10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) X OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirty-nine weeks ended September 24, 2000, 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 A Washington Corporation (IRS Employer Identification No. 91-0470860) Federal Way, Washington 98063 Telephone (253) 924-2345 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered ---------------------------------- -------------------------- Common Shares ($1.25 par value) Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange Exchangeable Shares (no par value) Toronto Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. The number of shares outstanding of the registrant's class of common stock, as of October 27, 2000, was 212,831,984 common shares ($1.25 par value). Weyerhaeuser Company -2- WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirty-nine weeks ended September 24, 2000 Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings 3 Consolidated Balance Sheet 4-5 Consolidated Statement of Cash Flows 6-7 Notes to Financial Statements 8-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26-27 Part II. Other Information Item 1. Legal Proceedings 27-28 Item 2. Changes in Securities (not applicable) Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 28
The financial information included in this report has been prepared in conformity with accounting practices and methods reflected in the financial statements included in the annual report (Form 10-K) filed with the Securities and Exchange Commission for the year ended December 26, 1999. Though not examined by independent public accountants, the financial information reflects, in the opinion of management, all adjustments necessary to present a fair statement of results for the interim periods indicated. The results of operations for the thirty-nine week period ending September 24, 2000, should not be regarded as necessarily indicative of the results that may be expected for the full year. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WEYERHAEUSER COMPANY By /s/ K.J. Stancato ----------------- K. J. Stancato Duly Authorized Officer and Principal Accounting Officer November 3, 2000 Weyerhaeuser Company -3-
WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED STATEMENT OF EARNINGS For the periods ended September 24, 2000, and September 26, 1999 (Dollar amounts in millions except as noted and per share data) (Unaudited) Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, 2000 1999 2000 1999 ------- ------- -------- ------- Net sales and revenues: Weyerhaeuser $3,349 $2,809 $10,573 $7,928 Real estate and related assets 341 311 943 901 ------- ------- -------- ------- Total net sales and revenues 3,690 3,120 11,516 8,829 ------- ------- -------- ------- Costs and expenses: Weyerhaeuser: Costs of products sold 2,533 2,046 7,857 5,940 Depreciation, amortization and fee stumpage 194 152 593 460 Selling, general and administrative expenses 240 192 760 550 Research and development expenses 14 12 41 38 Taxes other than payroll and income taxes 33 32 105 97 Charges for integration and closure of facilities (Note 13) 14 -- 43 94 Charge for settlement of hardboard siding claims (Note 14) -- -- 130 -- Charge for Year 2000 remediation -- 4 -- 31 ------- ------- -------- ------- 3,028 2,438 9,529 7,210 ------- ------- -------- ------- Real estate and related assets: Costs and operating expenses 282 257 777 735 Depreciation and amortization 1 2 4 4 Selling, general and administrative expenses 13 11 38 39 Taxes other than payroll and income taxes 1 2 5 6 ------- ------- -------- ------- 297 272 824 784 ------- ------- -------- ------- Total costs and expenses 3,325 2,710 10,353 7,994 ------- ------- -------- ------- Operating income 365 410 1,163 835 Interest expense and other: Weyerhaeuser: Interest expense incurred 87 62 260 196 Less interest capitalized 4 3 13 7 Equity in income of affiliates (Note 4) 17 5 42 13 Other income (expense), net (Note 5) 3 1 (4) 8 Real estate and related assets: Interest expense incurred 22 18 61 56 Less interest capitalized 19 14 50 44 Equity in income of unconsolidated subsidiaries (Note 4) 9 18 62 29 Other income (expense), net (Note 5) 5 2 12 12 ------- ------- -------- ------- Earnings before income taxes and cumulative effect of a change in an accounting principle 313 373 1,017 696 Income taxes (Note 6) 114 136 371 254 ------- ------- -------- ------- Earnings before cumulative effect of a change in an accounting principle 199 237 646 442 Cumulative effect of a change in an accounting principle (Note 1) -- -- -- 89 ------- ------- -------- ------- Net earnings $ 199 $ 237 $ 646 $ 353 ======= ======= ======== ======= Per common share (Note 2): Basic net earnings before cumulative effect of a change in an accounting principle $ 0.90 $ 1.18 $ 2.84 $ 2.21 Cumulative effect of a change in an accounting principle -- -- -- (0.45) ------- ------- -------- ------- $ 0.90 $ 1.18 $ 2.84 $ 1.76 ======= ======= ======== ======= Diluted net earnings before cumulative effect of a change in an accounting principle $ 0.90 $ 1.18 $ 2.83 $ 2.20 Cumulative effect of a change in an accounting principle -- -- -- (0.44) ------- ------- -------- ------- $ 0.90 $ 1.18 $ 2.83 $ 1.76 ======= ======= ======== ======= Dividends paid per share $ 0.40 $ 0.40 $ 1.20 $ 1.20 ======= ======= ======== =======
See Accompanying Notes to Financial Statements Weyerhaeuser Company -4-
WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED BALANCE SHEET September 24, 2000, and December 26, 1999 (Dollar amounts in millions) Sept. Dec. 24, 26, 2000 1999 ---------- -------- (Unaudited) Assets ------ Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 73 $ 1,640 Receivables, less allowances 1,410 1,296 Inventories (Note 7) 1,469 1,329 Prepaid expenses 367 278 ---------- -------- Total current assets 3,319 4,543 Property and equipment (Note 8) 8,045 7,560 Construction in progress 654 355 Timber and timberlands at cost, less fee stumpage charged to disposals 1,662 1,667 Investments in and advances to equity affiliates (Note 4) 564 950 Goodwill, net of accumulated amortization 1,146 792 Other assets and deferred charges 578 533 ---------- -------- 15,968 16,400 ---------- -------- Real estate and related assets Cash and short-term investments 14 3 Receivables, less discounts and allowances 97 94 Mortgage-related financial instruments, less discounts and allowances 76 84 Real estate in process of development and for sale 662 556 Land being processed for development 919 956 Investments in unconsolidated entities, less reserves (Note 4) 186 124 Other assets 135 122 ---------- -------- 2,089 1,939 ---------- -------- Total assets $18,057 $18,339 ========== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -5-
Sept. Dec. 24, 26, 2000 1999 ---------- -------- (Unaudited) Liabilities and shareholders' interest -------------------------------------- Weyerhaeuser Current liabilities: Notes payable and commercial paper $ 862 $ 54 Current maturities of long-term debt (Note 11) 88 855 Accounts payable (Note 1) 927 961 Accrued liabilities (Note 9) 796 1,093 ---------- -------- Total current liabilities 2,673 2,963 Long-term debt (Note 11) 3,982 3,945 Deferred income taxes (Note 6) 2,209 1,985 Deferred pension, other postretirement benefits and other liabilities 777 773 Commitments and contingencies (Note 15) ---------- -------- 9,641 9,666 ---------- -------- Real estate and related assets Notes payable and commercial paper 733 676 Long-term debt (Note 11) 428 479 Other liabilities 367 345 Commitments and contingencies (Note 15) ---------- -------- 1,528 1,500 ---------- -------- Total liabilities 11,169 11,166 ---------- -------- Shareholders' interest (Note 12) Common shares: authorized 400,000,000 shares, issued and outstanding: 212,824,084 and 226,039,188, $1.25 par value 266 283 Exchangeable shares; no par value; unlimited shares authorized; issued and held by nonaffiliates: 6,291,031 and 8,809,994 428 598 Other capital 2,492 2,443 Retained earnings 3,744 4,016 Cumulative other comprehensive (expense) (42) (167) ---------- -------- Total shareholders' interest 6,888 7,173 ---------- -------- Total liabilities and shareholders' interest $18,057 $18,339 ========== ========
Weyerhaeuser Company -6-
WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED STATEMENT OF CASH FLOWS For the thirty-nine week periods ended September 24, 2000, and September 26, 1999 (Dollar amounts in millions) (Unaudited) Consolidated ------------------ Sept. Sept. 24, 26, 2000 1999 -------- -------- Cash provided by (used for) operations: Net earnings $ 646 $ 353 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 597 464 Deferred income taxes, net 111 141 Pension and other postretirement benefits (128) (67) Equity in (income) loss of affiliates and unconsolidated entities (104) (42) Effect of a change in an accounting principle - net of taxes (Note 1) -- 89 Charge for settlement of hardboard siding claims (Note 14) 130 -- Charges for integration and closure of facilities (Note 13) 43 94 Decrease (increase) in working capital: Receivables 7 (201) Inventories, real estate and land (153) (82) Prepaid expenses (101) 10 Mortgage-related financial instruments 4 17 Accounts payable and accrued liabilities (495) 131 (Gain) loss on disposition of assets (6) 18 Other 6 (9) -------- -------- Net cash provided by (used for) operations 557 916 -------- -------- Cash provided by (used for) investing activities: Property and equipment (520) (301) Timber and timberlands (56) (35) Acquisition of businesses - net of cash acquired (Note 16) (642) -- Investments in and advances to equity affiliates 71 (23) Proceeds from sale of: Property and equipment 23 9 Businesses -- 80 Mortgage-related financial instruments 6 16 Intercompany advances -- -- Other 10 11 -------- -------- Net cash provided by (used for) investing activities (1,108) (243) -------- -------- Cash provided by (used for) financing activities: Issuances of debt 12 34 Notes and commercial paper borrowings, net 889 (128) Cash dividends (274) (240) Payments on debt (971) (322) Repurchase of common shares (808) -- Exercise of stock options 9 91 Other 138 (15) -------- -------- Net cash provided by (used for) financing activities (1,005) (580) -------- -------- Net increase (decrease) in cash and short-term investments (1,556) 93 Cash and short-term investments at beginning of year 1,643 35 -------- -------- Cash and short-term investments at end of period $ 87 $ 128 ======== ======== Cash paid during the period for: Interest, net of amount capitalized $ 285 $ 237 ======== ======== Income taxes $ 217 $ 18 ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -7-
