WY-9.30.12-10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  __________________________________________________
FORM 10-Q
  __________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
COMMISSION FILE NUMBER: 1-4825
  __________________________________________________ 
WEYERHAEUSER COMPANY
  __________________________________________________ 
Washington
 
91-0470860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
33663 Weyerhaeuser Way South
Federal Way, Washington
 
98063-9777
(Address of principal executive offices)
 
(Zip Code)
(253) 924-2345
(Registrant’s telephone number, including area code)
 __________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x    Accelerated filer  o    Non-accelerated filer  o    Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes    x  No
As of October 26, 2012, 541,532,100 shares of the registrant’s common stock ($1.25 par value) were outstanding.
 




TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS:
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NA
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
NA
ITEM 4.
MINE SAFETY DISCLOSURES
NA
ITEM 5.
OTHER INFORMATION
NA
ITEM 6.
 








FINANCIAL INFORMATION

CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Net sales and revenues
$
1,772

 
$
1,569

 
$
5,059

 
$
4,601

Cost of products sold
1,424

 
1,283

 
4,230

 
3,803

Gross margin
348

 
286

 
829

 
798

Selling, general and administrative expenses
156

 
135

 
448

 
452

Research and development expenses
8

 
7

 
23

 
21

Charges for restructuring, closures and impairments (Note 6)
10

 
41

 
26

 
52

Other operating costs (income), net (Note 7)
(28
)
 
3

 
(147
)
 
(190
)
Operating income
202

 
100

 
479

 
463

Interest income and other
15

 
15

 
38

 
35

Interest expense, net of capitalized interest
(87
)
 
(86
)
 
(260
)
 
(296
)
Earnings from continuing operations before income taxes
130

 
29

 
257

 
202

Income taxes (Note 15)
(13
)
 
104

 
(15
)
 
52

Earnings from continuing operations
117

 
133

 
242

 
254

Earnings from discontinued operations, net of income taxes (Note 4)

 
24

 

 
12

Net earnings attributable to Weyerhaeuser common shareholders
$
117

 
$
157

 
$
242

 
$
266

Earnings per share attributable to Weyerhaeuser common shareholders, basic and diluted (Note 3):
 
 
 
 
 
 
 
Continuing operations
$
0.22

 
$
0.25

 
$
0.45

 
$
0.47

Discontinued operations

 
0.04

 

 
0.02

Net earnings per share
$
0.22

 
$
0.29

 
$
0.45

 
$
0.49

Dividends paid per share
$
0.15

 
$
0.15

 
$
0.45

 
$
0.45

Weighted average shares outstanding (in thousands) (Note 3):
 
 
 
 
 
 
 
Basic
539,094

 
537,969

 
538,146

 
537,906

Diluted
542,311

 
539,827

 
540,694

 
540,469


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Net earnings attributable to Weyerhaeuser common shareholders
$
117

 
$
157

 
$
242

 
$
266

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
26

 
(40
)
 
25

 
(18
)
Actuarial gains, net of tax expense of $10, $20, $31 and $77
17

 
48

 
65

 
158

Prior service costs, net of tax expense (benefit) of $0, $1, ($49) and $2
(2
)
 
(1
)
 
(108
)
 
(4
)
Total other comprehensive income (loss)
41

 
7

 
(18
)
 
136

Comprehensive income attributable to Weyerhaeuser common shareholders
$
158

 
$
164

 
$
224

 
$
402

See accompanying Notes to Consolidated Financial Statements.

1


CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
SEPTEMBER 30,
2012
 
DECEMBER 31,
2011
ASSETS
 
 
 
Forest Products:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
602

 
$
950

Receivables, less allowances of $4 and $6
504

 
468

Receivables for taxes
97

 
22

Inventories (Note 8)
512

 
476

Prepaid expenses
83

 
68

Deferred tax assets
117

 
81

Total current assets
1,915

 
2,065

Property and equipment, less accumulated depreciation of $6,600 and $6,550
2,759

 
2,901

Construction in progress
220

 
145

Timber and timberlands at cost, less depletion charged to disposals
3,967

 
3,978

Investments in and advances to equity affiliates
188

 
192

Goodwill
40

 
40

Other assets
352

 
444

Assets held by variable interest entities (Note 12)
914

 
916

 
10,355

 
10,681

Real Estate:
 
 
 
Cash and cash equivalents
6

 
3

Receivables, less discounts and allowances of $6 and $2
36

 
41

Real estate in process of development and for sale
602

 
555

Land being processed for development
982

 
936

Investments in and advances to equity affiliates
20

 
21

Deferred tax assets
233

 
240

Other assets
98

 
113

Assets held by variable interest entities
6

 
8

 
1,983

 
1,917

Total assets
$
12,338

 
$
12,598

 
See accompanying Notes to Consolidated Financial Statements

2


CONSOLIDATED BALANCE SHEET
(CONTINUED)
 
 
SEPTEMBER 30,
2012
 
DECEMBER 31,
2011
LIABILITIES AND EQUITY
 
 
 
Forest Products:
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt (Note 10)
$
340

 
$
12

Accounts payable
356

 
336

Accrued liabilities (Note 9)
558

 
593

Total current liabilities
1,254

 
941

Long-term debt (Note 10)
3,842

 
4,181

Deferred income taxes
68

 
93

Deferred pension and other postretirement benefits
1,378

 
1,467

Other liabilities
477

 
408

Liabilities (nonrecourse to the company) held by variable interest entities (Note 12)
680

 
776

 
7,699

 
7,866

Real Estate:
 
 
 
Long-term debt (Note 10)
109

 
285

Other liabilities
177

 
172

Liabilities (nonrecourse to the company) held by variable interest entities

 
8

 
286

 
465

Commitments and contingencies (Note 14)


 


Total liabilities
7,985

 
8,331

Equity:
 
 
 
Weyerhaeuser shareholders’ interest:
 
 
 
Common shares: $1.25 par value; authorized 1,360,000,000 shares; issued and outstanding: 540,671,722 and 536,425,400 shares
676

 
671

Other capital
4,692

 
4,595

Retained earnings
169

 
176

Cumulative other comprehensive loss (Note 13)
(1,197
)
 
(1,179
)
Total Weyerhaeuser shareholders’ interest
4,340

 
4,263

Noncontrolling interests
13

 
4

Total equity
4,353

 
4,267

Total liabilities and equity
$
12,338

 
$
12,598

See accompanying Notes to Consolidated Financial Statements.

