Item 1. Financial Statements
Item 1. FINANCIAL STATEMENTS
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Net sales ( Note 3 )
$
2,110
$
1,671
$
5,469
$
5,006
Costs of sales
1,390
1,399
4,055
4,111
Gross margin
720
272
1,414
895
Selling expenses
22
20
62
62
General and administrative expenses
96
85
254
254
Product remediation recoveries ( Note 14 )
—
( 68
)
( 8
)
( 68
)
Other operating costs, net ( Note 16 )
92
33
113
85
Operating income
510
202
993
562
Non-operating pension and other postretirement benefit costs ( Note 7 )
( 9
)
( 15
)
( 28
)
( 495
)
Interest income and other
2
6
5
22
Interest expense, net of capitalized interest
( 111
)
( 91
)
( 299
)
( 289
)
Earnings (loss) before income taxes
392
102
671
( 200
)
Income taxes ( Note 17 )
( 109
)
( 3
)
( 166
)
138
Net earnings (loss)
$
283
$
99
$
505
$
( 62
)
Earnings (loss) per share, basic and diluted ( Note 4 )
$
0.38
$
0.13
$
0.68
$
( 0.08
)
Weighted average shares outstanding (in thousands) ( Note 4 ):
Basic
746,996
745,626
746,809
745,901
Diluted
748,450
746,514
747,530
745,901
See accompanying Notes to Consolidated Financial Statements .
1
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Net earnings (loss)
$
283
$
99
$
505
$
( 62
)
Other comprehensive income (loss):
Foreign currency translation adjustments
11
( 6
)
( 14
)
19
Changes in unamortized actuarial loss, net of tax expense of $ 6 , $ 8 , $ 30 and $ 128
19
25
86
398
Changes in unamortized net prior service credit, net of tax expense of $ 0 , $ 0 , $ 0 and $ 0
—
—
2
( 1
)
Total other comprehensive income
30
19
74
416
Total comprehensive income
$
313
$
118
$
579
$
354
See accompanying Notes to Consolidated Financial Statements .
2
WEYERHAEUSER COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PAR VALUE
SEPTEMBER 30,
2020
DECEMBER 31,
2019
ASSETS
Current assets:
Cash and cash equivalents
$
787
$
139
Receivables, net
500
309
Receivables for taxes
48
98
Inventories ( Note 5 )
411
416
Assets held for sale ( Note 15 )
199
140
Prepaid expenses and other current assets
101
147
Current restricted financial investments held by variable interest entities ( Note 6 )
—
362
Total current assets
2,046
1,611
Property and equipment, less accumulated depreciation of $ 3,423 and $ 3,477
1,945
1,969
Construction in progress
119
130
Timber and timberlands at cost, less depletion
11,465
11,929
Minerals and mineral rights, less depletion
271
281
Deferred tax assets
44
72
Other assets
466
414
Total assets
$
16,356
$
16,406
LIABILITIES AND EQUITY
Current liabilities:
Borrowings on line of credit ( Note 9 )
$
—
$
230
Accounts payable
215
246
Accrued liabilities ( Note 8 )
617
530
Total current liabilities
832
1,006
Long-term debt, net ( Note 9 )
5,974
6,147
Deferred tax liabilities
27
6
Deferred pension and other postretirement benefits ( Note 7 )
638
693
Other liabilities
358
377
Total liabilities
7,829
8,229
Commitments and contingencies ( Note 11 )
Equity:
Common shares: $ 1.25 par value; authorized 1,360 million shares; issued and outstanding: 746,398 thousand shares at September 30, 2020 and 745,300 thousand shares at
December 31, 2019
933
932
Other capital
8,178
8,152
Retained earnings (accumulated deficit)
246
( 3
)
Accumulated other comprehensive loss ( Note 12 )
( 830
)
( 904
)
Total equity
8,527
8,177
Total liabilities and equity
$
16,356
$
16,406
See accompanying Notes to Consolidated Financial Statements .
