SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
For the thirty-nine weeks ended September 26, 1999 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-4825
WEYERHAEUSER COMPANY
A Washington Corporation (IRS Employer Identification
No. 91-0470860)
Tacoma, Washington 98477
Telephone (253) 924-2345
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- ----------------------------------- -------------------------
Common Shares ($1.25 par value) Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___.
The number of shares outstanding of the registrant's class of common stock,
as of October 29, 1999, was 201,181,958 common shares ($1.25 par value).
<PAGE>
Weyerhaeuser Company
- -2-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the thirty-nine weeks ended September 26, 1999
<TABLE>
<CAPTION> Page No.
----------------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Earnings 3
Consolidated Balance Sheet 4-5
Consolidated Statement of Cash Flows 6-7
Notes to Financial Statements 8-17
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 18-25
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 25
Part II. Other Information
Item 1. Legal Proceedings 26-27
Item 2. Changes in Securities (not applicable)
Item 3. Defaults upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
The financial information included in this report has been prepared in
conformity with accounting practices and methods reflected in the financial
statements included in the annual report (Form 10-K) filed with the
Securities and Exchange Commission for the year ended December 27, 1998.
Though not examined by independent public accountants, the financial
information reflects, in the opinion of management, all adjustments
necessary to present a fair statement of results for the interim periods
indicated. The results of operations for the thirty-nine week period
ending September 26, 1999, should not be regarded as necessarily indicative
of the results that may be expected for the full year.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WEYERHAEUSER COMPANY
By /s/ K. J. Stancato
----------------------------
K. J. Stancato
Duly Authorized Officer and
Principal Accounting Officer
November 10, 1999
<PAGE>
Weyerhaeuser Company
-3-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
CONSOLIDATED EARNINGS
For the periods ended September 26, 1999 and September 27, 1998
(Dollar amounts in millions except as noted and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
-------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues:
Weyerhaeuser $ 2,809 $ 2,439 $ 7,928 $ 7,206
Real estate and related assets 311 297 901 809
--------- --------- --------- ---------
Total net sales and revenues 3,120 2,736 8,829 8,015
--------- --------- --------- ---------
Costs and expenses:
Weyerhaeuser:
Costs of products sold 2,046 1,874 5,943 5,633
Depreciation, amortization and
fee stumpage 152 145 460 435
Selling, general and
administrative expenses 192 174 550 485
Research and development
expenses 12 12 38 41
Taxes other than payroll and
income taxes 32 33 97 99
Charge for impairment of long-
lived assets (Note 13) -- -- 91 --
Charge for Year 2000 remediation 4 8 31 16
--------- --------- --------- ---------
2,438 2,246 7,210 6,709
--------- --------- --------- ---------
Real estate and related assets:
Costs and operating expenses 257 249 735 688
Depreciation and amortization 2 1 4 4
Selling, general and
administrative expenses 11 13 39 40
Taxes other than payroll and
income taxes 2 2 6 7
--------- --------- --------- ---------
272 265 784 739
--------- --------- --------- ---------
Total costs and expenses 2,710 2,511 7,994 7,448
--------- --------- --------- ---------
Operating income 410 225 835 567
Interest expense and other:
Weyerhaeuser:
Interest expense incurred 62 66 196 198
Less interest capitalized 2 3 7 5
Equity in income of
affiliates (Note 4) 5 5 13 20
Other income (expense), net 1 (1) 8 9
Real estate and related assets:
Interest expense incurred 18 18 56 56
Less interest capitalized 15 16 45 46
Equity in income of joint
ventures and limited
partnerships (Note 4) 18 9 29 21
Other income (expense), net 2 2 12 5
--------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of a change in
an accounting principle 373 175 697 419
Income taxes (Note 5) 136 65 254 155
--------- --------- --------- ---------
Earnings before cumulative effect
of a change in an accounting
principle 237 110 443 264
Cumulative effect of a change in
an accounting principle (Note 1) -- -- 90 --
--------- --------- --------- ---------
Net earnings $ 237 $ 110 $ 353 $ 264
========= ========= ========= =========
Per common share (Note 2):
Basic net earnings before
cumulative effect of a change
in an accounting principle $ 1.18 $ 0.56 $ 2.21 $ 1.33
Cumulative effect of a change
in an accounting principle -- -- (0.45) --
--------- --------- --------- ---------
$ 1.18 $ 0.56 $ 1.76 $ 1.33
========= ========= ========= =========
Diluted net earnings before
cumulative effect of a change
in an accounting principle $ 1.18 $ 0.55 $ 2.20 $ 1.32
Cumulative effect of a change
in an accounting principle -- -- (0.44) --
--------- --------- --------- ---------
$ 1.18 $ 0.55 $ 1.76 $ 1.32
========= ========= ========= =========
Dividends paid per share $ .40 $ .40 $ 1.20 $ 1.20
========= ========= ========= =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -4-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
CONSOLIDATED BALANCE SHEET
September 26, 1999 and December 27, 1998
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
1999 1998
----------- ---------
(Unaudited)
Assets
- ------
<S> <C> <C>
Weyerhaeuser
Current assets:
Cash and short-term investments (Note 1) $ 124 $ 28
Receivables, less allowances 1,080 886
Inventories (Note 6) 968 962
Prepaid expenses 277 294
----------- ---------
Total current assets 2,449 2,170
Property and equipment (Notes 7 and 13) 6,166 6,692
Construction in progress 442 315
Timber and timberlands at cost, less fee stumpage
charged to disposals 1,023 1,013
Investments in and advances to equity
affiliates (Notes 4 and 11) 534 482
Other assets and deferred charges 373 262
----------- ---------
10,987 10,934
----------- ---------
Real estate and related assets
Cash and short-term investments 4 7
Receivables, less discounts and allowances 90 81
Mortgage-related financial instruments, less
discounts and allowances 87 119
Real estate in process of development and for sale 578 584
Land being processed for development 946 854
Investments in and advances to joint ventures and
limited partnerships, less reserves (Note 4) 123 120
Other assets 134 135
----------- ---------
1,962 1,900
----------- ---------
Total assets $ 12,949 $12,834
=========== =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
-5-
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
1999 1998
----------- ---------
(Unaudited)
Liabilities and shareholders' interest
- --------------------------------------
<S> <C> <C>
Weyerhaeuser
Current liabilities:
Notes payable $ 4 $ 5
Current maturities of long-term debt 92 88
Accounts payable (Note 1) 729 699
Accrued liabilities (Note 8) 732 707
----------- ---------
Total current liabilities 1,557 1,499
Long-term debt (Note 10) 3,179 3,397
Deferred income taxes (Note 5) 1,482 1,404
Deferred pension, other postretirement benefits
and other liabilities 531 488
Commitments and contingencies (Note 14)
----------- ---------
6,749 6,788
Real estate and related assets
Notes payable and commercial paper 571 564
Long-term debt (Note 10) 493 701
Other liabilities 350 255
Commitments and contingencies (Note 14)
----------- ---------
1,414 1,520
----------- ---------
Total liabilities 8,163 8,308
----------- ---------
Shareholders' interest (Note 12)
Common shares: authorized 400,000,000 shares,
issued 206,072,890 shares, $1.25 par value 258 258
Other capital 411 416
Cumulative other comprehensive (expense) (152) (208)
Retained earnings 4,485 4,372
Treasury common shares, at cost: 4,892,147
and 7,063,917 (216) (312)
----------- ---------
Total shareholders' interest 4,786 4,526
----------- ---------
Total liabilities and shareholders' interest $ 12,949 $12,834
=========== =========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -6-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
CONSOLIDATED STATEMENT OF CASH FLOWS
For the thirty-nine week periods ended September 26, 1999 and September 27,
1998
(Dollar amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
----------------------
Sept. 26, Sept. 27,
1999 1998
----------- ---------
<S> <C> <C>
Cash provided by (used for) operations:
Net earnings $ 353 $ 264
Noncash charges (credits) to income:
Depreciation, amortization and fee stumpage 464 439
Deferred income taxes, net 141 120
Pension and other postretirement benefits (67) (27)
Equity in (income) loss of affiliates, joint
ventures and limited partnerships (42) (41)
Effect of a change in an accounting principle
(Note 1) 142 --
Effect of a change in an accounting principle -
deferred taxes (Note 1) (52) --
Charge for impairment of long-lived assets
(Note 13) 91 --
Decrease (increase) in working capital:
Receivables (201) (58)
Inventories, real estate and land (82) (12)
Prepaid expenses 10 18
Mortgage-related financial instruments 17 24
Accounts payable and accrued liabilities 131 (71)
(Gain) loss on disposition of assets 18 5
Other (7) (35)
----------- ---------
Net cash provided by (used for) operations 916 626
----------- ---------
Cash provided by (used for) investing activities:
Property and equipment (301) (365)
Timber and timberlands (35) (48)
Investments in and advances to equity affiliates (23) 20
Proceeds from sale of:
Property and equipment 9 33