3



CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
SEPTEMBER 30,
2012
 
SEPTEMBER 30,
2011
Cash flows from operations:
 
 
 
Net earnings
$
242

 
$
266

Noncash charges (credits) to earnings:
 
 
 
Depreciation, depletion and amortization
338

 
363

Deferred income taxes, net
22

 
(77
)
Pension and other postretirement benefits (Note 11)
(39
)
 
60

Share-based compensation expense
28

 
19

Charges for impairment of assets
19

 
37

Net gains on dispositions of assets(1)
(39
)
 
(227
)
Foreign exchange transaction (gains) losses (Note 7)
(8
)
 
11

Change in:
 
 
 
Receivables less allowances
(33
)
 
(34
)
Receivable for taxes
15

 
(19
)
Inventories
(34
)
 
(40
)
Real estate and land
(95
)
 
(49
)
Prepaid expenses
(18
)
 
(14
)
Accounts payable and accrued liabilities
10

 
(74
)
Deposits on land positions and other assets
11

 
(9
)
Pension and postretirement contributions
(109
)
 
(64
)
Other
19

 
(5
)
Net cash from operations
329

 
144

Cash flows from investing activities:
 
 
 
Property and equipment
(197
)
 
(136
)
Timberlands reforestation
(22
)
 
(23
)
Proceeds from sale of assets
36

 
353

Payments of liabilities held by variable interest entities (Note 12)
(97
)
 

Other
(1
)
 
(6
)
Cash from investing activities
(281
)
 
188

Cash flows from financing activities:
 
 
 
Cash dividends
(242
)
 
(242
)
Change in book overdrafts
(32
)
 
(26
)
Payments on debt
(187
)
 
(550
)
Exercises of stock options
73

 
37

Repurchase of common stock (Note 3)

 
(24
)
Other
(5
)
 
(23
)
Cash from financing activities
(393
)
 
(828
)
Net change in cash and cash equivalents
(345
)
 
(496
)
Cash and cash equivalents at beginning of period
953

 
1,467

Cash and cash equivalents at end of period
$
608

 
$
971

Cash paid (received) during the period for:
 
 
 
Interest, net of amount capitalized of $16 and $24
$
290

 
$
362

Income taxes
$
(14
)
 
$
21

(1)
Includes gains on timberland exchanges.

See accompanying Notes to Consolidated Financial Statements.

4



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1:
 
 
 
NOTE 2:
 
 
 
NOTE 3:
 
 
 
NOTE 4:
 
 
 
NOTE 5:
 
 
 
NOTE 6:
 
 
 
NOTE 7:
 
 
 
NOTE 8:
 
 
 
NOTE 9:
 
 
 
NOTE 10:
 
 
 
NOTE 11:
 
 
 
NOTE 12:
 
 
 
NOTE 13:
 
 
 
NOTE 14:
 
 
 
NOTE 15:

5



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS ENDED SEPTEMBER 30, 2012 AND 2011

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 through pay-as-cut sales contracts. REIT income can be distributed to shareholders without first paying corporate level tax, substantially eliminating the double taxation on income. A significant portion of our timberland segment earnings receives this favorable tax treatment. We are, however, subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We continue to be required to pay federal corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which principally includes our manufacturing businesses, our real estate development business and the portion of our Timberlands segment income included in the TRS.
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:
majority-owned domestic and foreign subsidiaries and
variable interest entities in which we are the primary beneficiary.
They do not include our intercompany transactions and accounts, which are eliminated, and noncontrolling interests are presented as a separate component of equity.
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.
We report our financial condition in two groups:
Forest Products – our forest products-based operations, principally the growing and harvesting of timber, the manufacture, distribution and sale of forest products and corporate governance activities; and
Real Estate – our real estate development and construction operations.
Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we” and “our” refer to the consolidated company, including both Forest Products and Real Estate.
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 disclosures normally provided in accordance with accounting principles generally accepted in the United States have been omitted. These 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, 2011. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

6



RECLASSIFICATIONS
We have reclassified certain balances and results from the prior year to be consistent with our 2012 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on net earnings or Weyerhaeuser shareholders’ interest. The reclassifications include the following:
We changed the way we classify certain transactions within operating on our Consolidated Statement of Cash Flows.
We now report the elimination of intersegment profit on inventory and the LIFO reserve in Unallocated Items. Previously these company-level adjustments were recorded in the business segments. This provides a better understanding of business operating results.

NOTE 2: BUSINESS SEGMENTS
We are principally engaged in the growing and harvesting of timber; the manufacture, distribution and sale of forest products; and real estate development and construction. Our principal business segments are:
Timberlands – which includes logs; timber; minerals, oil and gas; and international wood products;
Wood Products – which includes softwood lumber, engineered lumber, structural panels and building materials distribution;
Cellulose Fibers – which includes pulp, liquid packaging board and an equity interest in a newsprint joint venture; and
Real Estate – which includes real estate development, construction and sales.
We have disposed of various businesses and operations that are excluded from the segment results below. See Note 4: Discontinued Operations for information regarding our discontinued operations.

7



An analysis and reconciliation of our business segment information to the respective information in the Consolidated Financial Statements is as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Sales to and revenues from unaffiliated customers:
 
 
 
 
 
 
 
Timberlands
$
267

 
$
252

 
$
779

 
$
770

Wood Products
816

 
603

 
2,226

 
1,734

Cellulose Fibers
459

 
503

 
1,391

 
1,535

Real Estate
230

 
211

 
663

 
562

 
1,772

 
1,569

 
5,059

 
4,601

Intersegment sales:
 
 
 
 
 
 
 
Timberlands
162

 
154

 
498

 
479

Wood Products
18

 
20

 
58

 
61

 
180

 
174

 
556

 
540

Total sales and revenues
1,952


1,743

 
5,615

 
5,141

Intersegment eliminations
(180
)
 
(174
)
 
(556
)
 
(540
)
Total
$
1,772

 
$
1,569

 
$
5,059

 
$
4,601

Net contribution to earnings from continuing operations:
 
 
 
 
 
 
 
Timberlands
$
80

 
$
61

 
$
227

 
$
420

Wood Products
59

 
(80
)
 
82

 
(166
)
Cellulose Fibers
78

 
139

 
162

 
316

Real Estate
17

 
10

 
24

 
17

 
234

 
130

 
495

 
587

Unallocated Items(1)
(17
)
 
(15
)
 
22

 
(89
)
Net contribution to earnings from discontinued operations

 
37

 

 
20

Net contribution to earnings
217

 
152

 
517

 
518

Interest expense, net of capitalized interest
(87
)
 
(86
)
 
(260
)
 
(296
)
Income before income taxes (continuing and discontinued operations)
130

 
66

 
257

 
222

Income taxes (continuing and discontinued operations)
(13
)
 
91

 
(15
)
 
44

Net earnings attributable to Weyerhaeuser common shareholders
$
117

 
$
157

 
$
242

 
$
266

(1)
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; and the elimination of intersegment profit in inventory and the LIFO reserve.

NOTE 3: NET EARNINGS PER SHARE
Our basic and diluted earnings per share attributable to Weyerhaeuser shareholders were:
$0.22 during third quarter and $0.45 during year-to-date 2012, respectively; and
$0.29 during third quarter and $0.49 during year-to-date 2011, respectively.
Basic earnings per share is net earnings 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 divided by the sum of the:
weighted average number of our outstanding common shares and
the effect of our outstanding dilutive potential common shares.

8



Dilutive potential common shares can include:
outstanding stock options,
restricted stock units and
performance share units.
We use the treasury stock method to calculate the effect of our outstanding dilutive potential common shares. 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.

SHARES EXCLUDED FROM DILUTIVE EFFECT
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.

Potential Shares Not Included in the Computation of Diluted Earnings per Share
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Stock options
6,644

 
23,666

 
6,644

 
23,666

Performance share units
516

 
471

 
516

 
471


During third quarter 2011, we repurchased 1,199,800 shares of common stock for $20 million under the 2008 stock repurchase program. On August 11, 2011, our board of directors replaced the 2008 stock repurchase program and approved the 2011 stock repurchase program under which we are authorized to repurchase up to $250 million of outstanding shares. During third quarter 2011, we repurchased 589,824 shares of common stock for $9 million under the 2011 program. Cash settlements of $5 million occurred at the beginning of the fourth quarter. All common stock purchases under the programs were made in open-market transactions. As of September 30, 2012, we had remaining authorization of $233 million for future share repurchases.

NOTE 4: DISCONTINUED OPERATIONS

There are no operations classified as discontinued for the quarter and year-to-date periods ended September 30, 2012. Discontinued operations for the quarter and year-to-date periods ended September 30, 2011 include our hardwoods and Westwood Shipping Lines operations, both of which were sold in third quarter 2011. The following table summarizes the components of net sales and net earnings from discontinued operations.

9



 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2011
 
SEPTEMBER 2011
Net sales:
 
 
 
Hardwoods
$
27

 
$
222

Westwood Shipping Lines
56

 
180

Total net sales from discontinued operations
$
83

 
$
402

Loss from operations:
 
 
 
Hardwoods
$
(4
)
 
$
(3
)
Westwood Shipping Lines
(4
)
 

Other discontinued operations

 
(13
)
Total loss from discontinued operations
(8
)
 
(16
)
Income taxes
3

 
5

Net loss from operations
(5
)
 
(11
)
Net gain (loss) on sale (after-tax):
 
 
 
Hardwoods
(8
)
 
(14
)
Westwood Shipping Lines
31

 
31

Sale of property
6

 
6

Net earnings from discontinued operations
$
24

 
$
12


Results of discontinued operations exclude certain general corporate overhead costs that have been allocated to and are included in contribution to earnings for the operating segments.

Other discontinued operations relate to gains or losses recognized in the period for businesses we have divested in prior years and are included in Unallocated Items. During second quarter 2011 we increased our reserve for estimated future environmental remediation costs and recognized an $11 million charge associated with discontinued operations.

SALE OF HARDWOODS

On August 1, 2011, we completed the sale of our hardwoods operations to American Industrial Partners for consideration of $109 million, of which $25 million was a note receivable. During second quarter 2011, we reduced our hardwoods assets to their fair value less selling costs which resulted in the recognition of a $9 million charge. An additional $10 million pension curtailment charge was recognized in third quarter 2011 when the transaction closed. Total pre-tax charges on the sale of $22 million were recorded in our Wood Products segment. We recognized a tax benefit on the sale of $8 million resulting in a year-to-date net loss of $14 million.

SALE OF WESTWOOD SHIPPING LINES

On September 30, 2011, we completed the sale of Westwood Shipping Lines to J-WesCo of Japan for $58 million in cash. We recognized a pre-tax gain of $49 million in Unallocated and recorded tax expense of $18 million, resulting in a net gain of $31 million.

NOTE 5: SHARE-BASED COMPENSATION
In 2012, we granted 1,915,486 stock options, 749,333 restricted stock units, 344,237 performance share units, and 52,304 stock appreciation rights. In addition, 374,458 outstanding restricted stock unit awards vested during year-to-date 2012. A total of 4,200,554 shares of common stock were issued as a result of restricted stock unit vesting and stock option exercises.


10



STOCK OPTIONS
The weighted average exercise price of all of the stock options granted in 2012 was $20.42. The vesting and post-termination vesting terms for stock options granted in 2012 were as follows:
options vest ratably over 4 years;
options vest or continue to vest in the event of death, disability, or retirement at an age of at least 62;
options continue vesting for one year in the event of involuntary termination when the retirement criteria for full or continued vesting have not been met; and
options stop vesting for all other situations including early retirement prior to age 62.

Weighted Average Assumptions Used in Estimating the Value of Stock Options Granted in 2012
 
OPTIONS
Expected volatility
40.41
%
Expected dividends
2.94
%
Expected term (in years)
5.33

Risk-free rate
1.01
%
Weighted average grant date fair value
$
5.72


RESTRICTED STOCK UNITS
The weighted average fair value of the restricted stock units granted in 2012 was $20.44. The vesting provisions for restricted stock units granted in 2012 were as follows:
restricted stock units vest ratably over 4 years;
restricted stock units immediately vest in the event of death while employed or disability;
restricted stock units partially vest upon retirement at an age of at least 62 or job elimination depending on the employment period after grant date; and
restricted stock units will be forfeited 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 performance share units granted in 2012 was $21.73. The vesting provisions for performance share units granted in 2012 and that are earned were as follows:
units vest 50 percent, 25 percent and 25 percent on the second, third and fourth anniversaries of the grant date, respectively, as long as the individual remains employed by the company;
units fully vest in the event of death while employed or disability;
units partially vest upon retirement at an age of at least 62 or job elimination depending on the employment period after grant date; and
units will be forfeited upon termination of employment in all other situations including early retirement prior to age 62.