3
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
Cash flows from operations:
Net earnings (loss)
$
505
$
( 62
)
Noncash charges (credits) to earnings (loss):
Depreciation, depletion and amortization
355
382
Basis of real estate sold
136
105
Deferred income taxes, net
20
( 164
)
Pension and other postretirement benefits ( Note 7 )
55
519
Share-based compensation expense ( Note 13 )
22
23
Timber casualty loss ( Note 16 )
80
—
Change in:
Receivables, net
( 192
)
( 47
)
Receivables and payables for taxes
103
( 18
)
Inventories
2
( 2
)
Prepaid expenses and other current assets
5
5
Accounts payable and accrued liabilities
3
( 13
)
Pension and postretirement benefit contributions and payments
( 21
)
( 36
)
Other
12
( 18
)
Net cash from operations
1,085
674
Cash flows from investing activities:
Capital expenditures for property and equipment
( 158
)
( 199
)
Capital expenditures for timberlands reforestation
( 41
)
( 42
)
Proceeds from note receivable held by variable interest entities ( Note 6 )
362
253
Proceeds from sale of Montana timberlands ( Note 15 )
145
—
Other
3
20
Net cash from investing activities
311
32
Cash flows from financing activities:
Cash dividends on common shares
( 254
)
( 760
)
Net proceeds from issuance of long-term debt ( Note 9 )
732
739
Payments on long-term debt ( Note 9 )
( 936
)
( 512
)
Proceeds from borrowings on line of credit ( Note 9 )
550
875
Payments on line of credit ( Note 9 )
( 780
)
( 860
)
Payments on debt held by variable interest entities ( Note 6 )
—
( 302
)
Proceeds from exercise of stock options
9
8
Repurchases of common shares ( Note 4 )
—
( 60
)
Other
( 16
)
( 15
)
Net cash from financing activities
( 695
)
( 887
)
Net change in cash, cash equivalents and restricted cash
701
( 181
)
Cash, cash equivalents and restricted cash at beginning of period
139
334
Cash, cash equivalents and restricted cash at end of period
$
840
$
153
Cash paid (received) during the period for:
Interest, net of amount capitalized of $ 3 and $ 4
$
278
$
310
Income taxes, net of refunds
$
46
$
46
See accompanying Notes to Consolidated Financial Statements .
4
WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Common shares:
Balance at beginning of period
$
933
$
931
$
932
$
933
Issued for exercise of stock options and vested restricted stock units
—
—
1
1
Repurchases of common shares ( Note 4 )
—
—
—
( 3
)
Balance at end of period
933
931
933
931
Other capital:
Balance at beginning of period
8,166
8,130
8,152
8,172
Issued for exercise of stock options
3
3
9
7
Repurchases of common shares ( Note 4 )
—
—
—
( 57
)
Shared-based compensation
7
7
22
23
Other transactions, net
2
—
( 5
)
( 5
)
Balance at end of period
8,178
8,140
8,178
8,140
Retained earnings (accumulated deficit):
Balance at beginning of period
( 37
)
418
( 3
)
1,093
Net earnings (loss)
283
99
505
( 62
)
Dividends on common shares
—
( 253
)
( 256
)
( 760
)
Adjustments related to accounting pronouncements and other
—
—
—
( 7
)
Balance at end of period
246
264
246
264
Accumulated other comprehensive loss:
Balance at beginning of period
( 860
)
( 755
)
( 904
)
( 1,152
)
Other comprehensive income
30
19
74
416
Balance at end of period ( Note 12 )
( 830
)
( 736
)
( 830
)
( 736
)
Total equity:
Balance at end of period
$
8,527
$
8,599
$
8,527
$
8,599
Dividends paid per common share
$
—
$
0.34
$
0.34
$
1.02
See accompanying Notes to Consolidated Financial Statements .
5
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:
BASIS OF PRESENTATION
7
NOTE 2:
BUSINESS SEGMENTS
7
NOTE 3:
REVENUE RECOGNITION
8
NOTE 4:
NET EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES
8
NOTE 5:
INVENTORIES
9
NOTE 6:
VARIABLE INTEREST ENTITIES
9
NOTE 7:
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
10
NOTE 8:
ACCRUED LIABILITIES
11
NOTE 9:
LONG-TERM DEBT AND LINE OF CREDIT
11
NOTE 10:
FAIR VALUE OF FINANCIAL INSTRUMENTS
11
NOTE 11:
LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
12
NOTE 12:
ACCUMULATED OTHER COMPREHENSIVE LOSS
12
NOTE 13:
SHARE-BASED COMPENSATION
13
NOTE 14:
PRODUCT REMEDIATION RECOVERIES
13
NOTE 15:
TIMBERLAND ACQUISITIONS AND DIVESTITURES
13
NOTE 16:
OTHER OPERATING COSTS, NET
14
NOTE 17:
INCOME TAXES
14
NOTE 18:
RESTRICTED CASH
14
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND YEAR-TO-DATE PERIODS ENDED SEPTEMBER 30, 2020 AND 2019
NOTE 1: BASIS OF PRESENTATION
Our consolidated financial statements provide an overall view of our results of operations, financial condition and cash flows. They include our accounts and the accounts of entities we control, including majority-owned domestic and foreign subsidiaries. They do not include our intercompany transactions and accounts, which are eliminated. Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we,” “the company” and “our” refer to the consolidated company.
The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. Certain information and footnote disclosures normally included in our annual Consolidated Financial Statements have been condensed or omitted. These quarterly Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019. Results of operations for interim periods should not necessarily be regarded as indicative of the results that may be expected for the full year.
NOTE 2: BUSINESS SEGMENTS
We are principally engaged in growing and harvesting timber; manufacturing, distributing and selling products made from trees; maximizing the value of every acre we own through the sale of higher and better use (HBU) properties; and monetizing the value of surface and subsurface assets through leases and royalties. Our business segments are categorized based primarily on products and services which include:
●
Timberlands – Logs, timber, recreational leases and other products;
●
Real Estate & ENR – Real Estate (sales of timberlands) and ENR (rights to explore for and extract hard minerals, construction materials, oil and gas production, wind and solar) and
●
Wood Products – Structural lumber, oriented strand board, engineered wood products and building materials distribution.
A reconciliation of our business segment information to the respective information in the Consolidated Statement of Operations is as follows:
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Sales to unaffiliated customers:
Timberlands
$
345
$
398
$
1,085
$
1,230
Real Estate & ENR
69
69
246
268
Wood Products
1,696
1,204
4,138
3,508
2,110
1,671
5,469
5,006
Intersegment sales:
Timberlands
107
125
350
381
Total sales
2,217
1,796
5,819
5,387
Intersegment eliminations
( 107
)
( 125
)
( 350
)
( 381
)
Total
$
2,110
$
1,671
$
5,469
$
5,006
Net contribution (charge) to earnings:
Timberlands
$
( 11
)
$
72
$
169
$
294
Real Estate & ENR
17
32
72
122
Wood Products
566
143
859
293
572
247
1,100
709
Unallocated items (1)
( 69
)
( 54
)
( 130
)
( 620
)
Net contribution to earnings
503
193
970
89
Interest expense, net of capitalized interest
( 111
)
( 91
)
( 299
)
( 289
)
Earnings (loss) before income taxes
392
102
671
( 200
)
Income taxes
( 109
)
( 3
)
( 166
)
138
Net earnings (loss)
$
283
$
99
$
505
$
( 62
)
(1)
Unallocated items are gains or charges not related to, or allocated to, an individual operating segment. They include all or a portion of items such as share-based compensation, pension and postretirement costs, elimination of intersegment profit in inventory and LIFO, foreign exchange transaction gains and losses, interest income and other as well as legacy obligations.
