-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FPCLCvgH1kEAO+gkhqrRTCXQuwy7ipiOSzzROao2Qt/aqPz9NGo2+M0Q8rpnVO4N lEU9AykRyZ1xHPGhBa1kXg== 0000106535-99-000021.txt : 19990812 0000106535-99-000021.hdr.sgml : 19990812 ACCESSION NUMBER: 0000106535-99-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEYERHAEUSER CO CENTRAL INDEX KEY: 0000106535 STANDARD INDUSTRIAL CLASSIFICATION: LUMBER & WOOD PRODUCTS (NO FURNITURE) [2400] IRS NUMBER: 910470860 STATE OF INCORPORATION: WA FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04825 FILM NUMBER: 99684224 BUSINESS ADDRESS: STREET 1: 33663 WEYERHAEUSER WAY SOUTH CITY: FEDERAL WAY STATE: WA ZIP: 98003 BUSINESS PHONE: 2539242345 MAIL ADDRESS: STREET 1: 33663 WEYERHAEUSER WAY SOUTH CITY: FEDERAL WAY STATE: WA ZIP: 98003 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) X OF THE SECURITIES EXCHANGE ACT OF 1934 For the twenty-six weeks ended June 27, 1999 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) Tacoma, Washington 98477 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 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 July 30, 1999, was 201,167,081 common shares ($1.25 par value). Weyerhaeuser Company - -2- WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the twenty-six weeks ended June 27, 1999
Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statement of Earnings 3 Consolidated Balance Sheet 4-5 Consolidated Statement of Cash Flows 6-7 Notes to Financial Statements 8-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Part II. Other Information Item 1. Legal Proceedings 24-25 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 25 Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 25
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 27, 1998. Though not examined by independent public accountants, the financial information reflects, in the opinion of management, all adjustments necessary to present a fair statement of results for the interim periods indicated. The results of operations for the twenty-six week period ending June 27, 1999, should not be regarded as necessarily indicative of the results that may be expected for the full year. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WEYERHAEUSER COMPANY By /s/ K. J. Stancato --------------------- K. J. Stancato Duly Authorized Officer and Principal Accounting Officer August 11, 1999 Weyerhaeuser Company - -3- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED EARNINGS For the periods ended June 27, 1999 and June 28, 1998 (Dollar amounts in millions except as noted and per share data) (Unaudited)
Thirteen weeks Twenty-six ended weeks ended --------------- ----------------- June June June June 27, 28, 27, 28, 1999 1998 1999 1998 ------- ------- ------- ------- Net sales and revenues: Weyerhaeuser $2,730 $2,429 $5,119 $4,767 Real estate and related assets 314 247 590 512 ------- ------- ------- ------- Total net sales and revenues 3,044 2,676 5,709 5,279 ------- ------- ------- ------- Costs and expenses: Weyerhaeuser: Costs of products sold 2,059 1,939 3,897 3,759 Depreciation, amortization and fee stumpage 153 141 308 290 Selling, general and administrative expenses 194 148 358 311 Research and development expenses 13 15 26 29 Taxes other than payroll and income taxes 33 32 65 66 Charge for impairment of long-lived assets (Note 13) -- -- 91 -- Charge for Year 2000 remediation 10 7 27 8 ------- ------- ------- ------- 2,462 2,282 4,772 4,463 ------- ------- ------- ------- Real estate and related assets: Costs and operating expenses 258 214 478 439 Depreciation and amortization 1 2 2 3 Selling, general and administrative expenses 13 14 28 27 Taxes other than payroll and income taxes 2 3 4 5 ------- ------- ------- ------- 274 233 512 474 ------- ------- ------- ------- Total costs and expenses 2,736 2,515 5,284 4,937 ------- ------- ------- ------- Operating income 308 161 425 342 Interest expense and other: Weyerhaeuser: Interest expense incurred 67 65 134 132 Less interest capitalized 3 1 5 2 Equity in income of affiliates (Note 4) 6 9 8 15 Other income (expense), net 2 (3) 7 10 Real estate and related assets: Interest expense incurred 18 17 38 38 Less interest capitalized 15 15 30 30 Equity in income of joint ventures and limited partnerships (Note 4) 4 6 11 12 Other income (expense), net 5 2 10 3 ------- ------- ------- ------- Earnings before income taxes and cumulative effect of a change in an accounting principle 258 109 324 244 Income taxes (Note 5) 94 40 118 90 ------- ------- ------- ------- Earnings before cumulative effect of a change in an accounting principle 164 69 206 154 Cumulative effect of a change in an accounting principle (Note 1) -- -- 90 -- ------- ------- ------- ------- Net earnings $ 164 $ 69 $ 116 $ 154 ======= ======= ======= ======= Per common share (Note 2): Basic net earnings before cumulative effect of a change in an accounting principle $ 0.82 $ 0.34 $ 1.03 $ 0.77 Cumulative effect of a change in an accounting principle -- -- (0.45) -- ------- ------- ------- ------- $ 0.82 $ 0.34 $ 0.58 $ 0.77 ======= ======= ======= ======= Diluted net earnings before cumulative effect of a change in an accounting principle $ 0.81 $ 0.34 $ 1.02 $ 0.77 Cumulative effect of a change in an accounting principle -- -- (0.45) -- ------- ------- ------- ------- $ 0.81 $ 0.34 $ 0.57 $ 0.77 ======= ======= ======= ======= Dividends paid per share $ .40 $ .40 $ .80 $ .80 ======= ======= ======= =======
See Accompanying Notes to Financial Statements Weyerhaeuser Company - -4- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED BALANCE SHEET June 27, 1999 and December 27, 1998 (Dollar amounts in millions)
June 27, Dec. 27, 1999 1998 --------- --------- (Unaudited) Assets - ------ Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 51 $ 28 Receivables, less allowances 1,087 886 Inventories (Note 6) 989 962 Prepaid expenses 279 294 --------- --------- Total current assets 2,406 2,170 Property and equipment (Notes 7 and 13) 6,267 6,692 Construction in progress 416 315 Timber and timberlands at cost, less fee stumpage charged to disposals 1,025 1,013 Investments in and advances to equity affiliates (Notes 4 and 11) 524 482 Other assets and deferred charges 319 262 --------- --------- 10,957 10,934 --------- --------- Real estate and related assets Cash and short-term investments 3 7 Receivables, less discounts and allowances 74 81 Mortgage-related financial instruments, less discounts and allowances 94 119 Real estate in process of development and for sale 593 584 Land being processed for development 913 854 Investments in and advances to joint ventures and limited partnerships, less reserves (Note 4) 113 120 Other assets 123 135 --------- --------- 1,913 1,900 --------- --------- Total assets $ 12,870 $ 12,834 ========= =========
See Accompanying Notes to Financial Statements Weyerhaeuser Company - -5-
June 27, Dec. 27, 1999 1998 --------- --------- (Unaudited) Liabilities and shareholders' interest - -------------------------------------- Weyerhaeuser Current liabilities: Notes payable $ 7 $ 5 Current maturities of long-term debt 57 88 Accounts payable (Note 1) 732 699 Accrued liabilities (Note 8) 721 707 --------- --------- Total current liabilities 1,517 1,499 Long-term debt (Note 10) 3,338 3,397 Deferred income taxes (Note 5) 1,419 1,404 Deferred pension, other postretirement benefits and other liabilities 512 488 Commitments and contingencies (Note 14) --------- --------- 6,786 6,788 --------- --------- Real estate and related assets Notes payable and commercial paper 509 564 Long-term debt (Note 10) 639 701 Other liabilities 302 255 Commitments and contingencies (Note 14) --------- --------- 1,450 1,520 --------- --------- Total liabilities 8,236 8,308 --------- --------- Shareholders' interest (Note 12) Common shares: authorized 400,000,000 shares, issued 206,072,890 shares, $1.25 par value 258 258 Other capital 411 416 Cumulative other comprehensive (expense) (146) (208) Retained earnings 4,328 4,372 Treasury common shares, at cost: 4,908,803 and 7,063,917 (217) (312) --------- --------- Total shareholders' interest 4,634 4,526 --------- --------- Total liabilities and shareholders' interest $ 12,870 $ 12,834 ========= =========
Weyerhaeuser Company - -6- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED STATEMENT OF CASH FLOWS For the twenty-six week periods ended June 27, 1999 and June 28, 1998 (Dollar amounts in millions) (Unaudited)
Consolidated ------------------ June 27, June 28, 1999 1998 -------- -------- Cash provided by (used for) operations: Net earnings $ 116 $ 154 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 310 293 Deferred income taxes, net 76 63 Pension and other postretirement benefits (36) (11) Equity in (income) loss of affiliates, joint ventures and limited partnerships (19) (27) Effect of a change in an accounting principle (Note 1) 142 -- Effect of a change in an accounting principle - deferred taxes (Note 1) (52) -- Charge for impairment of long-lived assets (Note 13) 91 -- Decrease (increase) in working capital: Receivables (191) (72) Inventories, real estate and land (101) (9) Prepaid expenses 12 (37) Mortgage-related financial instruments 15 2 Accounts payable and accrued liabilities 99 (46) (Gain) loss on disposition of assets 1 1 Other (7) (21) -------- -------- Net cash provided by (used for) operations 456 290 -------- -------- Cash provided by (used for) investing activities: Property and equipment (198) (225) Timber and timberlands (29) (41) Investments in and advances to equity affiliates (18) 16 Proceeds from sale of: Property and equipment 7 28 Businesses 80 -- Mortgage-related financial instruments 12 34 Restructuring the ownership of a subsidiary (Note 11) -- 218 Intercompany advances -- -- Other 4 (3) -------- -------- Net cash provided by (used for) investing activities (142) 27 -------- -------- Cash provided by (used for) financing activities: Issuances of debt 31 8 Sale of industrial revenue bonds -- 48 Notes and commercial paper borrowings, net (76) 153 Cash dividends (160) (160) Payments on debt (161) (416) Purchase of treasury common shares -- (42) Exercise of stock options 90 18 Other (19) (7) -------- -------- Net cash provided by (used for) financing activities (295) (398) -------- -------- Net increase (decrease) in cash and short-term investments 19 (81) Cash and short-term investments at beginning of year 35 122 -------- -------- Cash and short-term investments at end of period $ 54 $ 41 ======== ======== Cash paid (received) during the period for: Interest, net of amount capitalized $ 141 $ 148 ======== ======== Income taxes $ (8) $ 61 ======== ========
See Accompanying Notes to Financial Statements Weyerhaeuser Company - -7-
Real Estate and Weyerhaeuser Related Assets ------------------ ------------------ June 27, June 28, June 27, June 28, 1999 1998 1999 1998 -------- -------- -------- -------- $ 59 $ 128 $ 57 $ 26 308 290 2 3 67 55 9 8 (35) (10) (1) (1) (8) (15) (11) (12) 142 -- -- -- (52) -- -- -- 91 -- -- -- (201) (64) 10 (8) (38) 6 (63) (15) 12 (37) -- -- -- -- 15 2 48 (11) 51 (35) 1 10 -- (9) 6 (18) (13) (3) -------- -------- -------- -------- 400 334 56 (44) -------- -------- -------- -------- (196) (224) (2) (1) (29) (41) -- -- (43) -- 25 16 6 9 1 19 80 -- -- -- -- -- 12 34 -- 218 -- -- (22) (190) 22 190 4 (2) -- (1) -------- -------- -------- -------- (200) (230) 58 257 -------- -------- -------- -------- 31 4 -- 4 -- 48 -- -- (21) 48 (55) 105 (160) (160) -- -- (98) (78) (63) (338) -- (42) -- -- 90 18 -- -- (19) (7) -- -- -------- -------- -------- -------- (177) (169) (118) (229) -------- -------- -------- -------- 23 (65) (4) (16) 28 100 7 22 -------- -------- -------- -------- $ 51 $ 35 $ 3 $ 6 ======== ======== ======== ======== $ 132 $ 136 $ 9 $ 12 ======== ======== ======== ======== $ (10) $ 22 $ 2 $ 39 ======== ======== ======== ========
Weyerhaeuser Company - -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ NOTES TO FINANCIAL STATEMENTS For the twenty-six week periods ended June 27, 1999 and June 28, 1998 Note 1: Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of Weyerhaeuser Company and all of its majority-owned domestic and foreign subsidiaries. Investments in and advances to equity affiliates which are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings. Significant intercompany transactions and accounts are eliminated. Certain of the consolidated financial statements and notes to financial statements are presented in two groupings: (1) Weyerhaeuser (the company), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction and other real estate related activities. Nature of Operations The company's principal business segments, which account for the majority of sales, earnings and the asset base, are: . Timberlands, which is engaged in the management of 5.1 million acres of company-owned and .2 million acres of leased commercial forestland in the United States (3.3 million acres in the South and 2.0 million acres in the Pacific Northwest). . Wood products, which produces a full line of solid wood products that are sold primarily through the company's own sales organizations to wholesalers, retailers and industrial users in North America, the Pacific Rim and Europe. It is also engaged in the management of 27 million acres of forestland in Canada under long-term licensing arrangements (of which 18.9 million acres are considered to be productive forestland). . Pulp, paper and packaging, which manufactures and sells pulp, paper, paperboard and containerboard in North American, Pacific Rim and European markets and packaging products for the domestic markets, and which operates an extensive wastepaper recycling system that serves company mills and worldwide markets. Accounting Pronouncements Implemented In the 1999 first quarter, the company implemented the following Statements of Position (SOP) issued by the American Institute of Certified Public Accountants Accounting Standards Executive Committee: . SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidelines on the accounting for internally developed computer software. The adoption of this SOP did not have a significant impact on the company's results of operations or financial position. . SOP 98-5, Reporting on the Costs of Start-up Activities, which requires that the costs of start-up activities be expensed as incurred. In addition, this pronouncement required that all unamortized start-up costs on the balance sheet at the implementation date be written off as a cumulative effect of a change in an accounting principle. The company recorded an after-tax charge of $90 million, or 45 cents per common share, in the first quarter to reflect this write-off. This charge included $9 million for the company's interest in the write-off of unamortized start-up costs in three of its 50 percent-owned equity affiliates. Weyerhaeuser Company - -9- Prospective Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The effective date of this pronouncement, originally fiscal years beginning after June 15, 1999, has been delayed to fiscal years beginning after June 15, 2000, with the issuance of SFAS No. 137 on June 30, 1999. This will be effective for the company's fiscal year 2001. Assuming that the company's current minimal involvement in derivatives and hedging activities continues after the implementation date of this statement, the company believes that the future adoption of this statement will not have a material impact on its results of operations or financial position. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivatives The company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and foreign exchange risks. These include: . Foreign exchange contracts, which are hedges for foreign denominated accounts receivable and accounts payable. These contracts generate gains or losses that are recognized at the contracts' respective settlement dates. . Interest rate swaps entered into with major banks or financial institutions in which the company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The premiums received by the company on the sale of these swaps are treated as deferred income and amortized against interest expense over the term of the agreements. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments, but does not expect its counterparties to fail to meet their obligations. The company deals only with highly rated counterparties. The notional amounts of these derivative financial instruments are $77 million and $102 million at June 27, 1999, and December 27, 1998, respectively. These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on the contractual terms against the notional amount of the contract, such as interest rates or exchange rates. The use of derivatives does not have a significant effect on the company's results of operations or its financial position. Cash and Short-Term Investments For purposes of cash flow and fair value reporting, short-term investments with original maturities of 90 days or less are considered as cash equivalents. Short-term investments are stated at cost, which approximates market. 