Document


 
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, 2016
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 29, 2016, 748,731,669 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.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
NA
ITEM 4.
MINE SAFETY DISCLOSURES
NA
ITEM 5.
ITEM 6.
 






FINANCIAL INFORMATION

WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Net sales
$
1,655

 
$
1,345

 
$
3,060

 
$
2,625

Costs of products sold
1,258

 
1,057

 
2,347

 
2,050

Gross margin
397

 
288

 
713

 
575

Selling expenses
22

 
24

 
45

 
49

General and administrative expenses
94

 
63

 
170

 
129

Research and development expenses
4

 
5

 
9

 
8

Charges for integration and restructuring, closures and asset impairments (Note 15)
14

 

 
125

 
14

Other operating costs (income), net (Note 16)
5

 
(4
)
 
(47
)
 
25

Operating income
258

 
200

 
411

 
350

Equity earnings from joint ventures (Note 7)
7

 

 
12

 

Interest income and other
10

 
9

 
19

 
18

Interest expense, net of capitalized interest
(114
)
 
(85
)
 
(209
)
 
(167
)
Earnings from continuing operations before income taxes
161

 
124

 
233

 
201

Income taxes (Note 17)
(31
)
 
1

 
(42
)
 
(8
)
Earnings from continuing operations
130

 
125

 
191

 
193

Earnings from discontinued operations, net of income taxes (Note 3)
38

 
19

 
58

 
52

Net earnings
168

 
144

 
249

 
245

Dividends on preference shares
(11
)
 
(11
)
 
(22
)
 
(22
)
Net earnings attributable to Weyerhaeuser common shareholders
$
157

 
$
133

 
$
227

 
$
223

Earnings per share attributable to Weyerhaeuser common shareholders, basic and diluted (Note 5):
 
 
 
 
 
 
 
Continuing operations
$
0.16

 
$
0.22

 
$
0.25

 
$
0.33

Discontinued operations
0.05

 
0.04

 
0.08

 
0.10

Net earnings per share
$
0.21

 
$
0.26

 
$
0.33

 
$
0.43

Dividends paid per share
$
0.31

 
$
0.29

 
$
0.62

 
$
0.58

Weighted average shares outstanding (in thousands) (Note 5):
 
 
 
 
 
 
 
Basic
743,140

 
516,626

 
687,572

 
520,008

Diluted
747,701

 
519,804

 
691,060

 
523,595

See accompanying Notes to Consolidated Financial Statements.


1



WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Net earnings
$
168

 
$
144

 
$
249

 
$
245

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2
)
 
12

 
39

 
(35
)
Actuarial gains, net of tax expense of $17, $24, $25 and $50
31

 
44

 
41

 
106

Prior service costs, net of tax expense (benefit) of $(1), $1, $0, and $1

 

 
(2
)
 
(2
)
Unrealized gains on available-for-sale securities
1

 

 
1

 
1

Total other comprehensive income
30

 
56

 
79

 
70

Comprehensive income attributable to Weyerhaeuser common shareholders
$
198

 
$
200

 
$
328

 
$
315

See accompanying Notes to Consolidated Financial Statements.


2



WEYERHAEUSER COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2016
 
DECEMBER 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
485

 
$
1,011

Receivables, less allowances of $2 and $1
409

 
276

Receivables for taxes
7

 
30

Inventories (Note 6)
387

 
325

Prepaid expenses and other current assets
132

 
63

Assets of discontinued operations (Note 3)
1,908

 
1,934

Total current assets
3,328

 
3,639

Property and equipment, less accumulated depreciation of $3,334 and $3,291
1,462

 
1,233

Construction in progress
172

 
144

Timber and timberlands at cost, less depletion charged to disposals
14,474

 
6,479

Minerals and mineral rights, net
319

 
14

Investments in and advances to joint ventures (Note 7)
905

 

Goodwill
40

 
40

Deferred tax assets
250

 
254

Other assets
424

 
302

Restricted financial investments held by variable interest entities
615

 
615

Total assets
$
21,989

 
$
12,720

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable
$
1

 
$
4

Accounts payable
300

 
204

Accrued liabilities (Note 9)
590

 
427

Liabilities of discontinued operations (Note 3)
666

 
690

Total current liabilities
1,557

 
1,325

Note payable to Timberland Venture (Note 10)
830

 

Long-term debt (Note 10)
8,013

 
4,787

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

 
511

Deferred pension and other postretirement benefits
926

 
987

Deposit from contribution of timberlands to related party (Note 7)
437

 

Other liabilities
285

 
241

Total liabilities
12,559

 
7,851

Commitments and contingencies (Note 12)


 


 
 
 
 
Equity:
 
 
 
Mandatory convertible preference shares, series A: $1.00 par value; $50.00 liquidation; authorized 40,000,000 shares; issued and outstanding: 13,693,046 and 13,799,711 shares
14

 
14

Common shares: $1.25 par value; authorized 1,360,000,000 shares; issued and outstanding: 733,010,052 and 510,483,285 shares
916

 
638

Other capital
8,527

 
4,080

Retained earnings
1,106

 
1,349

Cumulative other comprehensive loss (Note 13)
(1,133
)
 
(1,212
)
Total equity
9,430

 
4,869

Total liabilities and equity
$
21,989

 
$
12,720

See accompanying Notes to Consolidated Financial Statements.

3



WEYERHAEUSER COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED) 
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
Cash flows from operations:
 
 
 
Net earnings
$
249

 
$
245

Noncash charges (credits) to earnings:
 
 
 
Depreciation, depletion and amortization
289

 
241

Basis of real estate sold
30

 
11

Deferred income taxes, net
56

 
16

Pension and other postretirement benefits (Note 8)
5

 
21

Share-based compensation expense
40

 
16

Charges for impairment of assets
15

 
13

Equity (earnings) loss from joint ventures (Note 7)
(9
)
 
13

Net gains on dispositions of assets and operations
(51
)
 
(21
)
Foreign exchange transaction (gains) losses (Note 16)
(12
)
 
21

Change in:
 
 
 
Receivables less allowances
(90
)
 
(26
)
Receivable for taxes
35

 
14

Inventories
17

 
(15
)
Prepaid expenses
(1
)
 
(2
)
Accounts payable and accrued liabilities
36

 
(25
)
Pension and postretirement contributions (Note 8)
(29
)
 
(39
)
Distributions received from joint ventures
5

 

Other
(46
)
 
(29
)
Net cash from operations
539

 
454

Cash flows from investing activities:
 
 
 
Capital expenditures for property and equipment
(140
)
 
(170
)
Capital expenditures for timberlands reforestation
(34
)
 
(27
)
Acquisition of timberlands
(8
)
 
(32
)
Proceeds from sale of assets
83

 
6

Proceeds from contribution of timberlands to related party (Note 7)
440

 

Distributions received from joint ventures
27

 

Cash and cash equivalents acquired in Plum Creek merger (Note 4)
9

 

Other
(3
)
 
12

Cash from (used in) investing activities
374

 
(211
)
Cash flows from financing activities:
 
 
 
Cash dividends on common shares
(469
)
 
(301
)
Cash dividends on preference shares
(11
)
 
(11
)
Proceeds from issuance of long-term debt
1,398

 

Payments of debt
(723
)
 

Repurchase of common stock (Note 5)
(1,629
)
 
(407
)
Other
1

 
17

Cash from financing activities
(1,433
)
 
(702
)
 
 
 
 
Net change in cash and cash equivalents
(520
)
 
(459
)
 
 
 
 
Cash and cash equivalents from continuing operations at beginning of period
1,011

 
1,577

Cash and cash equivalents from discontinued operations at beginning of period
1

 
3

Cash and cash equivalents at beginning of period
1,012

 
1,580

 
 
 
 
Cash and cash equivalents from continuing operations at end of period
485

 
1,117

Cash and cash equivalents from discontinued operations at end of period
7

 
4

Cash and cash equivalents at end of period
$
492

 
$
1,121

 
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest, net of amount capitalized of $3 and $3
$
225

 
$
172

Income taxes
$
(25
)
 
$
5

 
 
 
 
Noncash investing and financing activities:
 
 
 
Equity issued as consideration for our merger with Plum Creek (Note 4)
$
6,383

 
$

See accompanying Notes to Consolidated Financial Statements.

