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 twenty-six weeks ended June 27, 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 July 30, 1999, was 201,167,081 common shares ($1.25 par value).
<PAGE>
Weyerhaeuser Company
- -2-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
Index to Form 10-Q Filing
For the twenty-six weeks ended June 27, 1999
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <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 18-23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24-25
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 25
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 25
</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 twenty-six week period ending
June 27, 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
August 11, 1999
<PAGE>
Weyerhaeuser Company
- -3-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
CONSOLIDATED EARNINGS
For the periods ended June 27, 1999 and June 28, 1998
(Dollar amounts in millions except as noted and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
--------------- -----------------
June June June June
27, 28, 27, 28,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales and revenues:
Weyerhaeuser $2,730 $2,429 $5,119 $4,767
Real estate and related assets 314 247 590 512
------- ------- ------- -------
Total net sales and revenues 3,044 2,676 5,709 5,279
------- ------- ------- -------
Costs and expenses:
Weyerhaeuser:
Costs of products sold 2,059 1,939 3,897 3,759
Depreciation, amortization and fee
stumpage 153 141 308 290
Selling, general and administrative
expenses 194 148 358 311
Research and development expenses 13 15 26 29
Taxes other than payroll and income
taxes 33 32 65 66
Charge for impairment of long-lived
assets (Note 13) -- -- 91 --
Charge for Year 2000 remediation 10 7 27 8
------- ------- ------- -------
2,462 2,282 4,772 4,463
------- ------- ------- -------
Real estate and related assets:
Costs and operating expenses 258 214 478 439
Depreciation and amortization 1 2 2 3
Selling, general and administrative
expenses 13 14 28 27
Taxes other than payroll and income
taxes 2 3 4 5
------- ------- ------- -------
274 233 512 474
------- ------- ------- -------
Total costs and expenses 2,736 2,515 5,284 4,937
------- ------- ------- -------
Operating income 308 161 425 342
Interest expense and other:
Weyerhaeuser:
Interest expense incurred 67 65 134 132
Less interest capitalized 3 1 5 2
Equity in income of affiliates
(Note 4) 6 9 8 15
Other income (expense), net 2 (3) 7 10
Real estate and related assets:
Interest expense incurred 18 17 38 38
Less interest capitalized 15 15 30 30
Equity in income of joint ventures
and limited partnerships (Note 4) 4 6 11 12
Other income (expense), net 5 2 10 3
------- ------- ------- -------
Earnings before income taxes and
cumulative effect of a change in an
accounting principle 258 109 324 244
Income taxes (Note 5) 94 40 118 90
------- ------- ------- -------
Earnings before cumulative effect of
a change in an accounting principle 164 69 206 154
Cumulative effect of a change in an
accounting principle (Note 1) -- -- 90 --
------- ------- ------- -------
Net earnings $ 164 $ 69 $ 116 $ 154
======= ======= ======= =======
Per common share (Note 2):
Basic net earnings before cumulative
effect of a change in an accounting
principle $ 0.82 $ 0.34 $ 1.03 $ 0.77
Cumulative effect of a change in an
accounting principle -- -- (0.45) --
------- ------- ------- -------
$ 0.82 $ 0.34 $ 0.58 $ 0.77
======= ======= ======= =======
Diluted net earnings before
cumulative effect of a change in
an accounting principle $ 0.81 $ 0.34 $ 1.02 $ 0.77
Cumulative effect of a change in an
accounting principle -- -- (0.45) --
------- ------- ------- -------
$ 0.81 $ 0.34 $ 0.57 $ 0.77
======= ======= ======= =======
Dividends paid per share $ .40 $ .40 $ .80 $ .80
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -4-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
CONSOLIDATED BALANCE SHEET
June 27, 1999 and December 27, 1998
(Dollar amounts in millions)
<TABLE>
<CAPTION>
