SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the twenty-six weeks ended June 30, 2002, or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-4825
WEYERHAEUSER COMPANY
A Washington Corporation (IRS Employer Identification
No. 91-0470860)
Federal Way, Washington 98063-9777
Telephone (253) 924-2345
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------------------ -------------------------
Common Shares ($1.25 par value) Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Exchangeable Shares (no par value) Toronto Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's class of common stock,
as of August 2, 2002, was 218,947,009 common shares ($1.25 par value).
Weyerhaeuser Company
- -2-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the twenty-six weeks ended June 30, 2002
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings 3
Consolidated Balance Sheet 4-5
Consolidated Statement of Cash Flows 6-7
Notes to Financial Statements 8-25
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 26-34
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34-35
Part II. Other Information
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 37
Item 3. Defaults upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders 37-38
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 38
The financial information included in this report has been prepared in
conformity with accounting practices and methods reflected in the financial
statements included in the annual report (Form 10-K) filed with the
Securities and Exchange Commission for the year ended December 30, 2001.
Though not audited by independent public accountants, the financial
information reflects, in the opinion of management, all adjustments necessary
to present a fair statement of results for the interim periods indicated.
The results of operations for the twenty-six week period ending June 30,
2002, should not be regarded as necessarily indicative of the results that
may be expected for the full year.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WEYERHAEUSER COMPANY
By /s/ Steven J. Hillyard
--------------------------
Steven J. Hillyard
Duly Authorized Officer and
Principal Accounting Officer
August 14, 2002
Weyerhaeuser Company
- -3-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENT OF EARNINGS
For the periods ended June 30, 2002 and July 1, 2001
(Dollar amounts in millions except as noted and per-share data)
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales and revenues:
Weyerhaeuser $ 4,528 $ 3,471 $ 8,140 $ 6,690
Real estate and related assets 421 371 817 705
-------- -------- -------- --------
Total net sales and revenues 4,949 3,842 8,957 7,395
-------- -------- -------- --------
Costs and expenses:
Weyerhaeuser:
Costs of products sold 3,546 2,644 6,394 5,136
Depreciation, amortization
and fee stumpage 311 214 575 425
Selling expenses 116 100 219 191
General and administrative expenses 231 182 417 353
Research and development expenses 13 14 25 27
Taxes other than payroll
and income taxes 53 38 91 75
Other operating costs, net (Note 6) (27) 21 (23) 53
Charges for integration of
facilities (Note 15) 23 10 25 19
Charges for closure of
facilities (Note 16) 28 -- 55 --
-------- -------- -------- --------
4,294 3,223 7,778 6,279
-------- -------- -------- --------
Real estate and related assets:
Costs and operating expenses 317 280 608 523
Depreciation and amortization 1 2 3 3
Selling expenses 24 19 45 38
General and administrative expenses 11 13 21 26
Taxes other than payroll
and income taxes 1 1 2 3
Other operating costs, net (Note 6) 2 (1) (6) (2)
-------- -------- -------- --------
356 314 673 591
-------- -------- -------- --------
Total costs and expenses 4,650 3,537 8,451 6,870
-------- -------- -------- --------
Operating income 299 305 506 525
Interest expense and other:
Weyerhaeuser:
Interest expense incurred (222) (87) (365) (175)
Less interest capitalized 16 6 20 10
Equity in income (loss) of
affiliates (Note 5) (2) 15 (6) 30
Interest income and other 6 4 11 10
Real estate and related assets:
Interest expense incurred (13) (18) (26) (37)
Less interest capitalized 13 17 26 33
Equity in income of
unconsolidated entities (Note 5) 6 3 12 17
Interest income and other 8 3 14 5
-------- -------- -------- --------
Earnings before income taxes and
extraordinary item 111 248 192 418
Income taxes (Note 7) (39) (77) (67) (140)
-------- -------- -------- --------
Earnings before extraordinary item 72 171 125 278
Extraordinary item, net of
tax benefit of $12 (Note 17) -- -- (23) --
-------- -------- -------- --------
Net earnings $ 72 $ 171 $ 102 $ 278
======== ======== ======== ========
Basic and diluted net earnings per share (Note 2):
Before extraordinary item $ 0.32 $ 0.78 $ 0.56 $ 1.27
Extraordinary item (Note 17) -- -- (0.10) --
-------- -------- -------- --------
Basic and diluted net earnings $ 0.32 $ 0.78 $ 0.46 $ 1.27
======== ======== ======== ========
Dividends paid per share $ 0.40 $ 0.40 $ 0.80 $ 0.80
======== ======== ======== ========
See Accompanying Notes to Financial Statements
Weyerhaeuser Company
- -4-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
------------------------------
CONSOLIDATED BALANCE SHEET
June 30, 2002 and December 30, 2001
(Dollar amounts in millions)
(Unaudited)
June 30, Dec. 30,
2002 2001
-------- --------
Assets
- ------
Weyerhaeuser
Current assets:
Cash and cash equivalents (Note 1) $ 141 $ 202
Receivables, less allowances 1,649 1,024
Inventories (Note 8) 2,012 1,428
Prepaid expenses 550 407
-------- --------
Total current assets 4,352 3,061
Property and equipment (Note 9) 12,362 8,309
Construction in progress 1,360 428
Timber and timberlands at cost,
less fee stumpage charged to disposals 4,472 1,789
Investments in and advances to equity affiliates (Note 5) 547 541
Goodwill (Note 10) 2,778 1,095
Deferred pension and other assets 1,239 1,053
-------- --------
27,110 16,276
-------- --------
Real estate and related assets
Cash and cash equivalents 8 2
Receivables, less discounts and allowances 71 71
Mortgage-related financial instruments,
less discounts and allowances 23 62
Real estate in process of development and for sale 716 689
Land being processed for development 1,060 958
Investments in unconsolidated entities,
less reserves (Note 5) 51 60
Other assets 171 175
-------- --------
2,100 2,017
-------- --------
Total assets $ 29,210 $ 18,293
======== ========
See Accompanying Notes to Financial Statements
Weyerhaeuser Company
- -5-
June 30, Dec. 30,
2002 2001
-------- --------
Liabilities and shareholders' interest
Weyerhaeuser
Current liabilities:
Notes payable and commercial paper (Note 12) $ 110 $ 4
Current maturities of long-term debt (Note 13) 368 8
Accounts payable (Note 1) 1,125 809
Accrued liabilities (Note 11) 1,320 1,042
-------- --------
Total current liabilities 2,923 1,863
Long-term debt (Note 13) 12,779 5,095
Deferred income taxes (Note 7) 4,389 2,377
Deferred pension, other postretirement benefits
and other liabilities 937 877
Commitments and contingencies (Note 18)
-------- --------
21,028 10,212
-------- --------
Real estate and related assets
Notes payable and commercial paper (Note 12) 357 358
Long-term debt (Note 13) 576 620
Other liabilities 467 408
Commitments and contingencies (Note 18)
-------- --------
1,400 1,386
-------- --------
Total liabilities 22,428 11,598
-------- --------
Shareholders' interest (Note 14)
Common shares: $1.25 par value; authorized
400,000,000 shares; issued and outstanding:
218,925,699 and 216,573,822 273 271
Exchangeable shares: no par value;
unlimited shares authorized; issued and held by
nonaffiliates: 2,314,558 and 3,289,259 158 224
Other capital 2,825 2,693
Retained earnings 3,778 3,852
Cumulative other comprehensive expense (252) (345)
-------- --------
Total shareholders' interest 6,782 6,695
-------- --------
Total liabilities and shareholders' interest $ 29,210 $ 18,293
======== ========
Weyerhaeuser Company
- -6-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the twenty-six week periods ended June 30, 2002 and July 1, 2001
(Dollar amounts in millions)
(Unaudited)
Consolidated
-------------------
June 30, July 1,
2002 2001
-------- --------
Cash flows from operations:
Net earnings $ 102 $ 278
Noncash charges (credits) to income:
Depreciation, amortization and fee stumpage 578 428
Deferred income taxes, net 33 72
Pension and other postretirement benefits (40) (110)
Equity in income of affiliates and unconsolidated entities (6) (47)
Countervailing duties and antidumping penalties (Note 18) (47) --
Charges for integration of facilities (Note 15) 25 19
Charges for closure of facilities (Note 16) 55 --
Charge for impairment of long-lived assets (Note 6) -- 20
Extraordinary loss on early extinguishment of debt (Note 17) 35 --
Decrease (increase) in working capital, net of acquisitions:
Receivables (207) 22
Inventories, real estate and land (177) (131)
Prepaid expenses (116) (30)
Mortgage-related financial instruments 7 1
Accounts payable and accrued liabilities 173 (157)
(Gain) loss on disposition of assets (2) 8
Other (84) (79)
-------- --------
Net cash from operations 329 294
-------- --------
Cash flows from investing activities:
Property and equipment (446) (353)
Timberlands reforestation (20) (16)
Acquisition of timberlands (33) (37)
Acquisition of businesses and facilities,
net of cash acquired (Note 19) (6,119) --
Net distributions from (investments in) equity affiliates 13 135
Proceeds from sale of:
Property and equipment 38 21
Mortgage-related financial instruments 34 5
Intercompany advances -- --
Other (20) (35)
-------- --------
Net cash from investing activities (6,553) (280)
-------- --------
Cash flows from financing activities:
Issuances of debt 13,101 400
Notes and commercial paper borrowings, net (120) (190)
Cash dividends (177) (175)
Intercompany cash dividends -- --
Payments on debt (6,734) (138)
Exercise of stock options 66 24
Other 33 13
-------- --------
Net cash from financing activities 6,169 (66)
-------- --------
Net change in cash and cash equivalents (55) (52)
Cash and cash equivalents at beginning of period 204 123
-------- --------
Cash and cash equivalents at end of period $ 149 $ 71
======== ========
Cash paid (received) during the period for:
Interest, net of amount capitalized $ 216 $ 191
======== ========
Income taxes $ 11 $ 36
======== ========
See Accompanying Notes to Financial Statements
Weyerhaeuser Company
- -7-
Weyerhaeuser Real Estate and Related Assets
------------------- ------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
------- ------- ------- -------
$ (8) $ 195 $ 110 $ 83
575 425 3 3
27 65 6 7
(39) (107) (1) (3)
6 (30) (12) (17)
(47) -- -- --
25 19 -- --
55 -- -- --
-- 20 -- --
35 -- -- --
(206) 28 (1) (6)
(74) (68) (103) (63)
(109) (32) (7) 2
-- -- 7 1
115 (119) 58 (38)
(1) 8 (1) --
(65) (43) (19) (36)
------- ------- ------- -------
289 361 40 (67)
------- ------- ------- -------
(446) (352) -- (1)
(20) (16) -- --
(33) (37) -- --
(6,119) -- -- --
(6) (25) 19 160
38 21 -- --
-- -- 34 5
41 8 (41) (8)
(18) (32) (2) (3)
------- ------- ------- -------
(6,563) (433) 10 153
------- ------- ------- -------
13,101 -- -- 400
(120) 235 -- (425)
(177) (175) -- --
-- 30 -- (30)
(6,690) (105) (44) (33)
66 24 -- --
33 12 -- 1
------- ------- ------- -------
6,213 21 (44) (87)
------- ------- ------- -------
(61) (51) 6 (1)
202 115 2 8
------- ------- ------- -------
$ 141 $ 64 $ 8 $ 7
======= ======= ======= =======
$ 215 $ 185 $ 1 $ 6
======= ======= ======= =======
$ 11 $ (37) $ -- $ 73
======= ======= ======= =======
Weyerhaeuser Company
- -8-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-----------------------------
NOTES TO FINANCIAL STATEMENTS
For the twenty-six week periods ended June 30, 2002 and July 1, 2001
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Weyerhaeuser
Company and all of its majority-owned domestic and foreign subsidiaries (the
company). As discussed in Note 19: Acquisition, the accounts of Willamette
Industries, Inc. (Willamette) are included beginning February 11, 2002.
Investments in and advances to equity affiliates which are not majority owned
or controlled are accounted for using the equity method with taxes provided
on undistributed earnings. Significant intercompany transactions and accounts
are eliminated.
Certain of the consolidated financial statements and notes to financial
statements are presented in two groupings: (1) Weyerhaeuser, principally
engaged in the growing and harvesting of timber and the manufacture,
distribution and sale of forest products, and (2) Real estate and related
assets, principally engaged in real estate development and construction and
other real estate related activities.