4



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:
 
 
 
NOTE 2:
BUSINESS SEGMENTS
 
 
 
NOTE 3:
DISCONTINUED OPERATIONS
 
 
 
NOTE 4:
MERGER WITH PLUM CREEK
 
 
 
NOTE 5:
NET EARNINGS PER SHARE AND SHARE REPURCHASES
 
 
 
NOTE 6:
 
 
 
NOTE 7:
RELATED PARTIES
 
 
 
NOTE 8:
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 
 
 
NOTE 9:
ACCRUED LIABILITIES
 
 
 
NOTE 10:
LONG-TERM DEBT AND LINES OF CREDIT
 
 
 
NOTE 11:
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 
 
NOTE 12:
LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
 
 
 
NOTE 13:
CUMULATIVE OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
NOTE 14:
SHARE-BASED COMPENSATION
 
 
 
NOTE 15:
CHARGES FOR INTEGRATION AND RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS
 
 
 
NOTE 16:
OTHER OPERATING COSTS (INCOME), NET
 
 
 
NOTE 17:
INCOME TAXES
 
 
 
NOTE 18:
CONDENSED CONSOLIDATING FINANCIAL INFORMATION

5



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND YEAR-TO-DATE ENDED JUNE 30, 2016 AND 2015

NOTE 1: BASIS OF PRESENTATION

We are a corporation that has elected to be taxed as a real estate investment trust (REIT). We expect to derive most of our REIT income from investments in timberlands, including the sale of standing timber. As a REIT, we generally are not subject to federal corporate level income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which includes our manufacturing businesses and the portion of our Timberlands and Real Estate and Energy & Natural Resources (Real Estate & ENR) segments' 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,
the results of Plum Creek Timber Company, Inc. (Plum Creek) for the period from February 19, 2016 (the merger date) to June 30, 2016 (see Note 4: Merger with Plum Creek), and
variable interest entities in which we are the primary beneficiary.

They do not include our intercompany transactions and accounts, which are eliminated.

We account for investments in and advances to unconsolidated equity affiliates using the equity method, with taxes provided on undistributed earnings. This means that we record earnings and accrue taxes in the period earnings are recognized by our unconsolidated equity affiliates.

Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we,” “the company” and “our” refer to the consolidated company.

The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements; certain 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, 2015. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

RECLASSIFICATIONS

We have reclassified certain balances and results from the prior year to be consistent with our 2016 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on consolidated net earnings or equity.

Our reclassifications present 1) our adoption of new accounting pronouncements and 2) the results of discontinued operations separately from results of continuing operations on our Consolidated Statement of Operations, Consolidated Balance Sheet and in the related footnotes. Note 3: Discontinued Operations provides information about our discontinued operations.

As a result of the merger, we have revised our business segments. Results for fiscal periods prior to 2016 have been revised to conform to the new segments and to exclude discontinued operations. Note 2: Business Segments provides information about our revised business segments.


6



NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, a comprehensive new revenue recognition model that requires an entity to recognize revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, which deferred the effective date for an additional year. In March 2016, FASB issued ASU 2016-08, which does not change the core principle of the guidance; however, it does clarify the implementation guidance on principal versus agent considerations. In April 2016, FASB issued ASU 2016-10, which clarifies two aspects of ASU 2014-09: identifying performance obligations and the licensing implementation guidance. In May 2016, FASB issued ASU 2016-12, which amends ASU 2014-09 to provide improvements and practical expedients to the new revenue recognition model. We plan to adopt these accounting standard updates on January 1, 2018, and may use either the retrospective or cumulative effect transition method. We are evaluating the impact on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor determined the effect of the standard to our ongoing financial reporting.

In April 2015, FASB issued ASU 2015-03, which amends the presentation of debt issuance costs on the consolidated balance sheet. Under the new guidance, debt issuance costs are presented as a direct deduction from the carrying amount of the debt liability rather than as an asset. The new guidance is effective retrospectively for fiscal periods beginning after December 15, 2015. We adopted on January 1, 2016, and have reclassified balances of debt issuance costs accordingly in our consolidated balance sheet and in related disclosures for all periods presented.

In May 2015, FASB issued ASU 2015-07, which clarifies the presentation within the fair value hierarchy of certain investments held within our pension plan. The new guidance is effective retrospectively for fiscal periods starting after December 15, 2015. This new guidance removes the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share as a practical expedient and, instead, permits separate disclosure. Upon adoption these investments are presented separately from the fair value hierarchy and reconciled to total investments in our consolidated financial statements and related disclosures. We adopted on January 1, 2016.

In July 2015, FASB issued ASU 2015-11, which simplifies the measurement of inventories valued under most methods, including our inventories valued under FIFO – the first-in, first-out – and moving average cost methods. Inventories valued under LIFO – the last-in, first-out method – are excluded. Under this new guidance, inventories valued under these methods would be valued at the lower of cost or net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. The new guidance is effective prospectively for fiscal periods starting after December 15, 2016, and early adoption is permitted. We expect to adopt on January 1, 2017, and are evaluating the impact on our consolidated financial statements and related disclosures.

In September 2015, FASB issued ASU 2015-16, which results in the ability to recognize, in current period earnings, any changes in provisional amounts during the measurement period after the closing of an acquisition, instead of restating prior periods for these changes. We adopted on January 1, 2016. Measurement period adjustments related to our merger with Plum Creek did not have a material impact to earnings or cash flows for the quarter and year-to-date period ended June 30, 2016.

In February 2016, FASB issued ASU 2016-02, which requires lessees to recognize assets and liabilities for the rights and obligations created by those leases and requires both capital and operating leases to be recognized on the balance sheet. The new guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. We expect to adopt on January 1, 2019, and are evaluating the impact on our consolidated financial statements and related disclosures.

In March 2016, FASB issued ASU 2016-09, which simplifies several aspects of accounting for share-based payment transactions, including income tax consequences, award classification, cash flows reporting, and forfeiture rate application. Specifically, the update requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement with a cumulative-effect adjustment to equity as of the beginning of the period of adoption. The update allows excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flows. When accruing compensation cost, an entity can make an entity-wide accounting policy election to either estimate the number of awards expected to vest or to

7



account for forfeitures as they occur with a cumulative-effect adjustment to equity as of the beginning of the period of adoption. The update requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows, applied retrospectively. This guidance is effective for fiscal years beginning after December 15, 2016. As permitted, we elected to adopt early, and applied the different aspects as prescribed by the standard effective January 1, 2016. The adoption of this guidance represents a change in accounting policy and did not have a material impact on our consolidated financial statements. Shares withheld by the employer for tax-withholding purposes for the six months ended June 30, 2015, of $11 million were retrospectively reclassified from an operating activity to a financing activity in the Consolidated Statement of Cash Flows.

NOTE 2: BUSINESS SEGMENTS

Reportable business segments are determined based on the company’s management approach. The management approach, as defined by FASB ASC 280, “Segment Reporting,” is based on the way the chief operating decision maker organizes the segments within a company for making decisions about resources to be allocated and assessing their performance.

During fiscal year 2016, the company’s chief operating decision maker changed the information regularly reviewed for making decisions to allocate resources and assess performance. As a result, the company will report its financial performance based on three business segments: Timberlands, Real Estate & ENR, and Wood Products. Prior to revising our segment structure, activities related to the Real Estate & ENR business segment were reported as part of the Timberlands business segment.

Amounts for all periods presented have been reclassified throughout the consolidated financial statements and disclosures to conform to the new segment structure.

We are principally engaged in growing and harvesting timber, manufacturing, distributing, and selling products made from trees, as well as maximizing the value of every acre we own through the sale of higher and better use (HBU) properties and monetizing reserves of minerals, oil, gas, coal, and other natural resources on our timberlands. The following is a brief description of each of our reportable business segments and activities:
Timberlands – which includes logs, timber, and our Uruguay operations;
Real Estate & ENR – which includes sales of HBU and non-core timberlands, minerals, oil, gas, coal and other natural resources, and equity interests in our Real Estate Development Ventures (as defined and described in Note 7: Related Parties); and
Wood Products – which includes softwood lumber, engineered wood products, oriented strand board, plywood, medium density fiberboard and building materials distribution.
Discontinued operations as presented herein consist of the operations of our former Cellulose Fibers segment, and relate to assets and liabilities that have been reclassified as discontinued operations on our balance sheet as of June 30, 2016. All periods presented have been revised to separate the results of discontinued operations from the results of our continuing operations. Refer to Note 3: Discontinued Operations for more information regarding our discontinued operations.