7
NOTE 3: REVENUE RECOGNITION
A reconciliation of revenue recognized by our major products:
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Net sales to unaffiliated customers:
Timberlands segment
Delivered logs:
West
Domestic sales
$
80
$
86
$
238
$
291
Export grade sales
83
86
281
280
Subtotal West
163
172
519
571
South
141
168
436
483
North (1)
13
24
37
70
Subtotal delivered logs sales
317
364
992
1,124
Stumpage and pay-as-cut timber
5
10
15
29
Recreational and other lease revenue
16
15
47
45
Other (2)
7
9
31
32
Net sales attributable to Timberlands segment
345
398
1,085
1,230
Real Estate & ENR segment
Real estate
49
45
192
200
Energy and natural resources
20
24
54
68
Net sales attributable to Real Estate & ENR segment
69
69
246
268
Wood Products segment
Structural lumber
819
487
1,865
1,426
Oriented strand board
290
159
659
475
Engineered solid section
135
138
373
388
Engineered I-joists
83
90
231
246
Softwood plywood
55
42
128
130
Medium density fiberboard
47
44
124
127
Complementary building products
183
162
505
466
Other (3)
84
82
253
250
Net sales attributable to Wood Products segment
1,696
1,204
4,138
3,508
Total net sales
$
2,110
$
1,671
$
5,469
$
5,006
(1)
In November 2019, we sold our Michigan timberlands and in March 2020, we sold our Montana timberlands.
(2)
Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips.
(3)
Other Wood Products sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.
NOTE 4: NET EARNINGS (LOSS) PER SHARE AND SHARE REPURCHASES
Our basic and diluted earnings (loss) per share were:
●
$ 0.38 during third quarter 2020 and $ 0.68 during year-to-date 2020;
●
$ 0.13 during third quarter 2019 and $( 0.08 ) during year-to-date 2019.
Basic earnings (loss) per share is net earnings (loss) divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued. Diluted earnings (loss) per share is net earnings (loss) divided by the sum of the weighted average number of our outstanding common shares and the effect of our outstanding dilutive potential common shares.
8
QUARTER ENDED
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Weighted average common shares outstanding – basic
746,996
745,626
746,809
745,901
Dilutive potential common shares:
Stock options
401
396
246
—
Restricted stock units
570
357
297
—
Performance share units
483
135
178
—
Total effect of outstanding dilutive potential common shares
1,454
888
721
—
Weighted average common shares outstanding – dilutive
748,450
746,514
747,530
745,901
We use the treasury stock method to calculate the dilutive effect of our outstanding stock options, restricted stock units and performance share units.
Potential Shares Not Included in the Computation of Diluted Earnings (Loss) per Share
The following shares were not included in the computation of diluted earnings (loss) per share because they were either antidilutive or the required performance or market conditions were not met. Some or all of these shares may be dilutive potential common shares in future periods.
QUARTER ENDED
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Stock options
2,260
2,384
2,260
2,755
Restricted stock units
—
—
—
358
Performance share units
729
959
729
1,054
Share Repurchase Program
On February 7, 2019, our board of directors approved and announced a new share repurchase program (the 2019 Repurchase Program) under which we are authorized to repurchase up to $ 500 million of outstanding shares. Concurrently, the board terminated the remaining repurchase authorization under the share repurchase program approved by the board in November 2015.
During year-to-date 2020, we did no t repurchase shares. During year-to-date 2019, we repurchased over 2.3 million common shares for approximately $ 60 million under the 2019 Repurchase Program. As of September 30, 2020, we had remaining authorization of approximately $ 440 million for future share repurchases. All common stock repurchases under the 2019 Repurchase Program were made in open-market transactions.
NOTE 5: INVENTORIES
Inventories include raw materials, work-in-process, finished goods, as well as materials and supplies.
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 30,
2020
DECEMBER 31,
2019
LIFO inventories:
Logs
$
14
$
19
Lumber, plywood, panels and fiberboard
64
82
Other products
8
10
Moving average cost or FIFO inventories:
Logs
49
28
Lumber, plywood, panels, fiberboard and engineered wood products
74
84
Other products
98
98
Materials and supplies
104
95
Total
$
411
$
416
LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. locations. The moving average cost method or FIFO – the first-in, first-out method – apply to the balance of our U.S. raw material and product inventories, all material and supply inventories and all foreign inventories.
NOTE 6: VARIABLE INTEREST ENTITIES
From 2002 through 2004, we sold certain nonstrategic timberlands. As a result of these sales, buyer-sponsored and monetization variable interest entities, or special purpose entities (SPEs), were formed. We were the primary beneficiary and consolidated the assets and liabilities of the SPEs involved in these transactions.
9
The assets of the buyer-sponsored SPEs were financial investments which consist ed of bank guarantees. These bank guarantees were in turn backed by bank notes, which were the liabilities of the monetization SPEs. Interest earned from the financial investments within the buyer-sponsored SPEs was used to pay interest accrued on the corresponding monetization SPE’s note.
During first quarter 2020, we received $ 362 million in proceeds from our final buyer-sponsored SPE at maturity. The corresponding $ 302 million in liabilities of this SPE was paid in third quarter 2019. During first quarter 2019, we received $ 253 million in proceeds from a buyer-sponsored SPE at maturity. The corresponding $ 209 million in liabilities of this SPE was paid in fourth quarter 2018.
NOTE 7: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of net periodic benefit cost are:
PENSION
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Service cost
$
9
$
8
$
27
$
24
Interest cost
35
39
104
122
Expected return on plan assets
( 59
)
( 54
)
( 175
)
( 170
)
Amortization of actuarial loss
31
27
92
85
Amortization of prior service cost
1
1
3
3
Settlement charge
—
—
—
449
Total net periodic benefit cost - pension
$
17
$
21
$
51
$
513
OTHER POSTRETIREMENT BENEFITS
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Interest cost
$
1
$
2
$
3
$
5
Amortization of actuarial loss
1
1
2
5
Amortization of prior service credit
( 1
)
( 1
)
( 1
)
( 4
)
Total net periodic benefit cost - other postretirement benefits
$
1
$
2
$
4
$
6
For the periods presented, service cost is included in “Costs of sales,” “Selling expenses,” and “General and administrative expenses” with the remaining components included in “Non-operating pension and other postretirement benefit costs” in the Consolidated Statement of Operations .
Actions to Reduce Pension Plan Obligations
As a part of our continued efforts to reduce pension plan obligations, we transferred approximately $ 1.5 billion of U.S. qualified pension plan assets and liabilities to an insurance company through the purchase of a group annuity contract in January 2019. In connection with this transaction, we recorded a preliminary noncash pretax settlement charge of $ 455 million during first quarter 2019, accelerating the recognition of previously unrecognized losses in “Accumulated other comprehensive loss”, that would have been recognized in subsequent periods. In second quarter 2019, we finalized the prior year-end fair value of pension plan assets and obligations, which reduced the settlement charge by $ 6 million for a final settlement charge of $ 449 million.
Fair Value of Pension Plan Assets and Obligations
In our year-end reporting process, we estimate the fair value of pension plan assets based upon the information available at that time. For certain assets, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year and market events. We update the year-end estimated fair value of pension plan assets in the second quarter of each year to incorporate final net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K.
During second quarter 2020, we recorded an increase to the beginning of the year fair value of the pension assets of $ 25 million, or less than 1 percent. We also updated our census data that is used to estimate our beginning of the year projected benefit obligation for our pension plans, which resulted in a projected benefit obligation increase of $ 11 million, or less than 1 percent. The net effect of these updates was a $ 14 million improvement in funded status as of December 31, 2019. This change in funded status was reflected on our second quarter 2020 Consolidated Balance Sheet .
10
NOTE 8: ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 30,
2020
DECEMBER 31,
2019
Compensation and employee benefit costs
$
187
$
188
Current portion of lease liabilities
30
33
Customer rebates, volume discounts and deferred income
122
105
Interest
86
98
Taxes payable
89
24
Other
103
82
Total
$
617
$
530
NOTE 9: LONG-TERM DEBT AND LINE OF CREDIT
In October 2020, we notified holders of our outstanding 4.625 percent notes due in September 2023 that we will redeem the entire aggregate principal amount outstanding in December 2020 . The amount of principal outstanding and the book value of the debt were approximately $ 500 million and $ 498 million, respectively, as of September 30, 2020. The total redemption price of the notes is expected to be approximately $ 560 million which reflects the make-whole premium due on early redemption.