June 27, Dec. 27,
1999 1998
--------- ---------
(Unaudited)
Assets
- ------
<S> <C> <C>
Weyerhaeuser
Current assets:
Cash and short-term investments (Note 1) $ 51 $ 28
Receivables, less allowances 1,087 886
Inventories (Note 6) 989 962
Prepaid expenses 279 294
--------- ---------
Total current assets 2,406 2,170
Property and equipment (Notes 7 and 13) 6,267 6,692
Construction in progress 416 315
Timber and timberlands at cost, less fee stumpage
charged to disposals 1,025 1,013
Investments in and advances to equity affiliates
(Notes 4 and 11) 524 482
Other assets and deferred charges 319 262
--------- ---------
10,957 10,934
--------- ---------
Real estate and related assets
Cash and short-term investments 3 7
Receivables, less discounts and allowances 74 81
Mortgage-related financial instruments, less
discounts and allowances 94 119
Real estate in process of development and for sale 593 584
Land being processed for development 913 854
Investments in and advances to joint ventures and
limited partnerships, less reserves (Note 4) 113 120
Other assets 123 135
--------- ---------
1,913 1,900
--------- ---------
Total assets $ 12,870 $ 12,834
========= =========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -5-
<TABLE>
<CAPTION>
June 27, Dec. 27,
1999 1998
--------- ---------
(Unaudited)
Liabilities and shareholders' interest
- --------------------------------------
<S> <C> <C>
Weyerhaeuser
Current liabilities:
Notes payable $ 7 $ 5
Current maturities of long-term debt 57 88
Accounts payable (Note 1) 732 699
Accrued liabilities (Note 8) 721 707
--------- ---------
Total current liabilities 1,517 1,499
Long-term debt (Note 10) 3,338 3,397
Deferred income taxes (Note 5) 1,419 1,404
Deferred pension, other postretirement benefits and
other liabilities 512 488
Commitments and contingencies (Note 14)
--------- ---------
6,786 6,788
--------- ---------
Real estate and related assets
Notes payable and commercial paper 509 564
Long-term debt (Note 10) 639 701
Other liabilities 302 255
Commitments and contingencies (Note 14)
--------- ---------
1,450 1,520
--------- ---------
Total liabilities 8,236 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) (146) (208)
Retained earnings 4,328 4,372
Treasury common shares, at cost: 4,908,803 and
7,063,917 (217) (312)
--------- ---------
Total shareholders' interest 4,634 4,526
--------- ---------
Total liabilities and shareholders' interest $ 12,870 $ 12,834
========= =========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -6-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
CONSOLIDATED STATEMENT OF CASH FLOWS
For the twenty-six week periods ended June 27, 1999 and June 28, 1998
(Dollar amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
------------------
June 27, June 28,
1999 1998
-------- --------
<S> <C> <C>
Cash provided by (used for) operations:
Net earnings $ 116 $ 154
Noncash charges (credits) to income:
Depreciation, amortization and fee stumpage 310 293
Deferred income taxes, net 76 63
Pension and other postretirement benefits (36) (11)
Equity in (income) loss of affiliates, joint ventures
and limited partnerships (19) (27)
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 (191) (72)
Inventories, real estate and land (101) (9)
Prepaid expenses 12 (37)
Mortgage-related financial instruments 15 2
Accounts payable and accrued liabilities 99 (46)
(Gain) loss on disposition of assets 1 1
Other (7) (21)
-------- --------
Net cash provided by (used for) operations 456 290
-------- --------
Cash provided by (used for) investing activities:
Property and equipment (198) (225)
Timber and timberlands (29) (41)
Investments in and advances to equity affiliates (18) 16
Proceeds from sale of:
Property and equipment 7 28
Businesses 80 --
Mortgage-related financial instruments 12 34
Restructuring the ownership of a subsidiary (Note 11) -- 218
Intercompany advances -- --
Other 4 (3)
-------- --------
Net cash provided by (used for) investing activities (142) 27
-------- --------
Cash provided by (used for) financing activities:
Issuances of debt 31 8
