Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

64K characters. Original on sec.gov · Markdown

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains statements concerning our future results and performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include, without limitation, statements relating to: our expected future financial and operating performance; our plans, strategies, intentions and expectations; estimated taxes and tax provision; our expectations relating to returns on invested pension plan assets and expected benefit payments; our capital structure and the sufficiency of our liquidity position to meet future cash requirements; compliance with covenants in our debt agreements; our expectations concerning our contingent liabilities and the sufficiency of related reserves and accruals including, but not limited to, cost estimates of future litigation and environmental remediation; expected capital expenditures; market and general economic conditions, including related influencing factors such as the trajectory of U.S. housing activity, repair and remodel activity, impacts from any future restrictions related to COVID or other viral or similar outbreak, inflation trends and interest rates; our expectations about our future opportunities in emerging carbon offset and carbon capture and storage markets; and assumptions used in valuing incentive compensation and related expense.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often involve use of words such as “anticipate,” “believe,” “committed,” "continue,” “estimate,” “expect,” “foreseeable,” “future,” “maintain,” “may,” “plan,” “potential,” “will,” and “would,” or similar words or terminology. They may use the positive, negative or another variation of those and similar words. These forward-looking statements are based on our current expectations and assumptions and are not guarantees of future events or performance. 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. There is no guarantee that any of the events anticipated by our forward-looking statements will occur. If any of the events occur, there is no guarantee what effect it will have on our operations, cash flows, or financial condition. We undertake no obligation to update our forward-looking statements after the date of this report. The factors listed below, as well as other factors not described herein because they are not currently known to us or we currently judge them to be immaterial, may cause our actual results to differ significantly from our forward-looking statements:

●the effect of general economic conditions, including employment rates, interest rate levels, inflation, housing starts, general availability and cost 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, including but not limited to any related regulatory restrictions or requirements, 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;
●the successful execution of our internal plans and strategic initiatives, including restructuring and cost reduction initiatives;
●our ability to hire and retain capable employees;
●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 and 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 as it relates to the cost of pension benefits 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 the accuracy of our estimates of charges related to casualty losses;
●changes in accounting principles; and
●other risks and uncertainties described in this report under Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and in our 2021 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.

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 (charge) to earnings does not include interest expense, loss on debt extinguishment or income taxes.

ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS

Our market conditions and the strength of the broader U.S. economy are, and will continue to be, influenced by the trajectory of activity in the U.S. housing and repair and remodel segments, impacts from any future restrictions related to COVID or other viral or similar outbreak, inflation trends and interest rates. 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, particularly new residential construction, strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Seasonal weather patterns impact the level of construction activity in the U.S., which in turn affects demand for our logs and wood products. 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 (OSB) as well as the demand for biofuels, such as wood-burning pellets made from pulpwood. The Timberlands segment is also influenced by the availability of harvestable timber. In general, Western log markets are highly tensioned by available supply, while Southern log markets have more available supply. However, additional mill capacity being added in the U.S. South has led to tightening of markets in certain geographies. Our Real Estate, Energy and Natural Resources segment is affected by a variety of factors, including the general state of the economy, local real estate market conditions, the level of construction activity in the U.S., and evolution of emerging renewable energy and carbon-related markets.

While underlying longer-term fundamentals remain favorable for construction of new housing in the U.S., home sales and building activity have slowed due in part to higher mortgage interest rates, reduced affordability, and general macroeconomic conditions. On a seasonally adjusted annual basis, as reported by the U.S. Census Bureau, housing starts for third quarter 2022 averaged 1.46 million units, an 11 percent decrease from second quarter 2022. Single family starts averaged 0.9 million units, a 16 percent decrease from second quarter 2022. Multi-family starts averaged 551 thousand units in third quarter 2022, which was a 2 percent decrease from second quarter 2022. Sales of newly built, single family homes averaged a seasonally adjusted annual rate of 608 thousand units for third quarter 2022, a decrease of 0.2 percent from the prior quarter. Over the medium to long-term, we expect continued strength in the U.S. housing construction market, supported by strong demographics in the key homebuying age cohorts, a decade of underbuilding and an aging housing stock.