Real Estate and Weyerhaeuser Related Assets ------------------ ------------------ Sept. Sept. Sept. Sept. 24, 26, 24, 26, 2000 1999 2000 1999 -------- -------- -------- -------- $ 532 $ 261 $ 114 $ 92 593 460 4 4 101 134 10 7 (124) (66) (4) (1) (42) (13) (62) (29) -- 89 -- -- 130 -- -- -- 43 94 -- -- 10 (194) (3) (7) (47) (17) (106) (65) (101) 10 -- -- -- -- 4 17 (518) 56 23 75 (6) 18 -- -- 14 (8) (8) (1) -------- -------- -------- -------- 585 824 (28) 92 -------- -------- -------- -------- (504) (292) (16) (9) (56) (35) -- -- (642) -- -- -- 30 (49) 41 26 23 8 -- 1 -- 80 -- -- -- -- 6 16 (4) (72) 4 72 10 11 -- -- -------- -------- -------- -------- (1,143) (349) 35 106 -------- -------- -------- -------- 11 32 1 2 832 (134) 57 6 (274) (240) -- -- (917) (113) (54) (209) (808) -- -- -- 9 91 -- -- 138 (15) -- -- -------- -------- -------- -------- (1,009) (379) 4 (201) -------- -------- -------- -------- (1,567) 96 11 (3) 1,640 28 3 7 -------- -------- -------- -------- $ 73 $ 124 $ 14 $ 4 ======== ======== ======== ======== $ 274 $ 224 $ 11 $ 13 ======== ======== ======== ======== $ 160 $ 16 $ 57 $ 2 ======== ======== ======== ========
Weyerhaeuser Company -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ NOTES TO FINANCIAL STATEMENTS For the thirty-nine week periods ended September 24, 2000, and September 26, 1999 Note 1: Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of Weyerhaeuser Company and all of its majority-owned domestic and foreign subsidiaries. Investments in and advances to equity affiliates which are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings. Significant intercompany transactions and accounts are eliminated. Certain of the consolidated financial statements and notes to financial statements are presented in two groupings: (1) Weyerhaeuser (the company), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction and other real estate related activities. Nature of Operations The company's principal business segments, which account for the majority of sales, earnings and the asset base, are: . Timberlands, which is engaged in the management of 5.9 million acres of company-owned and .5 million acres of leased commercial forestland in North America. . Wood products, which produces a full line of solid wood products that are sold primarily through the company's own sales organizations to wholesalers, retailers and industrial users in North America, the Pacific Rim and Europe. It is also engaged in the management of forestland in North America under long-term licensing arrangements. . Pulp, paper and packaging, which manufactures and sells pulp, paper, paperboard and containerboard in North American, Pacific Rim and European markets and packaging products for the domestic markets, and which operates an extensive wastepaper recycling system that serves company mills and worldwide markets. Accounting Pronouncement Implemented In the 1999 first quarter, the company implemented the Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities, issued by the American Institute of Certified Public Accountants Accounting Standards Executive Committee, which required that the costs of start-up activities be expensed as incurred. In addition, this pronouncement required that all unamortized start-up costs on the balance sheet at the implementation date be written off as a cumulative effect of a change in an accounting principle. The company recorded an after-tax charge of $89 million, or $0.45 per share, in the first quarter to reflect this write- off. This charge included $9 million for the company's interest in the write-off of unamortized start-up costs in three of its 50 percent-owned equity affiliates. Prospective Accounting Pronouncements . In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires the measurement of derivatives at fair value and recognition in the balance sheet as an asset or liability, depending on the company's rights or obligations under the applicable derivative contract. Subsequent to the issuance of SFAS 133, the FASB received many requests to clarify certain issues causing difficulties in implementation. In June 2000, the FASB issued SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to FASB Statement No. 133, which responds to those requests by amending certain provisions of SFAS 133. SFAS 133 and the corresponding amendments under SFAS 138 will be effective as of the first quarter of the company's fiscal year 2001. Assuming that the company's current minimal involvement in derivatives and hedging activities continues after Weyerhaeuser Company -9- the effective date of this statement, the company believes that the future adoption of this statement will not have a material impact on its financial position, results of operations or cash flow. . In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. This SAB states that revenue should not be recognized until it is realized or realizable and earned and gives guidance on criteria to apply to make the determination. Originally, compliance with the accounting guidance contained in this SAB was applicable to the first quarter of fiscal years beginning after December 15, 1999. Subsequently, the SEC has issued deferrals that extend the compliance requirement until the fourth quarter of fiscal years beginning after December 15, 1999. Since the company's current revenue recognition policy effectively complies with this guidance, there will be no effect on the company's financial position, results of operations or cash flow. . In September 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. This consensus requires that all shipping and handling fees charged to customers be reported as revenues and all shipping and handling costs incurred by a seller be reported as operating expenses. Compliance with the EITF consensus is applicable for the fourth quarter of fiscal years beginning after December 15, 1999. The company has historically recorded certain shipping and handling costs as a reduction of gross sales, in accordance with standard industry practice. Compliance with the EITF consensus will require reclassification of these costs to operating expenses. However, there will be no effect on the company's financial position, results of operations or cash flow. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivatives The company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and foreign exchange risks. These include: . Foreign exchange contracts, which are hedges for foreign denominated accounts receivable and accounts payable. These contracts generate gains or losses that are recognized at the contracts' respective settlement dates. . An interest rate swap entered into with a major financial institution in which the company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The premiums received by the company on the sale of this swap are treated as deferred income and amortized against interest expense over the term of the agreement. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments, but does not expect its counterparties to fail to meet their obligations. The company deals only with highly rated counterparties. The notional amounts of these derivative financial instruments are $107 million and $385 million at September 24, 2000, and December 26, 1999, respectively. These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on the contractual terms against the notional amount of the contract, such as interest rates or exchange rates. The company's use of derivatives does not have a significant effect on the company's results of operations or its financial position. Cash and Short-Term Investments For purposes of cash flow and fair value reporting, short-term investments with original maturities of 90 days or less are considered as cash equivalents. Short-term investments are stated at cost, which approximates market. At the end of 1999, the company's cash and short-term investments reflected $1.6 billion in marketable securities. These liquid investments were being held to meet cash requirements in early January to complete the $735 million acquisition of TJ International and redeem $750 million in notes payable. Weyerhaeuser Company -10- Inventories Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last-in, first-out (LIFO) method is used to cost approximately half of domestic raw materials, in process and finished goods inventories. LIFO inventories were $397 million and $358 million at September 24, 2000, and December 26, 1999, respectively. The balances of domestic raw material and product inventories, all materials and supplies inventories, and all foreign inventories are costed at either the first-in, first-out (FIFO) or moving average cost methods. Had the FIFO method been used to cost all inventories, the amounts at which product inventories are stated would have been $234 million and $227 million greater at September 24, 2000, and December 26, 1999, respectively. Property and Equipment The company's property accounts are maintained on an individual asset basis. Betterments and replacements of major units are capitalized. Maintenance, repairs and minor replacements are expensed. Depreciation is provided generally on the straight-line or unit-of-production method at rates based on estimated service lives. Amortization of logging railroads and truck roads is provided generally as timber is harvested and is based upon rates determined with reference to the volume of timber estimated to be removed over such facilities. The cost and related depreciation of property sold or retired is removed from the property and allowance for depreciation accounts and the gain or loss is included in earnings. Timber and Timberlands Timber and timberlands are carried at cost less fee stumpage charged to disposals. Fee stumpage is the cost of standing timber and is charged to fee timber disposals as fee timber is harvested, lost as the result of casualty or sold. Depletion rates used to relieve timber inventory are determined with reference to the net carrying value of timber and the related volume of timber estimated to be available over the growth cycle. Timber carrying costs are expensed as incurred. The cost of timber harvested is included in the carrying values of raw material and product inventories, and in the costs of products sold as these inventories are disposed of. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years, which is the expected period to be benefited. Accounts Payable The company's banking system provides for the daily replenishment of major bank accounts as checks are presented for payment. Accordingly, there were negative book cash balances of $107 million and $185 million at September 24, 2000, and December 26, 1999, respectively. Such balances result from outstanding checks that had not yet been paid by the bank and are reflected in accounts payable in the consolidated balance sheet. Income Taxes Deferred income taxes are provided to reflect temporary differences between the financial and tax bases of assets and liabilities using presently enacted tax rates and laws. Pension Plans The company has pension plans covering most of its employees. The U.S. plan covering salaried employees provides pension benefits based on the employee's highest monthly earnings for five consecutive years during the final ten years before retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). Postretirement Benefits Other Than Pensions In addition to providing pension benefits, the company provides certain health care and life insurance benefits for some retired employees and accrues the expected future cost of these benefits for its current eligible retirees and some employees. All of the company's salaried employees and some hourly employees may become eligible for these benefits when they retire. Weyerhaeuser Company -11- Shareholders' Interest The company has revised its presentation of repurchased company shares to more closely reflect legal treatment of equity. As a result, prior year presentations of common shares, other capital and retained earnings have been restated. Revenue Recognition The company's forest products-based operations recognize revenue from product sales upon shipment to their customers. The company's real estate operations recognize income from the sales of single-family housing units when construction has been completed, required down payments have been received and title has passed to the customer. Income from multi-family and commercial properties, developed lots and undeveloped land is recognized when required down payments are received and other income recognition criteria has been satisfied. Real Estate and Related Assets Real estate held for sale is stated at the lower of cost or fair value less costs to sell. The determination of fair value is based on appraisals and market pricing of comparable assets, when available, or the discounted value of estimated future cash flows from these assets. Real estate held for development is stated at cost to the extent it does not exceed the estimated undiscounted future net cash flows, in which case, it is carried at fair value. Mortgage-related financial instruments include mortgage loans receivable, mortgage-backed certificates and other financial instruments. Impairment of Long-Lived Assets to Be Disposed Of The company accounts for long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Assets to be disposed of are reported at the lower of the carrying value or fair value less cost to sell. Comprehensive Income Comprehensive income consists of net income, foreign currency translation adjustments and additional minimum pension liability adjustments. See Note 3: Comprehensive Income (Expense). Reclassifications Certain reclassifications have been made to conform prior years' data to the current format. Note 2: Net Earnings Per Share
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, 2000 1999 2000 1999 ------- ------- -------- ------- Weighted average shares outstanding (thousands): Basic 220,495 200,307 227,676 200,307 Dilutive effect of stock options 49 854 261 765 ------- ------- -------- ------- Diluted weighted average shares outstanding 220,544 201,161 227,937 201,072 ======= ======= ======== =======
Basic net earnings per share are based on the weighted average number of common and exchangeable shares outstanding during the period. Diluted net earnings per share are based on the weighted average number of common and exchangeable shares outstanding and stock options outstanding at the beginning of or granted during the period. Weyerhaeuser Company -12- Options to purchase 150,000 shares at $53.06 per share, 1,516,300 shares at $53.75 per share, 537,329 shares at $56.78 per share, 2,500 shares at $68.41 per share and 205,900 shares at $65.56 per share were outstanding during the thirty-nine weeks ending September 24, 2000. Options to purchase 2,500 shares at $68.41 per share were outstanding during the thirty-nine weeks ending September 26, 1999. These options were not included in the computation of diluted earnings per share for the respective periods because the option exercise prices were greater than the average market prices of common shares during those periods. Note 3: Comprehensive Income (Expense) The company's comprehensive income (expense) is as follows:
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, Dollar amounts in millions 2000 1999 2000 1999 ------- ------- -------- ------- Net earnings $ 199 $ 237 $ 646 $ 353 Other comprehensive income (expense): Foreign currency translation adjustments 45 (8) 138 67 Income tax (expense) on foreign currency translation adjustments (3) 2 (13) (11) ------- ------- -------- ------- Comprehensive income $ 241 $ 231 $ 771 $ 409 ======= ======= ======== =======
Note 4: Equity Affiliates Weyerhaeuser The company's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. The company's significant equity affiliates are: . Cedar River Paper Company - A 50 percent owned joint venture in Cedar Rapids, Iowa, that manufactures liner and medium containerboard from recycled fiber. . Nelson Forests Joint Venture - An investment in which the company owns a 51 percent financial interest and has a 50 percent voting interest, which holds Crown Forest License cutting rights and freehold land on the South Island of New Zealand. . SCA Weyerhaeuser Packaging Holding Company Asia Ltd. - A 50 percent owned joint venture formed to build or buy containerboard packaging facilities to serve manufacturers of consumer and industrial products in Asia. Two facilities are in operation in China. . RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint venture with institutional investors to make investments in timberlands and related assets outside the United States. The primary focus of this partnership is in pine forests in the Southern Hemisphere. During the 1999 second quarter, this joint venture paid approximately $142 million to acquire 62,500 acres of radiata pine plantations, two softwood lumber mills with a capacity of 115 million board feet, a lumber treating operation, a pine molding remanufacturing plant, a chip export business, and a 30 percent interest in a sales and distribution business in Australia. Approximately 500 people currently work in these operations. Weyerhaeuser Company, through a subsidiary, has the responsibility for all management and marketing activities of this acquisition. . North Pacific Paper Corporation - A 50 percent owned joint venture that has a newsprint manufacturing facility in Longview, Washington. . Wapawekka Lumber LP - A 51 percent owned limited partnership in Saskatchewan, Canada, that commenced the operation of a sawmill during 1999. Substantive participating rights by the minority partner preclude the consolidation of this partnership by the company. . Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North Carolina, which supplies full-service, value-added turnkey packaging solutions to assist product manufacturers in the areas of retail marketing and distribution. Weyerhaeuser Company -13- . ForestExpress, LLC - A 31.75 percent owned joint venture formed during 2000 to develop and operate a global, web-enabled, business-to- business marketplace for the forest products industry. Other equity members of the joint venture, which is headquartered in Atlanta, Georgia, include Georgia-Pacific Corp., International Paper and The Mead Corporation. . MAS Capital Management Partners, L.P. - A 50 percent owned limited partnership formed during 2000 for the purpose of providing investment management services to institutional and individual investors in the area of alternative investments. Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, is as follows:
Sept. Dec. 24, 26, Dollar amounts in millions 2000 1999 ---------- -------- Current assets $ 263 $ 525 Noncurrent assets 1,437 1,885 Current liabilities 199 275 Noncurrent liabilities 618 816
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, Dollar amounts in millions 2000 1999 2000 1999 ------- ------- -------- ------- Net sales and revenues $ 232 $ 203 $ 690 $ 544 Operating income 30 19 93 66 Net income 19 8 63 17
