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SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the thirty-nine weeks ended September 29, 2002, or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-4825
WEYERHAEUSER COMPANY
A Washington Corporation (IRS Employer Identification
No. 91-0470860)
Federal Way, Washington 98063-9777
Telephone (253) 924-2345
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ------------------------------ -------------------------
Common Shares ($1.25 par value) Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Exchangeable Shares (no par value) Toronto Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's class of common stock,
as of November 1, 2002, was 218,947,525 common shares ($1.25 par value).
Weyerhaeuser Company
- -2-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the thirty-nine weeks ended September 29, 2002
Page No.
--------
Officer Certifications 3-4
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings 5
Consolidated Balance Sheet 6-7
Consolidated Statement of Cash Flows 8-9
Notes to Financial Statements 10-30
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31-40
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 41
Item 4. Controls and Procedures 42
Part II. Other Information
Item 1. Legal Proceedings 43
Item 2. Changes in Securities (not applicable)
Item 3. Defaults upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 43
The financial information included in this report has been prepared in
conformity with accounting practices and methods reflected in the financial
statements included in the annual report (Form 10-K) filed with the
Securities and Exchange Commission for the year ended December 30, 2001.
Though not audited by independent public accountants, the financial
information reflects, in the opinion of management, all adjustments necessary
to present a fair statement of results for the interim periods indicated.
The results of operations for the thirty-nine week period ended
September 29, 2002, should not be regarded as necessarily indicative of the
results that may be expected for the full year.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WEYERHAEUSER COMPANY
By /s/ Steven J. Hillyard
--------------------------
Steven J. Hillyard
Duly Authorized Officer and
Principal Accounting Officer
November 12, 2002
Weyerhaeuser Company -3-
CERTIFICATIONS
I, Steven R. Rogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Weyerhaeuser
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ Steven R. Rogel
----------------------------
Steven R. Rogel
Chairman, President and Chief Executive Officer
Weyerhaeuser Company -4-
I, William C. Stivers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Weyerhaeuser
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ William C. Stivers
----------------------------
William C. Stivers
Executive Vice President and Chief Financial Officer
Weyerhaeuser Company -5-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENT OF EARNINGS
For the periods ended September 29, 2002 and September 30, 2001
(Dollar amounts in millions except per-share data)
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues:
Weyerhaeuser $ 4,444 $ 3,360 $ 12,584 $ 10,050
Real estate and related assets 468 392 1,285 1,097
-------- -------- -------- --------
Total net sales and revenues 4,912 3,752 13,869 11,147
-------- -------- -------- --------
Costs and expenses:
Weyerhaeuser:
Costs of products sold 3,598 2,659 9,992 7,795
Depreciation, amortization and
fee stumpage 304 223 879 648
Selling expenses 116 95 335 286
General and administrative
expenses 201 148 618 501
Research and development expenses 11 11 36 38
Taxes other than payroll and
income taxes 48 38 139 113
Other operating costs, net (Note 13)19 24 (4) 77
Charges for integration of
facilities (Note 14) 17 4 42 23
Charges for closure of
facilities (Note 15) -- 32 55 32
-------- -------- -------- --------
4,314 3,234 12,092 9,513
-------- -------- -------- --------
Real estate and related assets:
Costs and operating expenses 359 301 967 824
Depreciation and amortization 1 2 4 5
Selling expenses 23 23 68 61
General and administrative expenses 14 4 35 30
Taxes other than payroll and
income taxes 1 1 3 4
Other operating costs, net 6 (2) -- (4)
-------- -------- -------- --------
404 329 1,077 920
-------- -------- -------- --------
Total costs and expenses 4,718 3,563 13,169 10,433
-------- -------- -------- --------
Operating income 194 189 700 714
Interest expense and other:
Weyerhaeuser:
Interest expense incurred (214) (93) (579) (268)
Interest capitalized 16 6 36 16
Equity in income (loss) of
affiliates (Note 4) (6) 5 (12) 35
Interest income and other 9 4 20 14
Real estate and related assets:
Interest expense incurred (12) (17) (38) (54)
Interest capitalized 12 16 38 49
Equity in income of unconsolidated
entities (Note 4) 10 4 22 21
Interest income and other 11 8 25 13
-------- -------- -------- --------
Earnings before income taxes and
extraordinary item 20 122 212 540
Income taxes (Note 5) (7) (31) (74) (171)
-------- -------- -------- --------
Earnings before extraordinary item 13 91 138 369
Extraordinary item, net of tax
benefit of $12 (Note 16) -- -- (23) --
-------- -------- -------- --------
Net earnings $ 13 $ 91 $ 115 $ 369
======== ======== ======== ========
Basic and diluted net earnings per share (Note 2):
Before extraordinary item $ 0.06 $ 0.41 $ 0.62 $ 1.68
Extraordinary item (Note 16) -- -- (0.10) --
-------- -------- -------- --------
Basic and diluted net earnings $ 0.06 $ 0.41 $ 0.52 $ 1.68
======== ======== ======== ========
Dividends paid per share $ 0.40 $ 0.40 $ 1.20 $ 1.20
======== ======== ======== ========
See Accompanying Notes to Financial Statements
Weyerhaeuser Company -6-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEET
September 29, 2002 and December 30, 2001
(Dollar amounts in millions)
(Unaudited)
Sept. 29, Dec. 30,
2002 2001
---------- ----------
Assets
- ------
Weyerhaeuser
Current assets:
Cash and cash equivalents $ 119 $ 202
Receivables, less allowances 1,604 1,024
Inventories (Note 6) 1,951 1,428
Prepaid expenses 485 407
---------- ----------
Total current assets 4,159 3,061
Property and equipment (Note 7) 12,235 8,309
Construction in progress 1,338 428
Timber and timberlands at cost, less fee
stumpage charged to disposals 4,436 1,789
Investments in and advances to equity
affiliates (Note 4) 541 541
Goodwill (Note 8) 2,812 1,095
Deferred pension and other assets 1,239 1,053
---------- ----------
26,760 16,276
---------- ----------
Real estate and related assets
Cash and cash equivalents 11 2
Receivables, less discounts and allowances 68 71
Mortgage-related financial instruments, less
discounts and allowances 23 62
Real estate in process of development and for sale 735 689
Land being processed for development 995 958
Investments in unconsolidated entities, less
reserves (Note 4) 31 60
Other assets 172 175
---------- ----------
2,035 2,017
---------- ----------
Total assets $ 28,795 $ 18,293
========== ==========
See Accompanying Notes to Financial Statements
Weyerhaeuser Company -7-
Sept. 29, Dec. 30,
2002 2001
---------- ----------
Liabilities and shareholders' interest
- --------------------------------------
Weyerhaeuser
Current liabilities:
Notes payable and commercial paper (Note 10) $ 231 $ 4
Current maturities of long-term debt (Note 11) 791 8
Accounts payable 1,059 809
Accrued liabilities (Note 9) 1,189 1,042
---------- ----------
Total current liabilities 3,270 1,863
Long-term debt (Note 11) 12,224 5,095
Deferred income taxes (Note 5) 4,360 2,377
Deferred pension, other postretirement
benefits and other liabilities 947 877
Commitments and contingencies (Note 17)
---------- ----------
20,801 10,212
---------- ----------
Real estate and related assets
Notes payable and commercial paper (Note 10) 80 358
Long-term debt (Note 11) 856 620
Other liabilities 432 408
Commitments and contingencies (Note 17)
---------- ----------
1,368 1,386
---------- ----------
Total liabilities 22,169 11,598
---------- ----------
Shareholders' interest (Note 12)
Common shares: $1.25 par value; authorized
400,000,000 shares; issued and outstanding:
218,947,509 and 216,573,822 shares 274 271
Exchangeable shares: no par value; unlimited
shares authorized; issued and held by nonaffiliates:
2,304,269 and 3,289,259 shares 157 224
Other capital 2,826 2,693
Retained earnings 3,702 3,852
Cumulative other comprehensive loss (333) (345)
---------- ----------
Total shareholders' interest 6,626 6,695
---------- ----------
Total liabilities and shareholders' interest $ 28,795 $ 18,293
========== ==========
Weyerhaeuser Company -8-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the thirty-nine week periods ended
September 29, 2002 and September 30, 2001
(Dollar amounts in millions)
(Unaudited)
Consolidated
----------------------
Sept. 29, Sept. 30,
2002 2001
---------- ----------
Cash flows from operations:
Net earnings $ 115 $ 369
Noncash charges (credits) to income:
Depreciation, amortization and fee stumpage 883 652
Deferred income taxes, net 33 62
Net pension and other postretirement benefit income (64) (157)
Equity in income (loss) of affiliates and
unconsolidated entities (10) (56)
Reversals of countervailing duties and
antidumping penalties (Note 17) (47) --
Charges for integration of facilities (Note 14) 42 23
Charges for closure of facilities (Note 15) 55 32
Charge for impairment of long-lived assets (Note 13) -- 20
Extraordinary loss on early extinguishment of
debt (Note 16) 35 --
Decrease (increase) in working capital, net of acquisitions:
Receivables (158) 62
Inventories, real estate and land (71) (98)
Prepaid expenses (57) 13
Mortgage-related financial instruments 7 3
Accounts payable and accrued liabilities (92) (91)
(Gain) loss on disposition of assets 2 5
Other (14) (100)
---------- ----------
Net cash from operations 659 739
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (684) (485)
Timberlands reforestation (26) (20)
Acquisition of timberlands (47) (92)
Acquisition of businesses and facilities,
net of cash acquired (Note 18) (6,119) (261)
Net distributions from (investments in)
equity affiliates 38 136
Proceeds from sale of:
Property and equipment 43 41
Mortgage-related financial instruments 35 8
Intercompany advances -- --
Other (5) (28)
---------- ----------
Net cash from investing activities (6,765) (701)
---------- ----------
Cash flows from financing activities:
Issuances of debt 13,417 1,240
Notes and commercial paper borrowings, net (276) (890)
Cash dividends (265) (263)
Intercompany cash dividends -- --
Payments on debt (6,903) (151)
Exercise of stock options 67 29
Other (8) (13)
---------- ----------
Net cash from financing activities 6,032 (48)
---------- ----------
Net change in cash and cash equivalents (74) (10)
Cash and cash equivalents at beginning of period 204 123
---------- ----------
Cash and cash equivalents at end of period $ 130 $ 113
========== ==========
Cash paid (received) during the period for:
Interest, net of amount capitalized $ 539 $ 292
========== ==========
Income taxes $ 32 $ 35
========== ==========
See Accompanying Notes to Financial Statements
Weyerhaeuser Company -9-
Weyerhaeuser Real Estate and Related Assets
------------------------------ ------------------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
$ (51) $ 237 $ 166 $ 132
879 647 4 5
25 56 8 6
(63) (152) (1) (5)
12 (35) (22) (21)
(47) -- -- --
42 23 -- --
55 32 -- --
-- 20 -- --
35 -- -- --
(161) 79 3 (17)
(12) (19) (59) (79)
(52) 10 (5) 3
-- -- 7 3
(116) (109) 24 18
3 5 (1) --
8 (50) (22) (50)
------------- ------------- ------------- -------------
557 744 102 (5)
------------- ------------- ------------- -------------
(683) (483) (1) (2)
(26) (20) -- --
(47) (92) -- --
(6,119) (261) -- --
(9) (33) 47 169
43 41 -- --
-- -- 35 8
54 10 (54) (10)
(2) (24) (3) (4)
------------- ------------- ------------- -------------
(6,789) (862) 24 161
------------- ------------- ------------- -------------
13,127 840 290 400
2 (406) (278) (484)
(265) (263) -- --
75 30 (75) (30)
(6,849) (106) (54) (45)
67 29 -- --
(8) (13) -- --
------------- ------------- ------------- -------------
6,149 111 (117) (159)
------------- ------------- ------------- -------------
(83) (7) 9 (3)
202 115 2 8
------------- ------------- ------------- -------------
$ 119 $ 108 $ 11 $ 5
============= ============= ============= =============
$ 538 $ 285 $ 1 $ 7
============= ============= ============= =============
$ (50) $ (38) $ 82 $ 73
============= ============= ============= =============
Weyerhaeuser Company -10-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the thirty-nine week periods ended
September 29, 2002 and September 30, 2001
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Weyerhaeuser
Company and all of its majority-owned domestic and foreign subsidiaries (the
company). As discussed in Note 18: Acquisition, the accounts of Willamette
Industries, Inc. (Willamette) are included beginning February 11, 2002.
