WY-6.30.13-10Q


 
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 JUNE 30, 2013
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 July 26, 2013, 582,274,481 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
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Net sales
$
2,141

 
$
1,793

 
$
4,092

 
$
3,287

Cost of products sold
1,664

 
1,516

 
3,197

 
2,806

Gross margin
477

 
277

 
895

 
481

Selling expenses
54

 
47

 
105

 
89

General and administrative expenses
108

 
95

 
226

 
203

Research and development expenses
8

 
8

 
15

 
15

Charges for restructuring, closures and impairments
6

 
4

 
10

 
16

Other operating income, net (Note 12)
(10
)
 
(53
)
 
(28
)
 
(119
)
Operating income
311

 
176

 
567

 
277

Interest income and other
10

 
11

 
21

 
23

Interest expense, net of capitalized interest
(81
)
 
(86
)
 
(163
)
 
(173
)
Earnings before income taxes
240

 
101

 
425

 
127

Income taxes (Note 13)
(42
)
 
(17
)
 
(83
)
 
(2
)
Net earnings
198

 
84

 
342

 
125

Dividends on preference shares
(2
)
 

 
(2
)
 

Net earnings attributable to Weyerhaeuser common shareholders
$
196

 
$
84

 
$
340

 
$
125

Basic earnings per share attributable to Weyerhaeuser common shareholders (Note 3)
$
0.35

 
$
0.16

 
$
0.62

 
$
0.23

Diluted earnings per share attributable to Weyerhaeuser common shareholders (Note 3)
$
0.35

 
$
0.16

 
$
0.61

 
$
0.23

Dividends paid per common share
$
0.20

 
$
0.15

 
$
0.37

 
$
0.30

Weighted average shares outstanding (in thousands) (Note 3):
 
 
 
 
 
 
 
Basic
552,855

 
537,966

 
549,159

 
537,667

Diluted
557,588

 
540,033

 
554,301

 
539,880


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Net earnings attributable to Weyerhaeuser common shareholders
$
196

 
$
84

 
$
340

 
$
125

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(30
)
 
(12
)
 
(47
)
 
(1
)
Actuarial losses, net of tax benefit of $26, $8, $49 and $21
56

 
25

 
104

 
48

Prior service credits, net of tax expense of $3, $19, $3 and $49
(4
)
 
(36
)
 
(8
)
 
(106
)
Unrealized gains on available-for-sale securities

 
(1
)
 
1

 

Total other comprehensive income (loss)
22

 
(24
)
 
50

 
(59
)
Comprehensive income attributable to Weyerhaeuser common shareholders
$
218

 
$
60

 
$
390

 
$
66

See accompanying Notes to Consolidated Financial Statements.

1


CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2013
 
DECEMBER 31,
2012
ASSETS
 
 
 
Forest Products:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
908

 
$
893

Receivables, less allowances of $4 and $3
589

 
474

Receivables for taxes
43

 
95

Inventories (Note 4)
561

 
531

Prepaid expenses
96

 
83

Deferred tax assets
144

 
65

Total current assets
2,341

 
2,141

Property and equipment, less accumulated depreciation of $6,219 and $6,350
2,706

 
2,859

Construction in progress
72

 
50

Timber and timberlands at cost, less depletion charged to disposals
3,949

 
3,961

Cash and cash equivalents designated for the purchase of Longview Timber LLC (Note 14)
1,450



Investments in and advances to equity affiliates
186

 
192

Goodwill
42

 
40

Deferred tax assets
64

 
189

Other assets
349

 
358

Restricted financial investments held by variable interest entities (Note 6)
615

 
799

 
11,774

 
10,589

Real Estate:
 
 
 
Cash and cash equivalents
4

 
5

Receivables, less discounts and allowances of $3 and $4
74

 
72

Real estate in process of development and for sale
769

 
658

Land being processed for development
913

 
904

Real estate inventory held by variable interest entities

41

 
47

Investments in and advances to equity affiliates
20

 
21

Deferred tax assets
201

 
202

Other assets
112

 
94

 
2,134

 
2,003

Total assets
$
13,908

 
$
12,592

 
See accompanying Notes to Consolidated Financial Statements

2


CONSOLIDATED BALANCE SHEET
(CONTINUED)
 
 
JUNE 30,
2013
 
DECEMBER 31,
2012
LIABILITIES AND EQUITY
 
 
 
Forest Products:
 
 
 
Current liabilities:
 
 
 
Notes payable
$
2

 
$

Current maturities of long-term debt (Note 8)
163

 
340

Accounts payable
341

 
329

Accrued liabilities (Note 7)
573

 
570

Total current liabilities
1,079

 
1,239

Long-term debt (Note 8)
3,842

 
3,842

Long-term debt (nonrecourse to the company) held by variable interest entities (Note 6)
511

 
672

Deferred income taxes
38

 

Deferred pension and other postretirement benefits
1,785

 
1,930

Other liabilities
446

 
499

 
7,701

 
8,182

Real Estate:
 
 
 
Long-term debt (Note 8)
109

 
109

Long-term debt (nonrecourse to the company) held by variable interest entities
4

 
1

Other liabilities
188

 
187

 
301

 
297

Commitments and contingencies (Note 9)


 


Total liabilities
8,002

 
8,479

Equity:
 
 
 
Weyerhaeuser shareholders’ interest:
 
 
 
Mandatory convertible preference shares, series A: $1.00 par value; authorized 40,000,000 shares; issued and outstanding: 13,800,000 and 0 shares (Note 14)
14

 

Common shares: $1.25 par value; authorized 1,360,000,000 shares; issued and outstanding: 577,873,544 and 542,392,642 shares (Note 14)
722

 
678

Other capital (Note 14)
6,290

 
4,731

Retained earnings
350

 
219

Cumulative other comprehensive loss (Note 10)
(1,508
)
 
(1,558
)
Total Weyerhaeuser shareholders’ interest
5,868

 
4,070

Noncontrolling interests
38

 
43

Total equity
5,906

 
4,113

Total liabilities and equity
$
13,908

 
$
12,592

See accompanying Notes to Consolidated Financial Statements.

3



CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2013
 
JUNE 2012
Cash flows from operations:
 
 
 
Net earnings
$
342

 
$
125

Noncash charges (credits) to earnings:
 
 
 
Depreciation, depletion and amortization
223

 
226

Deferred income taxes, net
49

 
7

Pension and other postretirement benefits (Note 5)
52

 
(58
)
Share-based compensation expense
22

 
18

Charges for impairment of assets
3

 
12

Net gains on dispositions of assets(1)
(21
)
 
(17
)
Foreign exchange transaction losses (Note 12)
8

 
2

Change in:
 
 
 
Receivables less allowances
(120
)
 
(23
)
Receivable for taxes
52

 
16

Inventories
(36
)
 
(12
)
Real estate and land
(121
)
 
(48
)
Prepaid expenses
(14
)
 
(20
)
Accounts payable and accrued liabilities
(32
)
 
9

Deposits on land positions and other assets
(10
)
 
22

Pension and postretirement contributions / benefit payments
(69
)
 
(68
)
Other
(15
)
 
16

Net cash from operations
313

 
207

Cash flows from investing activities:
 
 
 
Property and equipment
(82
)
 
(122
)
Timberlands reforestation
(21
)
 
(17
)
Proceeds from sale of assets
14

 
24

Net proceeds of investments held by special purpose entities (Note 6)
22

 

Other
(4
)
 

Cash from investing activities
(71
)
 
(115
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common shares(2) (Note 14)
781

 

Net proceeds from issuance of preference shares(2) (Note 14)
669

 

Cash dividends on common shares
(202
)
 
(161
)
Change in book overdrafts
7

 
(20
)
Payments on debt
(177
)
 
(6
)
Exercises of stock options
132

 
7

Other
12

 
(4
)
Cash from financing activities
1,222

 
(184
)
Net change in cash and cash equivalents
1,464

 
(92
)
Cash and cash equivalents at beginning of period
898

 
953

Cash and cash equivalents at end of period
$
2,362

 
$
861

Cash paid (received) during the period for:
 
 
 
Interest, net of amount capitalized of $10 and $11
$
166

 
$
168

Income taxes
$
(6
)
 
$
(15
)
(1)
Includes gains on timberland exchanges.
(2) During second quarter 2013, we received $1,450 million in cash related to the issuance of common shares and mandatory convertible preference shares related to the acquisition of Longview Timber LLC. We have designated this cash as "Cash and cash equivalents designated for the purchase of Longview Timber LLC" on our Consolidated Balance Sheet. See Note 14: Longview Timber Purchase.
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:
LONGVIEW TIMBER PURCHASE

5



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS ENDED JUNE 30, 2013 AND 2012

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 single-family home building 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, 2012. 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



NOTE 2: BUSINESS SEGMENTS
We are principally engaged in growing and harvesting timber; manufacturing, distributing and selling forest products; and developing real estate and building single-family homes. 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 and single-family home building operations.
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
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Sales to unaffiliated customers:
 
 
 
 
 
 
 
Timberlands
$
333

 
$
262

 
$
626

 
$
512

Wood Products
1,065

 
776

 
2,053

 
1,410

Cellulose Fibers
476

 
459

 
950

 
932

Real Estate
267

 
296

 
463

 
433

 
2,141

 
1,793

 
4,092

 
3,287

Intersegment sales:
 
 
 
 
 
 
 
Timberlands
166

 
146

 
390

 
336

Wood Products
18

 
20

 
36

 
40

 
184

 
166

 
426

 
376

Total sales
2,325


1,959

 
4,518

 
3,663

Intersegment eliminations
(184
)
 
(166
)
 
(426
)
 
(376
)
Total
$
2,141

 
$
1,793

 
$
4,092

 
$
3,287

Net contribution to earnings:
 
 
 
 
 
 
 
Timberlands
$
114

 
$
77

 
$
218

 
$
147

Wood Products
136

 
36

 
314

 
23

Cellulose Fibers
57

 
36

 
88

 
84

Real Estate
14

 
15

 
14

 
7

 
321

 
164

 
634

 
261

Unallocated Items(1)

 
23

 
(46
)
 
39

Net contribution to earnings
321

 
187

 
588

 
300

Interest expense, net of capitalized interest
(81
)
 
(86
)
 
(163
)
 
(173
)
Income before income taxes
240

 
101

 
425

 
127

Income taxes
(42
)
 
(17
)
 
(83
)
 
(2
)
Net earnings
198

 
84

 
342

 
125

Dividends on preference shares
(2
)
 

 
(2
)
 

Net earnings attributable to Weyerhaeuser common shareholders
$
196

 
$
84

 
$
340

 
$
125

(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.


7



NOTE 3: NET EARNINGS PER SHARE
Our basic earnings per share attributable to Weyerhaeuser shareholders were:
$0.35 during second quarter and $0.62 during year-to-date 2013, respectively; and
$0.16 during second quarter and $0.23 during year-to-date 2012, respectively.
Our diluted earnings per share attributable to Weyerhaeuser shareholders were:
$0.35 during second quarter and $0.61 during year-to-date 2013, respectively; and
$0.16 during second quarter and $0.23 during year-to-date 2012, respectively.
Basic earnings per share is net earnings available to common shareholders divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued.
Diluted earnings per share is net earnings divided by the sum of the:
weighted average number of our outstanding common shares and
the effect of our outstanding dilutive potential common shares.
Dilutive potential common shares can include:
outstanding stock options,
restricted stock units,
performance share units and
preference shares.
We use the treasury stock method to calculate the effect of our outstanding stock options, restricted stock units and performance share units. Share-based payment awards that are contingently issuable upon the achievement of specified performance or market conditions are included in our diluted earnings per share calculation in the period in which the conditions are satisfied.
We use the if-converted method to calculate the effect of our outstanding preference shares. In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be antidilutive. Preference shares are antidilutive whenever the amount of the dividend declared in or accumulated for the current period per common share obtainable on conversion exceeds diluted earnings per share exclusive of the preference shares.
Preference shares are evaluated for participation on a quarterly basis to determine whether two-class presentation is required. As of the end of second quarter 2013, no amounts beyond the preference dividends have been ascribed to preference shareholders for purposes of calculating basic or diluted earnings per share under the two-class method.

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.
We issued 13.8 million 6.375 percent Mandatory Convertible Preference Shares, Series A on June 18, 2013. We do not include these shares in our calculation of diluted earnings per share because they are antidilutive. See Note 14: Longview Timber Purchase.


8



Potential Shares Not Included in the Computation of Diluted Earnings per Share
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Stock options
4,862

 
21,992

 
4,862

 
21,992

Performance share units
577

 
537

 
577

 
537

Preference shares
13,800

 

 
13,800

 


NOTE 4: INVENTORIES
Forest Products inventories include raw materials, work-in-process and finished goods.
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2013
 
DECEMBER 31,
2012
LIFO Inventories:
 
 
 
Logs and chips
$
17

 
$
17

Lumber, plywood and panels
65

 
46

Pulp and paperboard
106

 
121

Other products
10

 
8

FIFO or moving average cost inventories:
 
 
 
Logs and chips
29

 
28

Lumber, plywood, panels and engineered lumber
84

 
66

Pulp and paperboard
27

 
19

Other products
83

 
87

Materials and supplies
140

 
139

Total
$
561

 
$
531


The LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. domestic locations. We began to use the LIFO method for domestic products in the 1940s as required to conform with the tax method elected. Subsequent acquisitions of entities added new products under the FIFO - the first-in, first-out method – or moving average cost methods that have continued under those methods. The FIFO or moving average cost methods applies to the balance of our domestic raw material and product inventories as well as for all material and supply inventories and all foreign inventories. If we used FIFO for all inventories, our stated inventories would have been $111 million and $112 million higher as of June 30, 2013 and December 31,2012, respectively.

NOTE 5: 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
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Service cost
$
16

 
$
12

 
$
32

 
$
26

Interest cost
62

 
66

 
122

 
131

Expected return on plan assets
(111
)
 
(105
)
 
(220
)
 
(210
)
Amortization of actuarial loss
56

 
45

 
111

 
87

Amortization of prior service cost
1

 
2

 
3

 
4

Total net periodic benefit cost
$
24

 
$
20

 
$
48

 
$
38


9



 
OTHER POSTRETIREMENT BENEFITS
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Service cost
$
1

 
$
1

 
$
1

 
$
1

Interest cost
3

 
3

 
6

 
7

Amortization of actuarial loss
4

 
3

 
7

 
7

Amortization of prior service credit
(6
)
 
(57
)
 
(12
)
 
(115
)
Other
2

 

 
2

 
4

Total net periodic benefit cost (credit)
$
4

 
$
(50
)
 
$
4

 
$
(96
)

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 $51 million in second quarter 2012 and $103 million in first half 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. As of the end of second quarter 2012, the gain for the fourth quarter amendments had been fully recognized.

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. During second quarter 2013, we recorded an increase in the fair value of the pension assets of $56 million and an increase to the projected benefit obligation of $55 million, as a result of changes in the census data. The net effect was a $1 million increase in the funded status as of December 31, 2012.
EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS
We expect to make approximately $79 million of required contributions to our Canadian registered and nonregistered pension plans in 2013. The decrease in the expectation was the result of the company electing to apply for Alberta Funding Relief effective December 31, 2012, for the plans registered in that province.
We also expect that in 2013 we will:
make benefit payments of $19 million on behalf of our U.S. nonqualified pension plans and
make benefit payments of $37 million on behalf of our U.S. and Canadian other postretirement plans.
We do not anticipate making a contribution to our U.S. qualified pension plan for 2013.

NOTE 6: VARIABLE INTEREST ENTITIES
In second quarter 2013, we repaid a $162 million note and received $184 million related to one of our timber monetization special-purpose entities (SPEs) undertaken in 2003. Net proceeds were $22 million. As a result of dissolving one of our SPEs, the deferred tax liability related to our SPEs was reduced to $177 million as of June 30, 2013, compared to $240 million as of December 31, 2012. More information about these entities, which were formed in connection with the sale of nonstrategic timberlands in 2003, can be found in our annual reports on Form 10-K for 2012 and 2003.


10



NOTE 7: ACCRUED LIABILITIES
Forest Products accrued liabilities were comprised of the following:
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2013
 
DECEMBER 31,
2012
Wages, salaries and severance pay
$
129

 
$
139

Pension and postretirement
57

 
58

Vacation pay
48

 
46

Income taxes
16

 

Taxes – Social Security and real and personal property
34

 
27

Interest
95

 
99

Customer rebates and volume discounts
39

 
44

Deferred income
61

 
60

Other
94

 
97

Total
$
573

 
$
570


NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt consisted of the following:
 
JUNE 30,
2013
 
DECEMBER 31,
2012
DOLLAR AMOUNTS IN MILLIONS
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
 
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
Long-term debt (including current maturities):
 
 
 
 
 
 
 
Forest Products
$
4,005

 
$
4,780

 
$
4,182

 
$
4,994

Real Estate
$
109

 
$
111

 
$
109

 
$
112

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.

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.

NOTE 9: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
This note provides details about our:
legal proceedings and
environmental matters.

11



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 any degree of certainty.
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,
asset retirement obligations, and
regulation of air emission in the U.S.

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 June 30, 2013, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately $30 million. These reserves are recorded in "Accrued liabilities" and "Other liabilities" in our Consolidated Balance Sheet. The accrual has not changed materially since the end of 2012.

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, cap and monitor landfills. As of June 30, 2013, our total accruals for these obligations was $63 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" in our Consolidated Balance Sheet. The accruals have not changed materially since the end of 2012.
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.


12



Regulation of Air Emissions in the U.S.

In 2010, the EPA issued a final rule that would limit the growth in greenhouse gas emissions from new projects meeting certain emission thresholds. This rule, which would apply to our manufacturing operations on a project-by-project basis, originally included carbon dioxide from carbon-neutral biomass in the air permitting process. In 2011, the EPA issued a final rule deferring until mid-2014 greenhouse gas permitting requirements for carbon dioxide emissions from biomass while the EPA completed analysis and rulemaking on how biomass emissions should be treated. On July 12, 2013, the D.C Circuit Court of Appeals issued a decision to vacate the biomass deferral rule. The Court has not yet issued its mandate to the EPA and the EPA has not yet indicated how it may respond, so we are unable to predict the effect on our operations. However, more than 75 percent of energy for our operations is derived from biomass. If emissions from biomass are included in the air permitting process, it could significantly increase the burden and cost of the air permitting process. 

NOTE 10: CUMULATIVE OTHER COMPREHENSIVE INCOME (LOSS)
Changes in amounts included in our cumulative other comprehensive income (loss) by component are:
 
 
PENSION
OTHER POSTRETIREMENT BENEFITS
 
 
DOLLAR AMOUNTS IN MILLIONS
Foreign currency translation adjustments
Actuarial losses
Prior service costs
Actuarial losses
Prior service credits
Unrealized gains on available-for-sale securities
Total
Beginning balance as of December 31, 2012
$
413

$
(1,942
)
$
(23
)
$
(137
)
$
127

$
4

$
(1,558
)
Other comprehensive income (loss) before reclassifications
(47
)
33


2

(2
)
1

(13
)
Income taxes

(8
)


1


(7
)
Net other comprehensive income (loss) before reclassifications
(47
)
25


2

(1
)
1

(20
)
Amounts reclassified from cumulative other comprehensive income (loss)(1)

111

3

7

(12
)

109

Income taxes

(37
)
(1
)
(4
)
3


(39
)
Net amounts reclassified from cumulative other comprehensive income (loss)

74

2

3

(9
)

70

Total other comprehensive income (loss)
(47
)
99

2

5

(10
)
1

50

Ending balance as of
June 30, 2013
$
366

$
(1,843
)
$
(21
)
$
(132
)
$
117

$
5

$
(1,508
)
(1) Actuarial losses and prior service credits (cost) are included in the computation of net periodic benefit costs (credits). See Note 5: Pension and Other Postretirement Benefit Plans.


13



NOTE 11: SHARE-BASED COMPENSATION
In year-to-date 2013, we granted 1,986,934 stock options, 728,853 restricted stock units and 388,394 performance share units. In addition, 443,708 outstanding restricted stock units and 157,386 outstanding performance share units vested during year-to-date 2013. A total of 6,417,318 shares of common stock were issued as a result of restricted stock unit vesting, performance share unit vesting and stock option exercises.
At our Annual Meeting of Shareholders held on April 11, 2013, our shareholders approved the Weyerhaeuser Company 2013 Long-Term Incentive Plan (“2013 Plan”). Shareholders approved 10 million shares of common stock for issuance under the 2013 Plan. In addition, approximately 9 million shares authorized for issuance under our 2004 Long-Term Incentive Plan that have not been issued and are not subject to outstanding awards are available for issuance under the 2013 Plan. Our Board of Directors had previously adopted and approved the 2013 Plan, subject to shareholder approval.

STOCK OPTIONS
The weighted average exercise price of all of the stock options granted in 2013 was $30.54. The vesting and post-termination vesting terms for stock options granted in 2013 were as follows:
options vest ratably over 4 years;
options vest immediately in the event of disability or death while employed;
options continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant depending on the number of months employed after grant date;
options continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and
options stop vesting and are forfeited for all other situations including early retirement prior to age 62.

Weighted Average Assumptions Used in Estimating the Value of Stock Options Granted in 2013
 
OPTIONS
Expected volatility
38.00
%
Expected dividends
2.23
%
Expected term (in years)
4.97

Risk-free rate
0.92
%
Weighted average grant date fair value
$
8.40


RESTRICTED STOCK UNITS
The weighted average fair value of the restricted stock units granted in 2013 was $30.54. The vesting provisions for restricted stock units granted in 2013 were as follows:
restricted stock units vest ratably over 4 years;
restricted stock units vest immediately in the event of disability or death while employed;
restricted stock units continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant depending on the number of months employed after grant date;
restricted stock units continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and
restricted stock units will be forfeited upon termination of employment in all other situations including early retirement prior to age 62.


14



PERFORMANCE SHARE UNITS
The weighted average grant date fair value of performance share units granted in 2013 was $28.75. The vesting provisions for performance share units granted in 2013 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 disability or death while employed;
units continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant depending on the number of months employed after grant date;
units continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and
units will be forfeited upon termination of employment in all other situations including early retirement prior to age 62.

Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2013
 
Performance Share Units
Performance period
1/1/2013 – 12/31/2014
 
Valuation date closing stock price
$
30.48
 
Expected dividends
2.23
%
Risk-free rate
0.09
%
0.46
%
Expected volatility
22.09
%
29.57
%

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 June 30, 2013.

Weighted Average Assumptions Used to Remeasure the Value of Stock Appreciation Rights as of June 30, 2013
 
JUNE 30,
2013
Expected volatility
29.02
%
Expected dividends
2.91
%
Expected term (in years)
1.59

Risk-free rate
0.35
%
Weighted average fair value
$
6.57

There were no stock appreciation rights granted in year-to-date 2013.


15



NOTE 12: OTHER OPERATING INCOME, NET
Other operating income, net:
includes both recurring and occasional income and expense items and
can fluctuate from year to year.

Items Included in Other Operating Income, Net
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Gain on postretirement plan amendment (Note 5)
$

 
$
(51
)
 
$

 
$
(103
)
Gain on disposition of assets
(7
)
 
(7
)
 
(13
)
 
(8
)
Foreign exchange losses
4

 
9

 
8

 
2

Land management income
(7
)
 
(6
)
 
(13
)
 
(12
)
Other, net

 
2

 
(10
)
 
2

Total other operating income, net
$
(10
)
 
$
(53
)
 
$
(28
)
 
$
(119
)
Foreign exchange losses 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 13: 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 2013 provision for income taxes is based on the current estimate of the annual effective tax rate. Our 2013 estimated annual effective tax rate for our TRS is 32.0 percent, which is lower than the statutory federal tax rate primarily due to permanent tax deductions and lower foreign tax rates applicable to foreign earnings.
There were no significant discrete items excluded from the calculation of our effective income tax rate for 2013. 2012 items include:
DOLLAR AMOUNTS IN MILLIONS
 
First Quarter 2012:

Income taxes on postretirement plan amendment discussed in Note 5
$
(18
)
State income tax settlements
$
8

Second Quarter 2012:
 
Income taxes on postretirement plan amendment discussed in Note 5
$
(18
)
Income tax settlements
$
(3
)

It is reasonably possible that up to $160 million in unrecognized tax benefits, primarily related to alternative fuel mixture credits, may be recognized within the next 12 months when tax examinations are expected to be completed.


16



NOTE 14: LONGVIEW TIMBER PURCHASE
On July 23, 2013, we purchased 100 percent of the equity interests in Longview Timber LLC (Longview Timber) for cash and assumed debt. Longview Timber is a privately-held Delaware limited liability company engaged in the ownership and management of approximately 645,000 acres of timberlands primarily in Oregon (approximately 333,000 acres) and Washington (approximately 312,000 acres). We believe Longview Timber has productive lands with favorable age class distribution that will provide us with optionality for harvest. Earnings from this business will be reported as part of the Timberlands segment beginning in third quarter 2013.
The aggregate purchase price was $2.65 billion and included the assumption of Longview Timber debt of approximately $1.07 billion. We expect to obtain an additional $1.1 billion in debt financing in third quarter 2013 and repay all of the debt within 90 days after the closing of the acquisition.
Summarized unaudited pro forma information that presents combined amounts as if this acquisition occurred at the beginning of 2012, is as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2013
 
JUNE 2012
 
JUNE 2013
 
JUNE 2012
Net sales
$
2,196

 
$
1,840

 
$
4,199

 
$
3,379

Net earnings attributable to Weyerhaeuser common shareholders
$
211

 
$
74

 
$
361

 
$
110

Basic earnings per share attributable to Weyerhaeuser common shareholders
$
0.36

 
$
0.13

 
$
0.62

 
$
0.19

Diluted earnings per share attributable to Weyerhaeuser common shareholders
$
0.36

 
$
0.13

 
$
0.62

 
$
0.19


The preliminary fair values of identifiable assets acquired and liabilities assumed, based on estimates that may change materially when purchase accounting is completed, are as follows:
DOLLAR AMOUNTS IN MILLIONS
JULY 23,
2013
Current assets
$
46

Property and equipment
2

Timber and timberlands
2,723

Investments in and advances to equity affiliates
1

Total assets acquired
2,772

Current liabilities
7

Long-term debt
1,140

Other liabilities
19

Total liabilities assumed
1,166

Net assets acquired
$
1,606

In order to finance our purchase of Longview Timber, we issued the following:
29 million common shares on June 18, 2013, at the price of $27.75 per share for net proceeds of $781 million; and
13.8 million of our 6.375 percent Mandatory Convertible Preference Shares, Series A, par value $1.00 and liquidation preference of $50.00 per share on June 18, 2013, for net proceeds of $669 million. Dividends will be payable on a cumulative basis when, as and if declared by our Board of Directors, at an annual rate of 6.375 percent on the liquidation preference. We may pay declared dividends in cash or, subject to certain limitations, in common shares or by delivery of any combination of cash and common shares on January 1, April 1, July 1 and October 1 of each year, commencing on October 1, 2013, and to, and including, July 1, 2016. These shares will automatically convert on July 1, 2016 into between 1.5015 and 1.8018 of our common shares, subject to anti-dilution adjustments. At any time prior to that date, holders may elect to convert each share into common shares at the minimum conversion rate of 1.5015 common shares, subject to anti-dilution adjustments.

17



Subsequent to quarter end, we issued 4.4 million common shares on July 2, 2013, at the price of $27.75 per share for net proceeds of $117 million, in connection with the exercise of an overallotment option.
For issuances of shares, excess of par value is recorded in "Other capital" and net proceeds received are recorded in "Cash and cash equivalents designated for the purchase of Longview Timber LLC" in our Consolidated Balance Sheet.
Proceeds were used to finance the acquisition and pay related fees and expenses.


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 in this report, including with respect to an intended increase in our quarterly dividend, estimated tax rates, expected results of litigation and the sufficiency of litigation reserves, our expected capital expenditures for 2013, anticipated new borrowing to repay existing outstanding indebtedness of Longview Timber, our expectations relating to pension contributions and benefit payments, and recognition of certain tax benefits in the future.
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 level of competition from domestic and foreign producers;
the successful execution of our internal performance plans, including restructurings and cost reduction initiatives;
raw material prices;
energy prices;
the effect of weather;
the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters;
transportation 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 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 this document and 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 to the 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 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 June 30, 2013, compared to the quarter and year-to-date periods ended June 30, 2012.

CONSOLIDATED RESULTS
How We Did in Second Quarter and Year-to Date 2013
NET SALES / OPERATING INCOME / NET EARNINGS – WEYERHAEUSER COMPANY
Here is a comparison of net sales, operating income and net earnings for the quarters and year-to-date periods ended June 30, 2013 and 2012:
 
QUARTER ENDED

AMOUNT OF
CHANGE

YEAR-TO-DATE ENDED

AMOUNT OF
CHANGE
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2013

JUNE 2012

2013 VS. 2012

JUNE 2013

JUNE 2012

2013 VS. 2012
Net sales
$
2,141

 
$
1,793

 
$
348

 
$
4,092

 
$
3,287

 
$
805

Operating income
$
311

 
$
176

 
$
135

 
$
567

 
$
277

 
$
290

Net earnings attributable to Weyerhaeuser common shareholders
$
196

 
$
84

 
$
112

 
$
340

 
$
125

 
$
215

Basic earnings per share attributable to Weyerhaeuser common shareholders
$
0.35

 
$
0.16

 
$
0.19

 
$
0.62

 
$
0.23

 
$
0.39

Diluted earnings per share attributable to Weyerhaeuser common shareholders
$
0.35

 
$
0.16

 
$
0.19

 
$
0.61

 
$
0.23

 
$
0.38


Comparing Second Quarter 2013 with Second Quarter 2012
Net sales
Net sales increased $348 million – 19 percent – primarily due to the following:
Wood Products segment sales increased $289 million, primarily due to higher price realizations and higher sales volumes across all major product lines.
Timberlands segment sales increased $71 million, primarily due to higher export and domestic log prices and increased sales volume.
Cellulose Fibers segment sales increased $17 million, primarily due to increased sales volumes which was partially offset by decreased price realizations.
These increases were partially offset by a decrease of $29 million in Real Estate segment sales as decreased land sales more than offset increased single-family homes sales.

21



Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders increased $112 million primarily from a $177 million increase in gross margin in our Wood Products, Timberlands and Cellulose Fibers segments. Our Wood Products and Timberlands segment increases were primarily due to higher price realizations and sales volumes. Increased gross margin in our Cellulose Fibers segment was primarily due to increased production, lower maintenance and contractor services cost and decreased fiber, chemical and energy cost.
This was partially offset by:
a $51 million pretax gain recognized in 2012 related to a previously announced postretirement plan amendment; and
a $25 million increase in income taxes primarily due to higher income in our TRS in 2013 compared to 2012.

Comparing Year-to-Date 2013 with Year-to-Date 2012
Net sales
Net sales increased $805 million – 24 percent – primarily due to the following:
Wood Products segment sales increased $643 million, primarily due to higher price realizations and higher sales volumes across all major product lines.
Timberlands segment sales increased $114 million, primarily due to higher export and domestic log prices and increased sales volume.
Real Estate segment sales increased $30 million primarily due to increased home closings and improved average prices for homes closed.
Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders increased $215 million – primarily from a $378 million increase in gross margin in our Wood Products and Timberlands segments due to higher price realizations and higher sales volumes.
This was partially offset by:
a $103 million pretax gain recognized in 2012 related to a previously announced postretirement plan amendment; and
an $81 million increase in income taxes, primarily due to higher income in our TRS in 2013 compared to 2012.


22



TIMBERLANDS
How We Did Second Quarter and Year-to Date 2013
Here is a comparison of net sales to unaffiliated customers, intersegment sales, and net contribution to earnings for the quarters and year-to-date periods ended June 30, 2013 and 2012:

NET SALES / NET CONTRIBUTION TO EARNINGS – TIMBERLANDS
  
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
 
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
Net sales to unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
Logs:
 
 
 
 
 
 
 
 
 
 
 
West
$
208

 
$
146

 
$
62

 
$
385

 
$
276

 
$
109

South
65

 
56

 
9

 
126

 
106

 
20

Canada
2

 
2

 

 
9

 
9

 

Subtotal logs sales
275

 
204

 
71

 
520

 
391

 
129

Pay as cut timber sales
4

 
3

 
1

 
5

 
6

 
(1
)
Chip sales
2

 
4

 
(2
)
 
5

 
10

 
(5
)
Timberlands exchanges(1)
14

 
7

 
7

 
16

 
15

 
1

Higher and better-use land sales(1)
5

 
5

 

 
8

 
9

 
(1
)
Minerals, oil and gas
9

 
7

 
2

 
17

 
14

 
3

Products from international operations(2)
22

 
29

 
(7
)
 
44

 
54

 
(10
)
Other products
2

 
3

 
(1
)
 
11

 
13

 
(2
)
Subtotal net sales to unaffiliated customers
333

 
262

 
71

 
626

 
512

 
114

Intersegment sales:
 
 
 
 
 
 
 
 
 
 
 
United States
123

 
115

 
8

 
250

 
227

 
23

Other
43

 
31

 
12

 
140

 
109

 
31

Subtotal intersegment sales
166

 
146

 
20

 
390


336

 
54

Total sales
$
499

 
$
408

 
$
91

 
$
1,016

 
$
848

 
$
168

Net contribution to earnings
$
114


$
77

 
$
37

 
$
218

 
$
147

 
$
71

(1)
Significant dispositions of higher and better use timberland and some non-strategic timberlands are made through Forest Products subsidiaries.
(2)
Products include logs, plywood and hardwood lumber harvested or produced by our international operations, primarily in South America.

Comparing Second Quarter 2013 with Second Quarter 2012
Net sales – unaffiliated customers
Net sales to unaffiliated customers increased $71 million – 27 percent – primarily from the following:
Western log sales increased $62 million due to higher export and domestic log prices and a 17 percent increase in sales volume as a result of increased export and domestic demand; and
Southern log sales increased $9 million due to higher log prices and an 11 percent increase in sales volumes as the result of increased harvest levels in response to increased third party demand.
Intersegment sales
Intersegment sales increased $20 million – 14 percent – primarily from:
a $12 million increase due to higher log prices and increased sales volumes in Canada; and
an $8 million increase, primarily due to higher log prices in the West and South.

23



Net contribution to earnings
Net contribution to earnings increased $37 million – 48 percent – primarily from:
a $25 million increase due to higher log prices in the West and South and
an $11 million increase due to higher sales volumes and demand for export and domestic logs in the West. Harvest levels increased 5 percent in the West.

Comparing Year-to-Date 2013 with Year-to-Date 2012
Net sales – unaffiliated customers
Net sales to unaffiliated customers increased $114 million – 22 percent – primarily from the following:
Western log sales increased $109 million due to higher export and domestic log prices and a 22 percent increase in sales volume as a result of increased export and domestic demand; and
Southern log sales increased $20 million due to higher log prices and a 13 percent increase in sales volume as the result of increased harvest levels in response to increased third party demand.
Intersegment sales
Intersegment sales increased $54 million – 16 percent – primarily from:
a $31 million increase, primarily due to higher log prices and total increased sales volume in Canada; and
a $23 million increase, primarily due to higher log prices in the West and South and increased sales volume in the West.
Net contribution to earnings
Net contribution to earnings increased $71 million – 48 percent – primarily from:
a $51 million increase due to higher log prices in the West and South; and
a $23 million increase due to higher sales volumes and demand for export and domestic logs in the West. Harvest levels increased 12 percent in the West.

THIRD-PARTY LOG SALES VOLUMES AND FEE HARVEST VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN THOUSANDS
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
 
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
Third party log sales – cubic meters:
 
 
 
 
 
 
 
 
 
 
 
West
1,812

 
1,551

 
261

 
3,486

 
2,859

 
627

South
1,507

 
1,354

 
153

 
2,906

 
2,582

 
324

Canada
38

 
54

 
(16
)
 
242

 
259

 
(17
)
International
77

 
82

 
(5
)
 
145

 
160

 
(15
)
Total
3,434

 
3,041

 
393

 
6,779

 
5,860

 
919

Fee harvest volumes – cubic meters:
 
 
 
 
 
 
 
 
 
 
 
West
1,921

 
1,831

 
90

 
3,916

 
3,510

 
406

South
2,828

 
2,788

 
40

 
5,661

 
5,502

 
159

International
167

 
161

 
6

 
364

 
333

 
31

Total
4,916

 
4,780

 
136

 
9,941

 
9,345

 
596



24



WOOD PRODUCTS
How We Did Second Quarter and Year-to Date 2013
Here is a comparison of net sales to unaffiliated customers and net contribution to earnings for the quarters and year-to-date periods ended June 30, 2013 and 2012:

NET SALES / NET CONTRIBUTION TO EARNINGS – WOOD PRODUCTS
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
 
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
Net sales:
 
 
 
 
 
 
 
 
 
 
 
Structural lumber
$
502

 
$
370

 
$
132

 
$
953

 
$
661

 
$
292

Engineered solid section
84

 
70

 
14

 
166

 
135

 
31

Engineered I-joists
60

 
49

 
11

 
116

 
90

 
26

Oriented strand board
224

 
138

 
86

 
460

 
249

 
211

Softwood plywood
41

 
26

 
15

 
77

 
49

 
28

Other products produced
44

 
44

 

 
87

 
86

 
1

Complementary products purchased for resale
110

 
79

 
31

 
194

 
140

 
54

Total
$
1,065

 
$
776

 
$
289

 
$
2,053


$
1,410

 
$
643

Net contribution to earnings
$
136

 
$
36

 
$
100

 
$
314

 
$
23

 
$
291

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 Second Quarter 2013 with Second Quarter 2012
Net sales
Net sales increased $289 million – 37 percent – primarily from the following:
Structural lumber shipment volumes increased 9 percent and average price realizations increased 24 percent.
OSB shipment volumes increased 5 percent and average price realizations increased 55 percent.
Engineered solid section shipment volumes increased 13 percent and average price realizations increased 7 percent.
Engineered I-joists shipment volumes increased 10 percent and average price realizations increased 12 percent.
Softwood plywood shipment volumes increased 33 percent and average price realizations increased 14 percent .
Complementary products purchased for resale increased 39 percent.
Net contribution to earnings
Net contribution to earnings increased $100 million primarily from:
a $168 million increase, primarily due to higher price realizations across all major products; and
a $10 million increase in sales volumes across all major products.

25



These increases were partially offset by:
a $31 million increase in log cost due to continued strong lumber demand and increasing log prices;
a $23 million increase in manufacturing costs due to higher raw material, maintenance and labor costs; and
a $9 million increase in freight expense due to higher shipment volumes.
Comparing Year-to-Date 2013 with Year-to-Date 2012
Net sales
Net sales increased $643 million – 46 percent – primarily from the following:
Structural lumber shipment volumes increased 9 percent and average price realizations increased 32 percent.
OSB shipment volumes increased 10 percent and average price realizations increased 67 percent.
Engineered solid section shipment volumes increased 17 percent and average price realizations increased 4 percent.
Engineered I-joists shipment volumes increased 21 percent and average price realizations increased 7 percent.
Softwood plywood shipment volumes increased 34 percent and average price realizations increased 17 percent.
Complementary products purchased for resale increased 39 percent.
Net contribution to earnings
Net contribution to earnings increased $291 million primarily from:
a $383 million increase, primarily due to higher price realizations across all major products; and
a $21 million increase in sales volumes across all major products.
These increases were partially offset by:
a $54 million increase in log cost due to continued strong lumber demand and increasing log prices;
a $36 million increase in manufacturing costs due to higher raw material, maintenance and labor costs; and
a $26 million increase in freight expense due to higher shipment volumes.

THIRD-PARTY SALES VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN MILLIONS(1)
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
 
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
Structural lumber – board feet
1,156

 
1,056

 
100

 
2,181

 
1,993

 
188

Engineered solid section – cubic feet
4.4

 
3.9

 
0.5

 
8.8

 
7.5

 
1.3

Engineered I-joists – lineal feet
44

 
40

 
4

 
87

 
72

 
15

Oriented strand board – square feet (3/8”)
675

 
643

 
32

 
1,332

 
1,208

 
124

Softwood plywood – square feet (3/8”)
108

 
81

 
27

 
207

 
154

 
53

(1) Sales volumes include sales of internally produced products and products purchased for resale primarily through our distribution business.


26



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 OSB and engineered solid section are also used to manufacture engineered I-joists.
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN MILLIONS
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
 
JUNE 2013
 
JUNE 2012
 
2013 VS. 2012
Structural lumber – board feet:
 
 
 
 
 
 
 
 
 
 
 
Production
1,053

 
1,004

 
49

 
2,074

 
1,962

 
112

Outside purchase
77

 
47

 
30

 
179

 
79

 
100

Total
1,130

 
1,051

 
79

 
2,253

 
2,041

 
212

Engineered solid section – cubic feet:
 
 
 
 
 
 
 
 
 
 
 
Production
4.6

 
3.8

 
0.8

 
9.2

 
7.5

 
1.7

Outside purchase
0.4

 
0.2

 
0.2

 
1.3

 
1.2

 
0.1

Total
5.0

 
4.0

 
1.0

 
10.5

 
8.7