8



An analysis and reconciliation of our business segment information to the respective information in the Consolidated Statements of Operations is as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Sales to unaffiliated customers:
 
 
 
 
 
 
 
Timberlands
$
471

 
$
328

 
$
858

 
$
651

Real Estate & ENR
38

 
13

 
77

 
47

Wood Products
1,146

 
1,004

 
2,125

 
1,927

 
1,655

 
1,345

 
3,060

 
2,625

Intersegment sales:
 
 
 
 
 
 
 
Timberlands
193

 
187

 
415

 
415

Wood Products
22

 
22

 
44

 
41

 
215

 
209

 
459

 
456

Total sales
1,870

 
1,554

 
3,519

 
3,081

Intersegment eliminations
(215
)
 
(209
)
 
(459
)
 
(456
)
Total
$
1,655

 
$
1,345

 
$
3,060

 
$
2,625

Net contribution to earnings:
 
 
 
 
 
 
 
Timberlands
$
125

 
$
117

 
$
254

 
$
256

Real Estate & ENR(1)
12

 
10

 
27

 
33

Wood Products
156

 
71

 
243

 
133

 
293

 
198

 
524

 
422

Unallocated items(2)(3)
(18
)
 
11

 
(82
)
 
(54
)
Net contribution to earnings
275

 
209

 
442

 
368

Interest expense, net of capitalized interest
(114
)
 
(85
)
 
(209
)
 
(167
)
Earnings from continuing operations before income taxes
161

 
124

 
233

 
201

Income taxes
(31
)
 
1

 
(42
)
 
(8
)
Earnings from continuing operations
130

 
125

 
191

 
193

Earnings from discontinued operations, net of income taxes
38

 
19

 
58

 
52

Net earnings
168

 
144

 
249

 
245

Dividends on preference shares
(11
)
 
(11
)
 
(22
)
 
(22
)
Net earnings attributable to Weyerhaeuser common shareholders
$
157

 
$
133

 
$
227

 
$
223


(1)
The Real Estate & ENR segment includes the equity earnings from and investments in and advances to our Real Estate Development Ventures (as defined and described in Note 7: Related Parties), which are accounted for under the equity method.
(2)
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, equity earnings from our Timberland Venture, (as defined and described in Note 7: Related Parties), the elimination of intersegment profit in inventory and the LIFO reserve.
(3)
As a result of reclassifying our former Cellulose Fibers segment as discontinued operations, Unallocated items also includes retained indirect corporate overhead costs previously allocated to the former segment.



9



A reconciliation of our business segment total assets to total assets in the Consolidated Balance Sheet is as follows:
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2016
 
DECEMBER 31,
2015
Total Assets:
 
 
 
Timberlands and Real Estate & ENR(1)
$
15,888

 
$
7,260

Wood Products
1,840

 
1,541

Unallocated items
2,353

 
1,985

Discontinued operations
1,908

 
1,934

Total
$
21,989

 
$
12,720

(1)
Assets attributable to the Real Estate & ENR business segment are combined with total assets for the Timberlands segment because we do not produce separate balance sheets internally.


NOTE 3: DISCONTINUED OPERATIONS

On November 8, 2015, Weyerhaeuser announced that the board authorized the exploration of strategic alternatives for its Cellulose Fibers business segment.

On May 1, 2016, we entered into an agreement to sell our Cellulose Fibers pulp business to International Paper for $2.2 billion in cash. The pulp business consists of five pulp mills located in Columbus, Mississippi; Flint River, Georgia; New Bern, North Carolina; Port Wentworth, Georgia and Grande Prairie, Alberta, and two modified fiber mills located in Columbus, Mississippi and Gdansk, Poland. This transaction is expected to close in fourth quarter 2016.

On June 15, 2016, we entered into an agreement to sell our Cellulose Fibers liquid packaging board business to Nippon Paper Industries Co., Ltd., for $285 million in cash. Our liquid packaging board business consists of one mill located in Longview, Washington. This transaction is expected to close in third quarter 2016.

The transactions with International Paper and Nippon Paper Industries Co., Ltd., are subject to customary closing conditions, including regulatory review. We will continue to operate these operations separately from International Paper and Nippon Paper Industries Co., Ltd., until the respective transactions close.

The assets and liabilities of the pulp and liquid packaging board businesses, along with our investment in our printing papers joint venture, met the criteria necessary to be classified as held-for-sale during second quarter 2016, including the expectation that the sales of these assets are probable and will be completed within one year.

Results of operations for these businesses, along with our interest in our printing papers joint venture, have been reclassified to discontinued operations. These operations were previously reported as the Cellulose Fibers segment. These results have been summarized as "Earnings from discontinued operations, net of income taxes" on our Consolidated Statement of Operations for each period presented. The related assets and liabilities of these operations met the criteria for classification as "held for sale" and have been reclassified as discontinued operations on our Consolidated Balance Sheet for each date presented. We did not reclassify our Consolidated Statement of Cash Flows to reflect discontinued operations.

We expect to use after-tax proceeds from our sales of our discontinued operations for repayment of long-term debt.

10




The following table presents net earnings from discontinued operations.
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Total net sales
$
456

 
$
467

 
$
886

 
$
914

Costs of products sold
374

 
417

 
760

 
809

Gross margin
82

 
50

 
126

 
105

Selling expenses
3

 
4

 
7

 
7

General and administrative expenses
8

 
8

 
17

 
16

Research and development expenses
2

 
1

 
3

 
3

Charges for integration and restructuring, closures and asset impairments(1)
25

 

 
31

 

Other operating income, net
(10
)
 
(6
)
 
(19
)
 
(14
)
Operating income
54

 
43

 
87

 
93

Equity loss from joint venture
(1
)
 
(7
)
 
(3
)
 
(13
)
Interest expense, net of capitalized interest
(1
)
 
(3
)
 
(3
)
 
(4
)
Earnings from discontinued operations before income taxes
52

 
33

 
81

 
76

Income taxes
(14
)
 
(14
)
 
(23
)
 
(24
)
Net earnings from discontinued operations
$
38

 
$
19

 
$
58

 
$
52

(1)
Charges for integration and restructuring, closures and asset impairments consist of costs related to our strategic evaluation of the Cellulose Fibers businesses and transaction-related costs.

The following table shows carrying values for assets and liabilities classified as discontinued operations as of June 30, 2016 and December 31, 2015.
DOLLAR AMOUNTS IN MILLIONS
JUNE 30, 2016
 
DECEMBER 31, 2015
Assets
 
 
 
Cash and cash equivalents
$
7

 
$
1

Receivables, less allowances
213

 
211

Inventories
230

 
243

Prepaid expenses
15

 
14

Property and equipment, net
1,313

 
1,339

Construction in progress
72

 
51

Timber and timberlands at cost, less depletion charged to disposals

 
1

Investments in and advances to joint ventures
58

 
74

Total assets of discontinued operations
$
1,908

 
$
1,934

Liabilities
 
 
 
Accounts payable
$
99

 
$
122

Accrued liabilities
94

 
118

Long-term debt
88

 
88

Deferred income taxes
359

 
336

Other liabilities
26

 
26

Total liabilities of discontinued operations
$
666

 
$
690


11




Cash flows from discontinued operations for the three and six months ended June 30, 2016 and June 30, 2015 are as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Net cash provided by operating activities
$
68

 
$
73

 
$
134

 
$
173

Net cash used in investing activities
$
(12
)
 
$
(31
)
 
$
(34
)
 
$
(58
)

NOTE 4: MERGER WITH PLUM CREEK

On February 19, 2016, we merged with Plum Creek Timber Company, Inc. (Plum Creek). Plum Creek was a REIT that primarily owned and managed timberlands in the United States. Plum Creek also produced wood products, developed opportunities for mineral and other natural resource extraction, and sold real estate properties. The merger combined two industry leaders. The breadth and diversity of our combined timberlands, real estate, energy and natural resources assets, and wood products operations position Weyerhaeuser to capitalize on the improving housing market and to continue to capture HBU land values across the combined portfolio.

Under the merger agreement, each issued and outstanding share of Plum Creek common stock was exchanged for 1.60 Weyerhaeuser common shares, with cash paid in lieu of any fractional shares. Upon consummation of the merger, all outstanding Plum Creek stock options (all fully vested as of the merger date) and restricted stock units were converted into Weyerhaeuser stock options and restricted stock units, after giving effect to the 1.60 exchange ratio. Because the Plum Creek stock options were fully vested and relate to services rendered to Plum Creek prior to the merger, the replacement stock options were also fully vested and their fair value is included in the consideration transferred. Replacement restricted stock units relate to services to be performed post-merger and therefore were not included in consideration transferred. See additional details about replacement share-based payment awards in Note 14: Share-based Compensation.
 
The following table summarizes the total consideration transferred in the merger:
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
 
 
Number of Plum Creek common shares outstanding(1)
174,307,267

 
Exchange ratio per the merger agreement
1.60

 
Weyerhaeuser shares issued in exchange for Plum Creek equity(2)
278,901,479

 
Price per Weyerhaeuser common share(3)
$
22.87

 
Aggregate value of Weyerhaeuser common stock issued
 
$
6,378

Fair value of stock options(4)
 
5

Estimated consideration transferred
 
$
6,383

(1)
The number of shares of Plum Creek common stock issued and outstanding as of February 19, 2016.
(2)
Total shares issued net of partial shares settled in cash.
(3)
The closing price of Weyerhaeuser common stock on the NYSE on February 19, 2016.
(4)
The estimated fair value of Plum Creek stock options for pre-merger services rendered.

We recognized $8 million and $118 million of merger-related costs that were expensed during the quarter and year-to-date period ended June 30, 2016, respectively. We also recognized $14 million of merger-related costs that were expensed during the fourth quarter of 2015. See Note 15: Charges for Integration and Restructuring, Closures, and Asset Impairments for descriptions of the components of merger-related costs. These costs are included in "Charges for integration and restructuring, closures and asset impairments" in our Consolidated Statement of Operations.

The amount of revenue and loss before income taxes from acquired Plum Creek operations included in our Consolidated Statement of Operations from the merger date to June 30, 2016 are as follows:

12



 
QUARTER ENDED
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
JUNE 2016
Net sales
$
243

$
369

Loss before income taxes
$
4

$
35


Summarized unaudited pro forma information that presents combined amounts as if this merger occurred at the beginning of 2015 is as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Net sales
$
1,655

 
$
1,640

 
$
3,216

 
$
3,318

Net earnings from continuing operations attributable to Weyerhaeuser common shareholders
$
122

 
$
114

 
$
266

 
$
184

Earnings from continuing operations per share attributable to Weyerhaeuser common shareholders, basic and diluted
$
0.16

 
$
0.14

 
$
0.35

 
$
0.23


Pro forma net earnings attributable to Weyerhaeuser common shareholders excludes $3 million and $134 million non-recurring merger-related costs (net of tax) incurred in the quarterly and six-month periods ended June 30, 2016, respectively. No non-recurring merger-related costs were incurred during the quarterly or six-month periods ended June 30, 2015. Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.

Weyerhaeuser has accounted for the merger transaction as the acquirer and has applied the acquisition method of accounting. Under the acquisition method, the assets acquired and liabilities assumed by Weyerhaeuser from Plum Creek were recorded as of the date of the acquisition at their respective estimated fair values.

The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were generally based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in ASC 820, Fair Value Measurement, with the exception of certain long-term debt instruments assumed in the acquisition that can be valued using observable market inputs and are therefore Level 2 measurements. The income approach was primarily used to value acquired timberlands, minerals and mineral rights, equity investments in the Timberland Venture (as defined and described in Note 7: Related Parties) and Real Estate Development Ventures (as defined and described in Note 7: Related Parties), and the note payable to the Timberland Venture. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flows are discounted at rates of return that reflect the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. The market approach was primarily used to value higher and better use real estate tracts included within acquired timberlands, certain land and building assets included within acquired property and equipment, and long-term debt instruments. The market approach estimates fair value for an asset based on values of recent comparable transactions.

The initial allocation of purchase price was recorded using preliminary estimated fair value of assets acquired and liabilities assumed based upon the best information available to management at the time. The purchase price allocation was updated in the second quarter 2016. The measurement period adjustments reflect additional information obtained to record the fair value of certain assets acquired and liabilities assumed based on facts and circumstances existing as of the acquisition date. Measurement period adjustments reflected below did not have a material impact to earnings and had no impact to cash flows for the quarter or year-to-date period ended June 30, 2016.


13



Initial and updated preliminary estimated fair values of identifiable assets acquired and liabilities assumed as of the merger date are as follows:
DOLLAR AMOUNTS IN MILLIONS
FEBRUARY 19,
2016
 
MEASURMENT PERIOD ADJUSTMENTS
 
JUNE 30,
2016
Current assets
$
128

 
$
(2
)
 
$
126

Timber and timberlands
8,124

 
48

 
8,172

Minerals and mineral rights
312

 
(3
)
 
309

Property and equipment
272

 
(5
)
 
267

Equity investment in Timberland Venture
876

 
(35
)
 
841

Equity investment in Real Estate Development Ventures
88

 
(4
)
 
84

Other assets
163

 
2

 
165

Total assets acquired
9,963

 
1

 
9,964

 
 
 
 
 
 
Current liabilities
610

 

 
610

Long-term debt
2,056

 

 
2,056

Note Payable to Timberland Venture
837

 
1

 
838

Other liabilities
77

 

 
77

Total liabilities assumed
3,580

 
1

 
3,581

 
 
 
 
 
 
Net assets acquired
$
6,383

 
$

 
$
6,383


These estimated fair values are preliminary in nature and subject to further adjustments, which could be material. We have not identified any material unrecorded pre-merger contingencies where the related asset, liability or impairment is probable and the amount can be reasonably estimated. We are in the process of finalizing our valuations related to the following:
timber and timberlands,
minerals and mineral rights,
property and equipment,
acquired equity method investments, and
other contractual rights and obligations.
Our valuations will be finalized when certain information arranged to be obtained has been received and our review of that information has been completed. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation.


NOTE 5: NET EARNINGS PER SHARE AND SHARE REPURCHASES

NET EARNINGS PER SHARE

Our basic and diluted earnings per share attributable to Weyerhaeuser shareholders were:
$0.21 during second quarter 2016 and $0.33 during year-to-date 2016; and
$0.26 during second quarter 2015 and $0.43 during year-to-date 2015.

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.


14



Diluted earnings per share is net earnings available to common shareholders divided by the sum of the weighted average number of our outstanding common shares and the effect of our outstanding dilutive potential common shares:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Weighted average number of outstanding common shares – basic
743,140

 
516,626

 
687,572

 
520,008

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
3,061

 
2,446

 
2,398

 
2,704

Restricted stock units
1,075

 
291

 
678

 
353

Performance share units
425

 
441

 
412

 
530

Total effect of outstanding dilutive potential common shares
4,561

 
3,178

 
3,488

 
3,587

Weighted average number of outstanding common shares – dilutive
747,701

 
519,804

 
691,060

 
523,595

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. Preference shares are considered to be participating as of the financial reporting period end to the extent they would participate in dividends paid to common shareholders. Preference shares are not considered participating for the quarter and year-to-date periods ended June 30, 2016. Under the provisions of the two-class method, basic and diluted earnings per share would be presented for both preference and common shareholders.

Potential Shares Not Included in the Computation of Diluted Earnings per Share

The following shares were not included in the computation of diluted earnings per share because they were either antidilutive or the required performance or market conditions were not met. Some or all of these shares may be dilutive potential common shares in future periods.
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Stock options
1,916

 
2,102

 
1,916

 
2,102

Performance share units
471

 
354

 
471

 
354

Preference shares
25,273

 
24,987

 
25,273

 
24,987


STOCK REPURCHASE PROGRAM

We repurchased 26,673,396 shares of common stock for $832 million (including transaction fees) during second quarter 2016 and 58,040,937 shares of common stock for $1,695 million (including transaction fees) during year-to-date 2016 under the 2016 Share Repurchase Authorization. The 2016 Share Repurchase Authorization was approved in November 2015 by our Board of Directors and authorized management to repurchase up to $2.5 billion of outstanding shares subsequent to the closing of our merger with Plum Creek. This new authorization replaced the August 2015 share repurchase authorization. Transaction fees incurred for repurchases are not counted as use of funds authorized for repurchases under the 2016 Share Repurchase Authorization. All common stock purchases under the stock repurchase program were made in open-market transactions. As of June 30, 2016, we had remaining authorization of $806 million for future stock repurchases.


15



We record share repurchases upon trade date as opposed to the settlement date when cash is disbursed. We record a liability to account for repurchases that have not been cash settled. Unsettled repurchases consisted of 2,260,407 shares totaling $66 million as of June 30, 2016. There were no unsettled repurchases as of June 30, 2015, or December 31, 2015.

From July 1, 2016, to August 1, 2016, we repurchased 8,802,375 shares of common stock for $274 million under the 2016 Share Repurchase Authorization. As of August 1, 2016, we had remaining authorization of $532 million.

MANDATORY CONVERTIBLE PREFERENCE SHARES

On July 1, 2016, all outstanding 6.375% Mandatory Convertible Preference Shares, Series A (Preference Shares) converted into Weyerhaeuser common shares at a rate of 1.6929 Weyerhaeuser common shares per Preference Share. The company issued a total of 23.2 million Weyerhaeuser common shares in conjunction with the conversion, based on 13.7 million Preference Shares outstanding as of the conversion date.

In accordance with the terms of the Preference Shares, the number of Weyerhaeuser common shares issuable on conversion was determined based on the average volume weighted average price of $29.54 for Weyerhaeuser common shares over the 20-trading-day period beginning June 1, 2016, and ending on June 28, 2016.

NOTE 6: INVENTORIES

Inventories include raw materials, work-in-process and finished goods.
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2016
 
DECEMBER 31,
2015
LIFO Inventories:





Logs and chips
$
11


$
5

Lumber, plywood and panels
54


48

Other products
13


11

FIFO or moving average cost inventories:





Logs and chips
33


36

Lumber, plywood, panels and engineered wood products
95


75

Other products
95


84

Materials and supplies
86


66

Total
$
387


$
325


LIFO – the last-in, first-out method – applies to major inventory products held at our U.S. domestic locations. The FIFO – the first-in, first-out method – or moving average cost methods apply to the balance of our domestic raw material and product inventories as well as for all material and supply inventories and all foreign inventories. If we used FIFO for all LIFO inventories, our stated inventories would have been higher by $68 million as of June 30, 2016 and $67 million as of December 31, 2015.



16



NOTE 7: RELATED PARTIES

We use the equity method to account for our investments in various joint ventures. The following tables summarize the current period equity earnings or loss from and our respective balances of our investments in and advances to each of our joint ventures:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Equity earnings from joint ventures:
 
 
 
 
 
 
 
Timberland Venture
$
7

 
$

 
$
12

 
$

Real Estate Development Ventures

 

 

 

Total
$
7

 
$

 
$
12

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
JUNE 30,
2016
 
DECEMBER 31, 2015
Investment in and advances to joint ventures:
 
 
 
 
 
 
 
Timberland Venture
 
 
 
 
$
825

 
$

Real Estate Development Ventures
 
 
 
 
80

 

Total
 
 
 
 
$
905

 
$


Through our merger with Plum Creek on February 19, 2016, we acquired equity interests in the Real Estate Development Ventures and the Timberland Venture. Additionally, through the merger Weyerhaeuser assumed the benefits and obligations associated with the formation of Twin Creeks Timber, LLC a timberland venture (Twin Creeks Venture). The Twin Creeks Venture was funded with initial capital contributions on April 1, 2016.

Real Estate Development Ventures

WestRock-Charleston Land Partners, LLC (WR-CLP) is a limited liability company which holds residential and commercial real estate development properties, currently under development (Class A Properties) and higher-value timber and development lands (Class B Properties) (referred to collectively as the Real Estate Development Ventures). We have a 3 percent interest in Class A Properties and a 50 percent interest in Class B Properties. WestRock Company is the other member of WR-CLP and owns 97 percent of the Class A Properties and 50 percent of the Class B Properties. The Company uses the equity method for both its Class A and Class B interests. Our share of the equity earnings are included in the net contribution to earnings of our Real Estate & ENR segment.

WR-CLP is a variable interest entity and is financed by regular capital calls from the manager of WR-CLP in proportion to a member’s ownership interest. If a member does not make a capital contribution, the member’s ownership interest is diluted. We are committed to make additional capital contributions of up to $29 million during the years 2016 to 2020. We do not intend to provide any additional sources of financing for WR-CLP.

We are not the primary beneficiary of WR-CLP. We consider the activities that most significantly impact the economic performance of WR-CLP to be the day-to-day operating decisions along with the oversight responsibilities for the real estate development projects and properties. WestRock Company (the other equity member) has the power to direct the activities of WR-CLP that most significantly impact its economic performance through its ability to manage the day-to-day operations of WR-CLP. WestRock Company also has the ability to control all management decisions associated with all Class A and Class B Properties through its majority representation on the board of directors for the Class A Properties and due to its equal representation on the board of directors for the Class B Properties.

Our maximum exposure to loss is $80 million, the carrying amount of our investment in WR-CLP at June 30, 2016, plus any required future capital contributions we make.


17



Timberland Venture

We hold preferred and common interests in Southern Diversified Timber, LLC, a timberland joint venture (Timberland Venture), which includes 100 percent of the preferred interests and 9 percent of the common interests. The Timberland Venture’s other member, an affiliate of Campbell Global LLC, holds 91 percent of the Timberland Venture’s common interests. The activities of the Timberland Venture consist primarily of owning timberlands and entering into cutting contracts with an affiliate of Campbell Global for the selling and harvesting of timber. An affiliate of Campbell Global is the manager of the Timberland Venture. Our investment in and share of the equity earnings of the Timberland Venture is not attributed to one of our business segments, and is reported in Unallocated Items.

The preferred interest is entitled to a cumulative preferred return equal to 7.875 percent per year. No distributions can be made on the common interests until all current period and prior period preferred returns have been paid. Both our preferred and common interests are accounted for based on the equity method. Equity earnings of the Timberland Venture are first allocated to our preferred interest to the extent of our preferred return, with any excess earnings allocated among the common interests based on ownership percentage. All of the equity earnings will be allocated to our preferred interest in years in which our preferred return equals or exceeds the earnings of the Timberland Venture. To the extent of shortfall in equity earnings (cumulative preferred return in excess of allocated equity earnings), future years’ excess earnings will be allocated to our preferred interest until the cumulative shortfall is eliminated.

On June 27, 2016, the other member of the Timberland Venture notified us of their intention to exercise its option to redeem its interest, which will result in a termination of the joint venture. Upon the redemption, the members’ capital accounts will be adjusted to reflect the fair value of the Timberland Venture’s net assets at the redemption date. The adjustments will first be allocated to our preferred interest to the extent that any accumulated shortfall in net income attributable to our preferred interest exists, but only to the extent that the fair value of the net assets of the Timberland Venture exceed book basis. The other member is entitled to receive timberlands and other assets equal to its adjusted capital account in redemption of its interest in the joint venture. We expect the redemption to occur during the second half of 2016.

The Timberland Venture is a variable interest entity. Aside from quarterly interest payments on the Note Payable to Timberland Venture, we did not provide financing or other support to the venture. The venture generates sufficient cash from operating activities to finance its operations.

We are not the primary beneficiary of the Timberland Venture. We do not manage the day-to-day operations of the Timberland Venture, have only limited protective rights and our involvement is generally limited to receiving distributions on our preferred and common interests. We are not the primary beneficiary because we do not direct the activities that most significantly impact the Timberland Venture’s economic performance. We believe that the activities that most significantly impact the Timberland Venture’s economic performance include managing the timberlands along with the timing and extent of the harvesting activities, neither of which we control.

Our maximum exposure to loss is $825 million, the carrying amount of the investment at June 30, 2016. Generally, losses are first allocated among the common interests based on positive capital accounts in which we hold a 9 percent common interest. Losses would be allocated to our preferred interest only when losses have reduced capital accounts comprising the common interests to zero.

Twin Creeks Venture

On April 1, 2016, we contributed approximately 260,000 acres of our southern timberlands with an agreed-upon value of approximately $560 million to Twin Creeks Timber LLC (Twin Creeks Venture) in exchange for cash of approximately $440 million and a 21 percent ownership interest. The other members contributed cash of approximately $440 million for a combined 79 percent ownership interest.

The Twin Creeks Venture is expected to raise total committed capital of up to $950 million from its investors over the next several years. We expect to maintain a 21 percent ownership interest and to contribute additional capital of up to $85 million during the next several years. Unless extended by unanimous vote of all the investors, the term of the Twin Creeks Venture is 15 years.
In conjunction with contributing to the venture, we entered into a separate agreement to manage the timberlands owned by the Twin Creeks Venture, including harvesting activities, marketing and log sales activities, and replanting

18



and silviculture activities. This management agreement guarantees an annual return to the venture in the form of minimum quarterly payments from us equal to 3 percent of the fair value of the managed timberlands. We are also required to annually distribute 75 percent of any profits earned by us in excess of the minimum quarterly payments. The management agreement is cancellable at any time by Twin Creeks Timber LLC and otherwise will expire after three years.
The guaranteed return that the management agreement requires Weyerhaeuser to provide to the Twin Creeks Venture constitutes continuing involvement in the timberlands we contributed to the venture. This continuing involvement prohibits recognition of the contribution as a sale and requires application of the deposit method to account for the cash payment received. By applying the deposit method to the contribution of timberlands to the venture:
our receipt of $440 million proceeds from the contribution of timberlands to the venture was recorded as a noncurrent liability – "Deposit from contribution of timberlands to related party" – on our Consolidated Balance Sheet;
the contributed timberlands will continue to be reported within the "Timber and timberlands at cost, less depletion charged to disposals" on our Consolidated Balance Sheet with no change in value;
no gain or loss was recognized in our Consolidated Statement of Operations; and
our balance sheet does not reflect our 21 percent ownership interest in the Twin Creeks Venture.
The receipt of $440 million was classified as a cash flow from investing activities in our Consolidated Statement of Cash Flows. The cash proceeds from our contribution of timberlands were used to fund our share repurchases described in Note 5: Net Earnings per Share and Share Repurchases.
The "Deposit from contributions of timberlands to related party" liability balance will subsequently increase for additional payments received from the venture (e.g., distributions) and decrease for any payments by us to the venture (e.g., the guaranteed return payments) with no corresponding impact to earnings. These cash flows are included in "Other" cash flows from investing activities in our Consolidated Statement of Cash Flows.
All revenues and expenses from our harvest and sale of standing timber from the contributed timberland will continue to be reported in our Consolidated Statement of Operations and attributed to our Timberlands business segment as though the contribution had not occurred.

