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WEYERHAEUSER CO - Quarter Report: 2020 September (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

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

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-0470860

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

220 Occidental Avenue South

Seattle, Washington

 

98104-7800

(Address of principal executive offices)

 

(Zip Code)

 

(206) 539-3000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $1.25 per share

 

WY

 

New York 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      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No

As of October 26, 2020, 746,423 thousand shares of the registrant’s common stock ($1.25 par value) were outstanding.

 

 


 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS:

 

 

CONSOLIDATED STATEMENT OF OPERATIONS

1

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

2

 

CONSOLIDATED BALANCE SHEET

3

 

CONSOLIDATED STATEMENT OF CASH FLOWS

4

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

5

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

ITEM 2.

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

15

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

ITEM 4.

CONTROLS AND PROCEDURES

29

 

 

 

PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

29

ITEM 1A.

RISK FACTORS

29

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

30

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

30

ITEM 4.

MINE SAFETY DISCLOSURES

30

ITEM 5.

OTHER INFORMATION

30

ITEM 6.

EXHIBITS

31

 

SIGNATURES

32

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

WEYERHAEUSER COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Net sales (Note 3)

 

$

2,110

 

 

$

1,671

 

 

$

5,469

 

 

$

5,006

 

Costs of sales

 

 

1,390

 

 

 

1,399

 

 

 

4,055

 

 

 

4,111

 

Gross margin

 

 

720

 

 

 

272

 

 

 

1,414

 

 

 

895

 

Selling expenses

 

 

22

 

 

 

20

 

 

 

62

 

 

 

62

 

General and administrative expenses

 

 

96

 

 

 

85

 

 

 

254

 

 

 

254

 

Product remediation recoveries (Note 14)

 

 

 

 

 

(68

)

 

 

(8

)

 

 

(68

)

Other operating costs, net (Note 16)

 

 

92

 

 

 

33

 

 

 

113

 

 

 

85

 

Operating income

 

 

510

 

 

 

202

 

 

 

993

 

 

 

562

 

Non-operating pension and other postretirement benefit costs (Note 7)

 

 

(9

)

 

 

(15

)

 

 

(28

)

 

 

(495

)

Interest income and other

 

 

2

 

 

 

6

 

 

 

5

 

 

 

22

 

Interest expense, net of capitalized interest

 

 

(111

)

 

 

(91

)

 

 

(299

)

 

 

(289

)

Earnings (loss) before income taxes

 

 

392

 

 

 

102

 

 

 

671

 

 

 

(200

)

Income taxes (Note 17)

 

 

(109

)

 

 

(3

)

 

 

(166

)

 

 

138

 

Net earnings (loss)

 

$

283

 

 

$

99

 

 

$

505

 

 

$

(62

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share, basic and diluted (Note 4)

 

$

0.38

 

 

$

0.13

 

 

$

0.68

 

 

$

(0.08

)

Weighted average shares outstanding (in thousands) (Note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

746,996

 

 

 

745,626

 

 

 

746,809

 

 

 

745,901

 

Diluted

 

 

748,450

 

 

 

746,514

 

 

 

747,530

 

 

 

745,901

 

 

See accompanying Notes to Consolidated Financial Statements.

1


 

WEYERHAEUSER COMPANY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Net earnings (loss)

 

$

283

 

 

$

99

 

 

$

505

 

 

$

(62

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

11

 

 

 

(6

)

 

 

(14

)

 

 

19

 

Changes in unamortized actuarial loss, net of tax expense of $6, $8, $30 and $128

 

 

19

 

 

 

25

 

 

 

86

 

 

 

398

 

Changes in unamortized net prior service credit, net of tax expense of $0, $0, $0 and $0

 

 

 

 

 

 

 

 

2

 

 

 

(1

)

Total other comprehensive income

 

 

30

 

 

 

19

 

 

 

74

 

 

 

416

 

Total comprehensive income

 

$

313

 

 

$

118

 

 

$

579

 

 

$

354

 

 

See accompanying Notes to Consolidated Financial Statements.

2


 

WEYERHAEUSER COMPANY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

DOLLAR AMOUNTS IN MILLIONS, EXCEPT PAR VALUE

 

SEPTEMBER 30,

2020

 

 

DECEMBER 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

787

 

 

$

139

 

Receivables, net

 

 

500

 

 

 

309

 

Receivables for taxes

 

 

48

 

 

 

98

 

Inventories (Note 5)

 

 

411

 

 

 

416

 

Assets held for sale (Note 15)

 

 

199

 

 

 

140

 

Prepaid expenses and other current assets

 

 

101

 

 

 

147

 

Current restricted financial investments held by variable interest entities (Note 6)

 

 

 

 

 

362

 

Total current assets

 

 

2,046

 

 

 

1,611

 

Property and equipment, less accumulated depreciation of $3,423 and $3,477

 

 

1,945

 

 

 

1,969

 

Construction in progress

 

 

119

 

 

 

130

 

Timber and timberlands at cost, less depletion

 

 

11,465

 

 

 

11,929

 

Minerals and mineral rights, less depletion

 

 

271

 

 

 

281

 

Deferred tax assets

 

 

44

 

 

 

72

 

Other assets

 

 

466

 

 

 

414

 

Total assets

 

$

16,356

 

 

$

16,406

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Borrowings on line of credit (Note 9)

 

$

 

 

$

230

 

Accounts payable

 

 

215

 

 

 

246

 

Accrued liabilities (Note 8)

 

 

617

 

 

 

530

 

Total current liabilities

 

 

832

 

 

 

1,006

 

Long-term debt, net (Note 9)

 

 

5,974

 

 

 

6,147

 

Deferred tax liabilities

 

 

27

 

 

 

6

 

Deferred pension and other postretirement benefits (Note 7)

 

 

638

 

 

 

693

 

Other liabilities

 

 

358

 

 

 

377

 

Total liabilities

 

 

7,829

 

 

 

8,229

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common shares: $1.25 par value; authorized 1,360 million shares; issued and outstanding: 746,398 thousand shares at September 30, 2020 and 745,300 thousand shares at

December 31, 2019

 

 

933

 

 

 

932

 

Other capital

 

 

8,178

 

 

 

8,152

 

Retained earnings (accumulated deficit)

 

 

246

 

 

 

(3

)

Accumulated other comprehensive loss (Note 12)

 

 

(830

)

 

 

(904

)

Total equity

 

 

8,527

 

 

 

8,177

 

Total liabilities and equity

 

$

16,356

 

 

$

16,406

 

 

See accompanying Notes to Consolidated Financial Statements.

3


 

WEYERHAEUSER COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Cash flows from operations:

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

505

 

 

$

(62

)

Noncash charges (credits) to earnings (loss):

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

355

 

 

 

382

 

Basis of real estate sold

 

 

136

 

 

 

105

 

Deferred income taxes, net

 

 

20

 

 

 

(164

)

Pension and other postretirement benefits (Note 7)

 

 

55

 

 

 

519

 

Share-based compensation expense (Note 13)

 

 

22

 

 

 

23

 

Timber casualty loss (Note 16)

 

 

80

 

 

 

 

Change in:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(192

)

 

 

(47

)

Receivables and payables for taxes

 

 

103

 

 

 

(18

)

Inventories

 

 

2

 

 

 

(2

)

Prepaid expenses and other current assets

 

 

5

 

 

 

5

 

Accounts payable and accrued liabilities

 

 

3

 

 

 

(13

)

Pension and postretirement benefit contributions and payments

 

 

(21

)

 

 

(36

)

Other

 

 

12

 

 

 

(18

)

Net cash from operations

 

 

1,085

 

 

 

674

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(158

)

 

 

(199

)

Capital expenditures for timberlands reforestation

 

 

(41

)

 

 

(42

)

Proceeds from note receivable held by variable interest entities (Note 6)

 

 

362

 

 

 

253

 

Proceeds from sale of Montana timberlands (Note 15)

 

 

145

 

 

 

 

Other

 

 

3

 

 

 

20

 

Net cash from investing activities

 

 

311

 

 

 

32

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Cash dividends on common shares

 

 

(254

)

 

 

(760

)

Net proceeds from issuance of long-term debt (Note 9)

 

 

732

 

 

 

739

 

Payments on long-term debt (Note 9)

 

 

(936

)

 

 

(512

)

Proceeds from borrowings on line of credit (Note 9)

 

 

550

 

 

 

875

 

Payments on line of credit (Note 9)

 

 

(780

)

 

 

(860

)

Payments on debt held by variable interest entities (Note 6)

 

 

 

 

 

(302

)

Proceeds from exercise of stock options

 

 

9

 

 

 

8

 

Repurchases of common shares (Note 4)

 

 

 

 

 

(60

)

Other

 

 

(16

)

 

 

(15

)

Net cash from financing activities

 

 

(695

)

 

 

(887

)

Net change in cash, cash equivalents and restricted cash

 

 

701

 

 

 

(181

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

139

 

 

 

334

 

Cash, cash equivalents and restricted cash at end of period

 

$

840

 

 

$

153

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, net of amount capitalized of $3 and $4

 

$

278

 

 

$

310

 

Income taxes, net of refunds

 

$

46

 

 

$

46

 

 

See accompanying Notes to Consolidated Financial Statements.

4


 

WEYERHAEUSER COMPANY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

933

 

 

$

931

 

 

$

932

 

 

$

933

 

Issued for exercise of stock options and vested restricted stock units

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Repurchases of common shares (Note 4)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Balance at end of period

 

 

933

 

 

 

931

 

 

 

933

 

 

 

931

 

Other capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

8,166

 

 

 

8,130

 

 

 

8,152

 

 

 

8,172

 

Issued for exercise of stock options

 

 

3

 

 

 

3

 

 

 

9

 

 

 

7

 

Repurchases of common shares (Note 4)

 

 

 

 

 

 

 

 

 

 

 

(57

)

Shared-based compensation

 

 

7

 

 

 

7

 

 

 

22

 

 

 

23

 

Other transactions, net

 

 

2

 

 

 

 

 

 

(5

)

 

 

(5

)

Balance at end of period

 

 

8,178

 

 

 

8,140

 

 

 

8,178

 

 

 

8,140

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(37

)

 

 

418

 

 

 

(3

)

 

 

1,093

 

Net earnings (loss)

 

 

283

 

 

 

99

 

 

 

505

 

 

 

(62

)

Dividends on common shares

 

 

 

 

 

(253

)

 

 

(256

)

 

 

(760

)

Adjustments related to accounting pronouncements and other

 

 

 

 

 

 

 

 

 

 

 

(7

)

Balance at end of period

 

 

246

 

 

 

264

 

 

 

246

 

 

 

264

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(860

)

 

 

(755

)

 

 

(904

)

 

 

(1,152

)

Other comprehensive income

 

 

30

 

 

 

19

 

 

 

74

 

 

 

416

 

Balance at end of period (Note 12)

 

 

(830

)

 

 

(736

)

 

 

(830

)

 

 

(736

)

Total equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

8,527

 

 

$

8,599

 

 

$

8,527

 

 

$

8,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per common share

 

$

 

 

$

0.34

 

 

$

0.34

 

 

$

1.02

 

 

See accompanying Notes to Consolidated Financial Statements.