The company provides goods and services to these affiliates, which vary by entity, in the form of raw materials, management and marketing services, support services and shipping services. Additionally, the company purchases finished product from certain of these entities. The aggregate total of these transactions is not material to the results of operations of the company. Real Estate and Related Assets Investments in unconsolidated entities that are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings as appropriate. These investments include minor holdings in non-real estate partnerships that have significant assets and income. Unconsolidated financial information for unconsolidated entities, which are accounted for by the equity method, is as follows:
Sept. Dec. 24, 26, Dollar amounts in millions 2000 1999 ---------- -------- Current assets $ 11,848 $ 11,457 Noncurrent assets 207 159 Current liabilities 10,498 10,577 Noncurrent liabilities 124 115
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, Dollar amounts in millions 2000 1999 2000 1999 ------- ------- -------- ------- Net sales and revenues $ 399 $ 200 $1,086 $ 426 Operating income 168 86 472 227 Net income 127 70 399 183
The company may charge management and/or development fees to these unconsolidated entities. The aggregate total of these transactions is not material to the results of operations of the company. Weyerhaeuser Company -14- Note 5: Other Income (Expense), Net Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. There were no significant individual items in 2000 or 1999. Note 6: Income Taxes
Provisions for income taxes include the following: Thirty-nine weeks ended ---------------- Sept. Sept. 24, 26, Dollar amounts in millions 2000 1999 -------- ------- Federal: Current $ 139 $ 76 Deferred 83 112 -------- ------- 222 188 -------- ------- State: Current 19 13 Deferred 5 5 -------- ------- 24 18 -------- ------- Foreign: Current 102 24 Deferred 23 24 -------- ------- 125 48 -------- ------- Income taxes before cumulative effect of a change in an accounting principle 371 254 Deferred taxes applicable to the cumulative effect of a change in an accounting principle -- (52) -------- ------- $ 371 $ 202 ======== =======
Income tax provisions for interim periods are based on the current best estimate of the effective tax rate expected to be applicable for the full year. The effective tax rate reflects anticipated tax credits, foreign taxes and other tax planning alternatives. For the periods ended September 24, 2000, and September 26, 1999, the company's provision for income taxes as a percent of earnings before income taxes and cumulative effect of a change in an accounting principle is greater than the 35% federal statutory rate due principally to the effect of state income taxes. The effective tax rate for the thirty-nine week periods ended September 24, 2000, and September 26, 1999, was 36.5%. Deferred taxes are provided for the temporary differences between the financial and tax bases of assets and liabilities, applying presently enacted tax rates and laws. The major sources of these temporary differences include depreciable and depletable assets, real estate, and pension and retiree health care liabilities. Note 7: Inventories
Sept. Dec. 24, 26, Dollar amounts in millions 2000 1999 ---------- -------- Logs and chips $ 210 $ 197 Lumber, plywood, panels and engineered wood 353 297 Pulp and paper 208 161 Containerboard, paperboard and packaging 186 160 Other products 196 207 Materials and supplies 316 307 ---------- -------- $ 1,469 $ 1,329 ========== ========
Weyerhaeuser Company -15- Note 8: Property and Equipment
Sept. Dec. 24, 26, Dollar amounts in millions 2000 1999 ---------- -------- Property and equipment, at cost: Land $ 225 $ 219 Buildings and improvements 2,138 1,933 Machinery and equipment 11,165 10,499 Rail and truck roads 691 577 Other 162 149 ---------- -------- 14,381 13,377 Less allowance for depreciation and amortization 6,336 5,817 ---------- -------- $ 8,045 $ 7,560 ========== ========
Note 9: Accrued Liabilities
Sept. Dec. 24, 26, Dollar amounts in millions 2000 1999 ---------- -------- Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 402 $ 413 Taxes - Social Security and real and personal property 65 48 Product warranties 17 83 Interest 66 105 Income taxes 4 58 Other 242 386 ---------- -------- $ 796 $ 1,093 ========== ========
Note 10: Short-Term Debt Lines of Credit The company had short-term bank credit lines of $865 million and $515 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at September 24, 2000, and December 26, 1999, respectively. No portions of these lines have been availed of by the company or WRECO at September 24, 2000, or December 26, 1999. None of the entities referred to above is a guarantor of the borrowing of the other. In addition, the company's wholly owned Canadian subsidiary has short-term bank credit lines that provide for the borrowings of up to $700 million and $745 million at September 24, 2000, and December 26, 1999, respectively. No portions of these lines have been availed of by the company's subsidiary. Note 11: Long-Term Debt Lines of Credit The company's lines of credit include a five-year revolving credit facility agreement entered into in 1997 with a group of banks that provides for borrowings of up to the total amount of $400 million, all of which is available to the company. Borrowings are at LIBOR plus a spread or other such interest rates mutually agreed to between the borrower and lending banks. To the extent that these credit commitments expire more than one year after the balance sheet date and are unused, an equal amount of commercial paper is classifiable as long-term debt. Weyerhaeuser reclassified $400 million at September 24, 2000, and December 26, 1999. No portion of these lines has been availed of by the company at September 24, 2000, and December 26, 1999, except as noted. The company's compensating balance agreements were not significant. Weyerhaeuser Company -16- Note 12: Shareholders' Interest Common Shares A reconciliation of common share activity for the periods ending September 24, 2000, and December 26, 1999, is as follows:
Sept. Dec. 24, 26, In thousands 2000 1999 ---------- -------- Balance at beginning of year 226,039 199,009 New issuance 45 20,157 Retraction of exchangeable shares 2,712 4,568 Repurchase of common shares (16,182) -- Stock options exercised 210 2,305 ---------- -------- Balance at end of period 212,824 226,039 ========== ========
Exchangeable Shares Exchangeable Shares issued by Weyerhaeuser Company Ltd., a wholly owned Canadian subsidiary of the company, are, as nearly as practicable, the economic equivalent of the company's common shares; i.e., they have the following rights: . The right to exchange such shares for Weyerhaeuser common shares on a one- to-one basis. . The right to receive dividends, on a per-share basis, in amounts that are the same as, and are payable at the same time as, dividends declared on Weyerhaeuser common shares. . The right to vote at all shareholder meetings at which Weyerhaeuser shareholders are entitled to vote on the basis of one vote per Exchangeable Share. . The right to participate upon a Weyerhaeuser liquidation event on a pro- rata basis with the holders of Weyerhaeuser common shares in the distribution of assets of Weyerhaeuser. A reconciliation of Exchangeable Share activity for the periods ending September 24, 2000, and December 26, 1999, is as follows:
Sept. Dec. 24, 26, In thousands 2000 1999 ---------- -------- Balance at beginning of year 8,810 -- New issuance 193 13,373 Debentures converted to exchangeable shares -- 5 Retraction (2,712) (4,568) ---------- -------- Balance at end of period 6,291 8,810 ========== ========
Cumulative Other Comprehensive (Expense) The company's cumulative other comprehensive (expense) includes:
Sept. Dec. 24, 26, Dollar amounts in millions 2000 1999 ---------- -------- Foreign currency translation adjustments $ (34) $ (159) Minimum pension liability adjustment (8) (8) ---------- -------- $ (42) $ (167) ========== ========
Note 13: Charges for Integration and Closure of Facilities In 2000, the company incurred $43 million of pretax charges related to the MacMillan Bloedel acquisition. These expenditures included a $7 million accrual for the closure of a Weyerhaeuser containerboard packaging plant and $36 million of costs incurred for the transition and integration of activities. Weyerhaeuser Company -17- During the 1999 first quarter, the company recorded a pretax charge of $94 million for the impairment and disposition of certain long-lived assets. This charge was related to the company's decision to sell its composite products business and ply-veneer facility and close a chip export facility. These facilities, with a net book value of $160 million, were located in Springfield, Oregon; Moncure, North Carolina; Adel, Georgia; and Coos Bay, Oregon. The composite products business and ply-veneer facility were sold in the second quarter of 1999. The export chip facility was closed in the fourth quarter of 1999. Note 14: Charge for Settlement of Hardboard Siding Claims In the 2000 second quarter, the company took a pretax charge of $130 million ($82 million net of income taxes) to cover estimated costs of a nationwide class action settlement and claims related to hardboard siding. The settlement is subject to court approval and other conditions in the agreement. In July 2000, the proposed settlement received preliminary approval from the Superior Court, San Francisco County, California. The court set December 21, 2000, as the date for a final settlement approval hearing. This is a claims-based settlement, which means that the claims will be paid as submitted over a nine-year period. An independent adjuster will review each claim submitted and determine if it qualifies for payment under the terms of the settlement agreement. Note 15: Commitments and Contingencies The company's capital expenditures, excluding acquisitions, are expected to be approximately $800 million in 2000, as compared to actual expenditures of $566 million in 1999. However, the expected expenditure level could be increased or decreased as a consequence of future economic conditions. The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. Note 16: Acquisitions MacMillan