Investments in and advances to equity affiliates which are not majority owned
or controlled are accounted for using the equity method with taxes provided
on undistributed earnings. Significant intercompany transactions and accounts
are eliminated.
Certain of the consolidated financial statements and notes to financial
statements are presented in two groupings: (1) Weyerhaeuser, principally
engaged in the growing and harvesting of timber and the manufacture,
distribution and sale of forest products, and (2) Real estate and related
assets, principally engaged in real estate development and construction and
other real estate related activities.
Nature of Operations
Weyerhaeuser's principal business segments, which account for the majority of
sales, earnings and the asset base, are:
.. Timberlands, which manages 7.3 million acres of company-owned forestland in
North America. The company also has .8 million acres of leased commercial
forestland in the United States.
Through several wholly-owned subsidiaries and joint ventures, the company
is also responsible for management, marketing and distribution activities for
both forestlands and manufacturing facilities located in New Zealand,
Australia, Ireland, France and Uruguay.
.. Wood products, which produces a full line of solid wood products that are
sold primarily through the company's own sales organizations to wholesalers,
retailers and industrial users in North America, the Pacific Rim and Europe.
.. Pulp and paper, which manufactures and sells pulp, paper and bleached
paperboard in North American, European and Pacific Rim markets.
.. Containerboard, packaging and recycling, which manufactures and sells
containerboard in North American, Pacific Rim and European markets and
packaging products for the domestic and Mexican markets, and which operates
an extensive wastepaper recycling system that serves company mills and
worldwide markets.
Weyerhaeuser also holds renewable long-term licenses on 33.8 million acres of
forestland located in British Columbia, Alberta, Saskatchewan, Ontario, and
New Brunswick, Canada, that are managed by our Canadian operations. Revenues
and expenses associated with these licenses are included in the results of
operations of the manufacturing operations they support. The terms of these
licenses are described under "Timber and Timberlands" below.
During the second quarter of 2002, Weyerhaeuser changed the structure of its
internal organization, resulting in a change in the composition of its
reportable segments. In financial reports prior to the second quarter of
2002, Weyerhaeuser's paper-related businesses were reported in a single pulp,
paper and packaging segment. This report reflects the split of the pulp,
paper and packaging segment into two segments entitled (i) pulp and paper,
and (ii) containerboard, packaging and recycling. Comparative information
has been restated to conform to the new reportable segments.
Weyerhaeuser Company -11-
Accounting Pronouncements Implemented
At the beginning of fiscal 2002, the company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. In
accordance with Statement 142, the company no longer amortizes goodwill over
an estimated useful life. Rather, the company assesses goodwill for
impairment by applying a fair value based test at least annually. The
company has performed the fair value based assessment of goodwill as of the
beginning of fiscal 2002. Based upon this assessment, management believes
goodwill was not impaired upon the implementation of this standard. Statement
142 also requires separate recognition for certain acquired intangible assets
that will continue to be amortized over their useful lives. There were no
separately identified intangible assets other than goodwill that existed from
acquisitions prior to the adoption of Statement 142.
At the beginning of fiscal 2002, the company adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Statement 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and eliminates the
exception to consolidation of a subsidiary for which control is likely to be
temporary. Statement 144 supersedes Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and supersedes the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. Implementation of
Statement 144 did not have a material impact on the company's financial
position, results of operations or cash flows.
Prospective Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations. Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. The company will
adopt Statement 143 as of the beginning of fiscal 2003. The company has not
yet estimated the impact of implementation on its financial position, results
of operations or cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. Statement 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. The Statement also amends FASB Statement No. 13, Accounting
for Leases, to eliminate an inconsistency between the accounting required for
sale-leaseback transactions and for certain lease modifications that have
similar economic effects. This Statement also amends other existing
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. As a result of the
rescission of Statement 4, the company will reclassify the 2002 first quarter
extraordinary loss from early extinguishment of debt into earnings before
extraordinary items in its annual report for 2002. The provisions rescinding
Statements 44 and 64 will be effective in fiscal year 2003. The provisions
amending Statement 13 and all other provisions are effective for transactions
occurring or financial statements issued on or after May 15, 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities.
Statement 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Statement 146 will supersede
accounting guidance previously provided by Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Statement 146 will be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of this statement is
not expected to have a material impact on the company's financial position,
results of operations or cash flows.
Weyerhaeuser Company -12-
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Derivatives
The company utilizes well-defined financial contracts in the normal course of
its operations as a means to manage its foreign exchange, interest rate and
commodity price risks. The vast majority of these contracts either do not
provide for net settlement or are fixed-price contracts for future purchases
and sales of various commodities that meet the definition of "normal
purchases or normal sales," and therefore, are not considered derivative
instruments for accounting purposes. The company's current accounting
treatment for the limited number of contracts considered derivative
instruments follows.
For derivatives designated as fair value hedges, changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. For derivatives designated as cash flow hedges, the
effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in earnings when
the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. Changes in the fair
value of all other derivative instruments not designated as hedges are also
recognized in earnings in the period in which the changes occur.
The following financial instruments have been formally designated as cash
flow hedges:
.. Foreign exchange contracts, the objective of which is to hedge the
variability of future cash flows associated with foreign denominated accounts
receivable and accounts payable due to changes in foreign currency exchange
rates.
.. Commodity contracts, the objective of which is to hedge the variability of
future cash flows associated with certain commodity transactions.
Gains or losses related to cash flow hedges that have been recorded in other
comprehensive income are reclassified into earnings at the contracts' respective
settlement dates.
In addition, the company has the following contracts that have not been
designated as hedges:
.. Variable rate swap agreement entered into with a major financial
institution in which the company pays a floating rate based on LIBOR and
receives a floating return based on an investment fund index, with payments
calculated on a notional amount. The swap is an overlay to investments and
provides diversification benefits. The swap is settled quarterly and marked
to market value at each reporting date. All unrealized gains and losses are
recognized in earnings currently.
.. Variable-to-fixed interest rate swap agreement entered into with a major
financial institution in which the company pays a fixed rate and receives a
floating rate with the interest payments calculated on a notional amount. The
swap, which was acquired in 2001 as part of the Cedar River Paper Company
acquisition, cannot be designated as a hedge under Statement 133; however, it
fixes $50 million of the company's variable rate tax-exempt bond exposure.
The swap is marked to market value quarterly and any unrealized gains and
losses are recognized in earnings currently.
.. Lumber and other commodity futures designed to manage the consolidated
exposure to changes in inventory values due to fluctuations in market prices
for selected business units. The company's commodity futures positions are
marked to market value at each reporting date and all unrealized gains and
losses are recognized in earnings currently. These contract positions have
not had a material effect on the company's financial position, results of
operations or cash flows. As of September 29, 2002, the company's net
position with commodity futures contracts was immaterial.
The company is exposed to credit-related gains or losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The notional amounts of
these derivative financial instruments are $238 million and $198 million at
September 29, 2002, and December 30, 2001, respectively. These notional
amounts do not represent amounts exchanged by the parties and, thus, are not
a measure of exposure to the company through its use of derivatives. The
exposure in a derivative contract is the net difference between what each
Weyerhaeuser Company -13-
party is required to pay based on contractual terms. The net earnings impact
resulting from the company's use of derivative instruments was income of $8
million and $5 million for the thirty-nine weeks ended September 29, 2002,
and September 30, 2001, respectively.
Cash and Cash Equivalents
Short-term investments with original maturities of 90 days or less are
considered cash equivalents. Short-term investments are stated at cost, which
approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost includes labor,
materials and production overhead. The last-in, first-out (LIFO) method is
used to cost approximately half of domestic raw materials, in process and
finished goods inventories. LIFO inventories were $718 million and $354
million at September 29, 2002, and December 30, 2001, respectively. The
balance of domestic raw material and product inventories, all materials and
supplies inventories, and all foreign inventories is costed at either the
first-in, first-out (FIFO) or moving average cost methods. Had the FIFO
method been used to cost all inventories, the amounts at which product
inventories are stated would have been $187 million and $217 million greater
at September 29, 2002, and December 30, 2001, respectively.
Property and Equipment
The company's property accounts are maintained on an individual asset basis.
Betterments and replacements of major units are capitalized. Maintenance,
repairs and minor replacements are expensed. Depreciation is provided
generally on the straight-line or unit-of-production method at rates based on
estimated service lives. Amortization of logging railroads and truck roads is
provided generally as timber is harvested and is based upon rates determined
with reference to the volume of timber estimated to be removed over such
facilities.
The cost and accumulated depreciation of property sold or retired is removed
from the accounts and the gain or loss is included in earnings.
Timber and Timberlands
Timber and timberlands are carried at cost less fee stumpage charged to
disposals. Fee stumpage is the cost of standing timber and is charged to fee
timber disposals as fee timber is harvested, lost as a result of casualty or
sold. Generally, all initial site preparation and planting costs are
capitalized as reforestation. Reforestation is transferred to a merchantable
harvestable) timber classification after 15 years in the South and 41 years
in the West. Generally, costs incurred after the first planting, such as
fertilization, vegetation and insect control, pruning and pre-commercial
thinning, property taxes and interest, are considered to be maintenance of
the forest and are expensed. Accounting practices for these costs do not
change when timber becomes merchantable and harvesting commences.
Fee stumpage depletion rates used to relieve timber inventory are determined
with reference to the net carrying value of timber and the related volume of
timber estimated to be available over the growth cycle. The growth cycle
volume considers regulatory and environmental constraints affecting operable
acres, management strategies to be applied, inventory data improvements,
growth rate revisions and re-calibrations, and the exclusion of known
dispositions and inoperable acreage. The cost of timber harvested is included
in the carrying values of raw material and product inventories, and in the
cost of products sold as these inventories are disposed of.
Weyerhaeuser also holds forest management licenses in various Canadian
provinces. The provincial governments grant these licenses for initial
periods of 15-25 years, and the licenses are renewable every five years,
provided the company meets normal reforestation, operating and management
guidelines. Calculation of fees payable on harvested volumes varies from
province to province, but is tied to product market pricing and the
allocation of land management responsibilities agreed to in the license.
Weyerhaeuser Company -14-
Goodwill
Effective in the first quarter of 2002, the company accounts for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets. Goodwill, which represents the excess of
purchase price over fair value of net assets acquired, is assessed for
impairment at least annually using a fair value based approach.
Prior to the adoption of Statement 142, goodwill was amortized on a
straight-line basis over 40 years, which was the expected period to be
benefited. See Note 8: Goodwill for a reconciliation of 2001 earnings
excluding goodwill amortization.
Accounts Payable
The company's banking system provides for the daily replenishment of major
bank accounts as checks are presented for payment. Accordingly, certain
accounts had negative book cash balances totaling $173 million and $132
million at September 29, 2002, and December 30, 2001, respectively. Such
balances result from outstanding checks that had not yet been paid by the
bank and are reflected in accounts payable in the consolidated balance sheet.
Income Taxes
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently enacted
tax rates and laws.
Pension Plans
The company has pension plans covering most of its employees. Both the U.S.
and Canadian plans covering salaried employees provide pension benefits based
on the employee's highest monthly earnings for five consecutive years during
the final ten years before retirement. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
benefit levels for these plans are typically collectively bargained with the
unions. Contributions to U.S. plans are based on funding standards
established by the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions to Canadian plans are based on funding standards established by
the applicable Provincial Pension Benefits Act and by the Income Tax Act.
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, the company provides certain
health care and life insurance benefits for some retired employees and
accrues the expected future cost of these benefits for its current eligible
retirees and some employees. All of the company's salaried employees and some
hourly employees may become eligible for these benefits when they retire.
Revenue Recognition
The company's forest products operations recognize revenue from product sales
upon shipment to their customers, except for export sales where revenue is
recognized when title transfers at the foreign port.
The company's real estate and related assets operations are primarily engaged
in the development, construction and sale of residential homes. Real estate
revenues are recognized when closings have occurred, required down payments
have been received, and title and possession have been transferred to the
buyer.