In September 2020, we redeemed our $ 325 million 3.25 percent notes due in March 2023 . A pretax charge of $ 23 million was included in “Interest expense, net of capitalized interest” in the Consolidated Statement of Operations in third quarter 2020 for the make-whole premium in connection with the early extinguishment of the $325 million notes.
In March 2020, we issued $ 750 million of 4.00 percent notes due in April 2030 . The net proceeds after deducting the discount, underwriting fees and issuance costs were $ 732 million. In May 2020, a portion of the net proceeds was used to redeem our $ 569 million 4.70 percent notes due in March 2021 . A net pretax charge of $ 11 million was included in “Interest expense, net of capitalized interest” in the Consolidated Statement of Operations in second quarter 2020 for the make-whole premium in connection with the early extinguishment of the $569 million notes, partially offset by the write-off of an unamortized fair value step-up adjustment.
In February 2019, we issued $ 750 million of 4.00 percent notes due in November 2029 . The net proceeds after deducting the discount, underwriting fees and issuance costs were $ 739 million. In March 2019, a portion of the net proceeds was used to redeem our $ 500 million 7.38 percent notes due in October 2019 . A pretax charge of $ 12 million was included in "Interest expense, net of capitalized interest" in the Consolidated Statement of Operations in first quarter 2019 for the make-whole premium, unamortized debt issuance costs and unamortized debt discounts in connection with the early extinguishment of the $500 million notes.
In January 2020, we refinanced and extended our $ 1.5 billion five-year senior unsecured revolving credit facility, which now expires in January 2025 . Borrowings are at LIBOR plus a spread or at other interest rates mutually agreed upon between the borrower and the lending banks. We had no outstanding borrowings on our credit facility as of September 30, 2020. As of December 31, 2019, we had $ 230 million of outstanding borrowings on our credit facility.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt and line of credit consisted of the following:
SEPTEMBER 30,
2020
DECEMBER 31,
2019
DOLLAR AMOUNTS IN MILLIONS
CARRYING
VALUE
FAIR VALUE
(LEVEL 2)
CARRYING
VALUE
FAIR VALUE
(LEVEL 2)
Long-term debt (including current maturities) and line of credit:
Fixed rate
$
5,749
$
7,194
$
5,922
$
6,986
Variable rate
225
225
455
455
Total debt
$
5,974
$
7,419
$
6,377
$
7,441
To estimate the fair value of fixed rate long-term debt we used the market approach, which is based on quoted market prices we received for the same types and issues of our debt.
We believe that our variable rate long-term debt and line of credit instruments have net carrying values that approximate their fair values with only insignificant differences.
The inputs to these valuations are based on market data obtained from independent sources or information derived principally from observable market data. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at the measurement date.
Fair Value of Other Financial Instruments
We believe that our other financial instruments, including cash and cash equivalents, short-term investments, mutual fund investments held in grantor trusts, and receivables and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments and the allowance for doubtful accounts.
11
NOTE 11: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceeding that management believes could have a material adverse effect on our Consolidated Balance Sheet , Consolidated Statement of Operations or Consolidated Statement of Cash Flows .
Environmental Matters
Site Remediation
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) – commonly known as the “Superfund” – and similar state laws, we:
●
are a party to various proceedings related to the cleanup of hazardous waste sites and
●
have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated.
As of September 30, 2020, our total accrual for future estimated remediation costs on active Superfund sites and other sites for which we are potentially responsible was approximately $ 58 million. These amounts are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet .
Asset Retirement Obligations
We have obligations associated with the retirement of tangible long-lived assets consisting primarily of reforestation obligations related to forest management licenses in Canada and obligations to close and cap landfills. Some of our sites have asbestos containing materials. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when asbestos containing materials might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated. As of September 30, 2020, we had an asset retirement obligation reserve of $ 30 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet .
NOTE 12: ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in amounts included in our accumulated other comprehensive loss by component are:
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Pension (1)
Balance at beginning of period
$
( 1,060
)
$
( 972
)
$
( 1,128
)
$
( 1,343
)
Other comprehensive income (loss) before reclassifications
( 6
)
4
14
( 10
)
Amounts reclassified from accumulated other comprehensive loss to earnings (2)
24
21
72
406
Total other comprehensive income
18
25
86
396
Balance at end of period
$
( 1,042
)
$
( 947
)
$
( 1,042
)
$
( 947
)
Other Postretirement Benefits (1)
Balance at beginning of period
$
( 11
)
$
( 18
)
$
( 12
)
$
( 19
)
Other comprehensive income before reclassifications
1
—
1
—
Amounts reclassified from accumulated other comprehensive loss to earnings (2)
—
—
1
1
Total other comprehensive income
1
—
2
1
Balance at end of period
$
( 10
)
$
( 18
)
$
( 10
)
$
( 18
)
Translation Adjustments and Other
Balance at beginning of period
$
211
$
235
$
236
$
210
Translation adjustments
11
( 6
)
( 14
)
19
Total other comprehensive income (loss)
11
( 6
)
( 14
)
19
Balance at end of period
222
229
222
229
Accumulated other comprehensive loss, end of period
$
( 830
)
$
( 736
)
$
( 830
)
$
( 736
)
(1)
Amounts presented are net of tax.
(2)
Amounts of actuarial loss and prior service (cost) credit are components of net periodic benefit cost (credit). See Note 7: Pension and Other Postretirement Benefit Plans .
12
NOTE 13: SHARE-BASED COMPENSATION
Share-based compensation activity during year-to-date 2020 included the following:
SHARES IN THOUSANDS
GRANTED
VESTED
Restricted stock units (RSUs)
880
737
Performance share units (PSUs)
377
91
A total of 1.1 million shares of common stock were issued as a result of RSU vestings, PSU vestings and stock option exercises.
Restricted Stock Units
The weighted average fair value of the RSUs granted in 2020 was $ 28.92 . The vesting provisions for RSUs granted in 2020 were consistent with prior year grants.
Performance Share Units
The weighted average grant date fair value of PSUs granted in 2020 was $ 33.16 . The final number of shares granted in 2020 will range from 0 percent to 150 percent of each grant's target, depending upon actual company performance compared against an industry peer group. For prior year grants, company performance is measured against an industry peer group and the S&P 500. Beginning with PSUs granted in 2020, PSUs will vest at a maximum of 100 percent of target value in the event of negative absolute company total shareholder return.
Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2020
PERFORMANCE SHARE UNITS
Performance period
2/13/2020 – 12/31/2022
Valuation date average stock price (1)
$ 30.03
Expected dividends
4.50 %
Risk-free rate
1.45% – 1.62%
Expected volatility
20.02% – 22.40%
(1)
Calculated as an average of the high and low prices on grant date.
NOTE 14: PRODUCT REMEDIATION RECOVERIES
In July 2017, we announced we were implementing a solution to address concerns regarding our TJI® Joists coated with our former Flak Jacket® Protection product. This issue was isolated to Flak Jacket product manufactured after December 1, 2016 and did not affect any of our other products.
In third quarter 2019 and second quarter 2020, we received and recorded insurance recoveries of $ 68 million and $ 8 million, respectively, related to prior remediation efforts. These recoveries are attributable to our Wood Products segment and were recorded in "Product remediation recoveries" in the Consolidated Statement of Operations .
NOTE 15: TIMBERLAND ACQUISITIONS AND DIVESTITURES
Oregon Acquisition and Divestiture
On September 1, 2020, we announced an agreement to sell 149,000 acres of southern Oregon timberlands for $ 385 million and a separate agreement to purchase 85,000 acres of mid-coastal Oregon timberlands for $ 426 million. These transactions within our Timberlands business segment will be structured as a like-kind exchange for tax purposes. The two agreements are subject to customary closing conditions and are both expected to close in fourth quarter 2020.
The sale of southern Oregon timberlands is not considered a strategic shift that has, or will have, a major effect on our operations or financial results and therefore does not meet the requirements for presentation as discontinued operations. However, the related assets have met the relevant criteria to be classified as held for sale in the current period Consolidated Balance Sheet . This classification does not affect the presentation in the Consolidated Statement of Operations . The held for sale classification did change the presentation of the related assets from long-term to current on our Consolidated Balance Sheet . As of September 30, 2020, “Assets held for sale” had a balance of $ 199 million, which consisted primarily of timberlands and other related assets.