Repair and remodeling expenditures increased by 1.8 percent from second quarter 2022 to third quarter 2022 according to the Census Bureau Advance Retail Spending report. Do-it-yourself activity has been returning to more normalized levels while professionally contracted activities have benefitted from larger projects and increases in home equity levels. Over the longer term, we expect this sector to return to pre-pandemic growth trends with healthy household balance sheets, elevated home equity, and a housing stock median age of 43 years old.

In U.S. wood product markets, demand was measured most of third quarter 2022 as buyers adjusted to a more uncertain economic environment. The Random Lengths Framing Lumber Composite price averaged $591/MBF and the OSB Composite averaged $449/MSF in third quarter 2022. Over the course of the third quarter, prices declined from $604/MBF to $512/MBF for lumber and from $425/MSF to $402/MSF for OSB, reflecting a softening housing construction market. Pricing for both lumber and OSB remain well above 10-year averages.

In Western log markets, Douglas fir sawlog prices fell by 2.9 percent in third quarter 2022 compared with second quarter 2022 as reported by RISI Log Lines based on Weyerhaeuser’s portfolio mix. Overall, domestic prices in the West were supported by steady demand and constrained log supplies associated with log and haul capacity in the region. In the South, delivered sawlog prices increased by 0.2 percent from second quarter 2022 and 5.5 percent from third quarter 2021 as reported by TimberMart-South, as mills are carrying higher inventories to mitigate log and haul capacity constraints.

Currency exchange rates, available supply from other countries and trade policy affect our export businesses. During third quarter 2022, end use demand softened which was partly offset by disruptions of other global sources of log supply. In Japan, total housing starts increased 1.4 percent year to date through August compared to the same period in 2021, while the key Post and Beam segment saw a 2.8 percent decrease. An increase in lumber imports from Europe to Japan placed downward pressure on market conditions. China demand was held back by their general economic conditions, but constraints of supply sources from other countries supported demand from U.S. producers.

Interest rates affect our business primarily through their impact on mortgage rates and housing affordability, their general impact on the economy, and their influence on our capital management activities. Actions by the U.S. Federal Reserve, the overall condition of the economy, and fluctuations in financial markets are all factors that influence long-term interest rates. 30-year mortgage rates, which are correlated with long-term interest rates, increased from 5.7 percent at the end of second quarter 2022 to 6.7 percent at the end of the third quarter. This represents an increase of 3.6 percentage points from the end of 2021, which has had a negative impact on home affordability and has reduced demand for homebuying.

Monetary policy set by the U.S. Federal Reserve affects changes in the rate of inflation as well as changes in demand and supply for goods and services and fluctuations in labor markets. Increased inflation affects the cost of our operations across each of our business segments, including costs for raw materials, transportation, energy and labor. The Consumer Price Index increased 8.2 percent year over year in September 2022. While we can offset some of the impacts of inflation through our sales activities, our operational excellence initiatives, and our procurement practices, not all of the costs associated with inflation can be fully mitigated or passed on to the consumer.

The relative strength of the labor market affects all of our businesses as it relates to our ability to attract and retain employees and contractors. The unemployment rate was 3.5 percent in September 2022, compared to 3.6 percent at the end of the second quarter. Labor force participation has increased to 62.3 percent in September 2022, from 61.7 percent in September 2021, but this remains below pre-pandemic levels of over 63 percent.

Governments and businesses across the globe are taking action on climate change and are making significant commitments towards reducing greenhouse gas emissions to net zero. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts. We believe we are uniquely positioned to help entities achieve these commitments through natural climate solutions, including forest carbon sequestration and carbon capture and storage activities.