11



Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2012
 
Performance Share Units
Performance period
1/1/2012 – 12/31/2013
 
Valuation date closing stock price
$
20.56
 
Expected dividends
2.92
%
Risk-free rate
0.08
%
0.32
%
Expected volatility
34.66
%
34.86
%

STOCK APPRECIATION RIGHTS
Stock appreciation rights are remeasured to reflect the fair value at each reporting period. The following table shows the weighted average assumptions applied to all outstanding stock appreciation rights as of September 30, 2012.

Weighted Average Assumptions Used to Remeasure the Value of Stock Appreciation Rights as of September 30, 2012
 
SEPTEMBER 30,
2012
Expected volatility
31.37
%
Expected dividends
2.30
%
Expected term (in years)
1.93

Risk-free rate
0.24
%
Weighted average fair value
$
6.32

The vesting and post-termination vesting terms for stock appreciation rights granted in 2012 are the same as for stock options described above.

DEFERRED COMPENSATION STOCK EQUIVALENT UNITS

During first quarter 2012, the directors' deferred compensation plan was amended to allow the directors to elect to receive payments of amounts deferred into stock equivalent units in cash or stock. Elections to receive these deferred amounts in stock resulted in the issuance of 40,889 shares. The number of common shares to be issued in the future to directors who elected common share payments is 495,147.

NOTE 6: CHARGES FOR RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS
Charges for restructuring, closures and asset impairments for the quarters and year-to-date periods ended September 30, 2012 and 2011, include:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Restructuring and closure charges:
 
 
 
 
 
 
 
Termination benefits
$

 
$

 
$
1

 
$
1

Pension and postretirement charges

 
2

 

 
3

Other restructuring and closure costs
3

 
5

 
6

 
11

 
3

 
7

 
7

 
15

Asset Impairments:
 
 
 
 
 
 
 
Long-lived assets
5

 
30

 
16

 
33

Real estate impairments

 
2

 
1

 
2

Other assets
2

 
2

 
2

 
2

 
7

 
34

 
19

 
37

Charges for restructuring, closures and impairments
$
10

 
$
41

 
$
26

 
$
52


12



Asset impairments in 2012 are primarily related to unutilized assets held in Unallocated Items that were sold or are currently held for sale.
Asset impairments in third quarter 2011 included $29 million of impairment charges in the Wood Products segment primarily related to the decision to permanently close four engineered lumber facilities that had been previously indefinitely closed. The fair values of the facilities were determined using significant unobservable inputs (Level 3) based on liquidation values.

NOTE 7: 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
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Gain on sale of non-strategic timberlands
$

 
$

 
$

 
$
(152
)
Gain on postretirement plan amendment (Note 11)

 

 
(103
)
 

Gain on disposition of assets
(3
)
 
(6
)
 
(11
)
 
(14
)
Foreign exchange losses (gains), net
(10
)
 
18

 
(8
)
 
10

Land management income
(7
)
 
(6
)
 
(19
)
 
(19
)
Other, net
(8
)
 
(3
)
 
(6
)
 
(15
)
Total other operating costs (income), net
$
(28
)
 
$
3

 
$
(147
)
 
$
(190
)
The $152 million pretax gain on sale of non-strategic timberlands resulted from the sale of 82,000 acres in southwestern Washington. Timberland exchanges and smaller dispositions are included in our net sales and revenue and cost of products sold.
Foreign exchange losses (gains) result from changes in exchange rates, primarily related to our Canadian operations.
Land management income consists primarily of income derived from leasing, renting and granting easement and rights of way on our timberlands.

NOTE 8: INVENTORIES
Forest Products inventories include raw materials, work-in-process and finished goods.
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 30,
2012
 
DECEMBER 31,
2011
Logs and chips
$
65

 
$
68

Lumber, plywood, panels and engineered lumber
147

 
134

Pulp and paperboard
178

 
181

Other products
91

 
76

Materials and supplies
136

 
137

 
617

 
596

Less LIFO reserve
(105
)
 
(120
)
Total
$
512

 
$
476


The LIFO – the last-in, first-out method – inventory reserve applies to major inventory products held at our U.S. domestic locations. These inventory products include grade and fiber logs, chips, lumber, plywood, oriented strand board, pulp and paperboard.


13



NOTE 9: ACCRUED LIABILITIES
Forest Products accrued liabilities were comprised of the following:
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 30,
2012
 
DECEMBER 31,
2011
Wages, salaries and severance pay
$
129

 
$
136

Pension and postretirement
64

 
63

Vacation pay
46

 
44

Income taxes

 
13

Taxes – Social Security and real and personal property
37

 
29

Interest
71

 
99

Customer rebates and volume discounts
39

 
54

Deferred income
66

 
59

Other
106

 
96

Total
$
558

 
$
593


NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt consisted of the following:
 
SEPTEMBER 30,
2012
 
DECEMBER 31,
2011
DOLLAR AMOUNTS IN MILLIONS    
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
 
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
Long-term debt (including current maturities):
 
 
 
 
 
 
 
Forest Products
$
4,182

 
$
4,921

 
$
4,193

 
$
4,579

Real Estate
$
109

 
$
111

 
$
285

 
$
291


To estimate the fair value of long-term debt, we used the following valuation approaches:
market approach – based on quoted market prices 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.
The inputs to the 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.
We recognized a pretax charge in year-to-date 2011 of $26 million, which included early retirement premiums, unamortized debt issuance costs and other miscellaneous charges in connection with the early extinguishment of debt. This charge is included in interest expense in our Consolidated Statement of Operations.

FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
We believe that our other financial instruments, including cash, short-term investments, 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,
carrying short-term investments at expected net realizable value and
the allowance for doubtful accounts.