Impairment of Long-Lived Assets
The company accounts for long-lived assets in accordance with FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Assets to be disposed of by sale are reported at the lower of
the carrying value or fair value less cost to sell.
Weyerhaeuser Company -15-
Foreign Currency Translation
Local currencies are considered the functional currencies for most of the
company's operations outside the United States. Assets and liabilities are
translated into U.S. dollars using period-end exchange rates. Revenues and
expenses are translated into U.S. dollars at average monthly exchange rates
prevailing during the year.
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation
adjustments, additional minimum pension liability adjustments and fair value
adjustments on derivative instruments designated as cash flow hedges. See
Note 3: Comprehensive Income (Loss).
Reclassifications
Certain reclassifications have been made to conform comparative data to the
current format.
Real Estate and Related Assets
Real estate held for sale is stated at the lower of cost or fair value less
costs to sell. The determination of fair value is based on appraisals and
market pricing of comparable assets, when available, or the discounted value
of estimated future cash flows from these assets. Real estate held for
development is stated at cost to the extent it does not exceed the estimated
undiscounted future net cash flows, in which case, it is carried at fair
value.
Mortgage-related financial instruments include mortgage loans receivable,
mortgage-backed certificates and other financial instruments.
Note 2: Net Earnings Per Share
Basic net earnings per share are based on the weighted average number of
common and exchangeable shares outstanding during the period. Diluted net
earnings per share are based on the weighted average number of common and
exchangeable shares outstanding and dilutive stock options outstanding during
the period.
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
-------------------- ----------------------
Weighted average shares outstanding (thousands):
Basic 221,251 219,801 220,818 219,577
Dilutive effect of stock options 372 504 829 353
------- ------- ------- -------
Diluted 221,623 220,305 221,647 219,930
======= ======= ======= =======
Options to purchase 4,072,629 shares for the thirty-nine weeks ended
September 29, 2002, and 859,861 shares for the thirty-nine weeks ended
September 30, 2001, were not included in the computation of diluted earnings
per share because the option exercise prices were greater than the average
market prices of common shares during those periods.
Weyerhaeuser Company -16-
Note 3: Comprehensive Income (Loss)
The company's comprehensive income (loss) is as follows:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net earnings $ 13 $ 91 $ 115 $ 369
Other comprehensive income (loss):
Foreign currency translation
adjustments related to investments
in foreign subsidiaries (80) (103) 13 (105)
Cash flow hedges:
Net derivative gains (losses),
net of tax (benefit) expense of
$0 and $(2) for the thirteen
weeks and $0 and $3 for the
thirty-nine weeks, respectively (1) (2) (1) 5
Reclassification of (gains) losses,
net of tax benefit (expense) of $0
and $0 for the thirteen weeks and
$0 and $(1) for the thirty-nine
weeks, respectively -- -- -- (2)
--------- --------- --------- ----------
$ (68) $ (14) $ 127 $ 267
========= ========= ========= ==========
Note 4: Equity Affiliates
Weyerhaeuser
Weyerhaeuser's investments in affiliated companies that are not majority
owned or controlled are accounted for using the equity method. Weyerhaeuser's
significant equity affiliates as of September 29, 2002, are:
.. ForestExpress, LLC - A 33 percent owned joint venture formed to develop and
operate a global, web-enabled, business-to-business marketplace for the
forest products industry. Other equity members of the joint venture, which is
headquartered in Atlanta, Georgia, include Boise Cascade Corporation,
Georgia-Pacific Corporation, International Paper, MeadWestvaco and Morgan
Stanley.
.. MAS Capital Management Partners, L.P. - A 50 percent owned limited
partnership formed for the purpose of providing specialized investment
management services to institutional and individual investors.
.. Nelson Forests Joint Venture - An investment in which the company owns a 51
percent financial interest and has a 50 percent voting interest, which holds
Crown Forest License cutting rights and freehold land on the South Island of
New Zealand.
.. North Pacific Paper Corporation - A 50 percent owned joint venture that has
a newsprint manufacturing facility in Longview, Washington.
.. Optiframe Software LLC - A 50 percent owned joint venture in Denver,
Colorado, formed during 2001 to develop whole-house design and optimization
software for the building industry.
.. RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint venture
with institutional investors to make investments in timberlands and related
assets outside the United States. The primary focus of this partnership is in
pine forests in the Southern Hemisphere.
.. SCA Weyerhaeuser Packaging Holding Company Asia Ltd. - A 50 percent owned
joint venture formed to build or buy containerboard packaging facilities to
serve manufacturers of consumer and industrial products in Asia. Two
facilities are in operation in China.
.. Southern Cone Timber Investors Limited - A 50 percent owned joint venture
with institutional investors that has made an investment in Uruguayan
timberlands. The primary focus of this entity is in plantation forests in the
Southern Hemisphere.
Weyerhaeuser Company -17-
.. Wapawekka Lumber LP - A 51 percent owned limited partnership in
Saskatchewan, Canada, that operates a sawmill. Substantive participating
rights by the minority partner preclude the consolidation of this partnership
by the company.
.. Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North
Carolina, which supplies full-service, value-added turnkey packaging
solutions to assist product manufacturers in the areas of retail marketing
and distribution.
Unconsolidated financial information for affiliated companies, which are
accounted for by the equity method, follows. Unconsolidated net sales and
revenues and net income (loss) for the thirty-nine weeks ended September 30,
2001, also include Cedar River Paper Company, a joint venture that became
wholly owned by the company in July 2001.
Sept. 29, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Current assets $ 201 $ 191
Noncurrent assets 1,213 1,222
Current liabilities 124 120
Noncurrent liabilities 348 326
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 138 $ 155 $ 434 $ 603
Operating income (loss) (17) 1 (24) 64
Net income (loss) (26) (2) (35) 46
The company provides goods and services to these affiliates, which vary by
entity, in the form of raw materials, management and marketing services,
support services and shipping services. Additionally, the company purchases
finished product from certain of these entities. The aggregate total of these
transactions is not material to the results of operations of the company.
Real Estate and Related Assets
Investments in unconsolidated entities that are not majority owned or
controlled are accounted for using the equity method with taxes provided on
undistributed earnings as appropriate.
Unconsolidated financial information for unconsolidated entities, which are
accounted for by the equity method, is as follows. Net sales and revenues and
net income (loss) for the thirty-nine weeks ended September 30, 2001, include
the results of non-real estate partnership investments, which the company
sold during the first quarter of 2001.
Weyerhaeuser Company -18-
Sept. 29, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Current assets $ 8 $ 8
Noncurrent assets 281 306
Current liabilities 13 11
Noncurrent liabilities 199 158
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 14 $ 11 $ 41 $ 451
Operating income 7 4 26 167
Net income 1 3 15 133
The company may charge management and/or development fees to these
unconsolidated entities. The aggregate total of these transactions is not
material to the results of operations of the company.
Note 5: Income Taxes
Provisions for income taxes include the following:
Thirty-nine weeks ended
------------------------
Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Federal:
Current $ 22 $ 82
Deferred 40 122
--------- ----------
62 204
--------- ----------
State:
Current 8 11
Deferred 3 12
--------- ----------
11 23
--------- ----------
Foreign:
Current 11 16
Deferred (10) (72)
--------- ----------
1 (56)
--------- ----------
$ 74 $ 171
========= ==========
Income tax provisions for interim periods are based on the current best estimate
of the effective tax rate expected to be applicable for the full year. The
effective tax rate reflects anticipated tax credits, foreign taxes and other tax
planning alternatives.
During the third quarter of 2001, a one-time reduction in the British Columbia
provincial corporate income tax rate was enacted. During the second quarter of
2001, a phased-in reduction in Canadian income taxes was also enacted. These
changes in tax law produced one-time benefits by reducing foreign deferred
income taxes by $14 million in the third quarter of 2001 and by $29 million in
the thirty-nine weeks ended September 30, 2001, due to the effect of the lower
tax rates on the accumulated temporary differences of the company's Canadian
subsidiaries. The effect on foreign current income taxes was not significant.
The company's effective tax rate for the thirty-nine week periods ended
September 29, 2002, and September 30, 2001, was 35% and 31.7%, respectively.
For 2002, the effective tax rate reflects the federal statutory rate of 35%,
increased for the effect of state income taxes and decreased by benefits
Weyerhaeuser Company -19-
realized from the utilization of tax credits. In 2001, the effective tax rate
is lower than the 35% federal statutory rate, principally due to the effects of
the changes in the Canadian tax rates. These reductions were partially offset
by the effect of state income taxes.
Deferred taxes are provided for the temporary differences between the financial
and tax bases of assets and liabilities, applying presently enacted tax rates
and laws. The major sources of these temporary differences include depreciable
and depletable assets, real estate, and pension and retiree health care
liabilities.
Note 6: Inventories
Sept. 29, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Logs and chips $ 171 $ 186
Lumber, plywood, panels and engineered lumber 518 401
Pulp and paper 289 194
Containerboard and packaging 268 145
Other products 252 195
Materials and supplies 453 307
--------- ----------
$ 1,951 $ 1,428
========= ==========
Note 7: Property and Equipment
Sept. 29, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Property and equipment, at cost:
Land $ 320 $ 226
Buildings and improvements 2,877 2,310
Machinery and equipment 15,941 12,020
Rail and truck roads 733 612
Other 211 202
--------- ----------
20,082 15,370
Less allowance for depreciation and amortization (7,847) (7,061)
--------- ----------
$ 12,235 $ 8,309
========= ==========
Note 8: Goodwill
The changes in the carrying amount of goodwill for the thirty-nine weeks ended
September 29, 2002, are as follows:
Balance as of December 30, 2001 $ 1,095
Goodwill acquired (Note 18) 1,721
Goodwill written off related to facility closures (Note 15) (6)
Other 2
----------
Balance as of September 29, 2002 $ 2,812
==========
Weyerhaeuser Company -20-
The following table illustrates the effect of goodwill amortization on 2001 net
earnings and net earnings per share.
Earnings Before Basic and Diluted
Extraordinary Item Earnings Per Share
-------------------- -----------------------
Thirty-nine weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Dollar amounts in millions, Sept. 29, Sept. 30, Sept. 29, Sept. 30,
except per share data 2002 2001 2002 2001
--------- --------- --------- ----------
Reported earnings before
extraordinary item $ 138 $ 369 $ 0.62 $ 1.68
Add back goodwill amortization -- 27 -- 0.12
--------- --------- --------- ----------
Adjusted earnings before
extraordinary item $ 138 $ 396 $ 0.62 $ 1.80
========= ========= ========= ==========
Net Earnings
--------------------------------------------
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ----------
Reported net earnings $ 13 $ 91 $ 115 $ 369
Add back goodwill amortization -- 8 -- 27
--------- --------- --------- ----------
Adjusted net earnings $ 13 $ 99 $ 115 $ 396
========= ========= ========= ==========
Basic and Diluted Earnings Per Share
--------------------------------------------
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ----------
Reported net earnings per share $ 0.06 $ 0.41 $ 0.52 $ 1.68
Add back goodwill amortization -- 0.04 -- 0.12
--------- --------- --------- ----------
Adjusted net earnings per share $ 0.06 $ 0.45 $ 0.52 $ 1.80
========= ========= ========= ==========
Note 9: Accrued Liabilities
Sept. 29, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Payroll - wages and salaries, incentive awards,
retirement and vacation pay $ 509 $ 419
Taxes - Social Security and real and personal property 79 58
Product warranties 39 39
Interest 133 128
Other 429 398
--------- ----------
$ 1,189 $ 1,042
========= ==========
Note 10: Short-Term Debt
Lines of Credit
Weyerhaeuser had short-term bank credit lines of $1.3 billion and $925 million
at September 29, 2002, and December 30, 2001, respectively. Both Weyerhaeuser
and Weyerhaeuser Real Estate Company (WRECO) can borrow against each facility.
WRECO has access to $600 million of the $1.3 billion facility and had available
to it all of the $925 million facility. As of September 29, 2002, and December
30, 2001, neither Weyerhaeuser nor WRECO had outstanding borrowings against
these facilities. Neither Weyerhaeuser nor WRECO is a guarantor of the
borrowing of the other.
In addition, Weyerhaeuser had short-term bank credit lines that provided for the
borrowings of up to $300 million at December 30, 2001. This facility was
canceled during the first quarter of 2002.
Weyerhaeuser Company -21-
As of December 30, 2001, Weyerhaeuser's lines of credit included a five-year
revolving credit facility agreement entered into in 1997 with a group of banks
that provided for borrowings of up to the total amount of $400 million, all of
which was available to Weyerhaeuser. The agreement was scheduled to expire in
November 2002 and was canceled during the first quarter of 2002.
Note 11: Long-Term Debt
During the first quarter of 2002, Weyerhaeuser utilized bridge financing to fund
the acquisition of Willamette (see Note 18: Acquisition). Shortly thereafter,
Weyerhaeuser issued $5.5 billion of notes payable and repaid the bridge
financing. The notes bear interest at rates ranging from LIBOR plus 1.125%
(variable) to 7.375% (fixed) and mature from 2003 to 2032.
During the third quarter of 2002, Weyerhaeuser Real Estate Company issued $290
million of notes payable and applied the proceeds to repay other real estate and
related assets borrowings.
Lines of Credit
Weyerhaeuser's lines of credit include a five-year revolving credit facility
agreement entered into in 2002 with a group of banks that provides for
borrowings of up to the total amount of $1.3 billion, all of which is available
to Weyerhaeuser. Borrowings are at LIBOR plus a spread or other such interest
rates mutually agreed to between the borrower and lending banks. As of September
29, 2002, Weyerhaeuser had borrowed $1.3 billion against this facility.
The company's compensating balance agreements were not significant.
Note 12: Shareholders' Interest
Common Shares
A reconciliation of common share activity for the periods ended September 29,
2002, and December 30, 2001, is as follows:
Thirty-nine Fifty-two
weeks ended weeks ended
Sept. 29, Dec. 30,
In thousands 2002 2001
--------- ----------
Shares outstanding at beginning of year 216,574 213,898
Retraction of exchangeable shares 985 2,026
Stock options exercised 1,389 650
--------- ----------
Shares outstanding at end of period 218,948 216,574
========= ==========
Exchangeable Shares
Exchangeable shares issued by Weyerhaeuser Company Ltd., a wholly-owned Canadian
subsidiary of the company, are, as nearly as practicable, the economic
equivalent of the company's common shares; i.e., they have the following rights:
.. The right to exchange such shares for Weyerhaeuser common shares on a
one-to-one basis.
.. The right to receive dividends, on a per-share basis, in amounts that are the
same as, and are payable at the same time as, dividends declared on
Weyerhaeuser common shares.
.. The right to vote at all shareholder meetings at which Weyerhaeuser
shareholders are entitled to vote on the basis of one vote per exchangeable
share.
.. The right to participate upon a Weyerhaeuser liquidation event on a pro-rata
basis with the holders of Weyerhaeuser common shares in the distribution of
assets of Weyerhaeuser.
Weyerhaeuser Company -22-
A reconciliation of Exchangeable Share activity for the periods ended September
29, 2002, and December 30, 2001, is as follows:
Thirty-nine Fifty-two
weeks ended weeks ended
Sept. 29, Dec. 30,
In thousands 2002 2001
--------- ----------
Shares outstanding at beginning of year 3,289 5,315
Retractions (985) (2,026)
--------- ----------
Shares outstanding at end of period 2,304 3,289
========= ==========
Cumulative Other Comprehensive Loss
Weyerhaeuser's cumulative other comprehensive loss includes:
Sept. 29, Dec. 30,
Dollar amounts in millions 2002 2001
--------- ----------
Foreign currency translation adjustments related
to investments in foreign subsidiaries $ (293) $ (306)
Minimum pension liability adjustment (43) (43)
Cash flow hedge fair value adjustments 3 4
--------- ----------
$ (333) $ (345)
========= ==========
Note 13: Other Operating Costs, Net
Other operating costs, net, is an aggregation of both recurring and occasional
income and expense items and, as a result, can fluctuate from year to year.
Weyerhaeuser's other operating costs, net, includes the following pretax items:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Foreign exchange transaction
(gains) losses $ 16 $ 11 $ (19) $ 6
Costs associated with support
alignment initiative -- 5 4 55
Transition to Westwood Shipping
Lines' new fleet -- -- -- 10
Other, net 3 8 11 6
--------- --------- --------- ----------
$ 19 $ 24 $ (4) $ 77
========= ========= ========= ==========
Foreign exchange transaction gains and losses result from changes in exchange
rates primarily related to our Canadian and New Zealand operations.
Fluctuations in foreign exchange rates resulted in a foreign exchange
transaction gain of $8 million in the first quarter of 2002, a gain of $27
million in the second quarter of 2002, and a loss of $16 million in the third
quarter of 2002.
The 2001 support alignment costs include charges of $41 million recognized in
conjunction with the company's decision to outsource certain information
technology services, of which $20 million related to the impairment of
information technology assets sold for $10 million to the outsourcer and $21
million of additional costs such as retention bonuses, severance and other
transition costs. Additional support alignment spending in 2002 and 2001
consists of one-time costs representing severance, relocation and outplacement
costs as new regional centers were created to deliver support services.
Severance costs incurred in 2001 were paid within the fiscal year 2001.
Severance costs incurred in 2002 were not material.
The company ceased tracking support alignment costs at the end of the first
quarter of 2002, concurrent with the acquisition of Willamette (see
Note 18: Acquisition). Beginning in the second quarter of 2002, costs incurred
in connection with the company's integration and cost reduction efforts are
included in charges for integration of facilities (see Note 14: Charges for
Integration of Facilities).
Weyerhaeuser Company -23-
Note 14: Charges for Integration of Facilities
In the third quarter of 2002, Weyerhaeuser incurred $17 million of pretax
charges related to the transition and integration of activities in connection
with the Willamette acquisition. Year-to-date costs for integration of
facilities were $42 million. These charges include one-time transition costs
such as severance and relocation and include the cost of transitional services
and benefits provided under change in control agreements. During 2002
severance charges of $7 million were recognized in connection with the planned
termination of approximately 250 employees. As of September 29, 2002,
approximately 200 of these employees have been terminated and an accrual of
approximately $4 million remains.
In the third quarter of 2001, Weyerhaeuser incurred $4 million of pretax charges
related to the transition and integration of activities in connection with the
MacMillan Bloedel and Trus Joist acquisitions. Year-to-date charges totaled $23
million. These charges represented one-time transition costs including
approximately $10 million of severance-related costs recognized in connection
with the planned termination of approximately 450 employees. As of September
29, 2002, approximately 200 of the employees had been terminated and
approximately $3 million in severance accruals remained. As of December 30,
2001, approximately 100 employees had been terminated and approximately $5
million in related severance accruals remained.
Note 15: Charges for Closure of Facilities
Year to date 2002 results include pretax charges of $55 million associated with
the closure, or impending closure, of an oriented strand board facility, four
packaging facilities, a corrugated medium machine and a containerboard facility.
The year-to-date charges include $34 million for asset impairments, $6 million
for the impairment of goodwill associated with the closed facilities, $8 million
of severance and $7 million of other closure costs. The severance costs relate
to the termination of approximately 270 employees as a result of these
closures, of which approximately 240 had occurred as of September 29, 2002.
Approximately $5 million of these severance and closure liabilities remain in
accrued liabilities as of September 29, 2002.
In the third quarter of 2001, the company incurred $32 million in pretax charges
associated with the announced closures of a containerboard machine in
Springfield, Ore., and a fine paper machine and sheeter in Longview, Wash. The
charges include $22 million for asset impairments, $6 million of severance and
$4 million of other closure costs. The severance costs relate to the
termination of approximately 300 employees as a result of the closures. As of
September 29, 2002, approximately 270 terminations had occurred and
approximately $5 million in severance and other closure liabilities remained.
Approximately 110 terminations had occurred as of December 30, 2001, and
approximately $7 million of severance and closure liabilities remained in
accrued liabilities.
Note 16: Extraordinary Loss on Early Extinguishment of Debt
In February 2002, Weyerhaeuser issued bridge financing in connection with the
Willamette acquisition (see Note 18: Acquisition). Fees related to the
commitments on financing that had been secured for the acquisition were recorded
as deferred finance costs. In March 2002, Weyerhaeuser replaced the bridge
financing with $5.5 billion of notes payable (see Note 11: Long-Term Debt). The
unamortized portion of the deferred costs associated with the bridge financing
was written off as an extraordinary loss on the early extinguishment of debt in
the first quarter of 2002. Total deferred costs written off were $35 million.
The tax benefit associated with the write-off was $12 million.
Note 17: Commitments and Contingencies
Capital Expenditures
Weyerhaeuser's capital expenditures, excluding acquisitions and real estate and
related assets, were $683 million in 2001, and are expected to be approximately
$950 million in 2002; however, that expenditure level could be increased or
decreased as a consequence of future economic conditions.
Countervailing and Antidumping Duties
In April of 2001, the Coalition for Fair Lumber Imports (Coalition) filed two
petitions with the U.S. Department of Commerce (Department) and the
International Trade Commission (ITC), claiming that production of softwood
lumber in Canada was being subsidized by Canada and that imports from Canada
were being "dumped" into the U.S. market and sold at less than fair value. The
Coalition asked that countervailing duty (CVD) and antidumping tariffs be
imposed on softwood lumber imported from Canada.
Weyerhaeuser Company -24-
In March 2002, the Department confirmed its preliminary finding that certain
Canadian provinces were subsidizing logs by failing to collect full market price
for stumpage and established a final CVD rate of 18.79%. Because the final
determination eliminated the 90-day retroactive duties, the company reversed its
$18 million accrual for the retroactive portion of the CVD during the first
quarter of 2002. The charge for the retroactive portion of the CVD had been
recognized during 2001.
In May 2002, the ITC confirmed its earlier ruling that U.S. industry is
threatened by subsidized and dumped imports. Its finding of only threat of
injury means that the CVD and antidumping duties will be collected only for the
period beginning with the publication of its final order on May 22, 2002. In
the antidumping portion of the case, the Department selected Weyerhaeuser and
five Canadian companies to provide data for the antidumping investigation. In
its preliminary ruling issued on October 30, 2001, the Department found that the
company had engaged in dumping and set a preliminary "dumping margin" for the
company. In the final determination, the company's depository rate was set at
12.39%. With the finding by the ITC of only threat of injury, the
antidumping accruals of $29 million recorded in 2001 and $13 million recorded
in 2002 were reversed on the company books during the second quarter.
Following is a summary of the CVD and antidumping amounts recorded in the
company's statement of earnings:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Charges for CVD and antidumping
duties $ 31 $ 30 $ 51 $ 30
Reversals of 2001 charges for
estimated CVD and antidumping
duties -- -- (47) --
Reversals of 2002 charges for
estimated antidumping duties -- -- (13) --
--------- --------- --------- ----------
$ 31 $ 30 $ (9) $ 30
========= ========= ========= ==========
Approximately one year following the publication of the final order and annually
thereafter for a total of five years, the Department will conduct reviews to
determine whether the company had engaged in dumping and whether Canada
continued to subsidize softwood logs and, if so, the dumping margin and CVD to
impose. At the end of five years, both the countervailing duty and antidumping
orders will be automatically reviewed in a "sunset" proceeding to determine
whether dumping or a countervailing subsidy will continue or recur.
The company is appealing under the North American Free Trade Agreement (NAFTA).
A panel has been appointed and will review the imposition of the antidumping
duty. The federal and provincial governments in Canada also moved for appellate
review by panels under NAFTA and the World Trade Organization (WTO) with respect
to the CVD findings.
In July 2002, the WTO issued two interim rulings against the United States. The
first ruling was against the so-called "Byrd Amendment," which gives U.S. firms
cash from punitive trade sanctions applied on foreign imports. The second was
that a key measure used in the CVD to determine the existence of a subsidy is
improper. Both rulings are being contested by the United States.
It is difficult to predict the net effect final duties will have on the company.
In the event that the CVD and antidumping margins are determined to be improper,
the charges incurred for these duties may be reversed and the company could
receive reimbursement for amounts paid to date. In the event that final rates
differ from the depository rates, ultimate charges may be higher or lower than
those recorded to date. The company is unable to estimate at this time the
amount of additional charges or reversals that may be necessary for this matter
in the future.
Weyerhaeuser Company -25-
Hardboard Siding Claims
The company announced in June 2000 it had entered into a proposed nationwide
settlement of its hardboard siding class action cases and, as a result, took a
pretax charge of $130 million to cover the estimated cost of the settlement and
related claims. The court approved the settlement in December 2000. An appeal
from the settlement was denied in March 2002, and is now binding on all parties.
In the third quarter of 2001, the company reassessed the adequacy of the reserve
and increased the reserve by an additional $43 million.
The company incurred claims and related costs in the amount of $3 million and
$14 million in the third quarter of 2002 and 2001, respectively, and $9 million
and $24 million in the first thirty-nine weeks of 2002 and 2001, respectively,
and charged these costs against the reserve. While the company believes that
the reserve balances established for these matters are adequate, the company is
unable to estimate at this time the amount of additional charges, if any, that
may be required for these matters in the future.
The settlement class consists of all persons who own or owned structures in the
United States on which the company's hardboard siding had been installed from
January 1, 1981, through December 31, 1999. The following table presents an
analysis of the claims activity related to the hardboard siding class action
cases:
Thirty-nine Fifty-two Fifty-three
weeks ended weeks ended weeks ended
Sept. 29, Dec. 30, Dec. 31,
2002 2001 2000
----------- ----------- -----------
Number of claims filed during the period 2,240 6,480 40
Number of claims resolved 3,920 2,580 --
Number of claims unresolved at end of period 2,260 3,940 40
Number of damage awards paid 1,500 400 --
Average damage award paid $ 1,850 $ 1,700 $ --
The company negotiated settlements with its insurance carriers for recovery of
certain costs related to these claims. As of September 29, 2002, the company
has either received or accrued $52 million in recoveries from its insurance
carriers.
At the end of the third quarter of 2002, the company is a defendant in state
trial court in 12 cases involving primarily multi-family structures and
residential developments. The company anticipates that other individuals and
entities that have opted out of the settlement may file lawsuits against the
company. In January 2002, a jury returned a verdict in favor of the company in
a lawsuit involving hardboard siding manufactured by the company and installed
by a developer in a residential development located in Modesto, California. The
verdict has been appealed and is not included in the 12 cases mentioned at the
state court level.
Other Legal Proceedings
Antitrust Litigation. In May 1999, two civil antitrust lawsuits were filed
against the company in U.S. District Court, Eastern District of Pennsylvania.
Both suits name as defendants several other major containerboard and packaging
producers. The complaint in the first case alleges the defendants conspired to
fix the price of linerboard and that the alleged conspiracy had the effect of
increasing the price of corrugated containers. The suit requested class
certification for purchasers of corrugated containers during the period October
1993 through November 1995. The complaint in the second case alleges that the
company conspired to manipulate the price of linerboard and thereby the price of
corrugated sheets. The suit requested class certification for purchasers of
corrugated sheets during the period October 1993 through November 1995. Both
suits seek damages, including treble damages, under the antitrust laws. No
specific damage amounts have been claimed. In September 2001, the district
court certified both classes. On appeal the 3rd Circuit Court of Appeals
affirmed the trial court's certification of the two classes. The defendants
will seek certiorari with the U.S. Supreme Court. At the trial level,
discussions have begun on reactivating pretrial discovery efforts. Trial has
been set for April 2004.
In December 2000, a lawsuit was filed against the company in U.S. District Court
in Oregon alleging that from 1996 to present Weyerhaeuser had monopoly power or
attempted to gain monopoly power in the Pacific Northwest market for alder logs
and finished alder lumber. In August 2001, the complaint was amended to add an
additional plaintiff and raise the request for relief to $30 million plus treble
damages, attorney fees and costs. Trial is scheduled for April 8, 2003.
Weyerhaeuser denies the allegations and is vigorously defending this action.
Weyerhaeuser Company -26-
Paragon Trade Brands, Inc. Litigation. In May 1999, the Equity Committee
(Committee) in the Paragon Trade Brands, Inc. (Paragon) bankruptcy proceeding
filed a motion in U.S. Bankruptcy Court for the Northern District of Georgia for
authority to prosecute claims against the company in the name of the debtor's
estate. Specifically, the Committee asserted that the company breached certain
warranties in agreements entered into between Paragon and the company in
connection with Paragon's public offering of common stock in January 1993. The
Committee seeks to recover damages sustained by Paragon as a result of two
patent infringement cases, one brought by Procter & Gamble and the other by
Kimberly-Clark. In September 1999, the court authorized the Committee to
commence an adversary proceeding against the company. The Committee commenced
this proceeding in October 1999, seeking damages in excess of $420 million
against the company. Pursuant to a reorganization of Paragon, the litigation
claims representative for the bankruptcy estate became the plaintiff in the
proceeding. On June 26, 2002, the Bankruptcy Court issued an oral opinion
granting the plaintiff's motion for partial summary judgment, holding
Weyerhaeuser liable to plaintiff for breaches of warranty, and denying the
company's motion for summary judgment. On October 30, 2002, the Bankruptcy
Court issued a written order confirming the June oral opinion. The company
plans to file a Petition for Reconsideration with the Bankruptcy Court. No
trial date has been set for the determination of the damages. Weyerhaeuser
disagrees with the Bankruptcy Court's decision and will diligently
pursue all available relief.
Other Ligigation. The company is a party to other matters generally
incidental to its business, in addition to the matters described above.
Summary. Although the final outcome of any legal proceeding is subject to a
great many variables and cannot be predicted with any degree of certainty, the
company's management presently believes that resolving all of these matters will
not have a material adverse impact on the company's financial position or its
results of operations.
Environmental Matters
In April 1999, Willamette's Johnsonburg, Penn., paper and pulp mill received
a notice of violation (NOV) from the U.S. Environmental Protection Agency (EPA)
for alleged violations of the Clean Air Act (CAA). Management has met with
federal and state officials to resolve the matters alleged in the NOV and will
continue to work with officials to narrow issues in dispute. Management
believes that it is reasonably possible that a settlement will be reached at a
future date, that may involve payment of a penalty of up to approximately
$1 million and the installation of pollution control equipment.
The company is also a party to various proceedings relating to the cleanup of
hazardous waste sites under the Comprehensive Environmental Response
Compensation and Liability Act, commonly known as "Superfund," and similar state
laws. The EPA and/or various state agencies have notified the company that it
may be a potentially responsible party with respect to other hazardous waste
sites as to which no proceedings have been instituted against the company. The
company has established reserves for remediation costs on all of the
approximately 74 active sites across its operations as of the end of the third
quarter of 2002 totaling $41 million, down from $45 million at the end of 2001.
This decrease reflects the incorporation of new information on all sites
concerning remediation alternatives, updates on prior cost estimates and new
sites (none of which were significant) less the costs incurred to remediate
these sites during this period. The company accrued $2 million and $1 million of
remediation costs into this reserve in the first thirty-nine weeks of 2002 and
2001, respectively. Year to date, the company incurred remediation costs of $6
million in 2002 and $8 million in 2001, and charged these costs against the
reserve. While the company believes that the reserve balances established for
these matters are adequate, the company is unable to estimate at this time the
amount of additional charges, if any, that may be required for these matters in
the future.
Note 18: Acquisition
On March 14, 2002, the company completed a merger of Willamette and Company
Holdings, Inc. (CHI), a wholly owned subsidiary of the company, pursuant to
which Willamette became a wholly-owned subsidiary of the company. The total
purchase price, including assumed debt of $1.8 billion, was $8.1 billion.
Willamette was an integrated forest products company that produced building
materials, composite wood panels, fine paper, office paper products, corrugated
packaging and grocery bags in over 100 plants located in the United States,
Europe and Mexico, and owned 1.7 million acres of forestlands in the United
States. The company believes these assets fit well with and enhance the
company's capabilities in a number of its core product markets. The acquisition
creates a larger company that is a leading producer in its major product lines
and is better able to meet the needs of its customers. The company believes the
acquisition will position the company to increase shareholder value. These
factors contributed to the goodwill, which is preliminarily recorded at $1.7
billion.
Weyerhaeuser Company -27-
Pursuant to the merger agreement among the company, Willamette and CHI dated
January 28, 2002, CHI filed a tender offer for all of the outstanding shares of
common stock of Willamette at a purchase price of $55.50 per share. On February
11, 2002, CHI accepted for payment approximately 97% of the outstanding shares
of Willamette common stock and outstanding options to purchase shares of common
stock, thereby acquiring a controlling interest in Willamette. On March 14,
2002, the company consummated the merger and all the remaining outstanding
Willamette shares, other than those held by the company, CHI or Willamette, were
converted into the right to receive $55.50 in cash. Pursuant to the merger
agreement, options that were not surrendered in the tender became, as of the
merger date, options to purchase company shares in an amount and at an exercise
price adjusted by a conversion ratio based on $55.50 per share and the market
price of a share of the company's common stock. Effective June 30, 2002,
Willamette merged with and into the company with Willamette ceasing to exist.
The company accounted for the transaction using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired company were
included in the Consolidated Balance Sheet and the operating results were
included in the Consolidated Statement of Earnings beginning February 11, 2002.
The estimated excess cost at February 11, 2002, was calculated as follows:
Dollar amounts in millions
Purchase price of tender offer and stock option cash-out $ 6,162
Direct transaction costs and expenses 127
Deferred tax effect of applying purchase accounting 1,331
Less: historical net assets (2,487)
---------
Total excess costs $ 5,133
=========
The above calculation of excess purchase price is preliminary. The company is
in the process of conducting valuations of the acquired timberlands and
property, plant and equipment. The company expects the valuations to be
completed during the fourth quarter 2002 and that they will not materially
affect the preliminary allocation of the purchase price. The excess purchase
price is allocated as follows:
Dollar amounts in millions
Long-lived assets $ 3,412
Goodwill 1,721
---------
Total excess costs $ 5,133
=========
Property, plant and equipment are being depreciated over a weighted average of
15 years. The cost of timber and timberlands is charged to expense as the
related timber is harvested. Goodwill is not amortized, but will be assessed for
impairment annually using a fair value based approach.
The following summarized unaudited pro forma information, assuming this
acquisition occurred at the beginning of fiscal periods presented, is as
follows:
Pro Forma Information (unaudited)
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
Dollar amounts in millions, Sept. 29, Sept. 30, Sept. 29, Sept. 30,
except per share data 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 4,912 $ 4,843 $ 14,322 $ 14,437
Net earnings before extraordinary
item 13 83 98 352
Net earnings 13 83 74 330
Earnings per share:
Basic and diluted $ 0.06 $ 0.38 $ 0.33 $ 1.50
Weyerhaeuser Company -28-
Note 19: Business Segments
The company is principally engaged in the growing and harvesting of timber;
the manufacture, distribution, and sale of forest products; and real estate
development and construction. The company's principal business segments are:
.. Timberlands, which includes logs, chips and timber, and distribution and
converting facilities located outside North America;
.. Wood products, which includes softwood lumber, plywood and veneer, composite
panels, oriented strand board, hardwood lumber, treated products, engineered
lumber, raw materials and building materials distribution;
.. Pulp and paper, which includes pulp, paper and bleached paperboard;
.. Containerboard, packaging and recycling; and
.. Real estate and related assets.
Prior to the second quarter of 2002, Weyerhaeuser reported its paper-related
businesses in a single pulp, paper and packaging segment. During the second
quarter of 2002, Weyerhaeuser changed the structure of its internal
organization. As a result, the paper-related businesses are now reported as two
segments entitled (i) pulp and paper, and (ii) containerboard, packaging and
recycling. Comparative information has been restated to conform to the new
reportable segments.
The timber-based businesses involve a high degree of integration among timber
operations; building materials conversion facilities; and pulp, paper,
containerboard and bleached paperboard primary manufacturing and secondary
conversion facilities. This integration includes extensive transfers of raw
materials, semi-finished materials and end products between and among these
groups. The company's accounting policies for segments are the same as those
described in Note 1: Summary of Significant Accounting Policies.
Management evaluates segment performance based on the contributions to earnings
of the respective segments. Accounting for segment profitability in integrated
manufacturing sites involves allocation of joint conversion and common facility
costs based upon the extent of usage by the respective product lines at that
facility. Transfer of products between segments is accounted for at current
market values.
Weyerhaeuser Company -29-
An analysis and reconciliation of the company's business segment information to
the respective information in the consolidated financial statements is as
follows:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Sales to and revenues from
unaffiliated customers:
Timberlands $ 334 $ 184 $ 757 $ 590
Wood products 1,957 1,751 5,805 5,000
Pulp and paper 967 637 2,690 1,957
Containerboard, packaging
and recycling 1,149 755 3,222 2,388
Real estate and related assets 468 392 1,285 1,097
Corporate and other 37 33 110 115
--------- --------- --------- ----------
4,912 3,752 13,869 11,147
--------- --------- --------- ----------
Intersegment sales:
Timberlands 249 136 767 420
Wood products 68 52 171 170
Pulp and paper 25 29 85 111
Containerboard, packaging
and recycling 30 3 43 6
Corporate and other 3 2 7 9
--------- --------- --------- ----------
375 222 1,073 716
--------- --------- --------- ----------
Total sales and revenues 5,287 3,974 14,942 11,863
Intersegment eliminations (375) (222) (1,073) (716)
--------- --------- --------- ----------
$ 4,912 $ 3,752 $ 13,869 $ 11,147
========= ========= ========= ==========
Approximate contribution (charge) to earnings (1):
Timberlands $ 138 $ 107 $ 432 $ 378
Wood products (18) 47 55 123
Pulp and paper 10 (28) (4) 72
Containerboard, packaging
and recycling 88 69 221 231
Real estate and related assets (1) 85 75 255 206
Corporate and other (85) (61) (204) (218)
--------- --------- --------- ----------
218 209 755 792
Interest expense (214) (93) (579) (268)
Capitalized interest 16 6 36 16
--------- --------- --------- ----------
Earnings before income taxes and
extraordinary item 20 122 212 540
Income taxes (7) (31) (74) (171)
--------- --------- --------- ----------
Earnings before extraordinary item 13 91 138 369
Extraordinary item -- -- (23) --
--------- --------- --------- ----------
Net earnings $ 13 $ 91 $ 115 $ 369
========= ========= ========= ==========
Segment information for the thirty-nine weeks ended September 29, 2002, includes
the addition of the Willamette operations as of February 11, 2002. Total assets
of the company increased from $18.3 billion as of December 30, 2001, to $28.8
billion as of September 29, 2002, primarily due to the Willamette acquisition.
There were no material changes from year-end 2001 in basis for measuring segment
profit or loss.
Certain reclassifications have been made to conform comparative data to the
current format.
(1) Interest expense of $1 million for the thirteen weeks and $5 million for the
thirty-nine weeks ended September 30, 2001, is included in the determination
of approximate contributions to earnings and is excluded from interest
expense for the financial services businesses.
Weyerhaeuser Company -30-
Note 20: Subsequent Events
Subsequent to the close of the third quarter, the company announced its plans to
close its Sturgeon Falls, Ont., containerboard mill and two wood products
facilities located in Snoqualmie and Enumclaw, Wash. The company expects to
recognize pretax closure costs of approximately $25 million in its fourth
quarter 2002 results.
In addition, the company announced the sale of approximately 115,000 acres of
western timberlands for approximately $211 million. Net proceeds from this
transaction will be utilized to repay debt.
Weyerhaeuser Company -31-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
-------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward Looking Statements
Some information included in this report contains statements concerning the
company's future results and performance that are forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. The
accuracy of such statements is subject to a number of risks, uncertainties and
assumptions that may cause actual results to differ materially from those
projected, including, but not limited to:
.. the effect of general economic conditions, including the level of interest
rates and housing starts;
.. market demand for the company's products, which may be tied to the relative
strength of various U.S. business segments;
.. performance of the company's manufacturing operations;
.. the successful execution of internal performance plans;
.. the level of competition;
.. the effect of forestry, land use, environmental and other governmental
regulations;
.. fires, floods and other natural disasters;
.. regulatory approvals of pending timberland sales;
.. the company's ability to successfully integrate and manage acquired businesses
and to realize anticipated cost savings and synergies from these acquisitions;
.. the ability of acquired businesses to perform in accordance with the company's
expectations;
.. legal proceedings;
.. uncertainties affecting insurance recoveries; and
.. performance of pension fund investments.
The company is also a large exporter and is affected by changes in economic
activity in Europe and Asia, particularly Japan, and by changes in currency
exchange rates, particularly the relative value of the U.S. dollar to the
Canadian dollar, the Euro and the Yen, and restrictions on international trade
or tariffs imposed on imports, including the countervailing and dumping duties
imposed on the company's softwood lumber shipments from Canada to the United
States. These and other factors could cause or contribute to actual results
differing materially from such forward looking statements and, accordingly, no
assurances can be given that any of the events anticipated by the forward
looking statements will occur, or if any of them occurs, what effect they will
have on the company's results of operations or financial condition. The company
expressly declines any obligation to publicly revise any forward looking
statements that have been made to reflect the occurrence of events after the
date of this report.
Weyerhaeuser Company -32-
Results of Operations
The term "company" refers to Weyerhaeuser Company and all of its majority-owned
domestic and foreign subsidiaries. The term "Weyerhaeuser" excludes the real
estate and related assets operations.
Consolidated Results
Consolidated net sales and earnings for the thirteen and thirty-nine week
periods ended September 29, 2002, and September 30, 2001, were:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Dollar amounts in millions, Sept. 29, Sept. 30, Sept. 29, Sept. 30,
except per share data 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 4,912 $ 3,752 $ 13,869 $ 11,147
Net earnings 13 91 115 369
Net earnings per share, basic
and diluted 0.06 0.41 0.52 1.68
On February 11, 2002, Weyerhaeuser Company acquired Willamette Industries, Inc.
(Willamette). The consolidated statement of earnings includes Willamette's
results beginning on the date of acquisition.
Year-to-date net earnings for 2002 include the following unusual after-tax
items:
.. An extraordinary charge of $23 million for the deferred costs associated with
the bridge financing of the acquisition of Willamette;
.. Charges of $27 million for integration of facilities;
.. The unfavorable impact of business disruption of approximately $34 million
following a recovery boiler explosion at the Plymouth, N.C., paper facility
that occurred in the second quarter;
.. A charge of $35 million associated with the closure, or impending closure, of
seven facilities; and
.. A benefit of $31 million from the reversal of previously accrued
countervailing duties.
Year-to-date net earnings for 2001 include the following unusual after-tax
items:
.. A charge of $26 million associated with outsourcing certain information
technology services as part of the company's program to streamline support
services;
.. A charge of $20 million associated with the closure of two paper machines and
a sheeter;
.. A charge of $15 million for integration costs associated with the MacMillan
Bloedel and Trus Joist acquisitions;
.. Charges of $6 million for costs resulting from Westwood Shipping Line's
transition to a new charter fleet; and
.. A benefit of $29 million for one-time reductions in deferred taxes due to
lower Canadian and British Columbia provincial corporate tax rates.
Operating results for the first thirty-nine weeks of 2002 include $106 million
in net pension income compared with $177 million in the first thirty-nine weeks
of 2001. The decrease is primarily attributable to reductions in expected and
actual rates of return on plan assets and a reduction in the discount rate used
to calculate plan obligations. See Pension Plans for a discussion of the net
impact that changes in the assumptions can have on pension income.
Weyerhaeuser Company -33-
Timberlands
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 334 $ 184 $ 757 $ 590
Contribution to earnings 138 107 432 378
Third party sales volume for timberlands raw materials and log production volume
for the thirteen and thirty-nine week periods ended September 29, 2002, and
September 30, 2001, are as follows:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Volumes in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Raw materials third party sales
volume - cubic feet 104 76 279 233
Log production volume - cubic feet 164 129 508 392
Timberlands' net sales and revenues improved $150 million for the thirteen-week
period ended September 29, 2002, and $167 million year to date compared to the
same periods in 2001. The increases in sales are attributable to increased
volumes harvested of 27% in the third quarter and 30% year to date when compared
to the comparable periods in 2001. The increase in timber volumes is primarily
related to the inclusion of the acquired Willamette logging operations. Net
sales and revenues also increased with the addition of the former Willamette
composite panel operations in Europe, which are included in the timberlands
segment with the company's other wood products converting locations located
outside of North America.
Timberlands' contributions to earnings improved $31 million in the third quarter
of 2002 and $54 million year to date compared to the same periods in 2001,
primarily due to incremental volume harvested. Pretax gains on dispositions of
non-strategic timberlands contributed $28 million and $16 million for the third
quarter of 2002 and 2001, respectively, $69 million for the thirty-nine weeks
ended September 29, 2002, and $82 million for the comparative year-to-date
period in 2001. Year-to-date earnings for 2002 also reflect a $28 million net
increase in earnings in international operations, resulting from the combination
of a healthy housing market in Australia, strengthening export log prices in New
Zealand, and favorable exchange rate fluctuations.
Fourth quarter log prices are expected to soften seasonally as a result of
weaker lumber prices. Normal seasonal increases in harvest volumes during the
fourth quarter are expected to buoy the segment's earnings in the fourth quarter
of 2002 compared to the third quarter.
Weyerhaeuser Company -34-
Wood Products
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 1,957 $ 1,751 $ 5,805 $ 5,000
Contribution (charge) to earnings (18) 47 55 123
Net sales and revenues for the wood products segment improved $206 million for
the third quarter and $805 million for the first thirty-nine weeks of 2002
compared to the same periods in 2001, primarily due to incremental sales volume
from the acquired Willamette operations. These increases were partially offset
by declines in net selling prices for wood products, most notably softwood
lumber and structural panels.
Contribution to earnings declined $65 million and $68 million for the
comparative quarterly and year to date periods, primarily due to eroding
softwood lumber prices. Demand for wood products has remained relatively strong
as a result of low interest rates, which contributed to strong levels of housing
starts and remodeling activity. Despite strong demand, an oversupplied condition
exists in domestic markets as a result of the unintended consequences caused by
the countervailing (CVD) and antidumping duties on imports of Canadian softwood
lumber into the U.S. The duties have resulted in higher, not lower, shipments
of Canadian lumber into the U.S., as the method used to calculate these duties
has encouraged Canadian producers to run greater volumes to lower unit costs.
Declines in net selling prices for structural panels, while of a lesser
magnitude than softwood lumber price declines, have also contributed to the
decline in earnings.
Year-to-date contribution to earnings for 2002 includes a $17 million pretax
charge associated with the permanent closure of an oriented strand board (OSB)
facility in Canada. Other events in the third quarter and year-to-date periods
of 2002 negatively affected pretax segment earnings by approximately $10
million. These unusual events included start-up costs associated with the
Kenora, Ont., engineered wood products facility and the Simsboro, La.,
particleboard facility, which are both operating well through the start-up
curve. In addition, operating results include costs associated with previously
announced mill closures and reduced production at an OSB mill due to the loss of
a key machine center in early September 2002. Costs associated with these items
are expected to remain the same for the fourth quarter of 2002.
Following is a summary of the CVD and antidumping amounts included in the
segment's net sales and revenues and contribution to earnings:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Charges for CVD and
antidumping duties $ 31 $ 30 $ 51 $ 30
Reversals of 2001 charges for
estimated CVD and
antidumping duties -- -- (47) --
Reversals of 2002 charges for
estimated antidumping duties -- -- (13) --
--------- --------- --------- ----------
$ 31 $ 30 $ (9) $ 30
========= ========= ========= ==========
CVD and antidumping duties are expected to total between $65 and $70 million for
2002.
The momentum in the housing market is expected to continue into next year as new
residential housing starts are expected to remain relatively strong. As a
result, demand for wood products is expected to remain strong, but markets
remain oversupplied. In response to market conditions, the company may take
maintenance-related downtime and extended downtime during the holidays.
Inventories are expected to remain in balance. The outlook for pricing remains
uncertain; however, the company believes wood products prices are at or near
cash costs.
Weyerhaeuser Company -35-
Third party sales and total production volumes for the major products in the
wood products segment for the thirteen and thirty-nine week periods ended
September 29, 2002, and September 30, 2001, are as follows:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Third party sales volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(millions) 2002 2001 2002 2001
--------- --------- --------- ----------
Softwood lumber - board feet 2,362 1,943 6,469 5,402
Softwood plywood and
veneer - square feet (3/8") 736 494 2,061 1,434
Composite panels - square feet (3/4") 95 61 848 183
Oriented strand board - square
feet (3/8") 1,117 964 3,157 2,751
Hardwood lumber - board feet 104 99 325 311
Raw materials - cubic feet 207 154 514 467
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Total production volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(millions) 2002 2001 2002 2001
--------- --------- --------- ----------
Softwood lumber - board feet 1,728 1,315 4,960 4,143
Softwood plywood and
veneer - square feet (3/8") 584 275 1,577 838
Composite panels - square feet (3/4") 200 21 546 75
Oriented strand board - square
feet (3/8") 1,115 912 3,016 2,528
Hardwood lumber - board feet 107 99 302 319
Logs - cubic feet 204 166 576 477
Pulp and Paper
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 967 $ 637 $ 2,690 $ 1,957
Contribution (charge) to earnings 10 (28) (4) 72
During the second quarter of 2002, Weyerhaeuser changed the structure of its
internal organization, resulting in a change in the reporting of its pulp, paper
and packaging operations. Prior to the second quarter of 2002, Weyerhaeuser's
paper-related businesses were reported in a single pulp, paper and packaging
segment. These businesses have been split into two segments entitled (i) pulp
and paper, and (ii) containerboard, packaging and recycling. The pulp and paper
segment includes all of the company's white paper production including market
pulp, fine paper, newsprint, and bleached paperboard.
Incremental volume from the acquired Willamette operations contributed the
majority of the $330 million increase in net sales and revenues for the pulp and
paper segment in the third quarter of 2002, as well as the $733 million increase
in net sales in the first thirty-nine weeks of 2002, compared to the same
periods in 2001. The year-to-date increase attributable to the Willamette
acquisition was partially offset by declines in pulp prices, which are lower
than early 2001 levels. In recent quarters, however, prices have moderated.
Business disruption associated with the second quarter recovery boiler explosion
at the Plymouth, N.C., paper facility negatively impacted contribution to
earnings by approximately $30 million pretax for the third quarter of 2002 and
approximately $52 million pretax for the year-to-date period. The boiler
repairs have been completed and the facility has resumed normal operations.
Third quarter and year-to-date results for 2001 include a $19 million pretax
charge for costs associated with the fine paper machine closure at the Longview,
Wash., facility.
Excluding the impact of business disruption costs and closure costs,
contribution to earnings in the third quarter 2002 improved from the third
quarter 2001, primarily as a result of improved pricing for pulp and fine paper.
However, year-to-date 2002 contribution to earnings declined as a result of
depressed pulp prices in the beginning of the year. In addition, net selling
prices for newsprint have declined over the comparative year-to-date periods,
resulting in additional declines in contribution to earnings.
Weyerhaeuser Company -36-
Fine paper prices are expected to increase in the fourth quarter and are
expected to more than offset any potential decline in market pulp pricing. The
start-up of the paper machine at the Kingsport, Tenn., paper facility and the
closure of a higher cost machine will reduce production costs at that facility.
Due to recent machine closures and strong order backlogs, market related
downtime should be minimal, provided inventories remain in balance. In
addition, the recovery boiler at the Plymouth, N.C., facility has been repaired
and the company fully expects to recover its losses associated with business
disruption and repair costs through insurance proceeds during the fourth
quarter.
Third party sales and total production volumes for major pulp and paper products
follow:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Third party sales volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(thousands) 2002 2001 2002 2001
--------- --------- --------- ----------
Pulp - air-dry metric tons 561 527 1,742 1,514
Paper - tons 804 406 2,164 1,154
Bleached paperboard - tons 47 66 161 182
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Total production volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(thousands) 2002 2001 2002 2001
--------- --------- --------- ----------
Pulp - air-dry metric tons 630 553 1,729 1,550
Paper - tons 747 357 2,032 1,096
Bleached paperboard - tons 31 69 161 182
Weyerhaeuser Company -37-
Containerboard, Packaging and Recycling
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 1,149 $ 755 $ 3,222 $ 2,388
Contribution to earnings 88 69 221 231
Incremental volume from the acquired Willamette operations contributed to
increases in net sales for the containerboard, packaging and recycling segment
of $394 million for the third quarter and $834 million for the first thirty-nine
weeks of 2002 compared to the same periods in 2001. These increases were
partially offset by declines in net selling prices for both containerboard and
packaging from the comparative periods in 2001.
Contribution to earnings improved $19 million for the third quarter 2002
compared to the third quarter 2001, but declined $10 million for the
year-to-date comparative periods. Contribution to earnings for the first
thirty-nine weeks of 2002 includes charges of $38 million associated with
facility closures, or announced closures. Results for both the third quarter
and first thirty-nine weeks of 2001 include a $13 million charge for costs
associated with a containerboard machine closure at the Springfield, Ore.,
facility.
Excluding unusual items, contribution to earnings improved slightly in the third
quarter of 2002 compared to the third quarter of 2001. Year-to-date
contribution to earnings improved as a result of the Willamette acquisition and
improving operating rates at the company's containerboard facilities. These
positive trends were partially offset by declines in both containerboard and
box prices for the comparative periods.
Recent increases in containerboard prices are expected to hold in the fourth
quarter and the company expects to implement a price increase in packaging by
the end of the fourth quarter. Average old corrugated container costs for the
fourth quarter are expected to decline from the average costs for the third
quarter. Through capacity rationalizations and further integration with the box
plants, the company has reduced its exposure to both domestic and export open
market sales. These factors are expected to result in improved segment earnings
for the fourth quarter, despite seasonally lower demand.
Third party sales and total production volumes for containerboard, packaging,
and recycling follow:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Third party sales volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(thousands) 2002 2001 2002 2001
--------- --------- --------- ----------
Containerboard - tons 318 223 876 663
Packaging - MSF 17,902 13,319 50,888 37,865
Recycling - tons 539 548 1,695 2,191
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Total production volumes Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(thousands) 2002 2001 2002 2001
--------- --------- --------- ----------
Containerboard - tons 1,621 1,065 4,471 2,716
Packaging - MSF 20,432 13,077 57,343 39,864
Recycling - tons 1,545 1,210 4,547 3,583
Weyerhaeuser Company -38-
Real Estate and Related Assets
Thirteen weeks ended Thirty-nine weeks ended
-------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
Dollar amounts in millions 2002 2001 2002 2001
--------- --------- --------- ----------
Net sales and revenues $ 468 $ 392 $ 1,285 $ 1,097
Contribution to earnings 85 75 255 206
Net sales and contribution to earnings improved for both the third quarter and
first thirty-nine weeks of 2002 compared to the same periods in 2001. Sales in
markets where the company operates remained strong during the third quarter of
2002, despite a modest slowdown in traffic in some markets.
Contribution to earnings includes pretax gains from the sales of apartment
complexes of $14 million in the third quarter of 2002 and $21 million in the
first thirty-nine weeks of 2002. The real estate business is expected to
continue to perform well into the fourth quarter of 2002, given the six-month
backlog of sold but not closed homes and favorable mortgage rates; however, no
apartment complex sales are anticipated.
Costs and Expenses
Weyerhaeuser's third quarter costs and expenses were $4.3 billion compared to
$3.2 billion in the same quarter last year. Increases in costs and expenses are
primarily attributable to the inclusion of Willamette's operations since
acquisition. Weyerhaeuser's cost of products sold, as a percentage of sales, was
81% for the current quarter, compared to 79% for the third quarter 2001. The
increase is primarily attributable to the decline in net selling prices for the
company's structural lumber and panel products when compared to the third
quarter of 2001.
Various unusual or nonrecurring items are included in Weyerhaeuser's costs and
expenses. These items are discussed under the heading "Consolidated Results"
above and in the discussion of each segment materially affected by the unusual
item.
Other operating costs, net, is an aggregation of both recurring and nonrecurring
items and, as a result, can fluctuate from year to year. Exchange rates between
the U.S. dollar and Canadian dollar have fluctuated widely during 2002
contributing to a gain of $8 million in the first quarter of 2002, a gain
of $27 million in the second quarter of 2002, and a loss of
$16 million in the third quarter of 2002. Other operating costs for the first
thirty-nine weeks of 2001 are most significantly impacted by nonrecurring
charges associated with Westwood Shipping Line's transition to a new charter
fleet of $10 million and the company's support alignment initiative of $55
million. The majority of the costs recognized in conjunction with the
company's support alignment initiative are due to the company's decision to
outsource certain information services functions.
The increase in the real estate and related assets segment's costs and expenses
is attributable to the increased sales volumes over the same periods last year.
Pension Plans
The company sponsors several qualified and nonqualified pension plans for its
employees. Historically, the market value of the assets of the company's plans
has exceeded plan liabilities. The assumptions used in measuring the benefit
obligations of these plans, including the discount rate, the expected return on
plan assets and assumed increases in wages and salaries, are reviewed with
external plan actuaries annually at the end of each fiscal year and are updated
as appropriate. Actual experience that is less favorable than the assumptions
could reduce pension income in the company's consolidated statement of earnings,
could decrease shareholders' interest on the company's consolidated balance
sheet, and could require the company to make cash contributions.
Changes in each of the four key assumptions are estimated to have the following
impact on 2003 pension income:
.. For each 1% that the actual rate of return on plan assets is lower than the
assumed rate of return, pension income would be reduced by approximately $2
million for U.S. plans and $1 million for Canadian plans.
.. For each 1% reduction in the assumed rate of return on the plans, pension
income would be reduced by approximately $17 million for U.S. plans and $5
million for Canadian plans.
.. For each 0.5% reduction in the assumed discount rate, pension income would be
reduced by approximately $6 million for U.S. plans and $4 million for Canadian
plans.
Weyerhaeuser Company -39-
.. For each 0.5% increase in assumed wages and salaries, pension income would
decrease by approximately $11 million for U.S. plans and $5 million for
Canadian plans.
The annual actuarial review for 2002 will take place at the end of the fiscal
year. The company is unable to predict with any certainty the performance of
the financial markets for the remainder of 2002 or prevailing interest rates at
the end of 2002. Changes in these factors could have a material impact on the
company's pension related estimates. Based upon information currently
available, the company does not expect to be required to make any cash
contributions to its U.S. plans in 2002 or 2003, expects to make small cash
contributions to its Canadian plans in 2002 and 2003, and expects to record a
reduction in shareholders' interest of approximately $90 million in the fourth
quarter of 2002 to reflect an increase in its additional minimum pension
liability.
The company plans to terminate the U.S. salaried pension fund covering former
MacMillan Bloedel employees, and will pay out benefits earned by employees and
retirees under those plans. The termination of this plan will result in an
after-tax charge of approximately $25 million in the fourth quarter of 2002.
Liquidity and Capital Resources
General
The company is committed to the maintenance of a sound capital structure. This
commitment is based upon two considerations: the obligation to protect the
underlying interests of its shareholders and lenders and the desire to have
access, at all times, to all major financial markets.
The important elements of the policy governing the company's capital structure
are as follows:
.. To view separately the capital structures of Weyerhaeuser Company and
Weyerhaeuser Real Estate Company and related subsidiaries, given the very
different nature of their assets and business activities. The amount of debt
and equity associated with the capital structure of each will reflect the
basic earnings capacity, real value and unique liquidity characteristics of
the assets dedicated to that business.
.. The combination of maturing short-term debt and the structure of long-term
debt will be managed judiciously to minimize liquidity risk.
Operations
Net cash from operations before changes in working capital of $1.0 billion in
2002 was $180 million, or 21 percent, greater than the $850 million provided in
2001. The increase is due to changes in noncash items, primarily an increase in
depreciation, amortization and fee stumpage of $231 million resulting from the
acquisition of Willamette and a reduction in net pension and other
postretirement benefit income of $93 million. These increases were partially
offset by the decline in year-to-date net earnings.
Changes in working capital items resulted in a decrease in cash flow provided by
operations of $260 million, primarily due to increases in receivable balances.
The company continually strives to keep working capital balances in line. Since
the end of the second quarter, the company has reduced its investment in working
capital by more than $50 million. The company's inventory turnover rate
increased to 10.3 turns in the thirteen weeks ended September 29, 2002, compared
to 9.2 turns in the comparable period in 2001.
Weyerhaeuser Company -40-
Year-to-date earnings before interest expense, income taxes, and noncash
charges for the principal business segments were:
.. Timberlands - $525 million, an increase of $107 million over $418 million in
2001. Operating earnings for this segment were $54 million greater than last
year and noncash charges were $49 million greater, while net pension benefit
income decreased $4 million.
.. Wood Products - $243 million, a decrease of $44 million from $287 million in
2001. Operating earnings decreased $68 million from the same period last year
while noncash charges for depreciation and amortization and facility closures
increased by $75 million and noncash net pension benefit income decreased by
$26 million. 2002 also includes $47 million in noncash credits related to the
reversal of previously accrued countervailing duties, compared to $30 million
of noncash charges for these accruals in the year-to-date 2001 period.
.. Pulp and Paper - $240 million, an increase of $4 million from $236 million a
year ago. The $76 million decline in operating earnings included a $60
million increase in depreciation and amortization and facility closures, and
a $20 million decrease in noncash net pension benefit income.
.. Containerboard, Packaging and Recycling - $476 million, up $117 million from
$359 million a year ago. Operating earnings declined by only $10 million, but
noncash charges for depreciation, amortization and facility closures were $112
million greater than for the same period last year. Noncash net pension
benefit income also decreased $15 million.
Investing
Weyerhaeuser's capital expenditures for the first thirty-nine weeks of 2002,
excluding acquisitions and real estate and related assets, were $709 million in
2002 compared to $503 million in 2001. Current year capital spending by segment
was $64 million for timberlands; $162 million for wood products; $323 million
for pulp and paper; $129 million for containerboard, packaging and recycling;
and $31 million for corporate and other. Weyerhaeuser currently anticipates
capital expenditures, excluding acquisitions and real estate and related assets,
to approximate $950 million for the year; however, this expenditure level could
increase or decrease as a consequence of future economic conditions.
In 2002, the company expended $6.1 billion, net of cash acquired, to purchase
the tendered shares of Willamette and cash out stock options of certain
Willamette management personnel.
Cash provided by investments in equity affiliates for real estate and related
assets in 2001 reflects distributions from equity investments that were
liquidated by the company during the first quarter of 2001.
Financing
Year to date 2002, Weyerhaeuser increased its interest-bearing debt by $8.1
billion, primarily due to funding the acquisition of Willamette and the
assumption of $1.8 billion of Willamette debt. Proceeds from new borrowings,
net of debt issue costs, including both the initial acquisition funding and the
subsequent replacement of the bridge financing, totaled $13.1 billion in 2002.
Repayments of long-term debt, including the bridge funding, totaled $6.8
billion, for a net increase in new borrowings of $6.3 billion.
Weyerhaeuser's debt to total capital ratio, excluding real estate and related
assets, was 56 percent at the end of the 2002 third quarter, up from 38 percent
at the end of 2001 and 37 percent at the end of the 2001 third quarter. For
purposes of computing this ratio, debt includes Weyerhaeuser's interest-bearing
debt and capital lease obligations and total capital consists of debt,
shareholders' interest, deferred taxes and minority interest in subsidiaries,
net of Weyerhaeuser's investments in real estate subsidiaries. Weyerhaeuser's
goal is to pay down the additional debt using cash flow from operations and to
return to our historic debt ratios within three to five years.
As of September 29, 2002, the company had available approximately $1.3 billion
in unused committed bank facilities.
The real estate and related assets segment borrowed $290 million and repaid
other borrowings totaling $332 million resulting in an overall reduction in
third party debt of $42 million.
During the first thirty-nine weeks of 2002, the company paid $265 million in
cash dividends compared to $263 million in cash dividends paid during 2001.
Year to date 2002, the company also received $67 million in cash proceeds from
the exercise of stock options, compared to $29 million in 2001.
Weyerhaeuser Company -41-
Quantitative and Qualitative Disclosures About Market Risk
As part of the company's financing activities, derivative securities are
sometimes used to achieve the desired mix of fixed versus floating rate debt and
to manage the timing of finance opportunities. The company also utilizes
well-defined financial contracts in the normal course of its operations as
a means to manage its foreign exchange and commodity price risks. The company
has no material market risk sensitive instruments, positions or transactions and
the effect of the use of derivatives on the company's results of operations,
financial position and cash flows is not material. As of September 29, 2002,
the contracts held by the company that are considered derivative instruments
include:
.. Foreign exchange contracts, which the company has designated as cash flow
hedges, the objective of which is to hedge the variability of future cash
flows associated with foreign denominated accounts receivable and accounts
payable due to changes in foreign currency exchange rates. These contracts
generate gains or losses that are recorded in other comprehensive income until
the contracts' respective settlement dates, at which time they are
reclassified into earnings. At September 29, 2002, the company had a long
position in Canadian dollars and Norwegian kroners. The fair value and
corresponding notional amount was $3 million and $3 million for Canadian
dollars and $2 million and $1 million for Norwegian kroners. The contracts
are short term in nature, with expiration dates ranging from one month through
June 2003.
.. Commodity contracts, which the company has designated as cash flow hedges, the
objective of which is to hedge the variability of future cash flows associated
with certain commodity transactions. At September 29, 2002, the company had
open commodity contracts with a notional value of $25 million and a fair value
of $0. The contract expiration dates range from January 2003 through December
2005.
.. Variable-to-fixed interest rate swap agreement entered into with a major
financial institution in which the company pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional
amount. The swap, which was acquired from Cedar River Paper Company, cannot be
designated as a hedge under Statement 133; however, it fixes $50 million of
the company's variable rate tax-exempt bond exposure. At September 29, 2002,
the swap, which matures December 2003, had a notional amount of $50 million
and a fair value representing a loss of $1 million. The fair value amount of
the obligation under this swap is based on the assumption that it had
terminated at the end of the fiscal period and provides for the netting of
amounts payable by and to the counterparty. In each case, the amount of such
obligation is the net amount so determined.
.. Variable rate swap agreement entered into with a major financial institution
in which the company pays a floating rate based on LIBOR and receives a
floating return based on an investment fund index, with payments calculated on
a notional amount. The swap is an overlay to investments and provides
diversification benefits. The swap settles quarterly and is marked to market
at each reporting date. All unrealized gains and losses are recognized in
earnings currently. At September 29, 2002, the company had one swap with a
maturity date of March 31, 2004, a notional amount of $156 million and a fair
value of $1 million. The company has the right to terminate this swap with
short notice.
.. Lumber and other commodity futures designed to manage the consolidated
exposure of changes in inventory values due to fluctuations in market prices
for selected business units. The company's commodity futures positions are
marked to market at each reporting date and all unrealized gains and losses
are recognized in earnings currently. These contract positions to date have
not had a material effect on the company's financial position, results of
operations or cash flows. These futures contracts settle daily, and as a
result, the company's net position as of September 29, 2002, was immaterial.
The company is exposed to credit-related gains or losses in the event of
nonperformance by counterparties to financial instruments, but does not expect
any counterparties to fail to meet their obligations.
Weyerhaeuser Company -42-
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Weyerhaeuser Company's principal executive officer and principal financial
officer have evaluated the effectiveness of the company's disclosure controls
and procedures within 90 days of the filing date of this quarterly report on
Form 10-Q. Disclosure controls are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that it files or submits under the
Exchange Act is accumulated and communicated to management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
Based on their evaluation, the company's principal executive officer and
principal financial officer believe the controls and procedures in place are
effective to ensure that information required to be disclosed complies with the
SEC's rules and forms.
Changes in Internal Controls
There were no changes in Weyerhaeuser Company's internal controls, or in other
factors that could significantly affect these controls, subsequent to the date
of their evaluation by the principal executive officer and principal financial
officer.
Weyerhaeuser Company -43-
Part II. Other Information
Item 1. Legal Proceedings
See Note 17: Commitments and Contingencies of the Notes to Financial
Statements for information regarding legal proceedings.
Item 2. Changes in Securities not applicable
Item 3. Default upon Senior Securities not applicable
Item 4. Submission of Matters to a Vote of Security Holders not applicable
Item 5. Other Information not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits
12. Statements regarding computation of ratios
99. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
The registrant filed reports on Form 8-K dated July 1, 2002; July 23, 2002;
August 9, 2002; August 13, 2002; September 26, 2002; September 30, 2002;
and October 22, 2002; and on Form 8-K/A dated September 30, 2002;
reporting information under Item 5, Other Events; Item 7, Exhibits; and
Item 9, Regulation FD Disclosure.
EXHIBITS INDEX
- --------------
Exhibits
12. Statement regarding computation of ratios
99. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 12
Weyerhaeuser Company and Subsidiaries
-------------------------------------
Computation of Ratios of Earnings to Fixed Charges
(Dollar amounts in thousands)
Thirty-nine weeks ended
-------------------------
Sept. 29, Sept. 30,
2002 2001
--------- ----------
Available earnings:
Earnings before interest expense, amortization of
debt expense, income taxes and extraordinary item $ 790,500 $ 924,902
Add interest portion of rental expense 40,509 34,056
--------- ----------
Available earnings before extraordinary item $ 831,009 $ 958,958
========= =========
Fixed charges:
Interest expense incurred:
Weyerhaeuser Company and subsidiaries excluding
Weyerhaeuser Real Estate Company and other
related subsidiaries $ 557,547 $ 265,637
Weyerhaeuser Real Estate Company and other
related subsidiaries 38,693 54,541
--------- ----------
Subtotal 596,240 320,178
Less intercompany interest (712) (822)
--------- ----------
Total interest expense incurred 595,528 319,356
--------- ----------
Amortization of debt expense 21,491 2,903
--------- ----------
Rental expense:
Weyerhaeuser Company and subsidiaries excluding
Weyerhaeuser Real Estate Company and other
related subsidiaries 113,756 95,405
Weyerhaeuser Real Estate Company and other
related subsidiaries 7,771 6,763
--------- ----------
121,527 102,168
--------- ----------
Interest portion of rental expense 40,509 34,056
--------- ----------
Total fixed charges $ 657,528 $ 356,315
========= ==========
Ratio of earnings to fixed charges 1.26 2.69
========= ==========
Weyerhaeuser Company with its Weyerhaeuser Real Estate Company
and Other Related Subsidiaries Accounted for on the Equity Method,
but Excluding the Undistributed Earnings of Those Subsidiaries
Computation of Ratios of Earnings to Fixed Charges
(Dollar amounts in thousands)
Thirty-nine weeks ended
-------------------------
Sept. 29, Sept. 30,
2002 2001
--------- ----------
Available earnings:
Earnings before interest expense, amortization of
debt expense, income taxes and extraordinary item $ 754,788 $ 792,706
Add interest portion of rental expense 37,919 31,802
--------- ----------
792,707 824,508
--------- ----------
Deduct undistributed earnings of equity affiliates (8,519) (33,498)
--------- ----------
Deduct undistributed earnings before income taxes
of Weyerhaeuser Real Estate Company and
other related subsidiaries:
Deduct pretax earnings (254,835) (206,464)
Add back dividends paid to Weyerhaeuser 75,000 30,000
--------- ----------
Undistributed earnings (179,835) (176,464)
--------- ----------
Available earnings before extraordinary item $ 604,353 $ 614,546
========= ==========
Fixed charges:
Interest expense incurred $ 557,547 $ 265,637
Amortization of debt expense 21,491 2,903
Interest portion of rental expense 37,919 31,802
--------- ----------
Total fixed charges $ 616,957 $ 300,342
========= ==========
Ratio of earnings to fixed charges 0.98 2.05
========= ==========
EXHIBIT 99
Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), each of the
undersigned officers of Weyerhaeuser Company, a Washington corporation (the
"Company"), hereby certifies that:
The Company's Quarterly Report on Form 10-Q dated November 12, 2002 (the "Form
10-Q") fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and information contained in the Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Steven R. Rogel
- ----------------------------
Steven R. Rogel
Chairman, President and Chief Executive Officer
Dated: November 12, 2002
/s/ William C. Stivers
- ----------------------------
William C. Stivers
Executive Vice President and Chief Financial Officer
Dated: November 12, 2002
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of the Form
10-Q or as a separate disclosure document.