NOTE 8: 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 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Service cost(1)
$
11

 
$
13

 
$
24

 
$
28

Interest cost
69

 
68

 
137

 
133

Expected return on plan assets
(123
)
 
(121
)
 
(246
)
 
(239
)
Amortization of actuarial loss
40

 
47

 
78

 
91

Amortization of prior service cost
1

 
1

 
2

 
2

Accelerated pension costs included in Plum Creek merger-related costs (Note 15)

 

 
5

 

Total net periodic benefit cost (credit) - pension
$
(2
)
 
$
8

 
$

 
$
15


(1)
Service cost includes $3 million and $5 million for quarters ended June 30, 2016, and June 30, 2015, respectively, and $7 million and $8 million for the year-to-date periods ended June 30, 2016, and June 30, 2015, respectively for employees of our Cellulose Fibers segment. These charges are included in our results of discontinued operations.


19




 
OTHER POSTRETIREMENT BENEFITS
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Interest cost
$
3

 
$
2

 
$
5

 
$
5

Amortization of actuarial loss
2

 
3

 
4

 
5

Amortization of prior service credit
(2
)
 
(2
)
 
(4
)
 
(4
)
Total net periodic benefit cost - other postretirement benefits
$
3

 
$
3

 
$
5

 
$
6


ASSUMED PLANS FROM MERGER WITH PLUM CREEK

Upon our merger with Plum Creek, we assumed one qualified pension plan and two nonqualified pension plans. All active participants in these plans became fully vested and the plans were frozen as of February 19, 2016. The cumulative funded status of the assumed plans as of February 19, 2016, was a net liability of $62 million.

The expected return on assets for the qualified plan assumed is 7 percent. Assets of $47 million related to the nonqualified plans are held in a grantor trust and are subject to the claims of creditors in the event of bankruptcy. As a result, these are not considered plan assets and have not been netted against the nonqualified pension liability. These assets are included in "Other assets" in our Consolidated Balance Sheet.

During first quarter 2016, we recognized $5 million of pension benefit costs from change in control provisions for certain Plum Creek executives. These enhanced pension benefits were triggered by changes in control and retention decisions made after the completion of the merger (see Note 15: Charges for Integration and Restructuring, Closures and Impairments). We did not recognize any additional costs for change in control provisions during second quarter 2016.

FAIR VALUE OF PENSION PLAN ASSETS AND OBLIGATION

We estimate the fair value of pension plan assets based upon the information available during the year-end reporting process. In some cases, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year and market events. We updated the year-end estimated fair value of pension plan assets to incorporate year-end net asset values reflected in financial statements received after we have filed our Annual Report on Form 10-K. During second quarter 2016, we recorded an increase in the fair value of the pension assets of $7 million, or less than 1 percent. We also updated our census data that is used to estimate our projected benefit obligation for pension and other postretirement benefit plans. As a result of that update, during second quarter 2016, we recorded an increase to the projected benefit obligation of $1 million, or less than 1 percent. The net effect was a $6 million increase in the funded status.

Consistent with accounting for the merger as the acquirer in a business combination (see Note 4: Merger with Plum Creek), pension assets and benefit obligations for plans assumed from Plum Creek were re-measured to reflect their fair value as of the merger date. This included updating asset values, updating discount rates to reflect market conditions as of the date of the merger, and freezing benefit accruals. The fair value of these items as of February 19, 2016, were as follows:

$137 million qualified pension plan assets;
$149 million qualified pension plan projected benefit obligation; and
$50 million nonqualified pension plan projected benefit obligation.

No adjustments were made to the fair value of assets or projected benefit obligations of plans assumed from Plum Creek during the second quarter.


20



EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS

In 2016 we expect to:
be required to contribute approximately $17 million for our Canadian registered plan;
be required to contribute or make benefit payments for our Canadian nonregistered plans of $3 million;
make benefit payments of $57 million for our U.S. nonqualified pension plans, including $38 million of benefit payments for plans assumed from Plum Creek to be paid out of assets held in grantor trusts; and
make benefit payments of $22 million for our U.S. and Canadian other postretirement plans.

We do not anticipate making a contribution to our U.S. qualified pension plans for 2016.


NOTE 9: ACCRUED LIABILITIES

Accrued liabilities were comprised of the following:
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2016
 
DECEMBER 31,
2015
Wages, salaries and severance pay
$
130

 
$
117

Pension and other postretirement benefits
88

 
44

Vacation pay
34

 
30

Taxes – Social Security and real and personal property
33

 
17

Interest
126

 
102

Customer rebates and volume discounts
30

 
31

Deferred income
63

 
28

Other
86

 
58

Total
$
590

 
$
427



NOTE 10: LONG-TERM DEBT AND LINES OF CREDIT

This note provides details about our:
long-term debt assumed in the Plum Creek merger and
new term loans issued.

LONG-TERM DEBT ASSUMED IN THE PLUM CREEK MERGER

Through our merger with Plum Creek, we assumed long-term debt instruments consisting of:
two issuances of publicly traded Senior Notes;
an Installment Note (defined and described below); and
the Note Payable to Timberland Venture (defined and described below).

Concurrent with the merger, we repaid in full the outstanding balances of Plum Creek's Revolving Line of Credit and Term Loan using $720 million of cash on hand.

Senior Notes

The assumed Senior Notes are publicly traded and were issued by Plum Creek Timberlands, L.P. (PC Timberlands) and are fully and unconditionally guaranteed by Weyerhaeuser Company as of the acquisition date. See Note 18: Condensed Consolidating Financial Information for issuer and guarantor financial information. There were two separate issuances of Senior Notes: $569 million (principal) of 4.70 percent notes which mature in 2021 and $325 million (principal) of 3.25 percent notes which mature in 2023. The Senior Notes are redeemable prior to maturity;

21



however, they are subject to a premium on redemption, which is based upon interest rates of U.S. Treasury securities having similar average maturities. 

Through preliminary acquisition accounting the Senior Notes were recognized at estimated fair values of $614 million for the 4.70 percent notes and $324 million for the 3.25 percent notes as of the acquisition date. The differences between cash interest payments and the amounts recorded as interest expense at the effective market rates will adjust the carrying values of the notes to the principal amounts at maturity.

Installment Note

We assumed an installment note (Installment Note) payable to WestRock Land and Development, LLC (WR LD) that was issued in connection with Plum Creek's acquisition of certain timberland assets. The principal balance of the Installment Note is $860 million. Following the issuance, WR LD pledged the installment note to certain banks. The annual interest rate on the Installment Note is fixed at 5.207 percent. Interest is paid semi-annually with the principal due upon maturity in December 2023. The term may be extended at the request of the holder if the company at the time of the request intends to refinance all or a portion of the Installment Note for a term of five years or more. The Installment Note is generally not redeemable prior to maturity except in certain limited circumstances and could be subject to a premium on redemption.

We receive patronage refunds under the Installment Note. Patronage refunds are distributions of profits from banks in the farm credit system, which are cooperatives that are required to distribute profits to their members. Patronage distributions, which are made in either cash or stock, are received in the year after they were earned and are recorded as offsets to interest expense.

Through preliminary acquisition accounting, the Installment Note was recognized at an estimated fair value of $893 million as of the acquisition date. The difference between the cash interest payments and the amount being recorded as interest expense at the effective market rate will reduce the carrying value of the Installment Note to the principal amount at the maturity date.

Note Payable to Timberland Venture

We have assumed a promissory note payable to Timberland Venture (Note Payable to Timberland Venture) that has a principal balance of $783 million. The annual interest rate on the Note Payable to Timberland Venture is fixed at 7.375 percent. Interest is paid quarterly with the principal due upon maturity. The note matures on October 1, 2018, but may be extended until October 1, 2020, at our election. The note is not redeemable prior to maturity.

Through preliminary acquisition accounting, the Note Payable to Timberland Venture was recognized at an estimated fair value of $838 million as of the acquisition date. The difference between the cash interest payments and the amount being recorded as interest expense at the effective market rate will reduce the carrying value of the note to the principal amount at the maturity date.

The Timberland Venture is a related party, as described in Note 7: Related Parties.

NEW TERM LOANS ISSUED

During February 2016 and subsequent to completion of the Plum Creek merger, we entered into a $600 million 18-month senior unsecured term loan maturing in August 2017. Borrowings are currently at LIBOR plus 1.05 percent. As of June 30, 2016, we had $600 million outstanding under this facility.

During March 2016, we entered into a $1.9 billion 18-month senior unsecured term loan maturing in September 2017. Borrowings are currently at LIBOR plus 1.05 percent. At June 30, 2016, we had $800 million outstanding under this facility.



22



NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values and carrying values of our long-term debt consisted of the following:
 
JUNE 30,
2016
DECEMBER 31,
2015
DOLLAR AMOUNTS IN MILLIONS
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
 
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
Long-term Debt – fixed rate
$
6,066

 
$
7,184

 
$
4,238

 
$
4,967

Long-term Debt – variable rate
1,947

 
1,950

 
549

 
550

Note Payable to Timberland Venture
830

 
845

 

 

Total Debt
$
8,843

 
$
9,979

 
$
4,787

 
$
5,517


To estimate the fair value of fixed rate long-term debt, we used the following valuation approaches:
market approach – based on quoted market prices we received for the same types and issues of our debt; or
income approach – based on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt.

We believe that our variable rate long-term debt instruments have net carrying values that approximate their fair values with only insignificant differences.

The fair value of the Note Payable to Timberland Venture is estimated using a market approach based on quoted market prices we received for comparable issues of debt.

The inputs to these valuations are based on market data obtained from independent sources or information derived principally from observable market data. The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at the measurement date.

FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS

We believe that our other financial instruments, including cash and cash equivalents, short-term investments, mutual fund investments held in grantor trusts, receivables, and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to the short-term nature of these instruments and the allowance for doubtful accounts.


NOTE 12: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES

This note provides details about our:
legal proceedings and
environmental matters.

LEGAL PROCEEDINGS

We are party to various legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceeding that management believes could have a material adverse effect on our long-term consolidated financial position, results of operations or cash flows. See Note 17: Income Taxes for a discussion of a tax proceeding involving Plum Creek REIT's 2008 U.S. federal income tax return.


23



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.

We have received notification from the Environmental Protection Agency (the EPA) and have acknowledged that we are a potentially responsible party in a portion of the Kalamazoo River Superfund site in southwest Michigan. Our involvement in the remediation site is based on our former ownership of the Plainwell, Michigan mill located within the remediation site. In 2015, we received invitations from the EPA to negotiate an administrative order on consent for a contaminant removal action for a portion of the site comprising a stretch of the river approximately 1.7 miles long that the EPA refers to as the Otsego Township Dam Area. Several other companies also operated upstream pulp mills, and two other parties received the same invitations. On April 14, 2016, the EPA issued an administrative order to the company and the other parties, the terms and scope of which are generally consistent with the company’s and the other parties’ discussions with the EPA. The company and the other parties have begun to jointly implement the administrative order. At this time we do not expect to incur material losses related to the implementation of the administrative order.

As of June 30, 2016, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately $36 million. These reserves are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet. The accrual has not changed materially since the end of 2015.

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 June 30, 2016, our accrued balance for these obligations was $32 million. These obligations are recorded in "Accrued liabilities" and "Other liabilities" on our Consolidated Balance Sheet. The accruals have not changed materially for continuing operations since the end of 2015.

Some of our sites have materials containing asbestos. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when materials containing asbestos might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.



24



NOTE 13: CUMULATIVE OTHER COMPREHENSIVE INCOME (LOSS)

Changes in amounts included in our cumulative other comprehensive income (loss) by component are:
 
 
PENSION
OTHER POSTRETIREMENT BENEFITS
 
 
DOLLAR AMOUNTS IN MILLIONS
Foreign currency translation adjustments
Actuarial losses
Prior service costs
Actuarial losses
Prior service credits
Unrealized gains on available-for-sale securities
Total
Beginning balance as of December 31, 2015
$
207

$
(1,372
)
$
(11
)
$
(77
)
$
35

$
6

$
(1,212
)
Other comprehensive income (loss) before reclassifications
39

(19
)

3


1

24

Income taxes

4


(1
)


3

Net other comprehensive income (loss) before reclassifications
39

(15
)

2


1

27

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

78

2

4

(4
)

80

Income taxes

(27
)
(1
)
(1
)
1


(28
)
Net amounts reclassified from cumulative other comprehensive income (loss)

51

1

3

(3
)

52

Total other comprehensive income (loss)
39

36

1

5

(3
)
1

79

Ending balance as of June 30, 2016
$
246

$
(1,336
)
$
(10
)
$
(72
)
$
32

$
7

$
(1,133
)
(1) Actuarial losses and prior service credits (cost) are included in the computation of net periodic benefit costs (credits). See Note 8: Pension and Other Postretirement Benefit Plans.


NOTE 14: SHARE-BASED COMPENSATION

In year-to-date 2016, we granted 6,121,835 stock options, 1,954,769 restricted stock units (RSUs), 495,079 performance share units (PSUs) and 106,752 stock appreciation rights. In addition, 1,128,765 outstanding RSUs and 288,780 outstanding PSUs vested during year-to-date 2016. A total of 1,516,957 shares of common stock were issued as a result of RSU vesting, PSU vesting and stock option exercises.

SHARE-BASED COMPENSATION RESULTING FROM OUR MERGER WITH PLUM CREEK

Included in the award activity above are replacement awards granted as a result of the merger with Plum Creek. Eligible outstanding Plum Creek stock options, restricted stock unit and deferred stock unit awards were converted into equivalent equity awards with respect to Weyerhaeuser Common Shares, after giving effect to the appropriate adjustments to reflect the consummation of the merger. In total, we issued replacement awards consisting of 1,953,128 stock options and 1,248,006 RSUs. We also assumed 289,910 value management awards (VMAs) through the merger with Plum Creek.


25



Replacement Stock Option Awards

The replacement stock option awards issued as a result of the merger with Plum Creek have similar exercise provisions as the terms of our current awards. All replacement stock option awards were fully vested prior to the date of the merger, so no expense will be recorded. The value of the replacement stock option awards was $5 million, which was included in the equity consideration issued in the merger as described in Note 4: Merger with Plum Creek.

Replacement Restricted Stock Unit Awards

The replacement RSUs issued as a result of the merger with Plum Creek have similar vesting provisions as the terms of existing Weyerhaeuser restricted stock unit awards. Expense for replacement RSUs will continue to be recognized over the remaining service period unless a qualifying termination occurs. A qualifying termination of an awardee will result in acceleration of vesting and expense recognition in the period that the qualifying termination occurs. Qualifying terminations during year-to-date 2016 resulted in accelerated vesting of 669,490 of the replacement RSUs and recognition of $15 million of expense. This accelerated expense is included in merger-related integration costs as described in Note 15: Charges for Integration and Restructuring, Closures and Asset Impairments.

Value Management Awards

Following the merger, the VMAs assumed were valued at target. All outstanding VMAs, if earned, will vest December 31, 2017, and be paid in the first quarter of 2018. The VMAs are classified and accounted for as liabilities, as they will be cash settled upon vesting. The expense recognized over the remaining performance period will equal the cash value of an award as of the last day of the performance period multiplied by the number of awards that are earned. Expense for VMAs will continue to be recognized over the remaining service period unless a qualifying termination occurs. A qualifying termination of an awardee will result in acceleration of vesting and expense recognition in the period that the qualifying termination occurs. Qualifying terminations during year-to-date 2016 resulted in $6 million of expense recognized. This accelerated expense is included in merger-related integration costs as described in Note 15: Charges for Integration and Restructuring, Closures and Asset Impairments.

STOCK OPTIONS

Excluding replacement awards granted as a result of the merger, the weighted average exercise price of stock options granted to date in 2016 was $23.09. The vesting and post-termination vesting terms for stock options granted to date in 2016 were as follows:
vest ratably over four years, except for the replacement stock option awards granted as a result of the Plum Creek merger, which were fully vested as of the grant date;
vest or continue to vest in the event of death while employed, disability or retirement at an age of at least 62;
continue to vest upon retirement at an age of at least 62, but a portion of the grant forfeits if retirement occurs before the one year anniversary of the grant;
continue to vest for one year in the event of involuntary termination when the retirement criteria has not been met; and
stop vesting for all other situations including early retirement prior to age 62.


26



Weighted Average Assumptions Used in Estimating the Value of Stock Options Granted in 2016
 
Stock Options(1)
Expected volatility
25.43
%
Expected dividends
5.37
%
Expected term (in years)
4.95

Risk-free rate
1.28
%
Weighted average grant date fair value

$2.73

(1)
Weighted average assumptions presented do not include the replacement stock option awards issued as consideration for our merger with Plum Creek.

RESTRICTED STOCK UNITS

Excluding replacement awards granted as a result of the merger, the weighted average fair value of the RSUs granted in 2016 was $23.09. The vesting provisions for RSUs granted in 2016 were as follows:
vest ratably over four years;
immediately vest in the event of death while employed or disability;
continue to vest upon retirement at an age of at least 62, but a portion of the grant forfeits if retirement occurs before the one year anniversary of the grant;
continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met; and
will forfeit upon termination of employment in all other situations including early retirement prior to age 62.

PERFORMANCE SHARE UNITS

The weighted average grant date fair value of PSUs granted in 2016 was $20.83.

The final number of shares granted in 2016 will range from 0 percent to 150 percent of each grant's target, depending upon actual company performance.

The ultimate number of PSUs earned is based on three measures:
our relative total shareholder return (TSR) ranking measured against the S&P 500 over a three year period;
our relative TSR ranking measured against an industry peer group of companies over a three year period; and
achievement of Plum Creek merger cost synergy targets.

The vesting provisions for PSUs granted in 2016 were as follows:
vest 100 percent on the third anniversary of the grant date as long as the individual remains employed by the company;
fully vest in the event the participant dies or becomes disabled while employed;
continue to vest upon retirement at an age of at least 62, but a portion of the grant forfeits if retirement occurs before the one year anniversary of the grant;
continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met and the employee has met the second anniversary of the grant date; and
will forfeit upon termination of employment in all other situations including early retirement prior to age 62.

27




Weighted Average Assumptions Used in Estimating the Value of Performance Share Units Granted in 2016
 
Performance Share Units
Performance period
1/1/2016 – 12/31/2018
 
Valuation date closing stock price
$
23.09
 
Expected dividends
5.37
%
Risk-free rate
0.48
%
0.93
%
Expected volatility
23.57
%
28.09
%

STOCK APPRECIATION RIGHTS

Stock appreciation rights are re-measured 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, 2016.

Weighted Average Assumptions Used to Re-measure the Value of Stock Appreciation Rights as of June 30, 2016
 
Stock Appreciation Rights
Expected volatility
23.29
%
Expected dividends
4.27
%
Expected term (in years)
2.44

Risk-free rate
0.85
%
Weighted average fair value

$6.52


The vesting and post-termination vesting terms for stock appreciation rights granted in 2016 are the same as for stock options described above.


NOTE 15: CHARGES FOR INTEGRATION AND RESTRUCTURING, CLOSURES AND ASSET IMPAIRMENTS


QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Integration and restructuring charges related to our merger with Plum Creek:
 
 
 
 
 
 
 
Termination benefits
$
3

 
$

 
$
48

 
$

Acceleration of share-based compensation related to qualifying terminations (Note 14)
2

 

 
21

 

Acceleration of pension benefits related to qualifying terminations (Note 8)

 

 
5

 

Professional services

 

 
39

 

Other integration and restructuring costs
3

 

 
5

 

Total integration and restructuring charges related to our merger with Plum Creek
8

 

 
118

 

Charges related to closures and other restructuring activities:
 
 
 
 
 
 
 
Termination benefits
3

 

 
3

 
1

Other closures and restructuring costs
1

 

 
2

 

Total charges related to closures and other restructuring activities
4

 

 
5

 
1

Impairments of long-lived assets
2

 

 
2

 
13

Total charges for integration and restructuring, closures and impairments
$
14


$


$
125


$
14


During 2016, we incurred and accrued for termination benefits (primarily severance), accelerated share-based payment costs, and accelerated pension benefits based upon actual and expected qualifying terminations of certain

28



employees as a result of restructuring decisions made subsequent to the merger. We also incurred non-recurring professional services costs for investment banking, legal and consulting, and certain other fees directly attributable to our merger with Plum Creek.

During 2015, we recognized a noncash impairment charge of $13 million in first quarter 2015 related to a nonstrategic asset held in Unallocated Items that was sold in second quarter 2015. The fair value of the asset was determined using significant unobservable inputs (level 3) based on discounted cash flow model.

Changes in accrued severance related to restructuring during the year-to-date period ended June 30, 2016, were as follows:
DOLLAR AMOUNTS IN MILLIONS
Accrued severance as of December 31, 2015
$
5

Charges
51

Payments
(26
)
Accrued severance as of June 30, 2016
$
30


Accrued severance is recorded within the "Wages, salaries and severance pay" component of "Accrued liabilities" on our Consolidated Balance Sheet as detailed in Note 9: Accrued Liabilities. The majority of the accrued severance balance as of June 30, 2016, is expected to be paid within one year.


NOTE 16: OTHER OPERATING COSTS (INCOME), NET

Other operating costs (income), net:
includes both recurring and occasional income and expense items and
can fluctuate from year to year.

ITEMS INCLUDED IN OTHER OPERATING COSTS (INCOME), NET
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 2016
 
JUNE 2015
 
JUNE 2016
 
JUNE 2015
Gain on disposition of nonstrategic assets
$
(10
)
 
$
(4
)
 
$
(46
)
 
$
(6
)
Foreign exchange losses (gains), net
1

 
(8
)
 
(12
)
 
21

Litigation expense, net
18

 
6

 
21

 
11

Other, net
(4
)
 
2

 
(10
)
 
(1
)
Total other operating costs (income), net
$
5

 
$
(4
)
 
$
(47
)
 
$
25


Gain on disposition of nonstrategic assets included a $36 million pretax gain recognized in the first quarter of 2016 on the sale of our Federal Way, Washington headquarters campus.
Foreign exchange losses (gains) result from changes in exchange rates, primarily related to our Canadian operations.


NOTE 17: INCOME TAXES
As a REIT, we generally are not subject to federal corporate level income taxes on REIT taxable income that is distributed to shareholders. We are required to pay corporate income taxes on earnings of our TRS, which includes our manufacturing businesses and the portion of our Timberlands and Real Estate & ENR segments' income included in the TRS.

The quarterly provision for income taxes is based on the current estimate of the annual effective tax rate. Our 2016 estimated annual effective tax rate for our TRS is approximately 32 percent, which is lower than the U.S. domestic statutory federal tax rate primarily due to favorable permanent tax deductions and lower foreign tax rates applicable to foreign earnings, partially offset by state income taxes.

29




Following the merger with Plum Creek in first quarter 2016, our income tax receivables and deferred income tax balances for our TRS have been adjusted to include Plum Creek’s TRS, which include $4 million in federal income tax receivables and $61 million in deferred income tax assets arising from temporary differences between the tax bases and book bases of assets acquired and liabilities assumed in the merger. See Note 4: Merger with Plum Creek for additional details.

ONGOING IRS MATTER

We received a Notice of Final Partnership Administrative Adjustment (FPAA), dated July 20, 2016, from the Internal Revenue Service (IRS) in regard to Plum Creek REIT’s 2008 U.S. federal income tax treatment of the transaction forming the Timberland Venture. The IRS is asserting the transfer of the timberlands to the Timberland Venture was a taxable transaction to the company at the time of the transfer rather than a nontaxable capital contribution. We plan to file a petition in the U.S. Tax Court and will vigorously contest this adjustment.

In the event that we are unsuccessful in this tax litigation, we could be required to recognize and distribute gain to shareholders of approximately $600 million and pay built-in gains tax of approximately $100 million. We would also be required to pay interest on both of those amounts, which would be substantial. We expect that as much as 80 percent of any such distribution could be made with our common stock, and shareholders would be subject to tax on the distribution at the applicable capital gains tax rate. Alternatively, we could elect to retain the gain and pay corporate-level tax to minimize interest costs to the company.

Although the outcome of this process cannot be predicted with certainty, we are confident in our position based on U.S. tax law and believe we will be successful in defending it. Accordingly, no reserve has been recorded related to this matter.


NOTE 18: CONDENSED CONSOLIDATING FINANCIAL INFORMATION

PC Timberlands, a 100 percent owned subsidiary of Weyerhaeuser Company (WY), is the primary obligor of $894 million in debt securities that are registered under the U.S. Securities Act of 1933. WY has guaranteed this debt, fully, unconditionally and irrevocably assuming and agreeing to perform, jointly and severally with PC Timberlands, the payment and covenant obligations for the debt.

The following condensed consolidating financial information provides information about: PC Timberlands, as issuer and primary obligor of the registered debt securities; Weyerhaeuser, as guarantor of the registered debt securities; and all other subsidiaries, as required by SEC Rule 3-10 of Regulation S-X (Rule 3-10). This condensed consolidating information was prepared in accordance with US GAAP, with the exception of investments in subsidiaries, which are accounted for using the equity method as required by Rule 3-10.


30



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS – QUARTER
 
QUARTER ENDED JUNE 30, 2016
DOLLAR AMOUNTS IN MILLIONS
Parent Company – WY
Subsidiary Issuer – PC Timberlands
Non-Issuer and Non-Guarantor Subsidiaries
Eliminations
Total Company
Net sales
$
186

$
55

$
1,618

$
(204
)
$
1,655

Costs of products sold
68

37

1,360

(207
)
1,258

Gross margin
118

18

258

3

397

Other operating expenses, net
12

14

113


139

Operating income
106

4

145

3

258

Non-operating expense, net
(23
)
(9
)
(65
)

(97
)
Earnings (loss) from continuing operations before income taxes
83

(5
)
80

3

161

Income taxes


(31
)

(31
)