10-Q 1 f10qsep02.txt 10-Q SEPT 2002 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirty-nine weeks ended September 29, 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 November 1, 2002, was 218,947,525 common shares ($1.25 par value). Weyerhaeuser Company -2- WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirty-nine weeks ended September 29, 2002 Page No. -------- Officer Certifications 3-4 Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings 5 Consolidated Balance Sheet 6-7 Consolidated Statement of Cash Flows 8-9 Notes to Financial Statements 10-30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 31-40 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 42 Part II. Other Information Item 1. Legal Proceedings 43 Item 2. Changes in Securities (not applicable) Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 43 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 thirty-nine week period ended September 29, 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 November 12, 2002 Weyerhaeuser Company -3- CERTIFICATIONS I, Steven R. Rogel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Weyerhaeuser Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Steven R. Rogel ---------------------------- Steven R. Rogel Chairman, President and Chief Executive Officer Weyerhaeuser Company -4- I, William C. Stivers, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Weyerhaeuser Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ William C. Stivers ---------------------------- William C. Stivers Executive Vice President and Chief Financial Officer Weyerhaeuser Company -5- WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENT OF EARNINGS For the periods ended September 29, 2002 and September 30, 2001 (Dollar amounts in millions except per-share data) (Unaudited)
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues: Weyerhaeuser $ 4,444 $ 3,360 $ 12,584 $ 10,050 Real estate and related assets 468 392 1,285 1,097 -------- -------- -------- -------- Total net sales and revenues 4,912 3,752 13,869 11,147 -------- -------- -------- -------- Costs and expenses: Weyerhaeuser: Costs of products sold 3,598 2,659 9,992 7,795 Depreciation, amortization and fee stumpage 304 223 879 648 Selling expenses 116 95 335 286 General and administrative expenses 201 148 618 501 Research and development expenses 11 11 36 38 Taxes other than payroll and income taxes 48 38 139 113 Other operating costs, net (Note 13)19 24 (4) 77 Charges for integration of facilities (Note 14) 17 4 42 23 Charges for closure of facilities (Note 15) -- 32 55 32 -------- -------- -------- -------- 4,314 3,234 12,092 9,513 -------- -------- -------- -------- Real estate and related assets: Costs and operating expenses 359 301 967 824 Depreciation and amortization 1 2 4 5 Selling expenses 23 23 68 61 General and administrative expenses 14 4 35 30 Taxes other than payroll and income taxes 1 1 3 4 Other operating costs, net 6 (2) -- (4) -------- -------- -------- -------- 404 329 1,077 920 -------- -------- -------- -------- Total costs and expenses 4,718 3,563 13,169 10,433 -------- -------- -------- -------- Operating income 194 189 700 714 Interest expense and other: Weyerhaeuser: Interest expense incurred (214) (93) (579) (268) Interest capitalized 16 6 36 16 Equity in income (loss) of affiliates (Note 4) (6) 5 (12) 35 Interest income and other 9 4 20 14 Real estate and related assets: Interest expense incurred (12) (17) (38) (54) Interest capitalized 12 16 38 49 Equity in income of unconsolidated entities (Note 4) 10 4 22 21 Interest income and other 11 8 25 13 -------- -------- -------- -------- Earnings before income taxes and extraordinary item 20 122 212 540 Income taxes (Note 5) (7) (31) (74) (171) -------- -------- -------- -------- Earnings before extraordinary item 13 91 138 369 Extraordinary item, net of tax benefit of $12 (Note 16) -- -- (23) -- -------- -------- -------- -------- Net earnings $ 13 $ 91 $ 115 $ 369 ======== ======== ======== ======== Basic and diluted net earnings per share (Note 2): Before extraordinary item $ 0.06 $ 0.41 $ 0.62 $ 1.68 Extraordinary item (Note 16) -- -- (0.10) -- -------- -------- -------- -------- Basic and diluted net earnings $ 0.06 $ 0.41 $ 0.52 $ 1.68 ======== ======== ======== ======== Dividends paid per share $ 0.40 $ 0.40 $ 1.20 $ 1.20 ======== ======== ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -6- WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------------------- CONSOLIDATED BALANCE SHEET September 29, 2002 and December 30, 2001 (Dollar amounts in millions) (Unaudited)
Sept. 29, Dec. 30, 2002 2001 ---------- ---------- Assets ------ Weyerhaeuser Current assets: Cash and cash equivalents $ 119 $ 202 Receivables, less allowances 1,604 1,024 Inventories (Note 6) 1,951 1,428 Prepaid expenses 485 407 ---------- ---------- Total current assets 4,159 3,061 Property and equipment (Note 7) 12,235 8,309 Construction in progress 1,338 428 Timber and timberlands at cost, less fee stumpage charged to disposals 4,436 1,789 Investments in and advances to equity affiliates (Note 4) 541 541 Goodwill (Note 8) 2,812 1,095 Deferred pension and other assets 1,239 1,053 ---------- ---------- 26,760 16,276 ---------- ---------- Real estate and related assets Cash and cash equivalents 11 2 Receivables, less discounts and allowances 68 71 Mortgage-related financial instruments, less discounts and allowances 23 62 Real estate in process of development and for sale 735 689 Land being processed for development 995 958 Investments in unconsolidated entities, less reserves (Note 4) 31 60 Other assets 172 175 ---------- ---------- 2,035 2,017 ---------- ---------- Total assets $ 28,795 $ 18,293 ========== ==========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -7-
Sept. 29, Dec. 30, 2002 2001 ---------- ---------- Liabilities and shareholders' interest -------------------------------------- Weyerhaeuser Current liabilities: Notes payable and commercial paper (Note 10) $ 231 $ 4 Current maturities of long-term debt (Note 11) 791 8 Accounts payable 1,059 809 Accrued liabilities (Note 9) 1,189 1,042 ---------- ---------- Total current liabilities 3,270 1,863 Long-term debt (Note 11) 12,224 5,095 Deferred income taxes (Note 5) 4,360 2,377 Deferred pension, other postretirement benefits and other liabilities 947 877 Commitments and contingencies (Note 17) ---------- ---------- 20,801 10,212 ---------- ---------- Real estate and related assets Notes payable and commercial paper (Note 10) 80 358 Long-term debt (Note 11) 856 620 Other liabilities 432 408 Commitments and contingencies (Note 17) ---------- ---------- 1,368 1,386 ---------- ---------- Total liabilities 22,169 11,598 ---------- ---------- Shareholders' interest (Note 12) Common shares: $1.25 par value; authorized 400,000,000 shares; issued and outstanding: 218,947,509 and 216,573,822 shares 274 271 Exchangeable shares: no par value; unlimited shares authorized; issued and held by nonaffiliates: 2,304,269 and 3,289,259 shares 157 224 Other capital 2,826 2,693 Retained earnings 3,702 3,852 Cumulative other comprehensive loss (333) (345) ---------- ---------- Total shareholders' interest 6,626 6,695 ---------- ---------- Total liabilities and shareholders' interest $ 28,795 $ 18,293 ========== ==========
Weyerhaeuser Company -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS For the thirty-nine week periods ended September 29, 2002 and September 30, 2001 (Dollar amounts in millions) (Unaudited)
Consolidated ---------------------- Sept. 29, Sept. 30, 2002 2001 ---------- ---------- Cash flows from operations: Net earnings $ 115 $ 369 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 883 652 Deferred income taxes, net 33 62 Net pension and other postretirement benefit income (64) (157) Equity in income (loss) of affiliates and unconsolidated entities (10) (56) Reversals of countervailing duties and antidumping penalties (Note 17) (47) -- Charges for integration of facilities (Note 14) 42 23 Charges for closure of facilities (Note 15) 55 32 Charge for impairment of long-lived assets (Note 13) -- 20 Extraordinary loss on early extinguishment of debt (Note 16) 35 -- Decrease (increase) in working capital, net of acquisitions: Receivables (158) 62 Inventories, real estate and land (71) (98) Prepaid expenses (57) 13 Mortgage-related financial instruments 7 3 Accounts payable and accrued liabilities (92) (91) (Gain) loss on disposition of assets 2 5 Other (14) (100) ---------- ---------- Net cash from operations 659 739 ---------- ---------- Cash flows from investing activities: Purchases of property and equipment (684) (485) Timberlands reforestation (26) (20) Acquisition of timberlands (47) (92) Acquisition of businesses and facilities, net of cash acquired (Note 18) (6,119) (261) Net distributions from (investments in) equity affiliates 38 136 Proceeds from sale of: Property and equipment 43 41 Mortgage-related financial instruments 35 8 Intercompany advances -- -- Other (5) (28) ---------- ---------- Net cash from investing activities (6,765) (701) ---------- ---------- Cash flows from financing activities: Issuances of debt 13,417 1,240 Notes and commercial paper borrowings, net (276) (890) Cash dividends (265) (263) Intercompany cash dividends -- -- Payments on debt (6,903) (151) Exercise of stock options 67 29 Other (8) (13) ---------- ---------- Net cash from financing activities 6,032 (48) ---------- ---------- Net change in cash and cash equivalents (74) (10) Cash and cash equivalents at beginning of period 204 123 ---------- ---------- Cash and cash equivalents at end of period $ 130 $ 113 ========== ========== Cash paid (received) during the period for: Interest, net of amount capitalized $ 539 $ 292 ========== ========== Income taxes $ 32 $ 35 ========== ==========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -9-