14



NOTE 11: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of net periodic benefit costs (credits) are:
 
PENSION
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Service cost
$
13

 
$
11

 
$
39

 
$
36

Interest cost
65

 
68

 
196

 
207

Expected return on plan assets
(106
)
 
(104
)
 
(316
)
 
(315
)
Amortization of actuarial loss
44

 
33

 
131

 
102

Amortization of prior service cost
2

 
3

 
6

 
10

Loss due to curtailment and special termination benefits

 
13

 

 
14

Total net periodic benefit cost
$
18

 
$
24

 
$
56

 
$
54

 
OTHER POSTRETIREMENT BENEFITS
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
Service cost
$

 
$
1

 
$
1

 
$
2

Interest cost
4

 
6

 
11

 
18

Amortization of actuarial loss
3

 
3

 
10

 
10

Amortization of prior service credit
(6
)
 
(6
)
 
(121
)
 
(17
)
Other

 

 
4

 
4

Total net periodic benefit cost (credit)
$
1

 
$
4

 
$
(95
)
 
$
17


During fourth quarter 2011, we ratified amendments to our postretirement medical and life insurance benefit plans for U.S. salaried employees that reduced or eliminated certain benefits that were available to both past and present employees. The company recognized a gain of $103 million in year-to-date 2012 due to these benefit changes. This gain is included in other operating income and reflected in the amortization of prior service credit in the table above. The benefit related to the fourth quarter 2011 amendments was fully recognized in first and second quarter 2012.

Loss due to curtailment and special termination benefits includes charges of $11 million related to the sale of our hardwoods and Westwood Shipping Lines operations in third quarter 2011. These charges are included in our results of discontinued operations.

FAIR VALUE OF PENSION PLAN ASSETS
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 revise the year-end estimated fair value of pension plan assets to incorporate year-end net asset values reflected in audited financial statements received after we have filed our Annual Report on Form 10-K. The fair value of pension assets as of December 31, 2011 were $15 million higher than we estimated at year end.

We recorded the following adjustment during second quarter 2012 to reflect updated participant information as of the beginning of the year, which was partially offset by the increase in the pension assets:
$23 million increase in the liability for deferred pension;
$9 million decrease in the liability for deferred income taxes; and
$14 million net increase in cumulative other comprehensive loss, which resulted in a decrease in total Weyerhaeuser shareholders' interest.

15



EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, and updated for events occurring in 2012, we expect to:
make approximately $87 million of required contributions to our Canadian registered and nonregistered pension plans in 2012;
contribute approximately $20 million to our U.S. nonqualified pension plans in 2012; and
make U.S. and Canadian other postretirement benefit payments of approximately $42 million in 2012.
Congress passed legislation in June 2012 that changed the way the discount rate is computed for purposes of determining minimum pension contribution funding. Based upon this legislation, we do not have a required contribution to our U.S. qualified plan, which we previously estimated to be $60 million due by September 2013.

NOTE 12: VARIABLE INTEREST ENTITIES
In third quarter 2012, we repaid a $97 million note related to one of our timber monetization special-purpose entities (SPEs) undertaken in 2002. We will receive approximately $110 million in fourth quarter 2012 when the related financial investment matures. As a result of dissolving one of our SPEs, the deferred tax liability related to our SPEs was reduced to $240 million as of September 30, 2012, compared to $277 million as of December 31, 2011. More information about these entities, which were formed in connection with the sale of nonstrategic timberlands in 2002-2004, can be found in our annual reports on Form 10-K for 2011 and 2002-2004.

NOTE 13: CUMULATIVE OTHER COMPREHENSIVE LOSS
Items included in our cumulative other comprehensive loss are:
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 30,
2012
 
DECEMBER 31,
2011
Foreign currency translation adjustments
$
436

 
$
411

Net pension and other postretirement benefit loss not yet recognized in earnings
(1,756
)
 
(1,821
)
Prior service credit not yet recognized in earnings
119

 
227

Unrealized gains on available-for-sale securities
4

 
4

Total
$
(1,197
)
 
$
(1,179
)

The change in prior service credit not yet recognized in earnings includes the amortization of a $103 million gain recognized in 2012, as the result of previously announced benefit changes. See Note 11: Pension and Other Postretirement Benefit Plans.

NOTE 14: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
This note provides details about our:
legal proceedings and
environmental matters.

LEGAL PROCEEDINGS
We are party to legal matters generally incidental to our business. The ultimate outcome of any legal proceeding:
is subject to a great many variables and
cannot be predicted with certainty.

16



However, whenever probable losses from litigation could reasonably be determined – we believe that we have established adequate reserves. In addition, we believe the ultimate outcome of the legal proceedings:
could have a material adverse effect on our results of operations, cash flows or financial position in any given quarter or year; but
will not have a material adverse effect on our long-term results of operations, cash flows or financial position.

ENVIRONMENTAL MATTERS
Our environmental matters include:
site remediation and
asset retirement obligations.

Site Remediation
Under the Comprehensive Environmental Response Compensation and Liability Act – commonly known as the Superfund – and similar state laws, we:
are a party to various proceedings related to the cleanup of hazardous waste sites and
have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated.
As of September 30, 2012, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately $34 million. The accrual has not changed materially since the end of 2011.

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 September 30, 2012, our total accruals for these obligations was $62 million. The accruals have not changed materially since the end of 2011.
Some of our sites have asbestos containing materials. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when asbestos containing materials might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.

NOTE 15: INCOME TAXES
As a REIT, we generally are not subject to corporate level tax on income of the REIT that is distributed to shareholders. We will, however, be subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We also will continue to be required to pay federal corporate income taxes on earnings of our TRS, which principally includes our manufacturing businesses, our real estate development business and the portion of our Timberlands segment income included in the TRS.
The 2012 provision for income taxes is based on the year-to-date effective tax rate that applies to our TRS. Our 2012 estimated annual effective tax rate, excluding discrete items, is 55.6 percent and differs from the U.S. statutory rate, primarily due to losses from non-U.S. results where no tax benefit is accrued because it is more likely than not that a benefit will not be realized. The tax rate for the quarter differs from the estimated annual effective tax rate, primarily due to a different mix of earnings or losses in the quarter relative to the annual period and a catch up in the fourth quarter for the estimated change in our effective tax rate.
During third quarter 2012, as a result of reaching agreements with taxing authorities, we reduced our unrecognized tax benefits and recognized a tax provision reduction of $7 million.

17



Discrete items excluded from the calculation of our effective income tax rates include:
DOLLAR AMOUNTS IN MILLIONS    
 
First Quarter 2012:

Income taxes on postretirement plan amendment discussed in Note 11
$
(18
)
State income tax settlements
$
8

Second Quarter 2012:
 
Income taxes on postretirement plan amendment discussed in Note 11
$
(18
)
Income tax settlements
$
(3
)
Third Quarter 2012:
 
Income tax settlements
$
7

First Quarter 2011:
 
Income taxes on a non-strategic timberlands gain discussed in Note 7
$
(56
)
Second Quarter 2011:
 
Tax benefit on early extinguishment of debt discussed in Note 10
$
10

Third Quarter 2011:
 
Tax benefit related to foreign tax credits
$
83


18



MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

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 statements:
are based on various assumptions we make and
may not be accurate because of risks and uncertainties surrounding the assumptions that we make.
Factors listed in this section – as well as other factors not included – may cause our actual results to differ significantly from our forward-looking statements. There is no guarantee that any of the events anticipated by our forward-looking statements will occur. Or if any of the events occur, there is no guarantee what effect they will have on our operations or financial condition.
We will not update our forward-looking statements after the date of this report.

FORWARD-LOOKING TERMINOLOGY
Some forward-looking statements discuss our plans, strategies and intentions. They use words such as expects, may, will, believes, should, approximately, anticipates, estimates, and plans. In addition, these words may use the positive or negative or other variations of those terms.

STATEMENTS
We make forward-looking statements of our expectations regarding fourth quarter 2012, including:
slightly improved selling prices and comparable sales volumes for Western logs, slightly lower Southern log realizations due to mix and a small seasonal increase in fee harvest volume, increased silviculture costs, earnings from non-strategic land sales expected to be flat and comparable earnings in our Timberlands segment;
a seasonal decline in pricing and demand and lower earnings in our Wood Products segment;
lower selling prices for fluff pulp, increased sales volumes, lower maintenance expense, somewhat higher energy costs and comparable earnings in our Cellulose Fiber segment; and
a seasonal increase in home closings, lower average margins due to mix, higher selling expenses due to additional volume and slightly lower earnings from single-family homebuilding operations in our Real Estate segment.
We base our forward-looking statements on a number of factors, including the expected effect of:
the economy;
regulations;
adverse litigation outcomes and the adequacy of reserves;
changes in accounting principles;
contributions to pension plans;
projected benefit payments;
projected tax rates and credits; and
other related matters.


19



RISKS, UNCERTAINTIES AND ASSUMPTIONS
The major risks and uncertainties – and assumptions that we make – that affect our business and may cause actual results to differ from these forward-looking statements include, but are not limited to:
the effect of general economic conditions, including employment rates, housing starts, interest rate levels, availability of financing for home mortgages and strength of the U.S. dollar;
market demand for our products, which is related to the strength of the various U.S. business segments and U.S. and international economic conditions;
performance of our manufacturing operations, including maintenance requirements;
the successful execution of our internal performance plans, including restructurings and cost reduction initiatives;
the level of competition from domestic and foreign producers;
the effect of weather;
the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters;
raw material prices;
energy prices;
transportation costs;
the effect of forestry, land use, environmental and other governmental regulations;
federal tax policies;
legal proceedings;
performance of pension fund investments and related derivatives;
the effect of timing of retirements and changes in the market price of our common stock on charges for share-based compensation;
changes in accounting principles; and
other factors described under “Risk Factors” in our annual report on Form 10-K.

EXPORTING ISSUES
We are a large exporter, affected by changes in:
economic activity in Europe and Asia – particularly Japan and China;
currency exchange rates – particularly the relative value of the U.S. dollar to the euro and Canadian dollar and the relative value of the euro and yen; and
restrictions on international trade or tariffs imposed on imports.


20



RESULTS OF OPERATIONS
In reviewing our results of operations, it is important to understand these terms:
Price realizations refer to net selling prices – this includes selling price plus freight, minus normal sales deductions.
Net contribution to earnings can be positive or negative and refers to earnings (loss) attributable to Weyerhaeuser shareholders before interest expense and income taxes.
In reviewing our results of operations, it is important to understand net sales and revenues and operating income included in Consolidated Results and individual segment discussions below exclude the results of discontinued operations. Refer to Note 4: Discontinued Operations.
In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, price realizations, shipment volumes, and net contributions to earnings are based on the quarter and year-to-date periods ended September 30, 2012, compared to the quarter and year-to-date periods ended September 30, 2011.

CONSOLIDATED RESULTS
How We Did in Third Quarter and Year-to-Date 2012
NET SALES AND REVENUES / OPERATING INCOME / NET EARNINGS – WEYERHAEUSER COMPANY
Here is a comparison of net sales and revenues to unaffiliated customers, operating income and net earnings for the quarters and year-to-date periods ended September 30, 2012 and 2011:
 
QUARTER ENDED

AMOUNT OF
CHANGE

YEAR-TO-DATE ENDED

AMOUNT OF
CHANGE
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
SEPTEMBER 2012

SEPTEMBER 2011

2012 VS. 2011

SEPTEMBER 2012

SEPTEMBER 2011

2012 VS. 2011
Net sales and revenues
$
1,772

 
$
1,569

 
$
203

 
$
5,059

 
$
4,601

 
$
458

Operating income
$
202

 
$
100

 
$
102

 
$
479

 
$
463

 
$
16

Earnings of discontinued operations, net of tax
$

 
$
24

 
$
(24
)
 
$

 
$
12

 
$
(12
)
Net earnings attributable to Weyerhaeuser common shareholders
$
117

 
$
157

 
$
(40
)
 
$
242

 
$
266

 
$
(24
)
Net earnings per share attributable to Weyerhaeuser common shareholders, basic and diluted
$
0.22

 
$
0.29

 
$
(0.07
)
 
$
0.45

 
$
0.49

 
$
(0.04
)

Comparing Third Quarter 2012 with Third Quarter 2011
Net sales and revenues
Net sales and revenues increased $203 million – 13 percent – primarily due to the following:
Wood Products segment sales increased $213 million, primarily due to higher sales volumes across all major product lines and improved selling prices for lumber, oriented strand board (OSB) and plywood;
Real Estate segment sales increased $19 million as increased home closings more than offset lower average prices for homes closed; and
Timberlands segment sales increased $15 million, primarily due to increased timberlands exchanges.
These increases were partially offset by a decrease of $44 million in Cellulose Fibers segment sales, primarily due to lower pulp price realizations.

21



Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders decreased $40 million – 25 percent – primarily from:
a $117 million change in income taxes due to the change in discrete tax items and higher income in our TRS in third quarter 2012 compared to third quarter 2011;
a $24 million decrease in net earnings of discontinued operations; and
a $21 million increase in selling, general and administrative expenses, primarily due to increased share-based compensation expense in Unallocated Items as the result of a higher stock price in 2012 compared to 2011.
These decreases in our net earnings were partially offset by:
gross margin increased $62 million, primarily due to higher price realizations of lumber, OSB and plywood in our Wood Products segment partially offset by lower pulp price realizations in our Cellulose Fibers segment;
charges for restructuring, closures and asset impairments decreased $31 million; and
a $31 million increase in other operating income, primarily due to change in foreign exchange as a result of a stronger Canadian dollar relative to the U.S. dollar in 2012.

