XNYS:WY Weyerhaeuser Co Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    o  Yes    x  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 27, 2012, 537,767,552 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 30,
2012
 
JUNE 30,
2011
 
JUNE 30,
2012
 
JUNE 30,
2011
Net sales and revenues
$
1,793

 
$
1,610

 
$
3,287

 
$
3,032

Cost of products sold
1,516

 
1,343

 
2,806

 
2,520

Gross margin
277

 
267

 
481

 
512

Selling, general and administrative expenses
142

 
145

 
292

 
317

Research and development expenses
8

 
7

 
15

 
14

Charges for restructuring, closures and impairments
4

 
7

 
16

 
11

Other operating income, net (Note 6)
(53
)
 
(19
)
 
(119
)
 
(193
)
Operating income
176

 
127

 
277

 
363

Interest income and other
11

 
9

 
23

 
20

Interest expense, net of capitalized interest
(86
)
 
(117
)
 
(173
)
 
(210
)
Earnings from continuing operations before income taxes
101

 
19

 
127

 
173

Income taxes (Note 13)
(17
)
 
4

 
(2
)
 
(52
)
Earnings from continuing operations
84

 
23

 
125

 
121

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

 
(13
)
 

 
(12
)
Net earnings attributable to Weyerhaeuser common shareholders
$
84

 
$
10

 
$
125

 
$
109

Earnings (loss) per share attributable to Weyerhaeuser common shareholders, basic and diluted (Note 3):
 
 
 
 
 
 
 
Continuing operations
$
0.16

 
$
0.04

 
$
0.23

 
$
0.22

Discontinued operations

 
(0.02
)
 

 
(0.02
)
Net earnings per share
$
0.16

 
$
0.02

 
$
0.23

 
$
0.20

Dividends paid per share
$
0.15

 
$
0.15

 
$
0.30

 
$
0.30

Weighted average shares outstanding (in thousands) (Note 3):
 
 
 
 
 
 
 
Basic
537,966

 
538,599

 
537,667

 
537,873

Diluted
540,033

 
541,095

 
539,880

 
540,790


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
QUARTER ENDED
 
YEAR-TO-DATE
ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2012
 
JUNE 30,
2011
 
JUNE 30,
2012
 
JUNE 30,
2011
Net earnings attributable to Weyerhaeuser common shareholders
$
84

 
$
10

 
$
125

 
$
109

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

 
(1
)
 
22

Actuarial gains, net of tax expense of $8, $49, $21 and $57
25

 
96

 
48

 
110

Prior service costs, net of tax benefit of $19, $0, $49 and $1
(36
)
 
(4
)
 
(106
)
 
(3
)
Unrealized gains on available-for-sale securities
(1
)
 

 

 

Total other comprehensive income (loss)
(24
)
 
94

 
(59
)
 
129

Comprehensive income attributable to Weyerhaeuser common shareholders
$
60

 
$
104

 
$
66

 
$
238

See accompanying Notes to Consolidated Financial Statements.

1


CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 30,
2012
 
DECEMBER 31,
2011
ASSETS
 
 
 
Forest Products:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
857

 
$
950

Receivables, less allowances of $4 and $6
494

 
490

Inventories (Note 7)
487

 
476

Prepaid expenses
86

 
68

Deferred tax assets
100

 
81

Total current assets
2,024

 
2,065

Property and equipment, less accumulated depreciation of $6,693 and $6,550
2,770

 
2,901

Construction in progress
208

 
145

Timber and timberlands at cost, less depletion charged to disposals
3,963

 
3,978

Investments in and advances to equity affiliates
187

 
192

Goodwill
40

 
40

Other assets
435

 
444

Restricted assets held by special purpose entities
916

 
916

 
10,543

 
10,681

Real Estate:
 
 
 
Cash and cash equivalents
4

 
3

Receivables, less discounts and allowances of $6 and $2
38

 
41

Real estate in process of development and for sale
581

 
555

Land being processed for development
959

 
936

Investments in and advances to equity affiliates
20

 
21

Deferred tax assets
238

 
240

Other assets
89

 
113

Consolidated assets not owned
3

 
8

 
1,932

 
1,917

Total assets
$
12,475

 
$
12,598

 
See accompanying Notes to Consolidated Financial Statements

2


CONSOLIDATED BALANCE SHEET
(CONTINUED)
 
 
JUNE 30,
2012
 
DECEMBER 31,
2011
LIABILITIES AND EQUITY
 
 
 
Forest Products:
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt (Note 9)
$
184

 
$
12

Accounts payable
360

 
336

Accrued liabilities (Note 8)
576

 
593

Total current liabilities
1,120

 
941

Long-term debt (Note 9)
4,005

 
4,181

Deferred income taxes
92

 
93

Deferred pension and other postretirement benefits
1,429

 
1,467

Other liabilities
400

 
408

Liabilities (nonrecourse to Weyerhaeuser) held by special purpose entities
778

 
776

 
7,824

 
7,866

Real Estate:
 
 
 
Long-term debt (Note 9)
283

 
285

Other liabilities
171

 
172

Consolidated liabilities not owned

 
8

 
454

 
465

Commitments and contingencies (Note 12)


 


Total liabilities
8,278

 
8,331

Equity:
 
 
 
Weyerhaeuser shareholders’ interest:
 
 
 
Common shares: $1.25 par value; authorized 1,360,000,000 shares; issued and outstanding: 537,526,343 and 536,425,400 shares
672

 
671

Other capital
4,620

 
4,595

Retained earnings
132

 
176

Cumulative other comprehensive loss (Note 11)
(1,238
)
 
(1,179
)
Total Weyerhaeuser shareholders’ interest
4,186

 
4,263

Noncontrolling interests
11

 
4

Total equity
4,197

 
4,267

Total liabilities and equity
$
12,475

 
$
12,598

See accompanying Notes to Consolidated Financial Statements.