Businesses 80 --
Mortgage-related financial instruments 16 48
Restructuring the ownership of a subsidiary
(Note 11) -- 218
Intercompany advances -- --
Other 11 (6)
----------- ---------
Net cash provided by (used for) investing activities (243) (100)
----------- ---------
Cash provided by (used for) financing activities:
Issuances of debt 34 158
Sale of industrial revenue bonds -- 48
Notes and commercial paper borrowings, net (128) 254
Cash dividends (240) (239)
Intercompany cash dividends -- --
Payments on debt (322) (511)
Purchase of treasury common shares -- (42)
Exercise of stock options 91 18
Other (15) (2)
----------- ---------
Net cash provided by (used for) financing activities (580) (316)
----------- ---------
Net increase (decrease) in cash and short-term
investments 93 210
Cash and short-term investments at beginning of year 35 122
----------- ---------
Cash and short-term investments at end of period $ 128 $ 332
=========== =========
Cash paid (received) during the period for:
Interest, net of amount capitalized $ 237 $ 247
=========== =========
Income taxes $ 18 $ 65
=========== =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
-7-
<TABLE>
<CAPTION>
Real Estate and
Weyerhaeuser Related Assets
- --------------------- --------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
- --------- --------- --------- ---------
<C> <C> <C> <C>
$ 261 $ 213 $ 92 $ 51
460 435 4 4
134 106 7 14
(66) (26) (1) (1)
(13) (20) (29) (21)
142 -- -- --
(52) -- -- --
91 -- -- --
(194) (26) (7) (32)
(17) 30 (65) (42)
10 18 -- --
-- -- 17 24
56 (90) 75 19
18 14 -- (9)
(6) (23) (1) (12)
- --------- --------- --------- ---------
824 631 92 (5)
- --------- --------- --------- ---------
(292) (363) (9) (2)
(35) (48) -- --
(49) (6) 26 26
8 14 1 19
80 -- -- --
-- -- 16 48
-- 218 -- --
(72) (39) 72 39
11 (5) -- (1)
- --------- --------- --------- ---------
(349) (229) 106 129
- --------- --------- --------- ---------
32 4 2 154
-- 48 -- --
(134) (69) 6 323
(240) (239) -- --
-- 190 -- (190)
(113) (82) (209) (429)
-- (42) -- --
91 18 -- --
(15) (2) -- --
- --------- --------- --------- ---------
(379) (174) (201) (142)
- --------- --------- --------- ---------
96 228 (3) (18)
28 100 7 22
- --------- --------- --------- ---------
$ 124 $ 328 $ 4 $ 4
========= ========= ========= =========
$ 224 $ 230 $ 13 $ 17
========= ========= ========= =========
$ 16 $ 26 $ 2 $ 39
========= ========= ========= =========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -8-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
NOTES TO FINANCIAL STATEMENTS
For the thirty-nine week periods ended September 26, 1999 and September 27,
1998
Note 1: Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Weyerhaeuser
Company and all of its majority-owned domestic and foreign subsidiaries.
Investments in and advances to equity affiliates which are not majority
owned or controlled are accounted for using the equity method with taxes
provided on undistributed earnings. Significant intercompany transactions
and accounts are eliminated.
Certain of the consolidated financial statements and notes to financial
statements are presented in two groupings: (1) Weyerhaeuser (the company),
principally engaged in the growing and harvesting of timber and the
manufacture, distribution and sale of forest products, and (2) Real estate
and related assets, principally engaged in real estate development and
construction and other real estate related activities.
Nature of Operations
The company's principal business segments, which account for the majority
of sales, earnings and the asset base, are:
. Timberlands, which is engaged in the management of 5.1 million acres of
company-owned and .2 million acres of leased commercial forestland in the
United States (3.3 million acres in the South and 2.0 million acres in
the Pacific Northwest).
. Wood products, which produces a full line of solid wood products that are
sold primarily through the company's own sales organizations to
wholesalers, retailers and industrial users in North America, the Pacific
Rim and Europe. It is also engaged in the management of 27 million acres
of forestland in Canada under long-term licensing arrangements (of which
18.9 million acres are considered to be productive forestland).
. Pulp, paper and packaging, which manufactures and sells pulp, paper,
paperboard and containerboard in North American, Pacific Rim and European
markets and packaging products for the domestic markets, and which
operates an extensive wastepaper recycling system that serves company
mills and worldwide markets.
Accounting Pronouncements Implemented
In the 1999 first quarter, the company implemented the following Statements
of Position (SOP) issued by the American Institute of Certified Public
Accountants Accounting Standards Executive Committee:
. SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which provided guidelines on the accounting
for internally developed computer software. The adoption of this SOP did
not have a significant impact on the company's results of operations or
financial position.
. SOP 98-5, Reporting on the Costs of Start-up Activities, which required
that the costs of start-up activities be expensed as incurred. In
addition, this pronouncement required that all unamortized start-up costs
on the balance sheet at the implementation date be written off as a
cumulative effect of a change in an accounting principle. The company
recorded an after-tax charge of $90 million, or 45 cents per common
share, in the first quarter to reflect this write-off. This charge
included $9 million for the company's interest in the write-off of
unamortized start-up costs in three of its 50 percent-owned equity
affiliates.
<PAGE>
Weyerhaeuser Company
-9-
Prospective Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The effective date of this pronouncement,
originally fiscal years beginning after June 15, 1999, has been delayed to
fiscal years beginning after June 15, 2000, with the issuance of SFAS No.
137 on June 30, 1999. This will be effective for the company's fiscal year
2001. Assuming that the company's current minimal involvement in
derivatives and hedging activities continues after the implementation date
of this statement, the company believes that the future adoption of this
statement will not have a material impact on its results of operations or
financial position.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Derivatives
The company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate and foreign exchange risks. These
include:
. Foreign exchange contracts, which are hedges for foreign denominated
accounts receivable and accounts payable. These contracts generate gains
or losses that are recognized at the contracts' respective settlement
dates.
. Interest rate swaps entered into with major banks or financial
institutions in which the company pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional
amount. The premiums received by the company on the sale of these swaps
are treated as deferred income and amortized against interest expense
over the term of the agreements.
The company is exposed to credit-related gains or losses in the event of
nonperformance by counterparties to financial instruments, but does not
expect its counterparties to fail to meet their obligations. The company
deals only with highly rated counterparties.
The notional amounts of these derivative financial instruments are $75
million and $102 million at September 26, 1999, and December 27, 1998,
respectively. These notional amounts do not represent amounts exchanged by
the parties and, thus, are not a measure of exposure to the company through
its use of derivatives. The exposure in a derivative contract is the net
difference between what each party is required to pay based on the
contractual terms against the notional amount of the contract, such as
interest rates or exchange rates. The use of derivatives does not have a
significant effect on the company's results of operations or its financial
position.
Cash and Short-Term Investments
For purposes of cash flow and fair value reporting, short-term investments
with original maturities of 90 days or less are considered as cash
equivalents. Short-term investments are stated at cost, which approximates
market.
Inventories
Inventories are stated at the lower of cost or market. Cost includes
labor, materials and production overhead. The last-in, first-out (LIFO)
method is used to cost the majority of domestic raw materials, in process
and finished goods inventories. LIFO inventories were $248 million and
$253 million at September 26, 1999, and December 27, 1998, respectively.
The balance of domestic raw material and product inventories, all materials
and supplies inventories, and all foreign inventories is costed at either
the first-in, first-out (FIFO) or moving average cost methods. Had the
FIFO method been used to cost all inventories, the amounts at which product
inventories are stated would have been $220 million and $228 million greater
at September 26, 1999, and December 27, 1998, respectively.
<PAGE>
Weyerhaeuser Company
- -10-
Property and Equipment
The company's property accounts are maintained on an individual asset
basis. Betterments and replacements of major units are capitalized.
Maintenance, repairs and minor replacements are expensed. Depreciation is
provided generally on the straight-line or unit-of-production method at
rates based on estimated service lives. Amortization of logging railroads
and truck roads is provided generally as timber is harvested and is based
upon rates determined with reference to the volume of timber estimated to
be removed over such facilities.
The cost and related depreciation of property sold or retired is removed
from the property and allowance for depreciation accounts and the gain or
loss is included in earnings.
Timber and Timberlands
Timber and timberlands are carried at cost less fee stumpage charged to
disposals. Fee stumpage is the cost of standing timber and is charged to
fee timber disposals as fee timber is harvested, lost as the result of
casualty or sold. Depletion rates used to relieve timber inventory are
determined with reference to the net carrying value of timber and the
related volume of timber estimated to be available over the growth cycle.
Timber carrying costs are expensed as incurred. The cost of timber
harvested is included in the carrying values of raw material and product
inventories, and in the costs of products sold as these inventories are
disposed of.
Accounts Payable
The company's banking system provides for the daily replenishment of major
bank accounts as checks are presented for payment. Accordingly, there were
negative book cash balances of $126 million and $139 million at September
26, 1999, and December 27, 1998, respectively. Such balances result from
outstanding checks that had not yet been paid by the bank and are reflected
in accounts payable in the consolidated balance sheets.
Income Taxes
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently
enacted tax rates and laws.
Pension Plans
The company has pension plans covering most of its employees. The U.S.
plan covering salaried employees provides pension benefits based on the
employee's highest monthly earnings for five consecutive years during the
final ten years before retirement. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service.
Contributions to U.S. plans are based on funding standards established by
the Employee Retirement Income Security Act of 1974 (ERISA).
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, the company provides certain
health care and life insurance benefits for some retired employees and
accrues the expected future cost of these benefits for its current eligible
retirees and some employees. All of the company's salaried employees and
some hourly employees may become eligible for these benefits when they
retire.
Reclassifications
Certain reclassifications have been made to conform prior years' data to
the current format.
<PAGE>
Weyerhaeuser Company
-11-
Real Estate and Related Assets
Real estate held for sale is stated at the lower of cost or fair value less
costs to sell. The determination of fair value is based on appraisals and
market pricing of comparable assets, when available, or the discounted
value of estimated future cash flows from these assets. Real estate held
for development is stated at cost to the extent it does not exceed the
estimated undiscounted future net cash flows, in which case, it is carried
at fair value.
Mortgage-related financial instruments include mortgage loans receivable,
mortgage-backed certificates and other financial instruments.
Note 2: Net Earnings Per Common Share
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
-------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding (thousands):
Basic 200,307 198,886 200,307 198,886
Dilutive effect of stock options 854 101 765 359
--------- -------- -------- ---------
Diluted weighted average
shares outstanding 201,161 198,987 201,072 199,245
========= ========= ========= =========
</TABLE>
Basic net earnings per common share are based on the weighted average
number of common shares outstanding during the period. Diluted net
earnings per common share are based on the weighted average number of
common shares outstanding and stock options outstanding at the beginning of
or granted during the period.
Options to purchase 2,500 shares at $68.41 per share were outstanding
during the thirty-nine weeks ended September 26, 1999. Options to purchase
595,094 shares at $56.78 per share, 1,347,730 shares at $51.09 per share
and 150,000 shares at $53.06 per share were outstanding during the thirty-
nine weeks ending September 27, 1998. These options were not included in
the computation of diluted earnings per share for the respective periods
because the option exercise prices were greater than the average market
prices of common shares during those periods.
Note 3: Comprehensive Income
The company's comprehensive income (expense) is as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
Dollar amounts in millions 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings $ 237 $ 110 $ 353 $ 264
Other comprehensive income
(expense):
Foreign currency translation
adjustments (8) (33) 67 (72)
Income tax (expense) on foreign
currency translation adjustments 2 13 (11) 27
--------- --------- --------- ---------
Comprehensive income $ 231 $ 90 $ 409 $ 219
========= ========= ========= =========
</TABLE>
Note 4: Equity Affiliates
Weyerhaeuser
The company's investments in affiliated companies that are not majority
owned or controlled are accounted for using the equity method. Investments
carried at equity are:
. Cedar River Paper Company - A 50 percent owned joint venture in Cedar
Rapids, Iowa, that manufactures liner and medium containerboard from
recycled fiber.
. Nelson Forests Joint Venture - An investment in which the company owns a
51 percent financial interest and has a 50 percent voting interest,
which holds Crown Forest License cutting rights and freehold land on the
South Island of New Zealand.
<PAGE>
Weyerhaeuser Company
- -12-
. SCA Weyerhaeuser Packaging Holding Company Asia Ltd. - A 50 percent
owned joint venture formed to build or buy containerboard packaging
facilities to serve manufacturers of consumer and industrial products in
Asia. Currently, there are two facilities in operation in China, the
second one of which opened in July 1999.
. RII Weyerhaeuser World Timberfund, L.P. - A 50 percent owned joint
venture with institutional investors to make investments in timberlands
and related assets outside the United States. The primary focus of this
partnership is in pine forests in the Southern Hemisphere.
During the 1999 second quarter, this joint venture paid approximately US
$142 million to acquire 62,500 acres of radiata pine plantations, two
softwood lumber mills with a capacity of 115 million board feet, a
lumber treating operation, a pine molding remanufacturing plant, a chip
export business and a 30 percent interest in a sales and distribution
business in Australia. Approximately 500 people currently work in these
operations.
Weyerhaeuser Company, through a subsidiary, has the responsibility for
all management and marketing activities of this acquisition.
. North Pacific Paper Corporation - A 50 percent owned joint venture that
operates a newsprint manufacturing facility in Longview, Washington.
This venture was formed in February 1998 through a restructuring of the
company's 80 percent ownership, which was fully consolidated, to 50-50
ownership with Nippon Paper Industries Co., Ltd.
. Wilton Connor LLC - A 50 percent owned joint venture in Charlotte, North
Carolina, formed in October 1998. This venture supplies full-service,
value-added turnkey packaging solutions that assist product
manufacturers in the areas of retail marketing and distribution.
Unconsolidated financial information for affiliated companies, which are
accounted for by the equity method, is as follows:
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
Dollar amounts in millions 1999 1998
----------- ---------
<S> <C> <C>
Current assets $ 224 $ 166
Noncurrent assets 1,437 1,334
Current liabilities 175 80
Noncurrent liabilities 675 703
</TABLE>
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues $ 203 $ 163 $ 544 $ 516
Operating income 19 20 66 80
Net income (loss) 8 7 17 38
</TABLE>
The company provides goods and services to these affiliates, which vary by
entity, in the form of raw materials, management and marketing fees,
support services and shipping services. Additionally, the company
purchases finished product from certain of these entities. The aggregate
total of these transactions is not material to the results of operations of
the company.
Real Estate and Related Assets
Investments in and advances to joint ventures and limited partnerships that
are not majority owned or controlled are accounted for using the equity
method with taxes provided on undistributed earnings as appropriate.
<PAGE>
Weyerhaeuser Company
-13-
Unconsolidated financial information for joint ventures and limited
partnerships, which are accounted for by the equity method, is as follows:
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
Dollar amounts in millions 1999 1998
----------- ---------
<S> <C> <C>
Current assets $ 7,423 $1,755
Noncurrent assets 159 230
Current liabilities 6,630 1,241
Noncurrent liabilities 111 136
</TABLE>
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues $ 200 $ 54 $ 426 $ 148
Operating income 86 22 227 67
Net income 70 16 183 45
</TABLE>
The company may charge management and/or development fees to the joint
ventures or limited partnerships. The aggregate total of these
transactions is not material to the results of operations of the company.
Note 5: Income Taxes
<TABLE>
<CAPTION>
Provisions for income taxes include the following: Thirty-nine weeks
ended
--------------------
Sept. 26, Sept. 27,
Dollar amounts in millions 1999 1998
--------- ---------
<S> <C> <C>
Federal:
Current $ 76 $ 26
Deferred 112 95
--------- ---------
188 121
--------- ---------
State:
Current 13 6
Deferred 5 4
--------- ---------
18 10
--------- ---------
Foreign:
Current 24 3
Deferred 24 21
--------- ---------
48 24
--------- ---------
Income taxes before cumulative effect of a change in
an accounting principle 254 155
Deferred taxes applicable to the cumulative effect of
a change in an accounting principle (52) --
--------- ---------
$ 202 $ 155
========= =========
</TABLE>
Income tax provisions for interim periods are based on the current best
estimate of the effective tax rate expected to be applicable for the full
year. The effective tax rate reflects anticipated tax credits, foreign
taxes and other tax planning alternatives.
For the periods ended September 26, 1999, and September 27, 1998, the
company's provision for income taxes as a percent of earnings before income
taxes and cumulative effect of a change in an accounting principle is
greater than the 35% federal statutory rate due principally to the effect
of state income taxes. The effective tax rates for the thirty-nine week
periods ended September 26, 1999, and September 27, 1998, were 36.5% and
37%, respectively.
<PAGE>
Weyerhaeuser Company
- -14-
Deferred taxes are provided for the temporary differences between the
financial and tax bases of assets and liabilities, applying presently
enacted tax rates and laws. The major sources of these temporary
differences include depreciable and depletable assets, real estate, and
pension and retiree health care liabilities.
Note 6: Inventories
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
Dollar amounts in millions 1999 1998
----------- ---------
<S> <C> <C>
Logs and chips $ 84 $ 108
Lumber, plywood and panels 163 143
Pulp and paper 167 190
Containerboard, paperboard and packaging 117 96
Other products 166 150
Materials and supplies 271 275
----------- ---------
$ 968 $ 962
=========== =========
</TABLE>
Note 7: Property and Equipment
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
Dollar amounts in millions 1999 1998
----------- ---------
<S> <C> <C>
Property and equipment, at cost:
Land $ 152 $ 157
Buildings and improvements 1,689 1,667
Machinery and equipment 9,361 9,732
Rail and truck roads 562 555
Other 109 111
11,873 12,222
Less allowance for depreciation and amortization 5,707 5,530
----------- ---------
$ 6,166 $ 6,692
=========== =========
</TABLE>
Note 8: Accrued Liabilities
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
Dollar amounts in millions 1999 1998
----------- ---------
<S> <C> <C>
Payroll - wages and salaries, incentive awards,
retirement and vacation pay $ 297 $ 305
Taxes - social security and real and
personal property 53 46
Interest 52 87
Income taxes 79 16
Other 251 253
----------- ---------
$ 732 $ 707
=========== =========
</TABLE>
Note 9: Short-Term Debt
Lines of Credit
The company has short-term bank credit lines that provide for borrowings of
up to the total amount of $515 million and $650 million, all of which could
be availed of by the company and Weyerhaeuser Real Estate Company (WRECO)
at September 26, 1999, and December 27, 1998, respectively. No portion of
these lines has been availed of by the company or WRECO at September 26,
1999, or December 27, 1998. Neither of the entities referred to herein is
a guarantor of the borrowings of the other.
<PAGE>
Weyerhaeuser Company
-15-
Note 10: Long-Term Debt
Lines of Credit
The company's lines of credit include a five-year revolving credit facility
agreement entered into in 1997 with a group of banks that provides for
borrowings of up to the total amount of $400 million, all of which is
available to the company. Borrowings are at LIBOR plus a spread or other
such interest rates mutually agreed to between the borrower and lending
banks.
Weyerhaeuser Financial Services, Inc. (WFS), a wholly owned subsidiary, had
a set of term credit facility agreements with a group of banks that
provided for borrowings of up to $175 million as of December 27, 1998.
$100 million was outstanding under these agreements at December 27, 1998.
During the third quarter of 1999, the last of these agreements were repaid
and subsequently canceled.
To the extent that these credit commitments expire more than one year after
the balance sheet date and are unused, an equal amount of commercial paper
is classifiable as long-term debt. Weyerhaeuser reclassified $59 million
and $192 million as of September 26, 1999, and December 27, 1998,
respectively.
No portion of these lines has been availed of by the company, WRECO or WFS
at September 26, 1999, and December 27, 1998, except as noted.
The company's compensating balance agreements were not significant.
Note 11: Restructuring the Ownership of a Subsidiary
In the first quarter of 1998, the company and Nippon Paper Industries Co.,
Ltd. (NPI) completed the restructuring of their North Pacific Paper
Corporation (NORPAC) joint venture. Through this restructuring, the
ownership of NORPAC changed from 80 percent company ownership and 20
percent NPI ownership to 50 percent for each shareholder. This transaction
changed the reporting status of NORPAC from a fully consolidated
subsidiary, with minority elimination, to a joint venture accounted for on
the equity method of accounting. The company received net funds of $218
million and recognized a gain of $5 million on this transaction.
Note 12: Shareholders' Interest
Common Shares
Common shares reserved for stock option plans were 6,419,000 shares at
September 26, 1999, and 7,230,000 shares at December 27, 1998.
Cumulative Other Comprehensive (Expense)
The company's cumulative other comprehensive (expense) includes:
<TABLE>
<CAPTION>
Sept. 26, Dec. 27,
Dollar amounts in millions 1999 1998
----------- ---------
<S> <C> <C>
Foreign currency translation adjustments $ (144) $ (200)
Minimum pension liability adjustment (8) (8)
----------- ---------
$ (152) $ (208)
=========== =========
</TABLE>
Note 13: Impairment of Long-Lived Assets
During the 1999 first quarter, the company recorded a pretax charge of $91
million for the impairment of long-lived assets. This charge was related
to the company's decision to sell its composite products business and ply-
veneer facility and close a chip export facility. These facilities, with a
net book value of $160 million, are located in Springfield, Oregon;
Moncure, North Carolina; Adel, Georgia; and Coos Bay, Oregon.
<PAGE>
Weyerhaeuser Company
- -14-
The decision to sell the composite products business was an option explored
in a strategic review of this business. In 1996, the size and scale of the
company's position in the composite products business was significantly
reduced with the sale of two composite products plants as part of a
facility disposition. The sale of the composite products business and ply-
veneer facility was completed in the second quarter of 1999.
The pending closure of the Coos Bay chip export dock is a result of the
continuing decline in the supply of wood chips in the Pacific Northwest due
largely to a significant decrease in federal timber sales and related mill
closures over the last decade.
The sale or closure of these facilities did not have a material impact on
the company's results of operations or financial position.
Note 14: Commitments and Contingencies
The company's capital expenditures, excluding acquisitions, were $336
million year to date compared to $413 million for the same period in 1998
and $615 million for the year 1998. They are expected to be approximately
$550 million in 1999; however, that expenditure level could be increased or
decreased as a consequence of future economic conditions.
The company is a party to legal proceedings and environmental matters
generally incidental to its business. Although the final outcome of any
legal proceeding or environmental matter is subject to a great many
variables and cannot be predicted with any degree of certainty, the company
presently believes that the ultimate outcome resulting from these
proceedings and matters would not have a material effect on the company's
current financial position, liquidity or results of operations; however, in
any given future reporting period, such proceedings or matters could have a
material effect on results of operations.
Note 15: Subsequent Event
The company completed the acquisition of MacMillan Bloedel Limited on
November 1 following the approval of the transaction by the shareholders of
MacMillan Bloedel on October 28 and securing all regulatory approvals in
the United States, Canada and other jurisdictions. This completes a
process which commenced in the second quarter when an agreement was reached
for the company to acquire MacMillan Bloedel in a stock transaction valued
at approximately US$2.4 billion (CDN$3.5 billion). This value was based on
the average price of the company's stock, calculated using the four-day
trading period - June 17 through June 22, and the number of MacMillan
Bloedel common shares, warrants and stock options outstanding at June 21.
The agreement provides MacMillan Bloedel shareholders with .28 shares of
common stock in Weyerhaeuser, or .28 equivalent exchangeable shares in
Weyerhaeuser Company Limited, a new Weyerhaeuser Canadian subsidiary, for
each MacMillan Bloedel share owned. The company will account for this
transaction using the purchase method of business combination.
Note 16: Business Segments
The company is principally engaged in the growing and harvesting of timber
and the manufacture, distribution and sale of forest products. The
company's principal business segments are timberlands (including logs,
chips and timber); wood products (including softwood lumber, plywood and
veneer; oriented strand board; hardwood lumber; treated products; doors;
raw materials; and building materials distribution); pulp, paper and
packaging (including pulp, paper, containerboard, packaging, paperboard and
recycling); and real estate and related assets.
The timber-based businesses involve a high degree of integration among
timber operations; building materials conversion facilities; and pulp,
paper, containerboard and paperboard primary manufacturing and secondary
conversion facilities. This integration includes extensive transfers of
raw materials, semi-finished materials and end products between and among
these groups. The company's accounting policies for segments are the same
as those described in Note 1: Summary of Significant Accounting Policies.
Management evaluates segment performance based on the contributions to
earnings of the respective segments. Accounting for segment profitability
in integrated manufacturing sites involves allocation of joint conversion
and common facility costs based upon the extent of usage by the respective
product lines at that facility. Transfer of products between segments is
accounted for at current market values.
<PAGE>
Weyerhaeuser Company
-17-
An analysis and reconciliation of the company's business segment
information to the respective information in the consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales to and revenues from
unaffiliated customers:
Timberlands $ 166 $ 141 $ 495 $ 457
Wood products 1,337 1,192 3,865 3,370
Pulp, paper and packaging 1,253 1,068 3,435 3,269
Real estate and related assets 311 297 901 809
Corporate and other 53 38 133 110
--------- --------- --------- ---------
3,120 2,736 8,829 8,015
--------- --------- --------- ---------
Intersegment sales:
Timberlands 132 114 383 371
Wood products 65 45 162 142
Pulp, paper and packaging 26 13 82 49
Corporate and other 4 4 8 11
--------- --------- --------- ---------
227 176 635 573
--------- --------- --------- ---------
Total sales and revenues 3,347 2,912 9,464 8,588
Intersegment eliminations (227) (176) (635) (573)
--------- --------- --------- ---------
$ 3,120 $ 2,736 $ 8,829 $ 8,015
========= ========= ========= =========
Approximate contribution (charge)
to earnings (1):
Timberlands $ 130 $ 104 $ 392 $ 368
Wood products 202 87 363 166
Pulp, paper and packaging 105 67 180 160
Real estate and related assets (1) 56 38 147 79
Corporate and other (60) (58) (196) (161)
--------- --------- --------- ---------
433 238 886 612
Interest expense 62 66 196 198
Less capitalized interest 2 3 7 5
--------- --------- --------- ---------
Earnings before income taxes and
the cumulative effect of a change
in an accounting principle 373 175 697 419
Income taxes 136 65 254 155
--------- --------- --------- ---------
Earnings before the cumulative
effect of a change in an
accounting principle 237 110 443 264
Cumulative effect of a change in
an accounting principle -- -- 90 --
--------- --------- --------- ---------
$ 237 $ 110 $ 353 $ 264
========= ========= ========= =========
</TABLE>
There were no material changes from year-end 1998 in total assets, basis of
segmentation or basis for measuring segment profit or loss.
Certain reclassifications have been made to conform prior year's data to
the current format.
(1) Interest expense of $4 million and $5 million for the thirteen weeks
and $12 million and $16 million for the thirty-nine weeks ended
September 26, 1999, and September 27, 1998, respectively, is included
in the determination of approximate contributions to earnings and
excluded from interest expense for financial services businesses.
<PAGE>
Weyerhaeuser Company
- -18-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Consolidated Results
Consolidated net earnings for the third quarter were $237 million, or $1.18
basic and diluted earnings per common share, an increase of 115 percent
over 1998 third quarter earnings of $110 million, or 56 cents earnings per
common share basic (55 cents diluted). The quarter's results for all
business segments improved significantly compared to the same period last
year. The Pulp, Paper and Packaging segment had its strongest quarter
results since the first quarter of 1996. The Wood Products segment
produced its second consecutive quarter of record earnings while the
improvement in the Timberlands segment reflected the ongoing improvement in
Japanese housing.
Consolidated net sales and revenues for the quarter were $3.1 billion, an
increase of 14 percent over the $2.7 billion reported in the same period
last year. This increase was evenly distributed between price improvement
and volume increases.
Year to date, the company reported net income of $353 million, or $1.76
basic earnings and diluted per common share compared to $264 million, or
$1.33 basic earnings per common share ($1.32 diluted) for the prior year.
The current year's results were impacted by two material nonrecurring
charges:
. An after-tax charge of $90 million, or 45 cents per common share, from
the cumulative effect of a change in an accounting policy which required
the company to write off the unamortized balance of capitalized start-up
costs at year-end 1998. This charge included $9 million for the
company's interest in the write-off of unamortized start-up costs in
three of its 50 percent-owned equity affiliates.
. An after-tax charge of $60 million, or 30 cents per common share,
associated with the recognition of impairment of long-lived assets in
four of the company's composite products facilities, a ply-veneer
facility and a chip export dock. The composite products and ply-veneer
facilities were sold in the second quarter while the chip export dock is
expected to be closed before the end of the year.
Year-to-date earnings before these charges were $503 million, or $2.51 per
common share, a 91 percent improvement over 1998 results of $264 million,
or $1.33 per common share.
Consolidated net sales and revenues year to date were $8.8 billion, up 10
percent from $8 billion in the prior year.
Timberlands
Third quarter operating earnings for the timberlands segment were $130
million, a 25 percent increase over $104 million reported last year. Year-
to-date operating profit of $392 million is ahead of $368 million in 1998.
Sales to unaffiliated customers in the quarter were $166 million, up 18
percent from $141 million in the 1998 third quarter. Intersegment sales
were $132 million compared to $114 million reported a year ago.
Export log volumes were stable throughout the quarter and remain above last
year's levels, a reflection of the gradual recovery in Japanese housing and
the general stability in U.S. timber markets.
Raw material sales volumes to unaffiliated customers were 72 and 212
million cubic feet for the quarter and year to date, respectively, compared
to 68 and 185 million cubic feet, respectively, in the same periods of
1998.
Log production for the Timberlands segment was 129 and 386 million cubic
feet for the quarter and year to date, respectively, compared to 120 and
368 million cubic feet, respectively, in 1998.
Wood Products
This segment reported record operating earnings of $202 million for the
quarter, a 132 percent increase over $87 million in the same quarter last
year. This brings operating earnings for the nine months up to $363
million, 119 percent over last year's $166 million.
<PAGE>
Weyerhaeuser Company
-19-
Sales were $1.3 billion, up 12 percent from $1.2 billion in the third
quarter of 1998. Results for all product lines increased significantly
from a year ago due to the continued strong demand in the U.S. market.
Prices for most products declined during the quarter, but remained above
1998 levels as residential construction enters its traditional seasonal
slowdown.
The company completed the sale of its composite products business and a ply-
veneer facility to SierraPine Limited during the second quarter of 1999.
Third party sales and total production volumes for the major products in
this segment are as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Third party Sept. 26, Sept. 27, Sept. 26, Sept. 27,
sales volumes (millions) 1999 1998 1999 1998
- ------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Softwood lumber - board feet 1,408 1,276 4,122 3,701
Softwood plywood and veneer -
square feet (3/8") 476 474 1,394 1,388
Composite panels - square
feet (3/4") 54 146 333 444
Oriented strand board - square
feet (3/8") 616 686 1,960 2,032
Hardwood lumber - board feet 97 80 300 250
Engineered wood products -
lineal feet 47 47 131 123
Hardwood doors (thousands) 193 208 567 611
Raw materials - cubic feet 67 80 200 234
Total production
volumes (millions)
- --------------------
Softwood lumber - board feet 1,067 987 3,260 3,012
Softwood plywood and veneer -
square feet (3/8") 260 243 773 729
Composite panels - square
feet (3/4") 18 128 246 386
Oriented strand board - square
feet (3/8") 589 553 1,726 1,624
Hardwood lumber - board feet 95 84 286 258
Hardwood doors (thousands) 194 201 564 617
Logs - cubic feet 132 126 384 371
</TABLE>
Pulp, Paper and Packaging
Operating earnings for the quarter were $105 million, a 57 percent
increase from $67 million reported in the third quarter of 1998. Year-to-
date operating earnings are $180 million compared to $160 million last
year.
The quarter's sales were $1.3 billion, or 17 percent higher than the $1.1
billion reported in the same quarter a year ago. The markets for pulp,
containerboard packaging and fine paper continued to strengthen throughout
the quarter primarily due to improvements in the global economy. Costs
associated with downtime in North Carolina from Hurricane Floyd and related
flooding were offset by continued operational improvements the company is
making in the businesses.
<PAGE>
Weyerhaeuser Company
- -20-
Third party sales and total production volumes for the major products in
this segment are as follows:
<TABLE>
<CAPTION>
Thirteen weeks Thirty-nine
ended weeks ended
------------------- -------------------
Third party Sept. 26, Sept. 27, Sept. 26, Sept. 27,
sales volumes (thousands) 1999 1998 1999 1998
- -------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pulp - air-dry metric tons 561 481 1,675 1,499
Paper - tons 360 293 1,086 822
Paperboard - tons 65 59 183 175
Containerboard - tons 118 76 373 245
Packaging - MSF 11,329 11,065 33,877 33,511
Recycling - tons 709 618 2,075 1,895
Total production
volumes (thousands)
- ---------------------
Pulp - air-dry metric tons 555 513 1,632 1,421
Paper - tons 343 275 1,117 852
Paperboard - tons 68 60 188 175
Containerboard - tons 634 580 1,851 1,771
Packaging - MSF 11,626 11,535 35,421 35,084
Recycling - tons 1,064 942 3,166 2,868
</TABLE>
Real Estate and Related Assets
The segment earned $56 million in the quarter, a 47 percent increase over
the $38 million for the same quarter last year. Year-to-date operating
earnings of $147 million exceed last year's earnings of $79 million by 86
percent.
Revenues for the quarter were $311 million compared to third quarter 1998
revenues of $297. These increases in operating income and revenues are due
to an increase in single family closings, especially in Southern
California.
Costs and Expenses
Weyerhaeuser's total costs and expenses were $2.4 billion for the quarter,
a 9 percent increase over the $2.2 billion incurred in the same period last
year. The increase in the costs of products sold is the net effect of an
increase in sales volumes, primarily the lumber, pulp and paper product
lines, offset in part by improved production efficiencies and lower costs.
The costs of products sold, as a percentage of net sales, were 73 percent,
a favorable decline from last year's third quarter percentage of 77
percent. Selling, general and administrative expenses of $192 million were
up significantly over last year's expenses of $174 million, primarily from
an increase in accruals for employee performance incentives related to
higher earnings in both the current period and year to date.
The increase in the real estate and related assets segment's costs and
expenses can be attributed to increased sales volumes over the same period
last year.
Other income (expense) is an aggregation of both recurring and nonrecurring
items and, as a result, can fluctuate from year to year. There were no
significant individual items in 1999 or 1998.
Liquidity and Capital Resources
General
The company is committed to the maintenance of a sound, conservative
capital structure. This commitment is based upon two considerations: the
obligation to protect the underlying interests of its shareholders and
lenders and the desire to have access, at all times, to all major financial
markets.
The important elements of the policy governing the company's capital
structure are as follows:
. To view separately the capital structures of Weyerhaeuser Company,
Weyerhaeuser Real Estate Company and related subsidiaries, given the
very different nature of their assets and business activities. The
amount of debt and equity associated with the capital structure of each
will reflect the basic earnings capacity, real value and unique
liquidity characteristics of the assets dedicated to that business.
<PAGE>
Weyerhaeuser Company
-21-
. The combination of maturing short-term debt and the structure of long-
term debt will be managed judiciously to minimize liquidity risk.
Operations
Nine months year-to-date consolidated net cash provided by operations
increased $290 million, or 46 percent, to $916 million versus $626 million
in the same period of 1998.
Cash provided by operations before net changes in working capital increased
$316 million over 1998, primarily from an increase of $89 million in net
earnings and two noncash charges. These charges were the result of a
change in an accounting principle of $90 million, net of income taxes,
related to the write-off of unamortized capitalized start-up costs and a
$91 million write-down of impaired assets to fair market value. The
noncash credits for pension and other postretirement benefits increased by
$40 million over the prior year.
Net cash required for working capital by Weyerhaeuser in the first nine
months of 1999 was $145 million, an increase of $77 million over the 1998
requirement for the same period. The negative impacts were a $168 million
increase in accounts receivable, related to higher sales and revenues
compared to 1998, and an increase of $47 million in inventories, primarily
in pulp and paper with the addition of the Dryden facility in late 1998.
The product inventory turnover rate of 12.4 turns in the current quarter
was slightly better than the 12.0 for the same quarter last year. A
positive change in working capital was the increase of $146 million in
accounts payable and accrued liabilities as a result of higher accruals for
employee incentive compensation and income taxes.
The real estate and related assets segment working capital provided cash of
$20 million in 1999 compared to a use of $31 million in 1998, a net
positive effect of $51 million. Uses included $65 million for acquisition
of land and residential lots for construction. On the positive side, this
segment increased accounts payable and accrued liabilities by $75 million
compared to an increase of $19 million in the first nine months of last
year, a net improvement of $56 million. Accrued income taxes accounted for
$40 million while accounts payable increase amounted to $27 million.
Year-to-date earnings before interest expense and income taxes plus noncash
charges for the principal business segments were:
. Timberlands - $429 million comparable to $426 million in the prior year.
. Wood products - $676 million, an increase of 138 percent over 1998, due
primarily to earnings and a noncash charge of $91 million for impairment
of long-lived assets.
. Pulp, paper and packaging - $456 million compared to $405 million in
1998 with increased earnings and noncash charges contributing equally.
Investing
Capital expenditures for the first nine months were $336 million, a
decrease of $77 million, compared to $413 million a year ago. 1999 capital
spending by segment was $52 million for timberlands, $73 million for wood
products, $185 million for pulp, paper and packaging and $26 million for
corporate and other. The company has reduced expected capital
expenditures, excluding acquisitions, to approximately $550 million for the
year; however, this expenditure level could increase or decrease as a
consequence of future economic conditions.
In 1999, Weyerhaeuser increased its investment in equity affiliates by $49
million, primarily in the RII Weyerhaeuser World Timberfund, L.P. joint
venture that acquired timber and sawmills in Southeast Australia.
The cash needed to meet these capital expenditures, investments and other
needs was generated principally from internal cash flow. In addition, the
company received proceeds of $80 million from the sale of its composite
business and a ply-veneer facility.
Financing
During the first nine months of 1999, Weyerhaeuser used $379 million of
cash for financing activities compared to $174 million in 1998.
<PAGE>
Weyerhaeuser Company
- -22-
Debt was reduced by $215 million this year compared to a net decrease of
$99 million in 1998. The current year debt pay-down reduced the debt to
total capital ratio to 36 percent at the end of September compared to 38
percent a year ago.
In 1998, Weyerhaeuser received $190 million in dividends from its real
estate subsidiary, which were eliminated upon consolidation.
Cash dividends of $240 million were paid in the first nine months of 1999;
essentially the same as the $239 million paid in 1998.
The real estate and related assets segment utilized internal cash flow to
reduce long-term debt by $201 million in the first nine months of 1999. In
1998, this segment issued debt of $154 million and increased commercial
paper borrowings by $323 million to pay down other long-term debt of $429
million and fund the $190 million intercompany dividends to Weyerhaeuser.
In 1999, the company received $91 million from the sale of treasury stock
used in the exercising of stock options compared to $18 million in 1998.
This increased activity reflects the rise in the market price of the
company's common stock.
During 1998, the company expended $42 million to purchase 924 thousand
shares of its common stock to complete the 11 million share repurchase
program that commenced in 1995.
Year 2000
Weyerhaeuser, like all other companies using computers and microprocessors,
is faced with the task of addressing the Year 2000 problem before the end
of 1999. The Year 2000 challenge arises from the nearly universal practice
in the computer industry of using two digits rather than four digits to
designate the calendar year (e.g., DD/MM/YY). This can lead to incorrect
results when computer software performs arithmetic operations, comparisons
or data field sorting involving years later than 1999. The company has
implemented a structured, companywide program to identify and eliminate
Year 2000 problems. The program consists of the following phases: 1) a
comprehensive inventory, 2) assessment of business criticality, 3)
technical assessment of potential Year 2000 failures, 4) remediation, 5)
final testing, 6) analysis of the Year 2000 status of business partners,
and 7) contingency planning. The review of its systems is divided into
three primary areas: information technology, manufacturing and facilities
systems. The company's priority has been to modify or replace its affected
systems that would have a critical effect on its business operations and,
secondarily, those systems that would be required to be corrected at some
point in order to maintain the most efficient business operations. The
first three phases have been completed. In addition, the company has
essentially completed its goal of correcting and testing all those affected
systems identified as critical across the company and has substantially
completed its goal of correcting and testing required systems.
Weyerhaeuser's information technology systems include such common business
applications as payroll, human resources, sales order entry, inventory and
raw materials management, finance and accounting. Affected information
technology systems that are critical to business operations have been
essentially corrected and tested. Competition for resources, the need to
coordinate schedules with equipment outages and work on other systems, and
the phased in outsourcing of certain systems delayed the completion of the
company's goal with regard to a few remaining systems, but the company
expects to complete testing and verification of these systems before the
end of 1999.
Manufacturing systems include process control systems as well as embedded
technology, such as chips embedded in various machine components, that may
monitor and regulate power, emissions or production operations.
Remediation and testing of all manufacturing systems identified as critical
to the company's operations has been completed.
Facilities systems include building infrastructure, such as heating and air
conditioning systems, security access and alarm systems and telephone and
voice mail systems used in the company's offices and plants. Remediation
and testing of critical facilities systems has been essentially completed
though the replacement of a few affected phone and voice mail systems is
expected to be completed before the end of 1999.