Sale of industrial revenue bonds -- 48
Notes and commercial paper borrowings, net (76) 153
Cash dividends (160) (160)
Payments on debt (161) (416)
Purchase of treasury common shares -- (42)
Exercise of stock options 90 18
Other (19) (7)
-------- --------
Net cash provided by (used for) financing activities (295) (398)
-------- --------
Net increase (decrease) in cash and short-term
investments 19 (81)
Cash and short-term investments at beginning of year 35 122
-------- --------
Cash and short-term investments at end of period $ 54 $ 41
======== ========
Cash paid (received) during the period for:
Interest, net of amount capitalized $ 141 $ 148
======== ========
Income taxes $ (8) $ 61
======== ========
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
Weyerhaeuser Company
- -7-
<TABLE>
<CAPTION>
Real Estate and
Weyerhaeuser Related Assets
------------------ ------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<C> <C> <C> <C>
$ 59 $ 128 $ 57 $ 26
308 290 2 3
67 55 9 8
(35) (10) (1) (1)
(8) (15) (11) (12)
142 -- -- --
(52) -- -- --
91 -- -- --
(201) (64) 10 (8)
(38) 6 (63) (15)
12 (37) -- --
-- -- 15 2
48 (11) 51 (35)
1 10 -- (9)
6 (18) (13) (3)
-------- -------- -------- --------
400 334 56 (44)
-------- -------- -------- --------
(196) (224) (2) (1)
(29) (41) -- --
(43) -- 25 16
6 9 1 19
80 -- -- --
-- -- 12 34
-- 218 -- --
(22) (190) 22 190
4 (2) -- (1)
-------- -------- -------- --------
(200) (230) 58 257
-------- -------- -------- --------
31 4 -- 4
-- 48 -- --
(21) 48 (55) 105
(160) (160) -- --
(98) (78) (63) (338)
-- (42) -- --
90 18 -- --
(19) (7) -- --
-------- -------- -------- --------
(177) (169) (118) (229)
-------- -------- -------- --------
23 (65) (4) (16)
28 100 7 22
-------- -------- -------- --------
$ 51 $ 35 $ 3 $ 6
======== ======== ======== ========
$ 132 $ 136 $ 9 $ 12
======== ======== ======== ========
$ (10) $ 22 $ 2 $ 39
======== ======== ======== ========
</TABLE>
<PAGE>
Weyerhaeuser Company
- -8-
WEYERHAEUSER COMPANY AND SUBSIDIARIES
____________
NOTES TO FINANCIAL STATEMENTS
For the twenty-six week periods ended June 27, 1999 and June 28, 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 provides 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
requires 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
$77 million and $102 million at June 27, 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
$267 million and $253 million at June 27, 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 $213 million and $228 million greater at June 27, 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 $136 million and $139 million at June 27,
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 Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
(thousands):
Basic 199,874 198,832 199,874 198,832
Dilutive effect of stock options 1,025 695 722 584
-------- -------- -------- --------
Diluted weighted average shares
outstanding 200,899 199,527 200,596 199,416
======== ======== ======== ========
</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 twenty-six weeks ended June 27, 1999. Options to purchase
604,011 shares at $56.78 per share, 2,000 shares at $60.44 per share and
150,000 shares at $53.06 per share were outstanding during the twenty-six
weeks ending June 28, 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 (Expense)
The company's comprehensive income (expense) is as follows:
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
Dollar amounts in millions 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 164 $ 69 $ 116 $ 154
Other comprehensive income (expense):
Foreign currency translation
adjustments 36 (44) 75 (39)
Income tax (expense) on foreign
currency translation adjustments (7) 16 (13) 14
-------- -------- -------- --------
$ 193 $ 41 $ 178 $ 129
======== ======== ======== ========
</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, 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 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, will assume the
responsibility for all management and marketing activities of this
acquisition.
