10-Q 1 f10qmar02.txt 10-Q MARCH 2002 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirteen weeks ended March 31, 2002 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 98063-9777 Telephone (253)924-2345 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on 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 May 3, 2002, was 218,453,874 common shares ($1.25 par value). Weyerhaeuser Company -2- WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirteen weeks ended March 31, 2002 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 8-23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24-29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Part II. Other Information Item 1. Legal Proceedings 30-31 Item 2. Changes in Securities 31 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 31 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 30, 2001. 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 thirteen-week period ending March 31, 2002, 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/ Steven J. Hillyard --------------------------- Steven J. Hillyard Duly Authorized Officer and Principal Accounting Officer May 15, 2002 Weyerhaeuser Company -3- WEYERHAEUSER COMPANY AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF EARNINGS For the thirteen-week periods ended March 31, 2002 and April 1, 2001 (Dollar amounts in millions except as noted and per-share figures)/(Unaudited)
Thirteen weeks ended: March 31, April 1, 2002 2001 --------- --------- Net sales and revenues: Weyerhaeuser $ 3,612 $ 3,219 Real estate and related assets 396 334 -------- -------- Total net sales and revenues 4,008 3,553 -------- -------- Costs and expenses: Weyerhaeuser: Costs of products sold 2,848 2,492 Depreciation, amortization and fee stumpage 264 211 Selling expenses 103 91 General and administrative expenses 186 171 Research and development expenses 12 13 Taxes other than payroll and income taxes 38 37 Other operating costs, net (Note 6) -- (13) Support alignment costs (Note 15) 4 45 Charges for integration of facilities (Note 16) 2 9 Charges for closure of facilities (Note 17) 27 -- -------- -------- 3,484 3,056 -------- -------- Real estate and related assets: Costs and operating expenses 291 243 Depreciation and amortization 2 1 Selling expenses 21 19 General and administrative expenses 10 13 Taxes other than payroll and income taxes 1 2 Other operating costs, net (Note 6) (8) (1) -------- -------- 317 277 -------- -------- Total costs and expenses 3,801 3,333 -------- -------- Operating income 207 220 Interest expense and other: Weyerhaeuser: Interest expense incurred (143) (88) Less interest capitalized 4 4 Equity in income of affiliates (Note 5) (4) 15 Interest income and other 5 6 Real estate and related assets: Interest expense incurred (13) (19) Less interest capitalized 13 16 Equity in income of unconsolidated entities (Note 5) 6 14 Interest income and other 6 2 -------- -------- Earnings before income taxes and extraordinary item 81 170 Income taxes (Note 7) (28) (63) -------- -------- Earnings before extraordinary item 53 107 Extraordinary item (Note 18) (23) -- -------- -------- Net earnings $ 30 $ 107 ======== ======== Basic and diluted net earnings per share (Note 2): Before extraordinary item $ 0.24 $ 0.49 Extraordinary item (Note 18) (0.10) -- -------- -------- Basic and diluted net earnings $ 0.14 $ 0.49 ======== ======== Dividends paid per share $ 0.40 $ 0.40 ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -4- WEYERHAEUSER COMPANY AND SUBSIDIARIES ----------------------------------- CONSOLIDATED BALANCE SHEET March 31, 2002 and December 30, 2001 (Dollar amounts in millions)
March 31, Dec. 30, 2002 2001 --------- --------- (Unaudited) Assets ------ Weyerhaeuser Current assets: Cash and cash equivalents (Note 1) $ 127 $ 202 Receivables, less allowances 1,599 1,024 Inventories (Note 8) 2,072 1,428 Prepaid expenses 509 407 --------- --------- Total current assets 4,307 3,061 Property and equipment (Note 9) 12,454 8,309 Construction in progress 1,169 428 Timber and timberlands at cost, less fee stumpage charged to disposals 4,457 1,789 Investments in and advances to equity affiliates (Note 5) 542 541 Goodwill (Note 10) 2,741 1,095 Deferred pension and other assets 1,170 1,053 --------- --------- 26,840 16,276 --------- --------- Real estate and related assets Cash and cash equivalents 11 2 Receivables, less discounts and allowances 67 71 Mortgage-related financial instruments, less discounts and allowances 35 62 Real estate in process of development and for sale 699 689 Land being processed for development 1,028 958 Investments in unconsolidated entities, less reserves (Note 5) 59 60 Other assets 179 175 --------- --------- 2,078 2,017 --------- --------- Total assets $ 28,918 $ 18,293 ========= =========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -5-
March 31, Dec. 30, 2002 2001 --------- --------- (Unaudited) Liabilities and shareholders' interest -------------------------------------- Weyerhaeuser Current liabilities: Notes payable and commercial paper (Note 12) $ 260 $ 4 Current maturities of long-term debt (Note 13) 214 8 Accounts payable (Note 1) 1,072 809 Accrued liabilities (Note 11) 1,177 1,042 --------- --------- Total current liabilities 2,723 1,863 Long-term debt (Note 13) 12,927 5,095 Deferred income taxes (Note 7) 4,353 2,377 Deferred pension, other postretirement benefits and other liabilities 921 877 Commitments and contingencies (Note 19) --------- --------- 20,924 10,212 --------- --------- Real estate and related assets Notes payable and commercial paper (Note 12) 262 358 Long-term debt (Note 13) 596 620 Other liabilities 451 408 Commitments and contingencies (Note 19) --------- --------- 1,309 1,386 --------- --------- Total liabilities 22,233 11,598 --------- --------- Shareholders' interest (Note 14) Common shares: $1.25 par value; authorized 400,000,000 shares; issued and outstanding: 218,426,772 and 216,573,822 273 271 Exchangeable shares: no par value; unlimited shares authorized; issued and held by nonaffiliates: 2,396,422 and 3,289,259 163 224 Other capital 2,797 2,693 Retained earnings 3,794 3,852 Cumulative other comprehensive expense (342) (345) --------- --------- Total shareholders' interest 6,685 6,695 --------- --------- Total liabilities and shareholders' interest $ 28,918 $ 18,293 ========= =========
Weyerhaeuser Company -6- WEYERHAEUSER COMPANY AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS For the thirteen-week periods ended March 31, 2002 and April 1, 2001 (Dollar amounts in millions) (Unaudited)
Consolidated -------------------- March 31, April 1, 2002 2001 --------- --------- Cash provided by (used for) operations: Net earnings $ 30 $ 107 Non-cash charges (credits) to income: Depreciation, amortization and fee stumpage 266 212 Deferred income taxes, net 8 28 Pension and other post-retirement benefits (36) (62) Equity in income of affiliates and unconsolidated entities (2) (29) Countervailing duties and antidumping penalties (Note 19) (4) -- Charges for integration of facilities (Note 16) 2 9 Charges for closure of facilities (Note 17) 27 -- Charge for impairment of long-lived assets (Note 15) -- 20 Extraordinary loss on early extinguishment of debt(Note 18) 35 -- Decrease (increase) in working capital, net of acquisitions: Receivables (153) 3 Inventories, real estate and land (197) (211) Prepaid expenses (67) (7) Mortgage-related financial instruments 3 1 Accounts payable and accrued liabilities 10 (207) (Gain) loss on disposition of assets 10 (4) Other (7) (15) --------- --------- Net cash provided by (used for) operations (75) (155) --------- --------- Cash provided by (used for) investing activities: Property and equipment (158) (179) Timberlands reforestation (12) (10) Acquisition of timberlands (6) (33) Acquisition of businesses and facilities, net of cash acquired (Note 20) (6,119) -- Net distributions from (investments in) equity affiliates 7 163 Proceeds from sale of: Property and equipment 18 12 Mortgage-related financial instruments 24 2 Intercompany advances -- -- Other (18) 26 --------- --------- Net cash provided by (used for) investing activities (6,264) (19) --------- --------- Cash provided by (used for) financing activities: Issuances of debt 13,001 18 Notes and commercial paper borrowings, net (66) 207 Cash dividends (88) (87) Intercompany cash dividends -- -- Payments on debt (6,617) (21) Exercise of stock options 46 9 Other (3) (10) --------- --------- Net cash provided by (used for) financing activities 6,273 116 --------- --------- Net increase (decrease) in cash and cash equivalents (66) (58) Cash and cash equivalents at beginning of year 204 123 --------- --------- Cash and cash equivalents at end of period $ 138 $ 65 ========= ========= Cash paid (received) during the period for: Interest, net of amount capitalized $ 136 $ 152 ========= ========= Income taxes $ (1) $ 21 ========= =========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -7-
Weyerhaeuser Real Estate and Related Assets -------------------- ------------------------------ March 31, April 1, March 31, April 1, 2002 2001 2002 2001 --------- --------- --------- --------- $ (28) $ 63 $ 58 $ 44 264 211 2 1 7 24 1 4 (35) (60) (1) (2) 4 (15) (6) (14) (4) -- -- -- 2 9 -- -- 27 -- -- -- -- 20 -- -- 35 -- -- -- (156) (1) 3 4 (134) (155) (63) (56) (67) (7) -- -- -- -- 3 1 (30) (142) 40 (65) 10 (4) -- -- 15 (7) (22) (8) --------- --------- --------- --------- (90) (64) 15 (91) --------- --------- --------- --------- (158) (179) -- -- (12) (10) -- -- (6) (33) -- -- (6,119) -- -- -- (3) 7 10 156 18 12 -- -- -- -- 24 2 (80) (5) 80 5 (18) 29 -- (3) --------- --------- --------- --------- (6,378) (179) 114 160 --------- --------- --------- --------- 13,001 -- -- 18 30 261 (96) (54) (88) (87) -- -- -- 30 -- (30) (6,593) (19) (24) (2) 46 9 -- -- (3) (10) -- -- --------- --------- --------- --------- 6,393 184 (120) (68) --------- --------- --------- --------- (75) (59) 9 1 202 115 2 8 --------- --------- --------- --------- $ 127 $ 56 $ 11 $ 9 ========= ========= ========= ========= $ 136 $ 147 $ -- $ 5 ========= ========= ========= ========= $ (1) $ (52) $ -- $ 73 ========= ========= ========= =========
Weyerhaeuser Company -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ----------------------------------- NOTES TO FINANCIAL STATEMENTS For the thirteen-week periods ended March 31, 2002 and April 1, 2001 (Unaudited) 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. As discussed in Note 20: Acquisition, the accounts of Willamette Industries, Inc. (Willamette) are included beginning February 11, 2002. 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 manages 7.3 million acres of company-owned forestland in North America. The company also has .8 million acres of leased commercial forestland in the United States and renewable long-term licenses on 32.6 million acres of forestland located in five provinces throughout Canada that are managed by our Canadian operations. Through several wholly-owned subsidiaries and joint ventures, the company is also responsible for management and marketing activities for both forestlands and manufacturing facilities located in New Zealand, Australia and Uruguay. .. 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. .. 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 and Mexican markets, and which operates an extensive wastepaper recycling system that serves company mills and worldwide markets. Accounting Pronouncements Implemented Effective as of the beginning of fiscal 2002, the company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under Statement 142, goodwill is no longer amortized over an estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test. In addition, Statement 142 requires separate recognition for certain acquired intangible assets that will continue to be amortized over their useful lives. Effective as of the beginning of the 2002 first quarter, the company has ceased amortization of goodwill. The company is currently in the process of performing the fair-value-based assessment of goodwill and has not yet estimated the impact of implementation on its financial position or results of operations. There is no impact on cash flows. The first step of the transitional impairment test will be completed during the second quarter. Effective as of the beginning of fiscal 2002, the company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and eliminates the exception to consolidation of a subsidiary for which control is likely to be temporary. Statement 144 supersedes Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. Implementation of Statement 144 in the first quarter of 2002 did not have a material impact on the company's financial position, results of operations or cash flows. Weyerhaeuser Company -9- Effective January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133. Statement 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133 also requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Implementation of Statement 133, as amended, as of January 1, 2001, increased assets by approximately $37 million and increased liabilities by approximately $24 million, with a net offsetting amount of $13 million recorded in cumulative other comprehensive income (expense). Prospective Accounting Pronouncements In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement 143 will be effective for fiscal 2003. The company has not yet estimated the impact of implementation on its financial position, results of operations or cash flows. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 utilizes well-defined financial contracts in the normal course of its operations as means to manage its foreign exchange, interest rate and commodity price risks. The vast majority of these contracts either do not provide for net settlement or are fixed-price contracts for future purchases and sales of various commodities that meet the definition of "normal purchases or normal sales", and therefore, are not considered derivative instruments for accounting purposes. The company's current accounting treatment for the limited number of contracts considered derivative instruments follows: For derivatives designated as fair value hedges, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in earnings when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Changes in the fair value of all other derivative instruments not designated as hedges are also recognized in earnings in the period in which the changes occur. The following contracts have been formally designated as fair value hedges: .. Foreign currency futures contracts entered into in conjunction with the company's agreement to purchase equipment in a foreign denominated currency. The objective of the contracts is to hedge the company's future foreign denominated payments for the equipment purchase. The following financial instruments have been formally designated as cash flow hedges: .. Foreign exchange contracts, the objective of which is to hedge the variability of future cash flows associated with foreign denominated accounts receivable and accounts payable due to changes in foreign currency exchange rates. Gains or losses recorded in other comprehensive income are reclassified into earnings at the contracts' respective settlement dates. Weyerhaeuser Company -10- In addition, the company has the following contracts that have not been designated as hedges: .. Variable rate swap agreement entered into with a major financial institution in which the company pays a floating rate based on LIBOR and receives a floating return based on an investment fund index, with payments being calculated on a notional amount. The swap is an overlay to short-term investments and provides diversification benefits. The swap is settled quarterly, marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. .. Variable-to-fixed interest rate swap agreement 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 swap, which was acquired in 2001 as part of the Cedar River Paper Company acquisition, cannot be designated as a hedge under Statement 133; however, it fixes $50 million of the company's variable rate tax-exempt bond exposure. The swap is marked to market quarterly and any unrealized gains and losses are recognized in earnings currently. .. Lumber and other commodity futures designed to manage the consolidated exposure of changes in inventory values due to fluctuations in market prices for selected business units. The company's commodity futures positions are marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. These contract positions to date have not had a material effect on the company's financial position, results of operations or cash flows. As of March 31, 2002, the company's net position with commodity futures contracts was immaterial. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. The notional amounts of these derivative financial instruments are $204 million and $198 million at March 31, 2002, and December 30, 2001, 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 contractual terms. The net earnings impact resulting from the company's use of derivative instruments was $3 million and $2 million for the first quarters of 2002 and 2001, respectively. Cash and Cash Equivalents 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. 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 $416 million and $354 million at March 31, 2002, and December 30, 2001, respectively. The balance of domestic raw material and product inventories, all materials and supplies inventories, and all foreign inventories is 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 $210 million and $217 million greater at March 31, 2002, and December 30, 2001, 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. Weyerhaeuser Company -11- 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 Effective in the first quarter of 2002, the company accounts for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is assessed for impairment at least annually using a fair-value-based approach. Prior to the adoption of Statement 142, goodwill was amortized on a straight-line basis over 40 years, which was the expected period to be benefited. See Note 3: Goodwill and Other Intangible Assets - Adoption of Statement 142 for a reconciliation of 2001 earnings excluding goodwill amortization. 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 $198 million and $132 million at March 31, 2002, and December 30, 2001, 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 sheets. 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. Both the U.S. and Canadian plans covering salaried employees provide 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. The benefit levels for these plans are typically collectively bargained with the unions. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). Contributions to Canadian plans are based on funding standards established by the applicable Provincial Pension Benefits Act and by the Income Tax Act. 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. Revenue Recognition The company's forest products-based operations recognize revenue from product sales upon shipment to their customers, except for those export sales where revenue is recognized when title transfers at the foreign port. 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 have been satisfied. Weyerhaeuser Company -12- Impairment of Long-Lived Assets The company accounts for long-lived assets in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. 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 by sale are reported at the lower of the carrying value or fair value less cost to sell. Foreign Currency Translation Local currencies are considered the functional currencies for most of the company's operations outside the United States. Assets and liabilities are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenues and expenses are translated into U.S. dollars at average monthly exchange rates prevailing during the year. Comprehensive Income Comprehensive income consists of net income, foreign currency translation adjustments, additional minimum pension liability adjustments and fair value adjustments on derivative instruments designated as cash flow hedges. See Note 4: Comprehensive Income (Expense). Reclassifications Certain reclassifications have been made to conform prior years' data to the current format. 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. Note 2: Net Earnings Per Share 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.
Thirteen weeks ended --------------------- March 31, April 1, 2002 2001 --------- --------- Weighted average shares outstanding (thousands): Basic 220,184 219,319 Dilutive effect of stock options 926 231 --------- --------- Diluted 221,110 219,550 ========= =========
Options to purchase 203,150 shares at prices ranging from $68.41 to $68.56 per share were outstanding during the thirteen weeks ending March 31, 2002. Options to purchase 4,236,333 shares at prices ranging from $52.66 to $68.41 per share were outstanding during the thirteen weeks ending April 1, 2001. 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. Weyerhaeuser Company -13- Note 3: Goodwill and Other Intangible Assets - Adoption of Statement 142 The following table illustrates the effect of goodwill amortization on 2001 net earnings and net earnings per share. There were no separately identified intangible assets other than goodwill that existed from acquisitions prior to the adoption of Statement 142.
Earnings Before Basic and Diluted Extraordinary Item Earnings Per Share ---------------------- ----------------------- Thirteen weeks ended Thirteen weeks ended ---------------------- ----------------------- Dollar amounts in millions, March 31, April 1, March 31, April 1, except per share data 2002 2001 2002 2001 ---------------------- ----------------------- Reported earnings before extraordinary item $ 53 $ 107 $ 0.24 $ 0.49 Addback goodwill amortization, net of taxes -- 6 -- 0.03 ------- ------- -------- -------- Adjusted earnings before extraordinary item $ 53 $ 113 $ 0.24 $ 0.52 ======= ======= ======== ========
Basic and Diluted Net Earnings Earnings Per Share ---------------------- ----------------------- Thirteen weeks ended Thirteen weeks ended ---------------------- ----------------------- March 31, April 1, March 31, April 1, 2002 2001 2002 2001 ---------------------- ----------------------- Reported net earnings $ 30 $ 107 $ 0.14 $ 0.49 Add back goodwill amortization, net of taxes -- 6 -- 0.03 ------- ------- -------- -------- Adjusted net earnings $ 30 $ 113 $ 0.14 $ 0.52 ======= ======= ======== ========
Note 4: Comprehensive Income (Expense) The company's comprehensive income (expense) is as follows:
Thirteen weeks ended --------------------- March 31, April 1, 2002 2001 --------- --------- Dollar amounts in millions Net earnings $ 30 $ 107 Other comprehensive income (expense): Foreign currency translation adjustments, net of taxes of $0 and ($21) 1 (92) Cash flow hedges: Net derivative gains, net of taxes of $1 and $6 2 11 Reclassification adjustments, net of taxes of $0 and ($1) -- (2) --------- --------- 3 (83) --------- --------- Comprehensive income $ 33 $ 24 ========= =========
Weyerhaeuser Company -14- Note 5: 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 as of March 31, 2002, are: .. ForestExpress, LLC - A 33 percent owned joint venture formed 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 Boise Cascade Corporation, Georgia-Pacific Corporation, International Paper, MeadWestvaco and Morgan Stanley. .. MAS Capital Management Partners, L.P. - A 50 percent owned limited partnership formed for the purpose of providing specialized investment management services to institutional and individual investors. .. 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. .. North Pacific Paper Corporation - A 50 percent owned joint venture that has a newsprint manufacturing facility in Longview, Washington. .. Optiframe Software LLC - A 50 percent owned joint venture in Denver, Colorado, formed during 2001 to develop whole-house design and optimization software for the building industry. .. 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. .. 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. .. Southern Cone Timber Investors Limited - A 50 percent owned joint venture with institutional investors that has made an investment in Uruguayan timberlands. The primary focus of this entity is in plantation forests in the Southern Hemisphere. .. Wapawekka Lumber LP - A 51 percent owned limited partnership in Saskatchewan, Canada, that operates a sawmill. 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 -15- Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, follows. Unconsolidated revenues and income for the thirteen weeks ended April 1, 2001, also include Cedar River Paper Company, a joint venture that became wholly owned by the company in July 2001.
March 31, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Current assets $ 187 $ 191 Noncurrent assets 1,237 1,222 Current liabilities 120 120 Noncurrent liabilities 336 326
Thirteen weeks ended --------------------- March 31, April 1, 2002 2001 --------- --------- Net sales and revenues $ 148 $ 228 Operating income (loss) (7) 31 Net income (loss) (8) 24
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. Unconsolidated financial information for unconsolidated entities, which are accounted for by the equity method, is as follows. Revenues and income for the thirteen weeks ended April 1, 2001, include holdings in non-real estate partnerships which the company liquidated during the first quarter of 2001.
March 31, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Current assets $ 11 $ 8 Noncurrent assets 281 306 Current liabilities 11 11 Noncurrent liabilities 159 158
Thirteen weeks ended --------------------- March 31, April 1, 2002 2001 --------- --------- Net sales and revenues $ 18 $ 331 Operating income 20 155 Net income 17 125
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. Note 6: Other Operating Costs, Net Other operating costs, net, is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. There were no significant individual items in the first quarter of 2002 or 2001. Weyerhaeuser Company -16- Note 7: Income Taxes Provisions for income taxes include the following:
Thirteen weeks ended --------------------- March 31, April 1, Dollar amounts in millions 2002 2001 --------- --------- Federal: Current $ 5 $ 26 Deferred 11 26 --------- --------- 16 52 --------- --------- State: Current 1 3 Deferred 1 2 --------- --------- 2 5 --------- --------- Foreign: Current 2 6 Deferred (4) -- --------- --------- (2) 6 --------- --------- $ 16 $ 63 ========= =========
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 thirteen-week period ended March 31, 2002, the effective tax rate was 35%. For the thirteen-week period ended April 1, 2001, the effective tax rate was 37%, which was greater than the 35% federal statutory rate due primarily to the effect of state income taxes. The reduction in the effective tax rate in the first quarter of 2002 is primarily due to the utilization of tax credits. 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 8: Inventories
March 31, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Logs and chips $ 264 $ 186 Lumber, plywood, panels and engineered lumber 537 401 Pulp and paper 333 194 Containerboard, paperboard and packaging 275 145 Other products 228 195 Materials and supplies 435 307 --------- --------- $ 2,072 $ 1,428 ========= =========
Weyerhaeuser Company -17- Note 9: Property and Equipment
March 31, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Property and equipment, at cost: Land $ 318 $ 226 Buildings and improvements 2,773 2,310 Machinery and equipment 15,834 12,020 Rail and truck roads 614 612 Other 203 202 --------- --------- 19,742 15,370 Less allowance for depreciation and amortization (7,288) (7,061) --------- --------- $ 12,454 $ 8,309 ========= =========
Note 10: Goodwill The changes in the carrying amount of goodwill for the thirteen weeks ended March 31, 2002, are as follows: Balance as of December 30, 2001 $ 1,095 Goodwill acquired (Note 20) 1,652 Goodwill written off related to facility closures (Note 17) (5) Effect of foreign currency translation adjustments (1) --------- Balance as of March 31, 2002 $ 2,741 ========= The company is currently in the process of performing the transitional assessment of goodwill and has not yet estimated the impact, if any, of implementation-related impairments. The first step of the transitional impairment test will be completed during the second quarter. Note 11: Accrued Liabilities
March 31, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 482 $ 419 Taxes - Social Security and real and personal property 56 58 Product warranties 39 39 Interest 131 128 Other 469 398 --------- --------- $ 1,177 $ 1,042 ========= =========
Weyerhaeuser Company -18- Note 12: Short-Term Debt Lines of Credit The company had short-term bank credit lines of $1.3 billion and $925 million at March 31, 2002, and December 30, 2001, respectively. Both the company and Weyerhaeuser Real Estate Company (WRECO) can borrow against each facility. WRECO has access to $600 million of the $1.3 billion facility and had available to it all of the $925 million facility. As of March 31, 2002, the company had borrowed $200 million against this facility. WRECO had no borrowings against the facility as of March 31, 2002. No portion of the $925 million line had been availed of by the company or WRECO at December 30, 2001. None of the entities referred to above is a guarantor of the borrowing of the other. In addition, the company had short-term bank credit lines that provided for the borrowings of up to $300 million at December 30, 2001. This facility was canceled during the first quarter of 2002. No portion of this line had been availed of by the company. As of December 30, 2001, the company's lines of credit included a five-year revolving credit facility agreement entered into in 1997 with a group of banks that provided for borrowings of up to the total amount of $400 million, all of which was available to the company. The agreement was scheduled to expire in November 2002 and was canceled during the first quarter of 2002. No portion of this line had been availed of by the company as of December 30, 2001. Note 13: Long-Term Debt During the first quarter of 2002, the company issued $5.5 billion of notes payable to fund the acquisition of Willamette (see Note 20: Acquisition). The notes bear interest at rates ranging from LIBOR plus 1.125% (variable) to 7.375% (fixed) and mature from 2003 to 2032. Lines of Credit The company's lines of credit include a five-year revolving credit facility agreement entered into in 2002 with a group of banks that provides for borrowings of up to the total amount of $1.3 billion, 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. As of March 31, 2002, the company had borrowed $1.3 billion against this facility. To the extent that any credit commitment expires more than one year after the balance sheet date and is unused, an equal amount of commercial paper is classifiable as long-term debt. No amounts were reclassified as long-term debt as of March 31, 2002, or December 30, 2001. The company's compensating balance agreements were not significant. Note 14: Shareholders' Interest Common Shares A reconciliation of common share activity for the periods ending March 31, 2002, and December 30, 2001, is as follows:
March 31, Dec. 30, In thousands 2002 2001 --------- --------- Shares outstanding at beginning of year 216,574 213,898 Retraction of exchangeable shares 893 2,026 Stock options exercised 960 650 --------- --------- Shares outstanding at end of period 218,427 216,574 ========= =========
Weyerhaeuser Company -19- 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 March 31, 2002, and December 30, 2001, is as follows:
March 31, Dec. 30, In thousands 2002 2001 --------- --------- Shares outstanding at beginning of year 3,289 5,315 Retractions (893) (2,026) --------- --------- Shares outstanding at end of period 2,396 3,289 ========= =========
Cumulative Other Comprehensive Income (Expense) The company's cumulative other comprehensive income (expense) includes:
March 31, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Foreign currency translation adjustments $ (304) $ (306) Minimum pension liability adjustment (43) (43) Cash flow hedge fair value adjustments 5 4 --------- --------- $ (342) $ (345) ========= =========
Note 15: Support Alignment Costs In late 1999, the company announced an 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 2000, a process that is expected to be completed during 2004. In the first quarter of 2002, the company incurred $4 million of pretax charges related to the support alignment initiative. In the first quarter of 2001, the company incurred $45 million of pretax charges related to the support alignment initiative. These costs included $41 million recognized in conjunction with the company's decision to outsource certain information technology services, $20 million of which related to the impairment of information technology assets sold for $10 million to the outsourcer and $21 million of additional costs such as retention bonuses, severance and other transition costs. Additional support alignment spending in 2002 and 2001 consists of one-time costs representing severance, relocation and outplacement costs as we create new regional centers that deliver support services. Weyerhaeuser Company -20- Note 16: Charges for Integration of Facilities In the first quarter of 2002, the company incurred $2 million of pretax charges related to the transition and integration of activities in connection with the Willamette acquisition. In the first quarter of 2001, the company incurred $9 million of pretax charges related to the transition and integration of activities in connection with the MacMillan Bloedel and Trus Joist acquisitions. These charges included one-time transition costs such as severance and relocation. Note 17: Charges for Closure of Facilities In the first quarter of 2002, the company incurred $27 million of pretax charges associated with the announced closures of an oriented strand board facility and two packaging facilities. These charges include $10 million for asset impairments, $5 million for the impairment of goodwill associated with the closed facilities and $12 million of severance and other closure costs. Note 18: Extraordinary Loss on Early Extinguishment of Debt In February 2002, the company issued bridge financing in connection with the Willamette acquisition (see Note 20: Acquisition). Fees related to the commitments on financing that had been secured for the acquisition were recorded as deferred finance costs. In March 2002, the company replaced the bridge financing with $5.5 billion of notes payable (see Note 13: Long-Term Debt). The unamortized portion of the deferred costs associated with the bridge financing was written off as an extraordinary loss on the early extinguishment of debt in the first quarter of 2002. Total deferred costs written off were $35 million. The tax benefit associated with the write-off was $12 million. Note 19: Commitments and Contingencies The company's capital expenditures, excluding acquisitions and real estate and related assets, were $683 million in 2001, and are expected to be approximately $1.2 billion in 2002; however, that expenditure level could be increased or decreased as a consequence of future economic conditions. Following the expiration of a five-year agreement between the United States and Canada, on April 2, 2001, the Coalition for Fair Lumber Imports (Coalition) filed a petition with the U.S. Department of Commerce (Department) and the International Trade Commission (ITC), claiming that production of softwood lumber in Canada is being subsidized by Canada and that imports from Canada are being "dumped" into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber imported from Canada. In March 2002, the Department confirmed its preliminary finding of August 2001 that certain Canadian provinces were subsidizing logs by failing to collect full market price for stumpage and established a final CVD rate of 18.79% as corrected for ministerial errors (essentially confirming the 19.31% preliminary rate announced in August). However, the final determination eliminated the possible 90-day retroactive duties the preliminary finding had mandated, and the company reversed its $18 million accrual for the retroactive portion of the CVD during the first quarter of 2002. On May 2, 2002, the ITC confirmed its ruling of May 2001 that the U.S. industry is threatened by subsidized and dumped imports. Its finding limited to threat of injury means that the CVD and antidumping duties will only be collected for the period beginning with the publication of its final order, which is expected to take place in mid-May 2002. In the antidumping portion of the case, the Department had chosen Weyerhaeuser and five Canadian companies to provide data for the antidumping investigation. In its preliminary ruling issued on October 30, 2001, the Department found that the company had engaged in dumping and set a preliminary "dumping margin" for the company of 11.93%. In the final determination, as corrected by the Department for ministerial errors, the company's rate was set at 12.34%. As of the end of the first quarter of 2002, the company's accrual for the CVD and antidumping liability was $42 million. With the finding of the ITC of threat of injury, as opposed to actual injury, the company expects that this amount will be reversed on the company books during the second quarter. Approximately one year following the publication of the final order and annually thereafter for a total of five years, the Department will conduct reviews to determine whether the company had engaged in dumping and whether Canada continued to subsidize softwood logs and, if so, the dumping margin and CVD to impose. At the end of five years, both the countervailing duty and antidumping orders would be automatically reviewed in a "sunset" proceeding to determine whether dumping or a countervailing subsidy would be likely to continue or recur. The company has filed a notice of appeal under the North American Free Trade Agreement and requested that a panel be convened to review the imposition of the antidumping duty. The federal and provincial governments in Canada have filed and are expected to file notices of appeal with respect to the Department's and ITC's CVD findings. It is difficult to predict the net effect these duties would have on the company because the company produces softwood lumber in both the United States and Canada. The company believes that the controversy has created some volatility and uncertainty in the marketplace but has not had a material adverse effect on our Weyerhaeuser Company -21- results of operations. There can be no assurance, however, that if a permanent CVD or antidumping duty is imposed and continues for an extended period of time, it will not have a material adverse effect on the company's results of operations in the future. 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 20: Acquisition Willamette Industries, Inc. On March 14, 2002, the company completed a merger of Willamette and Company Holdings, Inc. ("CHI"), a wholly-owned subsidiary of the company, pursuant to which Willamette became a wholly-owned subsidiary of the company. The total purchase price, including assumed debt of $1.8 billion, was $7.9 billion. Willamette is an integrated forest products company that produces building materials, composite wood panels, fine paper, office paper products, corrugated packaging and grocery bags in over 100 plants located in the United States, Europe and Mexico, and owns 1.7 million acres of forestlands in the United States. The company believes these assets fit well with and enhance the company's capabilities in a number of its core product markets. The acquisition creates a larger company that is a leading producer in its major product lines and is better able to meet the needs of its customers. The company believes the acquisition will position the company to increase shareholder value. These factors contributed to the goodwill, which is preliminarily recorded at $1.7 billion. Pursuant to the merger agreement among the company, Willamette and CHI dated January 28, 2002, CHI filed a tender offer for all of the outstanding shares of common stock of Willamette at a purchase price of $55.50 per share. On February 11, 2002, CHI accepted for payment approximately 97% of the outstanding shares of Willamette common stock and outstanding options to purchase shares of common stock, thereby acquiring a controlling interest in Willamette. On March 14, 2002, the company consummated the merger and all the remaining outstanding Willamette shares, other than those held by the company, CHI or Willamette, were converted into the right to receive $55.50 in cash. Pursuant to the merger agreement, options that were not surrendered in the tender became, as of the merger date, options to purchase company shares in an amount and at an exercise price adjusted by a conversion ratio based on $55.50 per share and the market price of a share of the company's common stock. 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 February 11, 2002. The purchase price, plus estimated direct transaction costs and expenses, and the deferred tax effect of applying purchase accounting at February 11, 2002, was calculated as follows: Dollar amounts in millions Purchase price of tender offer and stock option cash-out $ 6,162 Direct transaction costs and expenses 59 Deferred tax effect of applying purchase accounting 1,331 Less: historical net assets (2,487) --------- Total excess costs $ 5,065 ========= The above calculation of excess purchase price is preliminary. The company will finalize the allocation by February 11, 2003. As of March 31, 2002, the excess purchase price was allocated as follows: Dollar amounts in millions Property, plant and equipment $ 3,413 Goodwill 1,652 --------- Total excess costs $ 5,065 ========= Property, plant and equipment are being depreciated over an average of 15 years. The cost of timber and timberlands is charged to expense as the related timber is harvested. Goodwill is not amortized, but will be assessed for impairment annually using a fair-value based approach. Weyerhaeuser Company -22- The following summarized unaudited pro forma information, assuming this acquisition occurred at the beginning of fiscal periods presented, is as follows:
Pro Forma Information (unaudited) Thirteen weeks ended ---------------------- March 31, April 1, Dollar amounts in millions 2002 2001 ---------- ---------- Net sales and revenues $ 4,447 $ 4,650 Net earnings (loss) (3) 73 Earnings per share: Basic and diluted $ (0.01) $ 0.33
Note 21: 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 lumber; 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 -23- An analysis and reconciliation of the company's business segment information to the respective information in the consolidated financial statements is as follows:
Thirteen weeks ended --------------------- March 31, April 1, Dollar amounts in millions 2002 2001 --------- --------- Sales to and revenues from unaffiliated customers: Timberlands $ 188 $ 271 Wood products 1,712 1,380 Pulp, paper and packaging 1,677 1,527 Real estate and related assets 396 334 Corporate and other 35 41 --------- --------- 4,008 3,553 --------- --------- Intersegment sales: Timberlands 158 225 Wood products 54 63 Pulp, paper and packaging 51 64 Corporate and other 2 4 --------- --------- 265 356 --------- --------- Total sales and revenues 4,273 3,909 Intersegment eliminations (265) (356) --------- --------- $ 4,008 $ 3,553 ========= ========= Approximate contribution (charge) to earnings (1): Timberlands $ 119 $ 141 Wood products 9 (33) Pulp, paper and packaging 59 167 Real estate and related assets (1) 91 69 Corporate and other (58) (90) --------- --------- 220 254 Interest expense (143) (88) Less capitalized interest 4 4 --------- --------- Earnings before income taxes and extraordinary item 81 170 Income taxes (28) (63) --------- --------- Earnings before extraordinary item 53 107 Extraordinary item (23) -- --------- --------- $ 30 $ 107 ========= =========
Segment information for the thirteen weeks ended March 31, 2002, includes the addition of the Willamette operations as of February 11, 2002. Total assets of the company increased from $18.3 billion as of December 30, 2001, to $28.9 billion as of March 31, 2002, primarily due to the Willamette acquisition. There were no material changes from year-end 2001 in 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 in the thirteen weeks ended April 1, 2001, is included in the determination of approximate contributions to earnings and excluded from interest expense for financial services businesses. Weyerhaeuser Company -24- 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 first quarter of 2002 were $30 million, or $0.14 basic and diluted earnings per share. This included an after-tax extraordinary charge of $23 million, or $0.10 per share, for the deferred costs associated with the bridge financing of the acquisition of Willamette. Earnings for the quarter also include a nonrecurring after-tax charge of $17 million associated with the closure of three facilities and an after-tax benefit of $12 million from the reversal of previously accrued countervailing duties (CVD). Consolidated net earnings for the first quarter of 2001 were $107 million, or $0.49 basic and diluted earnings per share. This included an after-tax nonrecurring charge of $26 million associated with the decision to outsource certain information technology services as part of the company's program to streamline support services and a $6 million after-tax charge for amortization of goodwill. Excluding the extraordinary and nonrecurring items, 2002 first quarter earnings were $58 million, or $0.27 per share, compared with $139 million, or $0.63 per share, for the same period last year. Consolidated net sales and revenues were $4.0 billion in the current quarter, up 13 percent from $3.6 billion for the same period last year. Sales and revenues in 2002 include the addition of Willamette sales since February 11, 2002. Operating results for 2002 include $43 million in net pension income compared with $66 million in 2001. Timberlands First quarter operating earnings were $119 million, a decrease of 16 percent from $141 million reported in 2001. Sales to unaffiliated customers were $188 million, down from $271 million for the same period last year. Intersegment sales were $158 million for the quarter compared to $225 million a year ago. Earnings decreased as export log markets remained weak due to the continued sluggishness of the Japanese economy. The company expects the export log markets to remain under competitive pressure throughout the second quarter. Domestic markets, which strengthened during the first quarter, are expected to modestly improve during the second quarter due to seasonal lumber demand. Wood Products The wood products segment reported operating earnings of $9 million for the first quarter of 2002, compared with a loss of $33 million for the same period last year. In 2002, a $18 million pretax reversal of an accrual for the CVD associated with Canadian lumber was offset by $17 million in pretax charges associated with the permanent closure of an oriented strand board (OSB) facility in Canada. Sales were $1.7 billion, up 24 percent over sales of $1.4 billion during the same period of 2001. Prices for softwood lumber and OSB strengthened during the quarter, as demand stayed strong for both product lines. The uncertainty regarding the imposition of duties on Canadian lumber is expected to affect the softwood lumber market in the second quarter. Markets for wood products are expected to improve from first quarter levels due to seasonal factors. Weyerhaeuser Company -25- Third party sales and total production volumes for the major products in the timberlands and wood products segments for the thirteen weeks ended March 31, 2002, and April 1, 2001, are as follows:
Third Party Sales Total Production ----------------------- ----------------------- Thirteen weeks ended Thirteen weeks ended ----------------------- ----------------------- March 31, April 1, March 31, April 1, Products (in millions) 2002 2001 2002 2001 ------------------------------ ----------- ----------- ----------- ------------ Timberlands: Raw materials - cubic feet 76 140 -- -- Logs - cubic feet -- -- 127 174 Wood Products: Softwood lumber - board feet 1,812 1,667 1,486 1,406 Softwood plywood and veneer - square feet (3/8") 575 449 431 285 Composite panels - square feet (3/4") 308 63 218 29 Oriented strand board - square feet (3/8") 984 871 957 783 Hardwood lumber - board feet 108 106 96 111 Raw materials - cubic feet 143 87 -- -- Logs - cubic feet -- -- 185 143
Pulp, Paper and Packaging Operating earnings for the first quarter were $59 million, significantly below earnings of $167 million reported for the first quarter of 2001. A $10 million pretax charge for the closure of two packaging facilities, combined with lower prices for all the company's major product lines contributed to the decrease. Sales for the quarter were $1.7 billion compared with $1.5 billion for the same period last year. To balance production with market demand, the company took downtime in a number of pulp, paper and containerboard mills during the first quarter. Pulp and paper prices appeared to stabilize late in the quarter and the company expects to see some modest improvement in these prices during the second quarter. Packaging shipments are expected to improve during the second quarter, but pricing is not expected to improve. Third party sales and total production volumes for the major products in this segment for the thirteen weeks ended March 31, 2002 and April 1, 2001, are as follows:
Third Party Sales Total Production ----------------------- ----------------------- Thirteen weeks ended Thirteen weeks ended ----------------------- ----------------------- March 31, April 1, March 31, April 1, Products (in thousands) 2002 2001 2002 2001 ------------------------------ ----------- ----------- ----------- ------------ Pulp - air-dry metric tons 563 480 764 549 Paper - tons 594 393 721 400 Paperboard - tons 53 60 63 52 Containerboard - tons 248 218 1,250 875 Packaging - MSF 15,356 12,690 16,281 13,355 Recycling - tons 604 826 1,258 1,192
Real Estate and Related Assets First quarter operating earnings of $91 million exceeded last year's earnings of $69 million by 32 percent. Sales and revenues were $396 million, up 19 percent from $334 million a year ago. Improved results are attributed to increased closings across all markets, a result of increased product offerings as well as favorable winter weather. Second quarter earnings are expected to be lower because of fewer closings of homes and residential lots. Weyerhaeuser Company -26- Costs and Expenses Weyerhaeuser's first quarter costs and expenses were $3.5 billion compared to $3.1 billion in the same quarter last year. Included in Weyerhaeuser's 2002 costs are nonrecurring pretax charges of $27 million associated with the closure of three facilities, $4 million for costs related to support alignment and $2 million in costs related to the integration of the Willamette acquisition. Included in Weyerhaeuser's 2001 costs are nonrecurring pretax charges of $45 million in support alignment costs and $9 million in integration costs related to the MacMillan Bloedel and Trus Joist acquisitions. Also included in 2001 costs is $10 million of pretax amortization of goodwill. Excluding these nonrecurring charges, 2002 costs and expenses were $3.5 billion, 15 percent above the prior year amount of $3.0 billion. This increase reflects the addition of Willamette operations since February 11, 2002. The 2002 closure charges include $10 million for asset impairments, $5 million for the impairment of goodwill associated with the closed facilities and $12 million of severance and other closure costs. The 2001 support alignment costs included $41 million recognized in conjunction with the company's decision to outsource certain information technology services, $20 million of which related to the impairment of information technology assets that were disposed of. Weyerhaeuser's costs of products sold, as a percentage of sales, was 79 percent for the current quarter compared to 77 percent in the 2001 first quarter. The increase in real estate and related assets segment's costs and expenses can be attributed to increased sales volumes over the same period last year. Other operating costs, net, is an aggregation of both recurring and nonrecurring items and, as a result, can fluctuate from year to year. There were no significant individual items in the first quarter of 2002 or 2001. Liquidity and Capital Resources General The company is committed to the maintenance of a sound capital structure. This commitment is based upon two considerations: the obligation to protect the underlying interests of its shareholders and lenders and the desire to have access, at all times, to all major financial markets. The important elements of the policy governing the company's capital structure are as follows: .. To view separately the capital structures of Weyerhaeuser Company and 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. .. The combination of maturing short-term debt and the structure of long-term debt will be managed judiciously to minimize liquidity risk. Operations Consolidated net cash used for operations in the first quarter of 2002 was $75 million, down $80 million, or 52 percent, from $155 million used during the same quarter last year. Net cash from operations before changes in working capital of $329 million in 2002 was $63 million, or 24 percent, greater than $266 million provided in 2001. Cash provided by net earnings of $30 million in 2002 was net of noncash charges of $266 million for depreciation and fee stumpage, $27 million for closure of facilities and $35 million for the write-off of deferred finance costs associated with bridge financing related to the Willamette acquisition. This was partially offset by noncash credits of $36 million for pension and postretirement benefits. 2001 cash provided by net earnings of $107 million was net of noncash charges of $212 million for depreciation, amortization and fee stumpage, $28 million in deferred taxes and $20 million for an asset impairment charge. This was partially offset by noncash credits of $62 million for pension and postretirement benefits and $29 million of equity in earnings of affiliates. Cash required for working capital by Weyerhaeuser was $387 million in the first quarter of 2002, an increase of $82 million, or 27 percent, over $305 million for the same period a year ago. Requirements for 2002 included $156 million for increases in receivables, $201 million for increases in inventories and prepaid expenses and $30 million for reductions in accounts payable and accrued liabilities. Inventory increased across all product lines, but excluding the inventories acquired from Willamette, the remaining increase was primarily in wood products. The inventory turnover rate increased to 9.1 turns in the first quarter of 2002 from 8.7 turns in the first quarter of 2001. Cash required by real estate and related assets for working capital in the amount of $17 million was 85 percent below $116 required for the same period in 2001. Current period Weyerhaeuser Company -27- cash outflows for working capital included $63 million for the acquisition and development of land and residential lots for development in excess of products sold, partially offset by $40 million in increases in accounts payable and accrued liabilities. Earnings before interest expense and income taxes plus net noncash charges for the principal business segments were: .. Timberlands - $135 million, a decrease of $20 million from $155 million in 2001. Operating earnings for this segment were $22 million lower than last year, while noncash charges and pension credits remained comparable. .. Wood products - $75 million, an increase of $69 million over $6 million in 2001. Operating earnings increased $42 million over the same period last year while noncash charges for depreciation and amortization and facility closures increased by $18 million and noncash pension credits decreased by $9 million. .. Pulp, paper and packaging - $202 million in the current quarter, down $44 million from $246 million a year ago. The $108 million decline in operating earnings included a $44 million increase in depreciation and amortization, $10 million of noncash closure charges and a $10 million increase in noncash pension credits. Investing Capital expenditures for the first quarter, excluding acquisitions and real estate and related assets, were $170 million in 2002 compared to $189 million in 2001. Current year capital spending by segment was $14 million for timberlands, $58 million for wood products, $91 million for pulp, paper and packaging and $7 million for corporate and other. The company currently anticipates capital expenditures, excluding acquisitions and real estate and related assets, to approximate $1.2 billion for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. During the first quarter of 2002, the company expended $6.1 billion, net of cash acquired, to purchase the tendered shares of Willamette and cash out stock options of certain Willamette management personnel. Cash provided by investments in equity affiliates for real estate and related assets in 2001 reflects distributions from equity investments that were liquidated by the company during the first quarter of 2001. Financing During the quarter, Weyerhaeuser increased its interest-bearing debt by $8.3 billion, primarily due to funding the acquisition of Willamette. Proceeds from new borrowings, net of debt issue costs, including both the initial acquisition funding and the subsequent replacement of the bridge financing, totaled $13.0 billion in the first quarter of 2002. Repayments of long-term debt, including the bridge funding, totaled $6.6 billion, for a net increase in new borrowings of $6.4 billion. The company also assumed approximately $1.8 billion of Willamette debt. The company's debt to total capital ratio at the end of the first quarter of 2002 was 57 percent, up from 38 percent at the end of 2001 and 36 percent at the end of the 2001 first quarter. The company's goal is to pay down the additional debt using cash flow from operations and to return to our historic debt levels within three to five years. The real estate and related assets segment reduced third party debt by $120 million. This reflects a $96 million reduction in notes and commercial paper borrowings and $24 million of debt repayments. During the first quarter, the company paid $88 million in cash dividends compared to $87 million in cash dividends paid during the 2001 first quarter. The company also received $46 million in cash proceeds from the exercise of stock options during the first quarter of 2002. Environmental Matters The company has established reserves for remediation costs on all of the approximately 73 active sites across its operations as of the end of first quarter 2002 in the aggregate amount of $43 million, down from $45 million at the end of 2001. This decrease 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 accrued $(4) million of remediation costs into this reserve in the first three months of 2001. The company incurred remediation costs of $2 million in both 2002 and 2001, and charged these costs against the reserve. Weyerhaeuser Company -28- 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 a pretax charge of $130 million to cover the estimated cost of the settlement and related claims. The court approved the settlement in December 2000. An appeal from the settlement was denied in March 2002, and is now binding on all parties. The company reassessed the adequacy of the reserve and increased the reserve by an additional $43 million in the third quarter of 2001. Claims and related costs in the amount of $2 million and $8 million were paid in the first three months of 2002 and 2001, respectively, and were charged against the reserve. The company negotiated settlements with its insurance carriers for recovery of certain costs related to these claims. As of March 31, 2002, the company has either received or accrued $51 million in recoveries from its insurance carriers. Support Alignment In late 1999, the company announced an 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 2000, a process that is expected to be completed during 2004. To date, the company has captured $108 million in savings while incurring $86 million of cumulative, one-time costs, such as severance, relocation and outsourcing. In the first quarter of 2002, the company incurred $4 million of pretax charges related to the support alignment initiative. In the first quarter of 2001, the company incurred $45 million of pretax charges related to the support alignment initiative, which included $41 million recognized in conjunction with the company's decision to outsource certain information technology services. Contingencies Following the expiration of a five-year agreement between the United States and Canada, on April 2, 2001, the Coalition for Fair Lumber Imports (Coalition) filed a petition with the U.S. Department of Commerce (Department) and the International Trade Commission (ITC), claiming that production of softwood lumber in Canada is being subsidized by Canada and that imports from Canada are being "dumped" into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber imported from Canada. In March 2002, the Department confirmed its preliminary finding of August 2001 that certain Canadian provinces were subsidizing logs by failing to collect full market price for stumpage and established a final CVD rate of 18.79% as corrected for ministerial errors (essentially confirming the 19.31% preliminary rate announced in August). However, the final determination eliminated the possible 90-day retroactive duties the preliminary finding had mandated, and the company reversed its $18 million accrual for the retroactive portion of the CVD during the first quarter of 2002. On May 2, 2002, the ITC confirmed its ruling of May 2001 that the U.S. industry is threatened by subsidized and dumped imports. Its finding limited to threat of injury means that the CVD and antidumping duties will only be collected for the period beginning with the publication of its final order, which is expected to take place in mid-May 2002. In the antidumping portion of the case, the Department had chosen Weyerhaeuser and five Canadian companies to provide data for the antidumping investigation. In its preliminary ruling issued on October 30, 2001, the Department found that the company had engaged in dumping and set a preliminary "dumping margin" for the company of 11.93%. In the final determination, as corrected by the Department for ministerial errors, the company's rate was set at 12.34%. As of the end of the first quarter of 2002, the company's accrual for the CVD and antidumping liability was $42 million. With the finding of the ITC of threat of injury, as opposed to actual injury, the company expects that this amount will be reversed on the company books during the second quarter. Approximately one year following the publication of the final order and annually thereafter for a total of five years, the Department will conduct reviews to determine whether the company had engaged in dumping and whether Canada continued to subsidize softwood logs and, if so, the dumping margin and CVD to impose. At the end of five years, both the countervailing duty and antidumping orders would be automatically reviewed in a "sunset" proceeding to determine whether dumping or a countervailing subsidy would be likely to continue or recur. The company has filed a notice of appeal under the North American Free Trade Agreement and requested that a panel be convened to review the imposition of the antidumping duty. The federal and provincial governments in Canada have filed and are expected to file notices of appeal with respect to the Department's and ITC's CVD findings. It is difficult to predict the net effect these duties would have on the company because the company produces softwood lumber in both the United States and Canada. The company believes that the controversy has created some volatility and uncertainty in the marketplace but has not had a material adverse effect on our results of operations. There can be no assurance, however, that if a permanent CVD or antidumping duty is imposed and continues for an extended period of time, it will not have a material adverse effect on the company's results of operations in the future. Weyerhaeuser Company -29- 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 activities, 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 also utilizes well-defined financial contracts in the normal course of its operations as means to manage its foreign exchange and commodity price risks. For those limited number of contracts that are considered derivative instruments, the company has formally designated most as hedges of specific and well-defined risks. These contracts include: .. Foreign currency futures contracts entered into in conjunction with the company's agreement to purchase equipment in a foreign denominated currency. The objective of the contracts, which have been designated as fair value hedges, is to fix the company's U.S. dollar cost of the equipment purchased in EUROs. At March 31, 2002, the company had a long position in EUROs, with both a fair value and a notional amount of $1 million. The contracts expire monthly through August 2002. .. Foreign exchange contracts, which the company has designated as cash flow hedges, the objective of which is to hedge the variability of future cash flows associated with foreign denominated accounts receivable and accounts payable due to changes in foreign currency exchange rates. These contracts generate gains or losses that are recorded in other comprehensive income until the contracts' respective settlement dates, at which time they are reclassified into earnings. At March 31, 2002, the company had a long position in Canadian dollars, with a fair value of $5 million and a corresponding notional amount of $6 million. The contracts expire monthly through June 2003. At March 31, 2002, the company also had a long position in Norwegian krones, with both a fair value and a notional amount of $3 million. .. Variable-to-fixed interest rate swap agreement 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 swap, which was acquired from Cedar River Paper Company, cannot be designated as a hedge under Statement 133; however, it fixes $50 million of the company's variable rate tax-exempt bond exposure. At March 31, 2002, the swap, which matures December 2003, had a notional amount of $50 million and a fair value representing a loss of $1 million. The fair value amount of the obligation 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. .. Variable rate swap agreement entered into with a major financial institution in which the company pays a floating rate based on LIBOR and receives a floating return based on an investment fund index, with payments being calculated on a notional amount. The swap is an overlay to short-term investments and provides diversification benefits. The swap is settled quarterly, marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. At March 31, 2002, the company had one swap with a maturity date of December 31, 2003, and a notional amount of $145 million. Both parties have the right to terminate this swap with short notice. The fair value of the swap approximates zero as of March 31, 2002. .. Lumber and other commodity futures designed to manage the consolidated exposure of changes in inventory values due to fluctuations in market prices for selected business units. The company's commodity futures positions are marked to market at each reporting date and all unrealized gains and losses are recognized in earnings currently. These contract positions to date have not had a material effect on the company's financial position, results of operations or cash flows. These futures contracts settle daily, and as a result, the company's net position as of March 31, 2002, was immaterial. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. Weyerhaeuser Company -30- Part II. Other Information Item 1. Legal Proceedings The company entered into a class action settlement of hardboard siding claims against the company that was approved by the Superior Court, San Francisco County, California, in December 2000. The settlement class consists of all persons who own or owned structures in the United States on which the company's hardboard siding had been installed from January 1, 1981, through December 31, 1999. An appeal from the settlement was denied and the settlement is now considered final and binding. The company has established reserves to cover the estimated cost of the settlement and related costs. At the end of the first quarter of 2002, the company is a defendant in 20 cases involving primarily multi-family structures and residential developments. The company anticipates that other individuals and entities that have opted out of the settlement may file lawsuits against the company. In January 2002, a jury returned a verdict in favor of the company in a lawsuit involving hardboard siding manufactured by the company and installed by a developer in a residential development located in Modesto, California. 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 requested class certification for 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 requested class certification for purchasers of corrugated sheets during the period October 1993 through November 1995. Both suits seek damages, including treble damages, under the antitrust laws. In September 2001, the court certified both classes. The 3rd Circuit Court of Appeals has accepted review of the decision to certify the classes and oral argument is expected to be heard in June 2002. 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. Both the Committee and the company have filed motions for summary judgment, which are pending. Following the expiration of a five-year agreement between the United States and Canada, on April 2, 2001, the Coalition for Fair Lumber Imports (Coalition) filed a petition with the U.S. Department of Commerce (Department) and the International Trade Commission (ITC), claiming that production of softwood lumber in Canada is being subsidized by Canada and that imports from Canada are being "dumped" into the U.S. market (sold at less than fair value). The Coalition asked that countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber imported from Canada. In March 2002, the Department confirmed its preliminary finding of August 2001 that certain Canadian provinces were subsidizing logs by failing to collect full market price for stumpage and established a final CVD rate of 18.79% as corrected for ministerial errors (essentially confirming the 19.31% preliminary rate announced in August). However, the final determination eliminated the possible 90-day retroactive duties the preliminary finding had mandated, and the company reversed its $18 million accrual for the retroactive portion of the CVD during the first quarter of 2002. On May 2, 2002, the ITC confirmed its ruling of May 2001 that the U.S. industry is threatened by subsidized and dumped imports. Its finding limited to threat of injury means that the CVD and antidumping duties will only be collected for the period beginning with the publication of its final order which is expected to take place in mid-May 2002. In the antidumping portion of the case, the Department had chosen Weyerhaeuser and five Canadian companies to provide data for the antidumping investigation. In its preliminary ruling issued on October 30, 2001, the Department found that the company had engaged in dumping and set a preliminary "dumping margin" for the company of 11.93%. In the final determination, as corrected by the Department for ministerial errors, the company's rate was set at 12.34%. As of the end of the first quarter of 2002, the company's accrual for the CVD and antidumping liability was $42 million. With the ITC finding a threat of injury, as opposed to actual injury, the company expects that this amount will be reversed on the company books during the second quarter. Approximately one year following the publication of the final order and annually thereafter for a total of five years, the Department will conduct reviews to determine whether the company had engaged in dumping and whether Canada continued to subsidize softwood logs and, if so, the dumping margin and CVD to impose. At the end of five years, both the countervailing duty and antidumping orders would be automatically reviewed in a Weyerhaeuser Company -31- "sunset" proceeding to determine whether dumping or a countervailing subsidy would be likely to continue or recur. The company has filed a notice of appeal under the North American Free Trade Agreement and requested that a panel be convened to review the imposition of the antidumping duty. The federal and provincial governments in Canada have filed and are expected to file notices of appeal with respect to the Department's and ITC's CVD findings. It is difficult to predict the net effect these duties would have on the company because the company produces softwood lumber in both the United States and Canada. The company believes that the controversy has created some volatility and uncertainty in the marketplace but has not had a material adverse effect on our results of operations. There can be no assurance, however, that if a permanent CVD or antidumping duty is imposed and continues for an extended period of time, it will not have a material adverse effect on the company's results of operations in the future. 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 Environmental Protection Agency (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 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 2. Changes in Securities (c) In March 2002, the company issued $5.5 billion of long-term debt, including $500 million of floating rate notes due September 15, 2003; $1.0 billion of 5.5% notes due March 15, 2005; $1.0 billion of 6.125% notes due March 15, 2007; $1.75 billion of 6.75% notes due March 15, 2012; and $1.25 billion of 7.375% debentures due March 15, 2032. The notes were offered only to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended; to a limited number of institutional accredited investors as defined in Rule 501 under the Securities Act and outside the United States in compliance with Regulation S of the Securities Act of 1933, as amended. The initial purchaser of the securities were Morgan Stanley & Co. Incorporated; J.P. Morgan Securities, Inc.; Deutsche Banc Alex. Brown Inc.; Tokyo-Mitsubishi International Plc; Banc of America Securities LLC; Salomon Smith Barney Inc.; and Scotia Capital (USA) Inc. The proceeds from the sale of the securities were used to repay indebtedness incurred in connection with the Willamette acquisition. 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 Exhibits None Reports on Form 8-K The registrant filed reports on Form 8-K dated January 24, January 29, February 26, March 28, April 1, April 19, and April 25, 2002, and on Form 8-K/A dated February 28, 2002, reporting information under Item 2, Acquisition or Disposition of Assets; Item 4, Changes in Registrant's Certifying Accountant; Item 5, Other Events; and Item 7, Financial Statements and Exhibits. Weyerhaeuser Company -32- EXHIBITS INDEX -------------- Exhibits: None