In mid-September 2022, Weyerhaeuser employee members of the International Association of Machinists and Aerospace Workers union commenced a work stoppage affecting the company’s operations in Washington and Oregon. The stoppage involves approximately 1,200 employees and affects four lumber mills in our Wood Products segment and a portion of our Western Timberlands operations. This event has had a negative impact on our results of operations for the third quarter, including reductions in fee harvest volumes and sale volumes for Western Timberlands, as well as reductions in production volumes and sales volumes for our lumber business. The stoppage has had a similar impact on our fourth quarter results to date. On October 28, 2022, the company announced the successful resolution of the work stoppage and will resume normal operations as soon as possible.

CONSOLIDATED RESULTS

How We Did Third Quarter 2022 and Year-to-Date 2022

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURESSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Net sales$2,276$2,345$(69)$8,361$7,995$366
Costs of sales$1,694$1,589$105$5,130$4,602$528
Operating income$457$649$(192)$2,848$3,034$(186)
Net earnings$310$482$(172)$1,869$2,191$(322)
Earnings per share, basic and diluted$0.42$0.64$(0.22)$2.51$2.92$(0.41)

Comparing Third Quarter 2022 with Third Quarter 2021

Net sales

Net sales decreased $69 million – 3 percent – primarily due to an $86 million decrease in Wood Products sales to unaffiliated customers attributable to decreased sales realizations for oriented strand board, as well as decreased sales volumes for structural lumber.

This decrease was partially offset by an $18 million increase in Timberlands net sales to unaffiliated customers primarily due to increased sales realizations for Southern logs.

Costs of sales

Costs of sales increased $105 million – 7 percent – primarily due to increased freight and raw material costs within our Wood Products segment, as well as increased logging and hauling costs within our Timberlands segment.

Operating income

Operating income decreased $192 million – 30 percent – primarily due to a $174 million decrease in consolidated gross margin (see discussion of components above).

Net earnings

Net earnings decreased $172 million – 36 percent – primarily due to the $192 million decrease in operating income discussed above.

This decrease was partially offset by a $12 million decrease in interest expense, as well as a $7 million decrease in income tax expense (refer to Interest Expense and Income Taxes).

Comparing Year-to-Date 2022 with Year-to-Date 2021

Net sales

Net sales increased $366 million – 5 percent – primarily due to a $214 million increase in Timberlands sales to unaffiliated customers attributable to increased sales realizations and sales volumes in the Western and Southern regions, as well as a $124 million increase in Wood Products sales to unaffiliated customers attributable to increased sales realizations across most product lines.

Costs of sales

Costs of sales increased $528 million – 11 percent – primarily due to increased freight and raw material costs within our Wood Products segment, as well as increased third-party log purchases and logging and hauling costs within our Timberlands segment.

Operating income

Operating income decreased $186 million – 6 percent – primarily due to a $162 million decrease in consolidated gross margin (see discussion of components above).

Net earnings

Net earnings decreased $322 million – 15 percent – primarily due to a $276 million pretax charge ($207 million after-tax) related to the early extinguishment of debt (refer to Note 8: Long-Term Debt and Line of Credit), as well as the $186 million decrease in operating income discussed above.

These decreases were partially offset by a $127 million decrease in income tax expense, as well as a $32 million decrease in interest expense (refer to Income Taxes and Interest Expense).

TIMBERLANDS

How We Did Third Quarter 2022 and Year-to-Date 2022

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Net sales to unaffiliated customers:
Delivered logs:
West$224$226$(2)$791$649$142
South1661531348042951
North1513240382
Subtotal delivered logs sales405392131,3111,116195
Stumpage and pay-as-cut timber109130228
Recreational and other lease revenue1816251483
Other(1)86229218
Subtotal net sales to unaffiliated customers441423181,4211,207214
Intersegment sales133129445039951
Total sales$574$552$22$1,871$1,606$265
Costs of sales$442$428$14$1,360$1,218$142
Operating income and Net contribution to earnings$107$133$(26)$442$354$88
(1)Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips.

Comparing Third Quarter 2022 with Third Quarter 2021

Net sales to unaffiliated customers

Net sales to unaffiliated customers increased $18 million – 4 percent – primarily due to a $13 million increase in Southern log sales attributable to a 9 percent increase in sales realizations. Western log sales decreased $2 million due to a 9 percent decrease in sales volumes, primarily attributable to the work stoppage in Washington and Oregon, partially offset by a 9 percent increase in sales realizations.