5


 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1:

BASIS OF PRESENTATION

7

 

 

 

NOTE 2:

BUSINESS SEGMENTS

7

 

 

 

NOTE 3:

REVENUE RECOGNITION

8

 

 

 

NOTE 4:

NET EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES

8

 

 

 

NOTE 5:

INVENTORIES

9

 

 

 

NOTE 6:

VARIABLE INTEREST ENTITIES

9

 

 

 

NOTE 7:

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

10

 

 

 

NOTE 8:

ACCRUED LIABILITIES

11

 

 

 

NOTE 9:

LONG-TERM DEBT AND LINE OF CREDIT

11

 

 

 

NOTE 10:

FAIR VALUE OF FINANCIAL INSTRUMENTS

11

 

 

 

NOTE 11:

LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES

12

 

 

 

NOTE 12:

ACCUMULATED OTHER COMPREHENSIVE LOSS

12

 

 

 

NOTE 13:

SHARE-BASED COMPENSATION

13

 

 

 

NOTE 14:

PRODUCT REMEDIATION RECOVERIES

13

 

 

 

NOTE 15:

TIMBERLAND ACQUISITIONS AND DIVESTITURES

13

 

 

 

NOTE 16:

OTHER OPERATING COSTS, NET

14

 

 

 

NOTE 17:

INCOME TAXES

14

 

 

 

NOTE 18:

RESTRICTED CASH

14

 

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE QUARTERS AND YEAR-TO-DATE PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

 

NOTE 1: BASIS OF PRESENTATION

Our consolidated financial statements provide an overall view of our results of operations, financial condition and cash flows. They include our accounts and the accounts of entities we control, including majority-owned domestic and foreign subsidiaries. They do not include our intercompany transactions and accounts, which are eliminated. Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we,” “the company” and “our” refer to the consolidated company.

The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain information and footnote disclosures normally included in our annual Consolidated Financial Statements have been condensed or omitted. These quarterly Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019. Results of operations for interim periods should not necessarily be regarded as indicative of the results that may be expected for the full year.

 

 

NOTE 2: BUSINESS SEGMENTS

We are principally engaged in growing and harvesting timber; manufacturing, distributing and selling products made from trees; maximizing the value of every acre we own through the sale of higher and better use (HBU) properties; and monetizing the value of surface and subsurface assets through leases and royalties. Our business segments are categorized based primarily on products and services which include:

Timberlands – Logs, timber, recreational leases and other products;

Real Estate & ENR – Real Estate (sales of timberlands) and ENR (rights to explore for and extract hard minerals, construction materials, oil and gas production, wind and solar) and

Wood Products – Structural lumber, oriented strand board, engineered wood products and building materials distribution.

A reconciliation of our business segment information to the respective information in the Consolidated Statement of Operations is as follows:

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Sales to unaffiliated customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

345

 

 

$

398

 

 

$

1,085

 

 

$

1,230

 

Real Estate & ENR

 

 

69

 

 

 

69

 

 

 

246

 

 

 

268

 

Wood Products

 

 

1,696

 

 

 

1,204

 

 

 

4,138

 

 

 

3,508

 

 

 

 

2,110

 

 

 

1,671

 

 

 

5,469

 

 

 

5,006

 

Intersegment sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

 

107

 

 

 

125

 

 

 

350

 

 

 

381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

 

2,217

 

 

 

1,796

 

 

 

5,819

 

 

 

5,387

 

Intersegment eliminations

 

 

(107

)

 

 

(125

)

 

 

(350

)

 

 

(381

)

Total

 

$

2,110

 

 

$

1,671

 

 

$

5,469

 

 

$

5,006

 

Net contribution (charge) to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

(11

)

 

$

72

 

 

$

169

 

 

$

294

 

Real Estate & ENR

 

 

17

 

 

 

32

 

 

 

72

 

 

 

122

 

Wood Products

 

 

566

 

 

 

143

 

 

 

859

 

 

 

293

 

 

 

 

572

 

 

 

247

 

 

 

1,100

 

 

 

709

 

Unallocated items(1)

 

 

(69

)

 

 

(54

)

 

 

(130

)

 

 

(620

)

Net contribution to earnings

 

 

503

 

 

 

193

 

 

 

970

 

 

 

89

 

Interest expense, net of capitalized interest

 

 

(111

)

 

 

(91

)

 

 

(299

)

 

 

(289

)

Earnings (loss) before income taxes

 

 

392

 

 

 

102

 

 

 

671

 

 

 

(200

)

Income taxes

 

 

(109

)

 

 

(3

)

 

 

(166

)

 

 

138

 

Net earnings (loss)

 

$

283

 

 

$

99

 

 

$

505

 

 

$

(62

)

(1)

Unallocated items are gains or charges not related to, or allocated to, an individual operating segment. They include all or a portion of items such as share-based compensation, pension and postretirement costs, elimination of intersegment profit in inventory and LIFO, foreign exchange transaction gains and losses, interest income and other as well as legacy obligations.

7


 

NOTE 3: REVENUE RECOGNITION

A reconciliation of revenue recognized by our major products:

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Net sales to unaffiliated customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delivered logs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic sales

 

$

80

 

 

$

86

 

 

$

238

 

 

$

291

 

Export grade sales

 

 

83

 

 

 

86

 

 

 

281

 

 

 

280

 

Subtotal West

 

 

163

 

 

 

172

 

 

 

519

 

 

 

571

 

South

 

 

141

 

 

 

168

 

 

 

436

 

 

 

483

 

North(1)

 

 

13

 

 

 

24

 

 

 

37

 

 

 

70

 

Subtotal delivered logs sales

 

 

317

 

 

 

364

 

 

 

992

 

 

 

1,124

 

Stumpage and pay-as-cut timber

 

 

5

 

 

 

10

 

 

 

15

 

 

 

29

 

Recreational and other lease revenue

 

 

16

 

 

 

15

 

 

 

47

 

 

 

45

 

Other(2)

 

 

7

 

 

 

9

 

 

 

31

 

 

 

32

 

Net sales attributable to Timberlands segment

 

 

345

 

 

 

398

 

 

 

1,085

 

 

 

1,230

 

Real Estate & ENR segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

49

 

 

 

45

 

 

 

192

 

 

 

200

 

Energy and natural resources

 

 

20

 

 

 

24

 

 

 

54

 

 

 

68

 

Net sales attributable to Real Estate & ENR segment

 

 

69

 

 

 

69

 

 

 

246

 

 

 

268

 

Wood Products segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural lumber

 

 

819

 

 

 

487

 

 

 

1,865

 

 

 

1,426

 

Oriented strand board

 

 

290

 

 

 

159

 

 

 

659

 

 

 

475

 

Engineered solid section

 

 

135

 

 

 

138

 

 

 

373

 

 

 

388

 

Engineered I-joists

 

 

83

 

 

 

90

 

 

 

231

 

 

 

246

 

Softwood plywood

 

 

55

 

 

 

42

 

 

 

128

 

 

 

130

 

Medium density fiberboard

 

 

47

 

 

 

44

 

 

 

124

 

 

 

127

 

Complementary building products

 

 

183

 

 

 

162

 

 

 

505

 

 

 

466

 

Other(3)

 

 

84

 

 

 

82

 

 

 

253

 

 

 

250

 

Net sales attributable to Wood Products segment

 

 

1,696

 

 

 

1,204

 

 

 

4,138

 

 

 

3,508

 

Total net sales

 

$

2,110

 

 

$

1,671

 

 

$

5,469

 

 

$

5,006

 

(1)

In November 2019, we sold our Michigan timberlands and in March 2020, we sold our Montana timberlands.

(2)

Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips.

(3)

Other Wood Products sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.

 

 

NOTE 4: NET EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES

 

Our basic and diluted earnings (loss) per share were:

$0.38 during third quarter 2020 and $0.68 during year-to-date 2020;

$0.13 during third quarter 2019 and $(0.08) during year-to-date 2019.

Basic earnings (loss) per share is net earnings (loss) divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued. Diluted earnings (loss) per share is net earnings (loss) divided by the sum of the weighted average number of our outstanding common shares and the effect of our outstanding dilutive potential common shares.

8


 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

SHARES IN THOUSANDS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Weighted average common shares outstanding – basic

 

 

746,996

 

 

 

745,626

 

 

 

746,809

 

 

 

745,901

 

Dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

401

 

 

 

396

 

 

 

246

 

 

 

 

Restricted stock units

 

 

570

 

 

 

357

 

 

 

297

 

 

 

 

Performance share units

 

 

483

 

 

 

135

 

 

 

178

 

 

 

 

Total effect of outstanding dilutive potential common shares

 

 

1,454

 

 

 

888

 

 

 

721

 

 

 

 

Weighted average common shares outstanding – dilutive

 

 

748,450

 

 

 

746,514

 

 

 

747,530

 

 

 

745,901

 

 

We use the treasury stock method to calculate the dilutive effect of our outstanding stock options, restricted stock units and performance share units.

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

The following shares were not included in the computation of diluted earnings (loss) per share because they were either antidilutive or the required performance or market conditions were not met. Some or all of these shares may be dilutive potential common shares in future periods.

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

SHARES IN THOUSANDS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Stock options

 

 

2,260

 

 

 

2,384

 

 

 

2,260

 

 

 

2,755

 

Restricted stock units

 

 

 

 

 

 

 

 

 

 

 

358

 

Performance share units

 

 

729

 

 

 

959

 

 

 

729

 

 

 

1,054

 

 

Share Repurchase Program

On February 7, 2019, our board of directors approved and announced a new share repurchase program (the 2019 Repurchase Program) under which we are authorized to repurchase up to $500 million of outstanding shares. Concurrently, the board terminated the remaining repurchase authorization under the share repurchase program approved by the board in November 2015.

During year-to-date 2020, we did not repurchase shares. During year-to-date 2019, we repurchased over 2.3 million common shares for approximately $60 million under the 2019 Repurchase Program. As of September 30, 2020, we had remaining authorization of approximately $440 million for future share repurchases. All common stock repurchases under the 2019 Repurchase Program were made in open-market transactions.

 

 

NOTE 5: INVENTORIES

Inventories include raw materials, work-in-process, finished goods, as well as materials and supplies.

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 30,

2020

 

 

DECEMBER 31,

2019

 

LIFO inventories:

 

 

 

 

 

 

 

 

Logs

 

$

14

 

 

$

19

 

Lumber, plywood, panels and fiberboard

 

 

64

 

 

 

82

 

Other products

 

 

8

 

 

 

10

 

Moving average cost or FIFO inventories:

 

 

 

 

 

 

 

 

Logs

 

 

49

 

 

 

28

 

Lumber, plywood, panels, fiberboard and engineered wood products

 

 

74

 

 

 

84

 

Other products

 

 

98

 

 

 

98

 

Materials and supplies

 

 

104

 

 

 

95

 

Total

 

$

411

 

 

$

416

 

 

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

 

 

NOTE 6: VARIABLE INTEREST ENTITIES

From 2002 through 2004, we sold certain nonstrategic timberlands. As a result of these sales, buyer-sponsored and monetization variable interest entities, or special purpose entities (SPEs), were formed. We were the primary beneficiary and consolidated the assets and liabilities of the SPEs involved in these transactions.

9


 

The assets of the buyer-sponsored SPEs were financial investments which consisted of bank guarantees. These bank guarantees were in turn backed by bank notes, which were the liabilities of the monetization SPEs. Interest earned from the financial investments within the buyer-sponsored SPEs was used to pay interest accrued on the corresponding monetization SPE’s note.

During first quarter 2020, we received $362 million in proceeds from our final buyer-sponsored SPE at maturity. The corresponding $302 million in liabilities of this SPE was paid in third quarter 2019. During first quarter 2019, we received $253 million in proceeds from a buyer-sponsored SPE at maturity. The corresponding $209 million in liabilities of this SPE was paid in fourth quarter 2018.

