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May 1, 2020, 4:07 p.m. EDT

10-Q: WEYERHAEUSER CO

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(EDGAR Online via COMTEX) -- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including but not limited to, our expectations concerning our future performance and the effects of the COVID-19 pandemic on the company's business, results of operations, cash flows and financial condition, as well as our plans and decisions relating to various capital expenditures, capital allocation priorities and other discretionary items, including but not limited to with respect to future dividend payments to our shareholders. Forward-looking statements generally are identified by words such as "believe," "project," "expect," "anticipate," "estimate," "foreseeable," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," and similar words and expressions. Forward-looking statements are based on our current expectations and assumptions. The realization of our expectations and the accuracy of our assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to:

? the effect of general economic conditions, including employment rates, interest rate levels, housing starts, general availability of financing for home mortgages and the relative strength of the U.S. dollar;

? the effect of COVID-19 and other viral or disease outbreaks and their potential effects on our business, results of operations, cash flows, financial condition and future prospects;

? market demand for the company's products, including market demand for our timberland properties with higher and better uses, which is related to, among other factors, the strength of the various U.S. business segments and U.S. and international economic conditions;

? changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Japanese yen, the Chinese yuan, and the Canadian dollar, and the relative value of the euro to the yen;

? restrictions on international trade and tariffs imposed on imports or exports;

? the availability and cost of shipping and transportation;

? economic activity in Asia, especially Japan and China;

? performance of our manufacturing operations, including maintenance and capital requirements;

? potential disruptions in our manufacturing operations;

? the level of competition from domestic and foreign producers;

? our operational excellence initiatives;

? the successful and timely execution and integration of our strategic acquisitions, including our ability to realize expected benefits and synergies, and the successful and timely execution of our strategic divestitures, each of which is subject to a number of risks and conditions beyond our control including, but not limited to, timing and required regulatory approvals;

? raw material availability and prices;

? the effect of weather;

? changes in global or regional climate conditions and governmental response to such changes;

? the risk of loss from fires, floods, windstorms, hurricanes, pest infestation and other natural disasters;

? energy prices;

? transportation and labor availability and costs;

? federal tax policies;

? the effect of forestry, land use, environmental and other governmental regulations;

? legal proceedings;

? performance of pension fund investments and related derivatives;

? the effect of timing of employee retirements and changes in the market price of our common stock on charges for share-based compensation;

? the accuracy of our estimates of costs and expenses related to contingent liabilities;

? changes in accounting principles; and

? other risks and uncertainties identified in our 2019 Annual Report on Form 10-K, as well as those set forth from time to time in our other public statements, reports, registration statements, prospectuses, information statements and other filings with the SEC.

It is not possible to predict or identify all risks and uncertainties that might affect the accuracy of our forward-looking statements and, consequently, our descriptions of such risks and uncertainties should not be considered exhaustive. There is no guarantee that any of the events anticipated by these forward-looking statements will occur, and if any of the events do occur, there is no guarantee what effect they will have on the company's business, results of operations, cash flows, financial condition and future prospects.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise.

RESULTS OF OPERATIONS

In reviewing our results of operations, it is important to understand these terms:

? Sales realizations for Timberlands and Wood Products refer to net selling prices. This includes selling price plus freight, minus normal sales deductions. Real Estate transactions are presented at the contract sales price before commissions and closing costs, net of any credits.

? Net contribution to earnings does not include interest expense or income taxes.

ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS

Overview

On March 11, 2020, the World Health Organization officially declared COVID-19 a global pandemic, and on March 13, 2020, the United States declared a national emergency. Since then, a number of states and municipalities have issued shelter-in-place and similar mandates requiring those not engaged in essential activities to remain home. The U.S. Department of Homeland Security has designated the forest products industry as an "essential critical infrastructure workforce," which recognizes the importance of timber and wood products operations in supporting critical infrastructure and construction projects and the manufacture of important personal hygiene items.

In light of the COVID-19 pandemic, we began taking proactive steps in early March to safeguard the health of our employees. These actions include detailed cleaning and disinfecting procedures, strict processes around social distancing and personal hygiene, clear communication with our contractors, vendors and visitors about our safety protocols, comprehensive guidance for response to any COVID-19 diagnoses or exposures in our operations, suspension of all air travel and non-essential meetings, and a directive that employees work from home if feasible.

Although our first quarter 2020 results were generally positive, the emergence of COVID-19 has affected, and we expect will continue to affect, our business and operations. In response to the decline in end-market demand for wood products in late first quarter, we began adjusting production volumes across our wood products manufacturing facilities to align with customer demand. These adjustments included a combination of temporary mill curtailments and reduced shift postures. We reduced operating capacity in our wood products businesses in April and expect to extend reductions at similar levels in May. In our Southern timberlands operations, we are reducing harvest volumes to align production with lower demand from wood products manufacturing customers.

Business Outlook and COVID-19

The demand for grade sawlogs within our Timberlands segment is directly affected by production levels of domestic wood-based building products. The strength of the U.S. housing market strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Our Timberlands segment, specifically the Western region, is also affected by export demand and trade policy. Japanese housing starts are a key driver of export log demand in Japan. The demand for pulpwood from our Timberlands segment is directly affected by the production of pulp, paper and oriented strand board as well as the demand for biofuels, such as pellets made from pulpwood.

Economic data and metrics pointed to generally strong economic activity in the first two months of 2020. After the World Health Organization declared the COVID-19 outbreak a global pandemic, U.S. states began to implement restrictions on business activity, including stay-at-home orders issued through March and into at least April or May. Shutdowns began to impact the economy immediately, eroding first quarter economic data and metrics.

On a seasonally adjusted annual basis, housing starts as reported by the U.S. Census for January and February 2020 averaged 1.59 million, before declining in March to 1.22 million. The first quarter averaged 1.47 million total units, which was 2 percent above fourth quarter 2019. Single family starts averaged 962 thousand units, a 1 percent decline over fourth quarter 2019 and an 11 percent improvement over first quarter 2019. Multi-family starts averaged 505 thousand units in first quarter 2020, which was 7 percent higher than fourth quarter 2019 and 44 percent higher than first quarter 2019. Although interim data for housing starts in the month of April is not yet available as of the date of this report, we do expect to see significant decreases in homebuilding activity. Sales of newly built, single-family homes declined 15 percent in March to a seasonally adjusted annual rate of 627,000 units. In April, the National Association of Home Builders Housing Market Index, which measures builder confidence in the U.S single-family housing market, recorded the largest single monthly decline in the history of the index and the first negative reading since June 2014. According to the Census Bureau Advance Retail Spending report, building material and garden supply store sales increased nearly 7 percent in the first quarter 2020 compared with the same quarter a year ago, suggesting a healthy remodeling market during the first quarter.

Our outlook for 2020 has been modified by the trajectory of COVID-19 and its impact on the overall economy, consumers, and ultimately wood products demand. Economists' expectations generally point to a severe contraction in U.S. GDP in second quarter 2020 with recovery of varying strength beginning in third quarter, dependent on the pandemic dynamics and the timing of easing of related restrictions on activity. Our 2020 outlook for housing activity anticipates this pattern of significant decline and gradual recovery beginning in third quarter, closely mirroring expectations for the labor market which, after a severe short-term contraction, is expected to rebound as the effects of the pandemic dissipate. COVID-19 related restrictions are expected to adversely affect some repair and remodeling activity in the second quarter 2020.

In U.S. wood product markets, demand remained solid through late March 2020 and first quarter 2020 prices for most products improved from fourth quarter 2019. The Random Lengths Framing Lumber Composite price averaged $399/MBF in first quarter 2020, an 8 percent increase from fourth quarter 2019. Most lumber products saw price increases during first quarter 2020, however, the magnitude of these improvements was differential by species. Douglas fir 2x4 green lumber increased by 13 percent, while Southern yellow pine 2x4 lumber decreased 4 percent. The Oriented Strand Board Composite indicator price improved, averaging $300/MSF in first quarter 2020, a 23 percent increase from fourth quarter 2019. To date, second quarter benchmark pricing for lumber and oriented strand board is lower than the first quarter average.

In western log markets, Douglas fir sawlog prices increased by 2 percent in first quarter 2020 compared with fourth quarter 2019. In the south, delivered sawlog prices remained flat compared with fourth quarter 2019 with less than a one percent change in price. In late March, several North American wood products manufacturers announced temporary production curtailments in response to changes in end-market demand and these reductions continued into April. For the month of April, we reduced operating capacity by 20 percent for lumber, 15 percent for oriented strand board and 15 to 25 percent for engineered wood products through a combination of temporary mill curtailments and reduced shift postures. The company anticipates extending lumber and oriented strand board capacity reductions at similar levels in May and will continue to dynamically adjust as market conditions evolve. In engineered wood products, the company expects to reduce operating capacity by an additional 10 percent, resulting in a 25 to 35 percent overall reduction in operating capacity for the month of May. Additionally, as a result of the production curtailments by several wood products manufacturers in the south, we are reducing our full year Southern timber harvest volumes by approximately 10 percent compared to 2019 harvest levels. These production and harvest

reductions will likely have a material adverse impact on our results of operations and cash flows in the second quarter. At this time, we are unable to predict how long these reductions will continue and whether further reductions may be necessary.

Exchange rates, available supply from other countries and trade policy affect our export businesses. In Japan, total housing starts for January and February 2020 declined 11.2 percent, compared to the same period a year ago. A smaller decline of 10.5 percent was observed for the key Post and Beam segment. The decline in year over year housing starts is likely due to the consumption tax which came into effect in October 2019. Improvement in U.S. domestic log pricing and reductions in the supply of competing logs from Western Canada and Europe kept the Japan market tensioned and prices for Japan grade logs remained mostly flat in the first quarter.

Export log prices to China on average increased slightly by 4 percent in first quarter 2020 over fourth quarter 2019 as reported by RISI Log Lines. Log supply in China was abundant in the first quarter and sawmilling activity was limited due to the Lunar New Year holiday and COVID-19 restrictions. Chinese softwood log imports declined 7 percent in the first two months of 2020 compared with the same period a year ago. As COVID-19-related travel restrictions in China eased throughout the month of March, sawmilling activity increased and demand for logs improved. Starting March 2, the China Customs Tariff Commission started accepting applications for tariff exclusions on imports of U.S. softwood logs. These exclusions would improve the competitiveness of U.S. logs relative to those imported from other countries. We have experienced minor supply chain disruptions related to the transportation and delivery of export logs to certain locations in Asia and have been actively working to mitigate them. We will continue to monitor potential disruptions in the Asia supply chain going forward.

Our Real Estate & ENR segment is affected by the health of the U.S. economy. According to the Realtors Land Institute (RLI) of the National Association of Realtors, the dollar volume of rural properties sold increased by 2.2 percent in 2019 over 2018, and per acre prices grew 2.1 percent on average. Through RLI's 2019 Land Market Survey published in January 2020, they expected these trends to continue with prices and volumes of land transactions forecasted to rise 2.2 percent, with timber expected to rise by 1.5 percent in 2020. However, COVID-19-related restrictions have disrupted, and are expected to continue to disrupt, real estate activity as social distancing has curtailed property tours and municipal government closures limit the ability to record transactions.







        CONSOLIDATED RESULTS
        How We Did First Quarter 2020
                                                                                        AMOUNT OF
                                                           QUARTER ENDED                 CHANGE
        DOLLAR AMOUNTS IN MILLIONS, EXCEPT         MARCH 2020        MARCH 2019         2020 VS.
        PER-SHARE FIGURES                                                                 2019
        Net sales                                 $       1,728     $       1,643     $          85
        Costs of sales                                    1,382             1,322                60
        Operating income                                    240               174                66
        Net earnings (loss)                                 150              (289 )             439
        Earnings (loss) per share, basic and               0.20             (0.39 )            0.59
        diluted
        


Comparing First Quarter 2020 with First Quarter 2019

Net sales

Net sales increased $85 million - 5 percent - primarily due to a $141 million increase in Wood Products sales to unaffiliated customers attributable to increased sales volumes across most product lines.

This increase was partially offset by a $50 million decrease in Timberlands sales to unaffiliated customers, primarily attributable to decreased sales volumes in the West and North, as well as a $6 million decrease in Real Estate & ENR net sales to unaffiliated customers primarily due to lower natural gas prices and decreased sales of energy right-of-ways.

Costs of sales

Costs of sales increased $60 million - 5 percent - primarily due to increased sales volumes within our Wood Products segment and increases in acres sold and basis per acre sold in our Real Estate & ENR segment. These increases were partially offset by a decrease in sales volumes within our Timberlands segment. Refer to additional analysis of fluctuations within our Timberlands , Real Estate, Energy and Natural Resources and Wood Products discussions below.

Operating income

Operating income increased $66 million - 38 percent - primarily due to:

a $27 million decrease in other operating cost, net attributable to a decrease in legal charges and the recognition of a $12 million legal benefit in first quarter 2020;

a $25 million increase in consolidated gross margin, as discussed above, and

a $14 million decrease in selling, general and administrative expenses.

Net earnings (loss)

Net earnings increased $439 million - 152 percent - primarily due to:

a $461 million decrease in non-operating pension and other postretirement benefit costs (refer to note 7:Pension and Other Postretirement Benefit Plans);

a $66 million increase in operating income, as discussed above, and

a $22 million decrease in interest expense, net of capitalized interest (refer to Interest Expense).

These changes were partially offset by a $101 million decrease in income tax benefit, from a $104 million benefit in first quarter 2019 to a $3 million benefit in first quarter 2020 (refer to Income Taxes).







        TIMBERLANDS
        How We Did First Quarter 2020
                                                                                            AMOUNT OF
                                                             QUARTER ENDED                    CHANGE
                                                    MARCH 2020           MARCH 2019          2020 VS.
        DOLLAR AMOUNTS IN MILLIONS                                                             2019
        Net sales to unaffiliated customers:
        Delivered logs:
        West                                      $           177      $          205     $          (28 )
        South                                                 150                 159                 (9 )
        North(1)                                               17                  29                (12 )
        Subtotal delivered logs sales                         344                 393                (49 )
        Stumpage and pay-as-cut timber                          5                   9                 (4 )
        Recreational and other lease revenue                   15                  15                  -
        Other(2)                                               17                  14                  3
        Subtotal net sales to unaffiliated                    381                 431                (50 )
        customers
        Intersegment sales                                    122                 125                 (3 )
        Total sales                               $           503      $          556     $          (53 )
        Costs of sales                            $           375      $          413     $          (38 )
        Operating income and Net contribution     $           105      $          120     $          (15 )
        to earnings
        


(1) In November 2019, we sold our Michigan timberlands.

(2) Other Timberlands sales include sales of seeds and seedlings from our nursery operations as well as wood chips.

Comparing First Quarter 2020 with First Quarter 2019

Net sales to unaffiliated customers

Net sales to unaffiliated customers decreased $50 million - 12 percent - primarily due to:

a $28 million decrease in Western log sales, attributable to a 12 percent decrease in sales volumes, as well as a 2 percent decrease in log prices;

a $12 million decrease in Northern log sales, attributable to a 43 percent decrease in sales volumes primarily due to the sale of our Michigan timberlands and

a $9 million decrease in Southern log sales, attributable to a 3 percent decrease in log prices, as well as a 3 percent decrease in sales volumes.

Intersegment sales

Intersegment sales decreased $3 million - 2 percent - primarily due to a 7 percent decrease in sales volumes, partially offset by a 4 percent increase in intersegment sales realizations.

Costs of sales

Costs of sales decreased $38 million - 9 percent - primarily due to decreases in sales volumes across all regions, as discussed above.

Operating income and Net contribution to earnings

Operating income and net contribution to earnings decreased $15 million - 13 percent - primarily due to the change in gross margin, as discussed above.







        Third-Party Log Sales Volumes and Fee Harvest Volumes
                                                                           AMOUNT OF
                                                QUARTER ENDED               CHANGE
                                         MARCH 2020       MARCH 2019       2020 VS.
        VOLUMES IN THOUSANDS                                                 2019
        Third-party log sales - tons:
        West(1)                                1,684            1,920            (236 )
        South                                  4,365            4,499            (134 )
        North(2)                                 284              494            (210 )
        Total                                  6,333            6,913            (580 )
        Fee harvest volumes - tons:
        West(1)                                2,310            2,385             (75 )
        South                                  6,130            6,492            (362 )
        North(2)                                 386              627            (241 )
        Total                                  8,826            9,504            (678 )
        


(1) Western logs are primarily transacted in thousand board feet (MBF) but are converted to ton equivalents for external reporting purposes.

(2) In November 2019, we sold our Michigan timberlands.







        REAL ESTATE, ENERGY AND NATURAL RESOURCES
        How We Did First Quarter 2020
                                                                           AMOUNT OF
                                               QUARTER ENDED                CHANGE
                                        MARCH 2020        MARCH 2019       2020 VS.
        DOLLAR AMOUNTS IN MILLIONS                                           2019
        Net sales:
        Real estate                    $         95      $         96     $        (1 )
        Energy and natural resources             17                22              (5 )
        Total                          $        112      $        118     $        (6 )
        Costs of sales                 $         70      $         56     $        14
        Net contribution to earnings   $         36      $         55     $       (19 )
        


The timing of real estate sales is a function of many factors, including the general state of the economy, demand in local real estate markets, the ability of buyers to obtain financing, the number of competing properties listed for sale, the seasonal nature of sales (particularly in the northern states), the plans of adjacent landowners, our expectation of future price appreciation, the timing of harvesting activities, and the availability of government and not-for-profit funding. In any period, the average sales price per acre will vary based on the location and physical characteristics of parcels sold.

Comparing First Quarter 2020 with First Quarter 2019

Net sales

Net sales decreased $6 million - 5 percent - primarily due to lower natural gas prices, as well as decreased sales of energy right-of-ways.

Costs of sales

Costs of sales increased $14 million - 25 percent - primarily due to increased real estate acres sold, as well as increased basis per acre sold.

Net contribution to earnings

Net contribution to earnings decreased $19 million - 35 percent - primarily due to the decrease in gross margin, as discussed above.







        REAL ESTATE SALES STATISTICS
                                                                    AMOUNT OF
                                         QUARTER ENDED               CHANGE
                                  MARCH 2020       MARCH 2019       2020 VS.
                                                                      2019
        Acres sold                     44,974           38,834           6,140
        Average price per acre   $      1,992     $      2,424     $      (432 )
        








        WOOD PRODUCTS
        How We Did First Quarter 2020
                                                                                       AMOUNT OF
                                                          QUARTER ENDED                  CHANGE
                                                  MARCH 2020        MARCH 2019          2020 VS.
        DOLLAR AMOUNTS IN MILLIONS                                                        2019
        Net sales:
        Structural lumber                        $         508     $         444     $           64
        Oriented strand board                              190               160                 30
        Engineered solid section                           127               116                 11
        Engineered I-joists                                 78                70                  8
        Softwood plywood                                    39                44                 (5 )
        Medium density fiberboard                           44                38                  6
        Complementary building products                    153               137                 16
        Other products produced(1)                          96                85                 11
        Total                                    $       1,235     $       1,094     $          141
        Costs of sales                           $       1,040     $         967     $           73
        Operating income and Net contribution    $         134     $          69     $           65
        to earnings
        


(1) Other products produced sales include wood chips, other byproducts and third-party residual log sales from our Canadian Forestlands operations.

Comparing First Quarter 2020 with First Quarter 2019

Net sales . . .

May 01, 2020

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