Montana Divestiture
On December 17, 2019, we announced an agreement to sell 630,000 acres of Montana timberlands, which was part of our Timberlands business segment. On March 26, 2020, we completed the sale for $ 145 million in cash proceeds, which is net of purchase price adjustments and closing costs. Due to the impairment recorded during fourth quarter 2019, no material gain or loss was recorded as a result of this sale.
The divestiture was not considered a strategic shift that had or will have a major effect on our operations or financial results and therefore did not meet the requirements for presentation as discontinued operations.
13
NOTE 16: OTHER OPERATING COSTS, NET
Other operating costs, net were comprised of the following:
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2020
SEPTEMBER 2019
SEPTEMBER 2020
SEPTEMBER 2019
Foreign exchange losses (gains), net
$
( 2
)
$
1
$
3
$
2
Litigation expense, net
7
25
9
59
Research and development expenses
1
1
4
4
Timber casualty loss
80
—
80
—
Other, net
6
6
17
20
Total other operating costs, net
$
92
$
33
$
113
$
85
Timber Casualty Loss
In September 2020, forest fires in the state of Oregon, commonly referred to as the Holiday Farm, Beachie Creek, Riverside, and Archie Creek fires, spread from adjacent lands onto portions of our Oregon timberland properties. Based on interpretation of satellite imagery and aerial photography, we estimate that the fires have had some impact on approximately 125,000 acres of our Oregon timberlands. Our initial assessments indicate that the extent of damage varies from tract to tract based on topographical conditions, rate of fire spread, age of the timber and other circumstances. Based on these initial assessments, we expect that the majority of merchantable timber, even if affected by the fires, is likely salvageable if we are able to harvest it within a reasonable period of time. We anticipate that the majority of pre-merchantable timber affected by the fires will not be able to be salvaged.
For the quarter ended September 30, 2020, we have recorded a timber casualty loss of $ 80 million which represents the estimated book value of timber and related assets that cannot be salvaged based on the information available at this time. The loss is attributable to our Timberlands segment and is recorded within “Other operating costs, net” in the Consolidated Statement of Operations . As salvage efforts continue and as we are able to complete on-site assessments of timber within the fire perimeter, it is reasonably possible that this estimate could increase by as much as $ 30 million to $ 40 million.
NOTE 17: INCOME TAXES
As a real estate investment trust (REIT), we generally are not subject to federal corporate income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our wholly-owned Taxable REIT Subsidiaries (TRSs), which includes our Wood Products segment earnings and portions of our Timberlands and Real Estate & ENR segments' earnings.
The quarterly provision for income taxes is based on our current estimate of the annual effective tax rate and is adjusted for discrete taxable events that have occurred during the year. Our 2020 estimated annual effective tax rate, excluding discrete items, differs from the U.S. federal statutory tax rate of 21 percent primarily due to tax benefits associated with our nontaxable REIT earnings and the projected mix of earnings between our REIT and our TRSs.
In July 2020, the Internal Revenue Service released final regulations which resolved uncertainties related to the deductible portion of our interest expense under the Tax Cuts and Jobs Act of 2017. Previously unrecognized tax benefits associated with this position were recognized in third quarter 2020, which favorably impacted our receivables for taxes and did not impact our effective tax rate.
NOTE 18: RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on our Consolidated Balance Sheet that sum to the total of the amounts shown in the Consolidated Statement of Cash Flows :
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 30,
2020
SEPTEMBER 30,
2019
Cash and cash equivalents
$
787
$
153
Restricted cash included in other assets (1)
53
—
Total cash, cash equivalents and restricted cash
$
840
$
153
(1)
Amounts included in restricted cash are primarily comprised of proceeds held by a qualified intermediary that are intended to be reinvested in timber and timberlands through a like-kind exchange transaction, as well as additional funds held in escrow related to this transaction.
14
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.