10-Q 1 wy630201810q.htm 10-Q Document


 
UNITED STATES
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 QUARTERLY PERIOD ENDED JUNE 30, 2018
or
o
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
  __________________________________________________ 
Washington
 
91-0470860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
220 Occidental Avenue South
Seattle, Washington
 
98104-7800
(Address of principal executive offices)
 
(Zip Code)
(206) 539-3000
(Registrant’s telephone number, including area code)
 __________________________________________________

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.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o
   Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes    x  No
As of July 23, 2018, 757,679,561 shares of the registrant’s common stock ($1.25 par value) were outstanding.
 




TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS:
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 






FINANCIAL INFORMATION

WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Net sales (Note 3)
$
2,065

 
$
1,808

 
$
3,930

 
$
3,501

Costs of products sold
1,447

 
1,336

 
2,795

 
2,608

Gross margin
618

 
472

 
1,135

 
893

Selling expenses
23

 
22

 
46

 
44

General and administrative expenses
80

 
76

 
158

 
163

Research and development expenses
2

 
4

 
4

 
8

Charges for integration and restructuring, closures and asset impairments (Note 15)

 
151

 
2

 
164

Charges (recoveries) for product remediation, net (Note 16)
20

 
50

 

 
50

Other operating costs, net (Note 17)
17

 
12

 
45

 
14

Operating income
476

 
157

 
880

 
450

Non-operating pension and other postretirement benefit costs
(13
)
 
(8
)
 
(37
)
 
(30
)
Interest income and other
11

 
9

 
23

 
18

Interest expense, net of capitalized interest
(92
)
 
(100
)
 
(185
)
 
(199
)
Earnings before income taxes
382

 
58

 
681

 
239

Income taxes (Note 18)
(65
)
 
(34
)
 
(95
)
 
(58
)
Net earnings
$
317


$
24


$
586


$
181

Earnings per share, basic and diluted (Note 5)
$
0.42

 
$
0.03

 
$
0.77

 
$
0.24

Dividends paid per share
$
0.32

 
$
0.31

 
$
0.64

 
$
0.62

Weighted average shares outstanding (in thousands) (Note 5):
 
 
 
 
 
 
 
Basic
757,829

 
752,630

 
757,317

 
751,674

Diluted
760,533

 
756,451

 
759,992

 
755,625

See accompanying Notes to Consolidated Financial Statements.


1



WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Net earnings
$
317

 
$
24

 
$
586

 
$
181

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(16
)
 
9

 
(31
)
 
11

Changes in unamortized actuarial loss, net of tax of $63, $24, $82, and $50
199

 
43

 
253

 
72

Changes in unamortized net prior service credit, net of tax of $1, $1, $1, and $1

 
(3
)
 
(1
)
 
(4
)
Unrealized gains on available-for-sale securities

 

 

 
1

Total other comprehensive income
183

 
49

 
221

 
80

Total comprehensive income
$
500

 
$
73

 
$
807

 
$
261

See accompanying Notes to Consolidated Financial Statements.


2



WEYERHAEUSER COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA
JUNE 30,
2018
 
DECEMBER 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
901

 
$
824

Receivables, less discounts and allowances of $1 and $1
491

 
396

Receivables for taxes
23

 
14

Inventories (Note 6)
414

 
383

Prepaid expenses and other current assets
146

 
98

Current restricted financial investments held by variable interest entities (Note 7)
253

 

Total current assets
2,228

 
1,715

Property and equipment, less accumulated depreciation of $3,370 and $3,338
1,597

 
1,618

Construction in progress
282

 
225

Timber and timberlands at cost, less depletion
12,790

 
12,954

Minerals and mineral rights, less depletion
302

 
308

Goodwill
40

 
40

Deferred tax assets
168

 
268

Other assets
279

 
316

Restricted financial investments held by variable interest entities (Note 7)
362

 
615

Total assets
$
18,048

 
$
18,059

 
 
 
 
LIABILITIES AND EQUITY
 
 

Current liabilities:
 
 
 
Current maturities of long-term debt (Note 10)
$

 
$
62

Current debt (nonrecourse to the company) held by variable interest entities (Note 7)
209

 
209

Accounts payable
270

 
249

Accrued liabilities (Note 9)
543

 
645

Total current liabilities
1,022

 
1,165

Long-term debt  (Note 10)
5,924

 
5,930

Long-term debt (nonrecourse to the company) held by variable interest entities (Note 7)
302

 
302

Deferred pension and other postretirement benefits (Note 8)
1,224

 
1,487

Other liabilities
295

 
276

Total liabilities
8,767

 
9,160

Commitments and contingencies (Note 12)


 
 
 
 
 
 
Equity:
 
 
 
Common shares: $1.25 par value; authorized 1,360,000,000 shares; issued and outstanding: 757,646,433 and 755,222,727 shares
947

 
944

Other capital
8,496

 
8,439

Retained earnings
1,441

 
1,078

Accumulated other comprehensive loss (Note 13)
(1,603
)
 
(1,562
)
Total equity
9,281

 
8,899

Total liabilities and equity
$
18,048

 
$
18,059

See accompanying Notes to Consolidated Financial Statements.

3



WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) 
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
Cash flows from operations:
 
 
 
Net earnings
$
586

 
$
181

Noncash charges to earnings:
 
 
 
Depreciation, depletion and amortization
239

 
262

Basis of real estate sold
34

 
24

Deferred income taxes, net
25

 
6

Pension and other postretirement benefits (Note 8)
55

 
47

Share-based compensation expense
18

 
19

Charges for impairment of assets (Note 15)
1

 
147

Change in:
 
 
 
Receivables, less allowances
(101
)
 
(78
)
Receivables and payables for taxes
15

 
(53
)
Inventories
(36
)
 
(7
)
Prepaid expenses
(1
)
 
(13
)
Accounts payable and accrued liabilities
(70
)
 
55

Pension and postretirement benefit contributions and payments
(32
)
 
(37
)
Other

 
(29
)
Net cash from operations
733

 
524

Cash flows from investing activities:
 
 
 
Capital expenditures for property and equipment
(144
)
 
(126
)
Capital expenditures for timberlands reforestation
(34
)
 
(36
)
Proceeds from sale of nonstrategic assets
2

 
12

Other
27

 
44

Net cash used in investing activities
(149
)
 
(106
)
Cash flows from financing activities:
 
 
 
Cash dividends on common shares
(485
)
 
(466
)
Payments of long-term debt (Note 10)
(62
)
 

Proceeds from exercise of stock options
48

 
81

Other
(8
)
 
(8
)
Net cash used in financing activities
(507
)
 
(393
)
 
 
 
 
Net change in cash and cash equivalents
77

 
25

Cash and cash equivalents at beginning of period
824

 
676

Cash and cash equivalents at end of period
$
901

 
$
701

 
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amount capitalized of $6 and $5
$
172

 
$
192

Income taxes
$
58

 
$
106

See accompanying Notes to Consolidated Financial Statements.

