WEYERHAEUSER CO 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) NOTE ABOUT FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including but not limited to, our expectations concerning our future performance and the effects of the COVID-19 pandemic on the company’s business, results of operations, liquidity, cash flows and financial condition, the consummation of previously announced timberland transactions, as well as our plans and decisions relating to various capital expenditures, capital allocation priorities and other discretionary items, including but not limited to with respect to future dividend payments to our shareholders. Forward-looking statements generally are identified by words such as "anticipate," "believe," "continue," "estimate," "expect," "foreseeable," "future," "intend," "maintain," "may," "plan," "potential," "project," "should," "targeted," "will," and "would," and similar words and expressions. Forward-looking statements are based on our current expectations and assumptions. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to: ● the effect of general economic conditions, including employment rates, interest rate levels, housing starts, general availability of financing for home mortgages and the relative strength of the U.S. dollar; ● the effect of COVID-19 and other viral or disease outbreaks and their potential effects on our business, results of operations, cash flows, financial condition and future prospects; ● market demand for the company's products, including market demand for our timberland properties with higher and better uses, which is related to, among other factors, the strength of the various U.S. business segments and U.S. and international economic conditions; ● changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Japanese yen, the Chinese yuan, and the Canadian dollar, and the relative value of the euro to the yen; ● restrictions on international trade and tariffs imposed on imports or exports; ● the availability and cost of shipping and transportation; ● economic activity in Asia, especially Japan and China; ● performance of our manufacturing operations, including maintenance and capital requirements; ● potential disruptions in our manufacturing operations; ● the level of competition from domestic and foreign producers; ● our operational excellence initiatives; ● the successful and timely execution and integration of our strategic acquisitions, including our ability to realize expected benefits and synergies, and the successful and timely execution of our strategic divestitures, each of which is subject to a number of risks and conditions beyond our control including, but not limited to, timing, required regulatory approvals or the occurrence of any event, change or other circumstances that could give rise to a termination of any acquisition or divestiture transaction under the terms of the governing transaction agreements; ● raw material availability and prices; ● the effect of weather; ● changes in global or regional climate conditions and governmental response to such changes; ● the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters; ● energy prices; ● transportation and labor availability and costs; ● federal tax policies; ● the effect of forestry, land use, environmental and other governmental regulations; ● legal proceedings; ● performance of pension fund investments and related derivatives; ● the effect of timing of employee retirements and changes in the market price of our common stock on charges for share-based compensation; ● the accuracy of our estimates of costs and expenses related to contingent liabilities and charges related to casualty losses; ● changes in accounting principles; and ● other risks and uncertainties identified in our 2019 Annual Report on Form 10-K, as well as those set forth from time to time in our other public statements, reports, registration statements, prospectuses, information statements and other filings with the SEC. It is not possible to predict or identify all risks and uncertainties that might affect the accuracy of our forward-looking statements and, consequently, our descriptions of such risks and uncertainties should not be considered exhaustive. There is no guarantee that any of the events anticipated by these forward-looking statements will occur, and if any of the events do occur, there is no guarantee what effect they will have on the company's business, results of operations, cash flows, financial condition and future prospects. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. 15 RESULTS OF OPERATIONS In reviewing our results of operations, it is important to understand these terms: ● Sales realizations for Timberlands and Wood Products refer to net selling prices. This includes selling price plus freight, minus normal sales deductions. Real Estate transactions are presented at the contract sales price before commissions and closing costs, net of any credits. ● Net contribution to earnings does not include interest expense or income taxes. ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS Overview In mid-March, COVID-19 was officially declared a global pandemic by the World Health Organization and a national emergency was declared by the United States. States and municipalities subsequently began to issue shelter-in-place orders and similar mandates requiring those not engaged in essential activities to remain home. The U.S. Department of Homeland Security designated the forest products industry as an "essential critical infrastructure workforce," which recognizes the importance of timber and wood products operations in supporting critical infrastructure and construction projects and the manufacture of important personal hygiene items. In response to the pandemic, we began taking proactive steps in early March to safeguard the health of our employees. These actions include detailed cleaning and disinfecting procedures, strict processes around social distancing and personal hygiene, clear communication with our employees, contractors, vendors and visitors about our safety protocols, comprehensive guidance for response to any COVID-19 diagnoses or exposures in our operations, suspension of all air travel and non-essential meetings, and a directive that employees work from home if feasible. Based on the timing of the outbreak, the economic effects of the pandemic were less pronounced in the first quarter with a drop in U.S. gross domestic product (GDP) of 5 percent. The effects in the second quarter were more acute, with U.S. GDP declining 31 percent. In April, the national unemployment rate soared to a record-high of nearly 15 percent driven by the restrictions imposed in response to the pandemic. Unemployment gradually decreased over the following two months to 13 percent in May and 11 percent in June as several states began to reopen their economies and loosen restrictions on certain sectors. U.S. GDP increased 33 percent in the third quarter based on the advance estimate released by the U.S. Bureau of Economic Analysis, a notable rebound from the prior quarter. The national unemployment rate has shown similar signs of recovery during the quarter, dropping from 10 percent in July to below 8 percent in September. However, a growing share of the job losses are permanent in nature, as opposed to temporary layoffs, raising further concerns about the prospects of sustained economic recovery. Our second and third quarter 2020 market conditions exceeded expectations, with a record run-up in pricing for our commodity wood products. This pricing was driven by strong repair and remodel demand and a stronger-than-expected U.S. housing market, resulting in demand that significantly outpaced available supply. However, there is still uncertainty as to our market conditions for the remainder of the year, which will be influenced by the trajectory of COVID-19 infections and the related impact on economic activity, including changes in the unemployment rate and the nature and extent of future government stimulus. Business Outlook The demand for sawlogs within our Timberlands segment is directly affected by domestic production of wood-based building products. The strength of the U.S. housing market, especially new residential construction, strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Our Timberlands segment, specifically the Western region, is also affected by export demand and trade policy. Japanese housing starts are a key driver of export log demand in Japan. The demand for pulpwood from our Timberlands segment is directly affected by the production of pulp, paper and oriented strand board as well as the demand for biofuels, such as pellets made from pulpwood. Third quarter new residential construction activity increased significantly compared with the prior quarter. On a seasonally adjusted annual basis, housing starts as reported by the U.S. Census Bureau for the third quarter 2020 averaged 1.43 million, which was 33 percent above second quarter 2020. Single family starts averaged 1.04 million units, a 36 percent improvement over second quarter 2020 and 16 percent higher than third quarter 2019. Multi-family starts averaged 390 thousand units in third quarter 2020, which was 24 percent higher than second quarter 2020 and 1 percent higher than third quarter 2019. Sales of newly built, single family homes averaged a seasonally adjusted annual rate of 973 thousand units for the third quarter of 2020, an increase of 38 percent from the prior quarter average of 703 thousand units. Additionally, the National Association of Home Builders Housing Market Index, which measures builder confidence in the market for newly built single family homes in the U.S., reported a historic high of 83 points in September. In repair and remodel markets, stay at home behavior has bolstered do-it-yourself activity, contributing to increased sales at building supply stores and overall repair and remodeling demand. According to the Census Bureau Advance Retail Spending report, building material and garden supply store sales increased 17 percent in third quarter 2020 compared with the same quarter a year ago, suggesting continued strength in the remodeling market through the third quarter. In U.S. wood product markets, demand and pricing for commodity products increased sharply throughout the quarter, and benchmark pricing for lumber and oriented strand board reached record highs in September 2020. The Random Lengths Framing Lumber Composite price averaged $746/MBF in third quarter 2020, an 84 percent increase from second quarter 2020. The Oriented Strand Board Composite indicator price also increased significantly, averaging $585/MSF in third quarter 2020, a 99 percent increase from second quarter 2020. To date, fourth quarter benchmark pricing for lumber has declined from its record high levels in September. Fourth quarter to date benchmark pricing for oriented strand board has held firm. In Western log markets, Douglas fir sawlog prices increased 10 percent in third quarter 2020 compared with second quarter 2020 as reported by RISI Log Lines. We experienced significant wildfire activity in the West during the third quarter which impacted our Oregon timberlands and restricted harvest activity. The resulting impacts to the supply chain and log prices from these wildfires and subsequent salvage operations remains to be seen. In the South, delivered sawlog prices decreased slightly compared with second quarter 2020 with a two percent change in price as reported by TimberMart-South. We continue to expect our full year Southern timber harvest volumes will be approximately 10 percent below 2019 harvest levels, as we reduced 2020 harvest volumes in light of the economic effects of the COVID-19 pandemic. Exchange rates, available supply from other countries and trade policy affect our export businesses. In Japan, total housing starts year to date through August 2020 declined 11 percent compared to the same period in 2019. A comparable decline was observed for the key Post and Beam segment. The decline in year over year housing starts is likely due to an increase in the consumption tax which came into effect in October 2019, as well as the impacts of the COVID-19 pandemic. 16 Export log prices to China decreased by 6 percent on average in third quarter 2020 over second quarter 2020, as reported by RISI Log Lines. Chinese economic activity and log demand improved in the third quarter as the impacts of COVID-19 remained limited. L og supply to China ’s main ocean ports was higher as shipment volumes from New Zealand and Europe increased following second quarter disruptions related to COVID-19. Softwood log inventories at China’s main ocean ports remained flat through the third quarter. Our Real Estate & ENR segment is affected by the health of the U.S. economy. According to the Realtors Land Institute (RLI) of the National Association of Realtors, the dollar volume of rural properties sold increased by 2.2 percent in 2019 over 2018, and per acre prices grew 2.1 percent on average. Based on RLI’s 2019 Land Market Survey published in January 2020, these trends are expected to continue with prices and volumes of land transactions forecasted to rise 2.2 percent and timberland sales expected to rise 1.5 percent in 2020. Demand for rural properties has remained solid in 2020, although COVID-19-related restrictions are delaying the financing and closing of some land transactions. CONSOLIDATED RESULTS How We Did Third Quarter 2020 and Year-to-Date 2020 QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Net sales $ 2,110 $ 1,671 $ 439 $ 5,469 $ 5,006 $ 463 Costs of sales 1,390 1,399 (9 ) 4,055 4,111 (56 ) Operating income 510 202 308 993 562 431 Net earnings (loss) 283 99 184 505 (62 ) 567 Earnings (loss) per share, basic and diluted 0.38 0.13 0.25 0.68 (0.08 ) 0.76 Comparing Third Quarter 2020 with Third Quarter 2019 Net sales Net sales increased $439 million – 26 percent – primarily due to a $492 million increase i n Wood Products sales to unaffiliated customers attributable to increased sales realizations across most product lines. This increase was partially offset by a $53 million decrease in Timberlands sales to unaffiliated customers, primarily due to decreased sales volumes across all regions. Costs of sales Costs of sales decreased $9 million – 1 percent – primarily due to decreased log sales volumes within our Timberlands segment partially offset by increased real estate acres sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Timberlands , Real Estate, Energy and Natural Resources and Wood Products discussions below. Operating income Operating income increased $308 million – 152 percent – primarily due to a $448 million increase in consolidated gross margin (see discussion of components above). This increase was partially offset by an $80 million timber casualty loss recorded related to the Oregon wildfires (refer to Note 16: Other Operating Costs, Net ) and a $68 million product remediation insurance recovery recorded in third quarter 2019, with no similar activity in third quarter 2020 (refer to Note 14: Product Remediation Recoveries ). Net earnings (loss) Net earnings increased $184 million – 186 percent – primarily due to the $308 million increase in operating income, as discussed above. This increase was partially offset by a $106 million increase in income tax expense and a $20 million increase in interest expense (refer to Income Taxes and Interest Expense ). Comparing Year-to-Date 2020 with Year-to-Date 2019 Net sales Net sales increased $463 million – 9 percent – primarily due to a $630 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations for our structural lumber and oriented strand board products. This increase was partially offset by a $145 million decrease in Timberlands sales to unaffiliated customers, primarily attributable to decreased sales volumes across all regions, as well as a $22 million decrease in Real Estate & ENR net sales to unaffiliated customers, primarily due to decreased oil and gas prices. 17 Costs of sales Costs of sales decreased $56 million – 1 percent – primarily due to decreased log sales volumes within our Timberlands segment. This decrease was partially offset by i ncreased real estate acres sold, as well as increased basis per acre sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Timberlands , Real Estate, Energy and Natural Resources and Wood Products discussions below. Operating income Operating income increased $431 million – 77 percent – primarily due to a $519 million increase in consolidated gross margin (see discussion of components above). This increase was partially offset by a $60 million decrease in product remediation insurance recoveries (r efer to Note 14: Product Remediation Recoveries ) and a $28 million increase in other operating costs, net attributable to an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires, partially offset by a reduction in legal charges (refer to Note 16: Other Operating Costs, Net ). Net earnings (loss) Net earnings increased $567 million – 915 percent – primarily due to: ● a $467 million decrease in non-operating pension and other postretirement benefit costs (refer to Note 7: Pension and Other Postretirement Benefit Plans ) and ● a $431 million increase in operating income, as discussed above. These changes were partially offset by a $304 million change in income taxes, from a $138 million benefit year-to-date 2019, to a $166 million income tax charge for year-to-date 2020 (refer to Income Taxes ), as well as a $17 million decrease in interest income and other. TIMBERLANDS How We Did Third Quarter 2020 and Year-to-Date 2020 QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Net sales to unaffiliated customers: Delivered logs: West $ 163 $ 172 $ (9 ) $ 519 $ 571 $ (52 ) South 141 168 (27 ) 436 483 (47 ) North (1) 13 24 (11 ) 37 70 (33 ) Subtotal delivered logs sales 317 364 (47 ) 992 1,124 (132 ) Stumpage and pay-as-cut timber 5 10 (5 ) 15 29 (14 ) Recreational and other lease revenue 16 15 1 47 45 2 Other (2) 7 9 (2 ) 31 32 (1 ) Subtotal net sales to unaffiliated customers 345 398 (53 ) 1,085 1,230 (145 ) Intersegment sales 107 125 (18 ) 350 381 (31 ) Total sales $ 452 $ 523 $ (71 ) $ 1,435 $ 1,611 $ (176 ) Costs of sales $ 358 $ 429 $ (71 ) $ 1,116 $ 1,247 $ (131 ) Operating income (loss) and Net contribution (charge) to earnings $ (11 ) $ 72 $ (83 ) $ 169 $ 294 $ (125 ) (1) In November 2019, we sold our Michigan timberlands and in March 2020, we sold our Montana timberlands. (2) Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips. Comparing Third Quarter 2020 with Third Quarter 2019 Net sales to unaffiliated customers Net sales to unaffiliated customers decreased $53 million – 13 percent – primarily due to: ● a $27 million decrease in Southern log sales attributable to a 13 percent decrease in sales volumes, as well as a 4 percent decrease in sales realizations; ● an $11 million decrease in Northern log sales attributable to a 46 percent decrease in sales volumes due to the divestitures of our Michigan and Montana timberlands and ● a $9 million decrease in Western log sales attributable to a 14 percent decrease in sales volumes, partially offset by a 10 percent increase in sales realizations. 18 Intersegment sales Intersegment sales decreased $18 million – 14 percent – primarily due to a 22 percent decrease in intersegment log sales volumes, partially offset by a 10 percent increase in intersegment log sales realizations. Costs of sales Costs of sales decreased $71 million – 17 percent – primarily due to decreases in log sales volumes across all regions, as discussed above. Operating income (loss) and Net contribution (charge) to earnings Operating income (loss) and net contribution (charge) to earnings decreased $83 million – 115 percent – primarily due to an $80 million timber casualty loss related to the Oregon wildfires recorded in third quarter 2020 with no similar activity in the same period in 2019. Comparing Year-to-Date 2020 with Year-to-Date 2019 Net sales to unaffiliated customers Net sales to unaffiliated customers decreased $145 million – 12 percent – primarily due to: ● a $52 million decrease in Western log sales attributable to an 11 percent decrease in sales volumes, partially offset by a 3 percent increase in sales realizations; ● a $47 million decrease in Southern log sales attributable to a 6 percent decrease in sales volumes, as well as a 4 percent decrease in sales realizations and ● a $33 million decrease in Northern log sales attributable to a 47 percent decrease in sales volumes due to the divestitures of our Michigan and Montana timberlands. Intersegment sales Intersegment sales decreased $31 million – 8 percent – primarily due to a 10 percent decrease in intersegment log sales volumes, partially offset by a 3 percent increase in intersegment log sales realizations. Costs of sales Costs of sales decreased $131 million – 11 percent – primarily due to decreases in log sales volumes across all regions, as discussed above. Operating income and Net contribution to earnings Operating income and net contribution to earnings decreased $125 million – 43 percent – primarily due to an $80 million timber casualty loss related to the Oregon wildfires recorded in year-to-date 2020 with no similar activity for the same period in 2019, as well as the change in the components of gross margin, as discussed above. Third-Party Log Sales Volumes and Fee Harvest Volumes QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE VOLUMES IN THOUSANDS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Third-party log sales – tons: West (1) 1,489 1,729 (240 ) 4,887 5,513 (626 ) South 4,185 4,795 (610 ) 12,857 13,694 (837 ) North (2) 234 429 (195 ) 631 1,186 (555 ) Total 5,908 6,953 (1,045 ) 18,375 20,393 (2,018 ) Fee harvest volumes – tons: West (1) 1,911 2,183 (272 ) 6,457 7,023 (566 ) South 5,596 6,802 (1,206 ) 17,640 19,661 (2,021 ) North (2) 321 560 (239 ) 901 1,565 (664 ) Total 7,828 9,545 (1,717 ) 24,998 28,249 (3,251 ) (1) Western logs are primarily transacted in thousand board feet (MBF) but are converted to ton equivalents for external reporting purposes. (2) In November 2019, we sold our Michigan timberlands and in March 2020, we sold our Montana timberlands. 19 REAL ESTATE, ENERGY AND NATURAL RESOURCES How We Did Third Quarter 2020 and Year-to-Date 2020 QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Net sales: Real estate $ 49 $ 45 $ 4 $ 192 $ 200 $ (8 ) Energy and natural resources 20 24 (4 ) 54 68 (14 ) Total $ 69 $ 69 $ — $ 246 $ 268 $ (22 ) Costs of sales $ 46 $ 32 $ 14 $ 156 $ 127 $ 29 Operating income and Net contribution to earnings $ 17 $ 32 $ (15 ) $ 72 $ 122 $ (50 ) The volume of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding. In any period, the average sales price per acre will vary based on the location and physical characteristics of parcels sold. Comparing Third Quarter 2020 with Third Quarter 2019 Net sales Net sales remained consistent due to a minimal increase in real estate sales, offset by an equal decrease in energy and natural resources sales. Costs of sales Costs of sales increased $14 million – 44 percent – primarily due to increased real estate acres sold. Operating income and Net contribution to earnings Operating income and net contribution to earnings decreased $15 million – 47 percent – primarily due to the change in the components of gross margin, as discussed above. Comparing Year-to-Date 2020 with Year-to-Date 2019 Net sales Net sales decreased $22 million – 8 percent – primarily due to lower oil and gas prices, as well as decreased energy and natural resources sales volumes. Costs of sales Costs of sales increased $29 million – 23 percent – primarily due to increased real estate acres sold, as well as increased basis per acre sold. Operating income and Net contribution to earnings Operating income and net contribution to earnings decreased $50 million – 41 percent – primarily due to the change in the components of gross margin, as discussed above. REAL ESTATE SALES STATISTICS QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Acres sold 34,917 18,057 16,860 111,228 103,922 7,306 Average price per acre $ 1,381 $ 2,415 $ (1,034 ) $ 1,662 $ 1,806 $ (144 ) 20 WOOD PRODUCTS How We Did Third Quarter 2020 and Year-to-Date 2020 QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Net sales: Structural lumber $ 819 $ 487 $ 332 $ 1,865 $ 1,426 $ 439 Oriented strand board 290 159 131 659 475 184 Engineered solid section 135 138 (3 ) 373 388 (15 ) Engineered I-joists 83 90 (7 ) 231 246 (15 ) Softwood plywood 55 42 13 128 130 (2 ) Medium density fiberboard 47 44 3 124 127 (3 ) Complementary building products 183 162 21 505 466 39 Other products produced (1) 84 82 2 253 250 3 Total $ 1,696 $ 1,204 $ 492 $ 4,138 $ 3,508 $ 630 Costs of sales $ 1,075 $ 1,067 $ 8 $ 3,112 $ 3,104 $ 8 Operating income and Net contribution to earnings $ 566 $ 143 $ 423 $ 859 $ 293 $ 566 (1) Other products produced sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations. Comparing Third Quarter 2020 with Third Quarter 2019 Net sales Net sales increased $492 million – 41 percent – primarily due to: ● a $332 million increase in structural lumber sales attributable to a 73 percent increase in sales realizations, partially offset by a 3 percent decrease in sales volumes; ● a $131 million increase in oriented strand board sales attributable to an 85 percent increase in sales realizations, partially offset by a 1 percent decrease in sales volumes; ● a $21 million increase in complementary building products sales attributable to increased sales volumes and ● a $13 million increase in softwood plywood sales attributable to a 47 percent increase in sales realizations, partially offset by a 12 percent decrease in sales volumes. These increases were partially offset by a $7 million decrease in sales for engineered I-joists and a $3 million decrease in sales for engineered solid section. Costs of sales Costs of sales increased $8 million – 1 percent – primarily due to increased Canadian timberlands and Distribution costs, partially offset by decreased sales volumes. Operating income and Net contribution to earnings Operating income and net contribution to earnings increased $423 million – 296 percent – primarily due to the change in the components of gross margin, as discussed above, partially offset by a $68 million decrease in product remediation insurance recoveries. Comparing Year-to-Date 2020 with Year-to-Date 2019 Net sales Net sales increased $630 million – 18 percent – primarily due to: ● a $439 million increase in structural lumber sales attributable to a 31 percent increase in sales realizations; ● a $184 million increase in oriented strand board sales attributable to a 35 percent increase in sales realizations, as well as a 3 percent increase in sales volumes and ● a $39 million increase in complementary building products sales attributable to increased sales volumes. These increases were partially offset by a $15 million decrease in sales for engineered solid section and a $15 million decrease in sales for engineered I-joists. Costs of sales Cost of sales increased $8 million – less than 1 percent – primarily due to a minimal 1 percent increase in total sales volumes. 21 Operating income and Net contribution to earnings Operating income and net contribution to earnings increased $566 million – 193 percent – primarily due to the change in the components of gross margin, as discussed above, partially offset by a $60 million decrease in product remediation insurance recoveries. Third-Party Sales Volumes QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE VOLUMES IN MILLIONS (1) SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Structural lumber – board feet 1,216 1,253 (37 ) 3,663 3,660 3 Oriented strand board – square feet (3/8”) 736 740 (4 ) 2,253 2,190 63 Engineered solid section – cubic feet 6.3 6.3 — 17.4 17.6 (0.2 ) Engineered I-joists – lineal feet 51 54 (3 ) 140 147 (7 ) Softwood plywood – square feet (3/8”) 107 121 (14 ) 315 351 (36 ) Medium density fiberboard – square feet (3/4”) 55 53 2 147 152 (5 ) (1) Sales volumes include sales of internally produced products and products purchased for resale primarily through our distribution business. PRODUCTION AND OUTSIDE PURCHASE VOLUMES Outside purchase volumes are primarily purchased for resale through our distribution business. Production volumes are produced for sale through our own sales organizations and through our distribution business. Production of oriented strand board and engineered solid section are also used to manufacture engineered I-joists. QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE VOLUMES IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Structural lumber – board feet: Production 1,170 1,189 (19 ) 3,487 3,527 (40 ) Outside purchase 55 69 (14 ) 164 182 (18 ) Total 1,225 1,258 (33 ) 3,651 3,709 (58 ) Oriented strand board – square feet (3/8”): Production 759 747 12 2,278 2,212 66 Outside purchase 77 93 (16 ) 228 262 (34 ) Total 836 840 (4 ) 2,506 2,474 32 Engineered solid section – cubic feet: Production 5.4 5.3 0.1 16.8 17.2 (0.4 ) Outside purchase 0.2 0.2 — 0.4 0.4 — Total 5.6 5.5 0.1 17.2 17.6 (0.4 ) Engineered I-joists – lineal feet: Production 43 47 (4 ) 128 139 (11 ) Outside purchase 3 4 (1 ) 8 8 — Total 46 51 (5 ) 136 147 (11 ) Softwood plywood – square feet (3/8”): Production 94 100 (6 ) 267 302 (35 ) Outside purchase 17 21 (4 ) 47 56 (9 ) Total 111 121 (10 ) 314 358 (44 ) Medium density fiberboard – square feet (3/4"): Production 57 47 10 148 153 (5 ) Total 57 47 10 148 153 (5 ) 22 UNALLOCATED ITEMS Unallocated items are gains or charges not related to, or allocated to, an individual operating segment. They include all or a portion of items such as share-based compensation, pension and postretirement costs, elimination of intersegment profit in inventory and LIFO, foreign exchange transaction gains and losses, interest income and other as well as legacy obligations. Net Charge to Earnings – Unallocated Items QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Unallocated corporate function and variable compensation expense $ (36 ) $ (19 ) $ (17 ) $ (78 ) $ (50 ) $ (28 ) Liability classified share-based compensation (5 ) (1 ) (4 ) 1 (5 ) 6 Foreign exchange gain (loss) 2 (1 ) 3 (3 ) (2 ) (1 ) Elimination of intersegment profit in inventory and LIFO (9 ) 6 (15 ) (4 ) (4 ) — Other (14 ) (30 ) 16 (23 ) (86 ) 63 Operating loss (62 ) (45 ) (17 ) (107 ) (147 ) 40 Non-operating pension and other postretirement benefit costs (9 ) (15 ) 6 (28 ) (495 ) 467 Interest income and other 2 6 (4 ) 5 22 (17 ) Net charge to earnings $ (69 ) $ (54 ) $ (15 ) $ (130 ) $ (620 ) $ 490 Comparing Third Quarter 2020 with Third Quarter 2019 Net charge to earnings increased $15 million – 28 percent – primarily due to: ● a $17 million increase in unallocated corporate function and variable compensation expense and ● a $15 million increase in elimination of intersegment profit in inventory and LIFO. These increases were partially offset by a $16 million decrease in Other, primarily due to a reduction in legal charges. Comparing Year-to-Date 2020 with Year-to-Date 2019 Net charge to earnings decreased $490 million – 79 percent – primarily due to: ● a $449 million noncash pension settlement charge recorded during year-to-date 2019, with no similar activity in 2020 (refer to Note 7: Pension and Other Postretirement Benefit Plans for further information); ● a $12 million legal benefit recognized during year-to-date 2020 and ● a $6 million decrease in expense related to liability classified share-based compensation attributable to a decrease in our stock price for the year-to-date period ended September 30, 2020 compared to an increase for the same period in 2019. INTEREST EXPENSE Our interest expense, net of capitalized interest, was: ● $111 million for third quarter 2020 and $299 million year-to-date 2020; ● $91 million for third quarter 2019 and $289 million year-to-date 2019. Interest expense increased by $20 million compared to third quarter 2019 primarily due to a $23 million charge related to the early extinguishment of debt recorded in third quarter 2020. Interest expense increased by $10 million compared to year-to-date 2019 primarily due to a $22 million increase in charges related to the early extinguishment of debt. This increase was partially offset by $12 million of expense on SPE notes recorded during year-to-date 2019, with no similar activity in 2020. Refer to Note 9: Long-Term Debt and Line of Credit for further information. INCOME TAXES Our provision for income taxes was: ● a $109 million expense for third quarter 2020 and a $166 million expense year-to-date 2020; ● a $3 million expense for third quarter 2019 and a $138 million benefit year-to-date 2019. 23 Our provision for income taxes is primarily driven by earnings (losses) generated by our TRSs . Income tax expense increased by $ 304 million compared to year-to-date 2019 primarily due to the $109 million tax benefit recognized in 2019 related to our noncash pension settlement charge and stronger current year-to-date earnings. Overall performance results for our business segments can be found in Consolidated Results . Refer to Note 17: Income Taxes and Note 7: Pension and Other Postretirement Benefit Plans for further information. LIQUIDITY AND CAPITAL RESOURCES We are committed to maintaining an appropriate capital structure that provides flexibility and enables us to protect the interests of our shareholders and meet our obligations to our lenders, while also maintaining access to all major financial markets. As of September 30, 2020, we have $787 million in cash and cash equivalents and $1.5 billion of availability on our line of credit, which expires in January 2025. We believe we have sufficient liquidity to meet our cash requirements for the foreseeable future. In light of the significant uncertainty regarding the duration and magnitude of the effects of the COVID-19 pandemic on our business and our customers, in May 2020, as part of several steps taken to enhance and preserve liquidity and financial flexibility, the board of directors temporarily suspended the quarterly cash dividend. The board has continued to evaluate the company’s cash flow, liquidity, leverage, customer demand, market conditions, the broader macroeconomic environment, and other factors in assessing opportunities to reinitiate the quarterly cash dividend. Based upon its most recent evaluation of these factors, the board has approved the reinitiation of the company’s quarterly cash dividend within a new implementation framework. Under this new framework, the company intends to pay a quarterly base cash dividend beginning in the fourth quarter 2020 that will be supported by cash flows from the Timberlands and Real Estate, Energy and Natural Resources segments. This base dividend may be supplemented by a variable cash dividend and potential opportunistic share repurchases, as needed, to achieve the company’s targeted annual total return of cash to shareholders. For the fourth quarter 2020, the base cash dividend declared by the board was $0.17 per share. The board will continue to evaluate the cash dividend on a quarterly basis based on this framework and the other factors outlined above. CASH FROM OPERATIONS Consolidated net cash from operations was: ● $1,085 million for year-to-date 2020 and ● $674 million for year-to-date 2019. Net cash from operations increased $411 million, primarily due to: ● increased cash inflows from our business segments and ● decreased cash used for interest payments. CASH FROM INVESTING ACTIVITIES Consolidated net cash from investing activities was: ● $311 million for year-to-date 2020 and ● $32 million for year-to-date 2019. Net cash from investing activities increased $279 million, primarily due to: ● $145 million of proceeds from the sale of our Montana timberlands during first quarter 2020; ● a $109 million increase in proceeds received from variable interest entities and ● a $41 million decrease in cash paid for capital expenditures for property and equipment. Summary of Capital Spending by Business Segment YEAR-TO-DATE ENDED DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 Timberlands $ 75 $ 79 Wood Products 124 148 Unallocated Items — 14 Total $ 199 $ 241 We expect our net capital expenditures for 2020 will be approximately $280 million. The amount we spend on capital expenditures could change. CASH FROM FINANCING ACTIVITIES Consolidated net cash from financing activities was: ● $(695) million for year-to-date 2020 and ● $(887) million for year-to-date 2019. Net cash from financing activities increased $192 million, primarily due to: 24 ● a $506 million decrease in cash paid for dividends ; ● a $302 million decrease in cash paid related to our monetized SPEs and ● a $60 million decrease in cash used for share repurchases. These changes were partially offset by a $424 million increase in cash used for payments on long-term debt and a $245 million increase in net cash payments related to borrowings on our line of credit. Line of Credit We had no outstanding borrowings on our credit facility as of September 30, 2020. As of December 31, 2019, we had $230 million of outstanding borrowings on our $1.5 billion five-year senior unsecured revolving credit facility. This credit facility expires in January 2025. Refer to Note 9: Long-Term Debt and Line of Credit for further information. Long-Term Debt In September 2020, we redeemed our $ 325 million 3.25 percent notes due in March 2023. In March 2020, we issued $750 million of 4.00 percent notes due in April 2030. The net proceeds after deducting the discount, underwriting fees and issuance costs were $732 million. In May 2020, a portion of the net proceeds was used to redeem our $569 million 4.70 percent notes due in March 2021. In February 2019, we issued $750 million of 4.00 percent notes due in November 2029. The net proceeds after deducting the discount, underwriting fees, and issuance costs were $739 million. In March 2019, a portion of the net proceeds was used to redeem our outstanding $500 million 7.38 percent notes due in October 2019. Refer to Note 9: Long-Term Debt and Line of Credit for further information. Our revolving credit agreement and our term loan agreement utilize the London Inter-bank Offered Rate (LIBOR) as a basis for one of the interest rate options available to the company to apply to outstanding borrowings. LIBOR is expected to be discontinued at some point during 2021, and we are closely monitoring ongoing market developments in the identification or creation of a widely accepted replacement rate. We have included provisions in our new revolving credit agreement that specifically contemplate the transition from LIBOR to a replacement benchmark rate. In July 2020, we amended our term loan agreement primarily to include provisions that address the future discontinuance of LIBOR and set forth the process for transition to an alternate benchmark rate. As of September 30, 2020, of our $6.0 billion of long-term debt, only $225 million in term loan borrowings are governed by a debt agreement that utilizes LIBOR as one of the alternative applicable rates. We therefore do not believe that the discontinuation of LIBOR as a reference rate in our debt agreements will have a material adverse effect on our financial position or materially affect our interest expense. Debt Covenants As of September 30, 2020, Weyerhaeuser Company was in compliance with its debt covenants. There have been no significant changes to the debt covenants presented in our 2019 Annual Report on Form 10-K for our existing long-term debt instruments, and we expect to remain in compliance with our debt covenants for the foreseeable future. Option Exercises We received cash proceeds from the exercise of stock options of: ● $9 million for year-to-date 2020 and ● $8 million for year-to-date 2019. Our average stock price was $24.67 and $25.57 for year-to-date 2020 and 2019, respectively. Dividend Payments We paid cash dividends on common shares of: ● $254 million for year-to-date 2020 and ● $760 million for year-to-date 2019. This decrease in dividends paid is due to the temporary suspension of the quarterly dividend that was announced in second quarter 2020. Share Repurchases During year-to-date 2020, we did not repurchase shares. During year-to-date 2019, we repurchased over 2.3 million common shares for approximately $60 million under the 2019 Repurchase Program. There were no unsettled repurchases as of September 30, 2020 or December 31, 2019. Refer to Note 4: Net Earnings (Loss) Per Share and Share Repurchases for further information. PERFORMANCE MEASURES Adjusted EBITDA by Segment We use adjusted earnings before interest, taxes, depreciation, depletion and amortization (Adjusted EBITDA) as a key performance measure to evaluate the performance of the consolidated company and our business segments. This measure should not be considered in isolation from, and is not intended to represent an alternative to, our results reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, we believe 25 Adjusted EBITDA provides meaningful supplemental information for investors about our operating performance, better facilitates period to period comparisons and is widely used by analysts, lenders, rating agencies and other interested parties. Our definition of Adjusted EBITDA may be different from similarly titled measures reported by other companies. Adjusted EBITDA, as we define it, is operating income adjusted for depreciation, depletion, amortization, basis of real estate sold and special items. QUARTER ENDED AMOUNT OF CHANGE YEAR-TO-DATE ENDED AMOUNT OF CHANGE DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 SEPTEMBER 2020 SEPTEMBER 2019 2020 VS. 2019 Adjusted EBITDA by Segment: Timberlands $ 130 $ 154 $ (24 ) $ 443 $ 522 $ (79 ) Real Estate & ENR 60 60 — 218 237 (19 ) Wood Products 615 123 492 997 366 631 805 337 468 1,658 1,125 533 Unallocated Items (60 ) (29 ) (31 ) (114 ) (109 ) (5 ) Adjusted EBITDA $ 745 $ 308 $ 437 $ 1,544 $ 1,016 $ 528 We reconcile Adjusted EBITDA to net earnings (loss) for the consolidated company and to operating income (loss) for the business segments, as those are the most directly comparable U.S. GAAP measures for each. The table below reconciles Adjusted EBITDA for the quarter ended September 30, 2020: DOLLAR AMOUNTS IN MILLIONS Timberlands Real Estate & ENR Wood Products Unallocated Items Total Adjusted EBITDA by Segment: Net earnings $ 283 Interest expense, net of capitalized interest (1) 111 Income taxes 109 Net contribution (charge) to earnings $ (11 ) $ 17 $ 566 $ (69 ) $ 503 Non-operating pension and other postretirement benefit costs — — — 9 9 Interest income and other — — — (2 ) (2 ) Operating income (loss) (11 ) 17 566 (62 ) 510 Depreciation, depletion and amortization 61 3 49 2 115 Basis of real estate sold — 40 — — 40 Special items included in operating income (loss) (2) 80 — — — 80 Adjusted EBITDA $ 130 $ 60 $ 615 $ (60 ) $ 745 (1) Interest expense, net of capitalized interest includes a pretax special item of $23 million related to a charge for the early extinguishment of debt. (2) Operating income (loss) includes a pretax special item consisting of an $80 million timber casualty loss . 26 The table below reconciles Adjusted EBITDA for the quarter ended September 30, 2019: DOLLAR AMOUNTS IN MILLIONS Timberlands Real Estate & ENR Wood Products Unallocated Items Total Adjusted EBITDA by Segment: Net earnings $ 99 Interest expense, net of capitalized interest 91 Income taxes 3 Net contribution (charge) to earnings $ 72 $ 32 $ 143 $ (54 ) $ 193 Non-operating pension and other postretirement benefit costs — — — 15 15 Interest income and other — — — (6 ) (6 ) Operating income (loss) 72 32 143 (45 ) 202 Depreciation, depletion and amortization 82 4 48 1 135 Basis of real estate sold — 24 — — 24 Special items included in operating income (loss) (1) — — (68 ) 15 (53 ) Adjusted EBITDA $ 154 $ 60 $ 123 $ (29 ) $ 308 ( 1 ) Operating income (loss) includes pretax special items consisting of a $68 million product remediation insurance recovery within Wood Products and a $15 million legal charge within Unallocated Items. The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2020: DOLLAR AMOUNTS IN MILLIONS Timberlands Real Estate & ENR Wood Products Unallocated Items Total Adjusted EBITDA by Segment: Net earnings $ 505 Interest expense, net of capitalized interest (1) 299 Income taxes 166 Net contribution (charge) to earnings $ 169 $ 72 $ 859 $ (130 ) $ 970 Non-operating pension and other postretirement benefit costs — — — 28 28 Interest income and other — — — (5 ) (5 ) Operating income (loss) 169 72 859 (107 ) 993 Depreciation, depletion and amortization 194 10 146 5 355 Basis of real estate sold — 136 — — 136 Special items included in operating income (loss) (2) 80 — (8 ) (12 ) 60 Adjusted EBITDA $ 443 $ 218 $ 997 $ (114 ) $ 1,544 (1) Interest expense, net of capitalized interest includes pretax special items of $34 million related to charges for the early extinguishment of debt. (2) Operating income (loss) includes pretax special items consisting of a $12 million noncash legal benefit within Unallocated Items, an $8 million product remediation insurance recovery within Wood Products and an $80 million timber casualty loss within Timberlands. 27 The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2019 : DOLLAR AMOUNTS IN MILLIONS Timberlands Real Estate & ENR Wood Products Unallocated Items Total Adjusted EBITDA by Segment: Net loss $ (62 ) Interest expense, net of capitalized interest (1) 289 Income taxes (138 ) Net contribution (charge) to earnings $ 294 $ 122 $ 293 $ (620 ) $ 89 Non-operating pension and other postretirement benefit costs (2) — — — 495 495 Interest income and other — — — (22 ) (22 ) Operating income (loss) 294 122 293 (147 ) 562 Depreciation, depletion and amortization 228 10 141 3 382 Basis of real estate sold — 105 — — 105 Special items included in operating income (loss) (3) — — (68 ) 35 (33 ) Adjusted EBITDA $ 522 $ 237 $ 366 $ (109 ) $ 1,016 (1) Interest expense, net of capitalized interest includes a pretax special item of $12 million related to a charge for the early extinguishment of debt. (2) Non-operating pension and other postretirement benefit costs includes a pretax special item consisting of a $449 million noncash settlement charge related to the transfer of approximately $1.5 billion of U.S. qualified pension plan assets and liabilities to an insurance company through the purchase of a group annuity contract. (3) Operating income (loss) includes pretax special items consisting of a $68 million product remediation insurance recovery within Wood Products and $35 million of legal charges within Unallocated Items. Net Earnings and Net Earnings per Diluted Share Before Special Items We use net earnings before special items and net earnings per diluted share before special items as key performance measures to evaluate the performance of the consolidated company. These measures should not be considered in isolation from, and are not intended to represent an alternative to, our results reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, we believe the measures provide meaningful supplemental information for investors about our operating performance, better facilitate period to period comparisons and are widely used by analysts, lenders, rating agencies and other interested parties. Net Earnings Before Special Items QUARTER ENDED YEAR-TO-DATE ENDED DOLLAR AMOUNTS IN MILLIONS SEPTEMBER 2020 SEPTEMBER 2019 SEPTEMBER 2020 SEPTEMBER 2019 Net earnings (loss) $ 283 $ 99 $ 505 $ (62 ) Early extinguishment of debt charges 23 — 34 9 Legal charges (benefits) — 11 (12 ) 26 Pension settlement charges — — — 340 Product remediation recoveries — (51 ) (6 ) (51 ) Timber casualty loss 80 — 80 — Net earnings before special items $ 386 $ 59 $ 601 $ 262 Net Earnings per Diluted Share Before Special Items QUARTER ENDED YEAR-TO-DATE ENDED SEPTEMBER 2020 SEPTEMBER 2019 SEPTEMBER 2020 SEPTEMBER 2019 Net earnings (loss) per diluted share $ 0.38 $ 0.13 $ 0.68 $ (0.08 ) Early extinguishment of debt charges 0.03 — 0.05 0.01 Legal charges (benefits) — 0.02 (0.02 ) 0.04 Pension settlement charges — — — 0.46 Product remediation recoveries — (0.07 ) (0.01 ) (0.07 ) Timber casualty loss 0.11 — 0.11 — Net earnings per diluted share before special items $ 0.52 $ 0.08 $ 0.81 $ 0.36 28 CRITICAL ACCOUNTING POLICIES There have been no significant changes during year-to-date 2020 to the critical accounting policies presented in our 2019 Annual Report on Form 10-K.