Weyerhaeuser Real Estate and Related Assets ------------------------------ ------------------------------ Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- $ (51) $ 237 $ 166 $ 132 879 647 4 5 25 56 8 6 (63) (152) (1) (5) 12 (35) (22) (21) (47) -- -- -- 42 23 -- -- 55 32 -- -- -- 20 -- -- 35 -- -- -- (161) 79 3 (17) (12) (19) (59) (79) (52) 10 (5) 3 -- -- 7 3 (116) (109) 24 18 3 5 (1) -- 8 (50) (22) (50) ------------- ------------- ------------- ------------- 557 744 102 (5) ------------- ------------- ------------- ------------- (683) (483) (1) (2) (26) (20) -- -- (47) (92) -- -- (6,119) (261) -- -- (9) (33) 47 169 43 41 -- -- -- -- 35 8 54 10 (54) (10) (2) (24) (3) (4) ------------- ------------- ------------- ------------- (6,789) (862) 24 161 ------------- ------------- ------------- ------------- 13,127 840 290 400 2 (406) (278) (484) (265) (263) -- -- 75 30 (75) (30) (6,849) (106) (54) (45) 67 29 -- -- (8) (13) -- -- ------------- ------------- ------------- ------------- 6,149 111 (117) (159) ------------- ------------- ------------- ------------- (83) (7) 9 (3) 202 115 2 8 ------------- ------------- ------------- ------------- $ 119 $ 108 $ 11 $ 5 ============= ============= ============= ============= $ 538 $ 285 $ 1 $ 7 ============= ============= ============= ============= $ (50) $ (38) $ 82 $ 73 ============= ============= ============= =============
Weyerhaeuser Company -10- WEYERHAEUSER COMPANY AND SUBSIDIARIES ------------------------------------- NOTES TO FINANCIAL STATEMENTS For the thirty-nine week periods ended September 29, 2002 and September 30, 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 18: 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. Through several wholly-owned subsidiaries and joint ventures, the company is also responsible for management, marketing and distribution activities for both forestlands and manufacturing facilities located in New Zealand, Australia, Ireland, France 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 bleached paperboard in North American, European and Pacific Rim 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. Weyerhaeuser also holds renewable long-term licenses on 33.8 million acres of forestland located in British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick, Canada, that are managed by our Canadian operations. Revenues and expenses associated with these licenses are included in the results of operations of the manufacturing operations they support. The terms of these licenses are described under "Timber and Timberlands" below. 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 financial reports prior to the second quarter of 2002, 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 -11- Accounting Pronouncements Implemented At the beginning of fiscal 2002, the company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. In accordance with Statement 142, the company no longer amortizes goodwill over an estimated useful life. Rather, the company assesses goodwill for impairment by applying a fair value based test at least annually. 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 was not impaired upon the implementation of this standard. Statement 142 also requires separate recognition for certain acquired intangible assets that will continue to be amortized over their useful lives. There were no separately identified intangible assets other than goodwill that existed from acquisitions prior to the adoption of Statement 142. At 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 the disposal of a segment of a business. Implementation of Statement 144 did not have a material impact on the company's financial position, results of operations or cash flows. 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. The company will adopt Statement 143 as of the beginning of 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 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, the company will reclassify the 2002 first quarter extraordinary loss from early extinguishment of debt into earnings before extraordinary items in its annual report for 2002. 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 Emerging Issues Task Force (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 will be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on the company's financial position, results of operations or cash flows. Weyerhaeuser Company -12- 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 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. . Commodity contracts, the objective of which is to hedge the variability of future cash flows associated with certain commodity transactions. Gains or losses related to cash flow hedges that have been 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 value quarterly and any unrealized gains and losses are recognized in earnings currently. . Lumber and other commodity futures designed to manage the consolidated exposure to changes in inventory values due to fluctuations in market prices for selected business units. The company's commodity futures positions are marked to market value at each reporting date and all unrealized gains and losses are recognized in earnings currently. These contract positions have not had a material effect on the company's financial position, results of operations or cash flows. As of September 29, 2002, the company's net position with commodity futures contracts was immaterial. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. The notional amounts of these derivative financial instruments are $238 million and $198 million at September 29, 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 Weyerhaeuser Company -13- 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 $8 million and $5 million for the thirty-nine weeks ended September 29, 2002, and September 30, 2001, respectively. Cash and Cash Equivalents Short-term investments with original maturities of 90 days or less are considered 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 $718 million and $354 million at September 29, 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 $187 million and $217 million greater at September 29, 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 accumulated depreciation of property sold or retired is removed from the 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. Accounting practices for these costs do not change 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 also holds forest management licenses in various Canadian provinces. The provincial governments grant these licenses for initial periods of 15-25 years, and the licenses are renewable every five years, provided the company meets normal reforestation, operating and management guidelines. Calculation of 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. Weyerhaeuser Company -14- 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 8: Goodwill 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, certain accounts had negative book cash balances totaling $173 million and $132 million at September 29, 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 sheet. Income Taxes Deferred income taxes are provided to reflect temporary differences between the financial and tax bases of assets and liabilities using presently enacted tax rates and laws. Pension Plans The company has pension plans covering most of its employees. Both the U.S. and Canadian plans covering salaried employees provide pension benefits based on the employee's highest monthly earnings for five consecutive years during the final ten years before retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The benefit levels for these plans are typically collectively bargained with the unions. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). Contributions to Canadian plans are based on funding standards established by the applicable Provincial Pension Benefits Act and by the Income Tax Act. Postretirement Benefits Other Than Pensions In addition to providing pension benefits, the company provides certain health care and life insurance benefits for some retired employees and accrues the expected future cost of these benefits for its current eligible retirees and some employees. All of the company's salaried employees and some hourly employees may become eligible for these benefits when they retire. Revenue Recognition The company's forest products operations recognize revenue from product sales upon shipment to their customers, except for 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 -15- 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 using period-end exchange rates. 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 3: Comprehensive Income (Loss). Reclassifications Certain reclassifications have been made to conform comparative 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 dilutive stock options outstanding during the period.
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 -------------------- ---------------------- Weighted average shares outstanding (thousands): Basic 221,251 219,801 220,818 219,577 Dilutive effect of stock options 372 504 829 353 ------- ------- ------- ------- Diluted 221,623 220,305 221,647 219,930 ======= ======= ======= =======
Options to purchase 4,072,629 shares for the thirty-nine weeks ended September 29, 2002, and 859,861 shares for the thirty-nine weeks ended September 30, 2001, were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market prices of common shares during those periods. Weyerhaeuser Company -16- Note 3: Comprehensive Income (Loss) The company's comprehensive income (loss) is as follows:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net earnings $ 13 $ 91 $ 115 $ 369 Other comprehensive income (loss): Foreign currency translation adjustments related to investments in foreign subsidiaries (80) (103) 13 (105) Cash flow hedges: Net derivative gains (losses), net of tax (benefit) expense of $0 and $(2) for the thirteen weeks and $0 and $3 for the thirty-nine weeks, respectively (1) (2) (1) 5 Reclassification of (gains) losses, net of tax benefit (expense) of $0 and $0 for the thirteen weeks and $0 and $(1) for the thirty-nine weeks, respectively -- -- -- (2) --------- --------- --------- ---------- $ (68) $ (14) $ 127 $ 267 ========= ========= ========= ==========
Note 4: 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 September 29, 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. Weyerhaeuser Company -17- . 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. Unconsolidated financial information for affiliated companies, which are accounted for by the equity method, follows. Unconsolidated net sales and revenues and net income (loss) for the thirty-nine weeks ended September 30, 2001, also include Cedar River Paper Company, a joint venture that became wholly owned by the company in July 2001.
Sept. 29, Dec. 30, Dollar amounts in millions 2002 2001 --------- ---------- Current assets $ 201 $ 191 Noncurrent assets 1,213 1,222 Current liabilities 124 120 Noncurrent liabilities 348 326
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 138 $ 155 $ 434 $ 603 Operating income (loss) (17) 1 (24) 64 Net income (loss) (26) (2) (35) 46
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. Net sales and revenues and net income (loss) for the thirty-nine weeks ended September 30, 2001, include the results of non-real estate partnership investments, which the company sold during the first quarter of 2001. Weyerhaeuser Company -18-
Sept. 29, Dec. 30, Dollar amounts in millions 2002 2001 --------- ---------- Current assets $ 8 $ 8 Noncurrent assets 281 306 Current liabilities 13 11 Noncurrent liabilities 199 158
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 14 $ 11 $ 41 $ 451 Operating income 7 4 26 167 Net income 1 3 15 133
The company may charge management and/or development fees to these unconsolidated entities. The aggregate total of these transactions is not material to the results of operations of the company. Note 5: Income Taxes Provisions for income taxes include the following:
Thirty-nine weeks ended ------------------------ Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 --------- ---------- Federal: Current $ 22 $ 82 Deferred 40 122 --------- ---------- 62 204 --------- ---------- State: Current 8 11 Deferred 3 12 --------- ---------- 11 23 --------- ---------- Foreign: Current 11 16 Deferred (10) (72) --------- ---------- 1 (56) --------- ---------- $ 74 $ 171 ========= ==========
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 third quarter of 2001, a one-time reduction in the British Columbia provincial corporate income tax rate was enacted. During the second quarter of 2001, a phased-in reduction in Canadian income taxes was also enacted. These changes in tax law produced one-time benefits by reducing foreign deferred income taxes by $14 million in the third quarter of 2001 and by $29 million in the thirty-nine weeks ended September 30, 2001, due to the effect of the lower tax rates on the accumulated temporary differences of the company's Canadian subsidiaries. The effect on foreign current income taxes was not significant. The company's effective tax rate for the thirty-nine week periods ended September 29, 2002, and September 30, 2001, was 35% and 31.7%, 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 Weyerhaeuser Company -19- 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 effects of the changes in the Canadian tax rates. These reductions were 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 6: Inventories
Sept. 29, Dec. 30, Dollar amounts in millions 2002 2001 --------- ---------- Logs and chips $ 171 $ 186 Lumber, plywood, panels and engineered lumber 518 401 Pulp and paper 289 194 Containerboard and packaging 268 145 Other products 252 195 Materials and supplies 453 307 --------- ---------- $ 1,951 $ 1,428 ========= ==========
Note 7: Property and Equipment
Sept. 29, Dec. 30, Dollar amounts in millions 2002 2001 --------- ---------- Property and equipment, at cost: Land $ 320 $ 226 Buildings and improvements 2,877 2,310 Machinery and equipment 15,941 12,020 Rail and truck roads 733 612 Other 211 202 --------- ---------- 20,082 15,370 Less allowance for depreciation and amortization (7,847) (7,061) --------- ---------- $ 12,235 $ 8,309 ========= ==========
Note 8: Goodwill The changes in the carrying amount of goodwill for the thirty-nine weeks ended September 29, 2002, are as follows: Balance as of December 30, 2001 $ 1,095 Goodwill acquired (Note 18) 1,721 Goodwill written off related to facility closures (Note 15) (6) Other 2 ---------- Balance as of September 29, 2002 $ 2,812 ========== Weyerhaeuser Company -20- The following table illustrates the effect of goodwill amortization on 2001 net earnings and net earnings per share.
Earnings Before Basic and Diluted Extraordinary Item Earnings Per Share -------------------- ----------------------- Thirty-nine weeks ended Thirty-nine weeks ended -------------------- ---------------------- Dollar amounts in millions, Sept. 29, Sept. 30, Sept. 29, Sept. 30, except per share data 2002 2001 2002 2001 --------- --------- --------- ---------- Reported earnings before extraordinary item $ 138 $ 369 $ 0.62 $ 1.68 Add back goodwill amortization -- 27 -- 0.12 --------- --------- --------- ---------- Adjusted earnings before extraordinary item $ 138 $ 396 $ 0.62 $ 1.80 ========= ========= ========= ==========
Net Earnings -------------------------------------------- Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 --------- --------- --------- ---------- Reported net earnings $ 13 $ 91 $ 115 $ 369 Add back goodwill amortization -- 8 -- 27 --------- --------- --------- ---------- Adjusted net earnings $ 13 $ 99 $ 115 $ 396 ========= ========= ========= ==========
Basic and Diluted Earnings Per Share -------------------------------------------- Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2002 2001 2002 2001 --------- --------- --------- ---------- Reported net earnings per share $ 0.06 $ 0.41 $ 0.52 $ 1.68 Add back goodwill amortization -- 0.04 -- 0.12 --------- --------- --------- ---------- Adjusted net earnings per share $ 0.06 $ 0.45 $ 0.52 $ 1.80 ========= ========= ========= ==========
Note 9: Accrued Liabilities
Sept. 29, Dec. 30, Dollar amounts in millions 2002 2001 --------- ---------- Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 509 $ 419 Taxes - Social Security and real and personal property 79 58 Product warranties 39 39 Interest 133 128 Other 429 398 --------- ---------- $ 1,189 $ 1,042 ========= ==========
Note 10: Short-Term Debt Lines of Credit Weyerhaeuser had short-term bank credit lines of $1.3 billion and $925 million at September 29, 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 September 29, 2002, and December 30, 2001, neither Weyerhaeuser nor WRECO had outstanding borrowings against these facilities. Neither Weyerhaeuser nor WRECO 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. Weyerhaeuser Company -21- 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. Note 11: Long-Term Debt During the first quarter of 2002, Weyerhaeuser utilized bridge financing to fund the acquisition of Willamette (see Note 18: Acquisition). Shortly thereafter, Weyerhaeuser issued $5.5 billion of notes payable and repaid the bridge financing. The notes bear interest at rates ranging from LIBOR plus 1.125% (variable) to 7.375% (fixed) and mature from 2003 to 2032. During the third quarter of 2002, Weyerhaeuser Real Estate Company issued $290 million of notes payable and applied the proceeds to repay other real estate and related assets borrowings. 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 September 29, 2002, Weyerhaeuser had borrowed $1.3 billion against this facility. The company's compensating balance agreements were not significant. Note 12: Shareholders' Interest Common Shares A reconciliation of common share activity for the periods ended September 29, 2002, and December 30, 2001, is as follows:
Thirty-nine Fifty-two weeks ended weeks ended Sept. 29, Dec. 30, In thousands 2002 2001 --------- ---------- Shares outstanding at beginning of year 216,574 213,898 Retraction of exchangeable shares 985 2,026 Stock options exercised 1,389 650 --------- ---------- Shares outstanding at end of period 218,948 216,574 ========= ==========
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. Weyerhaeuser Company -22- A reconciliation of Exchangeable Share activity for the periods ended September 29, 2002, and December 30, 2001, is as follows:
Thirty-nine Fifty-two weeks ended weeks ended Sept. 29, Dec. 30, In thousands 2002 2001 --------- ---------- Shares outstanding at beginning of year 3,289 5,315 Retractions (985) (2,026) --------- ---------- Shares outstanding at end of period 2,304 3,289 ========= ==========
Cumulative Other Comprehensive Loss Weyerhaeuser's cumulative other comprehensive loss includes:
Sept. 29, Dec. 30, Dollar amounts in millions 2002 2001 --------- ---------- Foreign currency translation adjustments related to investments in foreign subsidiaries $ (293) $ (306) Minimum pension liability adjustment (43) (43) Cash flow hedge fair value adjustments 3 4 --------- ---------- $ (333) $ (345) ========= ==========
Note 13: 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. Weyerhaeuser's other operating costs, net, includes the following pretax items:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Foreign exchange transaction (gains) losses $ 16 $ 11 $ (19) $ 6 Costs associated with support alignment initiative -- 5 4 55 Transition to Westwood Shipping Lines' new fleet -- -- -- 10 Other, net 3 8 11 6 --------- --------- --------- ---------- $ 19 $ 24 $ (4) $ 77 ========= ========= ========= ==========
Foreign exchange transaction gains and losses result from changes in exchange rates primarily related to our Canadian and New Zealand operations. Fluctuations in foreign exchange rates resulted in a foreign exchange transaction gain of $8 million in the first quarter of 2002, a gain of $27 million in the second quarter of 2002, and a loss of $16 million in the third quarter of 2002. The 2001 support alignment costs include charges of $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 at the end of the first quarter of 2002, concurrent with the acquisition of Willamette (see Note 18: Acquisition). Beginning in the second quarter of 2002, costs incurred in connection with the company's integration and cost reduction efforts are included in charges for integration of facilities (see Note 14: Charges for Integration of Facilities). Weyerhaeuser Company -23- Note 14: Charges for Integration of Facilities In the third quarter of 2002, Weyerhaeuser incurred $17 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 $42 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 $7 million were recognized in connection with the planned termination of approximately 250 employees. As of September 29, 2002, approximately 200 of these employees have been terminated and an accrual of approximately $4 million remains. In the third quarter of 2001, Weyerhaeuser incurred $4 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 $23 million. These charges represented one-time transition costs including approximately $10 million of severance-related costs recognized in connection with the planned termination of approximately 450 employees. As of September 29, 2002, approximately 200 of the employees had been terminated and approximately $3 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 15: Charges for Closure of Facilities Year to date 2002 results include pretax charges of $55 million associated with the closure, or impending closure, of an oriented strand board facility, four packaging facilities, a corrugated medium machine and a containerboard facility. 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 as a result of these closures, of which approximately 240 had occurred as of September 29, 2002. Approximately $5 million of these severance and closure liabilities remain in accrued liabilities as of September 29, 2002. In the third quarter of 2001, the company incurred $32 million in pretax charges associated with the announced closures of a containerboard machine in Springfield, Ore., and a fine paper machine and sheeter in Longview, Wash. The charges include $22 million for asset impairments, $6 million of severance and $4 million of other closure costs. The severance costs relate to the termination of approximately 300 employees as a result of the closures. As of September 29, 2002, approximately 270 terminations had occurred and approximately $5 million in severance and other closure liabilities remained. Approximately 110 terminations had occurred as of December 30, 2001, and approximately $7 million of severance and closure liabilities remained in accrued liabilities. Note 16: Extraordinary Loss on Early Extinguishment of Debt In February 2002, Weyerhaeuser issued bridge financing in connection with the Willamette acquisition (see Note 18: 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 11: 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 17: Commitments and Contingencies Capital Expenditures Weyerhaeuser'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. Countervailing and Antidumping Duties In April of 2001, the Coalition for Fair Lumber Imports (Coalition) filed two petitions with the U.S. Department of Commerce (Department) and the International Trade Commission (ITC), claiming that production of softwood lumber in Canada was being subsidized by Canada and that imports from Canada were being "dumped" into the U.S. market and sold at less than fair value. The Coalition asked that countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber imported from Canada. Weyerhaeuser Company -24- 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. The charge for the retroactive portion of the CVD had been recognized during 2001. In May 2002, the ITC confirmed its earlier ruling that 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 selected 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 depository rate was set at 12.39%. With the finding by the ITC of only threat of injury, the antidumping accruals of $29 million recorded in 2001 and $13 million recorded in 2002 were reversed on the company books during the second quarter. Following is a summary of the CVD and antidumping amounts recorded in the company's statement of earnings:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Charges for CVD and antidumping duties $ 31 $ 30 $ 51 $ 30 Reversals of 2001 charges for estimated CVD and antidumping duties -- -- (47) -- Reversals of 2002 charges for estimated antidumping duties -- -- (13) -- --------- --------- --------- ---------- $ 31 $ 30 $ (9) $ 30 ========= ========= ========= ==========
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 will be automatically reviewed in a "sunset" proceeding to determine whether dumping or a countervailing subsidy will continue or recur. The company is appealing under the North American Free Trade Agreement (NAFTA). A panel has been appointed and will 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 was that a key measure used in the CVD to determine the existence of a subsidy is improper. Both rulings are being contested by the United States. It is difficult to predict the net effect final duties will have on the company. In the event that the CVD and antidumping margins are determined to be improper, the charges incurred for these duties may be reversed and the company could receive reimbursement for amounts paid to date. In the event that final rates differ from the depository rates, ultimate charges may be higher or lower than those recorded to date. The company is unable to estimate at this time the amount of additional charges or reversals that may be necessary for this matter in the future. Weyerhaeuser Company -25- Hardboard Siding Claims 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. In the third quarter of 2001, the company reassessed the adequacy of the reserve and increased the reserve by an additional $43 million. The company incurred claims and related costs in the amount of $3 million and $14 million in the third quarter of 2002 and 2001, respectively, and $9 million and $24 million in the first thirty-nine weeks 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 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. The following table presents an analysis of the claims activity related to the hardboard siding class action cases:
Thirty-nine Fifty-two Fifty-three weeks ended weeks ended weeks ended Sept. 29, Dec. 30, Dec. 31, 2002 2001 2000 ----------- ----------- ----------- Number of claims filed during the period 2,240 6,480 40 Number of claims resolved 3,920 2,580 -- Number of claims unresolved at end of period 2,260 3,940 40 Number of damage awards paid 1,500 400 -- Average damage award paid $ 1,850 $ 1,700 $ --
The company negotiated settlements with its insurance carriers for recovery of certain costs related to these claims. As of September 29, 2002, the company has either received or accrued $52 million in recoveries from its insurance carriers. At the end of the third quarter of 2002, the company is a defendant in state trial court in 12 cases involving primarily multi-family structures and residential developments. The company anticipates that other individuals and entities that have opted out of the settlement may file lawsuits against the company. In January 2002, a jury returned a verdict in favor of the company in a lawsuit involving hardboard siding manufactured by the company and installed by a developer in a residential development located in Modesto, California. The verdict has been appealed and is not included in the 12 cases mentioned at the state court level. Other Legal Proceedings Antitrust Litigation. 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. In September 2001, the district court certified both classes. On appeal the 3rd Circuit Court of Appeals affirmed the trial court's certification of the two classes. The defendants will seek certiorari with the U.S. Supreme Court. At the trial level, discussions have begun on reactivating pretrial discovery efforts. Trial has been set for April 2004. In December 2000, a lawsuit was filed against the company in U.S. District Court in Oregon alleging that from 1996 to present Weyerhaeuser had monopoly power or attempted to gain monopoly power in the Pacific Northwest market for alder logs and finished alder lumber. In August 2001, the complaint was amended to add an additional plaintiff and raise the request for relief to $30 million plus treble damages, attorney fees and costs. Trial is scheduled for April 8, 2003. Weyerhaeuser denies the allegations and is vigorously defending this action. Weyerhaeuser Company -26- Paragon Trade Brands, Inc. Litigation. 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 company in the name of the debtor's estate. Specifically, the Committee asserted 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 issued an oral opinion granting the plaintiff's motion for partial summary judgment, holding Weyerhaeuser liable to plaintiff for breaches of warranty, and denying the company's motion for summary judgment. On October 30, 2002, the Bankruptcy Court issued a written order confirming the June oral opinion. The company plans to file a Petition for Reconsideration with the Bankruptcy Court. No trial date has been set for the determination of the damages. Weyerhaeuser disagrees with the Bankruptcy Court's decision and will diligently pursue all available relief. Other Ligigation. The company is a party to other matters generally incidental to its business, in addition to the matters described above. Summary. Although the final outcome of any legal proceeding is subject to a great many variables and cannot be predicted with any degree of certainty, the company's management presently believes that resolving all of these matters will not have a material adverse impact on the company's financial position or its results of operations. Environmental Matters In April 1999, Willamette's Johnsonburg, Penn., 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 has established reserves for remediation costs on all of the approximately 74 active sites across its operations as of the end of the third quarter of 2002 totaling $41 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 thirty-nine weeks of 2002 and 2001, respectively. Year to date, the company incurred remediation costs of $6 million in 2002 and $8 million in 2001, 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. Note 18: Acquisition 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 $8.1 billion. Willamette was an integrated forest products company that produced 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 owned 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. Weyerhaeuser Company -27- 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 127 Deferred tax effect of applying purchase accounting 1,331 Less: historical net assets (2,487) --------- Total excess costs $ 5,133 ========= 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. The excess purchase price is allocated as follows: Dollar amounts in millions Long-lived assets $ 3,412 Goodwill 1,721 --------- Total excess costs $ 5,133 ========= Property, plant and equipment are being depreciated over a weighted 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. The following summarized unaudited pro forma information, assuming this acquisition occurred at the beginning of fiscal periods presented, is as follows: Pro Forma Information (unaudited)
Thirteen weeks ended Thirty-nine weeks ended -------------------- ----------------------- Dollar amounts in millions, Sept. 29, Sept. 30, Sept. 29, Sept. 30, except per share data 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 4,912 $ 4,843 $ 14,322 $ 14,437 Net earnings before extraordinary item 13 83 98 352 Net earnings 13 83 74 330 Earnings per share: Basic and diluted $ 0.06 $ 0.38 $ 0.33 $ 1.50
Weyerhaeuser Company -28- Note 19: Business Segments The company is principally engaged in the growing and harvesting of timber; the manufacture, distribution, and sale of forest products; and real estate development and construction. The company's principal business segments are: . Timberlands, which includes logs, chips and timber, and distribution and converting facilities located outside North America; . Wood products, which includes 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, which includes pulp, paper and bleached paperboard; . Containerboard, packaging and recycling; and . Real estate and related assets. Prior to the second quarter of 2002, Weyerhaeuser reported its paper-related businesses in a single pulp, paper and packaging segment. During the second quarter of 2002, Weyerhaeuser changed the structure of its internal organization. As a result, the paper-related businesses are now 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 bleached 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 -29- 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 Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Sales to and revenues from unaffiliated customers: Timberlands $ 334 $ 184 $ 757 $ 590 Wood products 1,957 1,751 5,805 5,000 Pulp and paper 967 637 2,690 1,957 Containerboard, packaging and recycling 1,149 755 3,222 2,388 Real estate and related assets 468 392 1,285 1,097 Corporate and other 37 33 110 115 --------- --------- --------- ---------- 4,912 3,752 13,869 11,147 --------- --------- --------- ---------- Intersegment sales: Timberlands 249 136 767 420 Wood products 68 52 171 170 Pulp and paper 25 29 85 111 Containerboard, packaging and recycling 30 3 43 6 Corporate and other 3 2 7 9 --------- --------- --------- ---------- 375 222 1,073 716 --------- --------- --------- ---------- Total sales and revenues 5,287 3,974 14,942 11,863 Intersegment eliminations (375) (222) (1,073) (716) --------- --------- --------- ---------- $ 4,912 $ 3,752 $ 13,869 $ 11,147 ========= ========= ========= ==========
Approximate contribution (charge) to earnings (1): Timberlands $ 138 $ 107 $ 432 $ 378 Wood products (18) 47 55 123 Pulp and paper 10 (28) (4) 72 Containerboard, packaging and recycling 88 69 221 231 Real estate and related assets (1) 85 75 255 206 Corporate and other (85) (61) (204) (218) --------- --------- --------- ---------- 218 209 755 792 Interest expense (214) (93) (579) (268) Capitalized interest 16 6 36 16 --------- --------- --------- ---------- Earnings before income taxes and extraordinary item 20 122 212 540 Income taxes (7) (31) (74) (171) --------- --------- --------- ---------- Earnings before extraordinary item 13 91 138 369 Extraordinary item -- -- (23) -- --------- --------- --------- ---------- Net earnings $ 13 $ 91 $ 115 $ 369 ========= ========= ========= ==========
Segment information for the thirty-nine weeks ended September 29, 2002, includes the addition of the Willamette operations as of February 11, 2002. Total assets of the company increased from $18.3 billion as of December 30, 2001, to $28.8 billion as of September 29, 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 comparative data to the current format. (1) Interest expense of $1 million for the thirteen weeks and $5 million for the thirty-nine weeks ended September 30, 2001, is included in the determination of approximate contributions to earnings and is excluded from interest expense for the financial services businesses. Weyerhaeuser Company -30- Note 20: Subsequent Events Subsequent to the close of the third quarter, the company announced its plans to close its Sturgeon Falls, Ont., containerboard mill and two wood products facilities located in Snoqualmie and Enumclaw, Wash. The company expects to recognize pretax closure costs of approximately $25 million in its fourth quarter 2002 results. In addition, the company announced the sale of approximately 115,000 acres of western timberlands for approximately $211 million. Net proceeds from this transaction will be utilized to repay debt. Weyerhaeuser Company -31- 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 successful execution of internal performance plans; . the level of competition; . the effect of forestry, land use, environmental and other governmental regulations; . fires, floods and other natural disasters; . regulatory approvals of pending timberland sales; . the company's ability to successfully integrate and manage acquired businesses and to realize anticipated cost savings and synergies from these acquisitions; . the ability of acquired businesses to perform in accordance with the company's expectations; . legal proceedings; . uncertainties affecting insurance recoveries; and . performance of pension fund investments. 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 Canadian dollar, 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 of 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. Weyerhaeuser Company -32- 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 thirty-nine week periods ended September 29, 2002, and September 30, 2001, were:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Dollar amounts in millions, Sept. 29, Sept. 30, Sept. 29, Sept. 30, except per share data 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 4,912 $ 3,752 $ 13,869 $ 11,147 Net earnings 13 91 115 369 Net earnings per share, basic and diluted 0.06 0.41 0.52 1.68
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. Year-to-date net earnings for 2002 include the following unusual after-tax items: . An extraordinary charge of $23 million for the deferred costs associated with the bridge financing of the acquisition of Willamette; . Charges of $27 million for integration of facilities; . The unfavorable impact of business disruption of approximately $34 million following a recovery boiler explosion at the Plymouth, N.C., paper facility that occurred in the second quarter; . A charge of $35 million associated with the closure, or impending closure, of seven facilities; and . A benefit of $31 million from the reversal of previously accrued countervailing duties. Year-to-date net earnings for 2001 include the following unusual after-tax items: . A charge of $26 million associated with outsourcing certain information technology services as part of the company's program to streamline support services; . A charge of $20 million associated with the closure of two paper machines and a sheeter; . A charge of $15 million for integration costs associated with the MacMillan Bloedel and Trus Joist acquisitions; . Charges of $6 million for costs resulting from Westwood Shipping Line's transition to a new charter fleet; and . A benefit of $29 million for one-time reductions in deferred taxes due to lower Canadian and British Columbia provincial corporate tax rates. Operating results for the first thirty-nine weeks of 2002 include $106 million in net pension income compared with $177 million in the first thirty-nine weeks 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 used to calculate plan obligations. See Pension Plans for a discussion of the net impact that changes in the assumptions can have on pension income. Weyerhaeuser Company -33- Timberlands
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 334 $ 184 $ 757 $ 590 Contribution to earnings 138 107 432 378
Third party sales volume for timberlands raw materials and log production volume for the thirteen and thirty-nine week periods ended September 29, 2002, and September 30, 2001, are as follows:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Volumes in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Raw materials third party sales volume - cubic feet 104 76 279 233 Log production volume - cubic feet 164 129 508 392
Timberlands' net sales and revenues improved $150 million for the thirteen-week period ended September 29, 2002, and $167 million year to date compared to the same periods in 2001. The increases in sales are attributable to increased volumes harvested of 27% in the third quarter and 30% year to date when compared to the comparable periods in 2001. The increase in timber volumes is primarily related to the inclusion of the acquired Willamette logging operations. Net sales and revenues also increased with the addition of the former Willamette composite panel operations in Europe, which are included in the timberlands segment with the company's other wood products converting locations located outside of North America. Timberlands' contributions to earnings improved $31 million in the third quarter of 2002 and $54 million year to date compared to the same periods in 2001, primarily due to incremental volume harvested. Pretax gains on dispositions of non-strategic timberlands contributed $28 million and $16 million for the third quarter of 2002 and 2001, respectively, $69 million for the thirty-nine weeks ended September 29, 2002, and $82 million for the comparative year-to-date period in 2001. Year-to-date earnings for 2002 also reflect a $28 million net increase in earnings in international operations, resulting from the combination of a healthy housing market in Australia, strengthening export log prices in New Zealand, and favorable exchange rate fluctuations. Fourth quarter log prices are expected to soften seasonally as a result of weaker lumber prices. Normal seasonal increases in harvest volumes during the fourth quarter are expected to buoy the segment's earnings in the fourth quarter of 2002 compared to the third quarter. Weyerhaeuser Company -34- Wood Products
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 1,957 $ 1,751 $ 5,805 $ 5,000 Contribution (charge) to earnings (18) 47 55 123
Net sales and revenues for the wood products segment improved $206 million for the third quarter and $805 million for the first thirty-nine weeks of 2002 compared to the same periods in 2001, primarily due to incremental sales volume from the acquired Willamette operations. These increases were partially offset by declines in net selling prices for wood products, most notably softwood lumber and structural panels. Contribution to earnings declined $65 million and $68 million for the comparative quarterly and year to date periods, primarily due to eroding softwood lumber prices. Demand for wood products has remained relatively strong as a result of low interest rates, which contributed to strong levels of housing starts and remodeling activity. Despite strong demand, an oversupplied condition exists in domestic markets as a result of the unintended consequences caused by the countervailing (CVD) and antidumping duties on imports of Canadian softwood lumber into the U.S. The duties have resulted in higher, not lower, shipments of Canadian lumber into the U.S., as the method used to calculate these duties has encouraged Canadian producers to run greater volumes to lower unit costs. Declines in net selling prices for structural panels, while of a lesser magnitude than softwood lumber price declines, have also contributed to the decline in earnings. Year-to-date contribution to earnings for 2002 includes a $17 million pretax charge associated with the permanent closure of an oriented strand board (OSB) facility in Canada. Other events in the third quarter and year-to-date periods of 2002 negatively affected pretax segment earnings by approximately $10 million. These unusual events included start-up costs associated with the Kenora, Ont., engineered wood products facility and the Simsboro, La., particleboard facility, which are both operating well through the start-up curve. In addition, operating results include costs associated with previously announced mill closures and reduced production at an OSB mill due to the loss of a key machine center in early September 2002. Costs associated with these items are expected to remain the same for the fourth quarter of 2002. Following is a summary of the CVD and antidumping amounts included in the segment's net sales and revenues and contribution to earnings:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Charges for CVD and antidumping duties $ 31 $ 30 $ 51 $ 30 Reversals of 2001 charges for estimated CVD and antidumping duties -- -- (47) -- Reversals of 2002 charges for estimated antidumping duties -- -- (13) -- --------- --------- --------- ---------- $ 31 $ 30 $ (9) $ 30 ========= ========= ========= ==========
CVD and antidumping duties are expected to total between $65 and $70 million for 2002. The momentum in the housing market is expected to continue into next year as new residential housing starts are expected to remain relatively strong. As a result, demand for wood products is expected to remain strong, but markets remain oversupplied. In response to market conditions, the company may take maintenance-related downtime and extended downtime during the holidays. Inventories are expected to remain in balance. The outlook for pricing remains uncertain; however, the company believes wood products prices are at or near cash costs. Weyerhaeuser Company -35- Third party sales and total production volumes for the major products in the wood products segment for the thirteen and thirty-nine week periods ended September 29, 2002, and September 30, 2001, are as follows:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Third party sales volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30, (millions) 2002 2001 2002 2001 --------- --------- --------- ---------- Softwood lumber - board feet 2,362 1,943 6,469 5,402 Softwood plywood and veneer - square feet (3/8") 736 494 2,061 1,434 Composite panels - square feet (3/4") 95 61 848 183 Oriented strand board - square feet (3/8") 1,117 964 3,157 2,751 Hardwood lumber - board feet 104 99 325 311 Raw materials - cubic feet 207 154 514 467
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Total production volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30, (millions) 2002 2001 2002 2001 --------- --------- --------- ---------- Softwood lumber - board feet 1,728 1,315 4,960 4,143 Softwood plywood and veneer - square feet (3/8") 584 275 1,577 838 Composite panels - square feet (3/4") 200 21 546 75 Oriented strand board - square feet (3/8") 1,115 912 3,016 2,528 Hardwood lumber - board feet 107 99 302 319 Logs - cubic feet 204 166 576 477
Pulp and Paper
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 967 $ 637 $ 2,690 $ 1,957 Contribution (charge) to earnings 10 (28) (4) 72
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. Prior to the second quarter of 2002, Weyerhaeuser's paper-related businesses were reported in a single pulp, paper and packaging segment. These businesses have been split into 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 bleached paperboard. Incremental volume from the acquired Willamette operations contributed the majority of the $330 million increase in net sales and revenues for the pulp and paper segment in the third quarter of 2002, as well as the $733 million increase in net sales in the first thirty-nine weeks of 2002, compared to the same periods in 2001. The year-to-date increase attributable to the Willamette acquisition was partially offset by declines in pulp prices, which are lower than early 2001 levels. In recent quarters, however, prices have moderated. Business disruption associated with the second quarter recovery boiler explosion at the Plymouth, N.C., paper facility negatively impacted contribution to earnings by approximately $30 million pretax for the third quarter of 2002 and approximately $52 million pretax for the year-to-date period. The boiler repairs have been completed and the facility has resumed normal operations. Third quarter and year-to-date results for 2001 include a $19 million pretax charge for costs associated with the fine paper machine closure at the Longview, Wash., facility. Excluding the impact of business disruption costs and closure costs, contribution to earnings in the third quarter 2002 improved from the third quarter 2001, primarily as a result of improved pricing for pulp and fine paper. However, year-to-date 2002 contribution to earnings declined as a result of depressed pulp prices in the beginning of the year. In addition, net selling prices for newsprint have declined over the comparative year-to-date periods, resulting in additional declines in contribution to earnings. Weyerhaeuser Company -36- Fine paper prices are expected to increase in the fourth quarter and are expected to more than offset any potential decline in market pulp pricing. The start-up of the paper machine at the Kingsport, Tenn., paper facility and the closure of a higher cost machine will reduce production costs at that facility. Due to recent machine closures and strong order backlogs, market related downtime should be minimal, provided inventories remain in balance. In addition, the recovery boiler at the Plymouth, N.C., facility has been repaired and the company fully expects to recover its losses associated with business disruption and repair costs through insurance proceeds during the fourth quarter. Third party sales and total production volumes for major pulp and paper products follow:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Third party sales volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30, (thousands) 2002 2001 2002 2001 --------- --------- --------- ---------- Pulp - air-dry metric tons 561 527 1,742 1,514 Paper - tons 804 406 2,164 1,154 Bleached paperboard - tons 47 66 161 182
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Total production volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30, (thousands) 2002 2001 2002 2001 --------- --------- --------- ---------- Pulp - air-dry metric tons 630 553 1,729 1,550 Paper - tons 747 357 2,032 1,096 Bleached paperboard - tons 31 69 161 182
Weyerhaeuser Company -37- Containerboard, Packaging and Recycling
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 1,149 $ 755 $ 3,222 $ 2,388 Contribution to earnings 88 69 221 231
Incremental volume from the acquired Willamette operations contributed to increases in net sales for the containerboard, packaging and recycling segment of $394 million for the third quarter and $834 million for the first thirty-nine weeks of 2002 compared to the same periods in 2001. These increases were partially offset by declines in net selling prices for both containerboard and packaging from the comparative periods in 2001. Contribution to earnings improved $19 million for the third quarter 2002 compared to the third quarter 2001, but declined $10 million for the year-to-date comparative periods. Contribution to earnings for the first thirty-nine weeks of 2002 includes charges of $38 million associated with facility closures, or announced closures. Results for both the third quarter and first thirty-nine weeks of 2001 include a $13 million charge for costs associated with a containerboard machine closure at the Springfield, Ore., facility. Excluding unusual items, contribution to earnings improved slightly in the third quarter of 2002 compared to the third quarter of 2001. Year-to-date contribution to earnings improved as a result of the Willamette acquisition and improving operating rates at the company's containerboard facilities. These positive trends were partially offset by declines in both containerboard and box prices for the comparative periods. Recent increases in containerboard prices are expected to hold in the fourth quarter and the company expects to implement a price increase in packaging by the end of the fourth quarter. Average old corrugated container costs for the fourth quarter are expected to decline from the average costs for the third quarter. Through capacity rationalizations and further integration with the box plants, the company has reduced its exposure to both domestic and export open market sales. These factors are expected to result in improved segment earnings for the fourth quarter, despite seasonally lower demand. Third party sales and total production volumes for containerboard, packaging, and recycling follow:
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Third party sales volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30, (thousands) 2002 2001 2002 2001 --------- --------- --------- ---------- Containerboard - tons 318 223 876 663 Packaging - MSF 17,902 13,319 50,888 37,865 Recycling - tons 539 548 1,695 2,191
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Total production volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30, (thousands) 2002 2001 2002 2001 --------- --------- --------- ---------- Containerboard - tons 1,621 1,065 4,471 2,716 Packaging - MSF 20,432 13,077 57,343 39,864 Recycling - tons 1,545 1,210 4,547 3,583
Weyerhaeuser Company -38- Real Estate and Related Assets
Thirteen weeks ended Thirty-nine weeks ended -------------------- ---------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, Dollar amounts in millions 2002 2001 2002 2001 --------- --------- --------- ---------- Net sales and revenues $ 468 $ 392 $ 1,285 $ 1,097 Contribution to earnings 85 75 255 206
Net sales and contribution to earnings improved for both the third quarter and first thirty-nine weeks of 2002 compared to the same periods in 2001. Sales in markets where the company operates remained strong during the third quarter of 2002, despite a modest slowdown in traffic in some markets. Contribution to earnings includes pretax gains from the sales of apartment complexes of $14 million in the third quarter of 2002 and $21 million in the first thirty-nine weeks of 2002. The real estate business is expected to continue to perform well into the fourth quarter of 2002, given the six-month backlog of sold but not closed homes and favorable mortgage rates; however, no apartment complex sales are anticipated. Costs and Expenses Weyerhaeuser's third 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 81% for the current quarter, compared to 79% for the third quarter 2001. The increase is primarily attributable to the decline in net selling prices for the company's structural lumber and panel products when compared to the third quarter of 2001. Various unusual or nonrecurring items are included in Weyerhaeuser's costs and expenses. These items are discussed under the heading "Consolidated Results" above and in the discussion of each segment materially affected by the unusual item. Other operating costs, net, is an aggregation of both recurring and nonrecurring items and, as a result, can fluctuate from year to year. Exchange rates between the U.S. dollar and Canadian dollar have fluctuated widely during 2002 contributing to a gain of $8 million in the first quarter of 2002, a gain of $27 million in the second quarter of 2002, and a loss of $16 million in the third quarter of 2002. Other operating costs for the first thirty-nine weeks of 2001 are most significantly impacted by nonrecurring charges associated with Westwood Shipping Line's transition to a new charter fleet of $10 million and the company's support alignment initiative of $55 million. The majority of the costs recognized in conjunction with the company's support alignment initiative are due to the company's decision to outsource certain information services functions. The increase in the real estate and related assets segment's costs and expenses is attributable to the increased sales volumes over the same periods last year. Pension Plans The company sponsors several qualified and nonqualified pension plans for its employees. Historically, the market value of the assets of the company's plans has exceeded plan liabilities. The assumptions used in measuring the benefit obligations of these plans, including the discount rate, the expected return on plan assets and assumed increases in wages and salaries, are reviewed with external plan actuaries annually at the end of each fiscal year and are updated as appropriate. Actual experience that is less favorable than the assumptions could reduce pension income in the company's consolidated statement of earnings, could decrease shareholders' interest on the company's consolidated balance sheet, and could require the company to make cash contributions. Changes in each of the four key assumptions are estimated to have the following impact on 2003 pension income: . For each 1% that the actual rate of return on plan assets is lower than the assumed rate of return, pension income would be reduced by approximately $2 million for U.S. plans and $1 million for Canadian plans. . For each 1% reduction in the assumed rate of return on the plans, pension income would be reduced by approximately $17 million for U.S. plans and $5 million for Canadian plans. . For each 0.5% reduction in the assumed discount rate, pension income would be reduced by approximately $6 million for U.S. plans and $4 million for Canadian plans. Weyerhaeuser Company -39- . For each 0.5% increase in assumed wages and salaries, pension income would decrease by approximately $11 million for U.S. plans and $5 million for Canadian plans. The annual actuarial review for 2002 will take place at the end of the fiscal year. The company is unable to predict with any certainty the performance of the financial markets for the remainder of 2002 or prevailing interest rates at the end of 2002. Changes in these factors could have a material impact on the company's pension related estimates. Based upon information currently available, the company does not expect to be required to make any cash contributions to its U.S. plans in 2002 or 2003, expects to make small cash contributions to its Canadian plans in 2002 and 2003, and expects to record a reduction in shareholders' interest of approximately $90 million in the fourth quarter of 2002 to reflect an increase in its additional minimum pension liability. The company plans to terminate the U.S. salaried pension fund covering former MacMillan Bloedel employees, and will pay out benefits earned by employees and retirees under those plans. The termination of this plan will result in an after-tax charge of approximately $25 million in the fourth quarter of 2002. 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 Net cash from operations before changes in working capital of $1.0 billion in 2002 was $180 million, or 21 percent, greater than the $850 million provided in 2001. The increase is due to changes in noncash items, primarily an increase in depreciation, amortization and fee stumpage of $231 million resulting from the acquisition of Willamette and a reduction in net pension and other postretirement benefit income of $93 million. These increases were partially offset by the decline in year-to-date net earnings. Changes in working capital items resulted in a decrease in cash flow provided by operations of $260 million, primarily due to increases in receivable balances. The company continually strives to keep working capital balances in line. Since the end of the second quarter, the company has reduced its investment in working capital by more than $50 million. The company's inventory turnover rate increased to 10.3 turns in the thirteen weeks ended September 29, 2002, compared to 9.2 turns in the comparable period in 2001. Weyerhaeuser Company -40- Year-to-date earnings before interest expense, income taxes, and noncash charges for the principal business segments were: . Timberlands - $525 million, an increase of $107 million over $418 million in 2001. Operating earnings for this segment were $54 million greater than last year and noncash charges were $49 million greater, while net pension benefit income decreased $4 million. . Wood Products - $243 million, a decrease of $44 million from $287 million in 2001. Operating earnings decreased $68 million from the same period last year while noncash charges for depreciation and amortization and facility closures increased by $75 million and noncash net pension benefit income decreased by $26 million. 2002 also includes $47 million in noncash credits related to the reversal of previously accrued countervailing duties, compared to $30 million of noncash charges for these accruals in the year-to-date 2001 period. . Pulp and Paper - $240 million, an increase of $4 million from $236 million a year ago. The $76 million decline in operating earnings included a $60 million increase in depreciation and amortization and facility closures, and a $20 million decrease in noncash net pension benefit income. . Containerboard, Packaging and Recycling - $476 million, up $117 million from $359 million a year ago. Operating earnings declined by only $10 million, but noncash charges for depreciation, amortization and facility closures were $112 million greater than for the same period last year. Noncash net pension benefit income also decreased $15 million. Investing Weyerhaeuser's capital expenditures for the first thirty-nine weeks of 2002, excluding acquisitions and real estate and related assets, were $709 million in 2002 compared to $503 million in 2001. Current year capital spending by segment was $64 million for timberlands; $162 million for wood products; $323 million for pulp and paper; $129 million for containerboard, packaging and recycling; and $31 million for corporate and other. Weyerhaeuser 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 $8.1 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 $6.8 billion, for a net increase in new borrowings of $6.3 billion. Weyerhaeuser's debt to total capital ratio, excluding real estate and related assets, was 56 percent at the end of the 2002 third quarter, up from 38 percent at the end of 2001 and 37 percent at the end of the 2001 third 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 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. As of September 29, 2002, the company had available approximately $1.3 billion in unused committed bank facilities. The real estate and related assets segment borrowed $290 million and repaid other borrowings totaling $332 million resulting in an overall reduction in third party debt of $42 million. During the first thirty-nine weeks of 2002, the company paid $265 million in cash dividends compared to $263 million in cash dividends paid during 2001. Year to date 2002, the company also received $67 million in cash proceeds from the exercise of stock options, compared to $29 million in 2001. Weyerhaeuser Company -41- 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 a 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. As of September 29, 2002, the contracts held by the company that are considered derivative instruments include: . 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 September 29, 2002, the company had a long position in Canadian dollars and Norwegian kroners. The fair value and corresponding notional amount was $3 million and $3 million for Canadian dollars and $2 million and $1 million for Norwegian kroners. The contracts are short term in nature, with expiration dates ranging from one month through June 2003. . Commodity 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 certain commodity transactions. At September 29, 2002, the company had open commodity contracts with a notional value of $25 million and a fair value of $0. The contract expiration dates range from January 2003 through December 2005. . 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 September 29, 2002, the swap, which matures December 2003, had a notional amount of $50 million and a fair value representing a loss of $1 million. The fair value amount of the obligation under this swap is based on the assumption that it had terminated at the end of the fiscal period and provides for the netting of amounts payable by and to the counterparty. In each case, the amount of such obligation is the net amount so determined. . Variable rate swap agreement entered into with a major financial institution in which the company pays a floating rate based on LIBOR and receives a floating return based on an investment fund index, with payments calculated on a notional amount. The swap is an overlay to investments and provides diversification benefits. The swap settles quarterly and is marked to market at each reporting date. All unrealized gains and losses are recognized in earnings currently. At September 29, 2002, the company had one swap with a maturity date of March 31, 2004, a notional amount of $156 million and a fair value of $1 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 September 29, 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 -42- Controls and Procedures Evaluation of Disclosure Controls and Procedures Weyerhaeuser Company's principal executive officer and principal financial officer have evaluated the effectiveness of the company's disclosure controls and procedures within 90 days of the filing date of this quarterly report on Form 10-Q. Disclosure controls are controls and other procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation, the company's principal executive officer and principal financial officer believe the controls and procedures in place are effective to ensure that information required to be disclosed complies with the SEC's rules and forms. Changes in Internal Controls There were no changes in Weyerhaeuser Company's internal controls, or in other factors that could significantly affect these controls, subsequent to the date of their evaluation by the principal executive officer and principal financial officer. Weyerhaeuser Company -43- Part II. Other Information Item 1. Legal Proceedings See Note 17: Commitments and Contingencies of the Notes to Financial Statements for information regarding legal proceedings. Item 2. Changes in Securities not applicable Item 3. Default upon Senior Securities not applicable Item 4. Submission of Matters to a Vote of Security Holders not applicable Item 5. Other Information not applicable Item 6. Exhibits and Reports on Form 8-K Exhibits 12. Statements 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 July 1, 2002; July 23, 2002; August 9, 2002; August 13, 2002; September 26, 2002; September 30, 2002; and October 22, 2002; and on Form 8-K/A dated September 30, 2002; reporting information under Item 5, Other Events; Item 7, Exhibits; and Item 9, Regulation FD Disclosure. 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)
Thirty-nine weeks ended ------------------------- Sept. 29, Sept. 30, 2002 2001 --------- ---------- Available earnings: Earnings before interest expense, amortization of debt expense, income taxes and extraordinary item $ 790,500 $ 924,902 Add interest portion of rental expense 40,509 34,056 --------- ---------- Available earnings before extraordinary item $ 831,009 $ 958,958 ========= ========= Fixed charges: Interest expense incurred: Weyerhaeuser Company and subsidiaries excluding Weyerhaeuser Real Estate Company and other related subsidiaries $ 557,547 $ 265,637 Weyerhaeuser Real Estate Company and other related subsidiaries 38,693 54,541 --------- ---------- Subtotal 596,240 320,178 Less intercompany interest (712) (822) --------- ---------- Total interest expense incurred 595,528 319,356 --------- ---------- Amortization of debt expense 21,491 2,903 --------- ---------- Rental expense: Weyerhaeuser Company and subsidiaries excluding Weyerhaeuser Real Estate Company and other related subsidiaries 113,756 95,405 Weyerhaeuser Real Estate Company and other related subsidiaries 7,771 6,763 --------- ---------- 121,527 102,168 --------- ---------- Interest portion of rental expense 40,509 34,056 --------- ---------- Total fixed charges $ 657,528 $ 356,315 ========= ========== Ratio of earnings to fixed charges 1.26 2.69 ========= ==========
Weyerhaeuser Company with its Weyerhaeuser Real Estate Company and Other Related 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)
Thirty-nine weeks ended ------------------------- Sept. 29, Sept. 30, 2002 2001 --------- ---------- Available earnings: Earnings before interest expense, amortization of debt expense, income taxes and extraordinary item $ 754,788 $ 792,706 Add interest portion of rental expense 37,919 31,802 --------- ---------- 792,707 824,508 --------- ---------- Deduct undistributed earnings of equity affiliates (8,519) (33,498) --------- ---------- Deduct undistributed earnings before income taxes of Weyerhaeuser Real Estate Company and other related subsidiaries: Deduct pretax earnings (254,835) (206,464) Add back dividends paid to Weyerhaeuser 75,000 30,000 --------- ---------- Undistributed earnings (179,835) (176,464) --------- ---------- Available earnings before extraordinary item $ 604,353 $ 614,546 ========= ========== Fixed charges: Interest expense incurred $ 557,547 $ 265,637 Amortization of debt expense 21,491 2,903 Interest portion of rental expense 37,919 31,802 --------- ---------- Total fixed charges $ 616,957 $ 300,342 ========= ========== Ratio of earnings to fixed charges 0.98 2.05 ========= ==========
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 dated November 12, 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 ---------------------------- Steven R. Rogel Chairman, President and Chief Executive Officer Dated: November 12, 2002 /s/ William C. Stivers ---------------------------- William C. Stivers Executive Vice President and Chief Financial Officer Dated: November 12, 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.