. North Pacific Paper Corporation - A 50 percent owned joint venture that
has 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>
June 27, Dec. 27,
Dollar amounts in millions 1999 1998
-------- ---------
<S> <C> <C>
Current assets $ 206 $ 166
Noncurrent assets 1,451 1,334
Current liabilities 93 80
Noncurrent liabilities 761 703
</TABLE>
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales and revenues $ 177 $ 180 $ 341 $ 353
Operating income 27 32 47 60
Net income (loss) 13 17 9 31
</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>
June 27, Dec. 27,
Dollar amounts in millions 1999 1998
-------- ---------
<S> <C> <C>
Current assets $ 4,333 $ 1,755
Noncurrent assets 152 230
Current liabilities 3,665 1,241
Noncurrent liabilities 107 136
</TABLE>
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales and revenues $ 157 $ 37 $ 226 $ 94
Operating income 94 11 141 45
Net income 73 2 113 29
</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: Twenty-six
weeks ended
-----------------
June 27, June 28,
Dollar amounts in millions 1999 1998
-------- --------
<S> <C> <C>
Federal:
Current $ 23 $ 19
Deferred 61 58
-------- --------
84 77
-------- --------
State:
Current 5 4
Deferred 3 2
-------- --------
8 6
-------- --------
Foreign:
Current 14 4
Deferred 12 3
-------- --------
26 7
-------- --------
Income taxes before cumulative effect of a change in
an accounting principle 118 90
Deferred taxes applicable to the cumulative effect of
a change in an accounting principle (52) --
-------- --------
$ 66 $ 90
======== ========
</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 June 27, 1999, and June 28, 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 twenty-six week periods ended
June 27, 1999, and June 28, 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>
June 27, Dec. 27,
Dollar amounts in millions 1999 1998
-------- ---------
<S> <C> <C>
Logs and chips $ 102 $ 108
Lumber, plywood and panels 181 143
Pulp and paper 182 190
Containerboard, paperboard and packaging 95 96
Other products 162 150
Materials and supplies 267 275
-------- ---------
$ 989 $ 962
======== =========
</TABLE>
Note 7: Property and Equipment
<TABLE>
<CAPTION>
June 27, Dec. 27,
Dollar amounts in millions 1999 1998
-------- ---------
<S> <C> <C>
Property and equipment, at cost:
Land $ 156 $ 157
Buildings and improvements 1,692 1,667
Machinery and equipment 9,375 9,732
Rail and truck roads 558 555
Other 108 111
-------- ---------
11,889 12,222
Less allowance for depreciation and amortization 5,622 5,530
-------- ---------
$ 6,267 $ 6,692
======== =========
</TABLE>
Note 8: Accrued Liabilities
<TABLE>
<CAPTION>
June 27, Dec. 27,
Dollar amounts in millions 1999 1998
-------- ---------
<S> <C> <C>
Payroll -- wages and salaries, incentive awards,
retirement and vacation pay $ 298 $ 305
Taxes -- social security and real and personal
property 54 46
Interest 84 87
Income taxes 54 16
Other 231 253
-------- ---------
$ 721 $ 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 $590 million and $650 million, all of which could
be availed of by the company and Weyerhaeuser Real Estate Company (WRECO)
at June 27, 1999, and December 27, 1998, respectively. No portion of these
lines has been availed of by the company or WRECO at June 27, 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, has
a set of term credit facility agreements with a group of banks that provide
for borrowings of up to $125 million and $175 million as of June 27, 1999,
and December 27, 1998, respectively. $50 million and $100 million were
outstanding under these agreements at June 27, 1999, and December 27, 1998,
respectively.
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 $172 million
and $192 million as of June 27, 1999, and December 27, 1998, respectively.
No portion of these lines has been availed of by the company, WRECO or WFS
at June 27, 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 6,465,000 shares at June
27, 1999, and 7,222,000 shares at December 27, 1998.
Cumulative Other Comprehensive (Expense)
The company's cumulative other comprehensive (expense) includes:
<TABLE>
<CAPTION>
June 27, Dec. 27,
Dollar amounts in millions 1999 1998
-------- ---------
<S> <C> <C>
Foreign currency translation adjustments $ (138) $ (200)
Minimum pension liability adjustment (8) (8)
-------- ---------
$ (146) $ (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
- -16-
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
$227 million year to date compared to $266 million for the same period in
1998 and $615 million for the year 1998. They are expected to be
approximately $785 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: 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 Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
Dollar amounts in millions 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales to and revenues from
unaffiliated customers:
Timberlands $ 176 $ 153 $ 329 $ 316
Wood products 1,412 1,160 2,528 2,178
Pulp, paper and packaging 1,100 1,081 2,182 2,201
Real estate and related assets 314 247 590 512
Corporate and other 42 35 80 72
-------- -------- -------- --------
3,044 2,676 5,709 5,279
-------- -------- -------- --------
Intersegment sales:
Timberlands 126 118 251 257
Wood products 49 47 97 97
Pulp, paper and packaging 24 11 56 36
Corporate and other 2 2 4 7
-------- -------- -------- --------
201 178 408 397
-------- -------- -------- --------
Total sales and revenues 3,245 2,854 6,117 5,676
Intersegment eliminations (201) (178) (408) (397)
-------- -------- -------- --------
$ 3,044 $ 2,676 $ 5,709 $ 5,279
======== ======== ======== ========
Approximate contribution (charge) to
earnings (1):
Timberlands $ 143 $ 118 $ 262 $ 264
Wood products 174 53 160 79
Pulp, paper and packaging 34 40 76 93
Real estate and related assets (1) 45 16 91 41
Corporate and other (74) (54) (136) (103)
-------- -------- -------- --------
322 173 453 374
Interest expense (67) (65) (134) (132)
Less capitalized interest 3 1 5 2
-------- -------- -------- --------
Earnings before income taxes and the
cumulative effect of a change in an
accounting principle 258 109 324 244
Income taxes (94) (40) (118) (90)
-------- -------- -------- --------
Earnings before the cumulative effect
of a change in an accounting
principle 164 69 206 154
Cumulative effect of a change in an
accounting principle -- -- (90) --
-------- -------- -------- --------
$ 164 $ 69 $ 116 $ 154
======== ======== ======== ========
</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 $3 million and $5 million for the thirteen
weeks and $8 million and $11 million for the twenty-six weeks ended
June 27, 1999, and June 28, 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 second quarter were $164 million, or 82
cents basic earnings per common share (81 cents diluted), an increase of
138 percent over 1998 second quarter earnings of $69 million, or 34 cents
basic and diluted earnings per common share. The quarter's results reflect
the sustained demand for wood products that is being driven by the residential
remodeling and repair market and new home construction as evidenced by the
record performance in the wood products segment and strong earnings by the
real estate business.
Consolidated net sales and revenues for the quarter were $3 billion, an
increase of 14 percent over the $2.7 billion reported in the same period
last year.
Year to date, the company reported net income of $116 million, or
58 cents basic earnings per common share (57 cents diluted) compared to
$154 million, or 77 cents basic and diluted earnings per common share 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 $266 million, or $1.33 per
common share, a 73 percent improvement over 1998 results of $154 million,
or 77 cents per common share.
Consolidated net sales and revenues year to date were $5.7 billion, up 8
percent from $5.3 billion in the prior year.
Timberlands
Second quarter operating earnings for the timberlands segment were $142.7
million, a 21 percent increase over $117.6 million reported last year.
Sales to unaffiliated customers were $176 million, up 15 percent from $153
million in the 1998 second quarter. Intersegment sales were $126 million
compared to $118 million reported a year ago.
Volumes and prices for the export log market remain above last year's
levels as the Japanese market continues to show signs of slow, but steady
improvement as demonstrated by the slight increase in the level of wooden
housing starts in Japan during the quarter.
Raw material sales volumes to unaffiliated customers were 72 and
140 million cubic feet for the quarter and year to date, respectively,
compared to 63 and 117 million cubic feet, respectively, in the same
periods of 1998.
Log production for the segment was 128 and 257 million cubic feet for the
quarter and year to date, respectively, compared to 121 and 248 million
cubic feet, respectively, in 1998.
Wood Products
This segment reported record operating earnings of $173.8 million for the
quarter, a 226 percent increase over $53.3 million in the same quarter last
year. Sales were $1.4 billion, up 22 percent from $1.2 billion in 1998's
second quarter. This performance reflects strong price improvement for all
major products; i.e., lumber, plywood and oriented strand board and a 15
percent sales volume increase in lumber over the preceding year's second
quarter.
<PAGE>
Weyerhaeuser Company
- -19-
The company completed the sale of its composite products business and a ply-
veneer facility to SierraPine Limited during the quarter.
Third party sales and total production volumes for the major products in
this segment are as follows:
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
Third party sales volumes (millions) 1999 1998 1999 1998
- ------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Softwood lumber - board feet 1,494 1,294 2,714 2,425
Softwood plywood and veneer - square
feet (3/8") 503 478 918 914
Composite panels - square feet (3/4") 127 153 279 298
Oriented strand board - square
feet (3/8") 665 706 1,344 1,346
Hardwood lumber - board feet 104 84 203 170
Engineered wood products - lineal feet 45 44 84 76
Hardwood doors (thousands) 194 215 374 403
Raw materials - cubic feet 91 77 175 154
Total production volumes (millions)
- -----------------------------------
Softwood lumber - board feet 1,174 1,045 2,193 2,025
Softwood plywood and veneer - square
feet (3/8") 262 249 513 486
Composite panels - square feet (3/4") 94 131 228 258
Oriented strand board - square
feet (3/8") 564 538 1,137 1,071
Hardwood lumber - board feet 100 87 191 174
Hardwood doors (thousands) 192 207 370 416
Logs - cubic feet 98 97 252 245
</TABLE>
Pulp, Paper and Packaging
Operating earnings for the quarter were $34.1 million, a 14 percent
decrease from $39.8 million reported in the second quarter of 1998. The
quarter's sales were $1.1 billion, matching sales for the same quarter a
year ago. Although prices for pulp, containerboard and paper were lower
than a year ago, market conditions continued to improve over the current
year's first quarter. The segment's earnings were unfavorably impacted by
128 thousand tons of planned and unplanned downtime in the pulp and
containerboard operations.
Third party sales and total production volumes for the major products in
this segment are as follows:
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six
ended weeks ended
----------------- -----------------
June 27, June 28, June 27, June 28,
Third party sales volumes (thousands) 1999 1998 1999 1998
- ------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Pulp - air-dry metric tons 531 498 1,114 1,018
Paper - tons 355 263 726 529
Paperboard - tons 57 57 118 116
Containerboard - tons 140 88 255 169
Packaging - MSF 11,438 11,519 22,548 22,446
Recycling - tons 695 661 1,366 1,277
Total production volumes (millions)
- -----------------------------------
Pulp - air-dry metric tons 498 413 1,077 908
Paper - tons 371 288 774 577
Paperboard - tons 59 51 120 115
Containerboard - tons 620 579 1,217 1,191
Packaging - MSF 12,070 12,018 23,795 23,549
Recycling - tons 1,075 972 2,102 1,926
</TABLE>
<PAGE>
Weyerhaeuser Company
- -20-
Real Estate and Related Assets
The segment earned $44.9 million in the quarter compared to $16.5 million
for the same quarter last year, a 172 percent increase. Revenues were $314
million, an increase of 27 percent over the second quarter 1998 revenues of
$247 million. The continued strength of the real estate markets in which
the company operates, primarily single family construction in Southern
California, contributed to these increases. Single family closings and
margins were both up significantly.
Costs and Expenses
Weyerhaeuser's total costs and expenses were $2.5 billion for the quarter
compared to $2.3 billion in the same period last year. The increase in the
costs of products sold can be attributed to an increase in sales volumes in
most major product lines, offset in part by improved production
efficiencies. The costs of products sold, as a percentage of net sales was
75 percent, a favorable decline from last year's second quarter percentage
of 80 percent. Selling, general and administrative expenses of $194
million were up significantly over last year's expenses of $148 million. A
major factor in this change is the increased accrual for employee
performance incentives related to higher earnings in 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.
. The combination of maturing short-term debt and the structure of long-term
debt will be managed judiciously to minimize liquidity risk.
Operations
Consolidated net cash provided by operations in the first half of 1999
increased $166 million to $456 million versus $290 million in the first
half of 1998. Cash provided by operations before net changes in working
capital increased $170 million compared to the first six months of 1998.
Significant noncash charges were a change in an accounting principle; i.e.,
the write-off of unamortized capitalized start-up costs, of $90 million,
net of income taxes, and a charge of $91 million for the write-down of
impaired assets to fair market value. These noncash charges were offset in
part by a decrease of $38 million in year-to-date net earnings compared to
1998 and an increase of $25 million in the noncash credit for pension and
other postretirement benefits.
Cash required for working capital by Weyerhaeuser in the first half of 1999
was $179 million, an increase of $73 million over the 1998 requirement for
the same period. The negative impacts were a $137 million increase in
accounts receivable, related to higher sales and revenues and an increase of
$44 million in inventories, primarily in pulp and paper with the addition of
the Dryden facility in late 1998. The inventory turnover rate in the current
quarter was 12 turns, comparable to the year ago quarter, but higher than the
10.9 turns in the 1999 first quarter. Positive changes in working capital were
a decrease of $49 million in prepaid expenses and an increase of $59 million
in accounts payable and accrued liabilities as a result of higher accruals for
employee incentive compensation and income taxes.
<PAGE>
Weyerhaeuser Company
- -21-
The real estate and related assets segment working capital provided cash of
$13 million in 1999 compared to a use of $56 million in 1998, a net
positive effect of $69 million. Uses included an increase of $48 million
over 1998 for acquisition of land and residential lots for construction. A
positive change was an increase of $51 million in accounts payable and
accrued liabilities compared to a decrease of $35 million in the first six
months of last year, a net improvement of $86 million.
Year-to-date earnings before interest expense and income taxes plus noncash
charges for the principal business segments were:
. Timberlands - $286 million, comparable to $289 million in 1998.
. Wood products - $338 million, double the $169 million in the same period
last year. 1999 includes a noncash charge of $91 million for impairment
of long-lived assets.
. Pulp, paper and packaging - $261 million, essentially equal to the $258
million reported in 1998.
Investing
Capital expenditures for the first six months were $227 million compared to
$266 million a year ago. 1999 capital spending by segment was $41 million
for timberlands, $47 million for wood products, $123 million for pulp, paper
and packaging and $16 million for corporate and other. The company currently
anticipates capital expenditures, excluding acquisitions, to approximate
$785 million for the year; however, this expenditure level could increase or
decrease as a consequence of future economic conditions.
During the quarter, the company increased its investment in equity
affiliates by $43 million, primarily in the RII Weyerhaeuser World
Timberfund, L.P. as that joint venture 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 six months of 1999, Weyerhaeuser used $177 million of cash
for financing activities compared to $169 million in 1998. Debt was
reduced by $88 million this year compared to an increase of $22 million in
1998. The current year debt pay-down reduced the debt to total capital ratio
to 38 percent at the end of the period from 41 percent at both the 1998 first
half and year-end.
The real estate and related assets segment utilized internal cash flow to
reduce long-term debt by $118 million in the first six months of 1999. In
1998, this segment applied cash inflows from intercompany and commercial
paper borrowings to reduce long-term debt by $229 million.
Cash dividends of $160 million were paid in the first six months of both
1999 and 1998.
In 1999, the company received $90 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.
In the first half of 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.
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.
<PAGE>
Weyerhaeuser Company
- -22-
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.
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
conducted a comprehensive inventory to identify where this problem may
occur in its information technology, manufacturing and facilities systems.
The company is engaged in modifying or replacing its affected systems in a
manner that will minimize any detrimental effects on operations and has
substantially completed its goal of correcting affected systems that would
have a critical effect on its business operations. While a few significant
components remain uncorrected, the company believes that all such systems
have been identified and has plans in place to correct such systems before
the end of 1999. The company expects to complete the testing and
verification of such systems during 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; however, in any given
future reporting period, such costs could have a material effect on results
of operations. Through the second quarter of 1999, the company has
incurred $86 million of remediation costs, of which $54 million was
incurred in 1997 and 1998 and $14.6 million has been capitalized for new
hardware and software.
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 and continues to evaluate the progress of such entities 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.
The company is also developing 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.
<PAGE>
Weyerhaeuser Company
- -23-
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.
Acquisition
During the second quarter an agreement was reached for the company to
acquire MacMillan Bloedel Limited in a stock transaction valued at
approximately US$2.45 billion (CDN$3.59 billion) based on the closing
price of the company's stock and the value of the Canadian dollar on June
18. The boards of both companies have unanimously approved an agreement
that provides MacMillan Bloedel shareholders with .28 shares of common
stock in Weyerhaeuser, or .28 equivalent exchangeable shares in a new
Weyerhaeuser Canadian subsidiary, for each MacMillan Bloedel share owned.
The transaction is expected to close in the fourth quarter subject to
normal regulatory approvals in the United States and Canada, court approval
in Canada and a favorable vote by MacMillan Bloedel shareholders.
Contingencies
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.
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 June 27, 1999
------------------------------
Notional Maturity Fixed Fair Value
Amount Date Rate % % Based On of Swap(1)
-------- ---------- ------ ------ -------------------- ----------
<S> <C> <C> <C> <C> <C>
$ 75 11/6/99(2) 6.85 5.17 30 day LIBOR $(1.3)
</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.
At June 27, 1999, the company had Canadian dollar contracts worth
US$2 million to help meet the funding requirements of its Canadian
operations at the end of the quarter.
<PAGE>
Weyerhaeuser Company
- -24-
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. 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
26 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 April 1999, the company received a Notice of Violation (NOV) from the
Georgia Environmental Protection Department (EPD) for air emission issues
at its Adel, Georgia, facility. The NOV addresses the facility's failure
to satisfy the percentage of Volatile Organic Compounds (VOC) removal
required for the biofilter. The NOV requires the company to submit an
application for a permit amendment which contains a monitoring plan for VOC
emissions, a proposed VOC mass emission limit, proof of compliance with
that limit, and a detailed schedule for the installation of a continuous
VOC emission monitor and flow monitor that meets state requirements. The
required response to the NOV is being prepared by the company.
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 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
<PAGE>
Weyerhaeuser Company
- -25-
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 its motion, the
Committee alleges that the claims against the company, if proved
meritorious, should result in a recovery in excess of $500 million from the
company. No decision has been made by the Bankruptcy Court on the
Committee's motion.
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 4. Submission of Matters to a Vote of Security Holders
Matters voted upon and votes cast at the annual meeting of shareholders of
Weyerhaeuser Company held on Tuesday, April 20, 1999, were:
. The reelection of Martha R. Ingram, John I. Kieckhefer and George H.
Weyerhaeuser to the board of directors.
<TABLE>
<CAPTION>
For Withheld
----------- --------
<S> <C> <C>
Ingram 179,332,579 1,033,598
Kieckhefer 179,332,549 1,033,628
Weyerhaeuser 179,306,512 1,059,665
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
--------- ----------- -----------
<S> <C> <C> <C>
. Shareholder proposal
relating to the phase-out
of chlorine-based
chemicals 7,401,733 154,238,470 9,062,422
. Shareholder proposal -
on the floor submitted by
B. Naylor relating to a
classified board 420 180,365,757
</TABLE>
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, and July 16, 1999, reporting information under Item 5, Other
Events.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> JUN-27-1999
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 1,161<F1>
<ALLOWANCES> 0
<INVENTORY> 989
<CURRENT-ASSETS> 2,406
<PP&E> 6,267<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,870
<CURRENT-LIABILITIES> 1,517
<BONDS> 3,977
0
0
<COMMON> 258
<OTHER-SE> 4,376
<TOTAL-LIABILITY-AND-EQUITY> 12,870
<SALES> 5,709
<TOTAL-REVENUES> 5,709
<CGS> 4,375
<TOTAL-COSTS> 4,375
<OTHER-EXPENSES> 470
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> 324
<INCOME-TAX> 118
<INCOME-CONTINUING> 206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 90
<NET-INCOME> 116
<EPS-BASIC> .58
<EPS-DILUTED> .57
<FN>
<F1>Receivables are stated net of allowances.
<F2>Property, Plant and Equipment is stated net of accumulated depreciation.
</FN>
</TABLE>
