
216
Wood Products
2,341
2,629
4,860
4,650
Intersegment sales:
156
317
270
Total sales
3,129
3,280
6,402
5,920
Intersegment eliminations
(156
(136
(317
(270
Total
Net contribution (charge) to earnings:
153
113
335
221
63
146
129
863
1,338
2,045
2,178
1,081
1,514
2,526
2,528
Unallocated items(1)
(44
(84
(161
Net contribution to earnings
1,037
1,430
2,365
2,379
Loss on debt extinguishment
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
103
80
159
Export grade sales
142
351
264
Subtotal West
308
222
567
423
South
160
145
314
North
25
Subtotal delivered logs sales
478
376
906
724
Stumpage and pay-as-cut timber
20
Recreational and other lease revenue
16
33
32
Other(1)
21
Net sales attributable to Timberlands segment
Real Estate & ENR segment
Real estate
187
167
Energy and natural resources
58
49
Net sales attributable to Real Estate & ENR segment
Wood Products segment
Structural lumber
998
1,349
2,204
2,339
Oriented strand board
497
605
1,061
1,043
Engineered solid section
247
443
Engineered I-joists
168
104
305
Softwood plywood
53
69
111
125
Medium density fiberboard
101
91
Complementary building products
239
213
454
384
Other(2)
86
181
173
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:
$1.06 during second quarter 2022 and $2.09 during year-to-date 2022;
$1.37 during second quarter 2021 and $2.28 during year-to date 2021.
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
330
Restricted stock units
410
659
415
699
Performance share units
322
279
416
315
Total effect of outstanding dilutive potential common shares
1,040
1,381
1,177
1,344
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.
573
1,142
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).
We repurchased 3,784,787 common shares for approximately $138 million under the 2021 Repurchase Program during second quarter 2022 and 6,982,462 common shares for approximately $259 million under the 2021 Repurchase Program during year-to-date 2022. As of June 30, 2022, we had remaining authorization of $668 million for future share repurchases. We did not repurchase shares during year-to-date 2021.
All common stock repurchases under the 2021 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 June 30, 2022, or December 31, 2021.
NOTE 5: INVENTORIES
Inventories include raw materials, work-in-process and finished goods, as well as materials and supplies.
LIFO inventories:
Logs
Lumber, plywood, panels and fiberboard
75
61
Other products
Moving average cost or FIFO inventories:
Lumber, plywood, panels, fiberboard and engineered wood products
127
106
151
131
Materials and supplies
123
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: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
The components of net periodic benefit cost are:
PENSION
Service cost
Interest cost
Expected return on plan assets
(41
(53
(80
(102
Amortization of actuarial loss
47
57
Amortization of prior service cost
Total net periodic benefit cost – pension
39
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 2022, we recorded an increase to the beginning of the year fair value of the pension assets of $54 million, or 2 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 $13 million, or less than 1 percent. The net effect of these updates was a $67 million improvement in funded status. This change in funded status was reflected on our Consolidated Balance Sheet as of June 30, 2022.
NOTE 7: ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
Compensation and employee benefit costs
197
225
Current portion of lease liabilities
22
Customer rebates, volume discounts and deferred income
190
164
Interest
68
Taxes payable
119
62
71
NOTE 8: LONG-TERM DEBT AND LINE OF CREDIT
In March 2022, we completed a series of transactions that lowered our weighted average interest rate and extended our weighted average maturity by issuing $900 million in notes and using the net proceeds plus cash on hand to close cash tender offers for $931 million of principal in higher interest rate notes. We issued $450 million of 3.375 percent notes due in March 2033 and $450 million of 4.000 percent notes due in March 2052. The net proceeds after deducting the discount, underwriting fees and issuance costs were $444 million and $437 million, respectively. The net proceeds were used to retire $592 million of our 7.375 percent notes due in March 2032, $161 million of our 8.500 percent notes due in January 2025, $73 million of our 7.125 percent notes due in July 2023, $65 million of our 7.950 percent notes due in March 2025, and $40 million of our 7.850 percent notes due in July 2026. We paid holders an aggregate $1.2 billion in cash reflecting principal, premium to par and tender premium. A net pretax charge of $276 million ($207
million after-tax) was included in the Consolidated Statement of Operations in first quarter 2022 for premiums to retire $931 million of principal plus unamortized debt issuance costs and unamortized debt discounts in connection with the early debt retirement.
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 June 30, 2022 and December 31, 2021.
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value and carrying value of our long-term debt consisted of the following:
DECEMBER 31, 2021
Long-term fixed rate debt (including current maturities):
Carrying value
Fair value (level 2)
5,118
6,221
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 line of credit has a net carrying value that approximates its fair value within an insignificant difference. The inputs to the valuations of our long-term debt 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, 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 10: 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 June 30, 2022, our total accrual for future estimated remediation costs on active Superfund sites and other sites for which we are potentially responsible was approximately $62 million. These amounts are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.
NOTE 11: ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in amounts included in our accumulated other comprehensive loss by component are:
Pension(1)
(709
(1,044
(720
(1,064
Other comprehensive income before reclassifications
59
100
96
Amounts reclassified from accumulated other comprehensive loss to earnings(2)
37
120
88
140
(632
(924
Other post-employment benefits(1)
(2
(12
Other comprehensive loss before reclassifications
(10
Translation adjustments and other
259
243
254
Translation adjustments
Total other comprehensive income (loss)
234
278
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 6: Pension and Other Post-Employment Benefit Plans.
NOTE 12: SHARE-BASED COMPENSATION
Share-based compensation activity during year-to-date 2022 included the following:
GRANTED
VESTED
Restricted stock units (RSUs)
626
853
Performance share units (PSUs)
306
419
A total of 1.4 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 2022 was $41.94. The vesting provisions for RSUs granted in 2022 were consistent with prior year grants.
Performance Share Units
The weighted average grant date fair value of PSUs granted in 2022 was $49.77. The final number of shares granted in 2022 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 2022 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 2022
PERFORMANCE SHARE UNITS
Performance period
2/10/2022 – 12/31/2024
Valuation date average stock price(1)
$42.16
Expected dividends
1.72%
Risk-free rate
0.34% – 1.84%
Expected volatility
26.27% – 41.01%
Calculated as an average of the high and low prices on grant date.
NOTE 13: OTHER OPERATING COSTS, NET
Other operating costs, net were comprised of the following:
Foreign exchange losses (gains), net
(4
Litigation expense, net
Research and development expenses
Other, net
Total other operating costs, net
NOTE 14: 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 2022 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 15: 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:
Restricted cash included in other assets(1)
Restricted cash included in prepaid expenses and other current assets
Total cash, cash equivalents and restricted cash
Amounts included in restricted cash as of December 31, 2021 were comprised of proceeds held by a qualified intermediary that were intended to be reinvested in timber and timberlands through a like-kind exchange transaction. In first quarter 2022, the proceeds were released as a like-kind property was not identified.
NOTE 16: TIMBERLAND ACQUISITIONS
On April 14, 2022, we announced an agreement to purchase 81 thousand acres of North and South Carolina timberlands for approximately $265 million. We completed the purchase on May 18, 2022 and recorded $263 million of timberland assets in “Timber and timberlands at cost, less depletion” and $2 million of related assets in “Property and equipment, net” on our Consolidated Balance Sheet.
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. This transaction was structured as a like-kind exchange.
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 expectations relating to returns on invested pension plan assets and expected benefit payments; our capital structure and the sufficiency of our liquidity position to meet future cash requirements; compliance with covenants in our debt agreements; our expectations concerning our contingent liabilities and the sufficiency of related reserves and accruals including, but not limited to, cost estimates of future litigation and environmental remediation; expected capital expenditures; market and general economic conditions, including related influencing factors such as the trajectory of U.S. housing activity, repair and remodel activity, impacts from COVID-related restrictions, inflation trends and interest rates; our expectations about our future opportunities in emerging carbon offset and carbon capture and storage markets; and assumptions used in valuing incentive compensation and related expense.
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,” “maintain,” “may,” “plan,” “potential,” “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. There is no guarantee that any of the events anticipated by our forward-looking statements will occur. If any of the events occur, there is no guarantee what effect it will have on our operations, cash flows, or financial condition. We undertake no obligation to update our forward-looking statements after the date of this report. The factors listed below, as well as other factors not described herein because they are not currently known to us or we currently judge them to be immaterial, may cause our actual results to differ significantly from our forward-looking statements:
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;
our ability to hire and retain capable employees;
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 as it relates to the cost of pension benefits 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 2021 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, loss on debt extinguishment or income taxes.
ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS
Our market conditions and the strength of the broader U.S. economy are, and will continue to be, influenced by the trajectory of U.S. housing activity, repair and remodel activity, impacts from COVID-related restrictions, inflation trends and interest rates. 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, particularly 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. 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 oriented strand board (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 tightening of markets in certain geographies.
On a seasonally adjusted annual basis, as reported by the U.S. Census Bureau, housing starts for second quarter 2022 averaged 1.65 million units, a 4 percent decrease from first quarter 2022. Single family starts averaged 1.1 million units, a 9.5 percent decrease from first quarter 2022. Multi-family starts averaged 577 thousand units in second quarter 2022, which was an 8.4 percent increase from first quarter 2022. Sales of newly built, single family homes averaged a seasonally adjusted annual rate of 612 thousand units for second quarter 2022, a decrease of 21.1 percent from the prior quarter.
Repair and remodeling expenditures fell by 1 percent from first quarter 2022 to second quarter 2022 according to the Census Bureau Advance Retail Spending report. Do-it-yourself activity has been returning to more normalized levels while professionally contracted activities continue to increase.
In U.S. wood product markets, demand was steady most of second quarter 2022 as dealer inventories adjusted to a more uncertain economic environment. The Random Lengths Framing Lumber Composite price averaged $850/MBF and the OSB Composite averaged $798/MSF in second quarter 2022. Over the course of the second quarter, prices declined from $1,134/MBF to $604/MBF for lumber and from $1,372/MSF to $425/MSF for OSB, reflecting a more volatile pricing environment.
In Western log markets, Douglas fir sawlog prices fell by 3 percent in second quarter 2022 compared with first quarter 2022 as reported by RISI Log Lines. Continued strength in Western log prices was supported by tight log supplies. In the South, delivered sawlog prices increased by 0.7 percent from first quarter 2022 and 7 percent from second quarter 2021 as reported by TimberMart-South, as new mill capacity has increased demand in certain markets.
Exchange rates, available supply from other countries and trade policy affect our export businesses. During second quarter 2022, continued strength in end use demand and disruptions of other global sources of supply supported demand for export logs. China export activity and pricing were supported by constrained log and lumber imports from other geographies. In Japan, total housing starts increased 2.5 percent year to date through May compared to the same period in 2021, while the key Post and Beam segment saw a 2.1 percent decrease. Decreased lumber imports from Europe to Japan have been favorable to our Japanese log export business through the first half of 2022.
Interest rates affect our business primarily through their impact on mortgage rates, their general impact on the economy, and their influence on our capital management activities. Actions by the U.S. Federal Reserve, the overall condition of the economy, and fluctuations in financial markets are all factors that influence longer-term interest rates. Mortgage rates, which are correlated to longer-term interest rates, impact home affordability and therefore significant increases can reduce demand for homebuying.
Changes in inflation also reflect monetary policy set by the U.S. Federal Reserve, as well as changes in demand and supply for goods and services and fluctuations in labor markets. Increased inflation affects the cost of our operations across each of our business segments. The Consumer Price Index increased 9.1 percent year over year in June 2022. While we can offset some of the impacts of inflation through our sales activities, not all of the costs associated with inflation can be fully mitigated.
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 Second Quarter 2022 and Year-to-Date 2022
AMOUNT OF
CHANGE
2022 VS.
Net sales
(171
435
206
(382
(240
(150
Earnings per share, basic and diluted
(0.31
(0.19
Comparing Second Quarter 2022 with Second Quarter 2021
Net sales decreased $171 million – 5 percent – primarily due to a $288 million decrease in Wood Products sales to unaffiliated customers attributable to decreased sales realizations for structural lumber, oriented strand board and softwood plywood.
This decrease was partially offset by a $110 million increase in Timberlands net sales to unaffiliated customers primarily due to increased sales realizations.
Costs of sales increased $206 million – 13 percent – primarily due to increased freight and raw material costs within our Wood Products segment as well as increased freight costs, third-party log purchases and sales volumes within our Timberlands segment.
Operating income decreased $382 million – 27 percent – primarily due to a $377 million decrease in consolidated gross margin (see discussion of components above).
Net earnings decreased $240 million – 23 percent – primarily due to the $382 million decrease in operating income discussed above.
This decrease was partially offset by a $140 million decrease in income tax expense (refer to Income Taxes).
Comparing Year-to-Date 2022 with Year-to-Date 2021
Net sales increased $435 million – 8 percent – primarily due to a $210 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations across most product lines, as well as a $196 million increase in Timberlands sales to unaffiliated customers attributable to increased sales realizations and sales volumes in the Western and Southern regions.
Costs of sales increased $423 million –14 percent – primarily due to increased freight and raw material costs within our Wood Products segment as well as increased freight costs, third-party log purchases and sales volumes within our Timberlands segment.
Operating income increased $6 million – less than 1 percent – primarily due to a $12 million increase in consolidated gross margin (see discussion of components above).
Net earnings decreased $150 million – 9 percent – primarily due to a $276 million pretax charge ($207 million after-tax) related to the early extinguishment of debt (refer to Note 8: Long-Term Debt and Line of Credit).
This decrease was partially offset by a $120 million decrease in income tax expense (refer to Income Taxes).
TIMBERLANDS
144
38
182
Subtotal net sales to unaffiliated customers
196
Intersegment sales
671
541
130
1,297
1,054
407
918
790
128
Operating income and Net contribution to earnings
40
Net sales to unaffiliated customers
Net sales to unaffiliated customers increased $110 million – 27 percent – primarily due to an $86 million increase in Western log sales attributable to a 26 percent increase in sales realizations and an 11 percent increase in sales volumes, as well as a $15 million increase in Southern log sales attributable to a 10 percent increase in sales realizations.
Intersegment sales increased $20 million – 15 percent – primarily due to a 19 percent increase in sales realizations.
Costs of sales increased $88 million – 22 percent – primarily due to increased freight costs and third-party log purchases, as well as increased sales volumes, as discussed above.
Operating income and net contribution to earnings increased $40 million – 35 percent – primarily due to the change in the components of gross margin, as discussed above.
Net sales to unaffiliated customers increased $196 million – 25 percent – primarily due to a $144 million increase in Western log sales attributable to a 25 percent increase in sales realizations and a 7 percent increase in sales volumes, as well as a $38 million increase in Southern log sales attributable to a 9 percent increase in sales realizations and a 5 percent increase in sales volumes.
Intersegment sales increased $47 million – 17 percent – primarily due to a 19 percent increase in sales realizations.
Costs of sales increased $128 million – 16 percent – primarily due to increased freight costs and third-party log purchases, as well as increased sales volumes, as discussed above.
Operating income and net contribution to earnings increased $114 million – 52 percent – primarily due to the change in the components of gross margin, as discussed above.
Third-Party Log Sales Volumes and Fee Harvest Volumes
VOLUMES IN THOUSANDS
Third-party log sales – tons:
West(1)
1,778
1,608
170
3,382
3,147
235
4,167
4,150
8,302
7,932
118
115
328
(48
6,063
5,873
12,012
11,455
557
Fee harvest volumes – tons:
2,085
2,099
4,325
4,200
6,159
5,856
303
12,001
11,232
769
180
199
458
536
8,424
8,154
16,784
15,968
816
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:
41
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 increased $7 million – 6 percent – primarily due to an increase in the amount of acres sold, partially offset by decreased mitigation bank credit sales.
Costs of sales increased $4 million – 10 percent – primarily due to increases in the amount of acres sold and basis per acre sold.
Operating income and net contribution to earnings increased $2 million – 3 percent – primarily due to the change in the components of gross margin, as discussed above.
Net sales increased $29 million – 13 percent – primarily due to an increase in the amount of acres sold, partially offset by decreased mitigation bank credit sales.
Costs of sales increased $11 million – 15 percent – primarily due to increases in the amount of acres sold and basis per acre sold.
Operating income and net contribution to earnings increased $17 million – 13 percent – primarily due to the change in the components of gross margin, as discussed above.
REAL ESTATE SALES STATISTICS
Acres sold
26,906
18,415
8,491
51,032
37,870
13,162
Average price per acre
3,215
3,227
3,484
3,523
(39
WOOD PRODUCTS
(351
(135
(108
135
64
Other products produced(1)
(288
210
1,414
1,229
2,690
2,353
337
(475
Other products produced sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.
Net sales decreased $288 million – 11 percent – due to:
a $351 million decrease in structural lumber sales attributable to a 28 percent decrease in sales realizations, partially offset by a 3 percent increase in sales volumes;
a $108 million decrease in oriented strand board sales attributable to a 26 percent decrease in sales realizations, partially offset by an 11 percent increase in sales volumes and
a $16 million decrease in softwood plywood sales attributable to a 17 percent decrease in sales realizations, as well as a 9 percent decrease in sales volumes.
These decreases were partially offset by:
an $81 million increase in engineered solid section sales due to a 53 percent increase in sales realizations, partially offset by a 3 percent decrease in sales volumes;
a $64 million increase in engineered I-joists sales due to a 73 percent increase in sales realizations, partially offset by an 8 percent decrease in sales volumes;
a $26 million increase in complementary building products sales attributable to increased sales realizations;
a $10 million increase in medium density fiberboard sales attributable to a 35 percent increase in sales realizations, partially offset by a 10 percent decrease in sales volumes and
a $6 million increase in other products produced sales attributable to increased sales volumes.
Costs of sales increased $185 million – 15 percent – primarily due to increased freight and raw material costs.
Operating income and net contribution to earnings decreased $475 million – 36 percent – primarily due to the change in the components of gross margin, as discussed above.
Net sales increased $210 million – 5 percent – due to:
a $135 million increase in engineered solid section sales attributable to a 52 percent increase in sales realizations, partially offset by a 5 percent decrease in sales volumes;
a $118 million increase in engineered I-joists sales attributable to a 70 percent increase in sales realizations, partially offset by a 5 percent decrease in sales volumes;
a $70 million increase in complementary building products sales attributable to increased sales realizations;
an $18 million increase in oriented strand board sales attributable to 5 percent increase in sales volumes, partially offset by a 3 percent decrease in sales realizations;
a $10 million increase in medium density fiberboard sales attributable to a 32 percent increase in sales realizations, partially offset by a 17 percent decrease in sales volumes and
an $8 million increase in other products produced sales attributable to increased sales volumes.
These increases were partially offset by a $135 million decrease in structural lumber sales attributable to an 8 percent decrease in sales realizations, partially offset by a 2 percent increase in sales volumes, as well as a $14 million decrease in softwood plywood sales attributable to a 15 percent decrease in sales volumes, partially offset by a 4 percent increase in sales realizations.
Costs of sales increased $337 million – 14 percent – primarily due to increased freight and raw material costs.
Operating income and net contribution to earnings decreased $133 million – 6 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
1,289
1,252
2,446
2,397
Oriented strand board – square feet (3/8”)
735
663
72
1,452
1,377
Engineered solid section – cubic feet
6.4
6.6
(0.2
12.1
12.8
(0.7
Engineered I-joists – lineal feet
Softwood plywood – square feet (3/8”)
171
Medium density fiberboard – square feet (3/4”)
50
89
107
(18
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
1,232
1,234
2,435
2,445
Outside purchase
(6
85
1,275
1,283
2,520
2,549
(29
Oriented strand board – square feet (3/8”):
758
683
1,497
1,425
66
139
824
754
1,633
1,564
Engineered solid section – cubic feet:
6.2
0.2
12.2
(0.1
0.3
0.1
0.5
6.7
12.6
12.7
Engineered I-joists – lineal feet:
94
99
Softwood plywood – square feet (3/8”):
67
133
74
(17
Medium density fiberboard – square feet (3/4"):
48
92
108
UNALLOCATED ITEMS
Net Charge to Earnings – Unallocated Items
Unallocated corporate function and variable compensation expense
(36
(67
(61
Liability classified share-based compensation
Foreign exchange gain (loss)
Elimination of intersegment profit in inventory and LIFO
(28
(45
(21
Operating loss
(34
(85
(143
Non-operating pension and other post-employment benefit costs
Net charge to earnings
Net charge to earnings decreased $40 million – 48 percent – primarily due to a $46 million decrease in elimination of intersegment profit in inventory and LIFO.
Net charge to earnings increased $12 million – 8 percent – primarily due to a $17 million increase in non-operating pension and other post-employment benefit costs.
INTEREST EXPENSE
Our interest expense, net of capitalized interest, was:
$65 million for second quarter 2022 and $137 million year-to-date 2022;
$78 million for second quarter 2021 and $157 million year-to-date 2021.
Interest expense decreased by $13 million compared to second quarter 2021 and decreased by $20 million compared to year-to-date 2021 primarily due to decreases in the average outstanding debt and weighted average interest rate.
Refer to Note 8: Long-Term Debt and Line of Credit for further information.
Our provision for income taxes was:
a $184 million expense for second quarter 2022 and a $393 million expense year-to-date 2022;
a $324 million expense for second quarter 2021 and a $513 million expense year-to-date 2021.
Our provision for income taxes is primarily driven by earnings generated by our TRSs. Income tax expense decreased by $120 million compared to year-to-date 2021 primarily due to a tax benefit of approximately $69 million resulting from the $276 million pretax loss on debt extinguishment recorded in first quarter 2022, as well as a decrease in our estimated annual effective tax rate.
Refer to Note 14: Income Taxes and Note 8: Long-Term Debt and Line of Credit 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 June 30, 2022, we had over $1.7 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:
$2,103 million for year-to-date 2022 and
$2,006 million for year-to-date 2021.
Net cash from operations increased $97 million, primarily due to increased cash inflows from our business operations. This change was partially offset by a $91 million increase in cash paid for income taxes.
CASH FROM INVESTING ACTIVITIES
Consolidated net cash from investing activities was:
$(433) million for year-to-date 2022 and
$(273) million for year-to-date 2021.
Net cash from investing activities decreased $160 million, primarily due to:
a $134 million increase in cash paid for acquisition of timberlands and
a $26 million increase in cash paid for capital expenditures.
Summary of Capital Spending by Business Segment
76
Unallocated Items
We anticipate our capital expenditures for 2022 to be approximately $460 million. The amount we spend on capital expenditures could change.
CASH FROM FINANCING ACTIVITIES
Consolidated net cash from financing activities was:
$(1,938) million for year-to-date 2022 and
$(451) million for year-to-date 2021.
Net cash from financing activities decreased $1,487 million, primarily due to:
a $1,097 million increase in cash paid for dividends;
a $259 million increase in cash used for repurchases of common stock and
a $97 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 June 30, 2022 or December 31, 2021. This credit facility expires in January 2025.
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. We plan to transition our revolving credit facility to an alternate reference rate prior to the cessation of LIBOR. We have included provisions in our revolving credit agreement that specifically contemplate the transition from LIBOR to a replacement benchmark rate.
Long-Term Debt
In March 2022, we completed a series of transactions that lowered our weighted average interest rate and extended our weighted average maturity by issuing $900 million in notes and using the net proceeds plus cash on hand to close cash tender offers for $931 million of principal in higher interest rate notes. We issued $450 million of 3.375 percent notes due in March 2033 and $450 million of 4.000 percent notes due in March 2052. The net proceeds after deducting the discount, underwriting fees and issuance costs were $444 million and $437 million, respectively. The net proceeds were used to retire $592 million of our 7.375 percent notes due in March 2032, $161 million of our 8.500 percent notes due in January 2025, $73 million of our 7.125 percent notes due in July 2023, $65 million of our 7.950 percent notes due in March 2025, and $40 million of our 7.850 percent notes due in July 2026. We paid holders an aggregate $1.2 billion in cash reflecting principal, premium to par and tender premium.
Debt Covenants
As of June 30, 2022, Weyerhaeuser Company was in compliance with its debt covenants. There have been no significant changes to the debt covenants presented in our 2021 Annual Report on Form 10-K for our 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:
$14 million for year-to-date 2022 and
$45 million for year-to-date 2021.
Our average stock price was $38.89 and $35.60 for year-to-date 2022 and 2021, respectively.
Dividend Payments
We paid cash dividends on common shares of:
$1,352 million for year-to-date 2022 and
$255 million for year-to-date 2021.
The increase in dividends paid is primarily due to a supplemental dividend of $1.45 per share ($1,084 million in total) paid in the first quarter of 2022 based on 2021 financial results.
Share Repurchases
We repurchased 3,197,675 shares for approximately $121 million (including transaction fees) during first quarter 2022 and 3,784,787 shares for approximately $138 million (including transaction fees) during second quarter 2022 under the 2021 Repurchase Program. We did not repurchase shares during year-to-date 2021. There were no unsettled repurchases as of June 30, 2022 or December 31, 2021. Refer to Note 4: Net Earnings Per Share and Share Repurchases for further information.
PERFORMANCE MEASURES
Adjusted EBITDA by Segment
Adjusted EBITDA by Segment:
219
466
352
223
36
912
1,386
(474
2,145
2,275
(130
1,238
1,657
(419
2,834
2,814
(132
(140
Adjusted EBITDA
1,205
1,573
(368
2,702
2,674
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.
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 June 30, 2022:
Real Estate &
ENR
Wood
Products
Unallocated
Items
184
Net contribution (charge) to earnings
Operating income (loss)
The table below reconciles Adjusted EBITDA for the quarter ended June 30, 2021:
78
324
The table below reconciles Adjusted EBITDA for the year-to-date period ended June 30, 2022:
137
Loss on debt extinguishment(1)
393
Loss on debt extinguishment is a special item consisting of a pretax charge of $276 million related to early debt retirement.
The table below reconciles Adjusted EBITDA for the year-to-date period ended June 30, 2021:
Real Estate
& ENR
157
513
97
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
207
Net earnings before special items
1,766
Net Earnings per Diluted Share Before Special Items
Net earnings per diluted share
0.28
Net earnings per diluted share before special items
2.37
CRITICAL ACCOUNTING POLICIES
There have been no significant changes during year-to-date 2022 to the critical accounting policies presented in our 2021 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, 2022
2023
2024
2025
2026
THEREAFTER
TOTAL(1)
FAIR VALUE
Fixed-rate debt
978
272
3,633
5,093
Average interest rate
%
5.44
8.31
7.65
5.00
5.36
N/A
Excludes $40 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 June 30, 2022, 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 2022 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 10: 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
There have been no material changes with respect to the risk factors disclosed in our 2021 Annual Report on Form 10-K.
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 second quarter 2022:
COMMON SHARE REPURCHASES DURING SECOND QUARTER 2022
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
April 1 – April 30
981,596
37.88
768,422,544
May 1 – May 31
June 1 – June 30
2,803,191
35.66
668,467,616
3,784,787
36.23
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.
During first quarter 2022, we repurchased 3,197,675 common shares for approximately $121 million (including transaction fees) and during second quarter 2022, we repurchased 3,784,787 common shares for approximately $138 million (including transaction fees) under the 2021 Repurchase Program in open-market transactions. Transaction fees incurred for repurchases are not counted as use of funds authorized for repurchases under the 2021 Repurchase Program. As of June 30, 2022, we had remaining authorization of $668 million for future stock repurchases.
Item 6. EXHIBITS
10.1
Weyerhaeuser Company 2022 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on May 13, 2022 – Commission File Number 1-4825)
10.2
Form of 2022 Long-Term Incentive Plan Performance Share Unit Award Terms and Conditions (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed May 13, 2022 – Commission File Number 1-4825)
10.3
Form of 2022 Long-Term Incentive Plan Restricted Stock Unit Award Terms and Conditions (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed May 13, 2022 – Commission File Number 1-4825)
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 June 30, 2022, 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: July 29, 2022
By:
/s/ David M. Wold
David M. Wold
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer and Duly Authorized Officer)