10-Q 1 f10qjun02.txt 6-02 10-Q 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 twenty-six weeks ended June 30, 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: Name of Each Exchange on Title of Each Class Which Registered ------------------------------ ------------------------- Common Shares ($1.25 par value) Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange Exchangeable Shares (no par value) Toronto Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's class of common stock, as of August 2, 2002, was 218,947,009 common shares ($1.25 par value). Weyerhaeuser Company -2- WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the twenty-six weeks ended June 30, 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 8-25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26-34 Item 3. Quantitative and Qualitative Disclosures About Market Risk 34-35 Part II. Other Information Item 1. Legal Proceedings 36 Item 2. Changes in Securities 37 Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders 37-38 Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 38 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 audited 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 twenty-six week period ending June 30, 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 August 14, 2002 Weyerhaeuser Company -3- WEYERHAEUSER COMPANY AND SUBSIDIARIES --------------------------- CONSOLIDATED STATEMENT OF EARNINGS For the periods ended June 30, 2002 and July 1, 2001 (Dollar amounts in millions except as noted and per-share data) (Unaudited)
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 -------- -------- -------- -------- Net sales and revenues: Weyerhaeuser $ 4,528 $ 3,471 $ 8,140 $ 6,690 Real estate and related assets 421 371 817 705 -------- -------- -------- -------- Total net sales and revenues 4,949 3,842 8,957 7,395 -------- -------- -------- -------- Costs and expenses: Weyerhaeuser: Costs of products sold 3,546 2,644 6,394 5,136 Depreciation, amortization and fee stumpage 311 214 575 425 Selling expenses 116 100 219 191 General and administrative expenses 231 182 417 353 Research and development expenses 13 14 25 27 Taxes other than payroll and income taxes 53 38 91 75 Other operating costs, net (Note 6) (27) 21 (23) 53 Charges for integration of facilities (Note 15) 23 10 25 19 Charges for closure of facilities (Note 16) 28 -- 55 -- -------- -------- -------- -------- 4,294 3,223 7,778 6,279 -------- -------- -------- -------- Real estate and related assets: Costs and operating expenses 317 280 608 523 Depreciation and amortization 1 2 3 3 Selling expenses 24 19 45 38 General and administrative expenses 11 13 21 26 Taxes other than payroll and income taxes 1 1 2 3 Other operating costs, net (Note 6) 2 (1) (6) (2) -------- -------- -------- -------- 356 314 673 591 -------- -------- -------- -------- Total costs and expenses 4,650 3,537 8,451 6,870 -------- -------- -------- -------- Operating income 299 305 506 525 Interest expense and other: Weyerhaeuser: Interest expense incurred (222) (87) (365) (175) Less interest capitalized 16 6 20 10 Equity in income (loss) of affiliates (Note 5) (2) 15 (6) 30 Interest income and other 6 4 11 10 Real estate and related assets: Interest expense incurred (13) (18) (26) (37) Less interest capitalized 13 17 26 33 Equity in income of unconsolidated entities (Note 5) 6 3 12 17 Interest income and other 8 3 14 5 -------- -------- -------- -------- Earnings before income taxes and extraordinary item 111 248 192 418 Income taxes (Note 7) (39) (77) (67) (140) -------- -------- -------- -------- Earnings before extraordinary item 72 171 125 278 Extraordinary item, net of tax benefit of $12 (Note 17) -- -- (23) -- -------- -------- -------- -------- Net earnings $ 72 $ 171 $ 102 $ 278 ======== ======== ======== ======== Basic and diluted net earnings per share (Note 2): Before extraordinary item $ 0.32 $ 0.78 $ 0.56 $ 1.27 Extraordinary item (Note 17) -- -- (0.10) -- -------- -------- -------- -------- Basic and diluted net earnings $ 0.32 $ 0.78 $ 0.46 $ 1.27 ======== ======== ======== ======== Dividends paid per share $ 0.40 $ 0.40 $ 0.80 $ 0.80 ======== ======== ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -4- WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------------ CONSOLIDATED BALANCE SHEET June 30, 2002 and December 30, 2001 (Dollar amounts in millions) (Unaudited)
June 30, Dec. 30, 2002 2001 -------- -------- Assets ------ Weyerhaeuser Current assets: Cash and cash equivalents (Note 1) $ 141 $ 202 Receivables, less allowances 1,649 1,024 Inventories (Note 8) 2,012 1,428 Prepaid expenses 550 407 -------- -------- Total current assets 4,352 3,061 Property and equipment (Note 9) 12,362 8,309 Construction in progress 1,360 428 Timber and timberlands at cost, less fee stumpage charged to disposals 4,472 1,789 Investments in and advances to equity affiliates (Note 5) 547 541 Goodwill (Note 10) 2,778 1,095 Deferred pension and other assets 1,239 1,053 -------- -------- 27,110 16,276 -------- -------- Real estate and related assets Cash and cash equivalents 8 2 Receivables, less discounts and allowances 71 71 Mortgage-related financial instruments, less discounts and allowances 23 62 Real estate in process of development and for sale 716 689 Land being processed for development 1,060 958 Investments in unconsolidated entities, less reserves (Note 5) 51 60 Other assets 171 175 -------- -------- 2,100 2,017 -------- -------- Total assets $ 29,210 $ 18,293 ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -5-
June 30, Dec. 30, 2002 2001 -------- -------- Liabilities and shareholders' interest Weyerhaeuser Current liabilities: Notes payable and commercial paper (Note 12) $ 110 $ 4 Current maturities of long-term debt (Note 13) 368 8 Accounts payable (Note 1) 1,125 809 Accrued liabilities (Note 11) 1,320 1,042 -------- -------- Total current liabilities 2,923 1,863 Long-term debt (Note 13) 12,779 5,095 Deferred income taxes (Note 7) 4,389 2,377 Deferred pension, other postretirement benefits and other liabilities 937 877 Commitments and contingencies (Note 18) -------- -------- 21,028 10,212 -------- -------- Real estate and related assets Notes payable and commercial paper (Note 12) 357 358 Long-term debt (Note 13) 576 620 Other liabilities 467 408 Commitments and contingencies (Note 18) -------- -------- 1,400 1,386 -------- -------- Total liabilities 22,428 11,598 -------- -------- Shareholders' interest (Note 14) Common shares: $1.25 par value; authorized 400,000,000 shares; issued and outstanding: 218,925,699 and 216,573,822 273 271 Exchangeable shares: no par value; unlimited shares authorized; issued and held by nonaffiliates: 2,314,558 and 3,289,259 158 224 Other capital 2,825 2,693 Retained earnings 3,778 3,852 Cumulative other comprehensive expense (252) (345) -------- -------- Total shareholders' interest 6,782 6,695 -------- -------- Total liabilities and shareholders' interest $ 29,210 $ 18,293 ======== ========
Weyerhaeuser Company -6- WEYERHAEUSER COMPANY AND SUBSIDIARIES --------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS For the twenty-six week periods ended June 30, 2002 and July 1, 2001 (Dollar amounts in millions) (Unaudited)
Consolidated ------------------- June 30, July 1, 2002 2001 -------- -------- Cash flows from operations: Net earnings $ 102 $ 278 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 578 428 Deferred income taxes, net 33 72 Pension and other postretirement benefits (40) (110) Equity in income of affiliates and unconsolidated entities (6) (47) Countervailing duties and antidumping penalties (Note 18) (47) -- Charges for integration of facilities (Note 15) 25 19 Charges for closure of facilities (Note 16) 55 -- Charge for impairment of long-lived assets (Note 6) -- 20 Extraordinary loss on early extinguishment of debt (Note 17) 35 -- Decrease (increase) in working capital, net of acquisitions: Receivables (207) 22 Inventories, real estate and land (177) (131) Prepaid expenses (116) (30) Mortgage-related financial instruments 7 1 Accounts payable and accrued liabilities 173 (157) (Gain) loss on disposition of assets (2) 8 Other (84) (79) -------- -------- Net cash from operations 329 294 -------- -------- Cash flows from investing activities: Property and equipment (446) (353) Timberlands reforestation (20) (16) Acquisition of timberlands (33) (37) Acquisition of businesses and facilities, net of cash acquired (Note 19) (6,119) -- Net distributions from (investments in) equity affiliates 13 135 Proceeds from sale of: Property and equipment 38 21 Mortgage-related financial instruments 34 5 Intercompany advances -- -- Other (20) (35) -------- -------- Net cash from investing activities (6,553) (280) -------- -------- Cash flows from financing activities: Issuances of debt 13,101 400 Notes and commercial paper borrowings, net (120) (190) Cash dividends (177) (175) Intercompany cash dividends -- -- Payments on debt (6,734) (138) Exercise of stock options 66 24 Other 33 13 -------- -------- Net cash from financing activities 6,169 (66) -------- -------- Net change in cash and cash equivalents (55) (52) Cash and cash equivalents at beginning of period 204 123 -------- -------- Cash and cash equivalents at end of period $ 149 $ 71 ======== ======== Cash paid (received) during the period for: Interest, net of amount capitalized $ 216 $ 191 ======== ======== Income taxes $ 11 $ 36 ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -7-
Weyerhaeuser Real Estate and Related Assets ------------------- ------------------------------ June 30, July 1, June 30, July 1, 2002 2001 2002 2001 ------- ------- ------- ------- $ (8) $ 195 $ 110 $ 83 575 425 3 3 27 65 6 7 (39) (107) (1) (3) 6 (30) (12) (17) (47) -- -- -- 25 19 -- -- 55 -- -- -- -- 20 -- -- 35 -- -- -- (206) 28 (1) (6) (74) (68) (103) (63) (109) (32) (7) 2 -- -- 7 1 115 (119) 58 (38) (1) 8 (1) -- (65) (43) (19) (36) ------- ------- ------- ------- 289 361 40 (67) ------- ------- ------- ------- (446) (352) -- (1) (20) (16) -- -- (33) (37) -- -- (6,119) -- -- -- (6) (25) 19 160 38 21 -- -- -- -- 34 5 41 8 (41) (8) (18) (32) (2) (3) ------- ------- ------- ------- (6,563) (433) 10 153 ------- ------- ------- ------- 13,101 -- -- 400 (120) 235 -- (425) (177) (175) -- -- -- 30 -- (30) (6,690) (105) (44) (33) 66 24 -- -- 33 12 -- 1 ------- ------- ------- ------- 6,213 21 (44) (87) ------- ------- ------- ------- (61) (51) 6 (1) 202 115 2 8 ------- ------- ------- ------- $ 141 $ 64 $ 8 $ 7 ======= ======= ======= ======= $ 215 $ 185 $ 1 $ 6 ======= ======= ======= ======= $ 11 $ (37) $ -- $ 73 ======= ======= ======= =======
Weyerhaeuser Company -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ----------------------------- NOTES TO FINANCIAL STATEMENTS For the twenty-six week periods ended June 30, 2002 and July 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 (the company). As discussed in Note 19: 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, 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 Weyerhaeuser'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 33.8 million acres of forestland located in five provinces throughout Canada that are managed by our Canadian operations. Weyerhaeuser holds forest management licenses within the provinces of British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick, which support our manufacturing operations in those provinces. These licenses are granted by the respective provincial governments for initial periods of 15-25 years, but are renewable every five years, subject to meeting normal reforestation, operating and management guidelines. Calculation of the fees payable on harvested volumes varies from province to province, but is tied to product market pricing and the allocation of land management responsibilities agreed to in the license. 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 and paper, which manufactures and sells pulp, paper and paperboard in North American, Pacific Rim and European markets. . Containerboard, packaging and recycling, which manufactures and sells 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. During the second quarter of 2002, Weyerhaeuser changed the structure of its internal organization, resulting in a change in the composition of its reportable segments. In prior financial reports, Weyerhaeuser's paper-related businesses were reported in a single pulp, paper and packaging segment. This report reflects the split of the pulp, paper and packaging segment into two segments entitled (i) pulp and paper, and (ii) containerboard, packaging and recycling. Comparative information has been restated to conform to the new reportable segments. Weyerhaeuser Company -9- 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, the company assesses goodwill for impairment by applying a fair value based test at least annually. 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 ceased amortization of goodwill. The company has performed the fair value based assessment of goodwill as of the beginning of fiscal 2002. Based upon this assessment, management believes goodwill is not impaired upon the implementation of this new standard. 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. 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, at the beginning of fiscal year 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. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. The Statement also amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the accounting required for sale-leaseback transactions and accounting for certain lease modifications that have similar economic effects. This Statement also amends other existing pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. As a result of the rescission of Statement 4, in the period of adoption, the company will reclassify the 2002 first quarter extraordinary loss from early extinguishment of debt into earnings before extraordinary items. This provision of Statement 145, and the provisions rescinding Statements 44 and 64, will be effective in fiscal year 2003. The provisions amending Statement 13 and all other provisions are effective for transactions occurring or financial statements issued on or after May 15, 2002. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 will supersede accounting guidance previously provided by EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Weyerhaeuser Company -10- 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 a 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. 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 calculated on a notional amount. The swap is an overlay to investments and provides diversification benefits. The swap is settled quarterly and marked to market value at each reporting date. 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 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 June 30, 2002, the company's net position with commodity futures contracts was immaterial. Weyerhaeuser Company -11- 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 $208 million and $198 million at June 30, 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 income of $6 million and $2 million for the twenty-six weeks ended June 30, 2002, and July 2, 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 $762 million and $354 million at June 30, 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 $192 million and $217 million greater at June 30, 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. 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 a result of casualty or sold. Generally, all initial site preparation and planting costs are capitalized as reforestation. Reforestation is transferred to a merchantable (harvestable) timber classification after 15 years in the South and 41 years in the West. Generally, costs incurred after the first planting, such as fertilization, vegetation and insect control, pruning and pre-commercial thinning, property taxes and interest, are considered to be maintenance of the forest and are expensed. There is no change in accounting practices when timber becomes merchantable and harvesting commences. Fee stumpage 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. The growth cycle volume considers regulatory and environmental constraints affecting operable acres, management strategies to be applied, inventory data improvements, growth rate revisions and re-calibrations, and the exclusion of known dispositions and inoperable acreage. The cost of timber harvested is included in the carrying values of raw material and product inventories, and in the cost of products sold as these inventories are disposed of. Weyerhaeuser Company -12- 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 $248 million and $132 million at June 30, 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 stablished 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 and related assets operations are primarily engaged in the development, construction and sale of residential homes. Real estate revenues are recognized when closings have occurred, required down payments have been received, and title and possession have been transferred to the buyer. 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. Weyerhaeuser Company -13- 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 during the period.
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 -------- -------- -------- -------- Weighted average shares outstanding (thousands): Basic 221,020 219,600 220,602 219,465 Dilutive effect of stock options 1,270 479 1,029 296 -------- -------- -------- -------- Diluted 222,290 220,079 221,631 219,761 ======== ======== ======== ========
Options to purchase 202,650 shares at prices ranging from $65.56 to $68.41 per share were outstanding during the twenty-six weeks ended June 30, 2002. Options to purchase 2,337,940 shares at prices ranging from $53.75 to $68.41 per share were outstanding during the twenty-six weeks ended July 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. 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. Weyerhaeuser Company -14-
Earnings Before Basic and Diluted Extraordinary Item Earnings Per Share -------------------- ---------------------- Twenty-six weeks ended Twenty-six weeks ended -------------------- ---------------------- Dollar amounts in millions, June 30, July 1, June 30, July 1, except per share data 2002 2001 2002 2001 -------- -------- -------- -------- Reported earnings before extraordinary item $ 125 $ 278 $ 0.56 $ 1.27 Add back goodwill amortization -- 19 -- 0.08 -------- -------- -------- -------- Adjusted earnings before extraordinary item $ 125 $ 297 $ 0.56 $ 1.35 ======== ======== ======== ========
Net Earnings -------------------------------------------- Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 -------- -------- -------- -------- Reported net earnings $ 72 $ 171 $ 102 $ 278 Add back goodwill amortization -- 9 -- 19 -------- -------- -------- -------- Adjusted net earnings $ 72 $ 180 $ 102 $ 297 ======== ======== ======== ========
Basic and Diluted Earnings Per Share -------------------------------------------- Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 -------- -------- -------- -------- Reported net earnings per share $ 0.32 $ 0.78 $ 0.46 $ 1.27 Add back goodwill amortization -- 0.04 -- 0.08 -------- -------- -------- -------- Adjusted net earnings per share $ 0.32 $ 0.82 $ 0.46 $ 1.35 ======== ======== ======== ========
Note 4: Comprehensive Income (Expense) The company's comprehensive income (expense) is as follows:
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 -------- -------- -------- -------- Net earnings $ 72 $ 171 $ 102 $ 278 Other comprehensive income (expense): Foreign currency translation adjustments, net of tax (benefit) expense of $50 and $48 for the thirteen weeks and $50 and $(1) for the twenty-six weeks, respectively 92 90 93 (2) Cash flow hedges: Net derivative gains (losses), net of tax (benefit) expense of $(1) and $(1) for the thirteen weeks and $0 and $5 for the twenty-six weeks, respectively (2) (4) -- 7 Reclassification of (gains) losses, net of tax benefit (expense) of $0 and $0 for the thirteen weeks and $0 and $(1) for the twenty-six weeks, respectively -- -- -- (2) -------- -------- -------- -------- $ 162 $ 257 $ 195 $ 281 ======== ======== ======== ========
Weyerhaeuser Company -15- Note 5: Equity Affiliates Weyerhaeuser Weyerhaeuser's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. Weyerhaeuser's significant equity affiliates as of June 30, 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 -16- Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, follows. Unconsolidated revenues and income for the thirteen weeks and twenty-six weeks ended July 1, 2001, also include Cedar River Paper Company, a joint venture that became wholly owned by the company in July 2001.
June 30, Dec. 30, Dollar amounts in millions 2002 2001 -------- -------- Current assets $ 178 $ 191 Noncurrent assets 1,229 1,222 Current liabilities 127 120 Noncurrent liabilities 339 326
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 -------- -------- -------- -------- Net sales and revenues $ 148 $ 219 $ 296 $ 448 Operating income (loss) -- 31 (7) 63 Net income (loss) (1) 24 (9) 48
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 twenty-six weeks ended July 1, 2001, include non-real estate partnership investments which the company sold during the first quarter of 2001.
June 30, Dec. 30, Dollar amounts in millions 2002 2001 -------- -------- Current assets $ 11 $ 8 Noncurrent assets 273 306 Current liabilities 12 11 Noncurrent liabilities 160 158
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 -------- -------- -------- -------- Net sales and revenues $ 9 $ 109 $ 27 $ 440 Operating income (loss) (1) 8 19 163 Net income (loss) (3) 5 14 130
The company may charge management and/or development fees to these unconsolidated entities. The aggregate total of these transactions is not material to the results of operations of the company. Weyerhaeuser Company -17- 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. The twenty-six weeks ended June 30, 2002, include $35 million in foreign exchange gains, $27 million of which relates to the second quarter. These gains result from favorable changes in exchange rates primarily related to the company's Canadian and New Zealand operations. Also included in 2002 is $4 million of first quarter charges related to the company's support alignment initiative. The twenty-six weeks ended July 1, 2001, include $10 million of pretax charges related to Westwood Shipping Lines' transition to a new charter fleet and $50 million of pretax charges related to the company's support alignment initiative. The 2001 support alignment costs included $41 million recognized in conjunction with the company's decision to outsource certain information technology services, of which $20 million 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 new regional centers were created to deliver support services. Severance costs incurred in 2001 were paid within the fiscal year 2001. Severance costs incurred in 2002 were not material. The company ceased tracking support alignment costs as of the end of the first quarter of 2002, concurrent with the acquisition of Willamette Industries (see Note 19: Acquisition). Beginning in the second quarter of 2002, costs incurred in connection with the company's integration and cost reduction efforts are reported as part of charges for integration of facilities (see Note 15: Charges for Integration of Facilities). Note 7: Income Taxes Provisions for income taxes include the following:
Twenty-six weeks ended ---------------------- June 30, July 1, Dollar amounts in millions 2002 2001 -------- -------- Federal: Current $ 20 $ 47 Deferred 35 80 -------- -------- 55 127 -------- -------- State: Current 6 5 Deferred 3 7 -------- -------- 9 12 -------- -------- Foreign: Current 8 16 Deferred (5) (15) -------- -------- 3 1 -------- -------- $ 67 $ 140 ======== ========
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. During the second quarter of 2001, a phased-in reduction in Canadian income taxes was enacted. This change in tax law produced a one-time benefit by reducing foreign deferred income taxes in that period by $15 million due to the effect of the lower tax rate on the accumulated temporary differences of the company's Canadian subsidiaries. The effect on foreign current income taxes was not significant. Weyerhaeuser Company -18- The company's effective tax rate for the twenty-six week periods ended June 30, 2002, and July 1, 2001, was 35% and 33.5%, respectively. For 2002, the effective tax rate reflects the federal statutory rate of 35%, increased for the effect of state income taxes and decreased by benefits realized from the utilization of tax credits. In 2001, the effective tax rate is lower than the 35% federal statutory rate, principally due to the effect of the change in the Canadian tax rate. This reduction was partially offset by the effect of state income taxes. 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
June 30, Dec. 30, Dollar amounts in millions 2002 2001 -------- -------- Logs and chips $ 170 $ 186 Lumber, plywood, panels and engineered lumber 563 401 Pulp and paper 322 194 Containerboard, paperboard and packaging 255 145 Other products 258 195 Materials and supplies 444 307 -------- -------- $ 2,012 $ 1,428 ======== ========
Note 9: Property and Equipment
June 30, Dec. 30, Dollar amounts in millions 2002 2001 -------- -------- Property and equipment, at cost: Land $ 321 $ 226 Buildings and improvements 2,888 2,310 Machinery and equipment 15,924 12,020 Rail and truck roads 647 612 Other 206 202 -------- -------- 19,986 15,370 Less allowance for depreciation and amortization (7,624) (7,061) -------- -------- $ 12,362 $ 8,309 ======== ========
Note 10: Goodwill The changes in the carrying amount of goodwill for the twenty-six weeks ended June 30, 2002, are as follows: Balance as of December 30, 2001 $ 1,095 Goodwill acquired (Note 19) 1,706 Goodwill written off related to facility closures (Note 16) (6) Effect of foreign currency translation adjustments (17) ------- Balance as of June 30, 2002 $ 2,778 ======= The company has completed the transitional assessment of goodwill and management believes that there are no implementation-related impairments. Weyerhaeuser Company -19- Note 11: Accrued Liabilities
June 30, Dec. 30, Dollar amounts in millions 2002 2001 -------- -------- Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 483 $ 419 Taxes - Social Security and real and personal property 76 58 Product warranties 39 39 Interest 258 128 Other 464 398 ------- ------- $ 1,320 $ 1,042 ======= =======
Note 12: Short-Term Debt Lines of Credit Weyerhaeuser had short-term bank credit lines of $1.3 billion and $925 million at June 30, 2002, and December 30, 2001, respectively. Both Weyerhaeuser 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 June 30, 2002, Weyerhaeuser had borrowed $50 million against this facility. WRECO had no borrowings against the facility as of June 30, 2002. No portion of the $925 million line had been availed of by Weyerhaeuser or WRECO at December 30, 2001. Neither of the entities referred to above is a guarantor of the borrowing of the other. In addition, Weyerhaeuser 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 Weyerhaeuser. As of December 30, 2001, Weyerhaeuser'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 Weyerhaeuser. 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 Weyerhaeuser as of December 30, 2001. Note 13: Long-Term Debt During the first quarter of 2002, Weyerhaeuser issued $5.5 billion of notes payable to fund the acquisition of Willamette (see Note 19: 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 Weyerhaeuser'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 Weyerhaeuser. Borrowings are at LIBOR plus a spread or other such interest rates mutually agreed to between the borrower and lending banks. As of June 30, 2002, Weyerhaeuser 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 June 30, 2002, or December 30, 2001. The company's compensating balance agreements were not significant. Weyerhaeuser Company -20- Note 14: Shareholders' Interest Common Shares A reconciliation of common share activity for the periods ended June 30, 2002, and December 30, 2001, is as follows:
Twenty-six Fifty-two weeks ended weeks ended June 30, Dec. 30, In thousands 2002 2001 ----------- ----------- Shares outstanding at beginning of year 216,574 213,898 Retraction of exchangeable shares 974 2,026 Stock options exercised 1,378 650 ----------- ----------- Shares outstanding at end of period 218,926 216,574 =========== ===========
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 ended June 30, 2002, and December 30, 2001, is as follows:
Twenty-six Fifty-two weeks ended weeks ended In thousands June 30, Dec. 30, 2002 2001 ----------- ----------- Shares outstanding at beginning of year 3,289 5,315 Retractions (974) (2,026) ----------- ----------- Shares outstanding at end of period 2,315 3,289 =========== ===========
Cumulative Other Comprehensive Income (Expense) Weyerhaeuser's cumulative other comprehensive income (expense) includes:
June 30, Dec. 30, Dollar amounts in millions 2002 2001 --------- --------- Foreign currency translation adjustments $ (213) $ (306) Minimum pension liability adjustment (43) (43) Cash flow hedge fair value adjustments 4 4 --------- --------- $ (252) $ (345) ========= =========
Weyerhaeuser Company -21- Note 15: Charges for Integration of Facilities In the second quarter of 2002, Weyerhaeuser incurred $23 million of pretax charges related to the transition and integration of activities in connection with the Willamette acquisition. Year-to-date costs for integration of facilities were $25 million. These charges include one-time transition costs such as severance and relocation and include the cost of transitional services and benefits provided under change in control agreements. During 2002 severance charges of $5 million were recognized in connection with the planned termination of approximately 200 employees. As of June 30, 2002, approximately 50 of these employees have been terminated and an accrual of approximately $5 million remains. In the second quarter of 2001, Weyerhaeuser incurred $10 million of pretax charges related to the transition and integration of activities in connection with the MacMillan Bloedel and Trus Joist acquisitions. Year-to-date charges totaled $19 million. These charges represented one-time transition costs including approximately $9 million of severance-related costs recognized in connection with the planned termination of approximately 450 employees. As of June 30, 2002, approximately 200 of the employees had been terminated and approximately $4 million in severance accruals remained. As of December 30, 2001, approximately 100 employees had been terminated and approximately $5 million in related severance accruals remained. Note 16: Charges for Closure of Facilities In the second quarter of 2002, Weyerhaeuser incurred $28 million of pretax charges associated with the closure or impending closure of four containerboard, packaging and recycling facilities. Year-to-date charges of $55 million also included $27 million of first quarter charges associated with the closure of an oriented strand board facility and two packaging facilities. The year-to-date charges include $34 million for asset impairments, $6 million for the impairment of goodwill associated with the closed facilities, $8 million of severance and $7 million of other closure costs. The severance costs relate to the termination of approximately 270 employees expected to result from these closures, of which approximately 150 had occurred as of June 30, 2002. Approximately $7 million of these severance and closure liabilities remain in accrued liabilities as of June 30, 2002. Note 17: Extraordinary Loss on Early Extinguishment of Debt In February 2002, Weyerhaeuser issued bridge financing in connection with the Willamette acquisition (see Note 19: Acquisition). Fees related to the commitments on financing that had been secured for the acquisition were recorded as deferred finance costs. In March 2002, Weyerhaeuser 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 18: 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 $950 million in 2002; however, that expenditure level could be increased or decreased as a consequence of future economic conditions. Weyerhaeuser Company -22- Following the expiration of a five-year agreement between the United States and Canada, in 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 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%. Because the final determination eliminated the 90-day retroactive duties, the company reversed its $18 million accrual for the retroactive portion of the CVD during the first quarter of 2002. In May 2002, the ITC confirmed its earlier ruling that the U.S. industry is threatened by subsidized and dumped imports. Its finding of only threat of injury means that the CVD and antidumping duties will be collected only for the period beginning with the publication of its final order on May 22, 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. In the final determination, 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 only threat of injury, the accrual was 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 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 also moved for appellate review by panels under NAFTA and the World Trade Organization (WTO) with respect to the CVD findings. In July 2002, the WTO issued two interim rulings against the United States. The first ruling was against the so-called "Byrd Amendment," which gives U.S. firms cash from punitive trade sanctions applied on foreign imports. The second ruling was that a key measure used in the CVD to determine the existence of a subsidy is improper. It is difficult to predict the net effect final duties will 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 will not have a material adverse effect on the company's financial position, liquidity or results of operations. 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 will not have a material effect on the company's financial position, liquidity or results of operations. Weyerhaeuser Company -23- Note 19: 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. Effective June 30, 2002, Willamette merged with and into the company with Willamette ceasing to exist. 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 estimated excess cost 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 112 Deferred tax effect of applying purchase accounting 1,331 Less: historical net assets (2,487) -------- Total excess costs $ 5,118 ======== The above calculation of excess purchase price is preliminary. The company is in the process of conducting valuations of the acquired timberlands and property, plant and equipment. The company expects the valuations to be completed during the fourth quarter 2002 and that they will not materially affect the preliminary allocation of the purchase price. As of June 30, 2002, the excess purchase price was allocated as follows: Dollar amounts in millions Property, plant and equipment $ 3,412 Goodwill 1,706 -------- Total excess costs $ 5,118 ======== 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 -24- 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) Twenty-six weeks ended ---------------------- June 30, July 1, Dollar amounts in millions 2002 2001 --------- --------- Net sales and revenues $ 9,410 $ 9,594 Net earnings 61 246 Earnings per share: Basic and diluted $ 0.28 $ 1.12
Note 20: 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 and paper (including pulp, paper and paperboard); containerboard, packaging and recycling; and real estate and related assets. During the second quarter of 2002, Weyerhaeuser changed the structure of its internal organization, resulting in a change in the reporting of it's pulp, paper and packaging segment. Weyerhaeuser's paper-related businesses, which were reported in a single pulp, paper and packaging segment in prior financial reports, will now be reported as two segments entitled (i) pulp and paper, and (ii) containerboard, packaging and recycling. Comparative information has been restated to conform to the new reportable segments. 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 -25- 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 Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 ------- ------- ------- -------- Sales to and revenues from unaffiliated customers: Timberlands $ 235 $ 266 $ 423 $ 537 Wood products 2,147 1,738 3,848 3,118 Pulp and paper 951 609 1,723 1,320 Containerboard, packaging and recycling 1,157 817 2,073 1,633 Real estate and related assets 421 371 817 705 Corporate and other 38 41 73 82 ------- ------- ------- ------- 4,949 3,842 8,957 7,395 ------- ------- ------- ------- Intersegment sales: Timberlands 288 213 518 438 Wood products 52 55 103 118 Pulp and paper 7 18 60 82 Containerboard, packaging and recycling 8 1 13 3 Corporate and other 2 3 4 7 ------- ------- ------- ------- 357 290 698 648 ------- ------- ------- ------- Total sales and revenues 5,306 4,132 9,655 8,043 Intersegment eliminations (357) (290) (698) (648) ------- ------- ------- ------- $ 4,949 $ 3,842 $ 8,957 $ 7,395 ======= ======= ======= ======= Approximate contribution (charge) to earnings (1): Timberlands $ 175 $ 129 $ 294 $ 270 Wood products 64 110 73 77 Pulp and paper (15) 27 (14) 100 Containerboard, packaging and recycling 75 68 133 162 Real estate and related assets (1) 79 62 170 131 Corporate and other (61) (67) (119) (157) ------- ------- ------- ------- 317 329 537 583 Interest expense (222) (87) (365) (175) Less capitalized interest 16 6 20 10 ------- ------- ------- ------- Earnings before income taxes and extraordinary item 111 248 192 418 Income taxes (39) (77) (67) (140) ------- ------- ------- ------- Earnings before extraordinary item 72 171 125 278 Extraordinary item -- -- (23) -- ------- ------- ------- ------- Net earnings $ 72 $ 171 $ 102 $ 278 ======= ======= ======= =======
Segment information for the twenty-six weeks ended June 30, 2001, 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 $29.2 billion as of June 30, 2002, primarily due to the Willamette acquisition. There were no material changes from year-end 2001 in 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 $1 million for the thirteen weeks and $4 million for the twenty-six weeks ended July 1, 2002, is included in the determination of approximate contributions to earnings and is excluded from interest expense for financial services business. Weyerhaeuser Company -26- WEYERHAEUSER COMPANY AND SUBSIDIARIES ---------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Some information included in this report contains statements concerning the company's future results and performance that are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those projected, including, but not limited to: . the effect of general economic conditions, including the level of interest rates and housing starts; . market demand for the company's products, which may be tied to the relative strength of various U.S. business segments; . performance of the company's manufacturing operations; . the level of competition from foreign producers; . the effect of forestry, land use, environmental and other governmental regulations; and . fires, floods and other natural disasters. The company is also a large exporter and is affected by changes in economic activity in Europe and Asia, particularly Japan, and by changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Euro and the Yen, and restrictions on international trade or tariffs imposed on imports, including the countervailing and dumping duties imposed on the company's softwood lumber shipments from Canada to the United States. These and other factors could cause or contribute to actual results differing materially from such forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will occur, or if any them occurs, what effect they will have on the company's results of operations or financial condition. The company expressly declines any obligation to publicly revise any forward looking statements that have been made to reflect the occurrence of events after the date of this report. Results of Operations The term "company" refers to Weyerhaeuser Company and all of its majority owned domestic and foreign subsidiaries. The term "Weyerhaeuser" excludes the real estate and related assets operations. Consolidated Results Consolidated net sales and earnings for the thirteen and twenty-six week periods ended June 30, 2002, and July 1, 2001, were:
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- Dollar amounts in millions, June 30, July 1, June 30, July 1, except per share data 2002 2001 2002 2001 ------- ------- ------- -------- Net sales and revenues $ 4,949 $ 3,842 $ 8,957 $ 7,395 Net earnings 72 171 102 278 Net earnings per share, basic and diluted 0.32 0.78 0.46 1.27
On February 11, 2002, Weyerhaeuser Company acquired Willamette Industries, Inc. (Willamette). The consolidated statement of earnings includes Willamette's results beginning on the date of acquisition. Weyerhaeuser Company -27- Net earnings for the second quarter 2002 include the following non-routine items, which are presented net of taxes: . A charge of $18 million, or $0.08 per share, for costs associated with closure, or impending closure, of four facilities, . A charge of $16 million, or $0.08 per share, for one-time costs related to the integration of Willamette, and . A benefit of $19 million, or $0.09 per share, for the reversal of previously accrued countervailing duties. In addition to the second quarter 2002 non-routine items, net earnings for the first half of 2002 include: . An extraordinary charge for $23 million, or $0.10 per share, for the deferred costs associated with the bridge financing of the acquisition of Willamette, . A charge of $17 million, or $0.08 per share, associated with the closure of three facilities, and . A benefit of $12 million, or $0.05 per share, from the reversal of previously accrued countervailing duties. Net earnings for the second quarter of 2001 include the following non-routine items, which are presented net of taxes: . A benefit of $15 million, or $0.07 per share, for a one-time reduction in deferred taxes due to a lower Canadian corporate tax rate, . Charges of $6 million, or $0.03 per share, for costs resulting from Westwood Shipping Line's transition to a new charter fleet, and . A charge of $6 million, or $0.03 per share, for one-time costs associated with the integration of the MacMillan Bloedel and Trus Joist acquisitions. In addition to the second quarter 2001 items, earnings for the first half of 2001 also include the following non-routine items, net of taxes: . Charge of $26 million, or $0.12 per share, associated with outsourcing certain information technology services as part of the company's program to streamline support services, and . Charge of $6 million, or $0.02 per share, for integration costs associated with the MacMillan Bloedel and Trus Joist acquisitions. Operating results for the first half of 2002 include $71 million in net pension income compared with $124 million in the first half of 2001. The decrease is primarily attributable to reductions in expected and actual rates of return on plan assets and a reduction in the discount rate. Timberlands
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 ------- ------- ------- -------- Net sales and revenues $ 235 $ 266 $ 423 $ 537 Contribution to earnings 175 129 294 270
Timberlands' contribution to earnings improved for both the second quarter and first half of 2002 compared to the same periods in 2001. Net sales decreased for both comparative periods. The inclusion of the acquired Willamette operations and improvements in pricing increased net sales; however, declines in third party sales volumes more than offset those increases when compared to same periods in the previous year. The timberlands segment's operating results were buoyed by stable domestic log markets and improved export log markets during the second quarter, and were aided by the weakening dollar. Third party sales volume for timberlands raw materials and log production volume for the thirteen and twenty-six week periods ended June 30, 2002, and July 1, 2001, are as follows:
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Volumes in millions 2002 2001 2002 2001 ------- ------- ------- -------- Raw materials third party sales volume - cubic feet 99 140 175 280 Log production volume - cubic feet 217 170 344 344
Weyerhaeuser Company -28- In the third quarter, export log markets are expected to continue to improve, however, third quarter harvest levels are expected to be lower due to normal seasonal shutdowns and higher than normal fire conditions. Wood Products
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 ------- ------- ------- -------- Net sales and revenues $ 2,147 $ 1,738 $ 3,848 $ 3,118 Contribution to earnings 64 110 73 77
Net sales for Wood Products increased for both the second quarter and first half of 2002 compared to the same periods in 2001, however, contribution to earnings declined for both comparative periods. Net sales increased primarily as a result of the inclusion of the Willamette operations. Additional increases in net sales resulted from improvements in third party sales volumes of Weyerhaeuser's existing lumber, oriented strandboard (OSB), composite panels, and raw materials operations. These improvements were slightly offset by price declines in lumber, OSB and composite panels. Net sales includes $29 million for the second quarter of 2002 and $47 million for the first half of 2002 related to the reversal of previously accrued countervailing duties. Contribution to earnings in the second quarter of 2002 for the wood products operations includes the $29 million pretax reversal of countervailing duties. Wood products demand is strong, but the markets remain oversupplied as a result of inventories built in advance of the final countervailing duty ruling, resulting in weak pricing. Inventories are expected to decrease during the third quarter, however the outlook for pricing remains uncertain. Weyerhaeuser Company -31- Third party sales and total production volumes for the major products in the wood products segment for the thirteen and twenty-six week periods ended June 30, 2002, and July 1, 2001, are as follows:
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Third party sales volumes (millions) 2002 2001 2002 2001 ------- ------- ------- -------- Softwood lumber - board feet 2,295 1,792 4,107 3,459 Softwood plywood and veneer - square feet (3/8") 750 491 1,325 940 Composite panels - square feet (3/4") 445 59 753 122 Oriented strand board - square feet (3/8") 1,095 916 2,040 1,787 Hardwood lumber - board feet 113 106 221 212 Raw materials - cubic feet 164 69 307 156
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Total production volumes (millions) 2002 2001 2002 2001 ------- ------- ------- -------- Softwood lumber - board feet 1,702 1,422 3,232 2,828 Softwood plywood and veneer - square feet (3/8") 562 278 993 563 Composite panels - square feet (3/4") 378 25 596 54 Oriented strand board - square feet (3/8") 944 833 1,901 1,616 Hardwood lumber - board feet 99 109 195 220 Logs - cubic feet 187 98 372 230
Weyerhaeuser Company -29- Pulp and Paper
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 ------- ------- ------- -------- Net sales and revenues $ 951 $ 609 $ 1,723 $ 1,320 Contribution (charge) to earnings (15) 27 (14) 100
During the second quarter of 2002, Weyerhaeuser changed the structure of its internal organization, resulting in a change in the reporting of its pulp, paper and packaging operations. Weyerhaeuser's paper-related businesses, which were reported in a single pulp, paper and packaging segment in prior financial reports, are now reported as two segments entitled (i) pulp and paper, and (ii) containerboard, packaging and recycling. The pulp and paper segment includes all of the company's white paper production including market pulp, fine paper, newsprint, and paperboard. Net sales for the pulp and paper segment increased for both the second quarter and first half of 2002 compared to the same periods in 2001, however, contribution to earnings declined for both comparative periods. Net sales increased primarily as a result of the inclusion of Willamette's operations after February 11, 2002. Selling price declines in pulp and paper partially offset increases in net sales due to the Willamette acquisition for the first half of 2002 compared to the same period in 2001. Market pulp and paper pricing improved at the end of the second quarter as a result of low inventories and the weakening of the U.S. dollar. An explosion in the recovery boiler at our Plymouth, N.C., paper mill, had a significant adverse affect on pulp and paper operating results. Repairs are expected to be complete in August 2002, but the resulting lost production and higher operating costs are expected to adversely affect third quarter results. Also in the third quarter of 2002, the Kingsport, Tennessee, paper mill will begin operation as the first phase of the modernization project of the mill becomes operational. Third party sales and total production volumes for major pulp and paper products follow:
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Third party sales volumes (thousands)2002 2001 2002 2001 ------- ------- ------- -------- Pulp - air-dry metric tons 618 507 1,181 987 Paper - tons 766 355 1,360 748 Paperboard - tons 61 56 114 116
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Total production volumes (thousands) 2002 2001 2002 2001 ------- ------- ------- -------- Pulp - air-dry metric tons 701 448 1,386 997 Paper - tons 727 339 1,285 739 Paperboard - tons 67 61 130 113
In the third quarter, pricing is expected to stabilize, however, demand is recovering slowly and further price improvements will require additional improvement in demand. Containerboard, Packaging and Recycling
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 ------- ------- ------- -------- Net sales and revenues $ 1,157 $ 817 $ 2,073 $ 1,633 Contribution to earnings 75 68 133 162
Weyerhaeuser Company -30- Net sales for the containerboard, packaging, and recycling segment increased for both the second quarter and first half of 2002 compared to the same periods in 2001, however, contribution to earnings were mixed for the comparative periods. The increase in net sales in the first half of 2002 compared to the first half of 2001 is primarily attributable to the acquisition of Willamette. The increase as a result of the acquisition was offset, in part, by declines in price in the first half of 2002 compared to the first half of 2001 for both containerboard and packaging. Shipments in containerboard are improving slowly, and year-over-year improvements in existing Weyerhaeuser sales volumes were experienced in June. Contribution to earnings for the second quarter of 2002 include pretax charges of $28 million for facilities closures in 2002. The domestic containerboard and packaging markets are expected to continue to improve into the third quarter of 2002. Third party sales and total production volumes for containerboard, packaging, and recycling follow:
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Third party sales volumes (thousands)2002 2001 2002 2001 ------- ------- ------- -------- Containerboard - tons 309 222 558 440 Packaging - MSF 19,527 11,856 34,900 24,546 Recycling - tons 552 817 1,156 1,643
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Total production volumes (thousands) 2002 2001 2002 2001 ------- ------- ------- -------- Containerboard - tons 1,600 776 2,850 1,651 Packaging - MSF 20,630 13,432 36,911 26,787 Recycling - tons 1,286 1,181 2,544 2,373
Real Estate and Related Assets
Thirteen weeks ended Twenty-six weeks ended -------------------- ---------------------- June 30, July 1, June 30, July 1, Dollar amounts in millions 2002 2001 2002 2001 ------- ------- ------- ------- Net sales and revenues $ 421 $ 371 $ 817 $ 705 Contribution to earnings 79 62 170 131
Net sales and contribution to earnings improved for both the second quarter and first half of 2002 compared to the same periods in 2001. Sales in markets where the company operates remained strong during the second quarter of 2002, despite modest slowdown in traffic in some markets. Contribution to earnings for 2002 include a pretax gain of $7 million for the sale of an apartment complex. The real estate business is expected to continue to perform well into the third quarter of 2002 given the six-month backlog of existing orders and favorable mortgage rates. Costs and Expenses Weyerhaeuser's second quarter costs and expenses were $4.3 billion compared to $3.2 billion in the same quarter last year. Increases in costs and expenses are primarily attributable to the inclusion of Willamette's operations since acquisition. Weyerhaeuser's cost of products sold, as a percentage of sales, was 78 percent for the current quarter, compared to 76 percent for the second quarter 2001. Various nonrecurring items are included in Weyerhaeuser's costs and expenses. Costs and expenses for the second quarter of 2002 include nonrecurring pretax charges of: . $28 million associated with the closure, or pending closure, of four facilities, and . $23 million in costs related to the integration of the Willamette acquisition. Weyerhaeuser Company -31- Costs and expenses for the second quarter 2001 include nonrecurring pre-tax charges of: . $5 million in support alignment costs, and . $10 million in integration and closure costs related to the MacMillan Bloedel and Trus Joist acquisitions. Other operating costs, net, is an aggregation of both recurring and nonrecurring items and, as a result, can fluctuate from year to year. Other operating costs, net for the current quarter includes $27 million in exchange rate gains as a result of favorable changes in exchange rates. Other operating costs, net for the second quarter 2001 includes the $10 million pretax charges related to Westwood Shipping Line's transition to a new charter fleet. The increase in the real estate and related assets segment's costs and expenses can be attributed to the increased sales volumes over the same period last year. 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 provided by operations in the first half of 2002 was $329 million, up $35 million, or 12 percent, from $294 million provided during the same period last year. Net cash from operations before changes in working capital of $649 million in 2002 was $60 million, or 10 percent, greater than $589 million provided in 2001. Cash provided by net earnings of $102 million in 2002 was net of noncash charges of $578 million for depreciation, amortization and fee stumpage, $33 million in deferred taxes, $25 million for integration of facilities, $55 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 $40 million for pension and postretirement benefits and $47 million in reversals of previously accrued countervailing duties. 2001 cash provided by net earnings of $278 million was net of noncash charges of $428 million for depreciation, amortization and fee stumpage, $72 million in deferred taxes, $19 million in integration costs and $20 million for an asset impairment charge. This was partially offset by noncash credits of $110 million for pension and postretirement benefits and $47 million of equity in earnings of affiliates. Cash required for working capital by Weyerhaeuser was $274 million in the first two quarters of 2002, an increase of $83 million, or 43 percent, over $191 million for the same period a year ago. Requirements for 2002 included $206 million for increases in receivables, $74 million for increases in inventories and $109 million for increases in prepaid expenses, partially offset by increases in accounts payable and accrued liabilities of $115 million. Inventory increased across all product lines except raw materials. The inventory turnover rate increased to 9.7 turns in the second quarter of 2002 from 8.8 turns in the second quarter of 2001. Cash required by real estate and related assets for working capital in the amount of $46 million was 56 percent below $106 required for the same period in 2001. Current period cash outflows for working capital included $104 million for the acquisition and development of land and residential lots for development in excess of products sold, partially offset by $58 million in increases in accounts payable and accrued liabilities. Weyerhaeuser Company -32- Year-to-date earnings before interest expense and income taxes plus net noncash charges for the principal business segments were: . Timberlands - $342 million, an increase of $41 million from $301 million in 2001. Operating earnings for this segment were $24 million greater than last year and noncash charges were $13 million greater, while pension credits decreased $4 million. . Wood Products - $196 million, an increase of $46 million over $150 million in 2001. Operating earnings decreased $4 million from the same period last year while noncash charges for depreciation and amortization and facility closures increased by $78 million and noncash pension credits decreased by $19 million. 2002 also includes $47 million in noncash credits related to the reversal of previously accrued countervailing duties. . Pulp and Paper - $131 million, down $57 million from $188 million a year ago. The $114 million decline in operating earnings included a $43 million increase in depreciation and amortization, and a $14 million decrease in noncash pension credits. . Containerboard, Packaging and Recycling - $281 million, up $57 million from $224 million a year ago. Operating earnings declined by $29 million, but noncash charges for depreciation, amortization and facility closures were $75 million greater than for the same period last year. Noncash pension credits also decreased $11 million. Investing Capital expenditures for the first twenty-six weeks ended June 30, 2002, excluding acquisitions and real estate and related assets, were $466 million in 2002 compared to $368 million in 2001. Current year capital spending by segment was $29 million for timberlands, $134 million for wood products, $198 million for pulp and paper, $86 million for containerboard, packaging and recycling and $19 million for corporate and other. The company currently anticipates capital expenditures, excluding acquisitions and real estate and related assets, to approximate $950 million for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. In 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 Year-to-date 2002, Weyerhaeuser increased its interest-bearing debt by $8.2 billion, primarily due to funding the acquisition of Willamette and the assumption of $1.8 billion of Willamette debt. Proceeds from new borrowings, net of debt issue costs, including both the initial acquisition funding and the subsequent replacement of the bridge financing, totaled $13.1 billion in 2002. Repayments of long-term debt, including the bridge funding, totaled $6.7 billion, for a net increase in new borrowings of $6.4 billion. This was partially offset by $120 million in payments of notes and commercial paper. Weyerhaeuser's debt to total capital ratio, excluding real estate and related assets, was 56 percent at the end of the 2002 second quarter, up from 38 percent at the end of 2001 and 35 percent at the end of the 2001 second quarter. For purposes of computing this ratio, debt includes Weyerhaeuser's interest-bearing debt and capital lease obligations and total capital consists of debt, shareholders' interest, deferred taxes and minority interest in subsidiaries, net of Weyerhaeuser's investments in real estate and related assets subsidiaries. Weyerhaeuser's goal is to pay down the additional debt using cash flow from operations and to return to our historic debt ratios within three to five years. The real estate and related assets segment reduced third party debt by $44 million, all of which represents repayment of long-term debt. During the first two quarters of 2002, the company paid $177 million in cash dividends compared to $175 million in cash dividends paid during 2001. Year-to-date 2002, the company also received $66 million in cash proceeds from the exercise of stock options, compared to $24 million in 2001. Weyerhaeuser Company -33- Environmental Matters The company has established reserves for remediation costs on all of the approximately 75 active sites across its operations as of the end of 2002 second quarter 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 $2 million and $1 million of remediation costs into this reserve in the first six months of 2002 and 2001, respectively. The company incurred remediation costs of $4 million in both 2002 and 2001, and charged these costs against the reserve. 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. The company incurred claims and related costs in the amount of $6 million and $14 million in the first six months of 2002 and 2001, respectively, and charged these costs against the reserve. While the company believes that the reserve balances established for these matters are adequate, the company is unable to estimate at this time the amount of additional charges, if any, that may be required for these matters in the future. The company negotiated settlements with its insurance carriers for recovery of certain costs related to these claims. As of June 30, 2002, the company has either received or accrued $52 million in recoveries from its insurance carriers. The following table presents an analysis of the claims activity related to the hardboard siding class action cases:
Twenty-six weeks Fifty-two weeks Fifty-three weeks ended ended ended June 30, 2002 Dec. 30, 2001 Dec. 31, 2000 ---------------- ----------------- ----------------- Number of claims filed during the period 1,550 6,480 40 Number of claims resolved 1,630 2,580 -- Number of claims unresolved at end of period 3,860 3,940 40 Number of damage awards paid 1,200 400 -- Average damage award paid $1,800 $1,700 $--
Contingencies Following the expiration of a five-year agreement between the United States and Canada, in 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 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%. Because the final determination eliminated the 90-day retroactive duties, the company reversed its $18 million accrual for the retroactive portion of the CVD during the first quarter of 2002. In May 2002, the ITC confirmed its earlier ruling that the U.S. industry is threatened by subsidized and dumped imports. Its finding of only threat of injury means that the CVD and antidumping duties will be collected only for the period beginning with the publication of its final order on May 22, 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. In the final determination, 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 only threat of injury, the accrual was reversed on the company books during the second quarter. Approximately one Weyerhaeuser Company -34- 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 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 also moved for appellate review by panels under NAFTA and the World Trade Organization (WTO) with respect to the CVD findings. In July 2002, the WTO issued two interim rulings against the United States. The first ruling was against the so-called "Byrd Amendment," which gives U.S. firms cash from punitive trade sanctions applied on foreign imports. The second ruling was that a key measure used in the CVD to determine the existence of a subsidy is improper. It is difficult to predict the net effect final duties will 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 will not have a material adverse effect on the company's financial position, liquidity or results of operations. 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 will not have a material effect on the company's financial position, liquidity or 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. The company has no material market risk sensitive instruments, positions or transactions and the effect of the use of derivatives on the company's results of operations, financial position and cash flows is not material. 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 June 30, 2002, the company had a long position in Euros, with both a fair value and a notional amount approximating zero. 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 June 30, 2002, the company had a long position in Canadian dollars, with a fair value of $4 million and a corresponding notional amount of $5 million. The contracts expire monthly through June 2003. At June 30, 2002, the company also had a long position in Norwegian kroners, with both a fair value and a notional amount of $2 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 June 30, 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. Weyerhaeuser Company -35- . 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 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 June 30, 2002, the company had one swap with a maturity date of March 31, 2004, a notional amount of $151 million and a fair value of $3 million. The company has the right to terminate this swap with short notice. . 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 June 30, 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 -36- 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 of $175 million to cover the estimated cost of the settlement and related costs. While the company believes that the reserve balances established for these matters are adequate, the company is unable to estimate at this time the amount of additional charges, if any, that may be required for these matters in the future. At the end of the second quarter of 2002, the company is a defendant in 16 cases involving primarily multi-family structures and residential developments; however, five of these cases were improperly filed by persons who did not opt-out of the settlement and the company expects these cases to be dismissed. 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. The verdict has been appealed. 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. No specific damage amounts have been claimed and the company is unable at this time to provide an estimate of reasonably possible losses in these cases. In September 2001, the district court certified both classes. The 3rd Circuit Court of Appeals accepted review of the decision to certify the classes and heard oral arguments in June 2002. Trial court activity has been stayed until an opinion on the appeal has been rendered. In May 1999, the Equity Committee (Committee) in the Paragon Trade Brands, Inc. (Paragon) bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the ompany 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. Pursuant to a reorganization of Paragon, the litigation claims representative for the bankruptcy estate became the plaintiff in the proceeding. On June 26, 2002, the Bankruptcy Court granted the plaintiff's motion for partial summary judgment, holding that Weyerhaeuser is liable to the plaintiff for breaches of warranty, and denied the company's motion for summary judgment. A written order is expected in the near future. No trial date has been set for the determination of the damages. Weyerhaeuser strongly disagrees with the Bankruptcy Court's decision and will pursue all available relief. The company believes at the present time that the possibility of a material unfavorable outcome is remote. Following the expiration of a five-year agreement between the United States and Canada, in 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 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%. Because the final determination eliminated the 90-day retroactive duties, the company reversed its $18 million accrual for the retroactive portion of the CVD during the first quarter of 2002. In May 2002, the ITC confirmed its earlier ruling that the U.S. industry is threatened by subsidized and dumped imports. Its finding of only threat of injury means that the CVD and antidumping duties will be collected only for the period beginning with the publication of its final order on May 22, 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 Weyerhaeuser Company -37- dumping and set a preliminary "dumping margin" for the company. In the final determination, 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 only a threat of injury, the accrual was 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 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 also moved for appellate review by panels under NAFTA and the World Trade Organization (WTO) with respect to the CVD findings. In July 2002, the WTO issued two interim rulings against the United States. The first ruling was against the so-called "Byrd Amendment," which gives U.S. firms cash from punitive trade sanctions applied on foreign imports. The second ruling was that a key measure used in the CVD to determine the existence of a subsidy is improper. It is difficult to predict the net effect final duties will 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 will not have a material adverse effect on the company's current financial position, liquidity or results of operations. In April 1999, Willamette's Johnsonburg, Pennsylvania paper and pulp mill received a notice of violation (NOV) from the U.S. Environmental Protection Agency (EPA) for alleged violations of the Clean Air Act (CAA). Management has met with federal and state officials to resolve the matters alleged in the NOV and will continue to work with officials to narrow issues in dispute. Management believes that it is reasonably possible that a settlement will be reached at a future date, that may involve payment of a penalty of up to approximately $1 million and the installation of pollution control equipment. The company is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," and similar state laws. The EPA and/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings 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, will not have a material effect on the company's financial position, liquidity or 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 purchasers 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 Matters voted upon and votes cast at the annual meeting of shareholders of Weyerhaeuser Company held on Tuesday, April 16, 2002, were: The reelection of Martha Ingram, John Kieckhefer, Arnold Langbo and Clayton Yeutter to the board of directors.
For Withheld ------------- ------------- Ingram 186,169,567 7,815,163 Kieckhefer 187,109,174 6,875,556 Langbo 187,073,160 6,911,570 Yeutter 187,037,257 6,947,473
Weyerhaeuser Company -38- The terms of Richard Haskayne, Robert Herbold, Donald Mazankowski, Nicole Piasecki, Steven Rogel, William Ruckelshaus, Richard Sinkfield and James Sullivan continued after the annual meeting.
For Against Abstain ------------ ----------- ----------- Proposal to approve an amendment to the Weyerhaeuser Company 1998 Long-Term Incentive Plan 183,872,022 8,829,924 1,282,785 Shareholder proposal relating to a classified board 99,253,092 78,251,938 1,657,986 Shareholder proposal relating to shareholder rights plan 92,409,764 85,020,997 1,730,755
Item 5. Other Information not applicable Item 6. Exhibits and Reports on Form 8-K Exhibits 12. Statement regarding computation of ratios 99. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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, April 25, May 20, June 7, July 1, July 23, August 9 and August 13, 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; Item 7, Financial Statements and Exhibits; and Item 9, Regulation FD Disclosure. Weyerhaeuser Company -39- EXHIBITS INDEX -------------- Exhibits: 12. Statement regarding computation of ratios 99. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EXHIBIT 12 WEYERHAEUSER COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollar Amounts in Thousands)
TWENTY-SIX WEEKS ENDING ----------------------- JUNE 30, JULY 1, 2002 2001 --------- --------- Available earnings: Earnings before interest expense, amortization of debt expense, income taxes and extraordinary item $560,578 $704,576 Add interest portion of rental expense 27,164 22,708 --------- --------- Available earnings before extraordinary item $587,742 $727,284 ========= ========= Fixed charges: Interest expense incurred: Weyerhaeuser Company and subsidiaries excluding Weyerhaeuser Real Estate Company, Weyerhaeuser Financial Services, Inc. and Gryphon Investments of Nevada and their subsidiaries $349,358 $173,880 Weyerhaeuser Real Estate Company and consolidated subsidiaries 25,514 32,661 Weyerhaeuser Financial Services, Inc. and consolidated subsidiaries 683 4,541 Gryphon Investments of Nevada, Inc. -- -- --------- --------- Subtotal 375,555 211,082 Less intercompany interest 466 681 --------- --------- Total interest expense incurred 375,089 210,401 --------- --------- Amortization of debt expense 15,432 1,748 --------- --------- Rental expense: Weyerhaeuser Company and consolidated subsidiaries 76,362 63,691 Weyerhaeuser Real Estate Company and consolidated subsidiaries 5,129 4,433 Weyerhaeuser Financial Services, Inc. and consolidated subsidiaries -- -- Gryphon Investments of Nevada, Inc. -- -- --------- --------- 81,491 68,124 --------- --------- Interest portion of rental expense 27,164 22,708 --------- --------- Fixed Charges $417,685 $234,857 ========= ========= Ratio of earnings to fixed charges 1.41x 3.10x ========= =========
WEYERHAEUSER COMPANY WITH ITS WEYERHAEUSER REAL ESTATE COMPANY, WEYERHAEUSER FINANCIAL SERVICES, INC. AND GRYPHON INVESTMENTS OF NEVADA SUBSIDIARIES ACCOUNTED FOR ON THE EQUITY METHOD, BUT EXCLUDING THE UNDISTRIBUTED EARNINGS OF THOSE SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollar Amounts in Thousands)
TWENTY-SIX WEEKS ENDING ----------------------- JUNE 30, JULY 1, 2002 2001 --------- --------- Available earnings: Earnings before interest expense, amortization of debt expense, income taxes and extraordinary item $536,862 $583,225 Add interest portion of rental expense 25,454 21,230 --------- --------- 562,316 604,455 --------- --------- Deduct undistributed earnings of equity affiliates (3,932) (28,461) --------- --------- Deduct undistributed earnings before income taxes of Weyerhaeuser Real Estate Company, Weyerhaeuser Financial Services, Inc. and Gryphon Investments of Nevada and their subsidiaries: Deduct pretax earnings (169,258) (130,861) Add back dividends paid to Weyerhaeuser -- 30,000 --------- --------- Undistributed earnings (169,258) (100,861) --------- --------- Available earnings before extraordinary item $389,126 $475,133 ========= ========= Fixed charges: Interest expense incurred $349,358 $173,880 Amortization of debt expense 15,432 1,748 Interest portion of rental expense 25,454 21,230 --------- --------- Fixed charges $390,244 $196,858 ========= ========= Ratio of earnings to fixed charges 1.00x 2.41x ========= =========
EXHIBIT 99 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Weyerhaeuser Company, a Washington corporation (the "Company"), hereby certifies that: The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 (the "Form 10-Q") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven R. Rogel Chief Executive Officer Dated: August 14, 2002 /s/ William C. Stivers Chief Financial Officer Dated: August 14, 2002 The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.