Nature of Operations
Weyerhaeuser's principal business segments, which account for the majority of
sales, earnings and the asset base, are:
.. Timberlands, which manages 7.3 million acres of company-owned forestland in
North America. The company also has .8 million acres of leased commercial
forestland in the United States and renewable long-term licenses on 33.8
million acres of forestland located in five provinces throughout Canada that
are managed by our Canadian operations. Weyerhaeuser holds forest management
licenses within the provinces of British Columbia, Alberta, Saskatchewan,
Ontario, and New Brunswick, which support our manufacturing operations in
those provinces. These licenses are granted by the respective provincial
governments for initial periods of 15-25 years, but are renewable every five
years, subject to meeting normal reforestation, operating and management
guidelines. Calculation of the fees payable on harvested volumes varies from
province to province, but is tied to product market pricing and the
allocation of land management responsibilities agreed to in the license.
Through several wholly-owned subsidiaries and joint ventures, the company is
also responsible for management and marketing activities for both forestlands
and manufacturing facilities located in New Zealand, Australia and Uruguay.
.. Wood products, which produces a full line of solid wood products that are
sold primarily through the company's own sales organizations to wholesalers,
retailers and industrial users in North America, the Pacific Rim and Europe.
.. Pulp and paper, which manufactures and sells pulp, paper and paperboard in
North American, Pacific Rim and European markets.
.. Containerboard, packaging and recycling, which manufactures and sells
containerboard in North American, Pacific Rim and European markets and
packaging products for the domestic and Mexican markets, and which operates
an extensive wastepaper recycling system that serves company mills and
worldwide markets.
During the second quarter of 2002, Weyerhaeuser changed the structure of its
internal organization, resulting in a change in the composition of its
reportable segments. In prior financial reports, Weyerhaeuser's paper-related
businesses were reported in a single pulp, paper and packaging segment.
This report reflects the split of the pulp, paper and packaging segment into
two segments entitled (i) pulp and paper, and (ii) containerboard, packaging
and recycling. Comparative information has been restated to conform to the
new reportable segments.
Weyerhaeuser Company
- -9-
Accounting Pronouncements Implemented
Effective as of the beginning of fiscal 2002, the company adopted Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. Under Statement 142, goodwill is no longer amortized over an
estimated useful life. Rather, the company assesses goodwill for impairment
by applying a fair value based test at least annually. In addition,
Statement 142 requires separate recognition for certain acquired intangible
assets that will continue to be amortized over their useful lives. Effective
as of the beginning of the 2002 first quarter, the company ceased
amortization of goodwill. The company has performed the fair value based
assessment of goodwill as of the beginning of fiscal 2002. Based upon this
assessment, management believes goodwill is not impaired upon the implementation
of this new standard.
Effective as of the beginning of fiscal 2002, the company adopted Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
eliminates the exception to consolidation of a subsidiary for which control
is likely to be temporary. Statement 144 supersedes Statement 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of and supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for segments of a business to be disposed of. Implementation of
Statement 144 in the first quarter of 2002 did not have a material impact
on the company's financial position, results of operations or cash flows.
Effective January 1, 2001, the company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. Statement 133, as amended, establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative instrument's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Statement 133 also requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. Implementation of Statement 133, as amended, at the beginning of
fiscal year 2001, increased assets by approximately $37 million and increased
liabilities by approximately $24 million, with a net offsetting amount of $13
million recorded in cumulative other comprehensive income (expense).
Prospective Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations. Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. Statement 143 will be
effective for fiscal 2003. The company has not yet estimated the impact of
implementation on its financial position, results of operations or cash
flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. Statement 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. The Statement also amends FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the accounting required for
sale-leaseback transactions and accounting for certain lease modifications that
have similar economic effects. This Statement also amends other existing
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. As a result of the
rescission of Statement 4, in the period of adoption, the company will
reclassify the 2002 first quarter extraordinary loss from early extinguishment
of debt into earnings before extraordinary items. This provision of Statement
145, and the provisions rescinding Statements 44 and 64, will be effective in
fiscal year 2003. The provisions amending Statement 13 and all other provisions
are effective for transactions occurring or financial statements issued on or
after May 15, 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities.
Statement 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Statement 146 will supersede
accounting guidance previously provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). Statement
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002.
Weyerhaeuser Company
- -10-
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Derivatives
The company utilizes well-defined financial contracts in the normal course of
its operations as a means to manage its foreign exchange, interest rate and
commodity price risks. The vast majority of these contracts either do not
provide for net settlement or are fixed-price contracts for future purchases
and sales of various commodities that meet the definition of "normal
purchases or normal sales," and therefore, are not considered derivative
instruments for accounting purposes. The company's current accounting
treatment for the limited number of contracts considered derivative
instruments follows:
For derivatives designated as fair value hedges, changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. For derivatives designated as cash flow hedges, the
effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in earnings when
the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. Changes in the fair
value of all other derivative instruments not designated as hedges are also
recognized in earnings in the period in which the changes occur.
The following contracts have been formally designated as fair value hedges:
.. Foreign currency futures contracts entered into in conjunction with the
company's agreement to purchase equipment in a foreign denominated currency.
The objective of the contracts is to hedge the company's future foreign
denominated payments for the equipment purchase.
The following financial instruments have been formally designated as cash
flow hedges:
.. Foreign exchange contracts, the objective of which is to hedge the
variability of future cash flows associated with foreign denominated accounts
receivable and accounts payable due to changes in foreign currency exchange
rates. Gains or losses recorded in other comprehensive income are
reclassified into earnings at the contracts' respective settlement dates.
In addition, the company has the following contracts that have not been
designated as hedges:
.. Variable rate swap agreement entered into with a major financial
institution in which the company pays a floating rate based on LIBOR and
receives a floating return based on an investment fund index, with payments
calculated on a notional amount. The swap is an overlay to investments and
provides diversification benefits. The swap is settled quarterly and marked to
market value at each reporting date. All unrealized gains and losses are
recognized in earnings currently.
.. Variable-to-fixed interest rate swap agreement entered into with a major
financial institution in which the company pays a fixed rate and receives a
floating rate with the interest payments calculated on a notional
amount. The swap, which was acquired in 2001 as part of the Cedar River Paper
Company acquisition, cannot be designated as a hedge under Statement 133;
however, it fixes $50 million of the company's variable rate tax-exempt bond
exposure. The swap is marked to market quarterly and any unrealized gains and
losses are recognized in earnings currently.
.. Lumber and other commodity futures designed to manage the consolidated
exposure of changes in inventory values due to fluctuations in market prices
for selected business units. The company's commodity futures positions are
marked to market at each reporting date and all unrealized gains and losses
are recognized in earnings currently. These contract positions to date have
not had a material effect on the company's financial position, results of
operations or cash flows. As of June 30, 2002, the company's net position
with commodity futures contracts was immaterial.
Weyerhaeuser Company
- -11-
The company is exposed to credit-related gains or losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The notional amounts of
these derivative financial instruments are $208 million and $198 million at
June 30, 2002, and December 30, 2001, respectively. These notional amounts do
not represent amounts exchanged by the parties and, thus, are not a measure
of exposure to the company through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required
to pay based on contractual terms. The net earnings impact resulting from the
company's use of derivative instruments was income of $6 million and $2 million
for the twenty-six weeks ended June 30, 2002, and July 2, 2001, respectively.
Cash and Cash Equivalents
For purposes of cash flow and fair value reporting, short-term investments
with original maturities of 90 days or less are considered as cash
equivalents. Short-term investments are stated at cost, which approximates
market.
Inventories
Inventories are stated at the lower of cost or market. Cost includes labor,
materials and production overhead. The last-in, first-out (LIFO) method is
used to cost approximately half of domestic raw materials, in process and
finished goods inventories. LIFO inventories were $762 million and $354
million at June 30, 2002, and December 30, 2001, respectively. The balance of
domestic raw material and product inventories, all materials and supplies
inventories, and all foreign inventories is costed at either the first-in,
first-out (FIFO) or moving average cost methods. Had the FIFO method been
used to cost all inventories, the amounts at which product inventories are
stated would have been $192 million and $217 million greater at June 30,
2002, and December 30, 2001, respectively.
Property and Equipment
The company's property accounts are maintained on an individual asset basis.
Betterments and replacements of major units are capitalized. Maintenance,
repairs and minor replacements are expensed. Depreciation is provided
generally on the straight-line or unit-of-production method at rates based on
estimated service lives. Amortization of logging railroads and truck roads is
provided generally as timber is harvested and is based upon rates determined
with reference to the volume of timber estimated to be removed over such
facilities.
The cost and related depreciation of property sold or retired is removed from
the property and allowance for depreciation accounts and the gain or loss is
included in earnings.
Timber and Timberlands
Timber and timberlands are carried at cost less fee stumpage charged to
disposals. Fee stumpage is the cost of standing timber and is charged to fee
timber disposals as fee timber is harvested, lost as a result of casualty or
sold. Generally, all initial site preparation and planting costs are
capitalized as reforestation. Reforestation is transferred to a merchantable
(harvestable) timber classification after 15 years in the South and 41 years
in the West. Generally, costs incurred after the first planting, such as
fertilization, vegetation and insect control, pruning and pre-commercial
thinning, property taxes and interest, are considered to be maintenance of
the forest and are expensed. There is no change in accounting practices when
timber becomes merchantable and harvesting commences.
Fee stumpage depletion rates used to relieve timber inventory are determined
with reference to the net carrying value of timber and the related volume of
timber estimated to be available over the growth cycle. The growth cycle
volume considers regulatory and environmental constraints affecting operable
acres, management strategies to be applied, inventory data improvements,
growth rate revisions and re-calibrations, and the exclusion of known
dispositions and inoperable acreage. The cost of timber harvested is included
in the carrying values of raw material and product inventories, and in the
cost of products sold as these inventories are disposed of.
Weyerhaeuser Company
- -12-
Goodwill
Effective in the first quarter of 2002, the company accounts for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets. Goodwill, which represents the excess of
purchase price over fair value of net assets acquired, is assessed for
impairment at least annually using a fair value based approach.
Prior to the adoption of Statement 142, goodwill was amortized on a
straight-line basis over 40 years, which was the expected period to be
benefited. See Note 3: Goodwill and Other Intangible Assets - Adoption of
Statement 142 for a reconciliation of 2001 earnings excluding goodwill
amortization.
Accounts Payable
The company's banking system provides for the daily replenishment of major
bank accounts as checks are presented for payment. Accordingly, there were
negative book cash balances of $248 million and $132 million at June 30,
2002, and December 30, 2001, respectively. Such balances result from
outstanding checks that had not yet been paid by the bank and are reflected
in accounts payable in the consolidated balance sheets.
Income Taxes
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently enacted
tax rates and laws.
Pension Plans
The company has pension plans covering most of its employees. Both the U.S.
and Canadian plans covering salaried employees provide pension benefits based
on the employee's highest monthly earnings for five consecutive years during
the final ten years before retirement. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
benefit levels for these plans are typically collectively bargained with the
unions. Contributions to U.S. plans are based on funding standards
stablished by the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions to Canadian plans are based on funding standards established by
the applicable Provincial Pension Benefits Act and by the Income Tax Act.
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, the company provides certain
health care and life insurance benefits for some retired employees and
accrues the expected future cost of these benefits for its current eligible
retirees and some employees. All of the company's salaried employees and some
hourly employees may become eligible for these benefits when they retire.
Revenue Recognition
The company's forest products-based operations recognize revenue from product
sales upon shipment to their customers, except for those export sales where
revenue is recognized when title transfers at the foreign port.
The company's real estate and related assets operations are primarily engaged
in the development, construction and sale of residential homes. Real estate
revenues are recognized when closings have occurred, required down payments
have been received, and title and possession have been transferred to the
buyer.
Impairment of Long-Lived Assets
The company accounts for long-lived assets in accordance with FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Assets to be disposed of by sale are reported at the lower of
the carrying value or fair value less cost to sell.
Weyerhaeuser Company
- -13-
Foreign Currency Translation
Local currencies are considered the functional currencies for most of the
company's operations outside the United States. Assets and liabilities are
translated into U.S. dollars at the rate of exchange in effect at the balance
sheet date. Revenues and expenses are translated into U.S. dollars at average
monthly exchange rates prevailing during the year.
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation
adjustments, additional minimum pension liability adjustments and fair value
adjustments on derivative instruments designated as cash flow hedges. See
Note 4: Comprehensive Income (Expense).
Reclassifications
Certain reclassifications have been made to conform prior years' data to the
current format.
Real Estate and Related Assets
Real estate held for sale is stated at the lower of cost or fair value less
costs to sell. The determination of fair value is based on appraisals and
market pricing of comparable assets, when available, or the discounted value
of estimated future cash flows from these assets. Real estate held for
development is stated at cost to the extent it does not exceed the estimated
undiscounted future net cash flows, in which case, it is carried at fair
value.
Mortgage-related financial instruments include mortgage loans receivable,
mortgage-backed certificates and other financial instruments.
Note 2: Net Earnings Per Share
Basic net earnings per share are based on the weighted average number of
common and exchangeable shares outstanding during the period. Diluted net
earnings per share are based on the weighted average number of common and
exchangeable shares outstanding and stock options outstanding during the
period.
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
Weighted average shares outstanding (thousands):
Basic 221,020 219,600 220,602 219,465
Dilutive effect of stock options 1,270 479 1,029 296
-------- -------- -------- --------
Diluted 222,290 220,079 221,631 219,761
======== ======== ======== ========
Options to purchase 202,650 shares at prices ranging from $65.56 to $68.41
per share were outstanding during the twenty-six weeks ended June 30, 2002.
Options to purchase 2,337,940 shares at prices ranging from $53.75 to $68.41
per share were outstanding during the twenty-six weeks ended July 1, 2001.
These options were not included in the computation of diluted earnings per
share for the respective periods because the option exercise prices were
greater than the average market prices of common shares during those periods.
Note 3: Goodwill and Other Intangible Assets - Adoption of Statement 142
The following table illustrates the effect of goodwill amortization on 2001
net earnings and net earnings per share. There were no separately identified
intangible assets other than goodwill that existed from acquisitions prior to
the adoption of Statement 142.
Weyerhaeuser Company
- -14-
Earnings Before Basic and Diluted
Extraordinary Item Earnings Per Share
-------------------- ----------------------
Twenty-six weeks ended Twenty-six weeks ended
-------------------- ----------------------
Dollar amounts in millions, June 30, July 1, June 30, July 1,
except per share data 2002 2001 2002 2001
-------- -------- -------- --------
Reported earnings before
extraordinary item $ 125 $ 278 $ 0.56 $ 1.27
Add back goodwill amortization -- 19 -- 0.08
-------- -------- -------- --------
Adjusted earnings before
extraordinary item $ 125 $ 297 $ 0.56 $ 1.35
======== ======== ======== ========
Net Earnings
--------------------------------------------
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
Reported net earnings $ 72 $ 171 $ 102 $ 278
Add back goodwill amortization -- 9 -- 19
-------- -------- -------- --------
Adjusted net earnings $ 72 $ 180 $ 102 $ 297
======== ======== ======== ========
Basic and Diluted Earnings Per Share
--------------------------------------------
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
Reported net earnings per share $ 0.32 $ 0.78 $ 0.46 $ 1.27
Add back goodwill amortization -- 0.04 -- 0.08
-------- -------- -------- --------
Adjusted net earnings per share $ 0.32 $ 0.82 $ 0.46 $ 1.35
======== ======== ======== ========
Note 4: Comprehensive Income (Expense)
The company's comprehensive income (expense) is as follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 72 $ 171 $ 102 $ 278
Other comprehensive income (expense):
Foreign currency translation
adjustments, net of tax
(benefit) expense of $50 and
$48 for the thirteen weeks and
$50 and $(1) for the twenty-six
weeks, respectively 92 90 93 (2)
Cash flow hedges:
Net derivative gains (losses),
net of tax (benefit) expense of
$(1) and $(1) for the thirteen
weeks and $0 and $5 for the
twenty-six weeks, respectively (2) (4) -- 7
Reclassification of (gains) losses,
net of tax benefit (expense) of
$0 and $0 for the thirteen weeks
and $0 and $(1) for the twenty-six
weeks, respectively -- -- -- (2)
-------- -------- -------- --------
$ 162 $ 257 $ 195 $ 281
======== ======== ======== ========
Weyerhaeuser Company
- -15-
Note 5: Equity Affiliates
Weyerhaeuser
Weyerhaeuser's investments in affiliated companies that are not majority
owned or controlled are accounted for using the equity method. Weyerhaeuser's
significant equity affiliates as of June 30, 2002, are:
.. ForestExpress, LLC - A 33 percent owned joint venture formed to develop and
operate a global, web-enabled, business-to-business marketplace for the
forest products industry. Other equity members of the joint venture, which is
headquartered in Atlanta, Georgia, include Boise Cascade Corporation,
Georgia-Pacific Corporation, International Paper, MeadWestvaco and Morgan
Stanley.
.. MAS Capital Management Partners, L.P. - A 50 percent owned limited
partnership formed for the purpose of providing specialized investment
management services to institutional and individual investors.
.. Nelson Forests Joint Venture - An investment in which the company owns a 51
percent financial interest and has a 50 percent voting interest, which holds
Crown Forest License cutting rights and freehold land on the South Island of
New Zealand.
.. North Pacific Paper Corporation - A 50 percent owned joint venture that has
a newsprint manufacturing facility in Longview, Washington.
.. Optiframe Software LLC - A 50 percent owned joint venture in Denver,
Colorado, formed during 2001 to develop whole-house design and optimization
software for the building industry.
.. RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint venture
with institutional investors to make investments in timberlands and related
assets outside the United States. The primary focus of this partnership is in
pine forests in the Southern Hemisphere.
.. SCA Weyerhaeuser Packaging Holding Company Asia Ltd. - A 50 percent owned
joint venture formed to build or buy containerboard packaging facilities to
serve manufacturers of consumer and industrial products in Asia. Two
facilities are in operation in China.
.. Southern Cone Timber Investors Limited - A 50 percent owned joint venture
with institutional investors that has made an investment in Uruguayan
timberlands. The primary focus of this entity is in plantation forests in the
Southern Hemisphere.
.. Wapawekka Lumber LP - A 51 percent owned limited partnership in
Saskatchewan, Canada, that operates a sawmill. Substantive participating
rights by the minority partner preclude the consolidation of this partnership
by the company.
.. Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North
Carolina, which supplies full-service, value-added turnkey packaging
solutions to assist product manufacturers in the areas of retail marketing
and distribution.
Weyerhaeuser Company
- -16-
Unconsolidated financial information for affiliated companies, which are
accounted for by the equity method, follows. Unconsolidated revenues and
income for the thirteen weeks and twenty-six weeks ended July 1, 2001, also
include Cedar River Paper Company, a joint venture that became wholly owned
by the company in July 2001.
June 30, Dec. 30,
Dollar amounts in millions 2002 2001
-------- --------
Current assets $ 178 $ 191
Noncurrent assets 1,229 1,222
Current liabilities 127 120
Noncurrent liabilities 339 326
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
-------- -------- -------- --------
Net sales and revenues $ 148 $ 219 $ 296 $ 448
Operating income (loss) -- 31 (7) 63
Net income (loss) (1) 24 (9) 48
The company provides goods and services to these affiliates, which vary by
entity, in the form of raw materials, management and marketing services,
support services and shipping services. Additionally, the company purchases
finished product from certain of these entities. The aggregate total of
these transactions is not material to the results of operations of the
company.
Real Estate and Related Assets
Investments in unconsolidated entities that are not majority owned or
controlled are accounted for using the equity method with taxes provided on
undistributed earnings as appropriate.
Unconsolidated financial information for unconsolidated entities, which are
accounted for by the equity method, is as follows. Revenues and income for
the twenty-six weeks ended July 1, 2001, include non-real estate
partnership investments which the company sold during the first quarter of
2001.
June 30, Dec. 30,
Dollar amounts in millions 2002 2001
-------- --------
Current assets $ 11 $ 8
Noncurrent assets 273 306
Current liabilities 12 11
Noncurrent liabilities 160 158
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
-------- -------- -------- --------
Net sales and revenues $ 9 $ 109 $ 27 $ 440
Operating income (loss) (1) 8 19 163
Net income (loss) (3) 5 14 130
The company may charge management and/or development fees to these
unconsolidated entities. The aggregate total of these transactions is not
material to the results of operations of the company.
Weyerhaeuser Company
- -17-
Note 6: Other Operating Costs, Net
Other operating costs, net, is an aggregation of both recurring and
occasional income and expense items and, as a result, can fluctuate from year
to year.
The twenty-six weeks ended June 30, 2002, include $35 million in
foreign exchange gains, $27 million of which relates to the second quarter.
These gains result from favorable changes in exchange rates primarily related
to the company's Canadian and New Zealand operations. Also included in 2002
is $4 million of first quarter charges related to the company's support
alignment initiative. The twenty-six weeks ended July 1, 2001, include
$10 million of pretax charges related to Westwood Shipping Lines' transition
to a new charter fleet and $50 million of pretax charges related to the
company's support alignment initiative. The 2001 support alignment costs
included $41 million recognized in conjunction with the company's decision to
outsource certain information technology services, of which $20 million related
to the impairment of information technology assets sold for $10 million to the
outsourcer and $21 million of additional costs such as retention bonuses,
severance and other transition costs. Additional support alignment spending
in 2002 and 2001 consists of one-time costs representing severance,
relocation and outplacement costs as new regional centers were created to
deliver support services. Severance costs incurred in 2001 were paid within
the fiscal year 2001. Severance costs incurred in 2002 were not material.
The company ceased tracking support alignment costs as of the end of the first
quarter of 2002, concurrent with the acquisition of Willamette Industries (see
Note 19: Acquisition). Beginning in the second quarter of 2002, costs incurred
in connection with the company's integration and cost reduction efforts are
reported as part of charges for integration of facilities (see Note 15: Charges
for Integration of Facilities).
Note 7: Income Taxes
Provisions for income taxes include the following:
Twenty-six weeks ended
----------------------
June 30, July 1,
Dollar amounts in millions 2002 2001
-------- --------
Federal:
Current $ 20 $ 47
Deferred 35 80
-------- --------
55 127
-------- --------
State:
Current 6 5
Deferred 3 7
-------- --------
9 12
-------- --------
Foreign:
Current 8 16
Deferred (5) (15)
-------- --------
3 1
-------- --------
$ 67 $ 140
======== ========
Income tax provisions for interim periods are based on the current best
estimate of the effective tax rate expected to be applicable for the full
year. The effective tax rate reflects anticipated tax credits, foreign taxes
and other tax planning alternatives.
During the second quarter of 2001, a phased-in reduction in Canadian income
taxes was enacted. This change in tax law produced a one-time benefit by
reducing foreign deferred income taxes in that period by $15 million due to
the effect of the lower tax rate on the accumulated temporary differences of
the company's Canadian subsidiaries. The effect on foreign current income
taxes was not significant.
Weyerhaeuser Company
- -18-
The company's effective tax rate for the twenty-six week periods ended June
30, 2002, and July 1, 2001, was 35% and 33.5%, respectively. For 2002, the
effective tax rate reflects the federal statutory rate of 35%, increased for
the effect of state income taxes and decreased by benefits realized from the
utilization of tax credits. In 2001, the effective tax rate is lower than
the 35% federal statutory rate, principally due to the effect of the change
in the Canadian tax rate. This reduction was partially offset by the effect
of state income taxes.
Deferred taxes are provided for the temporary differences between the
financial and tax bases of assets and liabilities, applying presently enacted
tax rates and laws. The major sources of these temporary differences include
depreciable and depletable assets, real estate, and pension and retiree
health care liabilities.