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 the majority of domestic raw materials, in process and finished goods inventories. LIFO inventories were $267 million and $253 million at June 27, 1999, and December 27, 1998, 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 $213 million and $228 million greater at June 27, 1999, and December 27, 1998, respectively. Weyerhaeuser Company - -10- Property and Equipment The company's property accounts are maintained on an individual asset basis. Betterments and replacements of major units are capitalized. Maintenance, repairs and minor replacements are expensed. Depreciation is provided generally on the straight-line or unit-of-production method at rates based on estimated service lives. Amortization of logging railroads and truck roads is provided generally as timber is harvested and is based upon rates determined with reference to the volume of timber estimated to be removed over such facilities. The cost and related depreciation of property sold or retired is removed from the property and allowance for depreciation accounts and the gain or loss is included in earnings. Timber and Timberlands Timber and timberlands are carried at cost less fee stumpage charged to disposals. Fee stumpage is the cost of standing timber and is charged to fee timber disposals as fee timber is harvested, lost as the result of casualty or sold. Depletion rates used to relieve timber inventory are determined with reference to the net carrying value of timber and the related volume of timber estimated to be available over the growth cycle. Timber carrying costs are expensed as incurred. The cost of timber harvested is included in the carrying values of raw material and product inventories, and in the costs of products sold as these inventories are disposed of. Accounts Payable The company's banking system provides for the daily replenishment of major bank accounts as checks are presented for payment. Accordingly, there were negative book cash balances of $136 million and $139 million at June 27, 1999, and December 27, 1998, respectively. Such balances result from outstanding checks that had not yet been paid by the bank and are reflected in accounts payable in the consolidated balance sheets. Income Taxes Deferred income taxes are provided to reflect temporary differences between the financial and tax bases of assets and liabilities using presently enacted tax rates and laws. Pension Plans The company has pension plans covering most of its employees. The U.S. plan covering salaried employees provides pension benefits based on the employee's highest monthly earnings for five consecutive years during the final ten years before retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). Postretirement Benefits Other Than Pensions In addition to providing pension benefits, the company provides certain health care and life insurance benefits for some retired employees and accrues the expected future cost of these benefits for its current eligible retirees and some employees. All of the company's salaried employees and some hourly employees may become eligible for these benefits when they retire. Reclassifications Certain reclassifications have been made to conform prior years' data to the current format. Weyerhaeuser Company - -11- 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 Common Share
Thirteen weeks Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 -------- -------- -------- -------- Weighted average shares outstanding (thousands): Basic 199,874 198,832 199,874 198,832 Dilutive effect of stock options 1,025 695 722 584 -------- -------- -------- -------- Diluted weighted average shares outstanding 200,899 199,527 200,596 199,416 ======== ======== ======== ========
Basic net earnings per common share are based on the weighted average number of common shares outstanding during the period. Diluted net earnings per common share are based on the weighted average number of common shares outstanding and stock options outstanding at the beginning of or granted during the period. Options to purchase 2,500 shares at $68.41 per share were outstanding during the twenty-six weeks ended June 27, 1999. Options to purchase 604,011 shares at $56.78 per share, 2,000 shares at $60.44 per share and 150,000 shares at $53.06 per share were outstanding during the twenty-six weeks ending June 28, 1998. These options were not included in the computation of diluted earnings per share for the respective periods because the option exercise prices were greater than the average market prices of common shares during those periods. Note 3: Comprehensive Income (Expense) The company's comprehensive income (expense) is as follows:
Thirteen weeks Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, Dollar amounts in millions 1999 1998 1999 1998 -------- -------- -------- -------- Net earnings $ 164 $ 69 $ 116 $ 154 Other comprehensive income (expense): Foreign currency translation adjustments 36 (44) 75 (39) Income tax (expense) on foreign currency translation adjustments (7) 16 (13) 14 -------- -------- -------- -------- $ 193 $ 41 $ 178 $ 129 ======== ======== ======== ========
Note 4: Equity Affiliates Weyerhaeuser The company's investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. Investments carried at equity are: . Cedar River Paper Company - A 50 percent owned joint venture in Cedar Rapids, Iowa, that manufactures liner and medium containerboard from recycled fiber. . Nelson Forests Joint Venture - An investment in which the company owns a 51 percent financial interest and has a 50 percent voting interest, which holds Crown Forest License cutting rights and freehold land on the South Island of New Zealand. Weyerhaeuser Company - -12- . 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. Currently, there are two facilities in operation in China, one of which opened in July 1999. . RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint venture with institutional investors to make investments in timberlands and related assets outside the United States. The primary focus of this partnership is in pine forests in the Southern Hemisphere. During the quarter, this joint venture paid approximately US $142 million to acquire 62,500 acres of radiata pine plantations, two softwood lumber mills with a capacity of 115 million board feet, a lumber treating operation, a pine molding remanufacturing plant, a chip export business and a 30 percent interest in a sales and distribution business in Australia. Approximately 500 people currently work in these operations. Weyerhaeuser Company, through a subsidiary, will assume the responsibility for all management and marketing activities of this acquisition. . North Pacific Paper Corporation - A 50 percent owned joint venture that has a newsprint manufacturing facility in Longview, Washington. This venture was formed in February 1998 through a restructuring of the company's 80 percent ownership, which was fully consolidated, to 50-50 ownership with Nippon Paper Industries Co., Ltd. . Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North Carolina, formed in October 1998. This venture supplies full-service, value-added turnkey packaging solutions that 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, is as follows:
June 27, Dec. 27, Dollar amounts in millions 1999 1998 -------- --------- Current assets $ 206 $ 166 Noncurrent assets 1,451 1,334 Current liabilities 93 80 Noncurrent liabilities 761 703
Thirteen weeks Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 -------- -------- -------- -------- Net sales and revenues $ 177 $ 180 $ 341 $ 353 Operating income 27 32 47 60 Net income (loss) 13 17 9 31
The company provides goods and services to these affiliates, which vary by entity, in the form of raw materials, management and marketing fees, 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 and advances to joint ventures and limited partnerships that are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings as appropriate. Weyerhaeuser Company - -13- Unconsolidated financial information for joint ventures and limited partnerships, which are accounted for by the equity method, is as follows:
June 27, Dec. 27, Dollar amounts in millions 1999 1998 -------- --------- Current assets $ 4,333 $ 1,755 Noncurrent assets 152 230 Current liabilities 3,665 1,241 Noncurrent liabilities 107 136
Thirteen weeks Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, 1999 1998 1999 1998 -------- -------- -------- -------- Net sales and revenues $ 157 $ 37 $ 226 $ 94 Operating income 94 11 141 45 Net income 73 2 113 29
The company may charge management and/or development fees to the joint ventures or limited partnerships. 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: Twenty-six weeks ended ----------------- June 27, June 28, Dollar amounts in millions 1999 1998 -------- -------- Federal: Current $ 23 $ 19 Deferred 61 58 -------- -------- 84 77 -------- -------- State: Current 5 4 Deferred 3 2 -------- -------- 8 6 -------- -------- Foreign: Current 14 4 Deferred 12 3 -------- -------- 26 7 -------- -------- Income taxes before cumulative effect of a change in an accounting principle 118 90 Deferred taxes applicable to the cumulative effect of a change in an accounting principle (52) -- -------- -------- $ 66 $ 90 ======== ========
Income tax provisions for interim periods are based on the current best estimate of the effective tax rate expected to be applicable for the full year. The effective tax rate reflects anticipated tax credits, foreign taxes and other tax planning alternatives. For the periods ended June 27, 1999, and June 28, 1998, the company's provision for income taxes as a percent of earnings before income taxes and cumulative effect of a change in an accounting principle is greater than the 35% federal statutory rate due principally to the effect of state income taxes. The effective tax rates for the twenty-six week periods ended June 27, 1999, and June 28, 1998, were 36.5% and 37%, respectively. Weyerhaeuser Company - -14- 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
June 27, Dec. 27, Dollar amounts in millions 1999 1998 -------- --------- Logs and chips $ 102 $ 108 Lumber, plywood and panels 181 143 Pulp and paper 182 190 Containerboard, paperboard and packaging 95 96 Other products 162 150 Materials and supplies 267 275 -------- --------- $ 989 $ 962 ======== =========
Note 7: Property and Equipment
June 27, Dec. 27, Dollar amounts in millions 1999 1998 -------- --------- Property and equipment, at cost: Land $ 156 $ 157 Buildings and improvements 1,692 1,667 Machinery and equipment 9,375 9,732 Rail and truck roads 558 555 Other 108 111 -------- --------- 11,889 12,222 Less allowance for depreciation and amortization 5,622 5,530 -------- --------- $ 6,267 $ 6,692 ======== =========
Note 8: Accrued Liabilities
June 27, Dec. 27, Dollar amounts in millions 1999 1998 -------- --------- Payroll -- wages and salaries, incentive awards, retirement and vacation pay $ 298 $ 305 Taxes -- social security and real and personal property 54 46 Interest 84 87 Income taxes 54 16 Other 231 253 -------- --------- $ 721 $ 707 ======== =========
Note 9: Short-Term Debt Lines of Credit The company has short-term bank credit lines that provide for borrowings of up to the total amount of $590 million and $650 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at June 27, 1999, and December 27, 1998, respectively. No portion of these lines has been availed of by the company or WRECO at June 27, 1999, or December 27, 1998. Neither of the entities referred to herein is a guarantor of the borrowings of the other. Weyerhaeuser Company - -15- Note 10: Long-Term Debt Lines of Credit The company's lines of credit include a five-year revolving credit facility agreement entered into in 1997 with a group of banks that provides for borrowings of up to the total amount of $400 million, all of which is available to the company. Borrowings are at LIBOR plus a spread or other such interest rates mutually agreed to between the borrower and lending banks. Weyerhaeuser Financial Services, Inc. (WFS), a wholly owned subsidiary, has a set of term credit facility agreements with a group of banks that provide for borrowings of up to $125 million and $175 million as of June 27, 1999, and December 27, 1998, respectively. $50 million and $100 million were outstanding under these agreements at June 27, 1999, and December 27, 1998, respectively. To the extent that these credit commitments expire more than one year after the balance sheet date and are unused, an equal amount of commercial paper is classifiable as long-term debt. Weyerhaeuser reclassified $172 million and $192 million as of June 27, 1999, and December 27, 1998, respectively. No portion of these lines has been availed of by the company, WRECO or WFS at June 27, 1999, and December 27, 1998, except as noted. The company's compensating balance agreements were not significant. Note 11: Restructuring the Ownership of a Subsidiary In the first quarter of 1998, the company and Nippon Paper Industries Co., Ltd. (NPI) completed the restructuring of their North Pacific Paper Corporation (NORPAC) joint venture. Through this restructuring, the ownership of NORPAC changed from 80 percent company ownership and 20 percent NPI ownership to 50 percent for each shareholder. This transaction changed the reporting status of NORPAC from a fully consolidated subsidiary, with minority elimination, to a joint venture accounted for on the equity method of accounting. The company received net funds of $218 million and recognized a gain of $5 million on this transaction. Note 12: Shareholders' Interest Common Shares Common shares reserved for stock option plans were 6,465,000 shares at June 27, 1999, and 7,222,000 shares at December 27, 1998. Cumulative Other Comprehensive (Expense) The company's cumulative other comprehensive (expense) includes:
June 27, Dec. 27, Dollar amounts in millions 1999 1998 -------- --------- Foreign currency translation adjustments $ (138) $ (200) Minimum pension liability adjustment (8) (8) -------- --------- $ (146) $ (208) ======== =========
Note 13: Impairment of Long-Lived Assets During the 1999 first quarter, the company recorded a pretax charge of $91 million for the impairment of long-lived assets. This charge was related to the company's decision to sell its composite products business and ply- veneer facility and close a chip export facility. These facilities, with a net book value of $160 million, are located in Springfield, Oregon; Moncure, North Carolina; Adel, Georgia; and Coos Bay, Oregon. Weyerhaeuser Company - -16- The decision to sell the composite products business was an option explored in a strategic review of this business. In 1996, the size and scale of the company's position in the composite products business was significantly reduced with the sale of two composite products plants as part of a facility disposition. The sale of the composite products business and ply- veneer facility was completed in the second quarter of 1999. The pending closure of the Coos Bay chip export dock is a result of the continuing decline in the supply of wood chips in the Pacific Northwest due largely to a significant decrease in federal timber sales and related mill closures over the last decade. The sale or closure of these facilities did not have a material impact on the company's results of operations or financial position. Note 14: Commitments and Contingencies The company's capital expenditures, excluding acquisitions, were $227 million year to date compared to $266 million for the same period in 1998 and $615 million for the year 1998. They are expected to be approximately $785 million in 1999; however, that expenditure level could be increased or decreased as a consequence of future economic conditions. The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. Note 15: Business Segments The company is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products. The company's principal business segments are timberlands (including logs, chips and timber); wood products (including softwood lumber, plywood and veneer; oriented strand board; hardwood lumber; treated products; doors; raw materials; and building materials distribution); pulp, paper and packaging (including pulp, paper, containerboard, packaging, paperboard and recycling); and real estate and related assets. The timber-based businesses involve a high degree of integration among timber operations; building materials conversion facilities; and pulp, paper, containerboard and paperboard primary manufacturing and secondary conversion facilities. This integration includes extensive transfers of raw materials, semi-finished materials and end products between and among these groups. The company's accounting policies for segments are the same as those described in Note 1: Summary of Significant Accounting Policies. Management evaluates segment performance based on the contributions to earnings of the respective segments. Accounting for