4



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:
 
 
 
NOTE 2:
 
 
 
NOTE 3:
 
 
 
NOTE 4:
 
 
 
NOTE 5:
 
 
 
NOTE 6:
 
 
 
NOTE 7:
 
 
 
NOTE 8:
 
 
 
NOTE 9:
 
 
 
NOTE 10:
 
 
 
NOTE 11:
 
 
 
NOTE 12:
 
 
 
NOTE 13:
 
 
 
NOTE 14:
 
 
 
NOTE 15:
 
 
 
NOTE 16:
 
 
 
NOTE 17:
 
 
 
NOTE 18:



5



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND YEARS-TO-DATE ENDED JUNE 30, 2018 AND 2017

NOTE 1: BASIS OF PRESENTATION

We are a corporation that has elected to be taxed as a real estate investment trust (REIT). We expect to derive most of our REIT income from investments in timberlands, including the sale of standing timber. As a REIT, we generally are not subject to federal corporate level income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our taxable REIT subsidiaries (TRSs), which includes our Wood Products segment and portions of our Timberlands and Real Estate, Energy and Natural Resources (Real Estate & ENR) segments.

Our consolidated financial statements provide an overall view of our results of operations and financial condition. They include our accounts and the accounts of entities we control, including:
majority-owned domestic and foreign subsidiaries and
variable interest entities in which we are the primary beneficiary.

They do not include our intercompany transactions and accounts, which are eliminated.

We account for investments in and advances to unconsolidated equity affiliates using the equity method, with taxes provided on undistributed earnings. This means that we record earnings and accrue taxes in the period earnings are recognized by our unconsolidated equity affiliates.

Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we,” “the company” and “our” refer to the consolidated company.

The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain information and footnote disclosures normally included in our annual Consolidated Financial Statements have been condensed or omitted. These quarterly Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017. Results of operations for interim periods should not necessarily be regarded as indicative of the results that may be expected for the full year.

NEW ACCOUNTING PRONOUNCEMENTS

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, which requires lessees to recognize assets and liabilities for the rights and obligations created by those leases and requires leases to be recognized on the balance sheet. The new guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. We plan to adopt on January 1, 2019. We have evaluated the relevant guidance and will continue to monitor subsequent revisions either made or being contemplated by the FASB, including application of the available practical expedients. We expect the adoption to result in the recognition of the present value of the future commitments on operating leases on our Consolidated Balance Sheet, which is primarily related to vehicles, equipment, office and wholesale leases previously disclosed in Note 14, “Legal Proceedings, Commitments and Contingencies,” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Reclassification of Certain Amounts from Accumulated Other Comprehensive Loss

In February 2018, the FASB issued ASU 2018-02, which allows for the reclassification of certain income tax effects related to the Tax Cuts and Jobs Act (the "Tax Act") between “Accumulated other comprehensive loss” and “Retained earnings.” This ASU provides that adjustments to deferred tax liabilities and assets related to a change in tax laws be included in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other comprehensive income.” The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws was recognized. We adopted this ASU during first quarter 2018 using the period of adoption method, which resulted in a reclassification of $253 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet due to changes in federal statutory and effective state rates. In general, tax effects unrelated to the Tax Cuts and Jobs Act are released from accumulated other comprehensive loss using the portfolio approach.

In January 2016, the FASB issued ASU 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. We adopted ASU 2016-01 in first quarter 2018, which resulted in a reclassification of accumulated unrealized gains on available-for-sale securities of $9 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet.

NOTE 2: BUSINESS SEGMENTS

Reportable business segments are determined based on the company’s "management approach," as defined by FASB ASC 280, “Segment Reporting.” The management approach is based on the way the chief operating decision maker organizes the segments within a company for making decisions about resources to be allocated and assessing their performance.


6



We are principally engaged in growing and harvesting timber; manufacturing, distributing, and selling products made from trees; maximizing the value of every acre we own through the sale of higher and better use (HBU) properties; and monetizing reserves of minerals, oil, gas, coal, and other natural resources on our timberlands. The following is a brief description of each of our reportable business segments and activities:
Timberlands – which includes logs, timber and leased recreational access;
Real Estate & ENR – which includes sales of timberlands; rights to explore for and extract hard minerals, oil and gas production and coal; and equity interests in our Real Estate Development Ventures; and
Wood Products – which includes softwood lumber, engineered wood products, structural panels, medium density fiberboard and building materials distribution.

A reconciliation of our business segment information to the respective information in the Consolidated Statement of Operations is as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Sales to unaffiliated customers:
 
 
 
 
 
 
 
Timberlands
$
482

 
$
469

 
$
987

 
$
955

Real Estate & ENR
58

 
46

 
109

 
99

Wood Products
1,525

 
1,293

 
2,834

 
2,447

 
2,065

 
1,808

 
3,930

 
3,501

Intersegment sales:
 
 
 
 
 
 
 
Timberlands
185

 
163

 
413

 
365

 
 
 
 
 


 


Total sales
2,250

 
1,971

 
4,343

 
3,866

Intersegment eliminations
(185
)
 
(163
)
 
(413
)
 
(365
)
Total
$
2,065

 
$
1,808

 
$
3,930

 
$
3,501

Net contribution to earnings:
 
 
 
 
 
 
 
Timberlands(1) 
$
161

 
$
(12
)
 
$
350

 
$
136

Real Estate & ENR
22

 
23

 
47

 
49

Wood Products(2)
329

 
177

 
599

 
349

 
512

 
188

 
996

 
534

Unallocated items(3)
(38
)
 
(30
)
 
(130
)
 
(96
)
Net contribution to earnings
474

 
158

 
866

 
438

Interest expense, net of capitalized interest
(92
)
 
(100
)
 
(185
)
 
(199
)
Earnings before income taxes
382

 
58

 
681

 
239

Income taxes
(65
)
 
(34
)
 
(95
)
 
(58
)
Net earnings
$
317

 
$
24

 
$
586

 
$
181


(1)
Net contribution to earnings for the Timberlands segment includes a noncash pretax impairment charge of $147 million, recorded during second quarter 2017. This impairment was a result of our agreement to sell our Uruguayan operations, as announced during June 2017. Refer to Note 15: Charges for Integration and Restructuring, Closures and Asset Impairments.
(2)
Net contribution to earnings for the Wood Products segment includes a $20 million and $5 million recovery recorded during first quarter 2018 and second quarter 2018, respectively, and a $25 million and $50 million charge recorded during second quarter 2018 and second quarter 2017, respectively, to accrue for estimated costs to remediate an issue with certain I-joists coated with our Flak Jacket® Protection product. Refer to Note 16: Charges (Recoveries) for Product Remediation, Net for additional details.
(3)
Unallocated items are gains or charges not related to, or allocated to, an individual operating segment. They include a portion of items such as: share-based compensation expenses, pension and postretirement costs, foreign exchange transaction gains and losses and the elimination of intersegment profit in inventory and LIFO.

NOTE 3: REVENUE RECOGNITION

A majority of our revenue is derived from sales of delivered logs and manufactured wood products. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the cumulative effect method. The adoption of the new revenue recognition guidance did not materially impact our Consolidated Statement of Operations, Consolidated Balance Sheet, or Consolidated Statement of Cash Flows.


7



PERFORMANCE OBLIGATIONS

A performance obligation, as defined in ASC Topic 606, is a promise in a contract to transfer a distinct good or service to a customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue at the point in time, or over the period, in which the performance obligation is satisfied.

Performance obligations associated with delivered log sales are typically satisfied when the logs are delivered to our customers’ mills or delivered to an ocean vessel in the case of export sales. Performance obligations associated with the sale of wood products are typically satisfied when the products are shipped. Customers are generally invoiced shortly after logs are delivered or after wood products are shipped, with payment generally due within a month or less of the invoice date. ASC Topic 606 requires entities to consider significant financing components of contracts with customers, though allows for the use of a practical expedient when the period between satisfaction of a performance obligation and payment receipt is one year or less. Given the nature of our revenue transactions, we have elected to utilize this practical expedient.