3



CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS
JUNE 30,
2012
 
JUNE 30,
2011
Cash flows from operations:
 
 
 
Net earnings
$
125

 
$
109

Noncash charges (credits) to earnings:
 
 
 
Depreciation, depletion and amortization
226

 
243

Deferred income taxes, net
7

 
26

Pension and other postretirement benefits (Note 10)
(58
)
 
43

Share-based compensation expense
18

 
17

Charges for impairment of assets
12

 
3

Net gains on dispositions of assets
(17
)
 
(176
)
Foreign exchange transaction (gains) losses (Note 6)
2

 
(8
)
Change in:
 
 
 
Receivables less allowances
(23
)
 
(69
)
Receivable for taxes
16

 
(27
)
Inventories
(12
)
 
(31
)
Real estate and land
(48
)
 
(34
)
Prepaid expenses
(20
)
 
(14
)
Accounts payable and accrued liabilities
9

 
(23
)
Deposits on land positions and other assets
22

 
(4
)
Pension and postretirement contributions
(68
)
 
(37
)
Other
16

 
9

Net cash from operations
207

 
27

Cash flows from investing activities:
 
 
 
Property and equipment
(122
)
 
(74
)
Timberlands reforestation
(17
)
 
(19
)
Proceeds from sale of assets
24

 
196

Other

 
(5
)
Cash from investing activities
(115
)
 
98

Cash flows from financing activities:
 
 
 
Cash dividends
(161
)
 
(161
)
Change in book overdrafts
(20
)
 
(18
)
Payments on debt
(6
)
 
(550
)
Exercises of stock options
7

 
37

Other
(4
)
 
(19
)
Cash from financing activities
(184
)
 
(711
)
Net change in cash and cash equivalents
(92
)
 
(586
)
Cash and cash equivalents at beginning of period
953

 
1,467

Cash and cash equivalents at end of period
$
861

 
$
881

Cash paid (received) during the period for:
 
 
 
Interest, net of amount capitalized of $11 and $17
$
168

 
$
247

Income taxes
$
(15
)
 
$
15

See accompanying Notes to Consolidated Financial Statements.

4



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

5



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

NOTE 1: BASIS OF PRESENTATION
We are a corporation that has elected to be taxed as a real estate investment trust (REIT). We expect to derive most of our REIT income from investments in timberlands, including the sale of standing timber through pay-as-cut sales contracts. REIT income can be distributed to shareholders without first paying corporate level tax, substantially eliminating the double taxation on income. A significant portion of our timberland segment earnings receives this favorable tax treatment. We are, however, subject to corporate taxes on built-in-gains (the excess of fair market value over tax basis at January 1, 2010) on sales of real property (other than standing timber) held by the REIT during the first 10 years following the REIT conversion. We also will continue to be required to pay federal corporate income taxes on earnings of our Taxable REIT Subsidiary (TRS), which principally includes our manufacturing businesses, our real estate development business and the portion of our Timberlands segment income included in the TRS.
Our consolidated financial statements provide an overall view of our results and financial condition. They include our accounts and the accounts of entities we control, including:
majority-owned domestic and foreign subsidiaries and
variable interest entities in which we are the primary beneficiary.
They do not include our intercompany transactions and accounts, which are eliminated, and noncontrolling interests are presented as a separate component of equity.
We account for investments in and advances to unconsolidated equity affiliates using the equity method, with taxes provided on undistributed earnings. This means that we record earnings and accrue taxes in the period earnings are recognized by our unconsolidated equity affiliates.
We report our financial condition in two groups:
Forest Products – our forest products-based operations, principally the growing and harvesting of timber, the manufacture, distribution and sale of forest products and corporate governance activities; and
Real Estate – our real estate development and construction operations.
Throughout these Notes to Consolidated Financial Statements, unless specified otherwise, references to “Weyerhaeuser,” “we” and “our” refer to the consolidated company, including both Forest Products and Real Estate.
The accompanying unaudited Consolidated Financial Statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. Except as otherwise disclosed in these Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements; certain disclosures normally provided in accordance with accounting principles generally accepted in the United States have been omitted. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011. Results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the full year.

6



RECLASSIFICATIONS
We have reclassified certain balances and results from the prior year to be consistent with our 2012 reporting. This makes year-to-year comparisons easier. Our reclassifications had no effect on net earnings or Weyerhaeuser shareholders’ interest. The reclassifications include the following:
We changed the way we classify certain transactions as operating or financing on our Consolidated Statement of Cash Flows.
Results of operations discontinued in 2011 are presented separately on our Consolidated Statement of Operations. Note 4: Discontinued Operations provides information about our discontinued operations.
We now report the elimination of intersegment profit on inventory and the LIFO reserve in Unallocated Items. Previously these company-level adjustments were recorded in the business segments. This provides a better understanding of business operating results.

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

7



An analysis and reconciliation of our business segment information to the respective information in the Consolidated Financial Statements is as follows:
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
JUNE 30,
2012
 
JUNE 30,
2011
Sales to and revenues from unaffiliated customers:
 
 
 
 
 
 
 
Timberlands
$
262

 
$
288

 
$
512

 
$
518

Wood Products
776

 
605

 
1,410

 
1,131

Cellulose Fibers
459

 
526

 
932

 
1,032

Real Estate
296

 
191

 
433

 
351

 
1,793

 
1,610

 
3,287

 
3,032

Intersegment sales:
 
 
 
 
 
 
 
Timberlands
146

 
134

 
336

 
325

Wood Products
20

 
21

 
40

 
41

 
166

 
155

 
376

 
366

Total sales and revenues
1,959


1,765

 
3,663

 
3,398

Intersegment eliminations
(166
)
 
(155
)
 
(376
)
 
(366
)
Total
$
1,793

 
$
1,610

 
$
3,287

 
$
3,032

Net contribution to earnings from continuing operations:
 
 
 
 
 
 
 
Timberlands
$
77

 
$
118

 
$
147

 
$
359

Wood Products
36

 
(54
)
 
23

 
(86
)
Cellulose Fibers
36

 
85

 
84

 
177

Real Estate
15

 
8

 
7

 
7

 
164

 
157

 
261

 
457

Unallocated items(1)
23

 
(21
)
 
39

 
(74
)
Net contribution to earnings from discontinued operations

 
(19
)
 

 
(17
)
Net contribution to earnings
187

 
117

 
300

 
366

Interest expense, net of capitalized interest
(86
)
 
(117
)
 
(173
)
 
(210
)
Income before income taxes (continuing and discontinued operations)
101

 

 
127

 
156

Income taxes (continuing and discontinued operations)
(17
)
 
10

 
(2
)
 
(47
)
Net earnings attributable to Weyerhaeuser common shareholders
$
84

 
$
10

 
$
125

 
$
109

(1)
Unallocated items are gains or charges not related to or allocated to an individual operating segment. They include a portion of items such as: share-based compensation; pension and postretirement costs; foreign exchange transaction gains and losses associated with financing; and the elimination of intersegment profit in inventory and the LIFO reserve.

NOTE 3: NET EARNINGS PER SHARE
Our basic and diluted earnings per share attributable to Weyerhaeuser shareholders were:
$0.16 during second quarter and $0.23 during first half 2012, respectively; and
$0.02 during second quarter and $0.20 during first half 2011, respectively.
Basic earnings per share is net earnings divided by the weighted average number of our outstanding common shares, including stock equivalent units where there is no circumstance under which those shares would not be issued.
Diluted earnings per share is net earnings divided by the sum of the:
weighted average number of our outstanding common shares and
the effect of our outstanding dilutive potential common shares.

8



Dilutive potential common shares can include:
outstanding stock options,
restricted stock units and
performance share units.
We use the treasury stock method to calculate the effect of our outstanding dilutive potential common shares. Share-based payment awards that are contingently issuable upon the achievement of specified performance or market conditions are included in our diluted earnings per share calculation in the period in which the conditions are satisfied.

SHARES EXCLUDED FROM DILUTIVE EFFECT
The following shares were not included in the computation of diluted earnings per share because they were either antidilutive or the required performance or market conditions were not met. Some or all of these shares may be dilutive potential common shares in future periods.

Potential Shares Not Included in the Computation of Diluted Earnings per Share
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
SHARES IN THOUSANDS    
JUNE 30,
2012
 
JUNE 30,
2011
 
JUNE 30,
2012
 
JUNE 30,
2011
Stock options
21,992

 
24,197

 
21,992

 
24,197

Performance share units
537

 
476

 
537

 
476


NOTE 4: DISCONTINUED OPERATIONS

There are no operations classified as discontinued for the quarter and year-to-date periods ended June 30, 2012. Discontinued operations for the quarter and year-to-date periods ended June 30, 2011 include our hardwoods and Westwood Shipping Lines operations, both of which were sold in third quarter 2011. The following table summarizes the components of net sales and net earnings from discontinued operations.
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30, 2011
 
JUNE 30, 2011
Net sales:
 
 
 
Hardwoods
$
97

 
$
195

Westwood Shipping Lines
66

 
124

Total net sales from discontinued operations
$
163

 
$
319

Income (loss) from operations:
 
 
 
Hardwoods
$
1

 
$
1

Westwood Shipping Lines
2

 
4

Other discontinued operations
(13
)
 
(13
)
Total loss from discontinued operations
(10
)
 
(8
)
Income taxes
3

 
2

Net loss from operations
(7
)
 
(6
)
Charges related to hardwoods sale (after-tax)
(6
)
 
(6
)
Net loss from discontinued operations
$
(13
)
 
$
(12
)

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

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

9



NOTE 5: SHARE-BASED COMPENSATION
In first half 2012, we granted 1,915,486 stock options, 749,333 restricted stock units, 344,237 performance share units, and 52,304 stock appreciation rights. In addition, 373,476 outstanding restricted stock unit awards vested during first half 2012. A total of 1,079,549 shares of common stock were issued as a result of restricted stock unit vesting and stock option exercises.

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

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

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


RESTRICTED STOCK UNITS
The weighted average fair value of the restricted stock units granted in 2012 was $20.44. The vesting provisions for restricted stock units granted in 2012 were as follows:
restricted stock units vest ratably over 4 years;
restricted stock units immediately vest in the event of death while employed or disability;
restricted stock units partially vest upon retirement at an age of at least 62 or job elimination depending on the employment period after grant date; and
restricted stock units will be forfeited upon termination of employment in all other situations including early retirement prior to age 62.

PERFORMANCE SHARE UNITS
The weighted average grant date fair value of performance share units granted in 2012 was $21.71. The vesting provisions for performance share units granted in 2012 and that are earned were as follows:
units vest 50 percent, 25 percent and 25 percent on the second, third and fourth anniversaries of the grant date, respectively, as long as the individual remains employed by the company;
units fully vest in the event of death while employed or disability;
units partially vest upon retirement at an age of at least 62 or job elimination depending on the employment period after grant date; and
units will be forfeited upon termination of employment in all other situations including early retirement prior to age 62.


10



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

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

Weighted Average Assumptions Used to Remeasure the Value of Stock Appreciation Rights as of June 30, 2012
 
JUNE 30,
2012
Expected volatility
35.76
%
Expected dividends
2.68
%
Expected term (in years)
2.36

Risk-free rate
0.38
%
Weighted average fair value
$
4.66

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

DEFERRED COMPENSATION STOCK EQUIVALENT UNITS

During first quarter 2012, the directors' deferred compensation plan was amended to allow the directors to elect to receive payments of amounts deferred into stock equivalent units in cash or stock. Elections to receive these deferred amounts in stock resulted in the issuance of 40,889 shares. The number of common shares to be issued in the future to directors who elected common share payments is 489,792.

NOTE 6: 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 30, 2012
 
JUNE 30, 2011
 
JUNE 30, 2012
 
JUNE 30, 2011
Gain on sale of non-strategic timberlands
$

 
$

 
$

 
$
(152
)
Gain on postretirement plan amendment (Note 10)
(51
)
 

 
(103
)
 

Gain on disposition of assets
(7
)
 
(4
)
 
(8
)
 
(8
)
Foreign exchange (gains) losses, net
9

 
(1
)
 
2

 
(8
)
Land management income
(6
)
 
(7
)
 
(12
)
 
(13
)
Other, net
2

 
(7
)
 
2

 
(12
)
Total other operating income, net
$
(53
)
 
$
(19
)
 
$
(119
)
 
$
(193
)

11



The $152 million pretax gain on sale of non-strategic timberlands resulted from the sale of 82,000 acres in southwestern Washington.
Foreign exchange (gains) 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 7: INVENTORIES
Forest Products inventories include raw materials, work-in-process and finished goods.
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
DECEMBER 31,
2011
Logs and chips
$
70

 
$
68

Lumber, plywood, panels and engineered lumber
142

 
134

Pulp and paperboard
161

 
181

Other products
81

 
76

Materials and supplies
137

 
137

 
591

 
596

Less LIFO reserve
(104
)
 
(120
)
Total
$
487

 
$
476


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

NOTE 8: ACCRUED LIABILITIES
Forest Products accrued liabilities were comprised of the following:
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
DECEMBER 31,
2011
Wages, salaries and severance pay
$
110

 
$
136

Pension and postretirement
64

 
63

Vacation pay
46

 
44

Income taxes
13

 
13

Taxes – Social Security and real and personal property
33

 
29

Interest
99

 
99

Customer rebates and volume discounts
36

 
54

Deferred income
62

 
59

Other
113

 
96

Total
$
576

 
$
593


NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values and carrying values of our long-term debt consisted of the following:
 
JUNE 30,
2012
 
DECEMBER 31,
2011
DOLLAR AMOUNTS IN MILLIONS    
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
 
CARRYING 
VALUE
 
FAIR VALUE
(LEVEL 2)
Long-term debt (including current maturities):
 
 
 
 
 
 
 
Forest Products
$
4,189

 
$
4,922

 
$
4,193

 
$
4,579

Real Estate
$
283

 
$
284

 
$
285

 
$
291



12



To estimate the fair value of long-term debt, we used the following valuation approaches:
market approach – based on quoted market prices for the same types and issues of our debt; or
income approach – based on the discounted value of the future cash flows using market yields for the same type and comparable issues of debt.
The inputs to the valuations are based on market data obtained from independent sources or information derived principally from observable market data.
The difference between the fair value and the carrying value represents the theoretical net premium or discount we would pay or receive to retire all debt at the measurement date.
We recognized a pretax charge in second quarter 2011 of $26 million, which included early retirement premiums, unamortized debt issuance costs and other miscellaneous charges in connection with the early extinguishment of debt. This charge is included in interest expense in our Consolidated Statement of Operations.

FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
We believe that our other financial instruments, including cash, short-term investments, receivables, and payables, have net carrying values that approximate their fair values with only insignificant differences. This is primarily due to:
the short-term nature of these instruments,
carrying short-term investments at expected net realizable value and
the allowance for doubtful accounts.

NOTE 10: 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 30,
2012
 
JUNE 30,
2011
 
JUNE 30,
2012
 
JUNE 30,
2011
Service cost
$
12

 
$
13

 
$
26

 
$
25

Interest cost
66

 
70

 
131

 
139

Expected return on plan assets
(105
)
 
(106
)
 
(210
)
 
(211
)
Amortization of actuarial loss
45

 
34

 
87

 
69

Amortization of prior service cost
2

 
3

 
4

 
7

Loss due to curtailment and special termination benefits

 

 

 
1

Total net periodic benefit cost
$
20

 
$
14

 
$
38

 
$
30

 
OTHER POSTRETIREMENT BENEFITS
 
QUARTER ENDED
 
YEAR-TO-DATE ENDED
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
JUNE 30,
2012
 
JUNE 30,
2011
Service cost
$
1

 
$

 
$
1

 
$
1

Interest cost
3

 
6

 
7

 
12

Amortization of actuarial loss
3

 
4

 
7

 
7

Amortization of prior service credit
(57
)
 
(5
)
 
(115
)
 
(11
)
Other

 

 
4

 
4

Total net periodic benefit cost (credit)
$
(50
)
 
$
5

 
$
(96
)
 
$
13



13



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 has 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. The fair value of pension assets as of December 31, 2011 were $15 million higher than we estimated at year end.

We recorded the following adjustment during second quarter 2012 to reflect updated participant information as of the beginning of the year, which was partially offset by the increase in the pension assets:
$23 million increase in the liability for deferred pension;
$9 million decrease in the liability for deferred income taxes; and
$14 million net increase in cumulative other comprehensive loss, which resulted in a decrease in total Weyerhaeuser shareholders' interest.
EXPECTED CONTRIBUTIONS AND BENEFIT PAYMENTS
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, and updated for final asset valuations and plan and participant information, we expect to:
make approximately $87 million of required contributions to our Canadian registered and nonregistered pension plans in 2012;
contribute approximately $20 million to our U.S. nonqualified pension plans in 2012; and
make U.S. and Canadian other postretirement benefit payments of approximately $42 million in 2012.
Congress passed legislation in June 2012 that changed the way the discount rate is computed for purposes of determining minimum pension contribution funding. Based upon this legislation, we do not expect to have a required contribution to our U.S. qualified plan, which we previously estimated to be $60 million due by September 2013.

NOTE 11: CUMULATIVE OTHER COMPREHENSIVE LOSS
Items included in our cumulative other comprehensive loss are:
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
DECEMBER 31,
2011
Foreign currency translation adjustments
$
410

 
$
411

Net pension and other postretirement benefit loss not yet recognized in earnings
(1,773
)
 
(1,821
)
Prior service credit not yet recognized in earnings
121

 
227

Unrealized gains on available-for-sale securities
4

 
4

Total
$
(1,238
)
 
$
(1,179
)

The change in prior service credit not yet recognized in earnings includes the amortization of a $103 million gain recognized in first half 2012, as the result of previously announced benefit changes. See Note 10: Pension and Other Postretirement Benefit Plans.


14



NOTE 12: LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
This note provides details about our:
legal proceedings and
environmental matters.

LEGAL PROCEEDINGS
We are party to legal matters generally incidental to our business. The ultimate outcome of any legal proceeding:
is subject to a great many variables and
cannot be predicted with certainty.
However, whenever probable losses from litigation could reasonably be determined – we believe that we have established adequate reserves. In addition, we believe the ultimate outcome of the legal proceedings:
could have a material adverse effect on our results of operations, cash flows or financial position in any given quarter or year; but
will not have a material adverse effect on our long-term results of operations, cash flows or financial position.

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

Site Remediation
Under the Comprehensive Environmental Response Compensation and Liability Act – commonly known as the Superfund – and similar state laws, we:
are a party to various proceedings related to the cleanup of hazardous waste sites and
have been notified that we may be a potentially responsible party related to the cleanup of other hazardous waste sites for which proceedings have not yet been initiated.
As of June 30, 2012, our total accrual for future estimated remediation costs on the active Superfund sites and other sites for which we are responsible was approximately $33 million. The accrual has not changed materially since the end of 2011.

Asset Retirement Obligations
We have obligations associated with the retirement of tangible long-lived assets consisting primarily of reforestation obligations related to forest management licenses in Canada and obligations to close and cap landfills. As of June 30, 2012, our total accruals for these obligations was $65 million. The accruals have not changed materially since the end of 2011.
Some of our sites have asbestos containing materials. We have met our current legal obligation to identify and manage these materials. In situations where we cannot reasonably determine when asbestos containing materials might be removed from the sites, we have not recorded an accrual because the fair value of the obligation cannot be reasonably estimated.


15



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 2012 provision for income taxes is based on the year-to-date effective tax rate that applies to our TRS. Our 2012 estimated annual effective tax rate, excluding discrete items, is 22.7 percent and differs from the U.S. statutory rate, primarily due to lower tax rates applicable to non-U.S. results. The tax rate for the quarter differs from the estimated annual effective tax rate, primarily due to a different mix of non-U.S. earnings or losses in the quarter relative to the annual period.
Discrete items excluded from the calculation of our effective income tax rates include:
DOLLAR AMOUNTS IN MILLIONS    
 
First Quarter 2012:

Income taxes on postretirement plan amendment discussed in Note 10
$
(18
)
State income tax settlements
$
8

Second Quarter 2012:
 
Income taxes on postretirement plan amendment discussed in Note 10
$
(18
)
Income tax settlements
$
(3
)
First Quarter 2011:
 
Income taxes on a non-strategic timberlands gain discussed in Note 6
$
(56
)
Second Quarter 2011:
 
Tax benefit on early extinguishment of debt discussed in Note 9
$
10


16



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

FORWARD-LOOKING STATEMENTS
This report contains statements concerning our future results and performance that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements:
are based on various assumptions we make and
may not be accurate because of risks and uncertainties surrounding the assumptions that we make.
Factors listed in this section – as well as other factors not included – may cause our actual results to differ significantly from our forward-looking statements. There is no guarantee that any of the events anticipated by our forward-looking statements will occur. Or if any of the events occur, there is no guarantee what effect they will have on our operations or financial condition.
We will not update our forward-looking statements after the date of this report.

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

STATEMENTS
We make forward-looking statements of our expectations regarding third quarter 2012, including:
slightly lower export log realizations, lower domestic selling prices for Western logs, somewhat lower Southern log price realizations, higher earnings from the disposition of non-strategic timberlands, and comparable earnings in our Timberlands segment;
flat to slightly lower sales volumes, seasonally softer sales realizations, increased log costs in Canada, flat log costs in the South, declining log costs in the West, and solidly profitable results in our Wood Products segment;
weaker selling prices for pulp, higher pulp sales volumes, improved productivity, lower annual maintenance expense, reduced chemical and energy and fiber costs, slightly higher freight expense, and significantly higher earnings in our Cellulose Fiber segment; and
higher home closing volume, slightly lower average selling prices, gross margins of approximately 20 percent, increased selling expenses, and increased earnings from single-family homebuilding operations in our Real Estate segment.
We base our forward-looking statements on a number of factors, including the expected effect of:
the economy;
regulations;
adverse litigation outcomes and the adequacy of reserves;
changes in accounting principles;
contributions to pension plans;
projected benefit payments;
projected tax rates and credits; and
other related matters.


17



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

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


18



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

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

AMOUNT OF
CHANGE

YEAR-TO-DATE ENDED

AMOUNT OF
CHANGE
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE FIGURES
JUNE 30,
2012

JUNE 30,
2011

2012 VS. 2011

JUNE 30,
2012

JUNE 30,
2011

2012 VS. 2011
Net sales and revenues
$
1,793

 
$
1,610

 
$
183

 
$
3,287

 
$
3,032

 
$
255

Operating income
$
176

 
$
127

 
$
49

 
$
277

 
$
363

 
$
(86
)
Loss from discontinued operations, net of tax
$

 
$
(13
)
 
$
13

 
$

 
$
(12
)
 
$
12

Net earnings attributable to Weyerhaeuser common shareholders
$
84

 
$
10

 
$
74

 
$
125

 
$
109

 
$
16

Net earnings per share attributable to Weyerhaeuser common shareholders, basic and diluted
$
0.16

 
$
0.02

 
$
0.14

 
$
0.23

 
$
0.20

 
$
0.03


Comparing Second Quarter 2012 with Second Quarter 2011
Net sales and revenues
Net sales and revenues increased $183 million – 11 percent – primarily due to the following:
Wood Products segment sales increased $171 million, primarily due to higher sales volumes across all major product lines and improved selling prices for lumber, oriented strand board (OSB) and plywood; and
Real Estate segment sales increased $105 million, primarily due to the sale of a 3,200 acre master planned community in Houston, Texas.
These increases were partially offset by:
Cellulose Fibers segment sales decreased $67 million, primarily due to lower pulp price realizations; and
Timberlands segment sales decreased $26 million, primarily due to a decrease in timberlands exchanges and lower mineral, oil and gas revenue partially offset by increased sales in our international operations.

19



Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders increased $74 million primarily from:
a $51 million pretax gain recognized in 2012 related to a previously announced postretirement plan amendment; and
a $31 million decrease in interest expense due to lower charges associated with the early extinguishment of debt and lower interest due to a lower level of debt.
These increases in our earnings were partially offset by a $21 million change in income taxes due to the change in discrete tax items and income in our TRS in second quarter 2012 compared to a loss in our TRS in second quarter 2011.

Comparing Year-to-Date 2012 with Year-to-Date 2011
Net sales and revenues
Net sales and revenues increased $255 million – 8 percent – primarily due to the following:
Wood Products segment sales increased $279 million, primarily due to higher sales volumes across all major product lines and improved selling prices for lumber, OSB and plywood; and
Real Estate segment sales increased $82 million, primarily due to the sale of a 3,200 acre master planned community in Houston, Texas.
These increases were partially offset by a $100 million decrease in Cellulose Fibers segment sales, primarily due to lower pulp price realizations.
Net earnings attributable to Weyerhaeuser common shareholders
Our net earnings attributable to Weyerhaeuser common shareholders increased $16 million – 15 percent – primarily from:
a $103 million pretax gain recognized in 2012 related to a previously announced postretirement plan amendment;
a $50 million decrease in income taxes due to the change in discrete tax items and lower income in our TRS in year-to-date 2012 compared to our TRS in year-to-date 2011;
a $37 million decrease in interest expense due to lower charges associated with the early extinguishment of debt and lower interest due to a lower level of debt; and
a $25 million decrease in selling, general and administrative expenses as the result of previous cost reduction efforts and lower share-based compensation expense.
These increases in our earnings were partially offset by:
a pretax gain of $152 million on the sale of 82,000 acres of non-strategic timberlands in 2011; and
gross margin decreased $31 million, primarily due to lower pulp price realizations in our Cellulose Fibers segment and fewer timberlands exchanges and higher and better-use land sales in our Timberlands segment partially offset by higher price realizations of lumber, OSB and plywood in our Wood Products segment.


20



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

NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – TIMBERLANDS
  
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
 
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
Net sales and revenues to unaffiliated customers:
 
 
 
 
 
 
 
 
 
 
 
Logs:
 
 
 
 
 
 
 
 
 
 
 
West
$
146

 
$
152

 
$
(6
)
 
$
276

 
$
262

 
$
14

South
56

 
49

 
7

 
106

 
90

 
16

Canada
2

 
1

 
1

 
9

 
8

 
1

Subtotal logs sales and revenues
204

 
202

 
2

 
391

 
360

 
31

Pay as cut timber sales
9

 
8

 
1

 
20

 
16

 
4

Timberlands exchanges(1)
7

 
39

 
(32
)
 
15

 
60

 
(45
)
Higher and better-use land sales(1)
5

 
2

 
3

 
9

 
6

 
3

Minerals, oil and gas
7

 
15

 
(8
)
 
14

 
29

 
(15
)
Products from international operations(2)
29

 
21

 
8

 
54

 
38

 
16

Other products
1

 
1

 

 
9

 
9

 

Subtotal net sales and revenues to unaffiliated customers
262

 
288

 
(26
)
 
512

 
518

 
(6
)
Intersegment sales:
 
 
 
 
 
 
 
 
 
 
 
United States
115

 
107

 
8

 
227

 
219

 
8

Other
31

 
27

 
4

 
109

 
106

 
3

Subtotal intersegment sales
146

 
134

 
12

 
336


325

 
11

Total sales and revenues
$
408

 
$
422

 
$
(14
)
 
$
848

 
$
843

 
$
5

Net contribution to earnings
$
77


$
118

 
$
(41
)
 
$
147

 
$
359

 
$
(212
)
(1)
Sales of higher and better use timberland and non-strategic timberlands are conducted through Forest Products subsidiaries.
(2)
Includes logs, plywood and hardwood lumber harvested or produced by our international operations, primarily in South America.

Comparing Second Quarter 2012 with Second Quarter 2011
Net sales and revenues – unaffiliated customers
Net sales and revenues to unaffiliated customers decreased $26 million – 9 percent – primarily from the following:
a $32 million decrease in timberlands exchanges;
an $8 million decrease in minerals, oil and gas revenue primarily due to lower natural gas prices; and
Western log sales decreased $6 million primarily due to lower export and domestic log prices, partially offset by increased sales volumes of 12 percent.
The above items were partially offset by:
an $8 million increase in sales from our international operations due to a 16 percent increase in plywood prices and a 42 percent increase in plywood sales volumes; and

21



Southern log sales increased $7 million due to increased sales volumes of 12 percent as a result of increased third party demand.
Net contribution to earnings
Net contribution to earnings decreased $41 million – 35 percent – primarily from:
a $24 million decrease due to fewer timberlands exchanges and higher and better-use land sales;
a $16 million decrease due to lower export and domestic log prices in the West; and
a $7 million decrease in mineral income as a result of lower natural gas prices.
These decreases were partially offset by a $12 million increase, primarily due to increased demand for domestic logs and an increase in harvest levels of 5 percent in the West and 18 percent in the South.

Comparing Year-to-Date 2012 with Year-to-Date 2011
Net sales and revenues – unaffiliated customers
Net sales and revenues to unaffiliated customers decreased $6 million – 1 percent – primarily from the following:
a $45 million decrease in timberlands exchanges; and
a $15 million decrease in minerals, oil and gas revenue primarily due to lower natural gas prices.
The above items were partially offset by:
Southern log sales increased by $16 million due to increased sales volumes of 17 percent as a result of increased harvest levels in response to increased third party demand.
Sales from our international operations increased by $16 million, primarily due to increased plywood prices of 16 percent and plywood sales volumes of 47 percent.
Western log sales increased by $14 million primarily due to increased sales volumes of 15 percent. Increased export sales to Japan and domestic sales volumes were partially offset by lower export sales to China and domestic prices.
Net contribution to earnings
Net contribution to earnings decreased $212 million – 59 percent – primarily from:
a $152 million decrease due to the sale of 82,000 acres of non-strategic timberlands in 2011;
a $34 million decrease due to fewer timberlands exchanges and higher and better-use land sales;
a $22 million decrease as the mix of export log sales compared to domestic log sales decreased in the West and domestic log prices were lower in both the West and South;
a $14 million decrease in mineral income as a result of lower natural gas prices; and
operating costs increased $11 million, primarily due to higher fuel, logging and road costs.
The above items were partially offset by a $25 million increase, primarily due to increased demand for domestic and export logs and an increase in harvest levels of 5 percent in the West and 21 percent in the South.

Our Outlook
We expect comparable earnings from the Timberlands segment in third quarter. We expect higher earnings from disposition of non-strategic timberlands, partially offset by lower domestic selling prices for Western logs and a decline in Southern log price realizations due to mix.


22



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 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
 
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
Third party log sales – cubic meters:
 
 
 
 
 
 
 
 
 
 
 
West
1,551

 
1,391

 
160

 
2,859

 
2,486

 
373

South
1,354

 
1,211

 
143

 
2,582

 
2,216

 
366

Canada
54

 
23

 
31

 
259

 
217

 
42

International
82

 
79

 
3

 
160

 
151

 
9

Total
3,041

 
2,704

 
337

 
5,860

 
5,070

 
790

Fee harvest volumes – cubic meters:
 
 
 
 
 
 
 
 
 
 
 
West
1,831

 
1,747

 
84

 
3,510

 
3,358

 
152

South
2,788

 
2,355

 
433

 
5,502

 
4,535

 
967

International
161

 
221

 
(60
)
 
333

 
319

 
14

Total
4,780

 
4,323

 
457

 
9,345

 
8,212

 
1,133


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

NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – WOOD PRODUCTS
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
 
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
Net sales and revenues:
 
 
 
 
 
 
 
 
 
 
 
Structural lumber
$
370

 
$
290

 
$
80

 
$
661

 
$
550

 
$
111

Engineered solid section
70

 
64

 
6

 
135

 
117

 
18

Engineered I-joists
49

 
48

 
1

 
90

 
81

 
9

Oriented strand board
138

 
86

 
52

 
249

 
168

 
81

Softwood plywood
26

 
15

 
11

 
49

 
30

 
19

Other products produced
44

 
36

 
8

 
86

 
71

 
15

Other products purchased for resale
79

 
66

 
13

 
140

 
114

 
26

Net sales and revenues from continuing operations
$
776

 
$
605

 
$
171

 
$
1,410


$
1,131

 
$
279

Net contribution to earnings from continuing operations
36

 
(54
)
 
90

 
23

 
(86
)
 
109

Net contribution to earnings from discontinued operations

 
(8
)
 
8

 

 
(8
)
 
8

Net contribution to earnings
$
36

 
$
(62
)
 
$
98

 
$
23

 
$
(94
)
 
$
117

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 slightly better market conditions, have resulted in higher production rates in all primary product lines.

23



Comparing Second Quarter 2012 with Second Quarter 2011
Net sales and revenues
Net sales and revenues increased $171 million – 28 percent – primarily from the following:
Structural lumber shipment volumes increased 10 percent and average price realization increased 16 percent.
OSB shipment volumes increased 33 percent and average price realizations increased 21 percent.
Engineered solid section shipment volumes increased 22 percent.
Softwood plywood shipment volumes increased 40 percent and average price realizations increased 25 percent.
Other products produced increased 22 percent.
Other products purchased for resale increased 20 percent.
The above items were partially offset by a decrease of 11 percent in engineered solid section average price realizations.
Net contribution to earnings
Net contribution to earnings increased $98 million primarily from:
a $77 million increase as higher lumber, OSB and plywood price realizations more than offset lower prices for engineered I-joists and engineered solid section;
manufacturing costs decreased $13 million, primarily due to increased operating rates;
log costs decreased $7 million, primarily due to lower domestic prices in the West;
by-product sales increased $7 million as the result of higher lumber production volumes; and
2011 included an $8 million loss from discontinued operations.
These increases were partially offset by a $14 million increase in freight expense due to higher shipment volumes.
Comparing Year-to-Date 2012 with Year-to-Date 2011
Net sales and revenues
Net sales and revenues increased $279 million – 25 percent – primarily from the following:
Structural lumber shipment volumes increased 11 percent and average price realization increased 8 percent.
OSB shipment volumes increased 32 percent and average price realizations increased 12 percent.
Engineered solid section shipment volumes increased 29 percent.
Engineered I-joists shipment volumes increased 13 percent.
Softwood plywood shipment volumes increased 33 percent and average price realizations increased 23 percent.
Other products produced increased 21 percent.
Other products purchased for resale increased 23 percent.
The above items were partially offset by a decrease of 10 percent in engineered solid section average price realizations.

24



Net contribution to earnings
Net contribution to earnings increased $117 million primarily from:
an $82 million increase as higher lumber, OSB and plywood price realizations more than offset lower prices for engineered I-joists and engineered solid section;
manufacturing costs decreased $24 million, primarily due to increased operating rates;
by-product sales increased $15 million as the result of higher lumber production volumes;
a $10 million increase in sales volumes across all products;
log costs decreased $10 million, primarily due to lower domestic prices in the West and South; and
2011 included an $8 million loss from discontinued operations.
These increases were partially offset by a $25 million increase in freight expense due to higher shipment volumes.

Our Outlook
We expect the Wood Products segment to be solidly profitable in third quarter, although not as strong as second quarter results. We expect sales volumes to be flat to down slightly. Sales realizations may soften seasonally, especially for lumber, although overall channel inventories remain thinly stocked. Log costs are projected to increase in Canada, be flat in the South and lower in the West.

THIRD-PARTY SALES VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
 
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
Structural lumber – board feet
1,056

 
963

 
93

 
1,993

 
1,789

 
204

Engineered solid section – cubic feet
3.9

 
3.2

 
0.7

 
7.5

 
5.8

 
1.7

Engineered I-joists – lineal feet
40

 
38

 
2

 
72

 
64

 
8

Oriented strand board – square feet (3/8”)
643

 
484

 
159

 
1,208

 
916

 
292

Softwood plywood – square feet (3/8”)
81

 
58

 
23

 
154

 
116

 
38


TOTAL PRODUCTION VOLUMES
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF CHANGE
VOLUMES IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
 
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
Structural lumber – board feet
1,004

 
903

 
101

 
1,962

 
1,796

 
166

Engineered solid section – cubic feet
3.8

 
3.7

 
0.1

 
7.5

 
7.3

 
0.2

Engineered I-joists – lineal feet
37

 
34

 
3

 
71

 
64

 
7

Oriented strand board – square feet (3/8”)
626

 
518

 
108

 
1,227

 
1,012

 
215

Softwood plywood – square feet (3/8”)
50

 
48

 
2

 
101

 
101

 



25



CELLULOSE FIBERS
How We Did in Second Quarter and Year-to-Date 2012
Here is a comparison of net sales and revenues and net contribution to earnings for the quarters and year-to-date periods ended June 30, 2012 and 2011:

NET SALES AND REVENUES / NET CONTRIBUTION TO EARNINGS – CELLULOSE FIBERS
 
QUARTER ENDED
 
AMOUNT OF
CHANGE
 
YEAR-TO-DATE ENDED
 
AMOUNT OF
CHANGE
DOLLAR AMOUNTS IN MILLIONS    
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
 
JUNE 30,
2012
 
JUNE 30,
2011
 
2012 VS. 2011
Net sales and revenues: