-----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, G5q/zfcHV1JR4/4BCkWdYE4TVM/OHduWyTx5Raqz/XPzBTMOXTFwk67OzS2eLeHR V9SJpjMgqzC8dydclcgygQ== 0000106535-99-000044.txt : 19991115 0000106535-99-000044.hdr.sgml : 19991115 ACCESSION NUMBER: 0000106535-99-000044 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990926 FILED AS OF DATE: 19991112 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/A SEC ACT: SEC FILE NUMBER: 001-04825 FILM NUMBER: 99748202 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/A 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 thirty-nine weeks ended September 26, 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 October 29, 1999, was 201,181,958 common shares ($1.25 par value). Weyerhaeuser Company - -2- WEYERHAEUSER COMPANY AND SUBSIDIARIES Index to Form 10-Q Filing For the thirty-nine weeks ended September 26, 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 18-25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Part II. Other Information Item 1. Legal Proceedings 26-27 Item 2. Changes in Securities (not applicable) Item 3. Defaults upon Senior Securities (not applicable) Item 4. Submission of Matters to a Vote of Security Holders (not applicable) Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 27
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 thirty-nine week period ending September 26, 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 November 10, 1999 Weyerhaeuser Company -3- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED EARNINGS For the periods ended September 26, 1999 and September 27, 1998 (Dollar amounts in millions except as noted and per share data) (Unaudited)
Thirteen weeks Thirty-nine ended weeks ended -------------------- ------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales and revenues: Weyerhaeuser $ 2,809 $ 2,439 $ 7,928 $ 7,206 Real estate and related assets 311 297 901 809 --------- --------- --------- --------- Total net sales and revenues 3,120 2,736 8,829 8,015 --------- --------- --------- --------- Costs and expenses: Weyerhaeuser: Costs of products sold 2,046 1,874 5,943 5,633 Depreciation, amortization and fee stumpage 152 145 460 435 Selling, general and administrative expenses 192 174 550 485 Research and development expenses 12 12 38 41 Taxes other than payroll and income taxes 32 33 97 99 Charge for impairment of long- lived assets (Note 13) -- -- 91 -- Charge for Year 2000 remediation 4 8 31 16 --------- --------- --------- --------- 2,438 2,246 7,210 6,709 --------- --------- --------- --------- Real estate and related assets: Costs and operating expenses 257 249 735 688 Depreciation and amortization 2 1 4 4 Selling, general and administrative expenses 11 13 39 40 Taxes other than payroll and income taxes 2 2 6 7 --------- --------- --------- --------- 272 265 784 739 --------- --------- --------- --------- Total costs and expenses 2,710 2,511 7,994 7,448 --------- --------- --------- --------- Operating income 410 225 835 567 Interest expense and other: Weyerhaeuser: Interest expense incurred 62 66 196 198 Less interest capitalized 2 3 7 5 Equity in income of affiliates (Note 4) 5 5 13 20 Other income (expense), net 1 (1) 8 9 Real estate and related assets: Interest expense incurred 18 18 56 56 Less interest capitalized 15 16 45 46 Equity in income of joint ventures and limited partnerships (Note 4) 18 9 29 21 Other income (expense), net 2 2 12 5 --------- --------- --------- --------- Earnings before income taxes and cumulative effect of a change in an accounting principle 373 175 697 419 Income taxes (Note 5) 136 65 254 155 --------- --------- --------- --------- Earnings before cumulative effect of a change in an accounting principle 237 110 443 264 Cumulative effect of a change in an accounting principle (Note 1) -- -- 90 -- --------- --------- --------- --------- Net earnings $ 237 $ 110 $ 353 $ 264 ========= ========= ========= ========= Per common share (Note 2): Basic net earnings before cumulative effect of a change in an accounting principle $ 1.18 $ 0.56 $ 2.21 $ 1.33 Cumulative effect of a change in an accounting principle -- -- (0.45) -- --------- --------- --------- --------- $ 1.18 $ 0.56 $ 1.76 $ 1.33 ========= ========= ========= ========= Diluted net earnings before cumulative effect of a change in an accounting principle $ 1.18 $ 0.55 $ 2.20 $ 1.32 Cumulative effect of a change in an accounting principle -- -- (0.44) -- --------- --------- --------- --------- $ 1.18 $ 0.55 $ 1.76 $ 1.32 ========= ========= ========= ========= Dividends paid per share $ .40 $ .40 $ 1.20 $ 1.20 ========= ========= ========= =========
See Accompanying Notes to Financial Statements Weyerhaeuser Company - -4- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED BALANCE SHEET September 26, 1999 and December 27, 1998 (Dollar amounts in millions)
Sept. 26, Dec. 27, 1999 1998 ----------- --------- (Unaudited) Assets - ------ Weyerhaeuser Current assets: Cash and short-term investments (Note 1) $ 124 $ 28 Receivables, less allowances 1,080 886 Inventories (Note 6) 968 962 Prepaid expenses 277 294 ----------- --------- Total current assets 2,449 2,170 Property and equipment (Notes 7 and 13) 6,166 6,692 Construction in progress 442 315 Timber and timberlands at cost, less fee stumpage charged to disposals 1,023 1,013 Investments in and advances to equity affiliates (Notes 4 and 11) 534 482 Other assets and deferred charges 373 262 ----------- --------- 10,987 10,934 ----------- --------- Real estate and related assets Cash and short-term investments 4 7 Receivables, less discounts and allowances 90 81 Mortgage-related financial instruments, less discounts and allowances 87 119 Real estate in process of development and for sale 578 584 Land being processed for development 946 854 Investments in and advances to joint ventures and limited partnerships, less reserves (Note 4) 123 120 Other assets 134 135 ----------- --------- 1,962 1,900 ----------- --------- Total assets $ 12,949 $12,834 =========== =========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -5-
Sept. 26, Dec. 27, 1999 1998 ----------- --------- (Unaudited) Liabilities and shareholders' interest - -------------------------------------- Weyerhaeuser Current liabilities: Notes payable $ 4 $ 5 Current maturities of long-term debt 92 88 Accounts payable (Note 1) 729 699 Accrued liabilities (Note 8) 732 707 ----------- --------- Total current liabilities 1,557 1,499 Long-term debt (Note 10) 3,179 3,397 Deferred income taxes (Note 5) 1,482 1,404 Deferred pension, other postretirement benefits and other liabilities 531 488 Commitments and contingencies (Note 14) ----------- --------- 6,749 6,788 Real estate and related assets Notes payable and commercial paper 571 564 Long-term debt (Note 10) 493 701 Other liabilities 350 255 Commitments and contingencies (Note 14) ----------- --------- 1,414 1,520 ----------- --------- Total liabilities 8,163 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) (152) (208) Retained earnings 4,485 4,372 Treasury common shares, at cost: 4,892,147 and 7,063,917 (216) (312) ----------- --------- Total shareholders' interest 4,786 4,526 ----------- --------- Total liabilities and shareholders' interest $ 12,949 $12,834 =========== =========
Weyerhaeuser Company - -6- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ CONSOLIDATED STATEMENT OF CASH FLOWS For the thirty-nine week periods ended September 26, 1999 and September 27, 1998 (Dollar amounts in millions) (Unaudited)
Consolidated ---------------------- Sept. 26, Sept. 27, 1999 1998 ----------- --------- Cash provided by (used for) operations: Net earnings $ 353 $ 264 Noncash charges (credits) to income: Depreciation, amortization and fee stumpage 464 439 Deferred income taxes, net 141 120 Pension and other postretirement benefits (67) (27) Equity in (income) loss of affiliates, joint ventures and limited partnerships (42) (41) 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 (201) (58) Inventories, real estate and land (82) (12) Prepaid expenses 10 18 Mortgage-related financial instruments 17 24 Accounts payable and accrued liabilities 131 (71) (Gain) loss on disposition of assets 18 5 Other (7) (35) ----------- --------- Net cash provided by (used for) operations 916 626 ----------- --------- Cash provided by (used for) investing activities: Property and equipment (301) (365) Timber and timberlands (35) (48) Investments in and advances to equity affiliates (23) 20 Proceeds from sale of: Property and equipment 9 33 Businesses 80 -- Mortgage-related financial instruments 16 48 Restructuring the ownership of a subsidiary (Note 11) -- 218 Intercompany advances -- -- Other 11 (6) ----------- --------- Net cash provided by (used for) investing activities (243) (100) ----------- --------- Cash provided by (used for) financing activities: Issuances of debt 34 158 Sale of industrial revenue bonds -- 48 Notes and commercial paper borrowings, net (128) 254 Cash dividends (240) (239) Intercompany cash dividends -- -- Payments on debt (322) (511) Purchase of treasury common shares -- (42) Exercise of stock options 91 18 Other (15) (2) ----------- --------- Net cash provided by (used for) financing activities (580) (316) ----------- --------- Net increase (decrease) in cash and short-term investments 93 210 Cash and short-term investments at beginning of year 35 122 ----------- --------- Cash and short-term investments at end of period $ 128 $ 332 =========== ========= Cash paid (received) during the period for: Interest, net of amount capitalized $ 237 $ 247 =========== ========= Income taxes $ 18 $ 65 =========== =========
See Accompanying Notes to Financial Statements Weyerhaeuser Company -7-
Real Estate and Weyerhaeuser Related Assets - --------------------- -------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1999 1998 1999 1998 - --------- --------- --------- --------- $ 261 $ 213 $ 92 $ 51 460 435 4 4 134 106 7 14 (66) (26) (1) (1) (13) (20) (29) (21) 142 -- -- -- (52) -- -- -- 91 -- -- -- (194) (26) (7) (32) (17) 30 (65) (42) 10 18 -- -- -- -- 17 24 56 (90) 75 19 18 14 -- (9) (6) (23) (1) (12) - --------- --------- --------- --------- 824 631 92 (5) - --------- --------- --------- --------- (292) (363) (9) (2) (35) (48) -- -- (49) (6) 26 26 8 14 1 19 80 -- -- -- -- -- 16 48 -- 218 -- -- (72) (39) 72 39 11 (5) -- (1) - --------- --------- --------- --------- (349) (229) 106 129 - --------- --------- --------- --------- 32 4 2 154 -- 48 -- -- (134) (69) 6 323 (240) (239) -- -- -- 190 -- (190) (113) (82) (209) (429) -- (42) -- -- 91 18 -- -- (15) (2) -- -- - --------- --------- --------- --------- (379) (174) (201) (142) - --------- --------- --------- --------- 96 228 (3) (18) 28 100 7 22 - --------- --------- --------- --------- $ 124 $ 328 $ 4 $ 4 ========= ========= ========= ========= $ 224 $ 230 $ 13 $ 17 ========= ========= ========= ========= $ 16 $ 26 $ 2 $ 39 ========= ========= ========= =========
Weyerhaeuser Company - -8- WEYERHAEUSER COMPANY AND SUBSIDIARIES ____________ NOTES TO FINANCIAL STATEMENTS For the thirty-nine week periods ended September 26, 1999 and September 27, 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 provided 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 required 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 $75 million and $102 million at September 26, 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 $248 million and $253 million at September 26, 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 $220 million and $228 million greater at September 26, 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 $126 million and $139 million at September 26, 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 Thirty-nine ended weeks ended -------------------- ------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1999 1998 1999 1998 --------- --------- --------- --------- Weighted average shares outstanding (thousands): Basic 200,307 198,886 200,307 198,886 Dilutive effect of stock options 854 101 765 359 --------- -------- -------- --------- Diluted weighted average shares outstanding 201,161 198,987 201,072 199,245 ========= ========= ========= =========
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 thirty-nine weeks ended September 26, 1999. Options to purchase 595,094 shares at $56.78 per share, 1,347,730 shares at $51.09 per share and 150,000 shares at $53.06 per share were outstanding during the thirty- nine weeks ending September 27, 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 The company's comprehensive income (expense) is as follows:
Thirteen weeks Thirty-nine ended weeks ended ------------------- ------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, Dollar amounts in millions 1999 1998 1999 1998 --------- --------- --------- --------- Net earnings $ 237 $ 110 $ 353 $ 264 Other comprehensive income (expense): Foreign currency translation adjustments (8) (33) 67 (72) Income tax (expense) on foreign currency translation adjustments 2 13 (11) 27 --------- --------- --------- --------- Comprehensive income $ 231 $ 90 $ 409 $ 219 ========= ========= ========= =========
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, the second 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 1999 second 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, has the responsibility for all management and marketing activities of this acquisition. . North Pacific Paper Corporation - A 50 percent owned joint venture that operates 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:
Sept. 26, Dec. 27, Dollar amounts in millions 1999 1998 ----------- --------- Current assets $ 224 $ 166 Noncurrent assets 1,437 1,334 Current liabilities 175 80 Noncurrent liabilities 675 703
Thirteen weeks Thirty-nine ended weeks ended ------------------- ------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales and revenues $ 203 $ 163 $ 544 $ 516 Operating income 19 20 66 80 Net income (loss) 8 7 17 38
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:
Sept. 26, Dec. 27, Dollar amounts in millions 1999 1998 ----------- --------- Current assets $ 7,423 $1,755 Noncurrent assets 159 230 Current liabilities 6,630 1,241 Noncurrent liabilities 111 136
Thirteen weeks Thirty-nine ended weeks ended ------------------- ------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales and revenues $ 200 $ 54 $ 426 $ 148 Operating income 86 22 227 67 Net income 70 16 183 45
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: Thirty-nine weeks ended -------------------- Sept. 26, Sept. 27, Dollar amounts in millions 1999 1998 --------- --------- Federal: Current $ 76 $ 26 Deferred 112 95 --------- --------- 188 121 --------- --------- State: Current 13 6 Deferred 5 4 --------- --------- 18 10 --------- --------- Foreign: Current 24 3 Deferred 24 21 --------- --------- 48 24 --------- --------- Income taxes before cumulative effect of a change in an accounting principle 254 155 Deferred taxes applicable to the cumulative effect of a change in an accounting principle (52) -- --------- --------- $ 202 $ 155 ========= =========
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 September 26, 1999, and September 27, 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 thirty-nine week periods ended September 26, 1999, and September 27, 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
Sept. 26, Dec. 27, Dollar amounts in millions 1999 1998 ----------- --------- Logs and chips $ 84 $ 108 Lumber, plywood and panels 163 143 Pulp and paper 167 190 Containerboard, paperboard and packaging 117 96 Other products 166 150 Materials and supplies 271 275 ----------- --------- $ 968 $ 962 =========== =========
Note 7: Property and Equipment
Sept. 26, Dec. 27, Dollar amounts in millions 1999 1998 ----------- --------- Property and equipment, at cost: Land $ 152 $ 157 Buildings and improvements 1,689 1,667 Machinery and equipment 9,361 9,732 Rail and truck roads 562 555 Other 109 111 11,873 12,222 Less allowance for depreciation and amortization 5,707 5,530 ----------- --------- $ 6,166 $ 6,692 =========== =========
Note 8: Accrued Liabilities
Sept. 26, Dec. 27, Dollar amounts in millions 1999 1998 ----------- --------- Payroll - wages and salaries, incentive awards, retirement and vacation pay $ 297 $ 305 Taxes - social security and real and personal property 53 46 Interest 52 87 Income taxes 79 16 Other 251 253 ----------- --------- $ 732 $ 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 $515 million and $650 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at September 26, 1999, and December 27, 1998, respectively. No portion of these lines has been availed of by the company or WRECO at September 26, 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, had a set of term credit facility agreements with a group of banks that provided for borrowings of up to $175 million as of December 27, 1998. $100 million was outstanding under these agreements at December 27, 1998. During the third quarter of 1999, the last of these agreements were repaid and subsequently canceled. 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 $59 million and $192 million as of September 26, 1999, and December 27, 1998, respectively. No portion of these lines has been availed of by the company, WRECO or WFS at September 26, 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 6,419,000 shares at September 26, 1999, and 7,230,000 shares at December 27, 1998. Cumulative Other Comprehensive (Expense) The company's cumulative other comprehensive (expense) includes:
Sept. 26, Dec. 27, Dollar amounts in millions 1999 1998 ----------- --------- Foreign currency translation adjustments $ (144) $ (200) Minimum pension liability adjustment (8) (8) ----------- --------- $ (152) $ (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 - -14- 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 $336 million year to date compared to $413 million for the same period in 1998 and $615 million for the year 1998. They are expected to be approximately $550 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: Subsequent Event The company completed the acquisition of MacMillan Bloedel Limited on November 1 following the approval of the transaction by the shareholders of MacMillan Bloedel on October 28 and securing all regulatory approvals in the United States, Canada and other jurisdictions. This completes a process which commenced in the second quarter when an agreement was reached for the company to acquire MacMillan Bloedel in a stock transaction valued at approximately US$2.4 billion (CDN$3.5 billion). This value was based on the average price of the company's stock, calculated using the four-day trading period - June 17 through June 22, and the number of MacMillan Bloedel common shares, warrants and stock options outstanding at June 21. The agreement provides MacMillan Bloedel shareholders with .28 shares of common stock in Weyerhaeuser, or .28 equivalent exchangeable shares in Weyerhaeuser Company Limited, a new Weyerhaeuser Canadian subsidiary, for each MacMillan Bloedel share owned. The company will account for this transaction using the purchase method of business combination. Note 16: 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 Thirty-nine ended weeks ended ------------------- ------------------- Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1999 1998 1999 1998 --------- --------- --------- --------- Sales to and revenues from unaffiliated customers: Timberlands $ 166 $ 141 $ 495 $ 457 Wood products 1,337 1,192 3,865 3,370 Pulp, paper and packaging 1,253 1,068 3,435 3,269 Real estate and related assets 311 297 901 809 Corporate and other 53 38 133 110 --------- --------- --------- --------- 3,120 2,736 8,829 8,015 --------- --------- --------- --------- Intersegment sales: Timberlands 132 114 383 371 Wood products 65 45 162 142 Pulp, paper and packaging 26 13 82 49 Corporate and other 4 4 8 11 --------- --------- --------- --------- 227 176 635 573 --------- --------- --------- --------- Total sales and revenues 3,347 2,912 9,464 8,588 Intersegment eliminations (227) (176) (635) (573) --------- --------- --------- --------- $ 3,120 $ 2,736 $ 8,829 $ 8,015 ========= ========= ========= ========= Approximate contribution (charge) to earnings (1): Timberlands $ 130 $ 104 $ 392 $ 368 Wood products 202 87 363 166 Pulp, paper and packaging 105 67 180 160 Real estate and related assets (1) 56 38 147 79 Corporate and other (60) (58) (196) (161) --------- --------- --------- --------- 433 238 886 612 Interest expense 62 66 196 198 Less capitalized interest 2 3 7 5 --------- --------- --------- --------- Earnings before income taxes and the cumulative effect of a change in an accounting principle 373 175 697 419 Income taxes 136 65 254 155 --------- --------- --------- --------- Earnings before the cumulative effect of a change in an accounting principle 237 110 443 264 Cumulative effect of a change in an accounting principle -- -- 90 -- --------- --------- --------- --------- $ 237 $ 110 $ 353 $ 264 ========= ========= ========= =========
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 $4 million and $5 million for the thirteen weeks and $12 million and $16 million for the thirty-nine weeks ended September 26, 1999, and September 27, 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 third quarter were $237 million, or $1.18 basic and diluted earnings per common share, an increase of 115 percent over 1998 third quarter earnings of $110 million, or 56 cents earnings per common share basic (55 cents diluted). The quarter's results for all business segments improved significantly compared to the same period last year. The Pulp, Paper and Packaging segment had its strongest quarter results since the first quarter of 1996. The Wood Products segment produced its second consecutive quarter of record earnings while the improvement in the Timberlands segment reflected the ongoing improvement in Japanese housing. Consolidated net sales and revenues for the quarter were $3.1 billion, an increase of 14 percent over the $2.7 billion reported in the same period last year. This increase was evenly distributed between price improvement and volume increases. Year to date, the company reported net income of $353 million, or $1.76 basic earnings and diluted per common share compared to $264 million, or $1.33 basic earnings per common share ($1.32 diluted) 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 $503 million, or $2.51 per common share, a 91 percent improvement over 1998 results of $264 million, or $1.33 per common share. Consolidated net sales and revenues year to date were $8.8 billion, up 10 percent from $8 billion in the prior year. Timberlands Third quarter operating earnings for the timberlands segment were $130 million, a 25 percent increase over $104 million reported last year. Year- to-date operating profit of $392 million is ahead of $368 million in 1998. Sales to unaffiliated customers in the quarter were $166 million, up 18 percent from $141 million in the 1998 third quarter. Intersegment sales were $132 million compared to $114 million reported a year ago. Export log volumes were stable throughout the quarter and remain above last year's levels, a reflection of the gradual recovery in Japanese housing and the general stability in U.S. timber markets. Raw material sales volumes to unaffiliated customers were 72 and 212 million cubic feet for the quarter and year to date, respectively, compared to 68 and 185 million cubic feet, respectively, in the same periods of 1998. Log production for the Timberlands segment was 129 and 386 million cubic feet for the quarter and year to date, respectively, compared to 120 and 368 million cubic feet, respectively, in 1998. Wood Products This segment reported record operating earnings of $202 million for the quarter, a 132 percent increase over $87 million in the same quarter last year. This brings operating earnings for the nine months up to $363 million, 119 percent over last year's $166 million. Weyerhaeuser Company -19- Sales were $1.3 billion, up 12 percent from $1.2 billion in the third quarter of 1998. Results for all product lines increased significantly from a year ago due to the continued strong demand in the U.S. market. Prices for most products declined during the quarter, but remained above 1998 levels as residential construction enters its traditional seasonal slowdown. The company completed the sale of its composite products business and a ply- veneer facility to SierraPine Limited during the second quarter of 1999. Third party sales and total production volumes for the major products in this segment are as follows:
Thirteen weeks Thirty-nine ended weeks ended ------------------- ------------------- Third party Sept. 26, Sept. 27, Sept. 26, Sept. 27, sales volumes (millions) 1999 1998 1999 1998 - ------------------------- --------- --------- --------- --------- Softwood lumber - board feet 1,408 1,276 4,122 3,701 Softwood plywood and veneer - square feet (3/8") 476 474 1,394 1,388 Composite panels - square feet (3/4") 54 146 333 444 Oriented strand board - square feet (3/8") 616 686 1,960 2,032 Hardwood lumber - board feet 97 80 300 250 Engineered wood products - lineal feet 47 47 131 123 Hardwood doors (thousands) 193 208 567 611 Raw materials - cubic feet 67 80 200 234 Total production volumes (millions) - -------------------- Softwood lumber - board feet 1,067 987 3,260 3,012 Softwood plywood and veneer - square feet (3/8") 260 243 773 729 Composite panels - square feet (3/4") 18 128 246 386 Oriented strand board - square feet (3/8") 589 553 1,726 1,624 Hardwood lumber - board feet 95 84 286 258 Hardwood doors (thousands) 194 201 564 617 Logs - cubic feet 132 126 384 371
Pulp, Paper and Packaging Operating earnings for the quarter were $105 million, a 57 percent increase from $67 million reported in the third quarter of 1998. Year-to- date operating earnings are $180 million compared to $160 million last year. The quarter's sales were $1.3 billion, or 17 percent higher than the $1.1 billion reported in the same quarter a year ago. The markets for pulp, containerboard packaging and fine paper continued to strengthen throughout the quarter primarily due to improvements in the global economy. Costs associated with downtime in North Carolina from Hurricane Floyd and related flooding were offset by continued operational improvements the company is making in the businesses. Weyerhaeuser Company - -20- Third party sales and total production volumes for the major products in this segment are as follows:
Thirteen weeks Thirty-nine ended weeks ended ------------------- ------------------- Third party Sept. 26, Sept. 27, Sept. 26, Sept. 27, sales volumes (thousands) 1999 1998 1999 1998 - -------------------------- --------- --------- --------- --------- Pulp - air-dry metric tons 561 481 1,675 1,499 Paper - tons 360 293 1,086 822 Paperboard - tons 65 59 183 175 Containerboard - tons 118 76 373 245 Packaging - MSF 11,329 11,065 33,877 33,511 Recycling - tons 709 618 2,075 1,895 Total production volumes (thousands) - --------------------- Pulp - air-dry metric tons 555 513 1,632 1,421 Paper - tons 343 275 1,117 852 Paperboard - tons 68 60 188 175 Containerboard - tons 634 580 1,851 1,771 Packaging - MSF 11,626 11,535 35,421 35,084 Recycling - tons 1,064 942 3,166 2,868
Real Estate and Related Assets The segment earned $56 million in the quarter, a 47 percent increase over the $38 million for the same quarter last year. Year-to-date operating earnings of $147 million exceed last year's earnings of $79 million by 86 percent. Revenues for the quarter were $311 million compared to third quarter 1998 revenues of $297. These increases in operating income and revenues are due to an increase in single family closings, especially in Southern California. Costs and Expenses Weyerhaeuser's total costs and expenses were $2.4 billion for the quarter, a 9 percent increase over the $2.2 billion incurred in the same period last year. The increase in the costs of products sold is the net effect of an increase in sales volumes, primarily the lumber, pulp and paper product lines, offset in part by improved production efficiencies and lower costs. The costs of products sold, as a percentage of net sales, were 73 percent, a favorable decline from last year's third quarter percentage of 77 percent. Selling, general and administrative expenses of $192 million were up significantly over last year's expenses of $174 million, primarily from an increase in accruals for employee performance incentives related to higher earnings in both 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. Weyerhaeuser Company -21- . The combination of maturing short-term debt and the structure of long- term debt will be managed judiciously to minimize liquidity risk. Operations Nine months year-to-date consolidated net cash provided by operations increased $290 million, or 46 percent, to $916 million versus $626 million in the same period of 1998. Cash provided by operations before net changes in working capital increased $316 million over 1998, primarily from an increase of $89 million in net earnings and two noncash charges. These charges were the result of a change in an accounting principle of $90 million, net of income taxes, related to the write-off of unamortized capitalized start-up costs and a $91 million write-down of impaired assets to fair market value. The noncash credits for pension and other postretirement benefits increased by $40 million over the prior year. Net cash required for working capital by Weyerhaeuser in the first nine months of 1999 was $145 million, an increase of $77 million over the 1998 requirement for the same period. The negative impacts were a $168 million increase in accounts receivable, related to higher sales and revenues compared to 1998, and an increase of $47 million in inventories, primarily in pulp and paper with the addition of the Dryden facility in late 1998. The product inventory turnover rate of 12.4 turns in the current quarter was slightly better than the 12.0 for the same quarter last year. A positive change in working capital was the increase of $146 million in accounts payable and accrued liabilities as a result of higher accruals for employee incentive compensation and income taxes. The real estate and related assets segment working capital provided cash of $20 million in 1999 compared to a use of $31 million in 1998, a net positive effect of $51 million. Uses included $65 million for acquisition of land and residential lots for construction. On the positive side, this segment increased accounts payable and accrued liabilities by $75 million compared to an increase of $19 million in the first nine months of last year, a net improvement of $56 million. Accrued income taxes accounted for $40 million while accounts payable increase amounted to $27 million. Year-to-date earnings before interest expense and income taxes plus noncash charges for the principal business segments were: . Timberlands - $429 million comparable to $426 million in the prior year. . Wood products - $676 million, an increase of 138 percent over 1998, due primarily to earnings and a noncash charge of $91 million for impairment of long-lived assets. . Pulp, paper and packaging - $456 million compared to $405 million in 1998 with increased earnings and noncash charges contributing equally. Investing Capital expenditures for the first nine months were $336 million, a decrease of $77 million, compared to $413 million a year ago. 1999 capital spending by segment was $52 million for timberlands, $73 million for wood products, $185 million for pulp, paper and packaging and $26 million for corporate and other. The company has reduced expected capital expenditures, excluding acquisitions, to approximately $550 million for the year; however, this expenditure level could increase or decrease as a consequence of future economic conditions. In 1999, Weyerhaeuser increased its investment in equity affiliates by $49 million, primarily in the RII Weyerhaeuser World Timberfund, L.P. joint venture that 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 nine months of 1999, Weyerhaeuser used $379 million of cash for financing activities compared to $174 million in 1998. Weyerhaeuser Company - -22- Debt was reduced by $215 million this year compared to a net decrease of $99 million in 1998. The current year debt pay-down reduced the debt to total capital ratio to 36 percent at the end of September compared to 38 percent a year ago. In 1998, Weyerhaeuser received $190 million in dividends from its real estate subsidiary, which were eliminated upon consolidation. Cash dividends of $240 million were paid in the first nine months of 1999; essentially the same as the $239 million paid in 1998. The real estate and related assets segment utilized internal cash flow to reduce long-term debt by $201 million in the first nine months of 1999. In 1998, this segment issued debt of $154 million and increased commercial paper borrowings by $323 million to pay down other long-term debt of $429 million and fund the $190 million intercompany dividends to Weyerhaeuser. In 1999, the company received $91 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. During 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. 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 implemented a structured, companywide program to identify and eliminate Year 2000 problems. The program consists of the following phases: 1) a comprehensive inventory, 2) assessment of business criticality, 3) technical assessment of potential Year 2000 failures, 4) remediation, 5) final testing, 6) analysis of the Year 2000 status of business partners, and 7) contingency planning. The review of its systems is divided into three primary areas: information technology, manufacturing and facilities systems. The company's priority has been to modify or replace its affected systems that would have a critical effect on its business operations and, secondarily, those systems that would be required to be corrected at some point in order to maintain the most efficient business operations. The first three phases have been completed. In addition, the company has essentially completed its goal of correcting and testing all those affected systems identified as critical across the company and has substantially completed its goal of correcting and testing required systems. Weyerhaeuser's information technology systems include such common business applications as payroll, human resources, sales order entry, inventory and raw materials management, finance and accounting. Affected information technology systems that are critical to business operations have been essentially corrected and tested. Competition for resources, the need to coordinate schedules with equipment outages and work on other systems, and the phased in outsourcing of certain systems delayed the completion of the company's goal with regard to a few remaining systems, but the company expects to complete testing and verification of these systems before the end of 1999. Manufacturing systems include process control systems as well as embedded technology, such as chips embedded in various machine components, that may monitor and regulate power, emissions or production operations. Remediation and testing of all manufacturing systems identified as critical to the company's operations has been completed. Facilities systems include building infrastructure, such as heating and air conditioning systems, security access and alarm systems and telephone and voice mail systems used in the company's offices and plants. Remediation and testing of critical facilities systems has been essentially completed though the replacement of a few affected phone and voice mail systems is expected to be completed before the end of 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. Through the third quarter of 1999, the company has incurred $90 million of remediation costs, of which $54 million was incurred in 1997 and 1998 and $15 million has been capitalized for new hardware and software. Weyerhaeuser Company -23- 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. Written information regarding their Year 2000 compliance has been received from a substantial percentage of such entities indicating that they have corrected or expect to correct their internal Year 2000 issues in a timely manner. The company continues to evaluate their progress 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. Approaches to reduce the risk of interruptions to business operations caused by Year 2000 issues of such entities varies by business and facility, but the small percentage of suppliers who have been deemed to be of high risk to the company (either because they have not responded to the company's inquiries or because their responses have not been fully satisfactory) have been notified that they may be replaced. The company has developed 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. 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. 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. 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. Weyerhaeuser Company - -24- The company has established reserves for remediation costs on all of the approximately 100 active environmental sites across our operations as of the end of September 1999 in the aggregate amount of $40 million, up from $32 million at the end of 1998. This increase reflects the incorporation of new information on all sites concerning remediation alternatives, updates on prior cost estimates and new sites (none of which were significant) less the costs incurred to remediate these sites during this period. The company has accrued $16 million and $12 million remediation costs into this reserve during the first nine months of 1999 and 1998, respectively. The company incurred remediation costs of $8 million and $9 million during the first nine months of 1999 and 1998, respectively, and charged these costs against the reserve. Legal Proceedings The company is a defendant in hardboard siding cases that can be divided into two types: . Purported class actions. Of the nine class action cases that have been filed against the company since November 1996: - Four have been resolved without a class being certified. In one of those cases the plaintiffs have filed a petition for reconsideration, which is under review by the court. - Three cases were filed in 1999 and are, therefore, in the early stages of discovery. - One case has been dormant since 1997, but a certification hearing has been scheduled for the first quarter of 2000. - A class of plaintiffs has been certified in one case in California. Certification has been stayed pending review by the Court of Appeals. . Primarily multi-family and residential development cases. - Two cases have gone to trial. One resulted in a jury verdict in favor of the company and the other in a judgment for the plaintiffs of approximately $3.5 million, representing a jury verdict that the company was responsible for 20% of the plaintiff's losses, and 80% were caused by construction defects attributable to the general contractor and certain subcontractors. The company has appealed this decision and has established a reserve in the amount of the judgment. - Twenty-six cases of this type are pending. No pattern was developed that would allow the company to establish a reserve beyond what the company has already established for the existing jury verdict. The company also has hardboard siding product claims that have not been, nor are they anticipated to be, significant in relation to the company's results of operations. Contingencies As stated above, 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. Acquisition of MacMillan Bloedel Limited The acquisition of MacMillan Bloedel Limited was completed on November 1 following the approval of the transaction by the shareholders of MacMillan Bloedel on October 28 and securing all regulatory approvals in the United States, Canada and other jurisdictions. This completes a process which commenced in the second quarter when an agreement was reached for the company to acquire MacMillan Bloedel in a stock transaction valued at approximately US$2.4 billion (CDN$3.5 billion). This value was based on the average price of the company's stock, calculated using the four-day trading period - June 17 through June 22, and the number of MacMillan Bloedel common shares, warrants and stock options outstanding at June 21. The agreement provides MacMillan Bloedel shareholders with .28 shares of common stock in Weyerhaeuser, or .28 equivalent exchangeable shares in Weyerhaeuser Company Limited, a new Weyerhaeuser Canadian subsidiary, for each MacMillan Bloedel share owned. The company will account for this transaction using the purchase method of business combination. Weyerhaeuser Company -25- Other In October, the company announced a new initiative to streamline and improve delivery of internal support services that is expected to result in $150 to $200 million in annual savings. The company expects implementation of these plans to begin during the fourth quarter, a process that may take up to three years to complete. Because implementation plans are still under review, the specific number of employees affected, exact timing of the implementation and associated costs have not been finalized. 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 Sept. 26, 1999 ---------------------- Notional Maturity Fixed Rate Fair Value Amount Date % % Based On of Swap (1) - --------- --------- ---------- ----- ------------ ----------- $75 11/6/99 (2) 6.85 5.38 30 day LIBOR $(2.3)
(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. Weyerhaeuser Company - -26- 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. The plaintiffs have filed a petition for reconsideration which is under review by the court. 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 28 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 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 ("the Committee") in the Paragon Trade Brands, Inc. bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for authority to prosecute claims against the company in the name of the debtor's estate. Specifically, the 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 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 September 1999, the court authorized the Committee to commence an adversary proceeding against the company. The Committee commenced this proceeding in October 1999, seeking damages in excess of $420 million against the company. Weyerhaeuser Company -27- 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 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, July 16, September 21, and October 15, 1999, reporting information under Item 5, Other Events. The registrant filed a report on Form 8-K dated November 9, 1999, reporting information under Item 2, Acquisition or Disposition of Assets and Item 7, Financial Statements and Exhibits. EX-27 2
5 9-MOS DEC-26-1999 SEP-26-1999 128 0 1,170 0 968 2,449 6,166 0 12,949 1,557 3,672 0 0 258 4,528 12,949 8,829 8,829 6,678 6,678 658 6 200 697 254 443 0 0 90 353 1.76 1.76 Receivables are stated net of allowances. Property, plant and equipment is stated net of accumulated depreciation.
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