Note 8: Inventories
June 30, Dec. 30,
Dollar amounts in millions 2002 2001
-------- --------
Logs and chips $ 170 $ 186
Lumber, plywood, panels and engineered lumber 563 401
Pulp and paper 322 194
Containerboard, paperboard and packaging 255 145
Other products 258 195
Materials and supplies 444 307
-------- --------
$ 2,012 $ 1,428
======== ========
Note 9: Property and Equipment
June 30, Dec. 30,
Dollar amounts in millions 2002 2001
-------- --------
Property and equipment, at cost:
Land $ 321 $ 226
Buildings and improvements 2,888 2,310
Machinery and equipment 15,924 12,020
Rail and truck roads 647 612
Other 206 202
-------- --------
19,986 15,370
Less allowance for depreciation and amortization (7,624) (7,061)
-------- --------
$ 12,362 $ 8,309
======== ========
Note 10: Goodwill
The changes in the carrying amount of goodwill for the twenty-six weeks ended
June 30, 2002, are as follows:
Balance as of December 30, 2001 $ 1,095
Goodwill acquired (Note 19) 1,706
Goodwill written off related to facility closures (Note 16) (6)
Effect of foreign currency translation adjustments (17)
-------
Balance as of June 30, 2002 $ 2,778
=======
The company has completed the transitional assessment of goodwill and
management believes that there are no implementation-related impairments.
Weyerhaeuser Company
- -19-
Note 11: Accrued Liabilities
June 30, Dec. 30,
Dollar amounts in millions 2002 2001
-------- --------
Payroll - wages and salaries, incentive awards,
retirement and vacation pay $ 483 $ 419
Taxes - Social Security and real and
personal property 76 58
Product warranties 39 39
Interest 258 128
Other 464 398
------- -------
$ 1,320 $ 1,042
======= =======
Note 12: Short-Term Debt
Lines of Credit
Weyerhaeuser had short-term bank credit lines of $1.3 billion and $925
million at June 30, 2002, and December 30, 2001, respectively. Both
Weyerhaeuser and Weyerhaeuser Real Estate Company (WRECO) can borrow against
each facility. WRECO has access to $600 million of the $1.3 billion facility
and had available to it all of the $925 million facility. As of June 30,
2002, Weyerhaeuser had borrowed $50 million against this facility. WRECO had
no borrowings against the facility as of June 30, 2002. No portion of the
$925 million line had been availed of by Weyerhaeuser or WRECO at
December 30, 2001. Neither of the entities referred to above is a guarantor of
the borrowing of the other.
In addition, Weyerhaeuser had short-term bank credit lines that provided for
the borrowings of up to $300 million at December 30, 2001. This facility was
canceled during the first quarter of 2002. No portion of this line had been
availed of by Weyerhaeuser.
As of December 30, 2001, Weyerhaeuser's lines of credit included a five-year
revolving credit facility agreement entered into in 1997 with a group of
banks that provided for borrowings of up to the total amount of $400 million,
all of which was available to Weyerhaeuser. The agreement was scheduled to
expire in November 2002 and was canceled during the first quarter of 2002. No
portion of this line had been availed of by Weyerhaeuser as of December 30,
2001.
Note 13: Long-Term Debt
During the first quarter of 2002, Weyerhaeuser issued $5.5 billion of notes
payable to fund the acquisition of Willamette (see Note 19: Acquisition). The
notes bear interest at rates ranging from LIBOR plus 1.125% (variable) to
7.375% (fixed) and mature from 2003 to 2032.
Lines of Credit
Weyerhaeuser's lines of credit include a five-year revolving credit facility
agreement entered into in 2002 with a group of banks that provides for
borrowings of up to the total amount of $1.3 billion, all of which is
available to Weyerhaeuser. Borrowings are at LIBOR plus a spread or other
such interest rates mutually agreed to between the borrower and lending
banks. As of June 30, 2002, Weyerhaeuser had borrowed $1.3 billion against
this facility.
To the extent that any credit commitment expires more than one year after the
balance sheet date and is unused, an equal amount of commercial paper is
classifiable as long-term debt. No amounts were reclassified as long-term
debt as of June 30, 2002, or December 30, 2001.
The company's compensating balance agreements were not significant.
Weyerhaeuser Company
- -20-
Note 14: Shareholders' Interest
Common Shares
A reconciliation of common share activity for the periods ended June 30,
2002, and December 30, 2001, is as follows:
Twenty-six Fifty-two
weeks ended weeks ended
June 30, Dec. 30,
In thousands 2002 2001
----------- -----------
Shares outstanding at beginning of year 216,574 213,898
Retraction of exchangeable shares 974 2,026
Stock options exercised 1,378 650
----------- -----------
Shares outstanding at end of period 218,926 216,574
=========== ===========
Exchangeable Shares
Exchangeable Shares issued by Weyerhaeuser Company Ltd., a wholly-owned
Canadian subsidiary of the company, are, as nearly as practicable, the
economic equivalent of the company's common shares; i.e., they have the
following rights:
.. The right to exchange such shares for Weyerhaeuser common shares on a
one-to-one basis.
.. The right to receive dividends, on a per-share basis, in amounts that are
the same as, and are payable at the same time as, dividends declared on
Weyerhaeuser common shares.
.. The right to vote at all shareholder meetings at which Weyerhaeuser
shareholders are entitled to vote on the basis of one vote per Exchangeable
Share.
.. The right to participate upon a Weyerhaeuser liquidation event on a
pro-rata basis with the holders of Weyerhaeuser common shares in the
distribution of assets of Weyerhaeuser.
A reconciliation of Exchangeable Share activity for the periods ended June
30, 2002, and December 30, 2001, is as follows:
Twenty-six Fifty-two
weeks ended weeks ended
In thousands June 30, Dec. 30,
2002 2001
----------- -----------
Shares outstanding at beginning of year 3,289 5,315
Retractions (974) (2,026)
----------- -----------
Shares outstanding at end of period 2,315 3,289
=========== ===========
Cumulative Other Comprehensive Income (Expense)
Weyerhaeuser's cumulative other comprehensive income (expense) includes:
June 30, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ---------
Foreign currency translation adjustments $ (213) $ (306)
Minimum pension liability adjustment (43) (43)
Cash flow hedge fair value adjustments 4 4
--------- ---------
$ (252) $ (345)
========= =========
Weyerhaeuser Company
- -21-
Note 15: Charges for Integration of Facilities
In the second quarter of 2002, Weyerhaeuser incurred $23 million of pretax
charges related to the transition and integration of activities in connection
with the Willamette acquisition. Year-to-date costs for integration of
facilities were $25 million. These charges include one-time transition costs
such as severance and relocation and include the cost of transitional services
and benefits provided under change in control agreements. During 2002 severance
charges of $5 million were recognized in connection with the planned termination
of approximately 200 employees. As of June 30, 2002, approximately 50 of these
employees have been terminated and an accrual of approximately $5 million
remains.
In the second quarter of 2001, Weyerhaeuser incurred $10 million of pretax
charges related to the transition and integration of activities in connection
with the MacMillan Bloedel and Trus Joist acquisitions. Year-to-date charges
totaled $19 million. These charges represented one-time transition costs
including approximately $9 million of severance-related costs recognized
in connection with the planned termination of approximately 450 employees.
As of June 30, 2002, approximately 200 of the employees had been terminated
and approximately $4 million in severance accruals remained. As of
December 30, 2001, approximately 100 employees had been terminated and
approximately $5 million in related severance accruals remained.
Note 16: Charges for Closure of Facilities
In the second quarter of 2002, Weyerhaeuser incurred $28 million of pretax
charges associated with the closure or impending closure of four containerboard,
packaging and recycling facilities. Year-to-date charges of $55 million also
included $27 million of first quarter charges associated with the closure of an
oriented strand board facility and two packaging facilities. The year-to-date
charges include $34 million for asset impairments, $6 million for the impairment
of goodwill associated with the closed facilities, $8 million of severance
and $7 million of other closure costs. The severance costs relate to the
termination of approximately 270 employees expected to result from these
closures, of which approximately 150 had occurred as of June 30, 2002.
Approximately $7 million of these severance and closure liabilities remain in
accrued liabilities as of June 30, 2002.
Note 17: Extraordinary Loss on Early Extinguishment of Debt
In February 2002, Weyerhaeuser issued bridge financing in connection with the
Willamette acquisition (see Note 19: Acquisition). Fees related to the
commitments on financing that had been secured for the acquisition were recorded
as deferred finance costs. In March 2002, Weyerhaeuser replaced the bridge
financing with $5.5 billion of notes payable (see Note 13: Long-Term Debt). The
unamortized portion of the deferred costs associated with the bridge financing
was written off as an extraordinary loss on the early extinguishment of debt in
the first quarter of 2002. Total deferred costs written off were $35 million.
The tax benefit associated with the write-off was $12 million.
Note 18: Commitments and Contingencies
The company's capital expenditures, excluding acquisitions and real estate and
related assets, were $683 million in 2001, and are expected to be approximately
$950 million in 2002; however, that expenditure level could be increased or
decreased as a consequence of future economic conditions.
Weyerhaeuser Company
- -22-
Following the expiration of a five-year agreement between the United States and
Canada, in 2001, the Coalition for Fair Lumber Imports (Coalition) filed a
petition with the U.S. Department of Commerce (Department) and the International
Trade Commission (ITC), claiming that production of softwood lumber in Canada is
being subsidized by Canada and that imports from Canada are being "dumped" into
the U.S. market (sold at less than fair value). The Coalition asked that
countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber
imported from Canada. In March 2002, the Department confirmed its preliminary
finding that certain Canadian provinces were subsidizing logs by failing to
collect full market price for stumpage and established a final CVD rate of
18.79%. Because the final determination eliminated the 90-day retroactive
duties, the company reversed its $18 million accrual for the retroactive portion
of the CVD during the first quarter of 2002. In May 2002, the ITC confirmed its
earlier ruling that the U.S. industry is threatened by subsidized and dumped
imports. Its finding of only threat of injury means that the CVD and
antidumping duties will be collected only for the period beginning with the
publication of its final order on May 22, 2002. In the antidumping portion of
the case, the Department had chosen Weyerhaeuser and five Canadian companies to
provide data for the antidumping investigation. In its preliminary ruling
issued on October 30, 2001, the Department found that the company had engaged in
dumping and set a preliminary "dumping margin" for the company. In the final
determination, the company's rate was set at 12.34%. As of the end of the first
quarter of 2002, the company's accrual for the CVD and antidumping liability was
$42 million. With the finding of the ITC of only threat of injury, the accrual
was reversed on the company books during the second quarter. Approximately one
year following the publication of the final order and annually thereafter for a
total of five years, the Department will conduct reviews to determine whether
the company had engaged in dumping and whether Canada continued to subsidize
softwood logs and, if so, the dumping margin and CVD to impose. At the end of
five years, both the countervailing duty and antidumping orders would be
automatically reviewed in a "sunset" proceeding to determine whether dumping or
a countervailing subsidy would be likely to continue or recur. The company
filed a notice of appeal under the North American Free Trade Agreement and
requested that a panel be convened to review the imposition of the antidumping
duty. The federal and provincial governments in Canada also moved for appellate
review by panels under NAFTA and the World Trade Organization (WTO) with respect
to the CVD findings. In July 2002, the WTO issued two interim rulings against
the United States. The first ruling was against the so-called "Byrd Amendment,"
which gives U.S. firms cash from punitive trade sanctions applied on foreign
imports. The second ruling was that a key measure used in the CVD to determine
the existence of a subsidy is improper. It is difficult to predict the net
effect final duties will have on the company because the company produces
softwood lumber in both the United States and Canada. The company believes that
the controversy has created some volatility and uncertainty in the marketplace,
but will not have a material adverse effect on the company's financial position,
liquidity or results of operations.
The company is a party to legal proceedings and environmental matters generally
incidental to its business. Although the final outcome of any legal proceeding
or environmental matter is subject to a great many variables and cannot be
predicted with any degree of certainty, the company presently believes that the
ultimate outcome resulting from these proceedings and matters will not have a
material effect on the company's financial position, liquidity or
results of operations.
Weyerhaeuser Company
- -23-
Note 19: Acquisition
Willamette Industries, Inc.
On March 14, 2002, the company completed a merger of Willamette and Company
Holdings, Inc. (CHI), a wholly owned subsidiary of the company, pursuant to
which Willamette became a wholly-owned subsidiary of the company. The total
purchase price, including assumed debt of $1.8 billion, was $7.9 billion.
Willamette is an integrated forest products company that produces building
materials, composite wood panels, fine paper, office paper products, corrugated
packaging and grocery bags in over 100 plants located in the United States,
Europe and Mexico, and owns 1.7 million acres of forestlands in the United
States. The company believes these assets fit well with and enhance the
company's capabilities in a number of its core product markets. The acquisition
creates a larger company that is a leading producer in its major product lines
and is better able to meet the needs of its customers. The company believes the
acquisition will position the company to increase shareholder value. These
factors contributed to the goodwill, which is preliminarily recorded at $1.7
billion.
Pursuant to the merger agreement among the company, Willamette and CHI dated
January 28, 2002, CHI filed a tender offer for all of the outstanding shares of
common stock of Willamette at a purchase price of $55.50 per share. On February
11, 2002, CHI accepted for payment approximately 97% of the outstanding shares
of Willamette common stock and outstanding options to purchase shares of common
stock, thereby acquiring a controlling interest in Willamette. On March 14,
2002, the company consummated the merger and all the remaining outstanding
Willamette shares, other than those held by the company, CHI or Willamette, were
converted into the right to receive $55.50 in cash. Pursuant to the merger
agreement, options that were not surrendered in the tender became, as of the
merger date, options to purchase company shares in an amount and at an exercise
price adjusted by a conversion ratio based on $55.50 per share and the market
price of a share of the company's common stock. Effective June 30, 2002,
Willamette merged with and into the company with Willamette ceasing to exist.
The company accounted for the transaction using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired company were
included in the Consolidated Balance Sheet and the operating results were
included in the Consolidated Statement of Earnings beginning February 11, 2002.
The estimated excess cost at February 11, 2002, was calculated as follows:
Dollar amounts in millions
Purchase price of tender offer and stock option cash-out $ 6,162
Direct transaction costs and expenses 112
Deferred tax effect of applying purchase accounting 1,331
Less: historical net assets (2,487)
--------
Total excess costs $ 5,118
========
The above calculation of excess purchase price is preliminary. The company is
in the process of conducting valuations of the acquired timberlands and
property, plant and equipment. The company expects the valuations to be
completed during the fourth quarter 2002 and that they will not materially
affect the preliminary allocation of the purchase price. As of June 30, 2002,
the excess purchase price was allocated as follows:
Dollar amounts in millions
Property, plant and equipment $ 3,412
Goodwill 1,706
--------
Total excess costs $ 5,118
========
Property, plant and equipment are being depreciated over an average of 15 years.
The cost of timber and timberlands is charged to expense as the related timber
is harvested. Goodwill is not amortized, but will be assessed for impairment
annually using a fair-value-based approach.
Weyerhaeuser Company
- -24-
The following summarized unaudited pro forma information, assuming this
acquisition occurred at the beginning of fiscal periods presented, is as
follows:
Pro Forma Information (unaudited) Twenty-six weeks ended
----------------------
June 30, July 1,
Dollar amounts in millions 2002 2001
--------- ---------
Net sales and revenues $ 9,410 $ 9,594
Net earnings 61 246
Earnings per share:
Basic and diluted $ 0.28 $ 1.12
Note 20: Business Segments
The company is principally engaged in the growing and harvesting of timber and
the manufacture, distribution and sale of forest products. The company's
principal business segments are timberlands (including logs, chips and timber);
wood products (including softwood lumber, plywood and veneer, composite panels,
oriented strand board, hardwood lumber, treated products, engineered lumber, raw
materials and building materials distribution); pulp and paper (including pulp,
paper and paperboard); containerboard, packaging and recycling; and real estate
and related assets. During the second quarter of 2002, Weyerhaeuser changed the
structure of its internal organization, resulting in a change in the reporting
of it's pulp, paper and packaging segment. Weyerhaeuser's paper-related
businesses, which were reported in a single pulp, paper and packaging segment in
prior financial reports, will now be reported as two segments entitled (i) pulp
and paper, and (ii) containerboard, packaging and recycling. Comparative
information has been restated to conform to the new reportable segments.
The timber-based businesses involve a high degree of integration among timber
operations; building materials conversion facilities; and pulp, paper,
containerboard and paperboard primary manufacturing and secondary conversion
facilities. This integration includes extensive transfers of raw materials,
semi-finished materials and end products between and among these groups. The
company's accounting policies for segments are the same as those described in
Note 1: Summary of Significant Accounting Policies. Management evaluates segment
performance based on the contributions to earnings of the respective segments.
Accounting for segment profitability in integrated manufacturing sites involves
allocation of joint conversion and common facility costs based upon the extent
of usage by the respective product lines at that facility. Transfer of products
between segments is accounted for at current market values.
Weyerhaeuser Company
- -25-
An analysis and reconciliation of the company's business segment information to
the respective information in the consolidated financial statements is as
follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
------- ------- ------- --------
Sales to and revenues from
unaffiliated customers:
Timberlands $ 235 $ 266 $ 423 $ 537
Wood products 2,147 1,738 3,848 3,118
Pulp and paper 951 609 1,723 1,320
Containerboard, packaging
and recycling 1,157 817 2,073 1,633
Real estate and related assets 421 371 817 705
Corporate and other 38 41 73 82
------- ------- ------- -------
4,949 3,842 8,957 7,395
------- ------- ------- -------
Intersegment sales:
Timberlands 288 213 518 438
Wood products 52 55 103 118
Pulp and paper 7 18 60 82
Containerboard, packaging
and recycling 8 1 13 3
Corporate and other 2 3 4 7
------- ------- ------- -------
357 290 698 648
------- ------- ------- -------
Total sales and revenues 5,306 4,132 9,655 8,043
Intersegment eliminations (357) (290) (698) (648)
------- ------- ------- -------
$ 4,949 $ 3,842 $ 8,957 $ 7,395
======= ======= ======= =======
Approximate contribution (charge) to earnings (1):
Timberlands $ 175 $ 129 $ 294 $ 270
Wood products 64 110 73 77
Pulp and paper (15) 27 (14) 100
Containerboard, packaging
and recycling 75 68 133 162
Real estate and related assets (1) 79 62 170 131
Corporate and other (61) (67) (119) (157)
------- ------- ------- -------
317 329 537 583
Interest expense (222) (87) (365) (175)
Less capitalized interest 16 6 20 10
------- ------- ------- -------
Earnings before income taxes
and extraordinary item 111 248 192 418
Income taxes (39) (77) (67) (140)
------- ------- ------- -------
Earnings before extraordinary item 72 171 125 278
Extraordinary item -- -- (23) --
------- ------- ------- -------
Net earnings $ 72 $ 171 $ 102 $ 278
======= ======= ======= =======
Segment information for the twenty-six weeks ended June 30, 2001, includes the
addition of the Willamette operations as of February 11, 2002. Total assets of
the company increased from $18.3 billion as of December 30, 2001, to $29.2
billion as of June 30, 2002, primarily due to the Willamette acquisition. There
were no material changes from year-end 2001 in basis for measuring segment
profit or loss.
Certain reclassifications have been made to conform prior year's data to the
current format.
(1) Interest expense of $1 million for the thirteen weeks and $4 million for the
twenty-six weeks ended July 1, 2002, is included in the determination of
approximate contributions to earnings and is excluded from interest expense for
financial services business.
Weyerhaeuser Company
- -26-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
----------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
Some information included in this report contains statements concerning the
company's future results and performance that are forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
accuracy of such statements is subject to a number of risks, uncertainties and
assumptions that may cause actual results to differ materially from those
projected, including, but not limited to:
.. the effect of general economic conditions, including the level of interest
rates and housing starts;
.. market demand for the company's products, which may be tied to the relative
strength of various U.S. business segments;
.. performance of the company's manufacturing operations;
.. the level of competition from foreign producers;
.. the effect of forestry, land use, environmental and other governmental
regulations; and
.. fires, floods and other natural disasters.
The company is also a large exporter and is affected by changes in economic
activity in Europe and Asia, particularly Japan, and by changes in currency
exchange rates, particularly the relative value of the U.S. dollar to the Euro
and the Yen, and restrictions on international trade or tariffs imposed on
imports, including the countervailing and dumping duties imposed on the
company's softwood lumber shipments from Canada to the United States. These and
other factors could cause or contribute to actual results differing
materially from such forward looking statements and, accordingly, no assurances
can be given that any of the events anticipated by the forward looking
statements will occur, or if any them occurs, what effect they will have on
the company's results of operations or financial condition. The company
expressly declines any obligation to publicly revise any forward looking
statements that have been made to reflect the occurrence of events after the
date of this report.
Results of Operations
The term "company" refers to Weyerhaeuser Company and all of its majority owned
domestic and foreign subsidiaries. The term "Weyerhaeuser" excludes the real
estate and related assets operations.
Consolidated Results
Consolidated net sales and earnings for the thirteen and twenty-six week periods
ended June 30, 2002, and July 1, 2001, were:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
Dollar amounts in millions, June 30, July 1, June 30, July 1,
except per share data 2002 2001 2002 2001
------- ------- ------- --------
Net sales and revenues $ 4,949 $ 3,842 $ 8,957 $ 7,395
Net earnings 72 171 102 278
Net earnings per share,
basic and diluted 0.32 0.78 0.46 1.27
On February 11, 2002, Weyerhaeuser Company acquired Willamette Industries, Inc.
(Willamette). The consolidated statement of earnings includes Willamette's
results beginning on the date of acquisition.
Weyerhaeuser Company
- -27-
Net earnings for the second quarter 2002 include the following non-routine
items, which are presented net of taxes:
.. A charge of $18 million, or $0.08 per share, for costs associated with
closure, or impending closure, of four facilities,
.. A charge of $16 million, or $0.08 per share, for one-time costs related to the
integration of Willamette, and
.. A benefit of $19 million, or $0.09 per share, for the reversal of previously
accrued countervailing duties.
In addition to the second quarter 2002 non-routine items, net earnings for the
first half of 2002 include:
.. An extraordinary charge for $23 million, or $0.10 per share, for the deferred
costs associated with the bridge financing of the acquisition of Willamette,
.. A charge of $17 million, or $0.08 per share, associated with the closure of
three facilities, and
.. A benefit of $12 million, or $0.05 per share, from the reversal of previously
accrued countervailing duties.
Net earnings for the second quarter of 2001 include the following non-routine
items, which are presented net of taxes:
.. A benefit of $15 million, or $0.07 per share, for a one-time reduction in
deferred taxes due to a lower Canadian corporate tax rate,
.. Charges of $6 million, or $0.03 per share, for costs resulting from Westwood
Shipping Line's transition to a new charter fleet, and
.. A charge of $6 million, or $0.03 per share, for one-time costs associated with
the integration of the MacMillan Bloedel and Trus Joist acquisitions.
In addition to the second quarter 2001 items, earnings for the first half of
2001 also include the following non-routine items, net of taxes:
.. Charge of $26 million, or $0.12 per share, associated with outsourcing certain
information technology services as part of the company's program to streamline
support services, and
.. Charge of $6 million, or $0.02 per share, for integration costs associated
with the MacMillan Bloedel and Trus Joist acquisitions.
Operating results for the first half of 2002 include $71 million in net pension
income compared with $124 million in the first half of 2001. The decrease is
primarily attributable to reductions in expected and actual rates of return
on plan assets and a reduction in the discount rate.
Timberlands
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
------- ------- ------- --------
Net sales and revenues $ 235 $ 266 $ 423 $ 537
Contribution to earnings 175 129 294 270
Timberlands' contribution to earnings improved for both the second quarter and
first half of 2002 compared to the same periods in 2001. Net sales decreased
for both comparative periods. The inclusion of the acquired Willamette
operations and improvements in pricing increased net sales; however, declines in
third party sales volumes more than offset those increases when compared to same
periods in the previous year. The timberlands segment's operating results were
buoyed by stable domestic log markets and improved export log markets during the
second quarter, and were aided by the weakening dollar.
Third party sales volume for timberlands raw materials and log production volume
for the thirteen and twenty-six week periods ended June 30, 2002, and July 1,
2001, are as follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Volumes in millions 2002 2001 2002 2001
------- ------- ------- --------
Raw materials third party
sales volume - cubic feet 99 140 175 280
Log production volume - cubic feet 217 170 344 344
Weyerhaeuser Company
- -28-
In the third quarter, export log markets are expected to continue to improve,
however, third quarter harvest levels are expected to be lower due to normal
seasonal shutdowns and higher than normal fire conditions.
Wood Products
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
------- ------- ------- --------
Net sales and revenues $ 2,147 $ 1,738 $ 3,848 $ 3,118
Contribution to earnings 64 110 73 77
Net sales for Wood Products increased for both the second quarter and first
half of 2002 compared to the same periods in 2001, however, contribution to
earnings declined for both comparative periods. Net sales increased primarily
as a result of the inclusion of the Willamette operations. Additional increases
in net sales resulted from improvements in third party sales volumes of
Weyerhaeuser's existing lumber, oriented strandboard (OSB), composite panels,
and raw materials operations. These improvements were slightly offset by price
declines in lumber, OSB and composite panels. Net sales includes $29 million
for the second quarter of 2002 and $47 million for the first half of 2002
related to the reversal of previously accrued countervailing duties.
Contribution to earnings in the second quarter of 2002 for the wood products
operations includes the $29 million pretax reversal of countervailing duties.
Wood products demand is strong, but the markets remain oversupplied as a result
of inventories built in advance of the final countervailing duty ruling,
resulting in weak pricing. Inventories are expected to decrease during the
third quarter, however the outlook for pricing remains uncertain.
Weyerhaeuser Company
- -31-
Third party sales and total production volumes for the major products in the
wood products segment for the thirteen and twenty-six week periods ended June
30, 2002, and July 1, 2001, are as follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Third party sales volumes (millions) 2002 2001 2002 2001
------- ------- ------- --------
Softwood lumber - board feet 2,295 1,792 4,107 3,459
Softwood plywood and
veneer - square feet (3/8") 750 491 1,325 940
Composite panels - square feet (3/4") 445 59 753 122
Oriented strand board - square
feet (3/8") 1,095 916 2,040 1,787
Hardwood lumber - board feet 113 106 221 212
Raw materials - cubic feet 164 69 307 156
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Total production volumes (millions) 2002 2001 2002 2001
------- ------- ------- --------
Softwood lumber - board feet 1,702 1,422 3,232 2,828
Softwood plywood and
veneer - square feet (3/8") 562 278 993 563
Composite panels - square feet (3/4") 378 25 596 54
Oriented strand board - square
feet (3/8") 944 833 1,901 1,616
Hardwood lumber - board feet 99 109 195 220
Logs - cubic feet 187 98 372 230
Weyerhaeuser Company
- -29-
Pulp and Paper
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
------- ------- ------- --------
Net sales and revenues $ 951 $ 609 $ 1,723 $ 1,320
Contribution (charge) to earnings (15) 27 (14) 100
During the second quarter of 2002, Weyerhaeuser changed the structure of its
internal organization, resulting in a change in the reporting of its pulp, paper
and packaging operations. Weyerhaeuser's paper-related businesses, which were
reported in a single pulp, paper and packaging segment in prior financial
reports, are now reported as two segments entitled (i) pulp and paper, and
(ii) containerboard, packaging and recycling. The pulp and paper segment
includes all of the company's white paper production including market pulp, fine
paper, newsprint, and paperboard. Net sales for the pulp and paper segment
increased for both the second quarter and first half of 2002 compared to the
same periods in 2001, however, contribution to earnings declined for both
comparative periods. Net sales increased primarily as a result of the inclusion
of Willamette's operations after February 11, 2002. Selling price declines in
pulp and paper partially offset increases in net sales due to the Willamette
acquisition for the first half of 2002 compared to the same period in 2001.
Market pulp and paper pricing improved at the end of the second quarter as a
result of low inventories and the weakening of the U.S. dollar.
An explosion in the recovery boiler at our Plymouth, N.C., paper mill,
had a significant adverse affect on pulp and paper operating results. Repairs
are expected to be complete in August 2002, but the resulting lost production
and higher operating costs are expected to adversely affect third quarter
results. Also in the third quarter of 2002, the Kingsport, Tennessee, paper
mill will begin operation as the first phase of the modernization project of the
mill becomes operational.
Third party sales and total production volumes for major pulp and paper products
follow:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Third party sales volumes (thousands)2002 2001 2002 2001
------- ------- ------- --------
Pulp - air-dry metric tons 618 507 1,181 987
Paper - tons 766 355 1,360 748
Paperboard - tons 61 56 114 116
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Total production volumes (thousands) 2002 2001 2002 2001
------- ------- ------- --------
Pulp - air-dry metric tons 701 448 1,386 997
Paper - tons 727 339 1,285 739
Paperboard - tons 67 61 130 113
In the third quarter, pricing is expected to stabilize, however, demand is
recovering slowly and further price improvements will require additional
improvement in demand.
Containerboard, Packaging and Recycling
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
------- ------- ------- --------
Net sales and revenues $ 1,157 $ 817 $ 2,073 $ 1,633
Contribution to earnings 75 68 133 162
Weyerhaeuser Company
- -30-
Net sales for the containerboard, packaging, and recycling segment increased for
both the second quarter and first half of 2002 compared to the same periods in
2001, however, contribution to earnings were mixed for the comparative periods.
The increase in net sales in the first half of 2002 compared to the first half
of 2001 is primarily attributable to the acquisition of Willamette. The
increase as a result of the acquisition was offset, in part, by declines in
price in the first half of 2002 compared to the first half of 2001 for both
containerboard and packaging.
Shipments in containerboard are improving slowly, and year-over-year
improvements in existing Weyerhaeuser sales volumes were experienced in June.
Contribution to earnings for the second quarter of 2002 include pretax charges
of $28 million for facilities closures in 2002. The domestic containerboard and
packaging markets are expected to continue to improve into the third quarter
of 2002.
Third party sales and total production volumes for containerboard, packaging,
and recycling follow:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Third party sales volumes (thousands)2002 2001 2002 2001
------- ------- ------- --------
Containerboard - tons 309 222 558 440
Packaging - MSF 19,527 11,856 34,900 24,546
Recycling - tons 552 817 1,156 1,643
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Total production volumes (thousands) 2002 2001 2002 2001
------- ------- ------- --------
Containerboard - tons 1,600 776 2,850 1,651
Packaging - MSF 20,630 13,432 36,911 26,787
Recycling - tons 1,286 1,181 2,544 2,373
Real Estate and Related Assets
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
June 30, July 1, June 30, July 1,
Dollar amounts in millions 2002 2001 2002 2001
------- ------- ------- -------
Net sales and revenues $ 421 $ 371 $ 817 $ 705
Contribution to earnings 79 62 170 131
Net sales and contribution to earnings improved for both the second quarter and
first half of 2002 compared to the same periods in 2001. Sales in markets
where the company operates remained strong during the second quarter of 2002,
despite modest slowdown in traffic in some markets. Contribution to earnings
for 2002 include a pretax gain of $7 million for the sale of an apartment
complex. The real estate business is expected to continue to perform well into
the third quarter of 2002 given the six-month backlog of existing orders and
favorable mortgage rates.
Costs and Expenses
Weyerhaeuser's second quarter costs and expenses were $4.3 billion compared to
$3.2 billion in the same quarter last year. Increases in costs and expenses are
primarily attributable to the inclusion of Willamette's operations since
acquisition. Weyerhaeuser's cost of products sold, as a percentage of sales, was
78 percent for the current quarter, compared to 76 percent for the second
quarter 2001.
Various nonrecurring items are included in Weyerhaeuser's costs and expenses.
Costs and expenses for the second quarter of 2002 include nonrecurring pretax
charges of:
.. $28 million associated with the closure, or pending closure, of four
facilities, and
.. $23 million in costs related to the integration of the Willamette acquisition.
Weyerhaeuser Company
- -31-
Costs and expenses for the second quarter 2001 include nonrecurring pre-tax
charges of:
.. $5 million in support alignment costs, and
.. $10 million in integration and closure costs related to the MacMillan Bloedel
and Trus Joist acquisitions.
Other operating costs, net, is an aggregation of both recurring and nonrecurring
items and, as a result, can fluctuate from year to year. Other operating costs,
net for the current quarter includes $27 million in exchange rate gains as a
result of favorable changes in exchange rates. Other operating costs, net for
the second quarter 2001 includes the $10 million pretax charges related to
Westwood Shipping Line's transition to a new charter fleet.
The increase in the real estate and related assets segment's costs and expenses
can be attributed to the increased sales volumes over the same period last year.
Liquidity and Capital Resources
General
The company is committed to the maintenance of a sound capital structure. This
commitment is based upon two considerations: the obligation to protect the
underlying interests of its shareholders and lenders and the desire to have
access, at all times, to all major financial markets.
The important elements of the policy governing the company's capital structure
are as follows:
.. To view separately the capital structures of Weyerhaeuser Company and
Weyerhaeuser Real Estate Company and related subsidiaries, given the very
different nature of their assets and business activities. The amount of debt and
equity associated with the capital structure of each will reflect the basic
earnings capacity, real value and unique liquidity characteristics of the assets
dedicated to that business.
.. The combination of maturing short-term debt and the structure of long-term
debt will be managed judiciously to minimize liquidity risk.
Operations
Consolidated net cash provided by operations in the first half of 2002
was $329 million, up $35 million, or 12 percent, from $294 million provided
during the same period last year. Net cash from operations before changes in
working capital of $649 million in 2002 was $60 million, or 10 percent, greater
than $589 million provided in 2001. Cash provided by net earnings of $102
million in 2002 was net of noncash charges of $578 million for depreciation,
amortization and fee stumpage, $33 million in deferred taxes, $25 million for
integration of facilities, $55 million for closure of facilities and $35 million
for the write-off of deferred finance costs associated with bridge financing
related to the Willamette acquisition. This was partially offset by noncash
credits of $40 million for pension and postretirement benefits and $47 million
in reversals of previously accrued countervailing duties. 2001 cash provided by
net earnings of $278 million was net of noncash charges of $428 million for
depreciation, amortization and fee stumpage, $72 million in deferred taxes, $19
million in integration costs and $20 million for an asset impairment charge.
This was partially offset by noncash credits of $110 million for pension and
postretirement benefits and $47 million of equity in earnings of affiliates.
Cash required for working capital by Weyerhaeuser was $274 million in the first
two quarters of 2002, an increase of $83 million, or 43 percent, over $191
million for the same period a year ago. Requirements for 2002 included $206
million for increases in receivables, $74 million for increases in inventories
and $109 million for increases in prepaid expenses, partially offset by
increases in accounts payable and accrued liabilities of $115 million.
Inventory increased across all product lines except raw materials. The
inventory turnover rate increased to 9.7 turns in the second quarter of 2002
from 8.8 turns in the second quarter of 2001. Cash required by real estate and
related assets for working capital in the amount of $46 million was 56 percent
below $106 required for the same period in 2001. Current period cash outflows
for working capital included $104 million for the acquisition and development of
land and residential lots for development in excess of products sold, partially
offset by $58 million in increases in accounts payable and accrued liabilities.
Weyerhaeuser Company
- -32-
Year-to-date earnings before interest expense and income taxes plus net noncash
charges for the principal business segments were:
.. Timberlands - $342 million, an increase of $41 million from $301 million in
2001. Operating earnings for this segment were $24 million greater than last
year and noncash charges were $13 million greater, while pension credits
decreased $4 million.
.. Wood Products - $196 million, an increase of $46 million over $150 million in
2001. Operating earnings decreased $4 million from the same period last year
while noncash charges for depreciation and amortization and facility closures
increased by $78 million and noncash pension credits decreased by $19 million.
2002 also includes $47 million in noncash credits related to the reversal of
previously accrued countervailing duties.
.. Pulp and Paper - $131 million, down $57 million from $188 million a year ago.
The $114 million decline in operating earnings included a $43 million increase
in depreciation and amortization, and a $14 million decrease in noncash pension
credits.
.. Containerboard, Packaging and Recycling - $281 million, up $57 million from
$224 million a year ago. Operating earnings declined by $29 million, but
noncash charges for depreciation, amortization and facility closures were $75
million greater than for the same period last year. Noncash pension credits
also decreased $11 million.
Investing
Capital expenditures for the first twenty-six weeks ended June 30, 2002,
excluding acquisitions and real estate and related assets, were $466 million in
2002 compared to $368 million in 2001. Current year capital spending by segment
was $29 million for timberlands, $134 million for wood products, $198 million
for pulp and paper, $86 million for containerboard, packaging and recycling and
$19 million for corporate and other. The company currently anticipates capital
expenditures, excluding acquisitions and real estate and related assets, to
approximate $950 million for the year; however, this expenditure level could
increase or decrease as a consequence of future economic conditions.
In 2002, the company expended $6.1 billion, net of cash acquired, to purchase
the tendered shares of Willamette and cash out stock options of certain
Willamette management personnel.
Cash provided by investments in equity affiliates for real estate and related
assets in 2001 reflects distributions from equity investments that were
liquidated by the company during the first quarter of 2001.
Financing
Year-to-date 2002, Weyerhaeuser increased its interest-bearing debt by $8.2
billion, primarily due to funding the acquisition of Willamette and the
assumption of $1.8 billion of Willamette debt. Proceeds from new borrowings, net
of debt issue costs, including both the initial acquisition funding and the
subsequent replacement of the bridge financing, totaled $13.1 billion in 2002.
Repayments of long-term debt, including the bridge funding, totaled $6.7
billion, for a net increase in new borrowings of $6.4 billion. This was
partially offset by $120 million in payments of notes and commercial paper.
Weyerhaeuser's debt to total capital ratio, excluding real estate and related
assets, was 56 percent at the end of the 2002 second quarter, up from 38 percent
at the end of 2001 and 35 percent at the end of the 2001 second quarter. For
purposes of computing this ratio, debt includes Weyerhaeuser's interest-bearing
debt and capital lease obligations and total capital consists of debt,
shareholders' interest, deferred taxes and minority interest in subsidiaries,
net of Weyerhaeuser's investments in real estate and related assets
subsidiaries. Weyerhaeuser's goal is to pay down the additional debt using cash
flow from operations and to return to our historic debt ratios within three to
five years.
The real estate and related assets segment reduced third party debt by $44
million, all of which represents repayment of long-term debt.
During the first two quarters of 2002, the company paid $177 million in cash
dividends compared to $175 million in cash dividends paid during 2001.
Year-to-date 2002, the company also received $66 million in cash proceeds from
the exercise of stock options, compared to $24 million in 2001.
Weyerhaeuser Company
- -33-
Environmental Matters
The company has established reserves for remediation costs on all of the
approximately 75 active sites across its operations as of the end of 2002 second
quarter in the aggregate amount of $43 million, down from $45 million at the end
of 2001. This decrease reflects the incorporation of new information on all
sites concerning remediation alternatives, updates on prior cost estimates and
new sites (none of which were significant) less the costs incurred to remediate
these sites during this period. The company accrued $2 million and $1 million
of remediation costs into this reserve in the first six months of 2002 and 2001,
respectively. The company incurred remediation costs of $4 million in both 2002
and 2001, and charged these costs against the reserve.
Legal Proceedings
The company announced in June 2000 it had entered into a proposed nationwide
settlement of its hardboard siding class action cases and, as a result, took a
pretax charge of $130 million to cover the estimated cost of the settlement and
related claims. The court approved the settlement in December 2000. An appeal
from the settlement was denied in March 2002, and is now binding on all parties.
The company reassessed the adequacy of the reserve and increased the reserve by
an additional $43 million in the third quarter of 2001. The company incurred
claims and related costs in the amount of $6 million and $14 million in the
first six months of 2002 and 2001, respectively, and charged these costs against
the reserve. While the company believes that the reserve balances established
for these matters are adequate, the company is unable to estimate at this time
the amount of additional charges, if any, that may be required for these matters
in the future.
The company negotiated settlements with its insurance carriers for recovery of
certain costs related to these claims. As of June 30, 2002, the company has
either received or accrued $52 million in recoveries from its insurance
carriers.
The following table presents an analysis of the claims activity related to the
hardboard siding class action cases:
Twenty-six weeks Fifty-two weeks Fifty-three weeks
ended ended ended
June 30, 2002 Dec. 30, 2001 Dec. 31, 2000
---------------- ----------------- -----------------
Number of claims filed
during the period 1,550 6,480 40
Number of claims resolved 1,630 2,580 --
Number of claims unresolved
at end of period 3,860 3,940 40
Number of damage awards paid 1,200 400 --
Average damage award paid $1,800 $1,700 $--
Contingencies
Following the expiration of a five-year agreement between the United States and
Canada, in 2001, the Coalition for Fair Lumber Imports (Coalition) filed a
petition with the U.S. Department of Commerce (Department) and the International
Trade Commission (ITC), claiming that production of softwood lumber in Canada is
being subsidized by Canada and that imports from Canada are being "dumped" into
the U.S. market (sold at less than fair value). The Coalition asked that
countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber
imported from Canada. In March 2002, the Department confirmed its preliminary
finding that certain Canadian provinces were subsidizing logs by failing to
collect full market price for stumpage and established a final CVD rate of
18.79%. Because the final determination eliminated the 90-day retroactive
duties, the company reversed its $18 million accrual for the retroactive portion
of the CVD during the first quarter of 2002. In May 2002, the ITC confirmed its
earlier ruling that the U.S. industry is threatened by subsidized and dumped
imports. Its finding of only threat of injury means that the CVD and
antidumping duties will be collected only for the period beginning with the
publication of its final order on May 22, 2002. In the antidumping portion of
the case, the Department had chosen Weyerhaeuser and five Canadian companies to
provide data for the antidumping investigation. In its preliminary ruling
issued on October 30, 2001, the Department found that the company had engaged in
dumping and set a preliminary "dumping margin" for the company. In the final
determination, the company's rate was set at 12.34%. As of the end of the first
quarter of 2002, the company's accrual for the CVD and antidumping liability was
$42 million. With the finding of the ITC of only threat of injury, the accrual
was reversed on the company books during the second quarter. Approximately one
Weyerhaeuser Company
- -34-
year following the publication of the final order and annually thereafter for a
total of five years, the Department will conduct reviews to determine whether
the company had engaged in dumping and whether Canada continued to subsidize
softwood logs and, if so, the dumping margin and CVD to impose. At the end of
five years, both the countervailing duty and antidumping orders would be
automatically reviewed in a "sunset" proceeding to determine whether dumping or
a countervailing subsidy would be likely to continue or recur. The company
filed a notice of appeal under the North American Free Trade Agreement and
requested that a panel be convened to review the imposition of the antidumping
duty. The federal and provincial governments in Canada also moved for appellate
review by panels under NAFTA and the World Trade Organization (WTO) with respect
to the CVD findings. In July 2002, the WTO issued two interim rulings against
the United States. The first ruling was against the so-called "Byrd Amendment,"
which gives U.S. firms cash from punitive trade sanctions applied on foreign
imports. The second ruling was that a key measure used in the CVD to determine
the existence of a subsidy is improper. It is difficult to predict the net
effect final duties will have on the company because the company produces
softwood lumber in both the United States and Canada. The company believes that
the controversy has created some volatility and uncertainty in the marketplace,
but will not have a material adverse effect on the company's financial
position, liquidity or results of operations.
The company is a party to legal proceedings and environmental matters generally
incidental to its business. Although the final outcome of any legal proceeding
or environmental matter is subject to a great many variables and cannot be
predicted with any degree of certainty, the company presently believes that the
ultimate outcome resulting from these proceedings and matters will not have a
material effect on the company's financial position, liquidity or results of
operations.
Quantitative and Qualitative Disclosures About Market Risk
As part of the company's financing activities, derivative securities are
sometimes used to achieve the desired mix of fixed versus floating rate debt and
to manage the timing of finance opportunities. The company also utilizes
well-defined financial contracts in the normal course of its operations as means
to manage its foreign exchange and commodity price risks. The company has no
material market risk sensitive instruments, positions or transactions and the
effect of the use of derivatives on the company's results of operations,
financial position and cash flows is not material. For those limited number of
contracts that are considered derivative instruments, the company has formally
designated most as hedges of specific and well-defined risks. These contracts
include:
.. Foreign currency futures contracts entered into in conjunction with the
company's agreement to purchase equipment in a foreign denominated currency.
The objective of the contracts, which have been designated as fair value hedges,
is to fix the company's U.S. dollar cost of the equipment purchased in Euros.
At June 30, 2002, the company had a long position in Euros, with both a fair
value and a notional amount approximating zero. The contracts expire monthly
through August 2002.
.. Foreign exchange contracts, which the company has designated as cash flow
hedges, the objective of which is to hedge the variability of future cash flows
associated with foreign denominated accounts receivable and accounts payable due
to changes in foreign currency exchange rates. These contracts generate gains
or losses that are recorded in other comprehensive income until the contracts'
respective settlement dates, at which time they are reclassified into earnings.
At June 30, 2002, the company had a long position in Canadian dollars, with a
fair value of $4 million and a corresponding notional amount of $5 million. The
contracts expire monthly through June 2003. At June 30, 2002, the company also
had a long position in Norwegian kroners, with both a fair value and a notional
amount of $2 million.
.. Variable-to-fixed interest rate swap agreement entered into with a major
financial institution in which the company pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
The swap, which was acquired from Cedar River Paper Company, cannot be
designated as a hedge under Statement 133; however, it fixes $50 million of the
company's variable rate tax-exempt bond exposure. At June 30, 2002, the swap,
which matures December 2003, had a notional amount of $50 million and a fair
value representing a loss of $1 million. The fair value amount of the obligation
under this swap is based on the assumption that it had terminated at the end of
the fiscal period and provides for the netting of amounts payable by and to the
counterparty. In each case, the amount of such obligation is the net amount so
determined.
Weyerhaeuser Company
- -35-
.. Variable rate swap agreement entered into with a major financial institution
in which the company pays a floating rate based on LIBOR and receives a floating
return based on an investment fund index, with payments being calculated on a
notional amount. The swap is an overlay to investments and provides
diversification benefits. The swap is settled quarterly, marked to market at
each reporting date and all unrealized gains and losses are recognized in
earnings currently. At June 30, 2002, the company had one swap with a maturity
date of March 31, 2004, a notional amount of $151 million and a fair value of $3
million. The company has the right to terminate this swap with short notice.
.. Lumber and other commodity futures designed to manage the consolidated
exposure of changes in inventory values due to fluctuations in market prices for
selected business units. The company's commodity futures positions are marked
to market at each reporting date and all unrealized gains and losses are
recognized in earnings currently. These contract positions to date have not had
a material effect on the company's financial position, results of operations or
cash flows. These futures contracts settle daily, and as a result, the company's
net position as of June 30, 2002, was immaterial.
The company is exposed to credit-related gains or losses in the event of
nonperformance by counterparties to financial instruments, but does not expect
any counterparties to fail to meet their obligations.
Weyerhaeuser Company
- -36-
Part II. Other Information
Item 1. Legal Proceedings
The company entered into a class action settlement of hardboard siding claims
against the company that was approved by the Superior Court, San Francisco
County, California, in December 2000. The settlement class consists of all
persons who own or owned structures in the United States on which the company's
hardboard siding had been installed from January 1, 1981, through December 31,
1999. An appeal from the settlement was denied and the settlement is now
considered final and binding. The company has established reserves of $175
million to cover the estimated cost of the settlement and related costs. While
the company believes that the reserve balances established for these matters are
adequate, the company is unable to estimate at this time the amount of
additional charges, if any, that may be required for these matters in the
future. At the end of the second quarter of 2002, the company is a defendant in
16 cases involving primarily multi-family structures and residential
developments; however, five of these cases were improperly filed by persons who
did not opt-out of the settlement and the company expects these cases to be
dismissed. The company anticipates that other individuals and entities that
have opted out of the settlement may file lawsuits against the company. In
January 2002, a jury returned a verdict in favor of the company in a lawsuit
involving hardboard siding manufactured by the company and installed by a
developer in a residential development located in Modesto, California. The
verdict has been appealed.
In May 1999, two civil antitrust lawsuits were filed against the company in U.S.
District Court, Eastern District of Pennsylvania. Both suits name as defendants
several other major containerboard and packaging producers. The complaint in
the first case alleges the defendants conspired to fix the price of linerboard
and that the alleged conspiracy had the effect of increasing the price of
corrugated containers. The suit requested class certification for purchasers of
corrugated containers during the period October 1993 through November 1995. The
complaint in the second case alleges that the company conspired to manipulate
the price of linerboard and thereby the price of corrugated sheets. The suit
requested class certification for purchasers of corrugated sheets during the
period October 1993 through November 1995. Both suits seek damages, including
treble damages, under the antitrust laws. No specific damage amounts have been
claimed and the company is unable at this time to provide an estimate of
reasonably possible losses in these cases. In September 2001, the district
court certified both classes. The 3rd Circuit Court of Appeals accepted review
of the decision to certify the classes and heard oral arguments in June 2002.
Trial court activity has been stayed until an opinion on the appeal has been
rendered.
In May 1999, the Equity Committee (Committee) in the Paragon Trade Brands,
Inc. (Paragon) bankruptcy proceeding filed a motion in U.S. Bankruptcy Court for
the Northern District of Georgia for authority to prosecute claims against the
ompany in the name of the debtor's estate. Specifically, the Committee seeks to
assert that the company breached certain warranties in agreements entered into
between Paragon and the company in connection with Paragon's public offering of
common stock in January 1993. The Committee seeks to recover damages sustained
by Paragon as a result of two patent infringement cases, one brought by
Procter & Gamble and the other by Kimberly-Clark. In September 1999, the court
authorized the Committee to commence an adversary proceeding against the
company. The Committee commenced this proceeding in October 1999, seeking
damages in excess of $420 million against the company. Pursuant to a
reorganization of Paragon, the litigation claims representative for the
bankruptcy estate became the plaintiff in the proceeding. On June 26, 2002, the
Bankruptcy Court granted the plaintiff's motion for partial summary judgment,
holding that Weyerhaeuser is liable to the plaintiff for breaches of warranty,
and denied the company's motion for summary judgment. A written order is
expected in the near future. No trial date has been set for the determination
of the damages. Weyerhaeuser strongly disagrees with the Bankruptcy Court's
decision and will pursue all available relief. The company believes at the
present time that the possibility of a material unfavorable outcome is remote.
Following the expiration of a five-year agreement between the United States and
Canada, in 2001, the Coalition for Fair Lumber Imports (Coalition) filed a
petition with the U.S. Department of Commerce (Department) and the International
Trade Commission (ITC), claiming that production of softwood lumber in Canada is
being subsidized by Canada and that imports from Canada are being "dumped" into
the U.S. market (sold at less than fair value). The Coalition asked that
countervailing duty (CVD) and antidumping tariffs be imposed on softwood lumber
imported from Canada. In March 2002, the Department confirmed its preliminary
finding that certain Canadian provinces were subsidizing logs by failing to
collect full market price for stumpage and established a final CVD rate of
18.79%. Because the final determination eliminated the 90-day retroactive
duties, the company reversed its $18 million accrual for the retroactive portion
of the CVD during the first quarter of 2002. In May 2002, the ITC confirmed its
earlier ruling that the U.S. industry is threatened by subsidized and dumped
imports. Its finding of only threat of injury means that the CVD and
antidumping duties will be collected only for the period beginning with the
publication of its final order on May 22, 2002. In the antidumping portion of
the case, the Department had chosen Weyerhaeuser and five Canadian companies to
provide data for the antidumping investigation. In its preliminary ruling
issued on October 30, 2001, the Department found that the company had engaged in
Weyerhaeuser Company
- -37-
dumping and set a preliminary "dumping margin" for the company. In the final
determination, the company's rate was set at 12.34%. As of the end of the first
quarter of 2002, the company's accrual for the CVD and antidumping liability was
$42 million. With the ITC finding only a threat of injury, the accrual was
reversed on the company books during the second quarter. Approximately one year
following the publication of the final order and annually thereafter for a total
of five years, the Department will conduct reviews to determine whether the
company had engaged in dumping and whether Canada continued to subsidize
softwood logs and, if so, the dumping margin and CVD to impose. At the end of
five years, both the countervailing duty and antidumping orders would be
automatically reviewed in a "sunset" proceeding to determine whether dumping or
a countervailing subsidy would be likely to continue or recur. The company
filed a notice of appeal under the North American Free Trade Agreement and
requested that a panel be convened to review the imposition of the antidumping
duty. The federal and provincial governments in Canada also moved for appellate
review by panels under NAFTA and the World Trade Organization (WTO) with respect
to the CVD findings. In July 2002, the WTO issued two interim rulings against
the United States. The first ruling was against the so-called "Byrd Amendment,"
which gives U.S. firms cash from punitive trade sanctions applied on foreign
imports. The second ruling was that a key measure used in the CVD to determine
the existence of a subsidy is improper. It is difficult to predict the net
effect final duties will have on the company because the company produces
softwood lumber in both the United States and Canada. The company believes that
the controversy has created some volatility and uncertainty in the marketplace,
but will not have a material adverse effect on the company's current financial
position, liquidity or results of operations.
In April 1999, Willamette's Johnsonburg, Pennsylvania paper and pulp mill
received a notice of violation (NOV) from the U.S. Environmental Protection
Agency (EPA) for alleged violations of the Clean Air Act (CAA). Management has
met with federal and state officials to resolve the matters alleged in the NOV
and will continue to work with officials to narrow issues in dispute.
Management believes that it is reasonably possible that a settlement will be
reached at a future date, that may involve payment of a penalty of up to
approximately $1 million and the installation of pollution control equipment.
The company is also a party to various proceedings relating to the cleanup of
hazardous waste sites under the Comprehensive Environmental Response
Compensation and Liability Act, commonly known as "Superfund," and similar state
laws. The EPA and/or various state agencies have notified the company that it
may be a potentially responsible party with respect to other hazardous waste
sites as to which no proceedings have been instituted against the company. The
company is also a party to other legal proceedings generally incidental to its
business. Although the final outcome of any legal proceeding or environmental
matter is subject to a great many variables and cannot be predicted with any
degree of certainty, the company presently believes that any ultimate outcome
resulting from these proceedings and matters, or all of them combined, will not
have a material effect on the company's financial position, liquidity or results
of operations.
Item 2. Changes in Securities
(c) In March 2002, the company issued $5.5 billion of long-term debt, including
$500 million of floating rate notes due September 15, 2003; $1.0 billion of 5.5%
notes due March 15, 2005; $1.0 billion of 6.125% notes due March 15, 2007; $1.75
billion of 6.75% notes due March 15, 2012; and $1.25 billion of 7.375%
debentures due March 15, 2032. The notes were offered only to qualified
institutional buyers under Rule 144A of the Securities Act of 1933, as amended;
to a limited number of institutional accredited investors as defined in Rule 501
under the Securities Act and outside the United States in compliance with
Regulation S of the Securities Act of 1933, as amended. The initial purchasers
of the securities were Morgan Stanley & Co. Incorporated; J.P. Morgan
Securities, Inc.; Deutsche Banc Alex. Brown Inc.; Tokyo-Mitsubishi International
plc; Banc of America Securities LLC; Salomon Smith Barney Inc.; and Scotia
Capital (USA) Inc. The proceeds from the sale of the securities were used to
repay indebtedness incurred in connection with the Willamette acquisition.
Item 3. Defaults upon Senior Securities not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Matters voted upon and votes cast at the annual meeting of shareholders of
Weyerhaeuser Company held on Tuesday, April 16, 2002, were:
The reelection of Martha Ingram, John Kieckhefer, Arnold Langbo and Clayton
Yeutter to the board of directors.
For Withheld
------------- -------------
Ingram 186,169,567 7,815,163
Kieckhefer 187,109,174 6,875,556
Langbo 187,073,160 6,911,570
Yeutter 187,037,257 6,947,473
Weyerhaeuser Company
- -38-
The terms of Richard Haskayne, Robert Herbold, Donald Mazankowski, Nicole
Piasecki, Steven Rogel, William Ruckelshaus, Richard Sinkfield and James
Sullivan continued after the annual meeting.
For Against Abstain
------------ ----------- -----------
Proposal to approve an amendment
to the Weyerhaeuser Company 1998
Long-Term Incentive Plan 183,872,022 8,829,924 1,282,785
Shareholder proposal relating
to a classified board 99,253,092 78,251,938 1,657,986
Shareholder proposal relating
to shareholder rights plan 92,409,764 85,020,997 1,730,755
Item 5. Other Information not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits
12. Statement regarding computation of ratios
99. Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Reports on Form 8-K
The registrant filed reports on Form 8-K dated January 24, January 29, February
26, March 28, April 1, April 19, April 25, May 20, June 7, July 1, July 23,
August 9 and August 13, 2002, and on Form 8-K/A dated February 28, 2002,
reporting information under Item 2, Acquisition or Disposition of Assets;
Item 4, Changes in Registrant's Certifying Accountant; Item 5, Other Events;
Item 7, Financial Statements and Exhibits; and Item 9, Regulation FD Disclosure.
Weyerhaeuser Company
- -39-
EXHIBITS INDEX
- --------------
Exhibits:
12. Statement regarding computation of ratios
99. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 12
WEYERHAEUSER COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
TWENTY-SIX WEEKS ENDING
-----------------------
JUNE 30, JULY 1,
2002 2001
--------- ---------
Available earnings:
Earnings before interest expense,
amortization of debt expense,
income taxes and extraordinary item $560,578 $704,576
Add interest portion of rental expense 27,164 22,708
--------- ---------
Available earnings before extraordinary item $587,742 $727,284
========= =========
Fixed charges:
Interest expense incurred:
Weyerhaeuser Company and subsidiaries
excluding Weyerhaeuser Real Estate Company,
Weyerhaeuser Financial Services, Inc. and
Gryphon Investments of Nevada and
their subsidiaries $349,358 $173,880
Weyerhaeuser Real Estate Company and
consolidated subsidiaries 25,514 32,661
Weyerhaeuser Financial Services, Inc.
and consolidated subsidiaries 683 4,541
Gryphon Investments of Nevada, Inc. -- --
--------- ---------
Subtotal 375,555 211,082
Less intercompany interest 466 681
--------- ---------
Total interest expense incurred 375,089 210,401
--------- ---------
Amortization of debt expense 15,432 1,748
--------- ---------
Rental expense:
Weyerhaeuser Company and consolidated
subsidiaries 76,362 63,691
Weyerhaeuser Real Estate Company and
consolidated subsidiaries 5,129 4,433
Weyerhaeuser Financial Services, Inc.
and consolidated subsidiaries -- --
Gryphon Investments of Nevada, Inc. -- --
--------- ---------
81,491 68,124
--------- ---------
Interest portion of rental expense 27,164 22,708
--------- ---------
Fixed Charges $417,685 $234,857
========= =========
Ratio of earnings to fixed charges 1.41x 3.10x
========= =========
WEYERHAEUSER COMPANY WITH ITS WEYERHAEUSER REAL ESTATE COMPANY, WEYERHAEUSER
FINANCIAL SERVICES, INC. AND GRYPHON INVESTMENTS OF NEVADA SUBSIDIARIES
ACCOUNTED FOR ON THE EQUITY METHOD, BUT EXCLUDING THE UNDISTRIBUTED EARNINGS
OF THOSE SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
TWENTY-SIX WEEKS ENDING
-----------------------
JUNE 30, JULY 1,
2002 2001
--------- ---------
Available earnings:
Earnings before interest expense,
amortization of debt expense,
income taxes and extraordinary item $536,862 $583,225
Add interest portion of rental expense 25,454 21,230
--------- ---------
562,316 604,455
--------- ---------
Deduct undistributed earnings of
equity affiliates (3,932) (28,461)
--------- ---------
Deduct undistributed earnings before income
taxes of Weyerhaeuser Real Estate Company,
Weyerhaeuser Financial Services, Inc. and
Gryphon Investments of Nevada and
their subsidiaries:
Deduct pretax earnings (169,258) (130,861)
Add back dividends paid to Weyerhaeuser -- 30,000
--------- ---------
Undistributed earnings (169,258) (100,861)
--------- ---------
Available earnings before extraordinary item $389,126 $475,133
========= =========
Fixed charges:
Interest expense incurred $349,358 $173,880
Amortization of debt expense 15,432 1,748
Interest portion of rental expense 25,454 21,230
--------- ---------
Fixed charges $390,244 $196,858
========= =========
Ratio of earnings to fixed charges 1.00x 2.41x
========= =========
EXHIBIT 99
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Weyerhaeuser Company, a Washington corporation
(the "Company"), hereby certifies that:
The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 2002 (the "Form 10-Q") fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in the Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Steven R. Rogel
Chief Executive Officer
Dated: August 14, 2002
/s/ William C. Stivers
Chief Financial Officer
Dated: August 14, 2002
The foregoing certification is being furnished solely pursuant to section 906
of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350,
chapter 63 of title 18, United States Code) and is not being filed as part of
the Form 10-Q or as a separate disclosure document.