While it is difficult at present to fully quantify the overall cost of this
work, the company estimates that the overall cost of remediation, including
costs to be capitalized, could approach $100 million. The company
presently believes that such costs will not have a material effect on the
company's current financial position or liquidity. Through the third
quarter of 1999, the company has incurred $90 million of remediation costs,
of which $54 million was incurred in 1997 and 1998 and $15 million has been
capitalized for new hardware and software.
<PAGE>
Weyerhaeuser Company
-23-
Depending on whether suppliers, customers and other entities with which the
company does business are able to successfully address the Year 2000 issue,
the company's results of operations could be materially adversely affected
in any given future reporting period during which such a Year 2000 event
occurred. As a result, the company is communicating with such entities to
determine their state of readiness. The company has established a priority
of such entities based on their relative criticality to the company's
operations. Written information regarding their Year 2000 compliance has
been received from a substantial percentage of such entities indicating
that they have corrected or expect to correct their internal Year 2000
issues in a timely manner. The company continues to evaluate their
progress based on written requests and responses in some cases and through
meetings in others. The company will continue to seek and to assess
information regarding Year 2000 compliance of important contracting
parties. Approaches to reduce the risk of interruptions to business
operations caused by Year 2000 issues of such entities varies by business
and facility, but the small percentage of suppliers who have been deemed to
be of high risk to the company (either because they have not responded to
the company's inquiries or because their responses have not been fully
satisfactory) have been notified that they may be replaced.
The company has developed contingency plans to allow primary operations of
the company to continue if the company's significant systems or entities
with which it does business are disrupted by the Year 2000 problem. The
contingency plans may include, as appropriate, increasing inventory levels,
seeking alternate sources of supply, identifying manual alternatives,
shifting operations and stockpiling raw materials. The company's
contingency plans will continue to be reassessed and refined as more
information becomes available. In addition, the company has initiated a
process to develop joint contingency plans with its customers and
suppliers. The company currently expects that it will be prepared in the
event of systems failures to continue to do business, although such
operations may be at a higher cost.
These estimates and conclusions contain forward-looking statements that are
subject to risks and uncertainties that could cause actual results to
differ materially. The company's Year 2000 program is an ongoing process
and current estimates of the amount of time and the costs necessary to
address the Year 2000 problem are based on the facts and circumstances
existing at this time. The estimates were derived using multiple
assumptions of future events, including the continued availability of
certain resources, implementation success and other factors. New
developments may occur that could affect the company's estimates, such as
the acquisition of new systems; the amount of planning and modification
needed to achieve full resolution of the Year 2000 problem; the
availability and cost of resources; the company's ability to discover and
correct all Year 2000 sensitive computer code and equipment; and the
ability of suppliers, customers and other entities to bring their systems
into compliance.
Environmental Matters
During the first quarter of 1999, the National Marine Fisheries Service
(NMFS) announced decisions under the Endangered Species Act (ESA) with
respect to various species of fish that spawn in the Pacific Northwest
(Washington, Oregon, Idaho and northern California). Several populations of
chinook, chum and sockeye salmon and steelhead trout were determined to be
threatened or endangered. Several other populations were proposed to be
listed as threatened or endangered, listing decisions on several other
populations were deferred, and designations of critical habitat were
proposed for several populations. In April 1999, NMFS proposed listing
cutthroat trout in portions of Washington and Oregon and delisting
cutthroat trout in Oregon's Umpqua River drainage.
The ESA automatically prohibits the "take" of species listed as endangered
and gives NMFS authority to prohibit the "take" of species it lists as
threatened. NMFS announced that it intends to adopt rules to prohibit
"take" of the species it has listed as threatened, except "incidental take"
that may result from activities regulated under state or local programs
approved by NMFS. State agencies and local governments are reviewing their
environmental regulations regarding forestry and other land use activities
and are considering adoption of stronger regulations to help protect
habitat for such species and obtain such approvals from NMFS. Requirements
to protect habitat for threatened and endangered species have resulted in
restrictions in timber harvests on nonfederal timberlands, including some
timberlands of the company.
For example, during the second quarter of 1999, the Washington State
Legislature amended that state's Forest Practices Act to implement a salmon
recovery agreement negotiated among state and federal agencies, Indian
tribes and forest landowner organizations. This will result in revisions
to the state forest practice rules requiring additional timber to be left
unharvested in riparian zones along streams and imposing added road
construction and maintenance costs, partially offset by reductions in state
timber harvest taxes. The company expects the new rules to require some
reductions in timber harvest from its lands and other private and public
lands in Washington, but does not expect these reductions to significantly
impair its ability to operate its facilities or supply products to its
customers. In the future, such requirements to protect habitat could
result in restrictions on timber harvest and other forest management
practices on some of the company's timberlands, could increase operating
costs, and could affect timber supply and prices in some regions. The
company does not believe that such restrictions will have a significant
effect on the company's total harvest of timber in 1999 or 2000, although
they may have such an effect in the future.
<PAGE>
Weyerhaeuser Company
- -24-
The company has established reserves for remediation costs on all of the
approximately 100 active environmental sites across our operations as of
the end of September 1999 in the aggregate amount of $40 million, up from
$32 million at the end of 1998. This increase reflects the incorporation
of new information on all sites concerning remediation alternatives,
updates on prior cost estimates and new sites (none of which were
significant) less the costs incurred to remediate these sites during this
period. The company has accrued $16 million and $12 million remediation
costs into this reserve during the first nine months of 1999 and 1998,
respectively. The company incurred remediation costs of $8 million and $9
million during the first nine months of 1999 and 1998, respectively, and
charged these costs against the reserve.
Legal Proceedings
The company is a defendant in hardboard siding cases that can be divided
into two types:
. Purported class actions. Of the nine class action cases that have been
filed against the company since November 1996:
- Four have been resolved without a class being certified. In one of
those cases the plaintiffs have filed a petition for reconsideration,
which is under review by the court.
- Three cases were filed in 1999 and are, therefore, in the early stages
of discovery.
- One case has been dormant since 1997, but a certification hearing has
been scheduled for the first quarter of 2000.
- A class of plaintiffs has been certified in one case in California.
Certification has been stayed pending review by the Court of Appeals.
. Primarily multi-family and residential development cases.
- Two cases have gone to trial. One resulted in a jury verdict in favor
of the company and the other in a judgment for the plaintiffs of
approximately $3.5 million, representing a jury verdict that the
company was responsible for 20% of the plaintiff's losses, and 80%
were caused by construction defects attributable to the general
contractor and certain subcontractors. The company has appealed this
decision and has established a reserve in the amount of the judgment.
- Twenty-six cases of this type are pending. No pattern was developed
that would allow the company to establish a reserve beyond what the
company has already established for the existing jury verdict.
The company also has hardboard siding product claims that have not been,
nor are they anticipated to be, significant in relation to the company's
results of operations.
Contingencies
As stated above, the company is a party to legal proceedings and
environmental matters generally incidental to its business. Although the
final outcome of any legal proceeding or environmental matter is subject to
a great many variables and cannot be predicted with any degree of
certainty, the company presently believes that the ultimate outcome
resulting from these proceedings and matters would not have a material
effect on the company's current financial position, liquidity or results of
operations; however, in any given future reporting period such proceedings
or matters could have a material effect on results of operations.
Acquisition of MacMillan Bloedel Limited
The acquisition of MacMillan Bloedel Limited was completed on November 1
following the approval of the transaction by the shareholders of MacMillan
Bloedel on October 28 and securing all regulatory approvals in the United
States, Canada and other jurisdictions. This completes a process which
commenced in the second quarter when an agreement was reached for the
company to acquire MacMillan Bloedel in a stock transaction valued at
approximately US$2.4 billion (CDN$3.5 billion). This value was based on the
average price of the company's stock, calculated using the four-day trading
period - June 17 through June 22, and the number of MacMillan Bloedel
common shares, warrants and stock options outstanding at June 21. The
agreement provides MacMillan Bloedel shareholders with .28 shares of common
stock in Weyerhaeuser, or .28 equivalent exchangeable shares in
Weyerhaeuser Company Limited, a new Weyerhaeuser Canadian subsidiary, for
each MacMillan Bloedel share owned. The company will account for this
transaction using the purchase method of business combination.
<PAGE>
Weyerhaeuser Company
-25-
Other
In October, the company announced a new initiative to streamline and
improve delivery of internal support services that is expected to result in
$150 to $200 million in annual savings. The company expects implementation
of these plans to begin during the fourth quarter, a process that may take
up to three years to complete. Because implementation plans are still
under review, the specific number of employees affected, exact timing of
the implementation and associated costs have not been finalized.
Quantitative and Qualitative Disclosures About Market Risk
As part of the company's financing activity, derivative securities are
sometimes used to achieve the desired mix of fixed versus floating rate
debt and to manage the timing of finance opportunities. The company does
not hold or issue derivative financial instruments for trading. The
company's derivative instruments, which are matched directly against
outstanding borrowings, are "pay fixed, receive variable" interest rate
swaps with highly rated counterparties in which the interest payments are
calculated on a notional amount. The notional amounts do not represent
amounts exchanged by the parties and, thus, are not a measure of exposure
to the company through its use of derivatives. The company is exposed to
credit-related gains or losses in the event of nonperformance by
counterparties to these financial instruments; however, the company does
not expect its counterparties to fail to meet their obligations. Interest
rate swaps are described as follows:
<TABLE>
<CAPTION>
Dollar amounts in millions
Variable Rate at
Sept. 26, 1999
----------------------
Notional Maturity Fixed Rate Fair Value
Amount Date % % Based On of Swap (1)
- --------- --------- ---------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C>
$75 11/6/99 (2) 6.85 5.38 30 day LIBOR $(2.3)
</TABLE>
(1) The amount of the obligation under this swap is based on the assumption
that it had terminated at the end of the fiscal period, and provides
for the netting of amounts payable by and to the counterparty. In each
case, the amount of such obligation is the net amount so determined.
(2) Includes the value of an option, by the counterparty, to extend for two
years at maturity date.
<PAGE>
Weyerhaeuser Company
- -26-
Part II. Other Information
Item 1. Legal Proceedings
The company conducted a review of its 10 major pulp and paper facilities to
evaluate the facilities' compliance with federal Prevention of Significant
Deterioration (PSD) regulations. The results of the reviews were disclosed
to seven state agencies and the Environmental Protection Agency (EPA)
during 1994 and 1995. All PSD compliance issues identified in the review
have been resolved, except for PSD issues at the company's Springfield,
Oregon, containerboard facility. A final decision is expected to be made
by the Lane Regional Air Pollution Control Authority (Lane County, Oregon)
concerning alleged PSD and permit violations at the company's Springfield,
Oregon, containerboard manufacturing facility upon issuance of the
facility's Title V permit in 1999.
In June 1998, a lawsuit was filed against the company in Superior Court,
San Francisco County, California, on behalf of a purported class of
individuals and entities that own property in the United States on which
exterior hardboard siding manufactured by the company has been installed
since 1981. The action alleges the company manufactured and distributed
defective hardboard siding, breached express warranties and consumer
protection statutes and failed to disclose to consumers the alleged
defective nature of its hardboard siding. The action seeks compensatory
and punitive damages, costs and reasonable attorney fees. In December
1998, the complaint was amended narrowing the purported class to
individuals and entities in the state of California. In February 1999, the
court entered an order certifying the class. The company has filed an
appeal and the Court of Appeals has issued a stay of the certification
decision pending its review. In September 1998, a lawsuit purporting to be
a class action involving hardboard siding was filed against the company in
Superior Court, King County, Washington. The complaint was amended, in
January 1999, to allege a class consisting of individuals and entities that
own homes or other structures in the United States on which exterior
hardboard siding manufactured by the company at its former Klamath Falls,
Oregon, facility has been installed since January 1981. The amended
complaint alleges the company manufactured defective hardboard siding,
engaged in unfair trade practices and failed to disclose to customers the
alleged defective nature of its hardboard siding. The amended complaint
seeks compensatory damages, punitive or treble damages, restitution,
attorney fees, costs of the suit and such other relief as may be
appropriate. In July 1999, the company's motion for summary judgment was
granted in this case. The plaintiffs have filed a petition for
reconsideration which is under review by the court. A lawsuit was filed
against the company in District Court, Johnson County, Texas, in June 1999.
The case purports to be a class action on behalf of persons who own
structures in the state of Texas with exterior hardboard siding
manufactured by the company. The complaint alleges defective design,
misrepresentation, negligence, breach of express warranty and fraudulent
concealment. The complaint seeks unspecified compensatory damages. In
July 1999, a lawsuit was filed against the company in the Court of Common
Pleas, Beaufort County, South Carolina. The suit purports to be filed on
behalf of all owners of residential structures or other buildings with
hardboard siding manufactured by the company. The complaint alleges breach
of express and implied warranties, defective design and manufacturer, fraud
and violation of South Carolina's unfair trade practices act. The
plaintiffs seek compensatory damages, treble damages and attorneys' fees.
The company is a defendant in approximately 28 other hardboard siding
cases, two of which purport to be statewide class actions on behalf of
owners of property in Iowa and Oregon that contain the company's hardboard
siding.
In May 1999, two civil antitrust lawsuits were filed against the company in
U.S. District Court, Eastern District of Pennsylvania. Both suits name as
defendants several other major containerboard and packaging producers. The
complaint in the first case alleges the defendants conspired to fix the
price of linerboard and that the alleged conspiracy had the effect of
increasing the price of corrugated containers. The suit purports to be a
class action on behalf of purchasers of corrugated containers during the
period October 1993 through November 1995. The complaint in the second
case alleges that the company conspired to manipulate the price of
linerboard and thereby the price of corrugated sheets. The suit purports
to be a class action on behalf of purchasers of corrugated sheets during
the period October 1993 through November 1995. Both suits seek damages,
including treble damages, under the antitrust laws.
In May 1999, the Equity Committee ("the Committee") in the Paragon Trade
Brands, Inc. bankruptcy proceeding filed a motion in U.S. Bankruptcy Court
for the Northern District of Georgia for authority to prosecute claims
against the company in the name of the debtor's estate. Specifically, the
Equity Committee seeks to assert that the company breached certain
warranties in agreements entered into between Paragon and the company in
connection with Paragon's public offering of common stock in January 1993.
The Committee seeks to recover damages sustained by Paragon as a result of
two patent infringement cases, one brought by Procter & Gamble (P&G) and
the other by Kimberly-Clark (KC). In September 1999, the court authorized
the Committee to commence an adversary proceeding against the company. The
Committee commenced this proceeding in October 1999, seeking damages in
excess of $420 million against the company.
<PAGE>
Weyerhaeuser Company
-27-
The company is also a party to various proceedings relating to the cleanup
of hazardous waste sites under the Comprehensive Environmental Response
Compensation and Liability Act, commonly known as "Superfund," and similar
state laws. The EPA and/or various state agencies have notified the
company that it may be a potentially responsible party with respect to
other hazardous waste sites as to which no proceedings have been instituted
against the company. The company is also a party to other legal
proceedings and environmental matters generally incidental to its business.
Although the final outcome of any legal proceeding or environmental matter
is subject to a great many variables and cannot be predicted with any
degree of certainty, the company presently believes that any ultimate
outcome resulting from these proceedings and matters, or all of them
combined, would not have a material effect on the company's current
financial position, liquidity or results of operations; however, in any
given future reporting period, such proceedings or matters could have a
material effect on results of operations.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedules
Reports on Form 8-K
The registrant filed reports on Form 8-K dated January 7, January 21, April
14, June 22, July 16, September 21, and October 15, 1999, reporting
information under Item 5, Other Events.
The registrant filed a report on Form 8-K dated November 9, 1999, reporting
information under Item 2, Acquisition or Disposition of Assets and Item 7,
Financial Statements and Exhibits.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> SEP-26-1999
<CASH> 128
<SECURITIES> 0
<RECEIVABLES> 1,170<F1>
<ALLOWANCES> 0
<INVENTORY> 968
<CURRENT-ASSETS> 2,449
<PP&E> 6,166<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,949
<CURRENT-LIABILITIES> 1,557
<BONDS> 3,672
0
0
<COMMON> 258
<OTHER-SE> 4,528
<TOTAL-LIABILITY-AND-EQUITY> 12,949
<SALES> 8,829
<TOTAL-REVENUES> 8,829
<CGS> 6,678
<TOTAL-COSTS> 6,678
<OTHER-EXPENSES> 658
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> 697
<INCOME-TAX> 254
<INCOME-CONTINUING> 443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 90
<NET-INCOME> 353
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.76
<FN>
<F1>Receivables are stated net of allowances.
<F2>Property, plant and equipment is stated net of accumulated depreciation.
</FN>
</TABLE>
