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weyerhaeuser annual reports 1998 



weyerhaeuser annual reports 1998

 

 
 
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Published:  December 15, 2009
 
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Slide 1: the future is growing weyerhaeuser 1998 annual report
Slide 2: FOR WEYERHAEUSER, this past year was one of change and growth. After nearly 100 years as a company, it may seem strange to change. We are one of the world’s largest forest products companies. We own or manage more softwood timber than anyone in the world. We are a leading manufacturer of lumber, pulp and paper products. Our work force of 35,000 is one of the most dedicated and talented in the industry. But we’re changing to operate with speed, simplicity and decisiveness. We’re leveraging our enduring values and innovative capabilities to create a promising future. To illustrate these changes in our annual report we chose Ning Yeh, an artist whose landscape watercolors are executed simply, decisively, with speed. The portraits of Ning Yeh at work depict the company we’re becoming. the 1998 weyerhaeuser annual report LETTER TO SHAREHOLDERS 3 SENIOR MANAGEMENT TEAM 9 P U L P, P A P E R & P A C K A G I N G 3 0 TIMBERLANDS 16 WOOD PRODUCTS 20 S I G N I F I C A N T A C C O M P L I S H M E N T S 35 R E A L E S TAT E A N D R E L AT E D A S S E T S 34 FINANCIAL REPORT 37 W E Y E R H A E U S E R C O M PA N Y F O U N D AT I O N 7 4 C O R P O R AT E D ATA & S H A R E H O L D E R I N F O R M AT I O N 7 6
Slide 3: Forest products is one of the world’s most important industries. We fulfill needs fundamental to human well-being: shelter, communication, commerce. All told, forest products represent close to $600 billion in global gross economic output. Weyerhaeuser is one of the largest private owners of trees on Earth. And here is how we’re becoming the world’s best forest products company...
Slide 4: • Align business objectives with our corporate long-range plan. • Develop the capabilities of our people. superior stra Our v building profit from customer focus • Clearly understand customer needs and expectations. • Align our resources with the needs of our customers. • Deliver superior returns to shareholders. to be the best company in one company the • weyer future i
Slide 5: • Follow a disciplined approach to capital deployment. • Measure and track our progress. tegy execution • Build safety into everything we do. • Deploy reliable processes across the company. • Engage our people in improving our operations. ision: forest products the world. • Create a more diverse work force. safely delivering value to customers aeuser • one vision s growing TM
Slide 6: highlights dollar amounts in millions except per-share figures. 1998 1997 Net sales and revenues Net earnings before nonrecurring items Effect of nonrecurring items Net earnings Cash flow from operations, before working capital changes Capital expenditures (excluding acquisitions) Total assets Shareholders’ interest (1) $ 10,766 339 (45) 294 1,018 615 12,834 4,526 $ 11,210 351 (9) 342 1,092 656 13,075 4,649 1998 before nonrecurring items effect of nonrecurring items(1) before nonrecurring items 1997 effect of nonrecurring items(1) net net Basic earnings per common share First quarter Second quarter Third quarter Fourth quarter (2) $ .43 .34 .56 .38 $ 1.71 $ — — — (.23) $ .43 .34 .56 .15 $ .22 .47 .53 .54 $ (.12) .09 .04 (.05) $ .10 .56 .57 .49 $ (.23) $ 1.48 $ 1.76 $ (.04) $ 1.72 (1) The 1998 nonrecurring items are charges primarily associated with the closure of the Longview, Washington chemical facility; changing the British Columbia lumber operations; and the streamlining of pulp and paper operations. The 1997 nonrecurring items are the net of gains on the sales of Weyerhaeuser Mortgage Company and Saskatoon Chemicals, Ltd., and interest income from a favorable federal income tax decision offset by the loss on the sale of Shemin Nurseries; the consolidation, closure or disposition of certain recycling facilities; and closure of two plywood facilities, an export lumber mill and a corrugated medium machine. (2) Diluted earnings per common share by quarter for 1998 and 1997 were $0.43, $0.34, $0.55 and $ 0.15; and $0.10, $0.55, $0.57 and $0.49, respectively. market prices—high/low 1998 1997 15 16 First quarter Second quarter Third quarter Fourth quarter Year $ 57 ⁄ - 44 ⁄ 7 16 15 16 $ 50 5⁄8 - 44 1⁄2 55 1⁄4 - 42 5⁄8 6315⁄16 - 515⁄8 60 3⁄4 - 46 1⁄16 $ 6315⁄16 - 425⁄8 617⁄16 - 44 9⁄16 47 ⁄ - 36 ⁄ $ 61 ⁄ - 36 ⁄ 7 16 34 519⁄16 - 413⁄4 34 The consolidated financial statements include: (1) Weyerhaeuser Company (Weyerhaeuser), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction, and other real estate related activities.
Slide 7: STEVEN R ROGEL President & Chief Executive Officer (Chairman, President & Chief Executive Officer effective April 20, 1999) to our shareholders When we say “the future is growing” at Weyerhaeuser, we’re talking about more than the billions of trees we’ve planted. We’re making a statement about our ability to further increase shareholder returns. We’re stating there’s a company in our industry that represents an outstanding long-term investment opportunity. We’re saying that company is Weyerhaeuser. Few forest products companies can match the resources we’re deploying to meet this objective. WE BEGIN WITH AN O U T S TA N D I N G WORK FORCE. Like you, the men and women of Weyerhaeuser are part owners of this business. Through our Performance Share Plan, employees receive stock if our performance exceeds certain measures relative to our peer group and the Standard and Poor’s 500. This is not automatic, however, as demonstrated by the fact that we have not paid out on the plan in the years where we’ve failed to meet all of the program’s criteria. As owners, employees have an additional incentive to improve performance and better align their interests with those of other shareholders. We’ve given these employees some of the best assets with which to work. Our timber is unmatched. We have some great facilities in place and we’re getting better. Our research capabilities are world-renowned.We have one of the strongest balance sheets in the industry. In short, we have the tools to become the best forest products company in the world. By being the best, we can deliver superior returns. Some say such optimism is misplaced. 3
Slide 8: They wonder how a company in our industry can produce superior returns. I don’t deny that we face challenges. Our industry has struggled recently. In 1998, the Asian economic situation affected our entire industry. Imported pulp and paper products found customers in our markets. Forest product exports originally bound for Asia glutted domestic markets. Prices sank. Weyerhaeuser adjusted to these conditions. We took downtime to balance inventory levels with market conditions. We found ways to reduce costs. We maintained our focus on customers. As a result, we fared better in 1998 than many predicted. But we weren’t untouched by market conditions. NET EARNINGS before nonrecurring items were $339 million, or $1.71 per common share. This compares with $351 million, or $1.76 per common share, before nonrecurring items in 1997. NET SALES were $10.8 billion from operations, compared with $11.2 billion last year. N E T CASH FLOW before working capital changes, was $1 billion compared with $1.1 billion in 1997. It is easy to blame Asia for these disappointing results. It’s also easy to believe that our troubles will end when Asia’s economy improves. But such views ignore reality. While we will benefit from a stronger Asia, we recognize that we cannot rely on that recovery to solve our problems. Our industry has changed. We now operate in a global marketplace where the performance of domestic and international markets is intertwined. Our task is to change Weyerhaeuser to succeed in this environment and capitalize on our potential. It requires that we leverage our strengths and eliminate our weaknesses to become the best forest products company in the world. Weyerhaeuser already was making significant progress toward this goal when I arrived last year. 4
Slide 9: WE WERE BECOMING MORE FOCUSED. Through $12 steps taken since 1990, we have evolved to a company that basically does three things. We grow trees. We convert them into wood and paper products. And we develop selected timberland properties for higher and better uses. This has allowed us to focus our capital on 11 10 9 8 sustaining our core businesses. We were M A I N TA I N I N G A S T R O N G B A L A N C E S H E E T . 89 90 91 92 93 94 95 96 97 98 net sales and revenues billions of dollars Despite difficult market conditions the past two years, we remain comfortably within our target range of 35 to 45 percent of debt to total capital and have one of the best credit ratings in our industry. We had, and continue to have, one of the B E S T- P E R F O R M I N G S T O C K S I N T H E I N D U S T R Y. Our total shareholder return since 1991 ranks second among our peer group.* Our return on net assets has been in the top quartile of our industry since 1992—a leadership position we’re committed to improving even further. But we want to do more than outperform our industry peer group. We want to excel in manufacturing. We want to operate more safely than anyone else—inside or outside of our industry. We want to be an $1,000 O U T S TA N D I N G INVESTMENT O P P O R T U N I T Y. This year we began laying the foundation to achieve these goals. It started by taking a hard look at 750 500 ourselves. What are our strengths? What are our weaknesses? What chal- 250 lenges do we face? How do we compare with successful companies outside our 89 90 91 92 93 94 95 96 97 98 0 net earnings (before nonrecurring items) millions of dollars industry? It was an enlightening process. We learned what it takes to be the best. * Boise Cascade, Bowater, Champion International, Georgia-Pacific, International Paper, Louisiana-Pacific, MacMillian Bloedel, Potlatch, Smurfit-Stone, Temple-Inland, Union Camp, Westvaco, Willamette. 5
Slide 10: The answer lies in doing three things very well. EXECUTING O U R S T R AT E G I E S . F O C U S I N G ON CUSTOMERS. $5.00 O P E R AT I N G S A F E LY. These three objectives form 3.75 the base of our strategy. The inside front cover of this report lists these objectives and their supporting elements. We also learned that we must develop a system and organization to achieve these objectives. It means operating with speed, simplicity and decisiveness—terms not currently associated with 89 90 91 92 93 94 95 96 97 98 2.50 1.25 0 basic earnings per common share (before nonrecurring items) dollars Weyerhaeuser. It means changing our decision-making process, how we’re organized, how we manage this company. In 1998, we started making those changes. We began RESHAPING I M P O R TA N T FUNCTIONS to deliver services in the most cost-effective and efficient manner. We started with engineering and information technology. Then we combined our environmental, health and safety groups into a single organization. Finally, we aligned the manufacturing functions of our primary pulp, fine paper and containerboard mills under a single vice president. All are now company-wide functions accountable for two goals. First, they must meet the needs of the businesses they support. Second, they are to develop company-wide standards and reduce redundancy in their functions. From my experience, this approach produces substantial savings. We’re reviewing other support functions and in 1999 we’ll organize them to deliver services in the most cost-efficient and effective manner. We began R E P L I C A T I N G RELIABLE PROCESSES across the company. One key process involves how we deploy capital. To help increase the effectiveness of our investments, we’ve put in place a disciplined process of reviewing each request for capital. As we review these requests, they must demonstrate that they are the most cost-effective way of supporting our long-term strategies. Only projects that meet our strict criteria receive capital. 6
Slide 11: This approach eliminates nonstrategic efforts, develops better-planned projects, and eliminates waste and rework. We believe this process will ultimately increase the effectiveness of our capital spending by 20 to 30 percent. But our disciplined approach to capital spending is already producing results. By applying a “one-company” approach to investments, we reduced our capital expenditures, excluding acquisitions, this year by $41 million compared with our spending in 1997. Other reliable processes will help us produce a safer and more productive work environment. We continued to refine HOW WE SERVE OUR CUSTOMERS. For example, we’re carefully aligning our research and development capabilities with key pulp customers. Through this alignment, we can develop special pulp to meet unique customer requirements. In the process, we differentiate our products and reduce our exposure to volatile commodity markets. We began STRENGTHENING OUR CORE BUSINESSES to withstand down cycles in their markets. This includes growing and optimizing key businesses: Timberlands, Wood Products, Fine Paper and Containerboard Packaging. Our purchase of the Dryden, Ontario, facilities, for example, significantly enhances our Fine Paper business and 25 augments our Canadian Lumber position. We’re also improving the returns in our Pulp, Paper and Packaging sector by 20 15 reducing its exposure to commodity grades, improving process reliability and maintaining tight controls on capital spending. We 10 5 continued to capture the maximum value 89 90 91 92 93 94 95 96 97 98 0 from our timberlands. Weyerhaeuser currently owns or manages more than 5.3 million acres of timber in the United States. return on shareholders’ equity (before nonrecurring items) percent 7
Slide 12: We hold timber licenses for 27 million acres in Canada—a position we increased this year by acquiring additional timber licenses in Ontario as part of our Dryden acquisition. Over the years we’ve continually upgraded our timberland asset with investments we’ve made in New Zealand, South America and the southern United States. In the future, we will continue to FOCUS OUR INVESTMENT ACTIVITIES on these low-cost regions of the world. We also expect to benefit from our forestry practices, especially from our land in the United States. Over the next 10 years, we’ll see a significant increase in the volume of timber we harvest. At 1997 prices, the pre-tax cash flow generated by these forests will increase by more than 50 percent. We took some important steps in 1998. Weyerhaeuser is becoming more efficient, more cost-competitive and better positioned for future growth. Our work, however, is not done. We must drive these changes further into our organization. We must learn to operate more reliably. We must eliminate redundancy. We must continue our control on capital spending. We must look for future growth opportunities. Weyerhaeuser is a great company. It has a promising future. Our challenge is to fulfill our potential. We will do that. We will prove to you that at Weyerhaeuser “the future is growing.” STEVEN R ROGEL President & Chief Executive Officer (Chairman, President & Chief Executive Officer effective April 20, 1999) 8
Slide 13: senior management team STEVEN R ROGEL President & Chief Executive Officer (Chairman, President & Chief Executive Officer effective April 20, 1999) WILLIAM C STIVERS Executive Vice President & Chief Financial Officer WILLIAM R CORBIN Executive Vice President Wood Products RICHARD C GOZON Executive Vice President Pulp, Paper & Packaging GEORGE H WEYERHAEUSER JR RICHARD E HANSON Senior Vice President Technology MACK L HOGANS Senior Vice President Timberlands Senior Vice President Corporate Affairs THOMAS M LUTHY STEVEN R HILL Senior Vice President Senior Vice President Human Resources During 1998, these changes were made to the Senior Management Team: Senior Vice President, Technology, retired in April after a career with Weyerhaeuser Company spanning more than four decades. G E O R G E H W E Y E R H A E U S E R J R , who had previously served as President and Chief Executive Officer of Weyerhaeuser Canada Ltd, succeeded Johnson as Senior Vice President, Technology on May 11, 1998. W I L L I A M C S T I V E R S was elected Executive Vice President and T H O M A S M L U T H Y Senior Vice President, Wood Products, announced in Chief Financial Officer in April. He had served as Senior Vice President November that he would retire on March 31, 1999 after 31 years at and Chief Financial Officer since 1990. Weyerhaeuser Company. He is succeeded by W I L L I A M R C O R B I N , Executive Vice President, Timberlands, who became Executive Vice President, Wood Products on November 9, 1998. R I C H A R D E H A N S O N was named Senior Vice President, Timberlands, on November 9, 1998 succeeding Corbin. Hanson previously served as Vice President, Western Timberlands. NORMAN E JOHNSON
Slide 15: speed Watercolor is an exacting art. It relies on foresight and the ability to execute quickly. Weyerhaeuser is applying the same approach to our business. Success in a global market requires one to identify opportunities and then act quickly. Completing the purchase of the Dryden, Ontario, facilities in less than one month shows that we are learning to act with speed. In the future, we will apply the same approach to take advantage of opportunities critical to our long-term success.
Slide 16: Chinese brush painting reduces a form to its simplest expression. Only significant elements are put on paper. There are no wasted motions. The picture emerges from simple brushstrokes. At Weyerhaeuser, we seek simplicity. We’re focusing on how to deliver products and services more efficiently. We’re eliminating wasted motions. Making decisions faster. Being more accountable. Replicating processes throughout the company. The result is greater customer satisfaction and higher shareholder returns. simplicity
Slide 18: The artist has many brushes from which to choose. Only one creates the desired effect. A clear vision of the finished picture allows the painter to choose the right brush. In business, we have many opportunities. Only a few create our vision. Decisiveness comes from eliminating distracting options. We’ve identified where to focus our attention. Each decisive action we take moves us closer to our goal to be the best forest products company in the world. decisiveness
Slide 20: statistical data NET SALES (millions of dollars) 1998 1997 1996 1995 1994 To unaffiliated customers: Raw materials ( logs, chips and timber ) Other products Intersegment sales SALES VOLUMES (millions) $ 599 37 $ 636 $ 488 $ 760 37 $ 797 $ 520 $ 830 37 $ 867 $ 513 $ 850 32 $ 882 $ 574 $ 877 25 $ 902 $ 502 Raw materials—cubic feet A N N U A L P R O D U C T I O N C A PA C I T Y (millions) 259 235 254 254 271 Logs—cubic feet Fee harvest—cubic feet 495 585 476 541 412 496 420 518 392 525 16
Slide 21: timberlands F O R N E A R LY 1 0 0 Y E A R S , we have managed our timber- land asset for growth. What started out as 900,000 acres in 1900 now encompasses more than 5.3 million acres throughout the United States and timber licenses on 27 million acres in Canada. We’ve also grown internationally with joint ventures in New Zealand and Uruguay. During 1998, this focus on growth once again produced strong results from our Timberlands sector. We did, however, feel the effect of the Asian economic situation. Prices for both export and domestic logs dropped in response to lower Asian demand and higher inventories in the United States. This drop was offset somewhat by higher stumpage values in the southern United States. million in 1997. NET SALES O P E R AT I N G EARNINGS were $487 million compared with $535 in 1998 were $636 million compared with $797 million the prior year. Our Timberlands sector is focusing on three strategies to enhance its earnings potential. CAPTURE THE MAXIMUM VA L U E from our increasing harvest level. Due to our advanced forestry practices, we’ll see a significant increase in the volume of timber we harvest over the next 10 years. At 1997 prices, the pre-tax cash flow generated by these forests will increase by more than 50 percent. In addition, selective pruning will produce knot-free wood for use in high-margin appearancegrade lumber. I N V E S T IN TIMBERLANDS WITH LOW COST AND HIGH PRODUCTION. The Southern Hemisphere— especially New Zealand and South America—represents significant growth opportunities. We own a 51 percent interest in 193,000 acres of managed forestland and related assets in New Zealand. 17
Slide 22: As the majority owner,Weyerhaeuser is responsible for the management and marketing activities of the joint venture. We’ve also made additional investments through our partnership with institutional investors known as the World Timberfund. This partnership currently holds a 97 percent interest in a venture that has acquired 234,000 acres of private agricultural land in Uruguay that is being converted into plantation forests. L O W E R C O S T S A N D I M P R O V E Q U A L I T Y. To maximize the returns, we manage our timberlands as if they were a stand-alone operation. This means reducing costs and improving the quality of our product. We’ve reduced overhead costs by improving work systems and eliminating redundancy and waste. To improve quality, we’ve used selective pruning to produce knot-free wood. Within the next five years, we’ll begin harvesting this timber for use in appearance-grade lumber and other higher-value products that command higher market values. Weyerhaeuser is a leader in the development of the Sustainable Forestry Initiative (SFI), a comprehensive SM program developed by members of the American Forest & Paper Association. Under SFI, participating private forest landowners follow a land stewardship ethic that integrates forestry and conservation practices. This ensures that we meet present needs without compromising the ability of future generations to access wood and enjoy a healthy environment. We view SFI as a natural extension of our long-standing commitment to environmental stewardship and sustainable forestry. In the future, we will continue to manage this asset to enhance its value and generate shareholder value. 18
Slide 23: P R I N C I PA L L O C AT I O N S WESTERN TIMBERLANDS Acres owned Acres owned Acres leased 1,989,000 3,110,000 241,000 3,351,000 Oregon, Washington Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma SOUTHERN TIMBERLANDS CANADIAN TIMBERLANDS* Acres licensed 27,002,000 Alberta, British Columbia, Ontario, Saskatchewan (of which 18,938,000 acres are productive) * Managed by Canadian operations. 600 200 500 150 400 300 100 200 50 100 94 95 96 97 98 0 0 94 95 96 97 98 earnings (before nonrecurring items ) millions of dollars capital spending (excludes acquisitions) millions of dollars 19
Slide 24: statistical data NET SALES (millions of dollars) 1998 1997 1996 1995 1994 Softwood lumber Softwood plywood and veneer Oriented strand board, composite and other panel products Hardwood lumber Engineered wood products Raw materials ( logs, chips & timber ) Other products $ 1,793 452 765 240 330 228 667 $ 4,475 $ 2,094 502 594 272 284 232 599 $ 4,577 $ 1,988 519 667 235 233 220 511 $ 4,373 $ 1,648 591 752 193 207 228 430 $ 4,049 $ 1,880 636 750 175 157 91 401 $ 4,090 SALES VOLUMES (millions) 1998 1997 1996 1995 1994 Softwood lumber—board feet Softwood plywood and veneer—square feet (3/8”) Composite panels—square feet (3/4”) Oriented strand board—square feet (3/8”) Hardwood lumber—board feet Engineered wood products—linear feet Hardwood doors ( thousands ) Raw materials—cubic feet 4,995 1,842 586 2,697 339 164 789 315 4,869 2,042 551 2,462 362 137 730 325 4,745 2,172 604 2,083 349 116 652 304 4,515 2,324 648 1,931 293 128 648 260 4,402 2,685 660 1,803 254 71 617 165 ANNUAL PRODUCTION (thousands) C A PA C I T Y 1998 1997 1996 1995 1994 Softwood lumber—board feet Softwood plywood and veneer —square feet (3/8”) Composite panels—square feet (3/4”) Oriented strand board —square feet (3/8”) Hardwood lumber—board feet Hardwood doors ( thousands) Logs—cubic feet 4,161 1,017 575 2,240 386 850 — 4,025 960 510 2,179 342 788 526 3,968 1,092 478 2,041 345 740 519 3,701 1,243 535 1,687 333 646 500 3,419 1,292 583 1,654 278 643 494 3,249 1,249 594 1,568 229 597 279 P R I N C I PA L M A N U FA C T U R I N G FA C I L I T I E S Softwood lumber, plywood and veneer Composite panels Oriented strand board 32 5 6 Hardwood lumber Hardwood doors 12 1 20
Slide 25: wood products Our focus on customers and improved operating efficiencies helped the Wood Products sector withstand the challenges of a mixed market. Domestically, our oriented strand board and plywood markets benefited from another year of robust housing starts. This was offset, however, by the effects of the Japanese economy on lumber. Weak demand from Japan pushed import and domestic lumber into the US market resulting in low prices despite high demand. In 1998, our Wood Products sector produced: O P E R AT I N G EARNINGS of $208 million, excluding nonrecurring charges associated with changes to our Western Canada lumber operations to make them more competitive. This compares with $212 million, excluding charges associated with the closure of two plywood facilities and an export lumber mill, in 1997. NET SALES of $4.5 billion compared with $4.6 billion in 1997. Over the next five years, we will enhance the earnings potential of this sector by: FOCUSING ON CUSTOMERS. We develop “value propositions” with customers so they know what to expect from Weyerhaeuser. It’s an approach that ensures that we work on those things providing the most value to customers. Such “value propositions” range from providing large distributors with special lumber grades to developing product and delivery improvements. Our Installer’s Edge oriented strand board (OSB) is just one outgrowth of TM this approach. Early OSB required special installation in wet conditions. Working with customers, Weyerhaeuser developed a product that addressed this problem. This lowers the cost of installation for builders and increases use of our product. Similar “value propositions” result in products with higher margins and increased customer loyalty. LEVERAGING THE INTERNAL ALIGNMENT between our timber, manufacturing, sales and distribution operations to efficiently serve target industry segments. Industrial, treated truss and engineered products are examples of how we match our focus on industry segments with the strength of a “one-company” approach to reduce costs and meet the unique needs of key customers. 21
Slide 26: ENHANCING INTERNAL GROWTH OPPORTUNITIES. Over the next five years we will continue to significantly increase our production capabilities through modernization. This includes deploying new technologies that increase the amount of lumber per log while producing higher-quality lumber. We also involve our employees to help develop ways to increase our uptime and reduce the amount of time it takes to complete projects. As a result, we expect to increase lumber production by 35 percent and production of oriented strand board and plywood by 17 percent at our existing facilities. S T R A T E G I C A L LY G R O W I N G T H E B U S I N E S S . Wood Products consists of businesses targeted for potential growth. Most of this growth will come from operational improvements to existing facilities. We also expect to grow our appearance-grade wood capabilities to maximize our practice of selectively pruning existing timber. Such pruning reduces knots thereby creating “clear” wood for use in lumber that produces higher margins. While growth through acquisitions is not a primary strategy for Wood Products, we will take this approach in selected cases. Our purchase of the Dryden, Ontario, paper facility, for example, also provided an opportunity to add two mills to our Canadian lumber position. This acquisition enhances our product mix and allows us to better serve Eastern markets. Through operational excellence, we expect to achieve our earnings growth while maintaining capital spending near depreciation levels over the next five years. This will improve the returns on invested capital and is key to achieving our shareholder return goals. 600 400 500 300 400 300 200 200 100 100 94 95 96 97 98 0 94 95 96 97 98 0 earnings (before nonrecurring items) millions of dollars capital spending (excludes acquisitions) millions of dollars 22
Slide 27: P R I N C I PA L L O C AT I O N S SOFTWOOD LUMBER produces dimension lumber. United States: Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, Oklahoma, Oregon, Washington Canada: Alberta, British Columbia, Ontario, Saskatchewan P LY W O O D manufactures softwood structural and “appearance” panels for home remodelers, builders and industrial use. ORIENTED STRAND BOARD produces structural sheathing, subflooring, underlayments and other panels for residential and commercial construction. United States: Alabama, Arkansas, Oklahoma, Washington (veneer) United States: Michigan, North Carolina, West Virginia Canada: Alberta United States: COMPOSITE PRODUCTS makes industrial particleboard and medium density fiberboard used primarily in furniture, laminating, countertops, millwork, door manufacturing and for export. HARDWOOD LUMBER Georgia, North Carolina, Oregon, Wisconsin produces hardwood lumber and components for use in manufacturing cabinets and furniture. United States: Arkansas, Michigan, Oklahoma, Oregon, Pennsylvania, Washington, Wisconsin United States: B U I L D I N G M A T E R I A L S D I S T R I B U T I O N sells a broad range of building materials from a network of in-market customer service centers, satellites and reload operations located throughout North America. Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin Canada: Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec ARCHITECTURAL DOORS produces architectural doors used mainly in offices, schools and hospitals. PRODUCTS United States: Wisconsin 23
Slide 29: innovation Building on the work of preceding masters, a painter further develops the art form by creating new strokes and techniques. Such innovation enriches the art and enhances the enjoyment for viewers. We’re using our outstanding research and development capabilities to enrich the science of forestry and meet new customer needs. Innovation requires venturing into new areas. But as we pursue these opportunities, we’re aligning our capabilities with the needs of customers.
Slide 30: enduring values The values of Chinese brush painting are centuries old. They create a sense of purpose and discipline for the painter. For nearly a century, Weyerhaeuser has adhered to a set of values to guide us. They include being responsible to the communities in which we operate, respecting the environment and developing our employees. It means operating according to the highest ethical standards. As we look to our second hundred years, we’ll continue to steer a course guided by these enduring values.
Slide 33: the future Placing a chop, or stamp, on the watercolor completes a Chinese brush painting. Each chop has a special meaning. This chop depicts “endless possibilities.” As we look to our future, we believe in endless possibilities. We have the people, the resources, the financial strength and the commitment to be the best forest products company in the world. We will fufill our potential through future growth.
Slide 34: statistical data NET SALES (millions of dollars) 1998 1997 1996 1995 1994 Pulp Paper ( 1 ) Paperboard and containerboard Packaging Newsprint (2) Recycling Other products $ 935 869 298 1,894 37 191 88 $ 4,312 $ 986 842 301 1,781 416 189 94 $ 4,609 $ 954 803 281 1,921 451 140 98 $ 4,648 $ 1,616 1,001 325 1,863 508 266 103 $ 5,682 $ 1,012 664 240 1,495 356 121 178 $ 4,066 SALES VOLUMES (millions) 1998 1997 1996 1995 1994 Pulp—air-dry metric tons Paper—tons (1) Paperboard—tons Containerboard—tons Packaging—MSF Newsprint—metric tons (2) Recycling—tons 2,012 1,181 236 323 44,299 62 2,546 1,982 1,146 243 389 44,508 684 2,229 1,868 1,007 205 346 42,323 629 2,011 2,060 1,006 230 259 34,342 663 1,467 2,068 998 201 254 34,483 638 985 ANNUAL PRODUCTION (thousands) C A PA C I T Y 1998 1997 1996 1995 1994 Pulp—air-dry metric tons Paper—tons (1) Paperboard—tons Containerboard—tons Packaging—MSF Newsprint—metric tons (2) Recycling—tons 2,255 1,594 230 2,600 50,000 — — 1,971 1,235 237 2,291 46,410 69 3,833 2,063 1,128 231 2,381 46,488 704 3,655 2,004 1,034 206 2,331 44,471 631 3,428 2,159 1,060 229 2,329 36,041 687 2,754 2,041 982 189 2,357 36,020 651 2,042 P R I N C I PA L M A N U FA C T U R I N G FA C I L I T I E S Pulp Paper Paperboard 9 6 1 Containerboard Packaging Recycling 4 44 24 (1) Reflects the acquisition of the Dryden, Ontario, fine paper mill in October 1998. (2) Reflects the ownership restructuring of the North Pacific Paper Corporation (NORPAC ) newsprint facility from a fully consolidated subsidiary to an equity affiliate in February 1998. 30
Slide 35: pulp • paper and packaging IMPROVED O P E R AT I N G EFFICIENCIES and a disciplined approach to capital spending helped our Pulp, Paper and Packaging sector withstand difficult market conditions. During the year, Asian demand for pulp, paper and containerboard declined while imports of fine papers into the United States increased significantly. This led to high inventories and weak industry prices across most product lines. The effect of these forces was evident in our 1998 results: O P E R A T I N G EARNINGS were $192 million, unchanged from 1997 levels. 1998 operating earnings exclude nonrecurring charges associated with the closure of a chlor-alkali facility and the streamlining of pulp and paper operations. Operating earnings for 1997 exclude a gain for the sale of a chemical facility and charges associated with the consolidation, closure or disposition of some recycling facilities. N E T SALES were $4.3 billion in 1998 compared with $4.6 billion the prior year. Although these results are better than many in our industry, we are improving our performance to deliver superior shareholder returns. We have identified five specific ways to grow revenues and improve margins from our Pulp, Paper and Packaging sector. INCREASE OUTPUT LOWER COSTS AND from existing facilities. We’ve significantly improved the efficiency of our operations by engaging employees in the design and implementation of improved work systems. This approach has increased the reliability and performance of our mills while allowing us to maintain stringent control on overhead costs. In the future, our goal is to use process improvements to increase output from existing facilities by 1.5 to 2 percent annually. 31
Slide 36: M A I N TA I N T I G H T C O N T R O L S O N C A P I TA L S P E N D I N G . Capital spending in 1998 was $325 million compared with $315 million last year. This is the second year we’ve kept spending at, or below, depreciation levels. It also marks the third consecutive year of positive net cash flows in difficult market conditions. Such results reflect our strategy of investing capital to improve operating efficiencies at existing facilities rather than adding new capacity. GROW FINE PA P E R . In September, we acquired the Dryden, Ontario, fine paper facility and related assets. The acquisition adds 380,000 short tons of fine paper a year to our system, gives us additional geographic range and increases our ability to serve the fast-growing retail paper market. Our Fine Paper business has a sustained record of performance improvements that we will extend to the Dryden operations. S E L E C T I V E LY GROW C O N TA I N E R B O A R D PA C K A G I N G . As one of the industry’s largest providers of packaging solutions, we are prudently growing this business to meet the evolving needs of our customers. In May, we opened a box plant in Shanghai with SCA Packaging Europe BV to serve existing customers doing business in China. In October, we formed a joint venture with Wilton Connor Packaging to meet the needs of our domestic customers in the rapidly growing point-of-purchase display market. R E P O S I T I O N M A R K E T P U L P. We’re improving the competitive position of market pulp by reducing its exposure to volatile commodity markets. 1,200 We’ll build on past successes to reduce this exposure to less than 50 percent through product enhancements 800 1,000 developed by our extensive research and development 800 600 capabilities. By differentiating our pulp, we’ll add value for customers, improve margins and increase returns to shareholders. We’re confident we can overcome our current market challenges to position Weyerhaeuser as a leader in shareholder return. We will do that by continuing to improve efficiencies and differentiating our products in ways customers recognize and value. 94 95 96 97 98 600 400 400 200 200 0 94 95 96 97 98 earnings (before nonrecurring items) millions of dollars capital spending (excludes acquisitions) millions of dollars 32