Comparing Year-to-Date 2012 with Year-to-Date 2011
Net sales and revenues
Net sales and revenues increased $458 million – 10 percent – primarily due to the following:
Wood Products segment sales increased $492 million, primarily due to higher sales volumes across all major product lines and improved selling prices for lumber, OSB and plywood; and
Real Estate segment sales increased $101 million, primarily due to the sale of a 3,200 acre master planned community in Houston, Texas.
These increases were partially offset by a $144 million decrease in Cellulose Fibers segment sales, primarily due to lower pulp price realizations.
Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders decreased $24 million – 9 percent – primarily from:
a pretax gain of $152 million on the sale of 82,000 acres of non-strategic timberlands in 2011; and
a $67 million increase in income taxes primarily due to the change in discrete tax items.
These decreases in our net earnings were partially offset by:
a $103 million pretax gain recognized in 2012 related to a previously announced postretirement plan amendment;
a $36 million decrease in interest expense due to lower charges associated with the early extinguishment of debt and lower interest due to a lower level of debt;
gross margin increased $31 million, primarily due to higher price realizations of lumber, OSB and plywood in our Wood Products segment partially offset by lower pulp price realizations in our Cellulose Fibers segment and fewer timberland exchanges and lower mineral income in our Timberlands segment; and
charges for restructuring, closures and asset impairments decreased $26 million.

22



TIMBERLANDS
How We Did Third Quarter and Year-to-Date 2012
Here is a comparison of net sales and revenues to unaffiliated customers, intersegment sales, and net contribution to earnings for the quarters and year-to-date periods ended September 30, 2012 and 2011:

NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – TIMBERLANDS
  
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
Net sales and revenues to unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
Logs:
 
 
 
 
 
 
 
 
 
 
 
West
$
132

 
$
144

 
$
(12
)
 
$
408

 
$
406

 
$
2

South
60

 
53

 
7

 
166

 
143

 
23

Canada
5

 
4

 
1

 
14

 
12

 
2

Subtotal logs sales and revenues
197

 
201

 
(4
)
 
588

 
561

 
27

Pay as cut timber sales
8

 
9

 
(1
)
 
28

 
25

 
3

Timberlands exchanges(1)
24

 
2

 
22

 
39

 
62

 
(23
)
Higher and better-use land sales(1)
4

 
5

 
(1
)
 
13

 
11

 
2

Minerals, oil and gas
8

 
14

 
(6
)
 
22

 
43

 
(21
)
Products from international operations(2)
26

 
21

 
5

 
80

 
59

 
21

Other products

 

 

 
9

 
9

 

Subtotal net sales and revenues to unaffiliated customers
267

 
252

 
15

 
779

 
770

 
9

Intersegment sales:
 
 
 
 
 
 
 
 
 
 
 
United States
103

 
102

 
1

 
330

 
321

 
9

Other
59

 
52

 
7

 
168

 
158

 
10

Subtotal intersegment sales
162

 
154

 
8

 
498


479

 
19

Total sales and revenues
$
429

 
$
406

 
$
23

 
$
1,277

 
$
1,249

 
$
28

Net contribution to earnings
$
80


$
61

 
$
19

 
$
227

 
$
420

 
$
(193
)
(1)
Sales of higher and better use timberland and non-strategic timberlands are conducted through Forest Products subsidiaries.
(2)
Includes logs, plywood and hardwood lumber harvested or produced by our international operations, primarily in South America.

Comparing Third Quarter 2012 with Third Quarter 2011
Net sales and revenues – unaffiliated customers
Net sales and revenues to unaffiliated customers increased $15 million – 6 percent – primarily from the following:
a $22 million increase in timberlands exchanges;
Southern log sales increased $7 million due to higher log prices and a 7 percent increase in sales volumes as the result of increased harvest levels in response to increased third party demand; and
a $5 million increase in sales from our international operations due to a 13 percent increase in plywood prices and a 27 percent increase in plywood sales volumes.

23



The above items were partially offset by:
Western log sales decreased $12 million primarily due to lower export and domestic log prices, partially offset by increased sales volumes of 7 percent; and
a $6 million decrease in minerals, oil and gas revenue primarily due to lower natural gas prices.
Net contribution to earnings
Net contribution to earnings increase $19 million – 31 percent – primarily from:
a $21 million increase in land exchanges and higher and better-use land sales;
a $6 million increase due to higher sales volumes and demand for domestic logs, harvest levels increased 11 percent in both the West and South; and
a $5 million increase due to higher log prices in the South.
These increases were partially offset by a $13 million decrease due to lower export and domestic log prices in the West.

Comparing Year-to-Date 2012 with Year-to-Date 2011
Net sales and revenues – unaffiliated customers
Net sales and revenues to unaffiliated customers increased $9 million – 1 percent – notable items include:
Southern log sales increased $23 million due to increased sales volumes of 13 percent as a result of increased harvest levels in response to increased third party demand; and
a $21 million increase in sales from our international operations, primarily due to increased plywood prices of 11 percent and a 39 percent increase in plywood sales volumes.
The above items were partially offset by:
a $23 million decrease in timberlands exchanges; and
a $21 million decrease in minerals, oil and gas revenue primarily due to lower natural gas prices.
Net contribution to earnings
Net contribution to earnings decreased $193 million – 46 percent – primarily from:
a $152 million decrease due to the sale of 82,000 acres of non-strategic timberlands in 2011;
a $34 million decrease as the mix of export log sales compared to domestic log sales decreased in the West and both domestic and export log prices were lower in the West;
a $21 million decrease in mineral income as a result of lower natural gas prices;
a $15 million decrease due to fewer timberlands exchanges and higher and better-use land sales; and
an $11 million increase in operating costs, primarily due to increased logging and maintenance costs.
The above items were partially offset by:
a $31 million increase, primarily due to higher sales volumes and demand for domestic and export logs, harvest levels increased 7 percent in the West and 18 percent in the South; and
a $7 million increase in earnings from our international operations, primarily due to higher plywood prices and sales volumes.


24



Our Outlook
We expect comparable earnings from the Timberlands segment in fourth quarter. We expect seasonally higher fee harvest volumes and slightly improved selling prices for Western logs in export and domestic markets, offset by increased silviculture costs, primarily in the South.

THIRD-PARTY LOG SALES VOLUMES AND FEE HARVEST VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN THOUSANDS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
Third party log sales – cubic meters:
 
 
 
 
 
 
 
 
 
 
 
West
1,480

 
1,385

 
95

 
4,339

 
3,871

 
468

South
1,430

 
1,336

 
94

 
4,012

 
3,552

 
460

Canada
133

 
116

 
17

 
392

 
333

 
59

International
99

 
88

 
11

 
259

 
239

 
20

Total
3,142

 
2,925

 
217

 
9,002

 
7,995

 
1,007

Fee harvest volumes – cubic meters:
 
 
 
 
 
 
 
 
 
 
 
West
1,784

 
1,604

 
180

 
5,294

 
4,962

 
332

South
2,809

 
2,535

 
274

 
8,311

 
7,070

 
1,241

International
198

 
270

 
(72
)
 
531

 
589

 
(58
)
Total
4,791

 
4,409

 
382

 
14,136

 
12,621

 
1,515


WOOD PRODUCTS
How We Did Third Quarter and Year-to-Date 2012
Here is a comparison of net sales and revenues to unaffiliated customers and net contribution to earnings for the quarters and year-to-date periods ended September 30, 2012 and 2011:

NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – WOOD PRODUCTS
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
Net sales and revenues:
 
 
 
 
 
 
 
 
 
 
 
Structural lumber
$
363

 
$
281

 
$
82

 
$
1,024

 
$
831

 
$
193

Engineered solid section
76

 
63

 
13

 
211

 
180

 
31

Engineered I-joists
53

 
43

 
10

 
143

 
124

 
19

Oriented strand board
169

 
96

 
73

 
418

 
264

 
154

Softwood plywood
34

 
18

 
16

 
83

 
48

 
35

Other products produced
41

 
37

 
4

 
127

 
108

 
19

Other products purchased for resale
80

 
65

 
15

 
220

 
179

 
41

Net sales and revenues from continuing operations
$
816

 
$
603

 
$
213

 
$
2,226


$
1,734

 
$
492

Net contribution to earnings from continuing operations
59

 
(80
)
 
139

 
82

 
(166
)
 
248

Net contribution to earnings from discontinued operations

 
(17
)
 
17

 

 
(25
)
 
25

Net contribution to earnings
$
59

 
$
(97
)
 
$
156

 
$
82

 
$
(191
)
 
$
273


25



Overall performance in our Wood Products segment improved year over year. We continue to focus on reducing costs and increasing revenues by broadening our customer base; introducing new products; growing our specialty, as well as commodity building products business; and improving our operational capabilities. These improvement efforts and better market conditions, have resulted in higher production rates in all primary product lines.
Comparing Third Quarter 2012 with Third Quarter 2011
Net sales and revenues
Net sales and revenues increased $213 million – 35 percent – primarily from the following:
Structural lumber shipment volumes increased 8 percent and average price realizations increased 19 percent.
OSB shipment volumes increased 15 percent and average price realizations increased 52 percent.
Engineered solid section shipment volumes increased 24 percent.
Engineered I-joists shipment volumes increased 26 percent.
Softwood plywood shipment volumes increased 38 percent and average price realizations increased 37 percent.
Other products purchased for resale increased 23 percent.
Net contribution to earnings
Net contribution to earnings increased $156 million primarily from:
a $122 million increase as higher lumber, OSB and plywood price realizations more than offset lower prices for engineered I-joists and engineered solid section;
a $36 million decrease in restructuring, closures and asset impairments;
a $7 million increase in sales volumes across all products; and
2011 included a $17 million loss from discontinued operations.
These increases were partially offset by:
an $11 million increase in freight expense due to higher shipment volumes; and
a $7 million increase in selling, general and administrative expenses, primarily due to increased sales.
Comparing Year-to-Date 2012 with Year-to-Date 2011
Net sales and revenues
Net sales and revenues increased $492 million – 28 percent – primarily from the following:
Structural lumber shipment volumes increased 10 percent and average price realizations increased 12 percent.
OSB shipment volumes increased 26 percent and average price realizations increased 25 percent.
Engineered solid section shipment volumes increased 27 percent.
Engineered I-joists shipment volumes increased 17 percent.
Softwood plywood shipment volumes increased 35 percent and average price realizations increased 28 percent.
Other products produced increased 18 percent.
Other products purchased for resale increased 23 percent.
The above items were partially offset by a decrease of 8 percent in engineered solid section average price realizations.

26



Net contribution to earnings
Net contribution to earnings increased $273 million primarily from:
a $204 million increase as higher lumber, OSB and plywood price realizations more than offset lower prices for engineered I-joists and engineered solid section;
a $39 million decrease in restructuring, closures and asset impairments;
a $17 million increase in sales volumes across all products;
by-product sales increased $16 million as the result of higher lumber production volumes;
manufacturing and other costs decreased $9 million, primarily due to increased operating rates;
log costs decreased $9 million, primarily due to lower domestic prices in the West and South; and
2011 included a $25 million loss from discontinued operations.
These increases were partially offset by:
a $36 million increase in freight expense due to higher shipment volumes; and
an $8 million increase in selling, general and administrative expenses, primarily due to increased sales.

Our Outlook
We anticipate lower earnings from the Wood Products segment in fourth quarter due to seasonal declines in pricing and demand for most products.

THIRD-PARTY SALES VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
Structural lumber – board feet
1,013

 
934

 
79

 
3,006

 
2,723

 
283

Engineered solid section – cubic feet
4.2

 
3.4

 
0.8

 
11.7

 
9.2

 
2.5

Engineered I-joists – lineal feet
43

 
34

 
9

 
115

 
98

 
17

Oriented strand board – square feet (3/8”)
630

 
546

 
84

 
1,838

 
1,462

 
376

Softwood plywood – square feet (3/8”)
95

 
69

 
26

 
249

 
185

 
64


TOTAL PRODUCTION VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN MILLIONS    
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
 
SEPTEMBER 2012
 
SEPTEMBER 2011
 
2012 VS. 2011
Structural lumber – board feet
945

 
890

 
55

 
2,907

 
2,686

 
221

Engineered solid section – cubic feet
4.3

 
3.4

 
0.9

 
11.8

 
10.7

 
1.1

Engineered I-joists – lineal feet
39

 
32