 

 

NOTE 7: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The components of net periodic benefit cost are:

 

 

 

PENSION

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Service cost

 

$

9

 

 

$

8

 

 

$

27

 

 

$

24

 

Interest cost

 

 

35

 

 

 

39

 

 

 

104

 

 

 

122

 

Expected return on plan assets

 

 

(59

)

 

 

(54

)

 

 

(175

)

 

 

(170

)

Amortization of actuarial loss

 

 

31

 

 

 

27

 

 

 

92

 

 

 

85

 

Amortization of prior service cost

 

 

1

 

 

 

1

 

 

 

3

 

 

 

3

 

Settlement charge

 

 

 

 

 

 

 

 

 

 

 

449

 

Total net periodic benefit cost - pension

 

$

17

 

 

$

21

 

 

$

51

 

 

$

513

 

 

 

 

OTHER POSTRETIREMENT BENEFITS

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Interest cost

 

$

1

 

 

$

2

 

 

$

3

 

 

$

5

 

Amortization of actuarial loss

 

 

1

 

 

 

1

 

 

 

2

 

 

 

5

 

Amortization of prior service credit

 

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

(4

)

Total net periodic benefit cost - other postretirement benefits

 

$

1

 

 

$

2

 

 

$

4

 

 

$

6

 

 

For the periods presented, service cost is included in “Costs of sales,” “Selling expenses,” and “General and administrative expenses” with the remaining components included in “Non-operating pension and other postretirement benefit costs” in the Consolidated Statement of Operations.

Actions to Reduce Pension Plan Obligations

As a part of our continued efforts to reduce pension plan obligations, we transferred approximately $1.5 billion of U.S. qualified pension plan assets and liabilities to an insurance company through the purchase of a group annuity contract in January 2019. In connection with this transaction, we recorded a preliminary noncash pretax settlement charge of $455 million during first quarter 2019, accelerating the recognition of previously unrecognized losses in “Accumulated other comprehensive loss”, that would have been recognized in subsequent periods. In second quarter 2019, we finalized the prior year-end fair value of pension plan assets and obligations, which reduced the settlement charge by $6 million for a final settlement charge of $449 million.

Fair Value of Pension Plan Assets and Obligations

In our year-end reporting process, we estimate the fair value of pension plan assets based upon the information available at that time. For certain assets, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year and market events. We update the year-end estimated fair value of pension plan assets in the second quarter of each year to incorporate final net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K.

During second quarter 2020, we recorded an increase to the beginning of the year fair value of the pension assets of $25 million, or less than 1 percent. We also updated our census data that is used to estimate our beginning of the year projected benefit obligation for our pension plans, which resulted in a projected benefit obligation increase of $11 million, or less than 1 percent. The net effect of these updates was a $14 million improvement in funded status as of December 31, 2019. This change in funded status was reflected on our second quarter 2020 Consolidated Balance Sheet.

 

 

10


 

NOTE 8: ACCRUED LIABILITIES

Accrued liabilities were comprised of the following:

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 30,

2020

 

 

DECEMBER 31,

2019

 

Compensation and employee benefit costs

 

$

187

 

 

$

188

 

Current portion of lease liabilities

 

 

30

 

 

 

33

 

Customer rebates, volume discounts and deferred income

 

 

122

 

 

 

105

 

Interest

 

 

86

 

 

 

98

 

Taxes payable

 

 

89

 

 

 

24

 

Other

 

 

103

 

 

 

82

 

Total

 

$

617

 

 

$

530

 

 

 

NOTE 9: LONG-TERM DEBT AND LINE OF CREDIT

In October 2020, we notified holders of our outstanding 4.625 percent notes due in September 2023 that we will redeem the entire aggregate principal amount outstanding in December 2020. The amount of principal outstanding and the book value of the debt were approximately $500 million and $498 million, respectively, as of September 30, 2020. The total redemption price of the notes is expected to be approximately $560 million which reflects the make-whole premium due on early redemption.

In September 2020, we redeemed our $325 million 3.25 percent notes due in March 2023. A pretax charge of $23 million was included in “Interest expense, net of capitalized interest” in the Consolidated Statement of Operations in third quarter 2020 for the make-whole premium in connection with the early extinguishment of the $325 million notes.

In March 2020, we issued $750 million of 4.00 percent notes due in April 2030. The net proceeds after deducting the discount, underwriting fees and issuance costs were $732 million. In May 2020, a portion of the net proceeds was used to redeem our $569 million 4.70 percent notes due in March 2021. A net pretax charge of $11 million was included in “Interest expense, net of capitalized interest” in the Consolidated Statement of Operations in second quarter 2020 for the make-whole premium in connection with the early extinguishment of the $569 million notes, partially offset by the write-off of an unamortized fair value step-up adjustment.

In February 2019, we issued $750 million of 4.00 percent notes due in November 2029. The net proceeds after deducting the discount, underwriting fees and issuance costs were $739 million. In March 2019, a portion of the net proceeds was used to redeem our $500 million 7.38 percent notes due in October 2019. A pretax charge of $12 million was included in "Interest expense, net of capitalized interest" in the Consolidated Statement of Operations in first quarter 2019 for the make-whole premium, unamortized debt issuance costs and unamortized debt discounts in connection with the early extinguishment of the $500 million notes.

In January 2020, we refinanced and extended our $1.5 billion five-year senior unsecured revolving credit facility, which now expires in January 2025. Borrowings are at LIBOR plus a spread or at other interest rates mutually agreed upon between the borrower and the lending banks. We had no outstanding borrowings on our credit facility as of September 30, 2020. As of December 31, 2019, we had $230 million of outstanding borrowings on our credit facility.

 

 

NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values and carrying values of our long-term debt and line of credit consisted of the following:

 

 

 

SEPTEMBER 30,

2020

 

 

DECEMBER 31,

2019

 

DOLLAR AMOUNTS IN MILLIONS

 

CARRYING

VALUE

 

 

FAIR VALUE

(LEVEL 2)

 

 

CARRYING

VALUE

 

 

FAIR VALUE

(LEVEL 2)

 

Long-term debt (including current maturities) and line of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

5,749

 

 

$

7,194

 

 

$

5,922

 

 

$

6,986

 

Variable rate

 

 

225

 

 

 

225

 

 

 

455

 

 

 

455

 

Total debt

 

$

5,974

 

 

$

7,419

 

 

$

6,377

 

 

$

7,441

 

 

To estimate the fair value of fixed rate long-term debt we used the market approach, which is based on quoted market prices we received for the same types and issues of our debt.

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

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

Fair Value of Other Financial Instruments

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

11


 

 

 

Legal Proceedings

We are party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceeding that management believes could have a material adverse effect on our Consolidated Balance Sheet, Consolidated Statement of Operations or Consolidated Statement of Cash Flows.

Environmental Matters

Site Remediation

Under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) – commonly known as the “Superfund” – and similar state laws, we:

are a party to various proceedings related to the cleanup of hazardous waste sites and

have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated.

As of September 30, 2020, our total accrual for future estimated remediation costs on active Superfund sites and other sites for which we are potentially responsible was approximately $58 million. These amounts are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.

Asset Retirement Obligations

We have obligations associated with the retirement of tangible long-lived assets consisting primarily of reforestation obligations related to forest management licenses in Canada and obligations to close and cap landfills. Some of our sites have asbestos containing materials. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when asbestos containing materials might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated. As of September 30, 2020, we had an asset retirement obligation reserve of $30 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet.

 

 

NOTE 12: ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in amounts included in our accumulated other comprehensive loss by component are:

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Pension(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(1,060

)

 

$

(972

)

 

$

(1,128

)

 

$

(1,343

)

Other comprehensive income (loss) before reclassifications

 

 

(6

)

 

 

4

 

 

 

14

 

 

 

(10

)

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

 

 

24

 

 

 

21

 

 

 

72

 

 

 

406

 

Total other comprehensive income

 

 

18

 

 

 

25

 

 

 

86

 

 

 

396

 

Balance at end of period

 

$

(1,042

)

 

$

(947

)

 

$

(1,042

)

 

$

(947

)

Other Postretirement Benefits(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(11

)

 

$

(18

)

 

$

(12

)

 

$

(19

)

Other comprehensive income before reclassifications

 

 

1

 

 

 

 

 

 

1

 

 

 

 

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

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Total other comprehensive income

 

 

1

 

 

 

 

 

 

2

 

 

 

1

 

Balance at end of period

 

$

(10

)

 

$

(18

)

 

$

(10

)

 

$

(18

)

Translation Adjustments and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

211

 

 

$

235

 

 

$

236

 

 

$

210

 

Translation adjustments

 

 

11

 

 

 

(6

)

 

 

(14

)

 

 

19

 

Total other comprehensive income (loss)

 

 

11

 

 

 

(6

)

 

 

(14

)

 

 

19

 

Balance at end of period

 

 

222

 

 

 

229

 

 

 

222

 

 

 

229

 

Accumulated other comprehensive loss, end of period

 

$

(830

)

 

$

(736

)

 

$

(830

)

 

$

(736

)

(1)

Amounts presented are net of tax.

(2)

Amounts of actuarial loss and prior service (cost) credit are components of net periodic benefit cost (credit). See Note 7: Pension and Other Postretirement Benefit Plans.

 

 

12


 

NOTE 13: SHARE-BASED COMPENSATION

Share-based compensation activity during year-to-date 2020 included the following:

 

SHARES IN THOUSANDS

 

GRANTED

 

 

VESTED

 

Restricted stock units (RSUs)

 

 

880

 

 

 

737

 

Performance share units (PSUs)

 

 

377

 

 

 

91

 

 

A total of 1.1 million shares of common stock were issued as a result of RSU vestings, PSU vestings and stock option exercises.

Restricted Stock Units

The weighted average fair value of the RSUs granted in 2020 was $28.92. The vesting provisions for RSUs granted in 2020 were consistent with prior year grants.

Performance Share Units

The weighted average grant date fair value of PSUs granted in 2020 was $33.16. The final number of shares granted in 2020 will range from 0 percent to 150 percent of each grant's target, depending upon actual company performance compared against an industry peer group. For prior year grants, company performance is measured against an industry peer group and the S&P 500. Beginning with PSUs granted in 2020, PSUs will vest at a maximum of 100 percent of target value in the event of negative absolute company total shareholder return.

Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2020

 

 

 

PERFORMANCE SHARE UNITS

 

Performance period

 

2/13/2020 – 12/31/2022

 

Valuation date average stock price(1)

 

$30.03

 

Expected dividends

 

4.50%

 

Risk-free rate

 

1.45% – 1.62%

 

Expected volatility

 

20.02% – 22.40%

 

(1)

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

 

 

NOTE 14: PRODUCT REMEDIATION RECOVERIES

In July 2017, we announced we were implementing a solution to address concerns regarding our TJI® Joists coated with our former Flak Jacket® Protection product. This issue was isolated to Flak Jacket product manufactured after December 1, 2016 and did not affect any of our other products.

In third quarter 2019 and second quarter 2020, we received and recorded insurance recoveries of $68 million and $8 million, respectively, related to prior remediation efforts. These recoveries are attributable to our Wood Products segment and were recorded in "Product remediation recoveries" in the Consolidated Statement of Operations.

 

 

NOTE 15: TIMBERLAND ACQUISITIONS AND DIVESTITURES

Oregon Acquisition and Divestiture

On September 1, 2020, we announced an agreement to sell 149,000 acres of southern Oregon timberlands for $385 million and a separate agreement to purchase 85,000 acres of mid-coastal Oregon timberlands for $426 million. These transactions within our Timberlands business segment will be structured as a like-kind exchange for tax purposes. The two agreements are subject to customary closing conditions and are both expected to close in fourth quarter 2020.

The sale of southern Oregon timberlands is not considered a strategic shift that has, or will have, a major effect on our operations or financial results and therefore does not meet the requirements for presentation as discontinued operations. However, the related assets have met the relevant criteria to be classified as held for sale in the current period Consolidated Balance Sheet. This classification does not affect the presentation in the Consolidated Statement of Operations. The held for sale classification did change the presentation of the related assets from long-term to current on our Consolidated Balance Sheet. As of September 30, 2020, “Assets held for sale” had a balance of $199 million, which consisted primarily of timberlands and other related assets.

Montana Divestiture

On December 17, 2019, we announced an agreement to sell 630,000 acres of Montana timberlands, which was part of our Timberlands business segment. On March 26, 2020, we completed the sale for $145 million in cash proceeds, which is net of purchase price adjustments and closing costs. Due to the impairment recorded during fourth quarter 2019, no material gain or loss was recorded as a result of this sale.

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

 

 

13


 

NOTE 16: OTHER OPERATING COSTS, NET

Other operating costs, net were comprised of the following:

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Foreign exchange losses (gains), net

 

$

(2

)

 

$

1

 

 

$

3

 

 

$

2

 

Litigation expense, net

 

 

7

 

 

 

25

 

 

 

9

 

 

 

59

 

Research and development expenses

 

 

1

 

 

 

1

 

 

 

4

 

 

 

4

 

Timber casualty loss

 

 

80

 

 

 

 

 

 

80

 

 

 

 

Other, net

 

 

6

 

 

 

6

 

 

 

17

 

 

 

20

 

Total other operating costs, net

 

$

92

 

 

$

33

 

 

$

113

 

 

$

85

 

 

Timber Casualty Loss

In September 2020, forest fires in the state of Oregon, commonly referred to as the Holiday Farm, Beachie Creek, Riverside, and Archie Creek fires, spread from adjacent lands onto portions of our Oregon timberland properties. Based on interpretation of satellite imagery and aerial photography, we estimate that the fires have had some impact on approximately 125,000 acres of our Oregon timberlands. Our initial assessments indicate that the extent of damage varies from tract to tract based on topographical conditions, rate of fire spread, age of the timber and other circumstances. Based on these initial assessments, we expect that the majority of merchantable timber, even if affected by the fires, is likely salvageable if we are able to harvest it within a reasonable period of time. We anticipate that the majority of pre-merchantable timber affected by the fires will not be able to be salvaged.

For the quarter ended September 30, 2020, we have recorded a timber casualty loss of $80 million which represents the estimated book value of timber and related assets that cannot be salvaged based on the information available at this time. The loss is attributable to our Timberlands segment and is recorded within “Other operating costs, net” in the Consolidated Statement of Operations. As salvage efforts continue and as we are able to complete on-site assessments of timber within the fire perimeter, it is reasonably possible that this estimate could increase by as much as $30 million to $40 million.

 

 

NOTE 17: INCOME TAXES

As a real estate investment trust (REIT), we generally are not subject to federal corporate income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our wholly-owned Taxable REIT Subsidiaries (TRSs), which includes our Wood Products segment earnings and portions of our Timberlands and Real Estate & ENR segments' earnings.

The quarterly provision for income taxes is based on our current estimate of the annual effective tax rate and is adjusted for discrete taxable events that have occurred during the year. Our 2020 estimated annual effective tax rate, excluding discrete items, differs from the U.S. federal statutory tax rate of 21 percent primarily due to tax benefits associated with our nontaxable REIT earnings and the projected mix of earnings between our REIT and our TRSs.

In July 2020, the Internal Revenue Service released final regulations which resolved uncertainties related to the deductible portion of our interest expense under the Tax Cuts and Jobs Act of 2017. Previously unrecognized tax benefits associated with this position were recognized in third quarter 2020, which favorably impacted our receivables for taxes and did not impact our effective tax rate.

 

 

NOTE 18: RESTRICTED CASH

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on our Consolidated Balance Sheet that sum to the total of the amounts shown in the Consolidated Statement of Cash Flows:

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 30,

2020

 

 

SEPTEMBER 30,

2019

 

Cash and cash equivalents

 

$

787

 

 

$

153

 

Restricted cash included in other assets(1)

 

 

53

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

840

 

 

$

153

 

(1)

Amounts included in restricted cash are primarily comprised of proceeds held by a qualified intermediary that are intended to be reinvested in timber and timberlands through a like-kind exchange transaction, as well as additional funds held in escrow related to this transaction.

 

14


 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including but not limited to, our expectations concerning our future performance and the effects of the COVID-19 pandemic on the company’s business, results of operations, liquidity, cash flows and financial condition, the consummation of previously announced timberland transactions, as well as our plans and decisions relating to various capital expenditures, capital allocation priorities and other discretionary items, including but not limited to with respect to future dividend payments to our shareholders. Forward-looking statements generally are identified by words such as "anticipate," "believe," "continue," "estimate," "expect," "foreseeable," "future," "intend," "maintain," "may," "plan," "potential," "project," "should," "targeted," "will," and "would," and similar words and expressions. Forward-looking statements are based on our current expectations and assumptions. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to:

the effect of general economic conditions, including employment rates, interest rate levels, housing starts, general availability of financing for home mortgages and the relative strength of the U.S. dollar;

the effect of COVID-19 and other viral or disease outbreaks and their potential effects on our business, results of operations, cash flows, financial condition and future prospects;

market demand for the company's products, including market demand for our timberland properties with higher and better uses, which is related to, among other factors, the strength of the various U.S. business segments and U.S. and international economic conditions;

changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Japanese yen, the Chinese yuan, and the Canadian dollar, and the relative value of the euro to the yen;

restrictions on international trade and tariffs imposed on imports or exports;

the availability and cost of shipping and transportation;

economic activity in Asia, especially Japan and China;

performance of our manufacturing operations, including maintenance and capital requirements;

potential disruptions in our manufacturing operations;

the level of competition from domestic and foreign producers;

our operational excellence initiatives;

the successful and timely execution and integration of our strategic acquisitions, including our ability to realize expected benefits and synergies, and the successful and timely execution of our strategic divestitures, each of which is subject to a number of risks and conditions beyond our control including, but not limited to, timing, required regulatory approvals or the occurrence of any event, change or other circumstances that could give rise to a termination of any acquisition or divestiture transaction under the terms of the governing transaction agreements;

raw material availability and prices;

the effect of weather;

changes in global or regional climate conditions and governmental response to such changes;

the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters;

energy prices;

transportation and labor availability and costs;

federal tax policies;

the effect of forestry, land use, environmental and other governmental regulations;

legal proceedings;

performance of pension fund investments and related derivatives;

the effect of timing of employee retirements and changes in the market price of our common stock on charges for share-based compensation;

the accuracy of our estimates of costs and expenses related to contingent liabilities and charges related to casualty losses;

changes in accounting principles; and

other risks and uncertainties identified in our 2019 Annual Report on Form 10-K, as well as those set forth from time to time in our other public statements, reports, registration statements, prospectuses, information statements and other filings with the SEC.

 

It is not possible to predict or identify all risks and uncertainties that might affect the accuracy of our forward-looking statements and, consequently, our descriptions of such risks and uncertainties should not be considered exhaustive. There is no guarantee that any of the events anticipated by these forward-looking statements will occur, and if any of the events do occur, there is no guarantee what effect they will have on the company's business, results of operations, cash flows, financial condition and future prospects.

 

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

15


 

 

RESULTS OF OPERATIONS

 

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

 

Sales realizations for Timberlands and Wood Products refer to net selling prices. This includes selling price plus freight, minus normal sales deductions. Real Estate transactions are presented at the contract sales price before commissions and closing costs, net of any credits.

Net contribution to earnings does not include interest expense or income taxes.

 

 

ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS

Overview

In mid-March, COVID-19 was officially declared a global pandemic by the World Health Organization and a national emergency was declared by the United States. States and municipalities subsequently began to issue shelter-in-place orders and similar mandates requiring those not engaged in essential activities to remain home. The U.S. Department of Homeland Security designated the forest products industry as an "essential critical infrastructure workforce," which recognizes the importance of timber and wood products operations in supporting critical infrastructure and construction projects and the manufacture of important personal hygiene items. In response to the pandemic, we began taking proactive steps in early March to safeguard the health of our employees. These actions include detailed cleaning and disinfecting procedures, strict processes around social distancing and personal hygiene, clear communication with our employees, contractors, vendors and visitors about our safety protocols, comprehensive guidance for response to any COVID-19 diagnoses or exposures in our operations, suspension of all air travel and non-essential meetings, and a directive that employees work from home if feasible.

Based on the timing of the outbreak, the economic effects of the pandemic were less pronounced in the first quarter with a drop in U.S. gross domestic product (GDP) of 5 percent. The effects in the second quarter were more acute, with U.S. GDP declining 31 percent. In April, the national unemployment rate soared to a record-high of nearly 15 percent driven by the restrictions imposed in response to the pandemic. Unemployment gradually decreased over the following two months to 13 percent in May and 11 percent in June as several states began to reopen their economies and loosen restrictions on certain sectors. U.S. GDP increased 33 percent in the third quarter based on the advance estimate released by the U.S. Bureau of Economic Analysis, a notable rebound from the prior quarter. The national unemployment rate has shown similar signs of recovery during the quarter, dropping from 10 percent in July to below 8 percent in September. However, a growing share of the job losses are permanent in nature, as opposed to temporary layoffs, raising further concerns about the prospects of sustained economic recovery.

Our second and third quarter 2020 market conditions exceeded expectations, with a record run-up in pricing for our commodity wood products. This pricing was driven by strong repair and remodel demand and a stronger-than-expected U.S. housing market, resulting in demand that significantly outpaced available supply. However, there is still uncertainty as to our market conditions for the remainder of the year, which will be influenced by the trajectory of COVID-19 infections and the related impact on economic activity, including changes in the unemployment rate and the nature and extent of future government stimulus.

Business Outlook

The demand for sawlogs within our Timberlands segment is directly affected by domestic production of wood-based building products. The strength of the U.S. housing market, especially new residential construction, strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Our Timberlands segment, specifically the Western region, is also affected by export demand and trade policy. Japanese housing starts are a key driver of export log demand in Japan. The demand for pulpwood from our Timberlands segment is directly affected by the production of pulp, paper and oriented strand board as well as the demand for biofuels, such as pellets made from pulpwood.

Third quarter new residential construction activity increased significantly compared with the prior quarter. On a seasonally adjusted annual basis, housing starts as reported by the U.S. Census Bureau for the third quarter 2020 averaged 1.43 million, which was 33 percent above second quarter 2020. Single family starts averaged 1.04 million units, a 36 percent improvement over second quarter 2020 and 16 percent higher than third quarter 2019. Multi-family starts averaged 390 thousand units in third quarter 2020, which was 24 percent higher than second quarter 2020 and 1 percent higher than third quarter 2019. Sales of newly built, single family homes averaged a seasonally adjusted annual rate of 973 thousand units for the third quarter of 2020, an increase of 38 percent from the prior quarter average of 703 thousand units. Additionally, the National Association of Home Builders Housing Market Index, which measures builder confidence in the market for newly built single family homes in the U.S., reported a historic high of 83 points in September.

In repair and remodel markets, stay at home behavior has bolstered do-it-yourself activity, contributing to increased sales at building supply stores and overall repair and remodeling demand. According to the Census Bureau Advance Retail Spending report, building material and garden supply store sales increased 17 percent in third quarter 2020 compared with the same quarter a year ago, suggesting continued strength in the remodeling market through the third quarter.

In U.S. wood product markets, demand and pricing for commodity products increased sharply throughout the quarter, and benchmark pricing for lumber and oriented strand board reached record highs in September 2020. The Random Lengths Framing Lumber Composite price averaged $746/MBF in third quarter 2020, an 84 percent increase from second quarter 2020. The Oriented Strand Board Composite indicator price also increased significantly, averaging $585/MSF in third quarter 2020, a 99 percent increase from second quarter 2020. To date, fourth quarter benchmark pricing for lumber has declined from its record high levels in September. Fourth quarter to date benchmark pricing for oriented strand board has held firm.

In Western log markets, Douglas fir sawlog prices increased 10 percent in third quarter 2020 compared with second quarter 2020 as reported by RISI Log Lines. We experienced significant wildfire activity in the West during the third quarter which impacted our Oregon timberlands and restricted harvest activity. The resulting impacts to the supply chain and log prices from these wildfires and subsequent salvage operations remains to be seen. In the South, delivered sawlog prices decreased slightly compared with second quarter 2020 with a two percent change in price as reported by TimberMart-South. We continue to expect our full year Southern timber harvest volumes will be approximately 10 percent below 2019 harvest levels, as we reduced 2020 harvest volumes in light of the economic effects of the COVID-19 pandemic.

Exchange rates, available supply from other countries and trade policy affect our export businesses. In Japan, total housing starts year to date through August 2020 declined 11 percent compared to the same period in 2019. A comparable decline was observed for the key Post and Beam segment. The decline in year over year housing starts is likely due to an increase in the consumption tax which came into effect in October 2019, as well as the impacts of the COVID-19 pandemic.

16


 

Export log prices to China decreased by 6 percent on average in third quarter 2020 over second quarter 2020, as reported by RISI Log Lines. Chinese economic activity and log demand improved in the third quarter as the impacts of COVID-19 remained limited. Log supply to China’s main ocean ports was higher as shipment volumes from New Zealand and Europe increased following second quarter disruptions related to COVID-19. Softwood log inventories at China’s main ocean ports remained flat through the third quarter.    

Our Real Estate & ENR segment is affected by the health of the U.S. economy. According to the Realtors Land Institute (RLI) of the National Association of Realtors, the dollar volume of rural properties sold increased by 2.2 percent in 2019 over 2018, and per acre prices grew 2.1 percent on average. Based on RLI’s 2019 Land Market Survey published in January 2020, these trends are expected to continue with prices and volumes of land transactions forecasted to rise 2.2 percent and timberland sales expected to rise 1.5 percent in 2020. Demand for rural properties has remained solid in 2020, although COVID-19-related restrictions are delaying the financing and closing of some land transactions.

 

 

CONSOLIDATED RESULTS

 

How We Did Third Quarter 2020 and Year-to-Date 2020

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Net sales

 

$

2,110

 

 

$

1,671

 

 

$

439

 

 

$

5,469

 

 

$

5,006

 

 

$

463

 

Costs of sales

 

 

1,390

 

 

 

1,399

 

 

 

(9

)

 

 

4,055

 

 

 

4,111

 

 

 

(56

)

Operating income

 

 

510

 

 

 

202

 

 

 

308

 

 

 

993

 

 

 

562

 

 

 

431

 

Net earnings (loss)

 

 

283

 

 

 

99

 

 

 

184

 

 

 

505

 

 

 

(62

)

 

 

567

 

Earnings (loss) per share, basic and diluted

 

 

0.38

 

 

 

0.13

 

 

 

0.25

 

 

 

0.68

 

 

 

(0.08

)

 

 

0.76

 

 

Comparing Third Quarter 2020 with Third Quarter 2019

 

Net sales

 

Net sales increased $439 million – 26 percent – primarily due to a $492 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations across most product lines.

 

This increase was partially offset by a $53 million decrease in Timberlands sales to unaffiliated customers, primarily due to decreased sales volumes across all regions.

 

Costs of sales

 

Costs of sales decreased $9 million – 1 percent – primarily due to decreased log sales volumes within our Timberlands segment partially offset by increased real estate acres sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Timberlands, Real Estate, Energy and Natural Resources and Wood Products discussions below.

 

Operating income

 

Operating income increased $308 million – 152 percent – primarily due to a $448 million increase in consolidated gross margin (see discussion of components above).

 

This increase was partially offset by an $80 million timber casualty loss recorded related to the Oregon wildfires (refer to Note 16: Other Operating Costs, Net) and a $68 million product remediation insurance recovery recorded in third quarter 2019, with no similar activity in third quarter 2020 (refer to Note 14: Product Remediation Recoveries).

 

Net earnings (loss)

 

Net earnings increased $184 million – 186 percent – primarily due to the $308 million increase in operating income, as discussed above.

 

This increase was partially offset by a $106 million increase in income tax expense and a $20 million increase in interest expense (refer to Income Taxes and Interest Expense).

 

Comparing Year-to-Date 2020 with Year-to-Date 2019

 

Net sales

 

Net sales increased $463 million – 9 percent – primarily due to a $630 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations for our structural lumber and oriented strand board products.

 

This increase was partially offset by a $145 million decrease in Timberlands sales to unaffiliated customers, primarily attributable to decreased sales volumes across all regions, as well as a $22 million decrease in Real Estate & ENR net sales to unaffiliated customers, primarily due to decreased oil and gas prices.

 

17


 

Costs of sales

 

Costs of sales decreased $56 million – 1 percent – primarily due to decreased log sales volumes within our Timberlands segment. This decrease was partially offset by increased real estate acres sold, as well as increased basis per acre sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Timberlands, Real Estate, Energy and Natural Resources and Wood Products discussions below.

 

Operating income

 

Operating income increased $431 million – 77 percent – primarily due to a $519 million increase in consolidated gross margin (see discussion of components above).

This increase was partially offset by a $60 million decrease in product remediation insurance recoveries (refer to Note 14: Product Remediation Recoveries) and a $28 million increase in other operating costs, net attributable to an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires, partially offset by a reduction in legal charges (refer to Note 16: Other Operating Costs, Net).

 

Net earnings (loss)

 

Net earnings increased $567 million – 915 percent – primarily due to:

a $467 million decrease in non-operating pension and other postretirement benefit costs (refer to Note 7: Pension and Other Postretirement Benefit Plans) and

a $431 million increase in operating income, as discussed above.

These changes were partially offset by a $304 million change in income taxes, from a $138 million benefit year-to-date 2019, to a $166 million income tax charge for year-to-date 2020 (refer to Income Taxes), as well as a $17 million decrease in interest income and other.

 

TIMBERLANDS

 

How We Did Third Quarter 2020 and Year-to-Date 2020

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Net sales to unaffiliated customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delivered logs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West

 

$

163

 

 

$

172

 

 

$

(9

)

 

$

519

 

 

$

571

 

 

$

(52

)

South

 

 

141

 

 

 

168

 

 

 

(27

)

 

 

436

 

 

 

483

 

 

 

(47

)

North(1)

 

 

13

 

 

 

24

 

 

 

(11

)

 

 

37

 

 

 

70

 

 

 

(33

)

Subtotal delivered logs sales

 

 

317

 

 

 

364

 

 

 

(47

)

 

 

992

 

 

 

1,124

 

 

 

(132

)

Stumpage and pay-as-cut timber

 

 

5

 

 

 

10

 

 

 

(5

)

 

 

15

 

 

 

29

 

 

 

(14

)

Recreational and other lease revenue

 

 

16

 

 

 

15

 

 

 

1

 

 

 

47

 

 

 

45

 

 

 

2

 

Other(2)

 

 

7

 

 

 

9

 

 

 

(2

)

 

 

31

 

 

 

32

 

 

 

(1

)

Subtotal net sales to unaffiliated customers

 

 

345

 

 

 

398

 

 

 

(53

)

 

 

1,085

 

 

 

1,230

 

 

 

(145

)

Intersegment sales

 

 

107

 

 

 

125

 

 

 

(18

)

 

 

350

 

 

 

381

 

 

 

(31

)

Total sales

 

$

452

 

 

$

523

 

 

$

(71

)

 

$

1,435

 

 

$

1,611

 

 

$

(176

)

Costs of sales

 

$

358

 

 

$

429

 

 

$

(71

)

 

$

1,116

 

 

$

1,247

 

 

$

(131

)

Operating income (loss) and Net contribution (charge) to earnings

 

$

(11

)

 

$

72

 

 

$

(83

)

 

$

169

 

 

$

294

 

 

$

(125

)

(1)

In November 2019, we sold our Michigan timberlands and in March 2020, we sold our Montana timberlands.

(2)

Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips.

 

Comparing Third Quarter 2020 with Third Quarter 2019

 

Net sales to unaffiliated customers

 

Net sales to unaffiliated customers decreased $53 million – 13 percent – primarily due to:

a $27 million decrease in Southern log sales attributable to a 13 percent decrease in sales volumes, as well as a 4 percent decrease in sales realizations;

an $11 million decrease in Northern log sales attributable to a 46 percent decrease in sales volumes due to the divestitures of our Michigan and Montana timberlands and

a $9 million decrease in Western log sales attributable to a 14 percent decrease in sales volumes, partially offset by a 10 percent increase in sales realizations.

 

18


 

Intersegment sales

 

Intersegment sales decreased $18 million – 14 percent – primarily due to a 22 percent decrease in intersegment log sales volumes, partially offset by a 10 percent increase in intersegment log sales realizations.

 

Costs of sales

 

Costs of sales decreased $71 million – 17 percent – primarily due to decreases in log sales volumes across all regions, as discussed above.

 

Operating income (loss) and Net contribution (charge) to earnings

 

Operating income (loss) and net contribution (charge) to earnings decreased $83 million – 115 percent – primarily due to an $80 million timber casualty loss related to the Oregon wildfires recorded in third quarter 2020 with no similar activity in the same period in 2019.

 

Comparing Year-to-Date 2020 with Year-to-Date 2019

 

Net sales to unaffiliated customers

 

Net sales to unaffiliated customers decreased $145 million – 12 percent – primarily due to:

a $52 million decrease in Western log sales attributable to an 11 percent decrease in sales volumes, partially offset by a 3 percent increase in sales realizations;

a $47 million decrease in Southern log sales attributable to a 6 percent decrease in sales volumes, as well as a 4 percent decrease in sales realizations and

a $33 million decrease in Northern log sales attributable to a 47 percent decrease in sales volumes due to the divestitures of our Michigan and Montana timberlands.

 

Intersegment sales

 

Intersegment sales decreased $31 million – 8 percent – primarily due to a 10 percent decrease in intersegment log sales volumes, partially offset by a 3 percent increase in intersegment log sales realizations.

 

Costs of sales

 

Costs of sales decreased $131 million – 11 percent – primarily due to decreases in log sales volumes across all regions, as discussed above.

 

Operating income and Net contribution to earnings

 

Operating income and net contribution to earnings decreased $125 million – 43 percent – primarily due to an $80 million timber casualty loss related to the Oregon wildfires recorded in year-to-date 2020 with no similar activity for the same period in 2019, as well as the change in the components of gross margin, as discussed above.

 

Third-Party Log Sales Volumes and Fee Harvest Volumes

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

VOLUMES IN THOUSANDS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Third-party log sales – tons:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West(1)

 

 

1,489

 

 

 

1,729

 

 

 

(240

)

 

 

4,887

 

 

 

5,513

 

 

 

(626

)

South

 

 

4,185

 

 

 

4,795

 

 

 

(610

)

 

 

12,857

 

 

 

13,694

 

 

 

(837

)

North(2)

 

 

234

 

 

 

429

 

 

 

(195

)

 

 

631

 

 

 

1,186

 

 

 

(555

)

Total

 

 

5,908

 

 

 

6,953

 

 

 

(1,045

)

 

 

18,375

 

 

 

20,393

 

 

 

(2,018

)

Fee harvest volumes – tons:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West(1)

 

 

1,911

 

 

 

2,183

 

 

 

(272

)

 

 

6,457

 

 

 

7,023

 

 

 

(566

)

South

 

 

5,596

 

 

 

6,802

 

 

 

(1,206

)

 

 

17,640

 

 

 

19,661

 

 

 

(2,021

)

North(2)

 

 

321

 

 

 

560

 

 

 

(239

)

 

 

901

 

 

 

1,565

 

 

 

(664

)

Total

 

 

7,828

 

 

 

9,545

 

 

 

(1,717

)

 

 

24,998

 

 

 

28,249

 

 

 

(3,251

)

(1)

Western logs are primarily transacted in thousand board feet (MBF) but are converted to ton equivalents for external reporting purposes.

(2)

In November 2019, we sold our Michigan timberlands and in March 2020, we sold our Montana timberlands.

 

 

19


 

REAL ESTATE, ENERGY AND NATURAL RESOURCES

 

How We Did Third Quarter 2020 and Year-to-Date 2020

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

$

49

 

 

$

45

 

 

$

4

 

 

$

192

 

 

$

200

 

 

$

(8

)

Energy and natural resources

 

 

20

 

 

 

24

 

 

 

(4

)

 

 

54

 

 

 

68

 

 

 

(14

)

Total

 

$

69

 

 

$

69

 

 

$

 

 

$

246

 

 

$

268

 

 

$

(22

)

Costs of sales

 

$

46

 

 

$

32

 

 

$

14

 

 

$

156

 

 

$

127

 

 

$

29

 

Operating income and Net contribution to earnings

 

$

17

 

 

$

32

 

 

$

(15

)

 

$

72

 

 

$

122

 

 

$

(50

)

 

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

 

Comparing Third Quarter 2020 with Third Quarter 2019

 

Net sales

 

Net sales remained consistent due to a minimal increase in real estate sales, offset by an equal decrease in energy and natural resources sales.

 

Costs of sales

 

Costs of sales increased $14 million – 44 percent – primarily due to increased real estate acres sold.

 

Operating income and Net contribution to earnings

 

Operating income and net contribution to earnings decreased $15 million – 47 percent – primarily due to the change in the components of gross margin, as discussed above.

 

Comparing Year-to-Date 2020 with Year-to-Date 2019

 

Net sales

 

Net sales decreased $22 million – 8 percent – primarily due to lower oil and gas prices, as well as decreased energy and natural resources sales volumes.  

 

Costs of sales

 

Costs of sales increased $29 million – 23 percent – primarily due to increased real estate acres sold, as well as increased basis per acre sold.

 

Operating income and Net contribution to earnings

 

Operating income and net contribution to earnings decreased $50 million – 41 percent – primarily due to the change in the components of gross margin, as discussed above.

 

REAL ESTATE SALES STATISTICS

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Acres sold

 

 

34,917

 

 

 

18,057

 

 

 

16,860

 

 

 

111,228

 

 

 

103,922

 

 

 

7,306

 

Average price per acre

 

$

1,381

 

 

$

2,415

 

 

$

(1,034

)

 

$

1,662

 

 

$

1,806

 

 

$

(144

)

 

 

20


 

WOOD PRODUCTS

 

How We Did Third Quarter 2020 and Year-to-Date 2020

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structural lumber

 

$

819

 

 

$

487

 

 

$

332

 

 

$

1,865

 

 

$

1,426

 

 

$

439

 

Oriented strand board

 

 

290

 

 

 

159

 

 

 

131

 

 

 

659

 

 

 

475

 

 

 

184

 

Engineered solid section

 

 

135

 

 

 

138

 

 

 

(3

)

 

 

373

 

 

 

388

 

 

 

(15

)

Engineered I-joists

 

 

83

 

 

 

90

 

 

 

(7

)

 

 

231

 

 

 

246

 

 

 

(15

)

Softwood plywood

 

 

55

 

 

 

42

 

 

 

13

 

 

 

128

 

 

 

130

 

 

 

(2

)

Medium density fiberboard

 

 

47

 

 

 

44

 

 

 

3

 

 

 

124

 

 

 

127

 

 

 

(3

)

Complementary building products

 

 

183

 

 

 

162

 

 

 

21

 

 

 

505

 

 

 

466

 

 

 

39

 

Other products produced(1)

 

 

84

 

 

 

82

 

 

 

2

 

 

 

253

 

 

 

250

 

 

 

3

 

Total

 

$

1,696

 

 

$

1,204

 

 

$

492

 

 

$

4,138

 

 

$

3,508

 

 

$

630

 

Costs of sales

 

$

1,075

 

 

$

1,067

 

 

$

8

 

 

$

3,112

 

 

$

3,104

 

 

$

8

 

Operating income and Net contribution to earnings

 

$

566

 

 

$

143

 

 

$

423

 

 

$

859

 

 

$

293

 

 

$

566

 

(1)

Other products produced sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.

 

Comparing Third Quarter 2020 with Third Quarter 2019

 

Net sales

Net sales increased $492 million – 41 percent – primarily due to:

a $332 million increase in structural lumber sales attributable to a 73 percent increase in sales realizations, partially offset by a 3 percent decrease in sales volumes;

a $131 million increase in oriented strand board sales attributable to an 85 percent increase in sales realizations, partially offset by a 1 percent decrease in sales volumes;

a $21 million increase in complementary building products sales attributable to increased sales volumes and

a $13 million increase in softwood plywood sales attributable to a 47 percent increase in sales realizations, partially offset by a 12 percent decrease in sales volumes.

These increases were partially offset by a $7 million decrease in sales for engineered I-joists and a $3 million decrease in sales for engineered solid section.

 

Costs of sales

Costs of sales increased $8 million – 1 percent – primarily due to increased Canadian timberlands and Distribution costs, partially offset by decreased sales volumes.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings increased $423 million – 296 percent – primarily due to the change in the components of gross margin, as discussed above, partially offset by a $68 million decrease in product remediation insurance recoveries.

 

Comparing Year-to-Date 2020 with Year-to-Date 2019

 

Net sales

 

Net sales increased $630 million – 18 percent – primarily due to:

a $439 million increase in structural lumber sales attributable to a 31 percent increase in sales realizations;

a $184 million increase in oriented strand board sales attributable to a 35 percent increase in sales realizations, as well as a 3 percent increase in sales volumes and

a $39 million increase in complementary building products sales attributable to increased sales volumes.

These increases were partially offset by a $15 million decrease in sales for engineered solid section and a $15 million decrease in sales for engineered I-joists.

 

Costs of sales

 

Cost of sales increased $8 million – less than 1 percent – primarily due to a minimal 1 percent increase in total sales volumes.

 

21


 

Operating income and Net contribution to earnings

 

Operating income and net contribution to earnings increased $566 million – 193 percent – primarily due to the change in the components of gross margin, as discussed above, partially offset by a $60 million decrease in product remediation insurance recoveries.

 

Third-Party Sales Volumes

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

VOLUMES IN MILLIONS(1)

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Structural lumber – board feet

 

 

1,216

 

 

 

1,253

 

 

 

(37

)

 

 

3,663

 

 

 

3,660

 

 

 

3

 

Oriented strand board – square feet (3/8”)

 

 

736

 

 

 

740

 

 

 

(4

)

 

 

2,253

 

 

 

2,190

 

 

 

63

 

Engineered solid section – cubic feet

 

 

6.3

 

 

 

6.3

 

 

 

 

 

 

17.4

 

 

 

17.6

 

 

 

(0.2

)

Engineered I-joists – lineal feet

 

 

51

 

 

 

54

 

 

 

(3

)

 

 

140

 

 

 

147

 

 

 

(7

)

Softwood plywood – square feet (3/8”)

 

 

107

 

 

 

121

 

 

 

(14

)

 

 

315

 

 

 

351

 

 

 

(36

)

Medium density fiberboard – square feet (3/4”)

 

 

55

 

 

 

53

 

 

 

2

 

 

 

147

 

 

 

152

 

 

 

(5

)

(1)

Sales volumes include sales of internally produced products and products purchased for resale primarily through our distribution business.

 

PRODUCTION AND OUTSIDE PURCHASE VOLUMES

 

Outside purchase volumes are primarily purchased for resale through our distribution business. Production volumes are produced for sale through our own sales organizations and through our distribution business. Production of oriented strand board and engineered solid section are also used to manufacture engineered I-joists.

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

VOLUMES IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Structural lumber – board feet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

1,170

 

 

 

1,189

 

 

 

(19

)

 

 

3,487

 

 

 

3,527

 

 

 

(40

)

Outside purchase

 

 

55

 

 

 

69

 

 

 

(14

)

 

 

164

 

 

 

182

 

 

 

(18

)

Total

 

 

1,225

 

 

 

1,258

 

 

 

(33

)

 

 

3,651

 

 

 

3,709

 

 

 

(58

)

Oriented strand board – square feet (3/8”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

759

 

 

 

747

 

 

 

12

 

 

 

2,278

 

 

 

2,212

 

 

 

66

 

Outside purchase

 

 

77

 

 

 

93

 

 

 

(16

)

 

 

228

 

 

 

262

 

 

 

(34

)

Total

 

 

836

 

 

 

840

 

 

 

(4

)

 

 

2,506

 

 

 

2,474

 

 

 

32

 

Engineered solid section – cubic feet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

5.4

 

 

 

5.3

 

 

 

0.1

 

 

 

16.8

 

 

 

17.2

 

 

 

(0.4

)

Outside purchase

 

 

0.2

 

 

 

0.2

 

 

 

 

 

 

0.4

 

 

 

0.4

 

 

 

 

Total

 

 

5.6

 

 

 

5.5

 

 

 

0.1

 

 

 

17.2

 

 

 

17.6

 

 

 

(0.4

)

Engineered I-joists – lineal feet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

43

 

 

 

47

 

 

 

(4

)

 

 

128

 

 

 

139

 

 

 

(11

)

Outside purchase

 

 

3

 

 

 

4

 

 

 

(1

)

 

 

8

 

 

 

8

 

 

 

 

Total

 

 

46

 

 

 

51

 

 

 

(5

)

 

 

136

 

 

 

147

 

 

 

(11

)

Softwood plywood – square feet (3/8”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

94

 

 

 

100

 

 

 

(6

)

 

 

267

 

 

 

302

 

 

 

(35

)

Outside purchase

 

 

17

 

 

 

21

 

 

 

(4

)

 

 

47

 

 

 

56

 

 

 

(9

)

Total

 

 

111

 

 

 

121

 

 

 

(10

)

 

 

314

 

 

 

358

 

 

 

(44

)

Medium density fiberboard – square feet (3/4"):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

 

57

 

 

 

47

 

 

 

10

 

 

 

148

 

 

 

153

 

 

 

(5

)

Total

 

 

57

 

 

 

47

 

 

 

10

 

 

 

148

 

 

 

153

 

 

 

(5

)

 

 

22


 

UNALLOCATED ITEMS

 

Unallocated items are gains or charges not related to, or allocated to, an individual operating segment. They include all or a portion of items such as share-based compensation, pension and postretirement costs, elimination of intersegment profit in inventory and LIFO, foreign exchange transaction gains and losses, interest income and other as well as legacy obligations.

 

Net Charge to Earnings – Unallocated Items

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Unallocated corporate function and variable compensation expense

 

$

(36

)

 

$

(19

)

 

$

(17

)

 

$

(78

)

 

$

(50

)

 

$

(28

)

Liability classified share-based compensation

 

 

(5

)

 

 

(1

)

 

 

(4

)

 

 

1

 

 

 

(5

)

 

 

6

 

Foreign exchange gain (loss)

 

 

2

 

 

 

(1

)

 

 

3

 

 

 

(3

)

 

 

(2

)

 

 

(1

)

Elimination of intersegment profit in inventory and LIFO

 

 

(9

)

 

 

6

 

 

 

(15

)

 

 

(4

)

 

 

(4

)

 

 

 

Other

 

 

(14

)

 

 

(30

)

 

 

16

 

 

 

(23

)

 

 

(86

)

 

 

63

 

Operating loss

 

 

(62

)

 

 

(45

)

 

 

(17

)

 

 

(107

)

 

 

(147

)

 

 

40

 

Non-operating pension and other postretirement benefit costs

 

 

(9

)

 

 

(15

)

 

 

6

 

 

 

(28

)

 

 

(495

)

 

 

467

 

Interest income and other

 

 

2

 

 

 

6

 

 

 

(4

)

 

 

5

 

 

 

22

 

 

 

(17

)

Net charge to earnings

 

$

(69

)

 

$

(54

)

 

$

(15

)

 

$

(130

)

 

$

(620

)

 

$

490

 

 

Comparing Third Quarter 2020 with Third Quarter 2019

 

Net charge to earnings increased $15 million – 28 percent – primarily due to:

 

a $17 million increase in unallocated corporate function and variable compensation expense and

a $15 million increase in elimination of intersegment profit in inventory and LIFO.

These increases were partially offset by a $16 million decrease in Other, primarily due to a reduction in legal charges.

 

Comparing Year-to-Date 2020 with Year-to-Date 2019

 

Net charge to earnings decreased $490 million – 79 percent – primarily due to:

 

a $449 million noncash pension settlement charge recorded during year-to-date 2019, with no similar activity in 2020 (refer to Note 7: Pension and Other Postretirement Benefit Plans for further information);

a $12 million legal benefit recognized during year-to-date 2020 and

a $6 million decrease in expense related to liability classified share-based compensation attributable to a decrease in our stock price for the year-to-date period ended September 30, 2020 compared to an increase for the same period in 2019.

 

 

INTEREST EXPENSE

 

Our interest expense, net of capitalized interest, was:

$111 million for third quarter 2020 and $299 million year-to-date 2020;

$91 million for third quarter 2019 and $289 million year-to-date 2019.

 

Interest expense increased by $20 million compared to third quarter 2019 primarily due to a $23 million charge related to the early extinguishment of debt recorded in third quarter 2020.

 

Interest expense increased by $10 million compared to year-to-date 2019 primarily due to a $22 million increase in charges related to the early extinguishment of debt. This increase was partially offset by $12 million of expense on SPE notes recorded during year-to-date 2019, with no similar activity in 2020.

 

Refer to Note 9: Long-Term Debt and Line of Credit for further information.

 

 

INCOME TAXES

 

Our provision for income taxes was:

a $109 million expense for third quarter 2020 and a $166 million expense year-to-date 2020;

a $3 million expense for third quarter 2019 and a $138 million benefit year-to-date 2019.

23


 

Our provision for income taxes is primarily driven by earnings (losses) generated by our TRSs. Income tax expense increased by $304 million compared to year-to-date 2019 primarily due to the $109 million tax benefit recognized in 2019 related to our noncash pension settlement charge and stronger current year-to-date earnings. Overall performance results for our business segments can be found in Consolidated Results.

 

Refer to Note 17: Income Taxes and Note 7: Pension and Other Postretirement Benefit Plans for further information.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

We are committed to maintaining an appropriate capital structure that provides flexibility and enables us to protect the interests of our shareholders and meet our obligations to our lenders, while also maintaining access to all major financial markets. As of September 30, 2020, we have $787 million in cash and cash equivalents and $1.5 billion of availability on our line of credit, which expires in January 2025. We believe we have sufficient liquidity to meet our cash requirements for the foreseeable future.

 

In light of the significant uncertainty regarding the duration and magnitude of the effects of the COVID-19 pandemic on our business and our customers, in May 2020, as part of several steps taken to enhance and preserve liquidity and financial flexibility, the board of directors temporarily suspended the quarterly cash dividend.

 

The board has continued to evaluate the company’s cash flow, liquidity, leverage, customer demand, market conditions, the broader macroeconomic environment, and other factors in assessing opportunities to reinitiate the quarterly cash dividend. Based upon its most recent evaluation of these factors, the board has approved the reinitiation of the company’s quarterly cash dividend within a new implementation framework. Under this new framework, the company intends to pay a quarterly base cash dividend beginning in the fourth quarter 2020 that will be supported by cash flows from the Timberlands and Real Estate, Energy and Natural Resources segments. This base dividend may be supplemented by a variable cash dividend and potential opportunistic share repurchases, as needed, to achieve the company’s targeted annual total return of cash to shareholders. For the fourth quarter 2020, the base cash dividend declared by the board was $0.17 per share. The board will continue to evaluate the cash dividend on a quarterly basis based on this framework and the other factors outlined above.

 

CASH FROM OPERATIONS

 

Consolidated net cash from operations was:

$1,085 million for year-to-date 2020 and

$674 million for year-to-date 2019.

 

Net cash from operations increased $411 million, primarily due to:

 

increased cash inflows from our business segments and

decreased cash used for interest payments.

 

CASH FROM INVESTING ACTIVITIES

 

Consolidated net cash from investing activities was:

$311 million for year-to-date 2020 and

$32 million for year-to-date 2019.

 

Net cash from investing activities increased $279 million, primarily due to:

$145 million of proceeds from the sale of our Montana timberlands during first quarter 2020;

a $109 million increase in proceeds received from variable interest entities and

a $41 million decrease in cash paid for capital expenditures for property and equipment.

 

Summary of Capital Spending by Business Segment

 

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Timberlands

 

$

75

 

 

$

79

 

Wood Products

 

 

124

 

 

 

148

 

Unallocated Items

 

 

 

 

 

14

 

Total

 

$

199

 

 

$

241

 

 

We expect our net capital expenditures for 2020 will be approximately $280 million. The amount we spend on capital expenditures could change.

 

CASH FROM FINANCING ACTIVITIES

 

Consolidated net cash from financing activities was:

$(695) million for year-to-date 2020 and

$(887) million for year-to-date 2019.

 

Net cash from financing activities increased $192 million, primarily due to:

24


 

a $506 million decrease in cash paid for dividends;

a $302 million decrease in cash paid related to our monetized SPEs and

a $60 million decrease in cash used for share repurchases.

These changes were partially offset by a $424 million increase in cash used for payments on long-term debt and a $245 million increase in net cash payments related to borrowings on our line of credit.

 

Line of Credit

 

We had no outstanding borrowings on our credit facility as of September 30, 2020. As of December 31, 2019, we had $230 million of outstanding borrowings on our $1.5 billion five-year senior unsecured revolving credit facility. This credit facility expires in January 2025.

 

Refer to Note 9: Long-Term Debt and Line of Credit for further information.

 

Long-Term Debt

 

In September 2020, we redeemed our $325 million 3.25 percent notes due in March 2023.

 

In March 2020, we issued $750 million of 4.00 percent notes due in April 2030. The net proceeds after deducting the discount, underwriting fees and issuance costs were $732 million. In May 2020, a portion of the net proceeds was used to redeem our $569 million 4.70 percent notes due in March 2021.

 

In February 2019, we issued $750 million of 4.00 percent notes due in November 2029. The net proceeds after deducting the discount, underwriting fees, and issuance costs were $739 million. In March 2019, a portion of the net proceeds was used to redeem our outstanding $500 million 7.38 percent notes due in October 2019.

 

Refer to Note 9: Long-Term Debt and Line of Credit for further information.

 

Our revolving credit agreement and our term loan agreement utilize the London Inter-bank Offered Rate (LIBOR) as a basis for one of the interest rate options available to the company to apply to outstanding borrowings. LIBOR is expected to be discontinued at some point during 2021, and we are closely monitoring ongoing market developments in the identification or creation of a widely accepted replacement rate. We have included provisions in our new revolving credit agreement that specifically contemplate the transition from LIBOR to a replacement benchmark rate. In July 2020, we amended our term loan agreement primarily to include provisions that address the future discontinuance of LIBOR and set forth the process for transition to an alternate benchmark rate.

 

As of September 30, 2020, of our $6.0 billion of long-term debt, only $225 million in term loan borrowings are governed by a debt agreement that utilizes LIBOR as one of the alternative applicable rates. We therefore do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense.

 

Debt Covenants

 

As of September 30, 2020, Weyerhaeuser Company was in compliance with its debt covenants. There have been no significant changes to the debt covenants presented in our 2019 Annual Report on Form 10-K for our existing long-term debt instruments, and we expect to remain in compliance with our debt covenants for the foreseeable future.

 

Option Exercises

 

We received cash proceeds from the exercise of stock options of:

$9 million for year-to-date 2020 and

$8 million for year-to-date 2019.

 

Our average stock price was $24.67 and $25.57 for year-to-date 2020 and 2019, respectively.

 

Dividend Payments

 

We paid cash dividends on common shares of:

$254 million for year-to-date 2020 and

$760 million for year-to-date 2019.

This decrease in dividends paid is due to the temporary suspension of the quarterly dividend that was announced in second quarter 2020.

 

Share Repurchases

 

During year-to-date 2020, we did not repurchase shares. During year-to-date 2019, we repurchased over 2.3 million common shares for approximately $60 million under the 2019 Repurchase Program. There were no unsettled repurchases as of September 30, 2020 or December 31, 2019. Refer to Note 4: Net Earnings (Loss) Per Share and Share Repurchases for further information.

 

 

 

PERFORMANCE MEASURES

 

Adjusted EBITDA by Segment

 

We use adjusted earnings before interest, taxes, depreciation, depletion and amortization (Adjusted EBITDA) as a key performance measure to evaluate the performance of the consolidated company and our business segments. This measure should not be considered in isolation from, and is not intended to represent an alternative to, our results reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, we believe

25


 

Adjusted EBITDA provides meaningful supplemental information for investors about our operating performance, better facilitates period to period comparisons and is widely used by analysts, lenders, rating agencies and other interested parties.

 

Our definition of Adjusted EBITDA may be different from similarly titled measures reported by other companies. Adjusted EBITDA, as we define it, is operating income adjusted for depreciation, depletion, amortization, basis of real estate sold and special items.

 

 

 

QUARTER ENDED

 

 

AMOUNT OF

CHANGE

 

 

YEAR-TO-DATE ENDED

 

 

AMOUNT OF

CHANGE

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

2020 VS.

2019

 

Adjusted EBITDA by Segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

$

130

 

 

$

154

 

 

$

(24

)

 

$

443

 

 

$

522

 

 

$

(79

)

Real Estate & ENR

 

 

60

 

 

 

60

 

 

 

 

 

 

218

 

 

 

237

 

 

 

(19

)

Wood Products

 

 

615

 

 

 

123

 

 

 

492

 

 

 

997

 

 

 

366

 

 

 

631

 

 

 

 

805

 

 

 

337

 

 

 

468

 

 

 

1,658

 

 

 

1,125

 

 

 

533

 

Unallocated Items

 

 

(60

)

 

 

(29

)

 

 

(31

)

 

 

(114

)

 

 

(109

)

 

 

(5

)

Adjusted EBITDA

 

$

745

 

 

$

308

 

 

$

437

 

 

$

1,544

 

 

$

1,016

 

 

$

528

 

 

We reconcile Adjusted EBITDA to net earnings (loss) for the consolidated company and to operating income (loss) for the business segments, as those are the most directly comparable U.S. GAAP measures for each.

 

The table below reconciles Adjusted EBITDA for the quarter ended September 30, 2020:

 

DOLLAR AMOUNTS IN MILLIONS

 

Timberlands

 

 

Real Estate &

ENR

 

 

Wood

Products

 

 

Unallocated

Items

 

 

Total

 

Adjusted EBITDA by Segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

283

 

Interest expense, net of capitalized interest(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

111

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

109

 

Net contribution (charge) to earnings

 

$

(11

)

 

$

17

 

 

$

566

 

 

$

(69

)

 

$

503

 

Non-operating pension and other postretirement benefit costs

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

Interest income and other

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Operating income (loss)

 

 

(11

)

 

 

17

 

 

 

566

 

 

 

(62

)

 

 

510

 

Depreciation, depletion and amortization

 

 

61

 

 

 

3

 

 

 

49

 

 

 

2

 

 

 

115

 

Basis of real estate sold

 

 

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

Special items included in operating income (loss)(2)

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Adjusted EBITDA

 

$

130

 

 

$

60

 

 

$

615

 

 

$

(60

)

 

$

745

 

(1)

Interest expense, net of capitalized interest includes a pretax special item of $23 million related to a charge for the early extinguishment of debt.

(2)

Operating income (loss) includes a pretax special item consisting of an $80 million timber casualty loss.

26


 

 

The table below reconciles Adjusted EBITDA for the quarter ended September 30, 2019:

 

DOLLAR AMOUNTS IN MILLIONS

 

Timberlands

 

 

Real Estate &

ENR

 

 

Wood

Products

 

 

Unallocated

Items

 

 

Total

 

Adjusted EBITDA by Segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

99

 

Interest expense, net of capitalized interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Net contribution (charge) to earnings

 

$

72

 

 

$

32

 

 

$

143

 

 

$

(54

)

 

$

193

 

Non-operating pension and other postretirement benefit costs

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

15

 

Interest income and other

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Operating income (loss)

 

 

72

 

 

 

32

 

 

 

143

 

 

 

(45

)

 

 

202

 

Depreciation, depletion and amortization

 

 

82

 

 

 

4

 

 

 

48

 

 

 

1

 

 

 

135

 

Basis of real estate sold

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

24

 

Special items included in operating income (loss)(1)

 

 

 

 

 

 

 

 

(68

)

 

 

15

 

 

 

(53

)

Adjusted EBITDA

 

$

154

 

 

$

60

 

 

$

123

 

 

$

(29

)

 

$

308

 

(1)

Operating income (loss) includes pretax special items consisting of a $68 million product remediation insurance recovery within Wood Products and a $15 million legal charge within Unallocated Items.

 

The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2020:

 

DOLLAR AMOUNTS IN MILLIONS

 

Timberlands

 

 

Real Estate &

ENR

 

 

Wood

Products

 

 

Unallocated

Items

 

 

Total

 

Adjusted EBITDA by Segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

505

 

Interest expense, net of capitalized interest(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

299

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

166

 

Net contribution (charge) to earnings

 

$

169

 

 

$

72

 

 

$

859

 

 

$

(130

)

 

$

970

 

Non-operating pension and other postretirement benefit costs

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

28

 

Interest income and other

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Operating income (loss)

 

 

169

 

 

 

72

 

 

 

859

 

 

 

(107

)

 

 

993

 

Depreciation, depletion and amortization

 

 

194

 

 

 

10

 

 

 

146

 

 

 

5

 

 

 

355

 

Basis of real estate sold

 

 

 

 

 

136

 

 

 

 

 

 

 

 

 

136

 

Special items included in operating income (loss)(2)

 

 

80

 

 

 

 

 

 

(8

)

 

 

(12

)

 

 

60

 

Adjusted EBITDA

 

$

443

 

 

$

218

 

 

$

997

 

 

$

(114

)

 

$

1,544

 

(1)

Interest expense, net of capitalized interest includes pretax special items of $34 million related to charges for the early extinguishment of debt.

(2)

Operating income (loss) includes pretax special items consisting of a $12 million noncash legal benefit within Unallocated Items, an $8 million product remediation insurance recovery within Wood Products and an $80 million timber casualty loss within Timberlands.

 

27


 

The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2019:

 

DOLLAR AMOUNTS IN MILLIONS

 

Timberlands

 

 

Real Estate

& ENR

 

 

Wood

Products

 

 

Unallocated

Items

 

 

Total

 

Adjusted EBITDA by Segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(62

)

Interest expense, net of capitalized interest(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

289

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(138

)

Net contribution (charge) to earnings

 

$

294

 

 

$

122

 

 

$

293

 

 

$

(620

)

 

$

89

 

Non-operating pension and other postretirement benefit costs(2)

 

 

 

 

 

 

 

 

 

 

 

495

 

 

 

495

 

Interest income and other

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

(22

)

Operating income (loss)

 

 

294

 

 

 

122

 

 

 

293

 

 

 

(147

)

 

 

562

 

Depreciation, depletion and amortization

 

 

228

 

 

 

10

 

 

 

141

 

 

 

3

 

 

 

382

 

Basis of real estate sold

 

 

 

 

 

105

 

 

 

 

 

 

 

 

 

105

 

Special items included in operating income (loss)(3)

 

 

 

 

 

 

 

 

(68

)

 

 

35

 

 

 

(33

)

Adjusted EBITDA

 

$

522

 

 

$

237

 

 

$

366

 

 

$

(109

)

 

$

1,016

 

(1)

Interest expense, net of capitalized interest includes a pretax special item of $12 million related to a charge for the early extinguishment of debt.

(2)

Non-operating pension and other postretirement benefit costs includes a pretax special item consisting of a $449 million noncash settlement charge related to the transfer of approximately $1.5 billion of U.S. qualified pension plan assets and liabilities to an insurance company through the purchase of a group annuity contract.

(3)

Operating income (loss) includes pretax special items consisting of a $68 million product remediation insurance recovery within Wood Products and $35 million of legal charges within Unallocated Items.

 

Net Earnings and Net Earnings per Diluted Share Before Special Items

 

We use net earnings before special items and net earnings per diluted share before special items as key performance measures to evaluate the performance of the consolidated company. These measures should not be considered in isolation from, and are not intended to represent an alternative to, our results reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, we believe the measures provide meaningful supplemental information for investors about our operating performance, better facilitate period to period comparisons and are widely used by analysts, lenders, rating agencies and other interested parties.

 

Net Earnings Before Special Items

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

DOLLAR AMOUNTS IN MILLIONS

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Net earnings (loss)

 

$

283

 

 

$

99

 

 

$

505

 

 

$

(62

)

Early extinguishment of debt charges

 

 

23

 

 

 

 

 

 

34

 

 

 

9

 

Legal charges (benefits)

 

 

 

 

 

11

 

 

 

(12

)

 

 

26

 

Pension settlement charges

 

 

 

 

 

 

 

 

 

 

 

340

 

Product remediation recoveries

 

 

 

 

 

(51

)

 

 

(6

)

 

 

(51

)

Timber casualty loss

 

 

80

 

 

 

 

 

 

80

 

 

 

 

Net earnings before special items

 

$

386

 

 

$

59

 

 

$

601

 

 

$

262

 

 

Net Earnings per Diluted Share Before Special Items

 

 

 

QUARTER ENDED

 

 

YEAR-TO-DATE ENDED

 

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

 

SEPTEMBER 2020

 

 

SEPTEMBER 2019

 

Net earnings (loss) per diluted share

 

$

0.38

 

 

$

0.13

 

 

$

0.68

 

 

$

(0.08

)

Early extinguishment of debt charges

 

 

0.03

 

 

 

 

 

 

0.05

 

 

 

0.01

 

Legal charges (benefits)

 

 

 

 

 

0.02

 

 

 

(0.02

)

 

 

0.04

 

Pension settlement charges

 

 

 

 

 

 

 

 

 

 

 

0.46

 

Product remediation recoveries

 

 

 

 

 

(0.07

)

 

 

(0.01

)

 

 

(0.07

)

Timber casualty loss

 

 

0.11

 

 

 

 

 

 

0.11

 

 

 

 

Net earnings per diluted share before special items

 

$

0.52

 

 

$

0.08

 

 

$

0.81

 

 

$

0.36

 

 

 

28


 

CRITICAL ACCOUNTING POLICIES

 

There have been no significant changes during year-to-date 2020 to the critical accounting policies presented in our 2019 Annual Report on Form 10-K.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

LONG-TERM INDEBTEDNESS OBLIGATIONS

The following summary of our long-term indebtedness obligations includes:

scheduled principal repayments for the next five years and after;

weighted average interest rates for debt maturing in each of the next five years and after and

estimated fair values of outstanding obligations.

We estimate the fair value of our debt instruments using quoted market prices we received for the same types and issues of our debt or on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt. Changes in market rates of interest affect the fair value of our fixed-rate debt.

Summary of Long-Term Indebtedness Principal Obligations as of September 30, 2020

 

DOLLAR AMOUNTS IN MILLIONS

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

THEREAFTER

 

 

TOTAL(1)

 

 

FAIR VALUE

 

Fixed-rate debt

 

$

 

 

$

150

 

 

$

 

 

$

1,551

 

 

$

 

 

$

4,074

 

 

$

5,775

 

 

$

7,194

 

Average interest rate

 

 

%

 

 

9.00

%

 

 

%

 

 

5.26

%

 

 

%

 

 

6.19

%

 

 

6.01

%

 

N/A

 

Variable-rate debt

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

225

 

 

$

225

 

 

$

225

 

Average interest rate

 

 

%

 

 

%

 

 

%

 

 

%

 

 

%

 

 

1.75

%

 

 

1.75

%

 

N/A

 

(1)

Excludes $26 million of unamortized discounts, capitalized debt expense and business combination fair value adjustments.

Item 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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 rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. The company’s principal executive officer and principal financial officer have concluded that the company’s disclosure controls and procedures were effective as of September 30, 2020, based on an evaluation of the company’s disclosure controls and procedures as of that date.

CHANGES IN INTERNAL CONTROLS

No changes occurred in the company’s internal control over financial reporting during year-to-date 2020 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Refer to Note 11: Legal Proceedings, Commitments and Contingencies.

Item 1A. RISK FACTORS

The following supplements and updates the risk factors in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II,  Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020. If any of the risks discussed below or in our Annual Report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.

 

Homebuilding Market and Economic Risks

We face risks related to COVID-19 and other health epidemics and outbreaks, which may adversely affect our business, results of operations and financial condition.

We face risks related to health epidemics and other outbreaks, including the global outbreak of a novel strain of coronavirus (“COVID-19”). In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The outbreak spread widely throughout the United States and other regions of the world. In response, federal, state and local governments in the United States, as well as governments throughout the world, declared states of emergency and ordered preventative measures to contain and mitigate the spread of the virus. These measures, which have included shelter-in-place and similar mandates for individuals and closure or curtailment of many businesses, have caused significant economic disruption as well as disruption and volatility in global capital markets, which could worsen. As a result, there have been periodic adverse effects on the demand for our timber and wood products and disruptions to our supply chain and the manufacturing, distribution and export of our timber and wood products, all of which could worsen in the future. Any one or more of these consequences of COVID-19, as well as other unpredictable events, could materially adversely affect our business, results of operations, cash flows and financial condition. The COVID-19 outbreak continues to rapidly evolve, with periods of improvement followed by periods of higher infection rates in various geographical locations throughout the world. The extent to which COVID-19 may further impact our business, results of operations, cash flows and financial condition, as well as our plans and decisions relating to various capital expenditures, other discretionary items and capital allocation priorities, including the timing and amount of our dividends to shareholders, are therefore highly uncertain and will depend on future developments, which cannot be predicted with confidence. Such developments include, but are not limited to, the future rate of occurrence or mutation of COVID-19 or the outbreak of another virulent disease, continuation of or changes in governmental responses to disease outbreak, the duration of disease outbreak, the timing and effectiveness of treatment and testing options, including availability of a vaccine, and consequential restrictions, business disruptions and the effectiveness of responsive actions taken in the United States and other countries to contain

29


 

and manage the disease. The impacts of the outbreak and related restrictions have led to a significant increase in national unemployment since the outset of the pandemic. An extended continuation or worsening of domestic unemployment may adversely affect demand for our products and thus negatively impact our business, results of operations, cash flows and financial condition. In addition, the impact of COVID-19 or other virulent disease may also trigger the occurrence, or exacerbate, other risks discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could have a material adverse effect on our business, results of operation, cash flows and financial condition. For a more detailed discussion on the current effects of COVID-19 on our business and operations, see our discussion under Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) – Economic and Market Conditions Affecting our Operations.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

 

There were no share repurchases during third quarter 2020.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

None.

30


 

 

Item 6. EXHIBITS

 

10.1

2011 Fee Deferral Plan for Directors of Weyerhaeuser Company (Amended and Restated Effective August 14, 2020).*

 

 

10.2

Weyerhaeuser Company 2013 Long-Term Incentive Plan (Amended and Restated Effective August 14, 2020).*

 

 

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

 

 

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

 

 

32

Certification pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

 

 

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

101.SCH

Inline XBRL Taxonomy Extension Schema Document

 

 

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, has been formatted in Inline XBRL.

* Denotes a management contract or compensatory plan or arrangement.

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SIGNATURES

 

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 thereunto duly authorized.

 

 

WEYERHAEUSER COMPANY

 

(Registrant)

 

 

 

Date: October 30, 2020

By:

/s/ David M. Wold

 

 

David M. Wold

 

 

Vice President and Chief Accounting Officer

 

 

(Principal Accounting Officer and Duly Authorized Officer)

 

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