segment profitability in integrated manufacturing sites involves allocation of joint conversion and common facility costs based upon the extent of usage by the respective product lines at that facility. Transfer of products between segments is accounted for at current market values. Weyerhaeuser Company - -17- 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 Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, Dollar amounts in millions 1999 1998 1999 1998 -------- -------- -------- -------- Sales to and revenues from unaffiliated customers: Timberlands $ 176 $ 153 $ 329 $ 316 Wood products 1,412 1,160 2,528 2,178 Pulp, paper and packaging 1,100 1,081 2,182 2,201 Real estate and related assets 314 247 590 512 Corporate and other 42 35 80 72 -------- -------- -------- -------- 3,044 2,676 5,709 5,279 -------- -------- -------- -------- Intersegment sales: Timberlands 126 118 251 257 Wood products 49 47 97 97 Pulp, paper and packaging 24 11 56 36 Corporate and other 2 2 4 7 -------- -------- -------- -------- 201 178 408 397 -------- -------- -------- -------- Total sales and revenues 3,245 2,854 6,117 5,676 Intersegment eliminations (201) (178) (408) (397) -------- -------- -------- -------- $ 3,044 $ 2,676 $ 5,709 $ 5,279 ======== ======== ======== ======== Approximate contribution (charge) to earnings (1): Timberlands $ 143 $ 118 $ 262 $ 264 Wood products 174 53 160 79 Pulp, paper and packaging 34 40 76 93 Real estate and related assets (1) 45 16 91 41 Corporate and other (74) (54) (136) (103) -------- -------- -------- -------- 322 173 453 374 Interest expense (67) (65) (134) (132) Less capitalized interest 3 1 5 2 -------- -------- -------- -------- Earnings before income taxes and the cumulative effect of a change in an accounting principle 258 109 324 244 Income taxes (94) (40) (118) (90) -------- -------- -------- -------- Earnings before the cumulative effect of a change in an accounting principle 164 69 206 154 Cumulative effect of a change in an accounting principle -- -- (90) -- -------- -------- -------- -------- $ 164 $ 69 $ 116 $ 154 ======== ======== ======== ========
There were no material changes from year-end 1998 in total assets, basis of segmentation or basis for measuring segment profit or loss. Certain reclassifications have been made to conform prior year's data to the current format. (1) Interest expense of $3 million and $5 million for the thirteen weeks and $8 million and $11 million for the twenty-six weeks ended June 27, 1999, and June 28, 1998, respectively, is included in the determination of approximate contributions to earnings and excluded from interest expense for financial services businesses. Weyerhaeuser Company - -18- WEYERHAEUSER COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated Results Consolidated net earnings for the second quarter were $164 million, or 82 cents basic earnings per common share (81 cents diluted), an increase of 138 percent over 1998 second quarter earnings of $69 million, or 34 cents basic and diluted earnings per common share. The quarter's results reflect the sustained demand for wood products that is being driven by the residential remodeling and repair market and new home construction as evidenced by the record performance in the wood products segment and strong earnings by the real estate business. Consolidated net sales and revenues for the quarter were $3 billion, an increase of 14 percent over the $2.7 billion reported in the same period last year. Year to date, the company reported net income of $116 million, or 58 cents basic earnings per common share (57 cents diluted) compared to $154 million, or 77 cents basic and diluted earnings per common share for the prior year. The current year's results were impacted by two material nonrecurring charges: . An after-tax charge of $90 million, or 45 cents per common share, from the cumulative effect of a change in an accounting policy which required the company to write off the unamortized balance of capitalized start-up costs at year-end 1998. This charge included $9 million for the company's interest in the write-off of unamortized start-up costs in three of its 50 percent-owned equity affiliates. . An after-tax charge of $60 million, or 30 cents per common share, associated with the recognition of impairment of long-lived assets in four of the company's composite products facilities, a ply-veneer facility and a chip export dock. The composite products and ply-veneer facilities were sold in the second quarter while the chip export dock is expected to be closed before the end of the year. Year-to-date earnings before these charges were $266 million, or $1.33 per common share, a 73 percent improvement over 1998 results of $154 million, or 77 cents per common share. Consolidated net sales and revenues year to date were $5.7 billion, up 8 percent from $5.3 billion in the prior year. Timberlands Second quarter operating earnings for the timberlands segment were $142.7 million, a 21 percent increase over $117.6 million reported last year. Sales to unaffiliated customers were $176 million, up 15 percent from $153 million in the 1998 second quarter. Intersegment sales were $126 million compared to $118 million reported a year ago. Volumes and prices for the export log market remain above last year's levels as the Japanese market continues to show signs of slow, but steady improvement as demonstrated by the slight increase in the level of wooden housing starts in Japan during the quarter. Raw material sales volumes to unaffiliated customers were 72 and 140 million cubic feet for the quarter and year to date, respectively, compared to 63 and 117 million cubic feet, respectively, in the same periods of 1998. Log production for the segment was 128 and 257 million cubic feet for the quarter and year to date, respectively, compared to 121 and 248 million cubic feet, respectively, in 1998. Wood Products This segment reported record operating earnings of $173.8 million for the quarter, a 226 percent increase over $53.3 million in the same quarter last year. Sales were $1.4 billion, up 22 percent from $1.2 billion in 1998's second quarter. This performance reflects strong price improvement for all major products; i.e., lumber, plywood and oriented strand board and a 15 percent sales volume increase in lumber over the preceding year's second quarter. Weyerhaeuser Company - -19- The company completed the sale of its composite products business and a ply- veneer facility to SierraPine Limited during the quarter. Third party sales and total production volumes for the major products in this segment are as follows:
Thirteen weeks Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, Third party sales volumes (millions) 1999 1998 1999 1998 - ------------------------------------ -------- -------- -------- -------- Softwood lumber - board feet 1,494 1,294 2,714 2,425 Softwood plywood and veneer - square feet (3/8") 503 478 918 914 Composite panels - square feet (3/4") 127 153 279 298 Oriented strand board - square feet (3/8") 665 706 1,344 1,346 Hardwood lumber - board feet 104 84 203 170 Engineered wood products - lineal feet 45 44 84 76 Hardwood doors (thousands) 194 215 374 403 Raw materials - cubic feet 91 77 175 154 Total production volumes (millions) - ----------------------------------- Softwood lumber - board feet 1,174 1,045 2,193 2,025 Softwood plywood and veneer - square feet (3/8") 262 249 513 486 Composite panels - square feet (3/4") 94 131 228 258 Oriented strand board - square feet (3/8") 564 538 1,137 1,071 Hardwood lumber - board feet 100 87 191 174 Hardwood doors (thousands) 192 207 370 416 Logs - cubic feet 98 97 252 245
Pulp, Paper and Packaging Operating earnings for the quarter were $34.1 million, a 14 percent decrease from $39.8 million reported in the second quarter of 1998. The quarter's sales were $1.1 billion, matching sales for the same quarter a year ago. Although prices for pulp, containerboard and paper were lower than a year ago, market conditions continued to improve over the current year's first quarter. The segment's earnings were unfavorably impacted by 128 thousand tons of planned and unplanned downtime in the pulp and containerboard operations. Third party sales and total production volumes for the major products in this segment are as follows:
Thirteen weeks Twenty-six ended weeks ended ----------------- ----------------- June 27, June 28, June 27, June 28, Third party sales volumes (thousands) 1999 1998 1999 1998 - ------------------------------------- -------- -------- -------- -------- Pulp - air-dry metric tons 531 498 1,114 1,018 Paper - tons 355 263 726 529 Paperboard - tons 57 57 118 116 Containerboard - tons 140 88 255 169 Packaging - MSF 11,438 11,519 22,548 22,446 Recycling - tons 695 661 1,366 1,277 Total production volumes (millions) - ----------------------------------- Pulp - air-dry metric tons 498 413 1,077 908 Paper - tons 371 288 774 577 Paperboard - tons 59 51 120 115 Containerboard - tons 620 579 1,217 1,191 Packaging - MSF 12,070 12,018 23,795 23,549 Recycling - tons 1,075 972 2,102 1,926
Weyerhaeuser Company - -20- Real Estate and Related Assets The segment earned $44.9 million in the quarter compared to $16.5 million for the same quarter last year, a 172 percent increase. Revenues were $314 million, an increase of 27 percent over the second quarter 1998 revenues of $247 million. The continued strength of the real estate markets in which the company operates, primarily single family construction in Southern California, contributed to these increases. Single family closings and margins were both up significantly. Costs and Expenses Weyerhaeuser's total costs and expenses were $2.5 billion for the quarter compared to $2.3 billion in the same period last year. The increase in the costs of products sold can be attributed to an increase in sales volumes in most major product lines, offset in part by improved production efficiencies. The costs of products sold, as a percentage of net sales was 75 percent, a favorable decline from last year's second quarter percentage of 80 percent. Selling, general and administrative expenses of $194 million were up significantly over last year's expenses of $148 million. A major factor in this change is the increased accrual for employee performance incentives related to higher earnings in the current period and year to date. The increase in the real estate and related assets segment's costs and expenses can be attributed to increased sales volumes over the same period last year. Other income (expense) is an aggregation of both recurring and nonrecurring items and, as a result, can fluctuate from year to year. There were no significant individual items in 1999 or 1998. Liquidity and Capital Resources General The company is committed to the maintenance of a sound, conservative capital structure. This commitment is based upon two considerations: the obligation to protect the underlying interests of its shareholders and lenders and the desire to have access, at all times, to all major financial markets. The important elements of the policy governing the company's capital structure are as follows: . To view separately the capital structures of Weyerhaeuser Company, Weyerhaeuser Real Estate Company and related subsidiaries, given the very different nature of their assets and business activities. The amount of debt and equity associated with the capital structure of each will reflect the basic earnings capacity, real value and unique liquidity characteristics of the assets dedicated to that business. . The combination of maturing short-term debt and the structure of long-term debt will be managed judiciously to minimize liquidity risk. Operations Consolidated net cash provided by operations in the first half of 1999 increased $166 million to $456 million versus $290 million in the first half of 1998. Cash provided by operations before net changes in working capital increased $170 million compared to the first six months of 1998. Significant noncash charges were a change in an accounting principle; i.e., the write-off of unamortized capitalized start-up costs, of $90 million, net of income taxes, and a charge of $91 million for the write-down of impaired assets to fair market value. These noncash charges were offset in part by a decrease of $38 million in year-to-date net earnings compared to 1998 and an increase of $25 million in the noncash credit for pension and other postretirement benefits. Cash required for working capital by Weyerhaeuser in the first half of 1999 was $179 million, an increase of $73 million over the 1998 requirement for the same period. The negative impacts were a $137 million increase in accounts receivable, related to higher sales and revenues and an increase of $44 million in inventories, primarily in pulp and paper with the addition of the Dryden facility in late 1998. The inventory turnover rate in the current quarter was 12 turns, comparable to the year ago quarter, but higher than the 10.9 turns in the 1999 first quarter. Positive changes in working capital were a decrease of $49 million in prepaid expenses and an increase of $59 million in accounts payable and accrued liabilities as a result of higher accruals for employee incentive compensation and income taxes. Weyerhaeuser Company - -21- The real estate and related assets segment working capital provided cash of $13 million in 1999 compared to a use of $56 million in 1998, a net positive effect of $69 million. Uses included an increase of $48 million over 1998 for acquisition of land and residential lots for construction. A positive change was an increase of $51 million in accounts payable and accrued liabilities compared to a decrease of $35 million in the first six months of last year, a net improvement of $86 million. Year-to-date earnings before interest expense and income taxes plus noncash charges for the principal business segments were: . Timberlands - $286 million, comparable to $289 million in 1998. . Wood products - $338 million, double the $169 million in the same period last year. 1999 includes a noncash charge of $91 million for impairment of long-lived assets. . Pulp, paper and packaging - $261 million, essentially equal to the $258 million reported in 1998. Investing Capital expenditures for the first six months were $227 million compared to $266 million a year ago. 1999 capital spending by segment was $41 million for timberlands, $47 million for wood products, $123 million for pulp, paper and packaging and $16 million for corporate and other. The company currently anticipates capital expenditures, excluding acquisitions, to approximate $785 million for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. During the quarter, the company increased its investment in equity affiliates by $43 million, primarily in the RII Weyerhaeuser World Timberfund, L.P. as that joint venture acquired timber and sawmills in Southeast Australia. The cash needed to meet these capital expenditures, investments and other needs was generated principally from internal cash flow. In addition, the company received proceeds of $80 million from the sale of its composite business and a ply-veneer facility. Financing During the first six months of 1999, Weyerhaeuser used $177 million of cash for financing activities compared to $169 million in 1998. Debt was reduced by $88 million this year compared to an increase of $22 million in 1998. The current year debt pay-down reduced the debt to total capital ratio to 38 percent at the end of the period from 41 percent at both the 1998 first half and year-end. The real estate and related assets segment utilized internal cash flow to reduce long-term debt by $118 million in the first six months of 1999. In 1998, this segment applied cash inflows from intercompany and commercial paper borrowings to reduce long-term debt by $229 million. Cash dividends of $160 million were paid in the first six months of both 1999 and 1998. In 1999, the company received $90 million from the sale of treasury stock used in the exercising of stock options compared to $18 million in 1998. This increased activity reflects the rise in the market price of the company's common stock. In the first half of 1998, the company expended $42 million to purchase 924 thousand shares of its common stock to complete the 11 million share repurchase program that commenced in 1995. Environmental Matters During the first quarter of 1999, the National Marine Fisheries Service (NMFS) announced decisions under the Endangered Species Act (ESA) with respect to various species of fish that spawn in the Pacific Northwest (Washington, Oregon, Idaho and northern California). Several populations of chinook, chum and sockeye salmon and steelhead trout were determined to be threatened or endangered. Several other populations were proposed to be listed as threatened or endangered, listing decisions on several other populations were deferred, and designations of critical habitat were proposed for several populations. In April 1999, NMFS proposed listing cutthroat trout in portions of Washington and Oregon and delisting cutthroat trout in Oregon's Umpqua River drainage. Weyerhaeuser Company - -22- The ESA automatically prohibits the "take" of species listed as endangered and gives NMFS authority to prohibit the "take" of species it lists as threatened. NMFS announced that it intends to adopt rules to prohibit "take" of the species it has listed as threatened, except "incidental take" that may result from activities regulated under state or local programs approved by NMFS. State agencies and local governments are reviewing their environmental regulations regarding forestry and other land use activities and are considering adoption of stronger regulations to help protect habitat for such species and obtain such approvals from NMFS. Requirements to protect habitat for threatened and endangered species have resulted in restrictions in timber harvests on nonfederal timberlands, including some timberlands of the company. For example, during the second quarter of 1999, the Washington State Legislature amended that state's Forest Practices Act to implement a salmon recovery agreement negotiated among state and federal agencies, Indian tribes and forest landowner organizations. This will result in revisions to the state forest practice rules requiring additional timber to be left unharvested in riparian zones along streams and imposing added road construction and maintenance costs, partially offset by reductions in state timber harvest taxes. The company expects the new rules to require some reductions in timber harvest from its lands and other private and public lands in Washington, but does not expect these reductions to significantly impair its ability to operate its facilities or supply products to its customers. In the future, such requirements to protect habitat could result in restrictions on timber harvest and other forest management practices on some of the company's timberlands, could increase operating costs, and could affect timber supply and prices in some regions. The company does not believe that such restrictions will have a significant effect on the company's total harvest of timber in 1999 or 2000, although they may have such an effect in the future. Year 2000 Weyerhaeuser, like all other companies using computers and microprocessors, is faced with the task of addressing the Year 2000 problem before the end of 1999. The Year 2000 challenge arises from the nearly universal practice in the computer industry of using two digits rather than four digits to designate the calendar year (e.g., DD/MM/YY). This can lead to incorrect results when computer software performs arithmetic operations, comparisons or data field sorting involving years later than 1999. The company has conducted a comprehensive inventory to identify where this problem may occur in its information technology, manufacturing and facilities systems. The company is engaged in modifying or replacing its affected systems in a manner that will minimize any detrimental effects on operations and has substantially completed its goal of correcting affected systems that would have a critical effect on its business operations. While a few significant components remain uncorrected, the company believes that all such systems have been identified and has plans in place to correct such systems before the end of 1999. The company expects to complete the testing and verification of such systems during 1999. While it is difficult at present to fully quantify the overall cost of this work, the company estimates that the overall cost of remediation, including costs to be capitalized, could approach $100 million. The company presently believes that such costs will not have a material effect on the company's current financial position or liquidity; however, in any given future reporting period, such costs could have a material effect on results of operations. Through the second quarter of 1999, the company has incurred $86 million of remediation costs, of which $54 million was incurred in 1997 and 1998 and $14.6 million has been capitalized for new hardware and software. Depending on whether suppliers, customers and other entities with which the company does business are able to successfully address the Year 2000 issue, the company's results of operations could be materially adversely affected in any given future reporting period during which such a Year 2000 event occurred. As a result, the company is communicating with such entities to determine their state of readiness. The company has established a priority of such entities based on their relative criticality to the company's operations and continues to evaluate the progress of such entities based on written requests and responses in some cases and through meetings in others. The company will continue to seek and to assess information regarding Year 2000 compliance of important contracting parties. The company is also developing contingency plans to allow primary operations of the company to continue if the company's significant systems or entities with which it does business are disrupted by the Year 2000 problem. The contingency plans may include, as appropriate, increasing inventory levels, seeking alternate sources of supply, identifying manual alternatives, shifting operations and stockpiling raw materials. The company's contingency plans will continue to be reassessed and refined as more information becomes available. In addition, the company has initiated a process to develop joint contingency plans with its customers and suppliers. The company currently expects that it will be prepared in the event of systems failures to continue to do business, although such operations may be at a higher cost. Weyerhaeuser Company - -23- These estimates and conclusions contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The company's Year 2000 program is an ongoing process and current estimates of the amount of time and the costs necessary to address the Year 2000 problem are based on the facts and circumstances existing at this time. The estimates were derived using multiple assumptions of future events, including the continued availability of certain resources, implementation success and other factors. New developments may occur that could affect the company's estimates, such as the acquisition of new systems; the amount of planning and modification needed to achieve full resolution of the Year 2000 problem; the availability and cost of resources; the company's ability to discover and correct all Year 2000 sensitive computer code and equipment; and the ability of suppliers, customers and other entities to bring their systems into compliance. Acquisition During the second quarter an agreement was reached for the company to acquire MacMillan Bloedel Limited in a stock transaction valued at approximately US$2.45 billion (CDN$3.59 billion) based on the closing price of the company's stock and the value of the Canadian dollar on June 18. The boards of both companies have unanimously approved an agreement that provides MacMillan Bloedel shareholders with .28 shares of common stock in Weyerhaeuser, or .28 equivalent exchangeable shares in a new Weyerhaeuser Canadian subsidiary, for each MacMillan Bloedel share owned. The transaction is expected to close in the fourth quarter subject to normal regulatory approvals in the United States and Canada, court approval in Canada and a favorable vote by MacMillan Bloedel shareholders. Contingencies The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period such proceedings or matters could have a material effect on results of operations. Quantitative and Qualitative Disclosures About Market Risk As part of the company's financing activity, derivative securities are sometimes used to achieve the desired mix of fixed versus floating rate debt and to manage the timing of finance opportunities. The company does not hold or issue derivative financial instruments for trading. The company's derivative instruments, which are matched directly against outstanding borrowings, are "pay fixed, receive variable" interest rate swaps with highly rated counterparties in which the interest payments are calculated on a notional amount. The notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to these financial instruments; however, the company does not expect its counterparties to fail to meet their obligations. Interest rate swaps are described as follows:
Dollar amounts in millions Variable Rate at June 27, 1999 ------------------------------ Notional Maturity Fixed Fair Value Amount Date Rate % % Based On of Swap(1) -------- ---------- ------ ------ -------------------- ---------- $ 75 11/6/99(2) 6.85 5.17 30 day LIBOR $(1.3)
(1) The 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. (2) Includes the value of an option, by the counterparty, to extend for two years at maturity date. At June 27, 1999, the company had Canadian dollar contracts worth US$2 million to help meet the funding requirements of its Canadian operations at the end of the quarter. Weyerhaeuser Company - -24- Part II. Other Information Item 1. Legal Proceedings The company conducted a review of its 10 major pulp and paper facilities to evaluate the facilities' compliance with federal Prevention of Significant Deterioration (PSD) regulations. The results of the reviews were disclosed to seven state agencies and the Environmental Protection Agency (EPA) during 1994 and 1995. All PSD compliance issues identified in the review have been resolved, except for PSD issues at the company's Springfield, Oregon, containerboard facility. A final decision is expected to be made by the Lane Regional Air Pollution Control Authority (Lane County, Oregon) concerning alleged PSD and permit violations at the company's Springfield, Oregon, containerboard manufacturing facility upon issuance of the facility's Title V permit in 1999. In June 1998, a lawsuit was filed against the company in Superior Court, San Francisco County, California, on behalf of a purported class of individuals and entities that own property in the United States on which exterior hardboard siding manufactured by the company has been installed since 1981. The action alleges the company manufactured and distributed defective hardboard siding, breached express warranties and consumer protection statutes and failed to disclose to consumers the alleged defective nature of its hardboard siding. The action seeks compensatory and punitive damages, costs and reasonable attorney fees. In December 1998, the complaint was amended narrowing the purported class to individuals and entities in the state of California. In February 1999, the court entered an order certifying the class. The company has filed an appeal and the Court of Appeals has issued a stay of the certification decision pending its review. In September 1998, a lawsuit purporting to be a class action involving hardboard siding was filed against the company in Superior Court, King County, Washington. The complaint was amended, in January 1999, to allege a class consisting of individuals and entities that own homes or other structures in the United States on which exterior hardboard siding manufactured by the company at its former Klamath Falls, Oregon, facility has been installed since January 1981. The amended complaint alleges the company manufactured defective hardboard siding, engaged in unfair trade practices and failed to disclose to customers the alleged defective nature of its hardboard siding. The amended complaint seeks compensatory damages, punitive or treble damages, restitution, attorney fees, costs of the suit and such other relief as may be appropriate. In July 1999, the company's motion for summary judgment was granted in this case. A lawsuit was filed against the company in District Court, Johnson County, Texas, in June 1999. The case purports to be a class action on behalf of persons who own structures in the state of Texas with exterior hardboard siding manufactured by the company. The complaint alleges defective design, misrepresentation, negligence, breach of express warranty and fraudulent concealment. The complaint seeks unspecified compensatory damages. In July 1999, a lawsuit was filed against the company in the Court of Common Pleas, Beaufort County, South Carolina. The suit purports to be filed on behalf of all owners of residential structures or other buildings with hardboard siding manufactured by the company. The complaint alleges breach of express and implied warranties, defective design and manufacturer, fraud and violation of South Carolina's unfair trade practices act. The plaintiffs seek compensatory damages, treble damages and attorneys' fees. The company is a defendant in approximately 26 other hardboard siding cases, two of which purport to be statewide class actions on behalf of owners of property in Iowa and Oregon that contain the company's hardboard siding. In April 1999, the company received a Notice of Violation (NOV) from the Georgia Environmental Protection Department (EPD) for air emission issues at its Adel, Georgia, facility. The NOV addresses the facility's failure to satisfy the percentage of Volatile Organic Compounds (VOC) removal required for the biofilter. The NOV requires the company to submit an application for a permit amendment which contains a monitoring plan for VOC emissions, a proposed VOC mass emission limit, proof of compliance with that limit, and a detailed schedule for the installation of a continuous VOC emission monitor and flow monitor that meets state requirements. The required response to the NOV is being prepared by the company. In May 1999, two civil antitrust lawsuits were filed against the company in U.S. District Court, Eastern District of Pennsylvania. Both suits name as defendants several other major containerboard and packaging producers. The complaint in the first case alleges the defendants conspired to fix the price of linerboard and that the alleged conspiracy had the effect of increasing the price of corrugated containers. The suit purports to be a class action on behalf of purchasers of corrugated containers during the period October 1993 through November 1995. The complaint in the second case alleges that the company conspired to manipulate the price of linerboard and thereby the price of corrugated sheets. The suit purports to be a class action on behalf of purchasers of corrugated sheets during the period October 1993 through November 1995. Both suits seek damages, including treble damages, under the antitrust laws. In May 1999, the Equity Committee in the Paragon Trade Brands, Inc. bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the company in the name of the debtor's estate. Specifically, the Equity Committee seeks to assert that the company breached certain warranties in agreements entered into between Paragon and the company in connection with Paragon's public offering of common stock in Weyerhaeuser Company - -25- January 1993. The Committee seeks to recover damages sustained by Paragon as a result of two patent infringement cases, one brought by Procter & Gamble (P&G) and the other by Kimberly-Clark (KC). In its motion, the Committee alleges that the claims against the company, if proved meritorious, should result in a recovery in excess of $500 million from the company. No decision has been made by the Bankruptcy Court on the Committee's motion. The company is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," and similar state laws. The EPA and/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that any ultimate outcome resulting from these proceedings and matters, or all of them combined, would not have a material effect on the company's current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. Item 4. Submission of Matters to a Vote of Security Holders Matters voted upon and votes cast at the annual meeting of shareholders of Weyerhaeuser Company held on Tuesday, April 20, 1999, were: . The reelection of Martha R. Ingram, John I. Kieckhefer and George H. Weyerhaeuser to the board of directors.
For Withheld ----------- -------- Ingram 179,332,579 1,033,598 Kieckhefer 179,332,549 1,033,628 Weyerhaeuser 179,306,512 1,059,665
For Against Abstain --------- ----------- ----------- . Shareholder proposal relating to the phase-out of chlorine-based chemicals 7,401,733 154,238,470 9,062,422 . Shareholder proposal - on the floor submitted by B. Naylor relating to a classified board 420 180,365,757
Item 6. Exhibits and Reports on Form 8-K Exhibits 27 Financial Data Schedules Reports on Form 8-K The registrant filed reports on Form 8-K dated January 7, January 21, April 14, June 22, and July 16, 1999, reporting information under Item 5, Other Events. EX-27 2
5 1,000,000 6-MOS DEC-26-1999 JUN-27-1999 54 0 1,161 0 989 2,406 6,267 0 12,870 1,517 3,977 0 0 258 4,376 12,870 5,709 5,709 4,375 4,375 470 3 137 324 118 206 0 0 90 116 .58 .57 Receivables are stated net of allowances. Property, Plant and Equipment is stated net of accumulated depreciation.
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