Intersegment sales

Intersegment sales increased $4 million – 3 percent – primarily due to a 9 percent increase in sales realizations, partially offset by a 5 percent decrease in sales volumes, primarily attributable to the work stoppage in Washington and Oregon.

Costs of sales

Costs of sales increased $14 million – 3 percent – primarily due to increased logging and hauling costs, partially offset by a 3 percent decrease in sales volumes, primarily attributable to the work stoppage in Washington and Oregon.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings decreased $26 million – 20 percent – primarily due to a $32 million gain on sale of timberlands recorded in third quarter 2021, partially offset by the change in the components of gross margin, as discussed above.

Comparing Year-to-Date 2022 with Year-to-Date 2021

Net sales to unaffiliated customers

Net sales to unaffiliated customers increased $214 million – 18 percent – primarily due to a $142 million increase in Western log sales attributable to a 19 percent increase in sales realizations and a 2 percent increase in sales volumes, as well as a $51 million increase in Southern log sales attributable to a 9 percent increase in sales realizations and a 3 percent increase in sales volumes.

Intersegment sales

Intersegment sales increased $51 million – 13 percent – primarily due to a 16 percent increase in sales realizations, partially offset by a 3 percent decrease in sales volumes.

Costs of sales

Costs of sales increased $142 million – 12 percent – primarily due to increased third-party log purchases and logging and hauling costs.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings increased $88 million – 25 percent – primarily due to the change in the components of gross margin, as discussed above, partially offset by a $32 million gain on sale of timberlands recorded in third quarter 2021.

Third-Party Log Sales Volumes and Fee Harvest Volumes

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
VOLUMES IN THOUSANDSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Third-party log sales – tons:
West(1)1,4111,555(144)4,7934,70291
South4,3104,304612,61212,236376
North177195(18)505571(66)
Total5,8986,054(156)17,91017,509401
Fee harvest volumes – tons:
West(1)1,7601,930(170)6,0856,130(45)
South6,1125,91220018,11317,144969
North245264(19)703800(97)
Total8,1178,1061124,90124,074827
(1)Western logs are primarily transacted in thousand board feet (MBF) but are converted to ton equivalents for external reporting purposes.

REAL ESTATE, ENERGY AND NATURAL RESOURCES

How We Did Third Quarter 2022 and Year-to-Date 2022

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Net sales:
Real estate$30$45$(15)$217$212$5
Energy and natural resources382414967323
Total$68$69$(1)$313$285$28
Costs of sales$14$18$(4)$100$93$7
Operating income and Net contribution to earnings$48$45$3$194$174$20

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, 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 2022 with Third Quarter 2021

Net sales

Net sales decreased $1 million – 1 percent – primarily due to a decrease in acres sold, partially offset by an increase in royalty income from our Energy and Natural Resources business.

Costs of sales

Costs of sales decreased $4 million – 22 percent – primarily due to a decrease in acres sold.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings increased $3 million – 7 percent – primarily due to the change in the components of gross margin, as discussed above.

Comparing Year-to-Date 2022 with Year-to-Date 2021

Net sales

Net sales increased $28 million – 10 percent – primarily due to increases in acres sold and royalty income from our Energy and Natural Resources business, partially offset by a decrease in mitigation bank credit sales.

Costs of sales

Costs of sales increased $7 million – 8 percent – primarily due to an increase in acres sold, partially offset by a decrease in mitigation bank credit sales.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings increased $20 million – 11 percent – primarily due to the change in the components of gross margin, as discussed above.

REAL ESTATE SALES STATISTICS

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Acres sold5,01411,037(6,023)56,04648,9077,139
Average price per acre$5,046$4,005$1,041$3,624$3,632$(8)

WOOD PRODUCTS

How We Did Third Quarter 2022 and Year-to-Date 2022

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Net sales:
Structural lumber$676$681$(5)$2,880$3,020$(140)
Oriented strand board287470(183)1,3481,513(165)
Engineered solid section23318350676491185
Engineered I-joists16612838471315156
Softwood plywood47452158170(12)
Medium density fiberboard5052(2)1511438
Complementary building products2222111167659581
Other products produced(1)8683326725611
Total$1,767$1,853$(86)$6,627$6,503$124
Costs of sales$1,360$1,270$90$4,050$3,623$427
Operating income and Net contribution to earnings$344$517$(173)$2,389$2,695$(306)
(1)Other products produced sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.

Comparing Third Quarter 2022 with Third Quarter 2021

Net sales

Net sales decreased $86 million – 5 percent – due to a $183 million decrease in oriented strand board sales attributable to a 42 percent decrease in sales realizations, partially offset by a 5 percent increase in sales volumes, as well as a $5 million decrease in structural lumber sales attributable to an 8 percent decrease in sales volumes, partially offset by an 8 percent increase in sales realizations.

These decreases were partially offset by:

●a $50 million increase in engineered solid section sales due to a 28 percent increase in sales realizations;
●a $38 million increase in engineered I-joists sales due to a 36 percent increase in sales realizations and
●an $11 million increase in complementary building products sales due to increased sales volumes and sales realizations for siding and trim.

Costs of sales

Costs of sales increased $90 million – 7 percent – primarily due to increased freight and raw material costs.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings decreased $173 million – 33 percent – primarily due to the change in the components of gross margin, as discussed above.

Comparing Year-to-Date 2022 with Year-to-Date 2021

Net sales

Net sales increased $124 million – 2 percent – due to:

●a $185 million increase in engineered solid section sales attributable to a 43 percent increase in sales realizations, partially offset by a 4 percent decrease in sales volumes;
●a $156 million increase in engineered I-joists sales attributable to a 56 percent increase in sales realizations, partially offset by a 5 percent decrease in sales volumes;
●an $81 million increase in complementary building products sales attributable to increased sales realizations;
●an $11 million increase in other products produced sales attributable to increased sales volumes for wood chips and
●an $8 million increase in medium density fiberboard sales attributable to a 33 percent increase in sales realizations, partially offset by a 20 percent decrease in sales volumes.

These increases were partially offset by a $165 million decrease in oriented strand board sales due to a 15 percent decrease in sales realizations, partially offset by a 5 percent increase in sales volumes, as well as a $140 million decrease in structural lumber sales due to a 3 percent decrease in sales realizations and a 1 percent decrease in sales volumes.

Costs of sales

Costs of sales increased $427 million – 12 percent – primarily due to increased freight and raw material costs.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings decreased $306 million – 11 percent – primarily due to the change in the components of gross margin, as discussed above.

Third-Party Sales Volumes

QUARTER ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
VOLUMES IN MILLIONS(1)SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Structural lumber – board feet1,2161,320(104)3,6623,717(55)
Oriented strand board – square feet (3/8”)715681342,1672,058109
Engineered solid section – cubic feet5.95.9—18.018.7(0.7)
Engineered I-joists – lineal feet4749(2)142149(7)
Softwood plywood – square feet (3/8”)74695219240(21)
Medium density fiberboard – square feet (3/4”)4055(15)129162(33)
(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 ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
VOLUMES IN MILLIONSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Structural lumber – board feet:
Production1,1401,222(82)3,5753,667(92)
Outside purchase3556(21)120160(40)
Total1,1751,278(103)3,6953,827(132)
Oriented strand board – square feet (3/8”):
Production735715202,2322,14092
Outside purchase1862(44)154201(47)
Total753777(24)2,3862,34145
Engineered solid section – cubic feet:
Production6.05.80.218.118.00.1
Outside purchase3.60.23.44.10.73.4
Total9.66.03.622.218.73.5
Engineered I-joists – lineal feet:
Production4749(2)141144(3)
Outside purchase12(1)66—
Total4851(3)147150(3)
Softwood plywood – square feet (3/8”):
Production64613197203(6)
Outside purchase912(3)2738(11)
Total7373—224241(17)
Medium density fiberboard – square feet (3/4"):
Production3855(17)130163(33)
Total3855(17)130163(33)

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 post-employment 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 ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Unallocated corporate function and variable compensation expense$(36)$(33)$(3)$(103)$(94)$(9)
Liability classified share-based compensation2(1)35(2)7
Foreign exchange gain95412210
Elimination of intersegment profit in inventory and LIFO212(10)(39)(33)(6)
Other(19)(29)10(52)(62)10
Operating loss(42)(46)4(177)(189)12
Non-operating pension and other post-employment benefit costs(12)(5)(7)(38)(14)(24)
Interest income and other918945
Net charge to earnings$(45)$(50)$5$(206)$(199)$(7)

Comparing Third Quarter 2022 with Third Quarter 2021

Net charge to earnings decreased $5 million – 10 percent – primarily due to:

●an $8 million increase in interest income and other due to an increase in the interest rate on our cash and investment accounts;
●a $4 million increase in foreign exchange gain due to strengthening of the U.S. dollar and
●a $3 million decrease in liability classified share-based compensation driven by the change in our stock price.

These changes were partially offset by a $10 million increase in elimination of intersegment profit in inventory and LIFO.

Comparing Year-to-Date 2022 with Year-to-Date 2021

Net charge to earnings increased $7 million – 4 percent – primarily due to a $24 million increase in non-operating pension and other post-employment benefit costs.

This increase was partially offset by a $10 million increase in foreign exchange gain due to strengthening of the U.S. dollar, as well as a $7 million decrease in liability classified share-based compensation driven by the change in our stock price.

INTEREST EXPENSE

Our interest expense, net of capitalized interest, was:

●$67 million for third quarter 2022 and $204 million year-to-date 2022;
●$79 million for third quarter 2021 and $236 million year-to-date 2021.

Interest expense decreased by $12 million compared to third quarter 2021 and decreased by $32 million compared to year-to-date 2021 primarily due to decreases in the average outstanding debt and weighted average interest rate.

Refer to Note 8: Long-Term Debt and Line of Credit for further information.

INCOME TAXES

Our provision for income taxes was:

●a $77 million expense for third quarter 2022 and a $470 million expense year-to-date 2022;
●an $84 million expense for third quarter 2021 and a $597 million expense year-to-date 2021.

Our provision for income taxes is primarily driven by earnings generated by our TRSs. Income tax expense decreased by $127 million compared to year-to-date 2021 primarily due to a tax benefit of approximately $69 million resulting from the $276 million pretax loss on debt extinguishment recorded in first quarter 2022, as well as a decrease in our estimated annual effective tax rate.

Refer to Note 14: Income Taxes and Note 8: Long-Term Debt and Line of Credit 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, 2022, we had over $1.9 billion 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.

CASH FROM OPERATIONS

Consolidated net cash from operations was:

●$2,665 million for year-to-date 2022 and
●$2,665 million for year-to-date 2021.

Net cash from operations remained consistent as decreased cash inflows from our business operations were offset by a $48 million decrease in cash paid for income taxes, a $37 million decrease in pension and post-employment benefit contributions and payments, and a $26 million decrease in cash paid for interest.

CASH FROM INVESTING ACTIVITIES

Consolidated net cash from investing activities was:

●$(530) million for year-to-date 2022 and
●$(108) million for year-to-date 2021.

Net cash from investing activities decreased $422 million, primarily due to:

●a $261 million decrease in proceeds from the sale of timberlands;
●a $137 million increase in cash paid for the acquisition of timberlands and
●a $22 million increase in cash paid for capital expenditures.

Summary of Capital Spending by Business Segment

YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 2021
Timberlands$75$76
Wood Products163146
Unallocated Items71
Total$245$223

We anticipate our capital expenditures for 2022 to be approximately $460 million. The amount we spend on capital expenditures could change.

CASH FROM FINANCING ACTIVITIES

Consolidated net cash from financing activities was:

●$(2,214) million for year-to-date 2022 and
●$(606) million for year-to-date 2021.

Net cash from financing activities decreased $1,608 million, primarily due to:

●a $1,103 million increase in cash paid for dividends;
●a $376 million increase in cash used for repurchases of common stock and
●a $97 million increase in net cash used for payments on long term debt.

Line of Credit

We had no outstanding borrowings on our $1.5 billion five-year senior unsecured revolving credit facility as of September 30, 2022 or December 31, 2021. This credit facility expires in January 2025.

Our revolving credit agreement utilizes 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. We plan to transition our revolving credit facility to an alternate reference rate prior to the cessation of LIBOR. We have included provisions in our revolving credit agreement that specifically contemplate the transition from LIBOR to a replacement benchmark rate.

Refer to Note 8: Long-Term Debt and Line of Credit for further information.

Long-Term Debt

In March 2022, we completed a series of transactions that lowered our weighted average interest rate and extended our weighted average maturity by issuing $900 million in notes and using the net proceeds plus cash on hand to close cash tender offers for $931 million of principal in higher interest rate notes. We issued $450 million of 3.375 percent notes due in March 2033 and $450 million of 4.000 percent notes due in March 2052. The net proceeds after deducting the discount, underwriting fees and issuance costs were $444 million and $437 million, respectively. The net proceeds were used to retire $592 million of our 7.375 percent notes due in March 2032, $161 million of our 8.500 percent notes due in January 2025, $73 million of our 7.125 percent notes due in July 2023, $65 million of our 7.950 percent notes due in March 2025, and $40 million of our 7.850 percent notes due in July 2026. We paid holders an aggregate $1.2 billion in cash reflecting principal, premium to par and tender premium.

In May 2021, we repaid our $225 million variable-rate term loan that was scheduled to mature in July 2026.

Refer to Note 8: Long-Term Debt and Line of Credit for further information.

Debt Covenants

As of September 30, 2022, Weyerhaeuser Company was in compliance with its debt covenants. There have been no significant changes to the debt covenants presented in our 2021 Annual Report on Form 10-K for our 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:

●$15 million for year-to-date 2022 and
●$46 million for year-to-date 2021.

Our average stock price was $37.24 and $35.41 for year-to-date 2022 and 2021, respectively.

Dividend Payments

We paid cash dividends on common shares of:

●$1,485 million for year-to-date 2022 and
●$382 million for year-to-date 2021.

The increase in dividends paid is primarily due to a supplemental dividend of $1.45 per share ($1,084 million in total) paid in the first quarter of 2022 based on 2021 financial results.

Share Repurchases

We repurchased 4,234,838 common shares for approximately $145 million (including transaction fees) during third quarter 2022 and 11,217,300 common shares for approximately $404 million (including transaction fees) during year-to-date 2022 under the 2021 Repurchase Program. During third quarter and year-to-date 2021, we repurchased 780,228 common shares for approximately $26 million (including transaction fees) under the 2019 Repurchase Program. There were 64,135 unsettled shares (approximately $2 million) as of September 30, 2022 and no unsettled shares as of December 31, 2021. Refer to Note 4: Net Earnings Per Share and Share Repurchases for further information.

PERFORMANCE MEASURES

Adjusted EBITDA by Segment

We use 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 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 ENDEDAMOUNT OF CHANGEYEAR-TO-DATE ENDEDAMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 20212022 VS. 2021SEPTEMBER 2022SEPTEMBER 20212022 VS. 2021
Adjusted EBITDA by Segment:
Timberlands$168$165$3$634$517$117
Real Estate & ENR6060—28324736
Wood Products395565(170)2,5402,840(300)
623790(167)3,4573,604(147)
Unallocated Items(40)(44)4(172)(184)12
Adjusted EBITDA$583$746$(163)$3,285$3,420$(135)

We reconcile Adjusted EBITDA to net earnings 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, 2022:

DOLLAR AMOUNTS IN MILLIONSTimberlandsReal Estate & ENRWood ProductsUnallocated ItemsTotal
Adjusted EBITDA by Segment:
Net earnings$310
Interest expense, net of capitalized interest67
Income taxes77
Net contribution (charge) to earnings$107$48$344$(45)$454
Non-operating pension and other post-employment benefit costs———1212
Interest income and other———(9)(9)
Operating income (loss)10748344(42)457
Depreciation, depletion and amortization615512119
Basis of real estate sold—7——7
Adjusted EBITDA$168$60$395$(40)$583

The table below reconciles Adjusted EBITDA for the quarter ended September 30, 2021:

DOLLAR AMOUNTS IN MILLIONSTimberlandsReal Estate & ENRWood ProductsUnallocated ItemsTotal
Adjusted EBITDA by Segment:
Net earnings$482
Interest expense, net of capitalized interest79
Income taxes84
Net contribution (charge) to earnings$133$45$517$(50)$645
Non-operating pension and other post-employment benefit costs———55
Interest income and other———(1)(1)
Operating income (loss)13345517(46)649
Depreciation, depletion and amortization644482118
Basis of real estate sold—11——11
Special items included in operating income (loss)(1)(32)———(32)
Adjusted EBITDA$165$60$565$(44)$746
(1)Operating income (loss) includes a pretax special item consisting of a $32 million gain on the sale of timberlands.

The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2022:

DOLLAR AMOUNTS IN MILLIONSTimberlandsReal Estate & ENRWood ProductsUnallocated ItemsTotal
Adjusted EBITDA by Segment:
Net earnings$1,869
Interest expense, net of capitalized interest204
Loss on debt extinguishment(1)276
Income taxes470
Net contribution (charge) to earnings$442$194$2,389$(206)$2,819
Non-operating pension and other post-employment benefit costs———3838
Interest income and other———(9)(9)
Operating income (loss)4421942,389(177)2,848
Depreciation, depletion and amortization192121515360
Basis of real estate sold—77——77
Adjusted EBITDA$634$283$2,540$(172)$3,285
(1)Loss on debt extinguishment is a special item consisting of a pretax charge of $276 million related to early debt retirement.

The table below reconciles Adjusted EBITDA for the year-to-date period ended September 30, 2021:

DOLLAR AMOUNTS IN MILLIONSTimberlandsReal Estate & ENRWood ProductsUnallocated ItemsTotal
Adjusted EBITDA by Segment:
Net earnings$2,191
Interest expense, net of capitalized interest236
Income taxes597
Net contribution (charge) to earnings$354$174$2,695$(199)$3,024
Non-operating pension and other post-employment benefit costs———1414
Interest income and other———(4)(4)
Operating income (loss)3541742,695(189)3,034
Depreciation, depletion and amortization195111455356
Basis of real estate sold—62——62
Special items included in operating income (loss)(1)(32)———(32)
Adjusted EBITDA$517$247$2,840$(184)$3,420
(1)Operating income (loss) includes a pretax special item consisting of a $32 million gain on the sale of timberlands.

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. 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 ENDEDYEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONSSEPTEMBER 2022SEPTEMBER 2021SEPTEMBER 2022SEPTEMBER 2021
Net earnings$310$482$1,869$2,191
Loss on debt extinguishment——207—
Gain on sale of timberlands—(32)—(32)
Net earnings before special items$310$450$2,076$2,159

Net Earnings per Diluted Share Before Special Items

QUARTER ENDEDYEAR-TO-DATE ENDED
SEPTEMBER 2022SEPTEMBER 2021SEPTEMBER 2022SEPTEMBER 2021
Net earnings per diluted share$0.42$0.64$2.51$2.92
Loss on debt extinguishment——0.28—
Gain on sale of timberlands—(0.04)—(0.04)
Net earnings per diluted share before special items$0.42$0.60$2.79$2.88

CRITICAL ACCOUNTING POLICIES

There have been no significant changes during year-to-date 2022 to the critical accounting policies presented in our 2021 Annual Report on Form 10-K.

Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK