NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS ENDED
MARCH 31,
2017
AND
2016
NOTE 1: BASIS OF PRESENTATION
We are a corporation that has elected to be taxed as a real estate investment trust (REIT). We expect to derive most of our REIT income from investments in timberlands, including the sale of standing timber. As a REIT, we generally are not subject to federal corporate level income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our taxable REIT subsidiaries (TRSs), which includes our Wood Products segment and portions of our Timberlands and Real Estate, Energy and Natural Resources (Real Estate & ENR) segments.
Our consolidated financial statements provide an overall view of our results and financial condition. They include our accounts and the accounts of entities we control, including:
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•
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majority-owned domestic and foreign subsidiaries and
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•
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variable interest entities in which we are the primary beneficiary.
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They do not include our intercompany transactions and accounts, which are eliminated.
We account for investments in and advances to unconsolidated equity affiliates using the equity method, with taxes provided on undistributed earnings. This means that we record earnings and accrue taxes in the period earnings are recognized by our unconsolidated equity affiliates.
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, 2016
. Results of operations for interim periods should not necessarily be regarded as indicative of the results that may be expected for the full year.
RECLASSIFICATIONS
We have reclassified certain balances and results from the prior year to be consistent with our
2017
reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on consolidated net earnings or equity.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, a comprehensive new revenue recognition model that requires an entity to recognize revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, which deferred the effective date for an additional year. In March 2016, FASB issued ASU 2016-08, which does not change the core principle of the guidance; however, it does clarify the implementation guidance on principal versus agent considerations. In April 2016, FASB issued ASU 2016-10, which clarifies two aspects of ASU 2014-09: identifying performance obligations and the licensing implementation guidance. In May 2016, FASB issued ASU 2016-12, which amends ASU 2014-09
to provide improvements and practical expedients to the new revenue recognition model. In December 2016, the FASB issued ASU 2016-20, which amends ASU 2014-09 for technical corrections and to correct for unintended application of the guidance. Finally, in February 2017, FASB issued ASU 2017-05, which clarifies the scope of ASC 610-20 and impacts accounting for partial sales of nonfinancial assets.
The company expects to adopt and implement the new revenue recognition guidance effective January 1, 2018. The new standard is required to be applied retrospectively to each prior reporting period presented (full retrospective transition method) or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application (cumulative effect method). We expect to adopt using the cumulative effect method. We expect that the adoption of the new revenue recognition guidance will not materially impact our operating results, balance sheet, cash flows or financial reporting aside from adding expanded disclosures.
In July 2015, FASB issued ASU 2015-11, which simplifies the measurement of inventories valued under most methods, including our inventories valued under FIFO – the first-in, first-out – and moving average cost methods. Inventories valued under LIFO – the last-in, first-out method – are excluded. Under this new guidance, inventories valued under these methods would be valued at the lower of cost or net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. The new guidance is effective prospectively for fiscal periods starting after December 15, 2016, and early adoption is permitted. We adopted on January 1, 2017, and determined this pronouncement does not have a material impact on our consolidated financial statements and related disclosures.
In February 2016, FASB issued ASU 2016-02, which requires lessees to recognize assets and liabilities for the rights and obligations created by those leases and requires both capital and operating leases to be recognized on the balance sheet. The new guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. We expect to adopt on January 1, 2019, and are evaluating the impact on our consolidated financial statements and related disclosures.
In October 2016, FASB issued ASU 2016-16, which requires immediate recognition of the income tax consequences upon intra-entity transfers of assets other than inventory. The new guidance is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. We adopted this accounting standard on January 1, 2017. As a result of this adoption, our opening balance sheet was adjusted through retained earnings to include a deferred tax asset of
$22 million
for prior period intra-entity transfers. Adoption of this standard did not have a material impact on our
Consolidated Statement of Cash Flows
or
Consolidated Statement of Operations
.
In March 2017, FASB issued ASU 2017-07, which requires that an employer report the service cost component of pension and other postretirement benefit costs in the
Consolidated Statement of Operations
in the same line item or items as other compensation costs arising from services rendered by the pertinent employees. This requirement is consistent with how we have historically presented our pension service costs. The other requirement of this ASU is to present the remaining components of pension and other postretirement benefit costs (i.e., interest, expected return on plan assets, amortization of actuarial gains or losses, and amortization of prior service credits or costs) in the
Consolidated Statement of Operations
separately from the service cost component and outside a subtotal of income from operations. The new guidance is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. We have adopted this accounting standard as of January 1, 2017. As a result, we have reclassified amounts related to other components of pension and other post retirement benefit costs from their prior financial statements captions ("Costs of products sold," "General and administrative expenses," and "Other operating costs (income), net") into a new financial statement caption titled "Non-operating pension and other postretirement benefit (costs) credits" in our
Consolidated Statement of Operations
. The adoption of this ASU does not impact "Net earnings," nor does it impact our
Consolidated Balance Sheet
.
NOTE 2: BUSINESS SEGMENTS
Reportable business segments are determined based on the company’s management approach. The management approach, as defined by FASB ASC 280, “Segment Reporting,” is based on the way the chief operating decision maker organizes the segments within a company for making decisions about resources to be allocated and assessing their performance.
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 reserves of minerals, oil, gas, coal, and other natural resources on our timberlands. The following is a brief description of each of our reportable business segments and activities:
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Timberlands – which includes logs, timber and leased recreational access;
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•
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Real Estate & ENR – which includes sales of timberlands; rights to explore for and extract hard minerals, oil and gas production and coal; and equity interests in our Real Estate Development Ventures (as defined and described in
Note 7: Related Parties
); and
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•
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Wood Products – which includes softwood lumber, engineered wood products, structural panels, medium density fiberboard and building materials distribution.
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Discontinued operations as presented herein consist of the operations of our former Cellulose Fibers segment. All periods presented have been revised to separate the results of discontinued operations from the results of our continuing operations
.
Refer to
Note 3: Discontinued Operations
for more information regarding our discontinued operations.
On October 12, 2016, we announced the exploration of strategic alternatives for our timberlands and manufacturing operations in Uruguay. We intend to consider a broad range of alternatives, including continuing to hold and operate the business, or a sale. The related assets and liabilities of our Uruguay operations have not met the criteria for classification as "held for sale" and are not included in our results of discontinued operations.
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QUARTER ENDED
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DOLLAR AMOUNTS IN MILLIONS
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MARCH 2017
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MARCH 2016
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Sales to unaffiliated customers:
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Timberlands
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$
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486
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$
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387
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Real Estate & ENR
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53
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39
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Wood Products
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1,154
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979
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1,693
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|
1,405
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Intersegment sales:
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Timberlands
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202
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222
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Wood Products
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—
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22
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202
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244
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Total sales
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1,895
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1,649
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Intersegment eliminations
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(202
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)
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(244
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)
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Total
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$
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1,693
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$
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1,405
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Net contribution to earnings:
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Timberlands
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$
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148
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$
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129
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Real Estate & ENR
(1)
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26
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15
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Wood Products
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172
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87
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346
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231
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Unallocated items
(2)
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(66
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)
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|
(64
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)
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Net contribution to earnings
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280
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167
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Interest expense, net of capitalized interest
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(99
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)
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(95
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)
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Earnings from continuing operations before income taxes
|
181
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|
|
72
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|
Income taxes
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(24
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)
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(11
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)
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Earnings from continuing operations
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157
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|
61
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|
Earnings from discontinued operations, net of income taxes
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—
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20
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Net earnings
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157
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81
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Dividends on preference shares
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—
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(11
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)
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Net earnings attributable to Weyerhaeuser common shareholders
|
$
|
157
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$
|
70
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(1)
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The Real Estate & ENR segment includes the equity earnings from, investments in and advances to our Real Estate Development Ventures (as defined and described in
Note 7: Related Parties
), which are accounted for under the equity method.
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(2)
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Unallocated items are gains or charges not related to or allocated to an individual operating segment. They include a portion of items such as: share-based compensation, pension and postretirement costs, foreign exchange transaction gains and losses associated with financing, the elimination of intersegment profit in inventory and the LIFO reserve. As a result of reclassifying our former Cellulose Fibers segment as discontinued operations, Unallocated items also includes retained indirect corporate overhead costs previously allocated to the former segment. Additionally, amounts shown for 2016 include equity earnings from our former Timberland Venture. As of August 31, 2016, the Timberland Venture became a fully consolidated, wholly-owned subsidiary and therefore eliminated our equity method investment at that time.
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NOTE 3:
DISCONTINUED OPERATIONS
During 2016, we entered into three separate transactions to sell our Cellulose Fibers business. As a result of these transactions, the company recognized a pretax gain on disposition of
$789 million
and total cash proceeds of
$2.5 billion
in the second half of 2016. These transactions consisted of:
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sale of our Cellulose Fibers liquid packaging board business to Nippon Paper Industries Co., Ltd, which closed on August 31, 2016;
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•
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sale of our Cellulose Fibers printing papers joint venture to One Rock Capital Partners, LLC, which closed on November 1, 2016; and
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•
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sale of our Cellulose Fibers pulp business to International Paper, which closed on December 1, 2016.
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The results of operations for our pulp and liquid packaging board businesses, along with our interest in our printing papers joint venture, were reclassified to discontinued operations during our 2016 reporting year. These results have been summarized in "Earnings from discontinued operations, net of income taxes" on our
Consolidated Statement of Operations
for each period presented. We did not reclassify our
Consolidated Statement of Cash Flows
to reflect discontinued operations.
The following table presents net earnings from discontinued operations. As all discontinued operations were sold in 2016, no assets or liabilities remain as of
March 31, 2017
or
December 31, 2016
.
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QUARTER ENDED
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DOLLAR AMOUNTS IN MILLIONS
|
MARCH 2016
|
Total net sales
|
$
|
430
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Costs of products sold
|
386
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Gross margin
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44
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Selling expenses
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4
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General and administrative expenses
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9
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Research and development expenses
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1
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Charges for integration and restructuring, closures and asset impairments
(1)
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6
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Other operating income, net
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(9
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)
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Operating income
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33
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|
Equity loss from joint venture
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(2
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)
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Interest expense, net of capitalized interest
|
(2
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)
|
Earnings from discontinued operations before income taxes
|
29
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|
Income taxes
|
(9
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)
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Net earnings from discontinued operations
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$
|
20
|
|
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(1)
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Charges for integration and restructuring, closures and asset impairments consist of costs related to our strategic evaluation of the Cellulose Fibers businesses and transaction-related costs.
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Cash flows from discontinued operations for the
three
months ended
March 31, 2016
are as follows:
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QUARTER ENDED
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 2016
|
Net cash provided by (used in) operating activities
|
$
|
66
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|
Net cash provided by (used in) investing activities
|
$
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(22
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)
|
NOTE 4:
MERGER WITH PLUM CREEK
On February 19, 2016, we merged with Plum Creek Timber Company, Inc. (Plum Creek). Plum Creek was a REIT that primarily owned and managed timberlands in the United States. Plum Creek also produced wood products, developed opportunities for mineral and other natural resource extraction, and sold real estate properties.
The acquisition of total assets of
$10.0 billion
was a noncash investing and financing activity comprised of
$6.4 billion
in equity consideration transferred and
$3.6 billion
of liabilities assumed.
Summarized unaudited pro forma information that presents combined amounts as if this merger occurred at the beginning of 2016 is as follows:
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QUARTER ENDED
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DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
|
MARCH 2016
|
Net sales
|
$
|
1,561
|
|
Net earnings from continuing operations attributable to Weyerhaeuser common shareholders
|
$
|
144
|
|
Earnings from continuing operations per share attributable to Weyerhaeuser common shareholders, basic and diluted
|
$
|
0.18
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Pro forma net earnings attributable to Weyerhaeuser common shareholders exclude
$131 million
non-recurring merger-related costs (net of tax) incurred in the quarter ended
March 31, 2016
. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.
NOTE 5: NET EARNINGS PER SHARE AND SHARE REPURCHASES
NET EARNINGS PER SHARE
Our basic and diluted earnings per share attributable to Weyerhaeuser shareholders were:
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•
|
$0.21
during
first
quarter
2017
and
|
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•
|
$0.11
during
first
quarter
2016
.
|
Basic earnings per share is net earnings available to common shareholders 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 per share is net earnings available to common shareholders divided by the sum of the weighted average number of our outstanding common shares and the effect of our outstanding dilutive potential common shares:
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|
QUARTER ENDED
|
SHARES IN THOUSANDS
|
MARCH 2017
|
|
MARCH 2016
|
Weighted average number of outstanding common shares – basic
|
750,665
|
|
|
632,004
|
|
Dilutive potential common shares:
|
|
|
|
Stock options
|
2,981
|
|
|
2,060
|
|
Restricted stock units
|
547
|
|
|
409
|
|
Performance share units
|
554
|
|
|
399
|
|
Total effect of outstanding dilutive potential common shares
|
4,082
|
|
|
2,868
|
|
Weighted average number of outstanding common shares – dilutive
|
754,747
|
|
|
634,872
|
|
We use the treasury stock method to calculate the dilutive effect of our outstanding stock options, restricted stock units and performance share units. Share-based payment awards that are contingently issuable upon the achievement of specified performance or market conditions are included in our diluted earnings per share calculation in the period in which the conditions are satisfied.
We issued
13.8 million
6.375 percent
Mandatory Convertible Preference Shares, Series A on
June 24, 2013
, the majority of which remained outstanding through June 30, 2016. Preference Shares outstanding during the quarter ended March 31, 2016, were considered antidilutive and were not considered participating. On July 1, 2016, all outstanding
6.375 percent
Mandatory Convertible Preference Shares, Series A (Preference Shares) converted into Weyerhaeuser common shares at a rate of
1.6929
Weyerhaeuser common shares per Preference Share. There were
no
preference shares outstanding as of March 31, 2017.
Potential Shares Not Included in the Computation of Diluted Earnings per Share
The following shares were not included in the computation of diluted earnings 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.
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|
QUARTER ENDED
|
SHARES IN THOUSANDS
|
MARCH 2017
|
|
MARCH 2016
|
Stock options
|
1,432
|
|
|
6,215
|
|
Performance share units
|
568
|
|
|
534
|
|
Preference shares
|
—
|
|
|
25,307
|
|
STOCK REPURCHASE PROGRAM
The 2016 Share Repurchase Authorization was approved in November 2015 by our Board of Directors and authorized management to repurchase up to
$2.5 billion
of outstanding shares. During
first
quarter
2017
, we did not repurchase any shares. As of
March 31, 2017
, we had remaining authorization of
$500 million
for future stock repurchases.
NOTE 6: INVENTORIES
Inventories include raw materials, work-in-process and finished goods.
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|
|
|
|
|
|
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 31,
2017
|
|
DECEMBER 31,
2016
|
LIFO Inventories:
|
|
|
|
|
|
Logs
|
$
|
12
|
|
|
$
|
18
|
|
Lumber, plywood and panels
|
60
|
|
|
51
|
|
Other products
|
24
|
|
|
20
|
|
FIFO or moving average cost inventories:
|
|
|
|
|
|
Logs
|
41
|
|
|
21
|
|
Lumber, plywood, panels and engineered wood products
|
76
|
|
|
71
|
|
Other products
|
85
|
|
|
92
|
|
Materials and supplies
|
88
|
|
|
85
|
|
Total
|
$
|
386
|
|
|
$
|
358
|
|
LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. domestic locations. The FIFO – the first-in, first-out method – or moving average cost methods apply to the balance of our domestic raw material and product inventories as well as for all material and supply inventories and all foreign inventories. If we used FIFO for all LIFO inventories, our stated inventories would have been higher by
$71 million
as of
March 31, 2017
, and
December 31, 2016
.
NOTE 7:
RELATED PARTIES
This note provides details about our transactions with related parties. Our related parties consist of:
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|
•
|
our Real Estate Development Ventures, which are accounted for using the equity method and
|
|
|
•
|
our Twin Creeks Venture.
|
Real Estate Development Ventures
WestRock-Charleston Land Partners, LLC (WR-CLP) is a limited liability company which holds residential and commercial real estate development properties, currently under development (Class A Properties) and higher-value timber and development lands (Class B Properties) (referred to collectively as the Real Estate Development Ventures). Our share of the equity earnings are included in the net contribution to earnings of our Real Estate & ENR segment.
The carrying amount of our investment in WR-CLP is
$56 million
at
March 31, 2017
and
December 31, 2016
. We record our share of net earnings within "Equity earnings from joint ventures" in our
Consolidated Statement of Operations
in the period which earnings are recorded by the affiliates. We did not have any equity earnings from joint ventures during
first
quarter
2017
.
Twin Creeks Venture
On April 1, 2016, we contributed approximately
260,000
acres of our southern timberlands with an agreed-upon value of approximately
$560 million
to Twin Creeks Timber, LLC (Twin Creeks Venture), in exchange for cash of approximately
$440 million
and a
21 percent
ownership interest.
In conjunction with contributing to the venture, we entered into a separate agreement to manage the timberlands owned by the Twin Creeks Venture, including harvesting activities, marketing and log sales activities, and replanting and silviculture activities. This management agreement guarantees the Twin Creeks Venture an annual return equal to
3 percent
of the contributed value of the managed timberlands in the form of minimum quarterly payments from Weyerhaeuser. We are also required to annually distribute
75 percent
of any profits earned by us in excess of the minimum quarterly payments. The management agreement is cancellable at any time by Twin Creeks Timber, LLC, and otherwise will expire on April 1, 2019.
Changes in our "Deposit from contribution of timberlands to related party" balance during
first
quarter
2017
were as follows:
|
|
|
|
|
DOLLAR AMOUNTS IN MILLIONS
|
|
Balance at December 31, 2016
|
$
|
426
|
|
Lease payments to Twin Creeks Venture
|
(5
|
)
|
Distributions from Twin Creeks Venture
|
1
|
|
Balance at March 31, 2017
|
$
|
422
|
|
NOTE 8: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of net periodic benefit costs (credits) are:
|
|
|
|
|
|
|
|
|
|
PENSION
|
|
QUARTER ENDED
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 2017
|
|
MARCH 2016
|
Service cost
(1)
|
$
|
10
|
|
|
$
|
13
|
|
Interest cost
|
66
|
|
|
68
|
|
Expected return on plan assets
|
(102
|
)
|
|
(123
|
)
|
Amortization of actuarial loss
|
55
|
|
|
38
|
|
Amortization of prior service cost
|
1
|
|
|
1
|
|
Accelerated pension costs included in Plum Creek merger-related costs
(Note 15)
|
—
|
|
|
5
|
|
Total net periodic benefit cost - pension
|
$
|
30
|
|
|
$
|
2
|
|
|
|
(1)
|
Service cost includes
$4 million
for the quarter ended
March 31, 2016
, for employees that were part of our Cellulose Fibers divestitures. These charges are included in our results of discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
OTHER POSTRETIREMENT BENEFITS
|
|
QUARTER ENDED
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 2017
|
|
MARCH 2016
|
Interest cost
|
$
|
2
|
|
|
$
|
2
|
|
Amortization of actuarial loss
|
2
|
|
|
2
|
|
Amortization of prior service credit
|
(2
|
)
|
|
(2
|
)
|
Total net periodic benefit cost - other postretirement benefits
|
$
|
2
|
|
|
$
|
2
|
|
FAIR VALUE OF PENSION PLAN ASSETS AND OBLIGATION
We estimate the fair value of pension plan assets based upon the information available during the year-end reporting process. In some cases, 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 to incorporate year-end net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K. We expect to complete the valuation of our pension plan assets during second quarter
2017
. The final adjustments could affect net pension periodic benefit cost.
EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS
In
2017
we expect to:
|
|
•
|
be required to contribute approximately
$19 million
for our Canadian registered plan;
|
|
|
•
|
be required to contribute or make benefit payments for our Canadian nonregistered plans of
$3 million
;
|
|
|
•
|
make benefit payments of
$26 million
for our U.S. nonqualified pension plans; and
|
|
|
•
|
make benefit payments of
$21 million
for our U.S. and Canadian other postretirement plans.
|
We do not anticipate making a contribution to our U.S. qualified pension plans for
2017
.
NOTE 9: ACCRUED LIABILITIES
Accrued liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 31,
2017
|
|
DECEMBER 31,
2016
|
Wages, salaries and severance pay
|
$
|
97
|
|
|
$
|
178
|
|
Pension and other postretirement benefits
|
48
|
|
|
49
|
|
Vacation pay
|
36
|
|
|
33
|
|
Taxes – Social Security and real and personal property
|
25
|
|
|
20
|
|
Interest
|
89
|
|
|
120
|
|
Customer rebates and volume discounts
|
25
|
|
|
39
|
|
Deferred income
|
30
|
|
|
40
|
|
Accrued income taxes
|
31
|
|
|
139
|
|
Other
|
71
|
|
|
74
|
|
Total
|
$
|
452
|
|
|
$
|
692
|
|
NOTE 10:
LINES OF CREDIT
During March 2017, we entered into a new
$1.5 billion
five-year senior unsecured revolving credit facility that expires in
March 2022
. This replaces a
$1 billion
senior unsecured revolving credit facility that was set to expire
September 2018
. The entire amount is available to Weyerhaeuser Company. Borrowings are at LIBOR plus a spread or at other interest rates mutually agreed upon between the borrower and the lending banks. There were
no
borrowings or repayments under our available credit facilities in
first
quarter
2017
.
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARCH 31,
2017
|
|
|
DECEMBER 31,
2016
|
DOLLAR AMOUNTS IN MILLIONS
|
CARRYING
VALUE
|
|
FAIR VALUE
(LEVEL 2)
|
|
|
CARRYING
VALUE
|
|
FAIR VALUE
(LEVEL 2)
|
|
Long-term debt (including current maturities):
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
$
|
6,057
|
|
|
$
|
7,017
|
|
|
|
$
|
6,061
|
|
|
$
|
6,925
|
|
|
Variable rate
|
549
|
|
|
550
|
|
|
|
549
|
|
|
550
|
|
|
Total Debt
|
$
|
6,606
|
|
|
$
|
7,567
|
|
|
|
$
|
6,610
|
|
|
$
|
7,475
|
|
|
To estimate the fair value of fixed rate long-term debt, we used the following valuation approaches:
|
|
•
|
market approach – based on quoted market prices we received for the same types and issues of our debt; or
|
|
|
•
|
income approach – based on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt.
|
We believe that our variable rate long-term debt 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, 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.
NOTE 12: 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 long-term consolidated financial position, results of operations or cash flows. See
Note 17: Income Taxes
for a discussion of a tax proceeding involving Plum Creek REIT's 2008 U.S. federal income tax return.
ENVIRONMENTAL MATTERS
Site Remediation
Under the 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.
|
We have received notification from the Environmental Protection Agency (the EPA) and have acknowledged that we are a potentially responsible party in a portion of the Kalamazoo River Superfund site in southwest Michigan. Our involvement in the remediation site is based on our former ownership of the Plainwell, Michigan mill located within the remediation site. Several other companies also operated upstream pulp mills within the remediation site. We are currently cooperating with the other parties to jointly implement an administrative order issued by the EPA on April 14, 2016 with respect to a portion of the site comprising a stretch of the river approximately 1.7 miles long referred to as the Otsego Township Dam Area. We do not expect to incur material losses related to the implementation of this administrative order; however, we may incur additional costs, as yet not specified, in connection with remediation tasks resulting from other areas of the site. The company, along with others, was named as a defendant by Georgia-Pacific Consumer Products LP, Fort James Corporation and Georgia Pacific LLC in an action seeking contribution under CERCLA for remediation costs relating to the site. The trial has been concluded but a decision on cost contribution and allocation has not yet been rendered by the Court.
As of
March 31, 2017
, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately
$48 million
. These reserves are recorded in "Accrued liabilities" (current) and "Other liabilities" (noncurrent) 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. As of
March 31, 2017
, our accrued balance for these obligations was
$31 million
. These obligations are recorded in
"Accrued liabilities" (current) and "Other liabilities" (noncurrent) on our
Consolidated Balance Sheet
. The accruals have not changed materially since the end of
2016
.
Some of our sites have materials containing asbestos. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when materials containing asbestos might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.
NOTE 13: CUMULATIVE OTHER COMPREHENSIVE INCOME (LOSS)
Changes in amounts included in our cumulative other comprehensive income (loss) by component are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PENSION
|
OTHER POSTRETIREMENT BENEFITS
|
|
|
DOLLAR AMOUNTS IN MILLIONS
|
Foreign currency translation adjustments
|
Actuarial losses
|
Prior service costs
|
Actuarial losses
|
Prior service credits
|
Unrealized gains on available-for-sale securities
|
Total
|
Beginning balance as of December 31, 2016
|
$
|
232
|
|
$
|
(1,651
|
)
|
$
|
(9
|
)
|
$
|
(67
|
)
|
$
|
29
|
|
$
|
7
|
|
$
|
(1,459
|
)
|
Other comprehensive income (loss) before reclassifications
|
2
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
1
|
|
1
|
|
Income taxes
|
—
|
|
(6
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
(6
|
)
|
Net other comprehensive income (loss) before reclassifications
|
2
|
|
(8
|
)
|
—
|
|
—
|
|
—
|
|
1
|
|
(5
|
)
|
Amounts reclassified from cumulative other comprehensive income (loss)
(1)
|
—
|
|
55
|
|
1
|
|
2
|
|
(2
|
)
|
—
|
|
56
|
|
Income taxes
|
—
|
|
(19
|
)
|
(1
|
)
|
(1
|
)
|
1
|
|
—
|
|
(20
|
)
|
Net amounts reclassified from cumulative other comprehensive income (loss)
|
—
|
|
36
|
|
—
|
|
1
|
|
(1
|
)
|
—
|
|
36
|
|
Total other comprehensive income (loss)
|
2
|
|
28
|
|
—
|
|
1
|
|
(1
|
)
|
1
|
|
31
|
|
Ending balance as of March 31, 2017
|
$
|
234
|
|
$
|
(1,623
|
)
|
$
|
(9
|
)
|
$
|
(66
|
)
|
$
|
28
|
|
$
|
8
|
|
$
|
(1,428
|
)
|
|
NOTE 14: SHARE-BASED COMPENSATION
Share-based compensation activity in
first
quarter
2017
included the following:
|
|
|
|
|
|
|
SHARES IN THOUSANDS
|
Granted
|
|
Vested
|
Restricted Stock Units (RSUs)
|
763
|
|
|
662
|
|
Performance Share Units (PSUs)
|
348
|
|
|
142
|
|
A total of
2.9 million
shares of common stock were issued as a result of RSU vesting, PSU vesting and stock option exercises.
RESTRICTED STOCK UNITS
The weighted average fair value of the RSUs granted in
2017
was
$32.79
. The vesting provisions for RSUs granted in
2017
were as follows:
|
|
•
|
vest ratably over four years;
|
|
|
•
|
immediately vest in the event of death while employed or disability;
|
|
|
•
|
continue to vest upon retirement at an age of at least 62, but a portion of the grant forfeits if retirement occurs before the one year anniversary of the grant;
|
|
|
•
|
continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and
|
|
|
•
|
will forfeit upon termination of employment in all other situations including early retirement prior to age 62.
|
PERFORMANCE SHARE UNITS
The weighted average grant date fair value of PSUs granted in
2017
was
$37.93
.
The final number of shares granted in
2017
will range from
0 percent
to
150 percent
of each grant's target, depending upon actual company performance.
The ultimate number of PSUs earned is based on two measures:
|
|
•
|
our relative total shareholder return (TSR) ranking measured against the S&P 500 over a three year period and
|
|
|
•
|
our relative TSR ranking measured against an industry peer group of companies over a three year period.
|
The vesting provisions for PSUs granted in
2017
were as follows:
|
|
•
|
vest 100 percent on the third anniversary of the grant date as long as the individual remains employed by the company;
|
|
|
•
|
fully vest in the event the participant dies or becomes disabled while employed;
|
|
|
•
|
continue to vest upon retirement at an age of at least 62, but a portion of the grant forfeits if retirement occurs before the one year anniversary of the grant;
|
|
|
•
|
continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met and the employee has met the second anniversary of the grant date; and
|
|
|
•
|
will forfeit upon termination of employment in all other situations including early retirement prior to age 62.
|
Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in
2017
|
|
|
|
|
|
|
|
|
Performance Share Units
|
Performance period
|
1/1/2017 - 12/31/2019
|
|
Valuation date average stock price
(1)
|
$
|
32.79
|
|
Expected dividends
|
3.74
|
%
|
Risk-free rate
|
0.68
|
%
|
–
|
1.55
|
%
|
Expected volatility
|
22.71
|
%
|
–
|
24.07
|
%
|
(1) Calculated as an average of the high and low prices on grant date.
STOCK OPTIONS
We did not grant any stock options in
first
quarter
2017
and do not expect any grants to occur during the remainder of
2017
.
STOCK APPRECIATION RIGHTS
We did not grant any stock appreciation rights in
first
quarter
2017
and do not expect any grants to occur during the remainder of
2017
.
VALUE MANAGEMENT AWARDS
Value Management Awards (VMAs) are relative performance equity incentive awards granted to certain former employees of Plum Creek and assumed by the company in connection with the Plum Creek merger. In accordance with the terms of the merger, all VMAs outstanding on December 31, 2017 will vest at “target” level performance of
$100
per unit and will be paid in the first quarter of 2018. The VMAs are classified and accounted for as liabilities, as they will be settled in cash upon vesting. The expense recognized over the remaining performance period will equal the cash value of an award as of the last day of the performance period multiplied by the number of awards that are earned. Expense for VMAs will continue to be recognized over the remaining service period unless a qualifying termination occurs. A qualifying termination of any holder of a VMA award before December 31, 2017 will accelerate vesting and expense recognition in the period that the qualifying termination occurs.
NOTE 15:
CHARGES FOR INTEGRATION AND RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS
|
|
|
|
|
|
|
|
|
|
QUARTER ENDED
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 2017
|
|
MARCH 2016
|
Integration and restructuring charges related to our merger with Plum Creek:
|
|
|
|
Termination benefits
|
$
|
6
|
|
|
$
|
45
|
|
Acceleration of share-based compensation related to qualifying terminations
|
—
|
|
|
19
|
|
Acceleration of pension benefits related to qualifying terminations
|
—
|
|
|
5
|
|
Professional services
|
3
|
|
|
39
|
|
Other integration and restructuring costs
|
3
|
|
|
2
|
|
Total integration and restructuring charges related to our merger with Plum Creek
|
12
|
|
|
110
|
|
Charges related to closures and other restructuring activities:
|
|
|
|
Termination benefits
|
1
|
|
|
—
|
|
Other closures and restructuring costs
|
—
|
|
|
1
|
|
Total charges related to closures and other restructuring activities
|
1
|
|
|
1
|
|
Total charges for integration and restructuring, closures and impairments
|
$
|
13
|
|
|
$
|
111
|
|
During
2017
, we incurred and accrued for termination benefits (primarily severance) and non-recurring professional services costs directly attributable to our merger with Plum Creek.
During
2016
, we incurred and accrued for termination benefits (primarily severance), accelerated share-based payment costs, and accelerated pension benefits based upon actual and expected qualifying terminations of certain employees as a result of restructuring decisions made subsequent to the merger. We also incurred non-recurring professional services costs for investment banking, legal and consulting, and certain other fees directly attributable to our merger with Plum Creek.
Changes in accrued severance related to restructuring during the year-to-date period ended
March 31, 2017
, were as follows:
|
|
|
|
|
DOLLAR AMOUNTS IN MILLIONS
|
Accrued severance as of December 31, 2016
|
$
|
26
|
|
Charges
|
7
|
|
Payments
|
(14
|
)
|
Accrued severance as of March 31, 2017
|
$
|
19
|
|
Accrued severance is recorded within the "Wages, salaries and severance pay" component of "Accrued liabilities" on our
Consolidated Balance Sheet
as detailed in
Note 9: Accrued Liabilities
. The majority of the accrued severance balance as of
March 31, 2017
, is expected to be paid within one year.
NOTE 16:
OTHER OPERATING COSTS (INCOME), NET
Other operating costs (income), net:
|
|
•
|
includes both recurring and occasional income and expense items and
|
|
|
•
|
can fluctuate from year to year.
|
ITEMS INCLUDED IN OTHER OPERATING COSTS (INCOME), NET
|
|
|
|
|
|
|
|
|
|
QUARTER ENDED
|
DOLLAR AMOUNTS IN MILLIONS
|
MARCH 2017
|
|
MARCH 2016
|
Gain on disposition of nonstrategic assets
|
$
|
(7
|
)
|
|
$
|
(36
|
)
|
Foreign exchange losses (gains), net
|
3
|
|
|
(13
|
)
|
Litigation expense, net
|
3
|
|
|
3
|
|
Other, net
|
3
|
|
|
(9
|
)
|
Total other operating costs (income), net
|
$
|
2
|
|
|
$
|
(55
|
)
|
Gain on disposition of nonstrategic assets included a
$36 million
pretax gain recognized in
first
quarter
2016
on the sale of our Federal Way, Washington headquarters campus.
Foreign exchange losses (gains) result from changes in exchange rates, primarily related to our Canadian operations.
NOTE 17: INCOME TAXES
As a REIT, we generally are not subject to federal corporate level 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 TRSs, which includes our Wood Products segment and portions of our Timberlands and Real Estate & ENR segments' earnings.
The quarterly provision for income taxes is based on the current estimate of the annual effective tax rate. Our
2017
estimated annual effective tax rate for our TRSs is approximately
31 percent
, which is lower than the U.S. domestic statutory federal tax rate primarily due to lower foreign tax rates applicable to foreign earnings.
ONGOING IRS MATTER
In connection with the merger with Plum Creek, we acquired equity interests in Southern Diversified Timber, LLC, a timberland joint venture (Timberland Venture) with an affiliate of Campbell Global LLC (TCG Member). On August 31, 2016, the Timberland Venture redeemed TCG Member's interest and became a fully consolidated, wholly-owned subsidiary of Weyerhaeuser.
We received a Notice of Final Partnership Administrative Adjustment (FPAA), dated July 20, 2016, from the Internal Revenue Service (IRS) in regard to Plum Creek REIT’s 2008 U.S. federal income tax treatment of the transaction forming the Timberland Venture. The IRS is asserting that the transfer of the timberlands to the Timberland Venture was a taxable transaction to the company at the time of the transfer rather than a nontaxable capital contribution. We have filed a petition in the U.S. Tax Court and will vigorously contest this adjustment.
In the event that we are unsuccessful in this tax litigation, we could be required to recognize and distribute gain to shareholders of approximately
$600 million
and pay built-in gains tax of approximately
$100 million
. We would also be required to pay interest on both of those amounts, which would be substantial. We expect that as much as
80
percent of any such distribution could be made with our common stock, and shareholders would be subject to tax
on the distribution at the applicable capital gains tax rate. Alternatively, we could elect to retain the gain and pay corporate-level tax to minimize interest costs to the company.
Although the outcome of this process cannot be predicted with certainty, we are confident in our position based on U.S. tax law and believe we will be successful in defending it. Accordingly, no reserve has been recorded related to this matter.