Bloedel Limited On November 1, 1999, the company completed its acquisition of MacMillan Bloedel Limited (MB) following the approval of the transaction by the shareholders of MB and securing all regulatory approvals in the United States, Canada and other jurisdictions. The total purchase price updated through September 24, 2000, including assumed debt of $703 million, totaled $3,022 million. Through September 24, 2000, the company issued 20 million common shares, and its wholly owned Canadian subsidiary, Weyerhaeuser Company Ltd., issued 14 million Exchangeable Shares to fund the transaction. At the option of the holder, the Exchangeable Shares may be exchanged for Weyerhaeuser common shares on a one-for-one basis. In addition, the company issued replacement options in exchange for outstanding MB options with the number of shares and the exercise price appropriately adjusted by the exchange ratio. With the exception of $247 million of cash and short-term investments acquired, this transaction was a noncash investing activity in which the company acquired assets and assumed liabilities in exchange for common and exchangeable shares as described above. The company accounted for the transaction using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired company were included in the Consolidated Balance Sheet and the operating results were included in the Consolidated Statement of Earnings beginning November 1, 1999. The purchase price to MB shareholders of $2,319 million was calculated as follows: Weyerhaeuser common and exchangeable shares issued through September 24, 2000 33,767,088 Multiplied by the average market price (U.S.) $ 67.953 ------------ Value of common and exchangeable shares issued $ 2,294 Value of replacement options issued for MB stock options 25 ------------ Total purchase price $ 2,319 ============
Weyerhaeuser Company -18- The purchase price to MB shareholders, plus estimated direct transaction costs and expenses, additional accrued liabilities and the deferred tax effect of applying purchase accounting at November 1, 1999, over the historical net assets of MB, was calculated as follows:
Dollar amounts in millions Purchase price to MB shareholders $ 2,319 Direct transaction costs and expenses 18 Additional accrued liabilities 99 Deferred tax effect of applying purchase accounting 375 Less: historical net assets (951) ------------ Total excess costs $ 1,860 ============
The above calculation of excess purchase price is preliminary. The company will finalize this allocation by November 1, 2000. As of September 24, 2000, the excess purchase price was allocated as follows:
Dollar amounts in millions Plant, property and equipment, timber and timberlands, and investment in equity affiliates $ 1,030 Goodwill 830 ------------ Total excess costs $ 1,860 ============
Property, plant and equipment are being depreciated over an average of 20 years. The cost of timber and timberlands is charged to expense as the related timber is harvested, estimated to be 25 to 40 years. Goodwill is being amortized on a straight-line basis over 40 years. The summarized unaudited pro forma information, assuming this acquisition occurred at the beginning of fiscal year 1999, is as follows:
Pro Forma Information (unaudited) Thirty-nine weeks ended Dollar amounts in millions Sept. 26, 1999 -------------- Net sales and revenues $ 10,944 Net earnings before the cumulative effect of a change in an accounting principle 501 Net earnings 409 Earnings per share: Basic $ 1.75 Diluted $ 1.72
TJ International On January 6, 2000, the company acquired a controlling interest in TJ International (TJI), a 51 percent owner and managing partner of Trus Joist MacMillan (TJM), through a successful tender offer that represented more than 90 percent of the total number of outstanding shares. The company had acquired a 49 percent interest in TJM through its acquisition of MacMillan Bloedel, completed in November 1999. On January 21, 2000, the company completed the acquisition through the filing of a short-term merger document. This acquisition was completed under the terms of an offer by the company to purchase all outstanding shares of TJI for $42 per share and stock option cash-outs of certain TJI management personnel. The total purchase price, including assumed debt of $142 million, was $877 million. The company accounted for the transaction using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired company were included in the Consolidated Balance Sheet and the operating results were included in the Consolidated Statement of Earnings beginning January 6, 2000. Weyerhaeuser Company -19- The purchase price, plus estimated direct transaction costs and expenses, and the deferred tax effect of applying purchase accounting as of September 24, 2000, was calculated as follows:
Dollar amounts in millions Purchase price of tender offer and stock option cash-out $ 735 Direct transaction costs and expenses 21 Deferred tax effect of applying purchase accounting 116 Less: historical net assets (242) ------------ Total excess costs $ 630 ============
The above calculation of excess purchase price is preliminary. The company will finalize this allocation by January 6, 2001. As of September 24, 2000, the excess purchase price was allocated as follows:
Dollar amounts in millions Property, plant and equipment $ 288 Goodwill 342 ------------ Total excess costs $ 630 ============
Property, plant and equipment are being depreciated over an average of 20 years. Goodwill is being amortized on a straight-line basis over 40 years. Australian Sawmills and Distribution Capabilities During the 2000 second quarter, the company completed its previously announced acquisition of two sawmills and related assets in Australia from CSR Ltd. of Australia. Weyerhaeuser paid approximately US $48 million in cash to acquire: . Two sawmills with a combined annual production capacity of 171 million board feet (291,000 cubic meters) of lumber. The mills are located in Tumut, New South Wales; and Caboolture, Queensland. . CSR's 70 percent stake in Pine Solutions, Australia's largest softwood timber distributor. RII Weyerhaeuser World Timberfund LP, a partnership between Weyerhaeuser and UBS Brinson, acquired a 30 percent ownership of Pine Solutions last year. Note 17: Business Segments The company is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products. The company's principal business segments are timberlands (including logs, chips and timber); wood products (including softwood lumber, plywood and veneer; composite panels; oriented strand board; hardwood lumber; treated products; engineered wood; doors; raw materials; and building materials distribution); pulp, paper and packaging (including pulp, paper, containerboard, packaging, paperboard and recycling); and real estate and related assets. The timber-based businesses involve a high degree of integration among timber operations; building materials conversion facilities; and pulp, paper, containerboard and paperboard primary manufacturing and secondary conversion facilities. This integration includes extensive transfers of raw materials, semi-finished materials and end products between and among these groups. The company's accounting policies for segments are the same as those described in Note 1: Summary of Significant Accounting Policies. Management evaluates segment performance based on the contributions to earnings of the respective segments. Accounting for segment profitability in integrated manufacturing sites involves allocation of joint conversion and common facility costs based upon the extent of usage by the respective product lines at that facility. Transfer of products between segments is accounted for at current market values. Weyerhaeuser Company -20- An analysis and reconciliation of the company's business segment information to the respective information in the consolidated financial statements is as follows:
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, Dollar amounts in millions 2000 1999 2000 1999 ------- ------- -------- ------- Sales to and revenues from unaffiliated customers: Timberlands $ 151 $ 166 $ 795 $ 495 Wood products 1,606 1,337 5,092 3,865 Pulp, paper and packaging 1,546 1,253 4,550 3,435 Real estate and related assets 341 311 943 901 Corporate and other 46 53 136 133 ------- ------- -------- ------- 3,690 3,120 11,516 8,829 ------- ------- -------- ------- Intersegment sales: Timberlands 212 132 681 383 Wood products 64 65 196 162 Pulp, paper and packaging 51 26 110 82 Corporate and other 5 4 11 8 ------- ------- -------- ------- 332 227 998 635 ------- ------- -------- ------- Total sales and revenues 4,022 3,347 12,514 9,464 Intersegment eliminations (332) (227) (998) (635) ------- ------- -------- ------- $3,690 $3,120 $11,516 $8,829 ======= ======= ======== ======= Approximate contribution (charge) to earnings (1): Timberlands $ 111 $ 130 $ 437 $ 392 Wood products 55 202 187 363 Pulp, paper and packaging 252 105 675 180 Real estate and related assets (1) 54 56 181 147 Corporate and other (76) (61) (216) (197) ------- ------- -------- ------- 396 432 1,264 885 Interest expense 87 62 260 196 Less capitalized interest 4 3 13 7 ------- ------- -------- ------- Earnings before income taxes and the cumulative effect of a change in an accounting principle 313 373 1,017 696 Income taxes 114 136 371 254 ------- ------- -------- ------- Earnings before the cumulative effect of a change in an accounting principle 199 237 646 442 Cumulative effect of a change in an accounting principle -- -- -- 89 ------- ------- -------- ------- $ 199 $ 237 $ 646 $ 353 ======= ======= ======== =======
There were no material changes from year-end 1999 in total assets, basis of segmentation or basis for measuring segment profit or loss. Certain reclassifications have been made to conform prior year's data to the current format. (1) Interest expense of $3 million and $4 million for the thirteen weeks and $11 million and $12 million for the thirty-nine weeks ended September 24, 2000, and September 26, 1999, respectively, is included in the determination of approximate contributions to earnings and excluded from interest expense for financial services businesses. Weyerhaeuser Company -21- WEYERHAEUSER COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated Results Consolidated net earnings for the third quarter were $199 million, or $0.90 basic and diluted earnings per share, a decrease of 16 percent from 1999 third quarter earnings of $237 million, or $1.18 basic and diluted earnings per share. Consolidated net sales and revenues for the quarter were $3.7 billion, an increase of 18 percent over the $3.1 billion reported in the same period last year. The third quarter results were negatively impacted by weak markets for wood products, but benefited from the strong performance of the pulp, paper and packaging sector, the addition of the MacMillan Bloedel Limited (MB) and Trus Joist International (TJI) acquisitions and the related acquisition synergies the company is achieving. Year-to-date earnings were $646 million, or $2.84 basic earnings per share ($2.83 diluted) compared to $353 million, or $1.76 basic and diluted earnings per share for the prior year. The year-to-date results include an after-tax charge of $82 million, or $0.36 per share, to cover estimated costs of a nationwide class action settlement and claims related to hardboard siding. See Note 14 of Notes to Financial Statements. Prior year results were impacted by an after-tax charge of $89 million, or $0.45 per share from the cumulative effect of a change in an accounting principle and $60 million, or $0.30 per share associated with the impairment of long- lived assets. See Notes 1 and 13 of Notes to Financial Statements. Earnings before these charges were $728 million, or $3.20 basic earnings per share, in 2000, compared to $502 million, or $2.51 per share, in 1999. Consolidated net sales and revenues year to date were $11.5 billion, up 30 percent from $8.8 billion in the prior year. Timberlands Third quarter operating earnings for the timberlands segment were $111 million, a 15 percent decrease from $130 million reported last year. Year-to-date segment operating earnings of $437 million compares to $392 million reported in 1999. Sales to unaffiliated customers were $151 million, down 9 percent from $166 million in the 1999 third quarter. Intersegment sales were $212 million compared to $132 million reported a year ago, primarily due to acquisition related increases. After weakening throughout much of the quarter due to soft lumber markets, domestic log prices stabilized during September. Domestic log prices, however, remain below last year's levels, a trend the company expects to continue through the fourth quarter. Export markets strengthened during the quarter, resulting in September prices reaching their highest levels since 1997. Export markets may weaken during the fourth quarter due to seasonal factors. Wood Products This segment recorded operating earnings of $55 million for the quarter, a 73 percent decrease from a record $202 million in the same quarter last year. Year-to-date operating earnings of $187 million included a $130 million pretax charge to cover estimated costs of the nationwide class action settlement and claims related to hardboard siding. Operating earnings for the first nine months of 1999 were $363 million, which included $94 million in pretax charges related to the impairment and disposition of certain long-lived assets. Excluding these charges, the segment earned $317 million in the first nine months of 2000 compared to $457 million in 1999. The markets for most of the company's wood products continued to weaken during the quarter, leading to lower earnings. The addition of the MB and TJI acquisitions contributed to higher sales volumes for most products, but realizations were impacted by lower prices. An exception was the demand for engineered wood products, which held up well during the quarter. At the end of the quarter, softwood lumber prices had stabilized but market conditions remain weak. Sales were $1.6 billion in the quarter, up 20 percent from the $1.3 billion reported for the third quarter of 1999. Weyerhaeuser Company -22- Third party sales and total production volumes for the major products in the timberlands and wood products segments for the thirteen and thirty-nine weeks ended September 24, 2000, and September 26, 1999, are as follows:
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, Third party sales volumes (millions) 2000 1999 2000 1999 ------------------------------------ ------- ------- -------- ------- Timberlands: Raw materials - cubic feet 64 72 478 212 Wood products: Softwood lumber - board feet 1,804 1,408 5,386 4,122 Softwood plywood and veneer - square feet (3/8") 572 476 1,666 1,394 Composite panels - square feet (3/4") 97 54 292 333 Oriented strand board - square feet (3/8") 761 616 2,431 1,960 Hardwood lumber - board feet 100 97 299 300 Hardwood doors (thousands) 200 193 564 567 Raw materials - cubic feet 90 67 273 200 Total production volumes (millions) ----------------------------------- Timberlands: Logs - cubic feet 182 129 559 386 Wood products: Softwood lumber - board feet 1,322 1,067 4,206 3,260 Softwood plywood and veneer - square feet (3/8") 320 260 987 773 Composite panels - square feet (3/4") 50 18 163 246 Oriented strand board - square feet (3/8") 851 589 2,516 1,726 Hardwood lumber - board feet 94 95 291 286 Hardwood doors (thousands) 202 194 573 564 Logs - cubic feet 119 132 362 384
Pulp, Paper and Packaging Operating earnings for the quarter were $252 million, a 140 percent increase over $105 million reported in the third quarter of 1999. Year-to- date operating earnings of $675 million are ahead of prior year earnings of $180 million. Third quarter sales were $1.5 billion, a 23 percent increase over $1.3 billion in the same quarter a year ago. Strong earnings in the segment were driven by higher prices and the addition of the MB containerboard and packaging business. The segment's earnings were unfavorably impacted by extended downtime during the quarter due to equipment failure at the Prince Albert pulp mill. Orders for market pulp and containerboard from the non- Japanese Asian markets were lower in the quarter and this weakness is continuing into the fourth quarter. This decline in orders will result in lower production levels in the company's pulp and containerboard businesses during the fourth quarter. Weyerhaeuser Company -23- Third party sales and total production volumes for the major products in this segment for the thirteen and thirty-nine weeks ended September 24, 2000, and September 26, 1999, are as follows:
Thirteen Thirty-nine weeks ended weeks ended ---------------- ---------------- Sept. Sept. Sept. Sept. 24, 26, 24, 26, Third party sales volumes (thousands) 2000 1999 2000 1999 ------------------------------------ ------- ------- -------- ------- Pulp - air-dry metric tons 541 561 1,563 1,675 Paper - tons 408 360 1,171 1,086 Paperboard - tons 64 65 192 183 Containerboard - tons 195 118 721 373 Packaging - MSF 13,086 11,329 39,883 33,877 Recycling - tons 764 709 2,280 2,075 Total production volumes (thousands) ------------------------------------ Pulp - air-dry metric tons 574 555 1,707 1,632 Paper - tons 391 343 1,190 1,117 Paperboard - tons 68 68 193 188 Containerboard - tons 782 634 2,635 1,851 Packaging - MSF 13,817 11,626 41,950 35,421 Recycling - tons 1,073 1,064 3,312 3,166
Real Estate and Related Assets The segment earned $54 million in the quarter, a 4 percent decrease from $56 million in the same quarter last year. Year-to-date operating earnings of $181 million exceed last year's earnings of $147 million by 23 percent. Year-to-date 2000 earnings include a $21 million gain on the sale of assets within a real estate joint venture. Third quarter revenues were $341 million in 2000 compared to $311 million in 1999. While national new home sales appear to be weakening, housing demand remains strong in the markets in which the company operates. Costs and Expenses Third quarter costs and expenses were $3.3 billion, a 23 percent increase over the same period last year. The increase includes the incremental operating and one-time transition costs related to the MB and TJI acquisitions. Weyerhaeuser's costs of products sold, as a percentage of net sales, was 76 percent for the current quarter as compared to 73 percent for the third quarter of 1999, due to lower sales prices in the current quarter. As of the end of the third quarter of 2000, the company has achieved $83 million in synergies associated with the integration of the MB and TJI acquisitions, of which $35 million was achieved in the third quarter. The increase in the real estate and related assets segment's costs and expenses can be attributed to increased sales volumes over the same period last year. Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. There were no significant individual items in the third quarter of 2000 or 1999. Liquidity and Capital Resources General The company is committed to the maintenance of a sound, conservative capital structure. This commitment is based upon two considerations: the obligation to protect the underlying interests of its shareholders and lenders and the desire to have access, at all times, to all major financial markets. The important elements of the policy governing the company's capital structure are as follows: . To view separately the capital structures of Weyerhaeuser Company, Weyerhaeuser Real Estate Company and related subsidiaries, given the very different nature of their assets and business activities. The amount of debt and equity associated with the capital structure of each will reflect the basic earnings capacity, real value and unique liquidity characteristics of the assets dedicated to that business. Weyerhaeuser Company -24- . The combination of maturing short-term debt and the structure of long- term debt will be managed judiciously to minimize liquidity risk. Operations Year-to-date consolidated net cash provided by operations was $557 million, a decrease of $359 million from $916 million provided in 1999. Cash provided by operations before net changes in working capital was $1,295 million, an increase of $254 million over the $1,041 million provided in the first nine months of 1999. This increase was due primarily to increases of $293 million in net earnings and $133 million in depreciation, amortization and fee stumpage over 1999, which resulted from additional assets acquired in the MB and TJI acquisitions. In addition, a $130 million noncash charge was recognized in 2000 for the settlement of hardboard siding claims. Significant noncash charges in 1999 included $89 million, net of income taxes, for the effect of a change in an accounting principle and $94 million for impairment and disposition of certain long- lived assets. These charges were offset, in part, by increases of $61 million in pension and other postretirement benefits and $62 million in equity earnings of affiliates and unconsolidated entities. Cash required for working capital by Weyerhaeuser for the first nine months of 2000 was $656 million, an increase of $511 million over the 1999 requirement for the same period. Requirements for 2000, net of the effects of the TJI and Australian acquisitions, included increases of $47 million in inventories and $101 million in prepaid expenses along with a decrease of $518 million in accounts payable and accrued liabilities. The inventory increase was across all product lines with an inventory turnover rate of 10.7 turns for the current quarter compared to 10.9 turns in the 2000 second quarter and 12.4 turns in the 1999 third quarter. The increase in prepaid expenses consists of payments for deferred charges, deposits and advances, including timber-cutting rights. Accrued liabilities that have decreased since year-end 1999 include payroll, product warranties, interest and income taxes. Real estate and related assets working capital cash outflows included $106 million expended for the acquisition and development of land and residential lots for construction in excess of products sold. Year-to-date earnings before interest expense and income taxes plus noncash charges for the principal business segments were: . Timberlands - $497 million, an increase of $68 million over $429 million reported in 1999. This reflects increases in both operating earnings and depreciation, amortization and fee stumpage. . Wood products - $499 million compared to $582 million in 1999. Operating earnings declined by $176 million while depreciation increased by $54 million. 2000 included a noncash charge of $130 million to cover the estimated costs of the hardboard siding claim. 1999 included a noncash charge of $94 million for the impairment and disposition of certain long-lived assets. . Pulp, paper and packaging - $990 million compared to $456 million in 1999 as a result of significantly improved operating earnings and increased depreciation. Investing Capital expenditures, excluding acquisitions, for the first nine months were $576 million compared to $336 million a year ago. 2000 capital spending by segment was $86 million for timberlands, $206 million for wood products, $252 million for pulp, paper and packaging, $16 million for real estate and related assets, and $16 million for corporate and other. The company currently anticipates capital expenditures, excluding acquisitions, to approximate $800 million for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. During the first nine months of the year, the company expended $48 million to acquire two sawmills and distribution capabilities in Australia and $594 million to complete its tender offer for the stock of TJI. The cash needed to meet capital expenditures, investments and other requirements was generated principally from internal cash flows and the redemption of short-term securities held at year-end 1999. Weyerhaeuser Company -25- Financing Year to date, Weyerhaeuser has decreased its interest-bearing debt by $74 million. Payments of $917 million on long-term debt obligations were offset, in part, by an increase of $832 million in commercial paper borrowings. The company's debt to total capital ratio was 37 percent at the end of the quarter. This is comparable to 36 percent at both the end of the 1999 third quarter and year end 1999. The real estate and related assets segment increased third party debt by $4 million to finance real estate purchases. This was the net of $58 million provided by commercial paper and other borrowings less $54 million used to pay off scheduled note maturities. Cash dividends of $274 million were paid in the first nine months of 2000 compared to $240 million in 1999. This reflects the additional shares issued in the MB acquisition. During the first nine months of 2000, the company expended $808 million to purchase 16.2 million of its common shares. This completed the 12 million share repurchase program authorized by the board of directors in January and commenced a second program authorized in June to repurchase an additional 10 million shares, which should be completed within a year. Environmental Matters Over the past several years, the National Marine Fisheries Service (NMFS) has listed as threatened or endangered under the Endangered Species Act (ESA) various species of salmon and steelhead trout that spawn in the Pacific Northwest (Washington, Oregon, Idaho and northern California) and some additional populations have been proposed to be listed. The U.S. Fish and Wildlife Service also has listed a number of species as threatened or endangered under the ESA, including the northern spotted owl, marbled murrelet, bull trout and lynx. The ESA automatically prohibits the "take" of species listed as endangered and gives NMFS authority to prohibit the "take" of species it lists as threatened. In the second quarter, NMFS announced adoption of rules to prohibit "take" of the salmon species it has listed as threatened, except "incidental take" that may result from activities regulated under state or local programs approved by NMFS. The rules became effective September 8, 2000, for steelhead and will become effective January 8, 2001, for most threatened salmon species. State agencies and local governments are reviewing their environmental regulations regarding forestry and other land use activities and are considering adoption of stronger regulations to help protect habitat for such species and obtain such approvals from NMFS. Requirements to protect habitat for threatened and endangered species have resulted in restrictions in timber harvests on nonfederal timberlands, including some timberlands of the company. For example, during the second quarter of 1999, the Washington State Legislature amended that state's Forest Practices Act to implement a salmon recovery agreement negotiated among state and federal agencies, Indian tribes and forest landowner organizations and in the first quarter of 2000 the Washington Forest Practices Board adopted interim rules to implement that agreement. These rules require additional timber to be left unharvested in riparian zones along streams and impose added road construction and maintenance costs, partially offset by reductions in state timber harvest taxes. The company expects the new rules to require some reductions in timber harvest from its lands and other private and public lands in Washington, but does not expect these reductions to significantly impair its ability to operate its facilities or supply products to its customers. The new NMFS rules relating to threatened steelhead and salmon specifically provide for approval of these state rules as an exception to the prohibition against "take" of those species; the company expects such approval to be finalized within the next several quarters. In the future, requirements to protect habitat could result in restrictions on timber harvest and other forest management practices on some of the company's timberlands, could increase operating costs, and could affect timber supply and prices in some regions. The company does not believe that such restrictions will have a significant effect on the company's total harvest of timber in 2000 or 2001, although they may have such an effect in the future. The company has established reserves for remediation costs on all of the approximately 115 active sites across our operations as of the end of September 2000 in the aggregate amount of $61 million, compared to $45 million at the end of 1999. This increase reflects the incorporation of new information on all sites concerning remediation alternatives, updates on prior cost estimates and new sites (none of which were significant) less the costs incurred to remediate these sites during this period. The company has accrued remediation costs of $23 million and $16 million in the first nine months of 2000 and 1999, respectively. The company incurred remediation costs of $7 million and $8 million during the first nine months of 2000 and 1999, respectively, and charged these costs against the reserve. Weyerhaeuser Company -26- Legal Proceedings The company announced in June 2000 it had entered into a proposed nationwide settlement of its hardboard siding class action cases and, as a result, took an after-tax charge of $82 million to cover the estimated cost of the settlement and related claims. In July 2000, the proposed settlement received preliminary approval from the Superior Court, San Francisco County, California. The court set December 21, 2000, as the date for a final settlement approval hearing. Acquisition of TJ International On January 6, 2000, the company acquired a controlling interest in TJ International (TJI), a 51 percent owner and managing partner of Trus Joist MacMillan (TJM), through a successful tender offer that represented more than 90 percent of the total number of outstanding shares. On January 21, 2000, the company completed the acquisition through the filing of a short- term merger document. See Note 16: Acquisitions in Notes to Financial Statements. Other . During the fourth quarter of 1999, the company announced a new initiative to streamline and improve delivery of internal support services that is expected to result in $150 million to $200 million in annual savings. The company began implementation of these plans during the first quarter of 2000, a process that may take up to three years to complete. Because implementation plans are still under review, the specific number of employees affected, exact timing of the implementation and associated costs have not been finalized. . On October 2, 2000, the company's wholly owned Canadian subsidiary, Weyerhaeuser Company Limited, announced the closure of an agreement to acquire the operations of Coast Mountain Hardwoods, a subsidiary of Advent International Corp., in British Columbia. Terms were not disclosed. The purchase includes a hardwood lumber mill producing more than 42 million board feet (MMBF) annually; dry kilns with annual capacity of 20 MMBF; an abrasive planer that produces more than 25 MMBF annually; and five volume-based forest licenses dispersed in the Vancouver, B.C. forest region. Weyerhaeuser's hardwoods business will manage the facility in conjunction with Weyerhaeuser Company Limited and continue to serve as the sole marketer for Coast Mountain's hardwood products. Contingencies The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period such proceedings or matters could have a material effect on results of operations. Quantitative and Qualitative Disclosures About Market Risk As part of the company's financing activity, derivative securities are sometimes used to achieve the desired mix of fixed versus floating rate debt and to manage the timing of finance opportunities. The company does not hold or issue derivative financial instruments for trading. They are used to manage well-defined interest rate and foreign exchange risks. These include: . Foreign exchange contracts, which are hedges for foreign denominated accounts receivable and accounts payable. These contracts generate gains or losses that are recognized at the contracts' respective settlement dates. At September 24, 2000, the company had a long position in Canadian dollars with a fair value of $52 million, a long position in German DMs with a fair value of $1 million and a short position in Japanese yen with a fair value of $19 million. The corresponding contract values are $51 million, $2 million and $21 million, respectively. . Interest rate swaps entered into with major financial institutions in which the company pays a fixed rate and receives a floating rate, with the interest payments being calculated on a notional amount. The notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. At September 24, 2000, the company had one interest rate swap with a maturity date of November 6, 2001, and a notional amount of $75 million with a fixed interest rate of 6.85 percent. The variable rate at September 24, 2000, based on the 30-day LIBOR, was 6.62 percent, with the fair value of the swap being a loss of $1.5 million. The amount of the obligation Weyerhaeuser Company -27- under this swap is based on the assumption that it had terminated at the end of the fiscal period and provides for the netting of amounts payable by and to the counterparty. In each case, the amount of such obligation is the net amount so determined. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to these financial instruments; however, the company does not expect its counterparties to fail to meet their obligations. The company deals only with highly rated counterparties. Part II. Other Information Item 1. Legal Proceedings The company conducted a review of its 10 major pulp and paper facilities to evaluate the facilities' compliance with federal Prevention of Significant Deterioration (PSD) regulations. The results of the reviews were disclosed to seven state agencies and the Environmental Protection Agency (EPA) during 1994 and 1995. All PSD compliance issues identified in the review have been resolved, except for PSD issues at the company's Springfield, Oregon, containerboard facility. A final decision is expected to be made by the Lane Regional Air Pollution Control Authority (Lane County, Oregon) concerning alleged PSD and permit violations at the company's Springfield, Oregon, containerboard manufacturing facility upon issuance of the facility's Title V permit in 2000. In addition, the company has conducted a review of two wood products facilities that were recently acquired to evaluate their compliance with PSD and new source review regulations. The company has entered into a proposed class action settlement of hardboard siding claims against the company. The settlement class consists of all persons who own or owned structures in the United States on which the company's hardboard siding has been installed from January 1, 1981 through December 31, 1999. The proposed settlement received preliminary approval from the Superior Court, San Francisco County, California on July 12, 2000. The court set December 21, 2000, as the date for a hearing on final approval of the proposed settlement. The company took an after-tax charge of $82 million in the second quarter to cover the estimated cost of the settlement and related costs. If the proposed nationwide class action settlement is approved, two cases in which class actions have been claimed but not certified in Oregon and Texas and one case in Washington claiming a class that has been dismissed and is now on appeal will be dismissed. Cases pending in South Carolina and Iowa in which statewide classes have been sought but not certified, could proceed as individual cases but could not be certified as class actions on behalf of any claimants included in a certified nationwide class. At the end of the third quarter, the company also was a defendant in about 25 nonclass hardboard siding cases involving primarily multi-family structures and residential developments. In May 1999, two civil antitrust lawsuits were filed against the company in U.S. District Court, Eastern District of Pennsylvania. Both suits name as defendants several other major containerboard and packaging producers. The complaint in the first case alleges the defendants conspired to fix the price of linerboard and that the alleged conspiracy had the effect of increasing the price of corrugated containers. The suit purports to be a class action on behalf of purchasers of corrugated containers during the period October 1993 through November 1995. The complaint in the second case alleges that the company conspired to manipulate the price of linerboard and thereby the price of corrugated sheets. The suit purports to be a class action on behalf of purchasers of corrugated sheets during the period October 1993 through November 1995. Both suits seek damages, including treble damages, under the antitrust laws. In May 1999, the Equity Committee ("the Committee") in the Paragon Trade Brands, Inc. bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the company in the name of the debtor's estate. Specifically, the Committee seeks to assert that the company breached certain warranties in agreements entered into between Paragon and the company in connection with Paragon's public offering of common stock in January 1993. The Committee seeks to recover damages sustained by Paragon as a result of two patent infringement cases, one brought by Procter & Gamble and the other by Kimberly-Clark. In September 1999, the court authorized the Committee to commence an adversary proceeding against the company. The Committee commenced this proceeding in October 1999, seeking damages in excess of $420 million against the company. Subsidiaries of the company, formerly known as MacMillan Bloedel Limited and MacMillan Bloedel (USA) Inc., have agreed to settle a class action suit involving claims in the United States (excluding Colorado) alleging the failure of cement fiber roofing products previously manufactured by American Cemwood Corporation, a company owned by MacMillan Bloedel (USA) Inc. The proposed settlement would create a fund of $105 million, consisting of $65 million in cash and $40 million guaranteed recovery by the class from certain insurance carriers. The settlement received final court approval in May 2000. The company has established reserves for liabilities and legal defense costs it believes are probable and reasonably estimable with respect to the proposed settlement and pending suits and claims. Weyerhaeuser Company -28- Item 1. Legal Proceedings - Continued In April 2000, the Environmental Protection Agency (Region X) issued a notice of violation (NOV) and proposed penalty of $194 thousand to the company's Mountain Pine, Arkansas, manufacturing facility. The NOV alleges the facility was in violation of its Title V operating permit because it had reported multiple instances in which the mill's two boilers had exceeded pressure drop and scrubber flow rate requirements in its permits. The company has appealed the proposed penalty. Settlement negotiations are ongoing. The company is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," and similar state laws. The EPA and/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that any ultimate outcome resulting from these proceedings and matters, or all of them combined, would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. Item 6. Exhibits and Reports on Form 8-K Exhibits 27 Financial Data Schedules Reports on Form 8-K The registrant filed reports on Form 8-K dated January 24, April 20, July 10, July 18, and October 23, 2000, reporting information under Item 5, Other Events. The registrant filed a Form 8-K on January 10, 2000, which amended a Form 8- K dated November 9, 1999, reporting information under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements and Exhibits. Weyerhaeuser Company and Subsidiaries EXHIBITS INDEX ------------------------------------------------------------------------- Exhibits: 27 - Financial Data Schedules