Performance obligations associated with real estate sales are generally met when placed into escrow and all conditions of closing have been satisfied.

CONTRACT ESTIMATES

Substantially all of the company’s performance obligations are satisfied as of a point in time. Therefore, there is little judgment in determining when control transfers for our business segments as described above.

The transaction price for log sales generally equals the amount billed to our customer for logs delivered during the accounting period. For the limited number of log sales subject to a long-term supply agreement, the transaction price is variable but is known at the time of billing. For wood products sales, the transaction price is generally the amount billed to the customer for the products shipped but may be reduced slightly for estimated cash discounts and rebates.

There are no significant contract estimates related to the real estate business.

CONTRACT BALANCES

In general, customers are billed and a receivable is recorded as we ship and/or deliver wood products and logs. We generally receive payment shortly after products have been received by our customers. Contract asset and liability balances are immaterial.

For real estate sales, the company receives the entire consideration in cash at closing.

8



MAJOR PRODUCTS

A reconciliation of revenue recognized by our major products:
  
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Net sales:
 
 
 
 
 
 
 
Timberlands Segment
 
 
 
 
 
 
 
Delivered logs(1):
 
 
 
 
 
 
 
West
 
 
 
 
 
 
 
Domestic sales
$
136

 
$
126

 
$
273

 
$
245

Export sales
126

 
101

 
255

 
207

Subtotal West
262

 
227

 
528

 
452

South
158

 
148

 
315

 
296

North
20

 
16

 
45

 
43

Other
7

 
11

 
21

 
31

Subtotal delivered logs sales
447

 
402

 
909

 
822

Stumpage and pay-as-cut timber
11

 
17

 
26

 
29

Recreational and other lease revenue
15

 
15

 
29

 
29

Other(2)
9

 
35

 
23

 
75

Net sales attributable to Timberlands segment
482

 
469

 
987

 
955

Real Estate & ENR Segment
 
 
 
 
 
 
 
Real estate
38

 
27

 
72

 
64

Energy and natural resources
20

 
19

 
37

 
35

Net sales attributable to Real Estate & ENR segment
58

 
46

 
109

 
99

Wood Products Segment
 
 
 
 
 
 
 
Structural lumber
681

 
538

 
1,250

 
1,016

Engineered solid section
139

 
130

 
268

 
247

Engineered I-joists
92

 
85

 
170

 
158

Oriented strand board
277

 
225

 
509

 
428

Softwood plywood
55

 
47

 
105

 
91

Medium density fiberboard
47

 
51

 
90

 
98

Complementary building products
160

 
149

 
297

 
271

Other
74

 
68

 
145

 
138

Net sales attributable to Wood Products segment
1,525

 
1,293

 
2,834

 
2,447

Total net sales
$
2,065

 
$
1,808

 
$
3,930

 
$
3,501


(1)
The West region includes Washington and Oregon. The South region includes Virginia, North Carolina, South Carolina, Florida, Georgia, Alabama, Mississippi, Louisiana, Arkansas, Texas and Oklahoma. The North region includes West Virginia, Maine, New Hampshire, Vermont, Michigan, Wisconsin and Montana. Other includes our Canadian operations and managed Twin Creeks Venture. Our management agreement for the Twin Creeks Venture began in April 2016 and terminated in December 2017.
(2)
Other Timberlands sales include sales of seeds and seedlings, chips, as well as sales from our former Uruguayan operations (sold during third quarter 2017). Our former Uruguayan operations included logs, plywood and hardwood lumber harvested or produced. Refer to Note 4: Operations Divested for further information.


NOTE 4: OPERATIONS DIVESTED

On October 12, 2016, we announced the exploration of strategic alternatives for our Uruguay timberlands and manufacturing operations, which was part of our Timberlands business segment. On June 2, 2017, the Weyerhaeuser Board of Directors approved an equity purchase agreement with a consortium led by BTG Pactual's Timberland Investment Group (TIG), including other long-term investors, pursuant to which the Company agreed to sell, in exchange for $403 million in cash, all of its equity interest in the subsidiaries that collectively owned and operated its Uruguayan timberlands and manufacturing operations.

On September 1, 2017, we completed the sale of our Uruguay timberlands and manufacturing operations for $403 million of cash proceeds. Due to the impairment of our Uruguayan operations recorded during second quarter 2017 (refer to Note 15: Charges for Integration and Restructuring, Closures and Asset Impairments), no material gain or loss was recorded as a result of this sale.

9




The sale of our Uruguayan operations was not considered a strategic shift that had or will have a major effect on our operations or financial results, and therefore did not meet the requirements for presentation as discontinued operations.


NOTE 5: NET EARNINGS PER SHARE

Our basic and diluted earnings per share were:
$0.42 during second quarter 2018 and $0.77 during year-to-date 2018;
$0.03 during second quarter 2017 and $0.24 during year-to-date 2017.

Basic earnings per share is net earnings divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued. Diluted earnings per share is net earnings divided by the sum of the weighted average number of our outstanding common shares and the effect of our outstanding dilutive potential common shares:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Weighted average common shares outstanding – basic
757,829

 
752,630

 
757,317

 
751,674

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
1,628

 
2,845

 
1,655

 
2,913

Restricted stock units
512

 
488

 
540

 
518

Performance share units
564

 
488

 
480

 
520

Total effect of outstanding dilutive potential common shares
2,704

 
3,821

 
2,675

 
3,951

Weighted average common shares outstanding – dilutive
760,533

 
756,451

 
759,992

 
755,625


We use the treasury stock method to calculate the dilutive effect of our outstanding stock options, restricted stock units and performance share units. Share-based payment awards that are contingently issuable upon the achievement of specified performance or market conditions are included in our diluted earnings per share calculation in the period in which the conditions are satisfied.

Potential Shares Not Included in the Computation of Diluted Earnings per Share

The following shares were not included in the computation of diluted earnings per share because they were either antidilutive or the required performance or market conditions were not met. Some or all of these shares may be dilutive potential common shares in future periods.
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Stock options

 
1,408

 

 
1,408

Performance share units
486

 
450

 
486

 
450



NOTE 6: INVENTORIES

Inventories include raw materials, work-in-process, finished goods, and materials and supplies.
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2018
 
DECEMBER 31,
2017
LIFO inventories:





Logs
$
15


$
17

Lumber, plywood, panels and fiberboard
71


66

Other products
15

 
10

FIFO or moving average cost inventories:





Logs
38


38

Lumber, plywood, panels, fiberboard and engineered wood products
110


91

Other products
80


77

Materials and supplies
85


84

Total
$
414


$
383


LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. locations. The FIFO – the first-in, first-out method – or moving average cost methods apply to the balance of our U.S. raw material and product inventories, all material and supply inventories and all

10



foreign inventories. If we used FIFO for all LIFO inventories, our stated inventories would have been higher by $70 million as of June 30, 2018, and $70 million as of December 31, 2017.


NOTE 7: SPECIAL-PURPOSE ENTITIES

From 2002 through 2004, we sold certain nonstrategic timberlands in five separate transactions. We are the primary beneficiary and consolidate the assets and liabilities of certain monetization and buyer-sponsored Special-purpose entities (SPEs) involved in these transactions. We have an equity interest in the monetization SPEs, but no ownership interest in the buyer-sponsored SPEs. The long-term notes of our monetization SPEs and the financial investments of our buyer-sponsored SPEs include $209 million and $253 million scheduled to mature in fourth quarter 2018 and first quarter 2019, respectively. We have classified the long-term notes scheduled to mature in fourth quarter 2018 as current liabilities and the financial investments scheduled to mature in first quarter 2019 as current receivables on our Consolidated Balance Sheet.


NOTE 8: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The components of net periodic benefit cost are:
 
PENSION
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Service cost
$
8

 
$
7

 
$
18

 
$
17

Interest cost
59

 
66

 
119

 
132

Expected return on plan assets
(100
)
 
(103
)
 
(200
)
 
(205
)
Amortization of actuarial loss
52

 
42

 
113

 
97

Amortization of prior service cost
1

 
1

 
2

 
2

Total net periodic benefit cost - pension
$
20

 
$
13

 
$
52

 
$
43

 
OTHER POSTRETIREMENT BENEFITS
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Interest cost
$
1

 
$
2

 
$
3

 
$
4

Amortization of actuarial loss
2

 
2

 
4

 
4

Amortization of prior service credit
(2
)
 
(2
)
 
(4
)
 
(4
)
Total net periodic benefit cost - other postretirement benefits
$
1

 
$
2

 
$
3

 
$
4


For the periods presented, Service cost is included in "Cost of products sold," "Selling expenses," and "General and administrative expenses". The remaining components are included in "Non-operating pension and other postretirement benefit costs." Refer to the Consolidated Statement of Operations.

FAIR VALUE OF PENSION PLAN ASSETS AND OBLIGATIONS

We estimate the fair value of pension plan assets based upon the information available during the year end reporting process. In some cases, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year and market events. We update the year end estimated fair value of pension plan assets to incorporate year end net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K. During second quarter 2018, we recorded an increase in the beginning of year fair value of the pension assets of $44 million, or less than 1 percent.

During second quarter 2018, we also updated our mortality assumption and census data used to estimate our projected benefit obligation for our US qualified pension plan. We recorded an adjustment to our projected benefit obligation, incorporating updated census data and applying new company-specific mortality data. As a result of these updates, the beginning of year pension projected benefit obligation decreased by $155 million, or approximately 2 percent. The net effect of these updates, including the update to the pension assets, was a $199 million improvement in funded status.

EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS

In 2018 we expect to:
be required to contribute approximately $23 million for our Canadian registered plan;
be required to contribute or make benefit payments for our Canadian nonregistered plans of $2 million;
make benefit payments of $19 million for our U.S. nonqualified pension plans; and

11



make benefit payments of $19 million for our U.S. and Canadian other postretirement plans.

We do not anticipate being required to make a contribution to our U.S. qualified pension plans in 2018.


NOTE 9: ACCRUED LIABILITIES

Accrued liabilities were comprised of the following:
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2018
 
DECEMBER 31,
2017
Accrued income taxes
$
9

 
$
19

Customer rebates and volume discounts
47

 
48

Deferred income
68

 
48

Interest
108

 
111

Pension and other postretirement benefits
40

 
40

Product remediation accrual
25

 
98

Taxes – Social Security and real and personal property
30

 
24

Vacation pay
34

 
33

Wages, salaries and severance pay
109

 
150

Other
73

 
74

Total
$
543

 
$
645



NOTE 10: LONG-TERM DEBT AND LINES OF CREDIT

During first quarter 2018, we paid our $62 million 7.00 percent debenture at maturity.

During March 2017, we entered into a new $1.5 billion five-year senior unsecured revolving credit facility that expires in March 2022. This replaced a $1.0 billion senior unsecured revolving credit facility. The entire amount is available to Weyerhaeuser Company. Interest on borrowings are at LIBOR plus a spread or at other interest rates mutually agreed upon between the borrower and the lending banks. As of June 30, 2018, there were no borrowings outstanding.


NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values and carrying values of our long-term debt consisted of the following:
 
JUNE 30,
2018
 
DECEMBER 31,
2017
DOLLAR AMOUNTS IN MILLIONS
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
 
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
Long-term debt (including current maturities)(1):
 
 
 
 
 
 
 
Fixed rate
$
5,700

 
$
6,424

 
$
5,768

 
$
6,823

Variable rate
224

 
225

 
224

 
225

Total debt
$
5,924

 
$
6,649

 
$
5,992

 
$
7,048


(1)
Excludes nonrecourse debt held by our Variable Interest Entities (VIEs).

To estimate the fair value of fixed rate long-term debt, we used the following valuation approaches:
market approach – based on quoted market prices we received for the same types and issues of our debt; or
income approach – based on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt.

We believe that our variable rate long-term debt instruments have net carrying values that approximate their fair values with only insignificant differences.

The inputs to these valuations are based on market data obtained from independent sources or information derived principally from observable market data. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at the measurement date.


12



FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS

We believe that our other financial instruments, including cash and cash equivalents, short-term investments, mutual fund investments held in grantor trusts, receivables, and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments and the allowance for doubtful accounts.


NOTE 12: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

We are party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceeding that management believes could have a material adverse effect on our Consolidated Balance Sheet, Consolidated Statement of Operations, or Consolidated Statement of Cash Flows. See Note 18: Income Taxes for a discussion of a tax proceeding involving Plum Creek's 2008 U.S. federal income tax return.

ENVIRONMENTAL MATTERS

Site Remediation

Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) – commonly known as the Superfund – and similar state laws, we:
are a party to various proceedings related to the cleanup of hazardous waste sites and
have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated.

We have received notification from the Environmental Protection Agency (the EPA) and have acknowledged that we are a potentially responsible party in a portion of the Kalamazoo River Superfund site in southwest Michigan. Our involvement in the remediation site is based on our former ownership of the Plainwell, Michigan mill located within the remediation site. Several other companies also have been deemed potentially responsible parties as past or present owners or operators of facilities within the site, or as arrangers under CERCLA.

We are currently cooperating with other parties to jointly implement an administrative order issued by the EPA on April 14, 2016, with respect to a portion of the site comprising a stretch of the river approximately 1.7 miles long referred to as the Otsego Township Dam Area. We do not expect to incur material losses related to the implementation of this administrative order.

In 2010, the company, along with others, was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia-Pacific LLC in an action seeking contribution under CERCLA for remediation costs relating to a certain area within the site. On March 29, 2018, the U.S. District Court issued an opinion and order assigning the company responsibility for five percent of approximately $50 million in past costs incurred by the plaintiffs. The remaining ninety-five percent of this pool of past costs incurred was allocated to the plaintiffs and other defendants.

The opinion and order does not establish allocation for future remediation costs, and accordingly, we may incur additional costs in connection with future remediation tasks for other areas of the site. In connection with the opinion and order, we have updated our best estimate of the liability associated with the site and have recorded a pretax charge of $28 million in the first quarter as "Other operating costs, net" on the Consolidated Statement of Operations.

As of June 30, 2018, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are potentially responsible was approximately $69 million. These amounts are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.

Asset Retirement Obligations

We have obligations associated with the future retirement of tangible long-lived assets consisting primarily of reforestation obligations related to forest management licenses in Canada and obligations to close and cap landfills. As of June 30, 2018, our accrued balance for these obligations was $32 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet. The accruals have not changed significantly since December 31, 2017.

Some of our sites have materials containing asbestos. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when materials containing asbestos might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.

PRODUCT REMEDIATION




13



NOTE 13: ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in amounts included in our accumulated other comprehensive loss by component are:
 
 
 
PENSION
 
OTHER POSTRETIREMENT BENEFITS
 
 
 
 
DOLLAR AMOUNTS IN MILLIONS
Foreign currency translation adjustments
 
Actuarial loss
Prior service cost
 
Actuarial loss
Prior service credit
 
Unrealized gains on available-for-sale securities
 
Total
Beginning balance as of December 31, 2017
$
264

 
$
(1,802
)
$
(8
)
 
$
(48
)
$
23

 
$
9

 
$
(1,562
)
Other comprehensive income (loss) before reclassifications(1)
(31
)
 
166


 


 

 
135

Amounts reclassified from accumulated other comprehensive loss to earnings(1)(2)

 
85

2

 
2

(3
)
 

 
86

Total other comprehensive income (loss)
(31
)
 
251

2

 
2

(3
)
 

 
221

Reclassification of certain tax affects due to tax law changes(3)

 
(245
)
(1
)
 
(12
)
5

 

 
(253
)
Reclassification of accumulated unrealized gains on available-for-sale securities(4)

 


 


 
(9
)
 
(9
)
Net amounts reclassified from accumulated other comprehensive loss to retained earnings

 
(245
)
(1
)
 
(12
)
5

 
(9
)
 
(262
)
Ending balance as of June 30, 2018
$
233

 
$
(1,796
)
$
(7
)
 
$
(58
)
$
25

 
$

 
$
(1,603
)

(1)
Amounts are presented net of tax.
(2)
Amortization of actuarial loss and prior service (cost) credit are components of net periodic benefit cost (credit). See Note 8: Pension and Other Postretirement Benefit Plans.
(3)
We reclassified certain tax affects from tax law changes of $253 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet in accordance with ASU 2018-02. See Note 1: Basis of Presentation.
(4)
We reclassified accumulated unrealized gains from available-for-sale securities of $9 million from "Accumulated other comprehensive loss" to "Retained earnings" on our Consolidated Balance Sheet in accordance with ASU 2016-01. See Note 1: Basis of Presentation.


NOTE 14: SHARE-BASED COMPENSATION

Share-based compensation activity during year-to-date 2018 included the following:
SHARES IN THOUSANDS
Granted
 
Vested
Restricted Stock Units (RSUs)
673

 
595

Performance Share Units (PSUs)
344

 
112


A total of 2.4 million shares of common stock were issued as a result of RSU vestings, PSU vestings and stock option exercises.

RESTRICTED STOCK UNITS

The weighted average fair value of the RSUs granted in 2018 was $34.14. The vesting provisions for RSUs granted in 2018 were as follows:
vest ratably over four years;
immediately vest in the event of death while employed or disability;
continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one-year anniversary of the grant;
continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and
will be entirely forfeited upon termination of employment in all other situations including early retirement prior to age 62.

PERFORMANCE SHARE UNITS

The weighted average grant date fair value of PSUs granted in 2018 was $35.49.

The final number of shares granted in 2018 will range from 0 percent to 150 percent of each grant's target, depending upon actual company performance.


14



The ultimate number of PSUs earned is based on two measures:
our relative total shareholder return (TSR) ranking measured against the S&P 500 over a three year period and
our relative TSR ranking measured against an industry peer group of companies over a three year period.

The vesting provisions for PSUs granted in 2018 were as follows:
vest 100 percent on the third anniversary of the grant date if the individual remains employed by the company;
fully vest in the event the participant dies or becomes disabled while employed;
continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant;
continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met and the employee has met the second anniversary of the grant date; and
will be entirely forfeited upon termination of employment in all other situations including early retirement prior to age 62.

Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2018
 
Performance Share Units
Performance period
1/1/2018

12/31/2020
Valuation date average stock price(1)
 
 
$34.14
Expected dividends
 
 
3.81%
Risk-free rate
1.75
%
2.34%
Expected volatility
17.30
%
21.52%

(1)
Calculated as an average of the high and low prices on grant date.

VALUE MANAGEMENT AWARDS

Value Management Awards (VMAs) are relative performance equity incentive awards granted to certain former employees of Plum Creek and assumed by the company in connection with the Plum Creek merger. In accordance with the terms of the merger, all VMAs outstanding on December 31, 2017, vested at “target” level performance of $100 per unit and were paid out in full in first quarter of 2018.


NOTE 15: CHARGES FOR INTEGRATION AND RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS

QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Integration and restructuring charges related to our merger with Plum Creek
$

 
$
2

 
$

 
$
14

Charges related to closures and other restructuring activities

 
2

 
1

 
3

Impairments of long-lived assets

 
147

 
1

 
147

Total charges for integration and restructuring, closures and asset impairments
$

 
$
151

 
$
2

 
$
164


IMPAIRMENTS OF LONG-LIVED ASSETS
In second quarter 2017, we recognized an impairment charge to the timberlands and manufacturing assets of our Uruguayan operations. On June 2, 2017, our Board of Directors approved an agreement to sell all of the Company's equity in the Uruguayan business to a consortium led by BTG Pactual's Timberland Investment Group (TIG). As a result of this agreement, the related assets met the criteria to be classified as held for sale. This designation required us to record the related assets at fair value, less an amount of estimated selling costs, and thus recognize a $147 million noncash pretax impairment charge. This amount was recorded in the Timberlands segment. The fair value of the related assets was primarily based on the agreed upon cash purchase price of $403 million. On September 1, 2017, we announced the completion of the sale. Refer to Note 4: Operations Divested for further details of the Uruguayan operations sale.


NOTE 16: CHARGES (RECOVERIES) FOR PRODUCT REMEDIATION, NET

In July 2017, we announced we were implementing a solution to address concerns regarding our TJI® Joists with Flak Jacket® Protection product. This issue was isolated to Flak Jacket product manufactured after December 1, 2016, and does not affect any of our other products. In first quarter 2018, we received and recorded insurance recoveries of $20 million. During second quarter 2018, we recorded an additional charge of $25 million as a result of additional product remediation expenses, partially offset by $5 million of insurance recoveries. During second quarter 2017, we recorded $50 million of product remediation charges. The charges and recoveries are attributable to our Wood Products segment and were recorded in "Charges (recoveries) for product remediation, net" on the Consolidated Statement of Operations.



15



NOTE 17: OTHER OPERATING COSTS, NET

Other operating costs, net:
includes both recurring and occasional income and expense items and
can fluctuate from year to year.

ITEMS INCLUDED IN OTHER OPERATING COSTS, NET
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
JUNE 2018
 
JUNE 2017
Gain on disposition of nonstrategic assets 
$
(1
)
 
$
(2
)
 
$
(3
)
 
$
(9
)
Foreign exchange losses, net
(2
)
 

 

 
3

Litigation expense, net
8

 
3

 
13

 
6

Other, net(1)
12

 
11

 
35

 
14

Total other operating costs, net
$
17

 
$
12

 
$
45

 
$
14


(1)
"Other, net" includes environmental remediation charges. See Note 12: Legal Proceedings, Commitments, and Contingencies for more information.

NOTE 18: INCOME TAXES
As a REIT, we generally are not subject to federal corporate level income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our wholly-owned TRSs, which includes our Wood Products segment and portions of our Timberlands and Real Estate & ENR segments' earnings.

The quarterly provision for income taxes is based on the current estimate of the annual effective tax rate. Our 2018 estimated annual effective tax rate for our TRSs is approximately 25 percent, which is higher than the U.S. domestic statutory federal tax rate primarily due to higher foreign tax rates applicable to foreign earnings and state income taxes.

TAX LEGISLATION

On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (the "Tax Act"), was enacted. The Tax Act contains significant changes to corporate taxation, including the reduction of the corporate tax rate from 35 percent to 21 percent. As a result of the reduction in the corporate tax rate, we revalued our deferred tax assets and liabilities and recorded a tax expense of $74 million during 2017, which reduced our net deferred tax asset. The deemed repatriation on deferred foreign income provisions does not impact our operations due to the fact that we have no foreign undistributed earnings.

The impact of the Tax Act provisions effective in 2018 is a reduction to our overall estimated annual effective tax rate primarily due to the reduced corporate tax rate.

During first quarter 2018, we adopted ASU 2018-02 which allows for the reclassification of certain income tax effects related to the Tax Act between accumulated other comprehensive income and retained earnings. Refer to Note 1: Basis of Presentation for further details on this ASU and the related impact on our financial statements.

ONGOING IRS MATTER
In connection with the merger with Plum Creek, we acquired equity interests in Southern Diversified Timber, LLC, a timberland joint venture (Timberland Venture) with an affiliate of Campbell Global LLC (TCG Member). On August 31, 2016, the Timberland Venture redeemed TCG Member's interest and became a fully consolidated, wholly-owned subsidiary of Weyerhaeuser.

We received a Notice of Final Partnership Administrative Adjustment (FPAA), dated July 20, 2016, from the Internal Revenue Service (IRS) in regard to Plum Creek's 2008 U.S. federal income tax treatment of the transaction forming the Timberland Venture. The IRS is asserting that the transfer of the timberlands to the Timberland Venture was a taxable transaction to Plum Creek at the time of the transfer rather than a nontaxable capital contribution. We have filed a petition in the U.S. Tax Court and will vigorously contest this adjustment.

In the event that we are unsuccessful in this tax litigation, we could be required to recognize and distribute gain to shareholders of approximately $600 million and pay built-in gains tax of approximately $100 million. We would also be required to pay interest on both of those amounts, which would be substantial. As much as 80 percent of any such gain distribution could be made with our common stock, and shareholders would be subject to tax on the distribution at the applicable capital gains tax rate. Alternatively, we could elect to retain the gain and pay corporate-level tax to minimize interest costs to the company.

Although the outcome of this process cannot be predicted with certainty, we are confident in our position based on U.S. tax law and believe we will be successful in defending it. Accordingly, no reserve has been recorded related to this matter.



16



MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains statements concerning our future results and performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report. These forward-looking statements generally are identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” and expressions such as “will be,” “will continue,” “will likely result,” and similar words and expressions. Forward-looking statements are based on our current expectations and assumptions and are not guarantees of future performance. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from the content of these forward-looking statements. These risks and uncertainties include, but are not limited to:
the effect of general economic conditions, including employment rates, interest rate levels, housing starts, general availability of financing for home mortgages and the relative strength of the U.S. dollar;
market demand for the company's products, including market demand for our timberland properties with higher and better uses, which is related to, among other factors, the strength of the various U.S. business segments and U.S. and international economic conditions;
changes in currency exchange rates, particularly the relative value of the U.S. dollar to the yen and the Canadian dollar, and the relative value of the euro to the yen;
restrictions on international trade, tariffs imposed on imports and the availability and cost of shipping and transportation; economic activity in Asia, especially Japan and China;
performance of our manufacturing operations, including maintenance and capital requirements;
potential disruptions in our manufacturing operations;
the level of competition from domestic and foreign producers;
the successful execution of our internal plans and strategic initiatives, including restructuring and cost reduction initiatives;
the successful and timely execution and integration of our strategic acquisitions, including our ability to realize expected benefits and synergies, and the successful and timely execution of our strategic divestitures, each of which is subject to a number of risks and conditions beyond our control including, but not limited to, timing and required regulatory approvals;
raw material availability and prices;
the effect of weather;
the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters;
energy prices;
transportation and labor availability and costs;
federal tax policies;
the effect of forestry, land use, environmental and other governmental regulations;
legal proceedings;
performance of pension fund investments and related derivatives;
the effect of timing of employee retirements and changes in the market price of our common stock on charges for share-based compensation;
the accuracy of our estimates of costs and expenses related to contingent liabilities;
changes in accounting principles; and
other risks and uncertainties identified in our 2017 Annual Report on Form 10-K, which are incorporated herein by reference, as well as those set forth from time to time in our other public statements and other reports and filings with the SEC.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise.



17




RESULTS OF OPERATIONS

In reviewing our results of operations, it is important to understand these terms:

Sales realizations for Timberlands and Wood Products refer to net selling prices – this includes selling price plus freight, minus normal sales deductions. Real Estate transactions are presented at the contract sales price before commissions and closing costs, net of any credits.
Net contribution to earnings does not include interest expense and income taxes.

In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, sales realizations, shipment volumes, and net contributions to earnings are based on the quarter ended June 30, 2018, compared to quarter ended June 30, 2017.


ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS

The demand for logs within our Timberlands segment is directly affected by production levels of domestic wood-based building products. The strength of the U.S. housing market strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Our Timberlands segment, specifically the Western region, is also affected by export demand. Japanese housing starts are a key driver of export log demand in Japan.
In second quarter 2018, housing starts averaged 1.26 million total units on a seasonally adjusted annual basis according to the U.S. Census Bureau. Single family units accounted for 71 percent of total housing starts in second quarter, up from 67 percent in first quarter 2018. Multifamily starts were 15 percent lower than first quarter, at 362,000 in second quarter. Single family starts are 8 percent higher on a year ago basis for the quarter. We continue to expect improving U.S. housing starts and anticipate a level of approximately 1.30 million units in 2018, an 8 percent increase compared to 2017. We attribute this continued improvement primarily to employment growth, improving consumer confidence and mortgage rates which, while rising, remain near historic lows.
According to the Joint Center for Housing of Harvard University, the Leading Indicator of Remodeling Activity (LIRA) increased by 7.1 percent in second quarter 2018 and is expected to increase an average 7.35 percent for the remaining quarters of 2018.
U.S. wood product markets continued their advance in second quarter 2018, consistent with growth in homebuilding and remodeling segments, as described above. According to Forest Economic Advisors, LLC, North American lumber consumption is expected to grow at a 4 percent rate in 2018. Consistent with this expectation, increases in wood products production drove increased demand for logs, resulting in higher market prices for logs in second quarter 2018. In the South, log supplies kept pace with increased demand, helped by favorable weather conditions, leaving prices flat to slightly lower from first quarter 2018.
Log inventories in Chinese ports declined in the latter part of second quarter as reported by International Wood Markets China Bulletin. Volumes of US log imports for the first four months of 2018 were running 6.5 percent above 2017, however, China Customs have temporarily stopped releasing trade information due to an audit by the National Audit Office, limiting the availability of current trade data. In Japan, wooden housing starts for April and May are very similar to the same period last year, with the key Post and Beam segment up 0.4 percent in April and flat in May compared with the same month a year ago.
We expect demand from China and Japan in 2018 to be similar to demand experienced in 2017.
Our Real Estate, Energy and Natural Resources segment is affected by the health of the U.S. economy and especially the U.S. housing sector of the economy. According to the Realtors Land Institute (RLI) of the National Association of Realtors, the dollar volume of rural properties, including timber, grew 4 percent in 2017 sales while per acre prices were up 3 percent on average. Additionally, RLI expects these trends to continue in 2018.


CONSOLIDATED RESULTS

How We Did Second Quarter 2018 and Year-to-Date 2018
 
QUARTER ENDED

AMOUNT OF CHANGE

YEAR-TO-DATE ENDED

AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2018
 
JUNE 2017

2018 VS.
2017

JUNE 2018

JUNE 2017

2018 VS. 
2017
Net sales
$
2,065

 
$
1,808

 
$
257

 
$
3,930

 
$
3,501

 
$
429

Costs of products sold
1,447

 
1,336

 
111

 
2,795

 
2,608

 
187

Operating income
476

 
157

 
319

 
880

 
450

 
430

Net earnings
317

 
24

 
293

 
586

 
181

 
405

Earnings per share, basic and diluted
$
0.42

 
$
0.03

 
$
0.39

 
$
0.77

 
$
0.24

 
$
0.53



18



Comparing Second Quarter 2018 with Second Quarter 2017

Net sales

Net sales increased $257 million14 percent – primarily attributable to the following factors:
Wood Products sales to unaffiliated customers increased $232 million18 percent – primarily due to increased sales realizations across the majority of product lines;
Timberlands sales to unaffiliated customers increased $13 million3 percent – primarily due to increased Western log sales realizations, partially offset by decreased operations revenue from the sale of our Uruguayan operations in third quarter 2017; and
Real Estate & ENR sales to unaffiliated customers increased $12 million26 percent – primarily due to increased acres sold, offset by a decrease in price realized per acre due to mix of properties sold.

Costs of products sold

Costs of products sold increased $111 million8 percent – primarily attributable to the following:
Wood Products costs of products sold increased $102 million – 12 percent – primarily due to increased log and fiber costs across all product lines in the West and Canada; and
Real Estate & ENR costs of products sold increased $14 million88 percent – primarily attributable to increased acres sold and higher basis of real estate sold.

Operating income

Operating income increased $319 million203 percent – primarily attributable to:
a noncash pretax impairment charge of $147 million recorded during second quarter 2017. This impairment was a result of our agreement to sell our Uruguayan operations, as announced during June 2017 (refer to Note 15: Charges for Integration, Restructuring, Closures, and Asset Impairments);
increased consolidated gross margin of $146 million, as described above; and
decreased net charges of $30 million for product remediation (refer to Note 16: Charges (Recoveries) for Product Remediation).

Net earnings

Our Net earnings increased $293 million1,221 percent. This is attributable to:

increased operating income of $319 million, as described above; and
decreased interest expense of $8 million (refer to Interest Expense).

This increase in operating results was offset in part by a $31 million increase in income taxes (refer to Income Taxes).

Comparing Year-to-Date 2018 with Year-to-Date 2017

Net sales

Net sales increased $429 million12 percent – primarily attributable to the following factors:
Wood Products sales to unaffiliated customers increased $387 million16 percent – primarily due to increased sales realizations across the majority of product lines;
Timberlands sales to unaffiliated customers increased $32 million3 percent – primarily due to increased Western log sales realizations, partially offset by decreased operations revenue from the sale of our Uruguayan operations in third quarter 2017; and
Real estate & ENR sales to unaffiliated customers increased $10 million10 percent – primarily attributable to an increase in acres sold, offset by decreased average price per acre due to mix of properties sold.

Costs of products sold

Costs of products sold increased $187 million7 percent – primarily attributable to the following:
Wood Products costs of products sold increased $152 million – 10 percent – primarily due to increased log and fiber costs across all product lines in the West and Canada;
Timberlands costs of products sold increased $16 million2 percent – primarily due to increased cost per unit related to outside purchases, specifically for export sales in the West, offset by a decrease in cost of products sold due to the divestiture of our Uruguayan operations in third quarter 2017; and
Unallocated cost of products sold increased $15 million – 83 percent – primarily due to $9 million increased costs for elimination of intersegment profit in inventory and LIFO. Refer to Unallocated Items for further details.

Operating income

Operating income increased $430 million96 percent – primarily attributable to:
increased consolidated gross margin of $242 million as described above;
a noncash pretax impairment charge of $147 million recorded during second quarter 2017. This impairment was a result of our agreement to sell our Uruguayan operations, as announced during June 2017 (refer to Note 15: Charges for Integration, Restructuring, Closures, and Asset Impairments); and

19



$50 million incremental charges for product remediation for the year-to-date period ended 2017 compared to net $0 for the year-to-date period ended 2018 (refer to Note 16: Charges (Recoveries) for Product Remediation, Net for further details).

Net earnings

Our Net earnings increased $405 million224 percent. This is primarily attributable to increased operating income, as described above.
This increase in operating results was offset in part by a $37 million increase in income taxes (refer to Income Taxes).


TIMBERLANDS

How We Did Second Quarter 2018 and Year-to-Date 2018
  
QUARTER ENDED
 
AMOUNT OF CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
2018 VS.
2017
 
JUNE 2018
 
JUNE 2017
 
2018 VS. 
2017
Net sales to unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
Delivered logs(1):
 
 
 
 
 
 
 
 
 
 
 
West
$
262

 
$
227

 
$
35

 
$
528

 
$
452

 
$
76

South
158

 
148

 
10

 
315

 
296

 
19

North
20

 
16

 
4

 
45

 
43

 
2

Other
7

 
11

 
(4
)
 
21

 
31

 
(10
)
Subtotal delivered logs sales
447

 
402

 
45

 
909

 
822

 
87

Stumpage and pay-as-cut timber
11

 
17

 
(6
)
 
26

 
29

 
(3
)
Uruguay operations(2)

 
21

 
(21
)
 

 
40

 
(40
)
Recreational and other lease revenue
15

 
15

 

 
29

 
29

 

Other
9

 
14

 
(5
)
 
23

 
35

 
(12
)
Subtotal net sales to unaffiliated customers
482

 
469

 
13

 
987

 
955

 
32

Intersegment sales:
 
 
 
 
 
 
 
 
 
 
 
United States
139

 
126

 
13

 
281

 
256

 
25

Other
46

 
37

 
9

 
132

 
109

 
23

Subtotal intersegment sales
185

 
163

 
22

 
413

 
365

 
48

Total sales
$
667

 
$
632

 
$
35

 
$
1,400

 
$
1,320

 
$
80

Costs of products sold
$
485

 
$
476

 
$
9

 
$
1,011

 
$
995

 
$
16

Operating income and Net contribution to earnings
$
161

 
$
(12
)
 
$
173

 
$
350

 
$
136

 
$
214


(1)
The West region includes Washington and Oregon. The South region includes Virginia, North Carolina, South Carolina, Florida, Georgia, Alabama, Mississippi, Louisiana, Arkansas, Texas and Oklahoma. The North region includes West Virginia, Maine, New Hampshire, Vermont, Michigan, Wisconsin and Montana. Other includes our Canadian operations and previously managed Twin Creeks Venture. Our management agreement for the Twin Creeks Venture was terminated in December 2017.
(2)
Includes logs, plywood and hardwood lumber harvested or produced by our former international operations in Uruguay. On June 2nd, 2017, we agreed to sell all of our equity interest in the subsidiaries that collectively own and operate our Uruguayan timberlands and manufacturing operations and recorded a $147 million impairment within the Timberlands business segment during second quarter 2017. Our Uruguayan operations were divested on September 1, 2017. Refer to Note 4: Operations Divested and Note 15: Charges for Integration and Restructuring, Closures and Asset Impairments for further information.

Comparing Second Quarter 2018 with Second Quarter 2017

Net sales to unaffiliated customers

Net sales to unaffiliated customers increased $13 million3 percent – primarily due to a $35 million increase in Western log sales, which was attributable to a 20 percent increase in Western log prices partially offset by an 8 percent decrease in Western delivered log sales volumes.
This increase was partially offset by a $21 million decrease in sales from our Uruguayan operations, which were divested in third quarter 2017.

20



Intersegment sales
Intersegment sales increased $22 million13 percent – primarily due to increases in Western log prices, consistent with third party sales discussed above.

Costs of products sold

Costs of products sold increased $9 million2 percent – primarily due to increased sales volumes in Southern and Northern regions, as well as increased cost per unit related to outside purchases in the West.

These increases were partially offset by a decrease in cost of products sold from our Uruguayan operations, which were divested in third quarter 2017.

Operating income and Net contribution to earnings

Operating income and Net contribution to earnings increased $173 million1,442 percent – primarily attributable to:

a noncash pretax impairment charge of $147 million recorded during second quarter 2017. This impairment was a result of our agreement to sell our Uruguayan operations, as announced during June 2017 (refer to Note 15: Charges for Integration, Restructuring, Closures, and Asset Impairments), and
increased gross margin, as discussed above.

Comparing Year-to-Date 2018 with Year-to-Date 2017

Net sales to unaffiliated customers

Net sales to unaffiliated customers increased $32 million3 percent – primarily due to a $76 million increase in Western log sales, which was attributable to a 26 percent increase in Western log prices partially offset by a 7 percent decrease in Western delivered log sales volumes.
This increase was partially offset by a $40 million decrease in sales from our Uruguayan operations, which were divested in third quarter 2017.
Intersegment sales
Intersegment sales increased $48 million13 percent – primarily due to increases in Western log prices, consistent with third party sales discussed above.

Costs of products sold

Costs of products sold increased $16 million2 percent – primarily due to:

a decrease in our cost of products sold due to the divestiture of our Uruguayan operations during third quarter 2017;
an increase in the West, primarily due to increased cost per unit related to outside purchases, specifically for export sales; and
an increase in the South, primarily attributable to an increase in log sales volumes.

Operating income and Net contribution to earnings

Operating income and Net contribution to earnings increased $214 million157 percent – primarily attributable to:

a noncash pretax impairment charge of $147 million recorded during second quarter 2017. This impairment was a result of our agreement to sell our Uruguayan operations, as announced during June 2017 (refer to Note 15: Charges for Integration, Restructuring, Closures, and Asset Impairments); and
increased gross margin, as discussed above.



21



THIRD-PARTY LOG SALES VOLUMES AND FEE HARVEST VOLUMES
 
QUARTER ENDED
 
AMOUNT OF CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN THOUSANDS (1)(2)
JUNE 2018
 
JUNE 2017
 
2018 VS.
2017
 
JUNE 2018
 
JUNE 2017
 
2018 VS. 
2017
Third party log sales – tons:
 
 
 
 
 
 
 
 
 
 
 
West
1,984

 
2,143

 
(159
)
 
4,003

 
4,300

 
(297
)
South
4,560

 
4,285

 
275

 
9,070

 
8,578

 
492

North
313

 
253

 
60

 
717

 
707

 
10

Other
81

 
292

 
(211
)
 
398

 
802

 
(404
)
Total (3)
6,938

 
6,973

 
(35
)
 
14,188

 
14,387

 
(199
)
Fee harvest volumes – tons:
 
 
 
 
 
 
 
 
 
 
 
West
2,360

 
2,652

 
(292
)
 
4,803

 
5,309

 
(506
)
South
6,630

 
6,473

 
157

 
13,381

 
12,846

 
535

North
423

 
383

 
40

 
972

 
1,005

 
(33
)
Other

 
444

 
(444
)
 

 
815

 
(815
)
Total (3)
9,413

 
9,952

 
(539
)
 
19,156

 
19,975

 
(819
)

(1)
The West region includes Washington and Oregon. The South region includes Virginia, North Carolina, South Carolina, Florida, Georgia, Alabama, Mississippi, Louisiana, Arkansas, Texas and Oklahoma. The North region includes West Virginia, Maine, New Hampshire, Vermont, Michigan, Wisconsin and Montana. Other includes our Canadian operations and managed Twin Creeks Venture. Our management agreement for the Twin Creeks Venture began in April 2016 and terminated in December 2017.
(2)
Western logs are primarily transacted in thousand board feet (MBF) but are converted to ton equivalents for external reporting purposes.
(3)
Total volumes exclude third party log sales and fee harvest volumes from our former Uruguayan operations, which we sold during third quarter 2017. Refer to Note 4: Operations Divested for further information regarding this sale.


REAL ESTATE, ENERGY AND NATURAL RESOURCES

How We Did Second Quarter 2018 and Year-to-Date 2018
 
QUARTER ENDED
 
AMOUNT OF CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017
 
2018 VS.
2017
 
JUNE 2018
 
JUNE 2017
 
2018 VS. 
2017
Net sales:
 
 
 
 
 
 
 
 
 
 
 
Real estate
$
38

 
$
27

 
$
11

 
72

 
64

 
8

Energy and natural resources
20

 
19

 
1

 
37

 
35

 
2

Total
$
58

 
$
46

 
$
12

 
$
109

 
$
99

 
$
10

Costs of products sold
$
30

 
$
16

 
$
14

 
$
49

 
$
36

 
$
13

Operating income and net contribution to earnings
$
22

 
$
23

 
$
(1
)
 
$
47

 
$
49

 
$
(2
)

The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability to obtain entitlements, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding. In any period the average sales price per acre will vary based on the location and physical characteristics of parcels sold.

Comparing Second Quarter 2018 with Second Quarter 2017

Net sales

Net sales increased $12 million26 percent – primarily attributable to an increase in acres sold, offset in part by a decrease in price realized per acre due to mix of properties sold.

Costs of products sold
Costs of products sold increased $14 million88 percent – primarily attributable to an increase in acres sold as well as higher basis of real estate sold.

22




Net contribution to earnings

Net contribution to earnings decreased $1 million4 percent – primarily attributable to decreased gross margin due to higher basis of real estate sold, as discussed above.

Comparing Year-to-Date 2018 with Year-to-Date 2017

Net sales

Net sales increased $10 million10 percent – primarily attributable to an increase in acres sold, offset in part by a decrease in average price per acre due to mix of properties sold.

Costs of products sold
Costs of products sold increased $13 million36 percent – primarily attributable to an increase in acres sold, as discussed above, as well as higher basis of real estate sold.

Net contribution to earnings

Net contribution to earnings for the quarter decreased $2 million4 percent – primarily attributable to decreased gross margin due to higher basis of real estate sold, as discussed above.

REAL ESTATE SALES STATISTICS
 
QUARTER ENDED
 
AMOUNT OF CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
 
JUNE 2018
 
JUNE 2017
 
2018 VS.
2017
 
JUNE 2018
 
JUNE 2017
 
2018 VS. 
2017
Acres sold
16,290

 
10,003

 
6,287

 
38,061

 
23,260

 
14,801

Average price per acre
$
2,258

 
$
2,714

 
$
(456
)
 
$
1,847

 
$
2,537

 
$
(690
)


WOOD PRODUCTS

How We Did Second Quarter 2018 and Year-to-Date 2018
 
QUARTER ENDED
 
AMOUNT OF CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS
JUNE 2018
 
JUNE 2017