Slide 37: P R I N C I PA L L O C AT I O N S MARKET PULP manufactures wood pulp for global markets. United States: Georgia, Mississippi, North Carolina, Washington Canada: Alberta, British Columbia, Ontario, Saskatchewan F I N E PA P E R manufactures a range of both coated and uncoated fine papers and markets its products through paper merchants. United States: Mississippi, North Carolina, Washington, Wisconsin Canada: Ontario, Saskatchewan B L E A C H E D PA P E R B O A R D produces and markets bleached paperboard to West Coast and Pacific Rim customers for production of liquid containers such as milk and juice cartons. United States: Washington C O N TA I N E R B O A R D PA C K A G I N G manufactures containerboard (medium and linerboard) and corrugated boxes. United States: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, Wisconsin United States: RECYCLING operates an extensive wastepaper collection system to supply company mills and national and international customers. Arizona, California, Colorado, Illinois, Iowa, Kansas, Maryland, Minnesota, Nebraska, North Carolina, Oklahoma, Oregon, Tennessee, Texas, Utah, Virginia, Washington PRODUCTS 33
Slide 38: real estate and related assets Continued execution of its strategic plan, combined with a robust domestic housing market, resulted in strong earnings for our Real Estate business. For the year, the sector reported earnings of $124 million. This compares with $66 million before a gain associated with the sale of Weyerhaeuser Mortgage Company in 1997. TO MAXIMIZE ITS EARNING POTENTIAL, our Real Estate business focuses on the home- building and land-development business. Improved earnings resulted from increased operating efficiencies and improved margins and inventory turnover. During the year, the backlog of homes sold, both in absolute terms and as a percentage of in-process inventory, was increased to record levels. Homebuilding and land-development sales increased over the prior year. THESE IMPROVEMENTS HELPED PRODUCE strong earnings by our real estate operations. With home-building and land-development activities in Southern California, Las Vegas, Houston, Maryland, Virginia and the Puget Sound area in Washington state, Weyerhaeuser Real Estate Company continues to be among the largest home builders in its selected markets. P R I N C I PA L L O C AT I O N S LAND MANAGEMENT United States: Arkansas, Georgia, North Carolina, Washington PA R D E E C O N S T R U C T I O N C O M PA N Y United States: Nevada, Southern California Q U A D R A N T C O R P O R AT I O N United States: Washington TRENDMAKER HOMES United States: Texas WINCHESTER HOMES United States: Maryland, Virginia W E Y E R H A E U S E R R E A LT Y I N V E S T O R S United States: California, Washington O P E R AT I O N S 34
Slide 39: significant accomplishments SAFETY Safety is a core value at Weyerhaeuser and the company’s number one priority. We measure safety by recordable incident rate, which is the number of recordable safety incidents per 100 employees per year. In 1998, our recordable incident rate was 3.9 compared with 4.6 in 1997, a 16 percent decrease. The target for 1999 is 2.5. The ongoing goal is a rate of less than one. Those facilities or operations receiving significant external recognition for their efforts to improve safety during 1998 include: PULP MILL Flint River, Georgia Received a “Star” plant site designation by the US Department of Occupational Safety and Health Administration (OSHA). Flint River is the fifth Weyerhaeuser facility to receive OSHA’s highest award for accident prevention and on-the-job safety performance. Accepted into OSHA’s Voluntary Protection Program. Acceptance requires plants to exceed the industry safety average and have active safety processes that exceed OSHA regulations. C O N TA I N E R B O A R D PA C K A G I N G P L A N T Amarillo, Texas T I M B E R L A N D S O P E R AT I O N Coos Bay, Oregon Received second consecutive Oregon OSHA Safety & Health Achievement Recognition Program (SHARP) award. SHARP provides incentives for Oregon employers to develop and implement effective injury- and illness-prevention programs. ARCHITECTURAL DOOR BUSINESS Marshfield, Wisconsin Received the Plant Safety Award from the National Wood Window and Door Association for outstanding safety performance in a 12-month period. B U I L D I N G M AT E R I A L S Distribution Business Received Dow Chemical Company’s Sales Excellence Award for outstanding performance. Dow—the world’s largest producer of Styrofoam™ brand extruded insulation products—recognized BMD for doubling its sales of Styrofoam™ products in three years. Won Fleetwood Homes’ Circle of Excellence Customer Satisfaction Award for the second consecutive year. Fleetwood is the largest manufacturer of recreational vehicles and manufactured homes in the United States. Presented 1998 Golden Hammer Award for vendor excellence in marketing and partnership by National Home Center News. This is the second consecutive year Weyerhaeuser has won the award. Building Materials Distribution; Southern, Western and Canadian Lumber; Plywood; Eastern and Western Oriented Strand Board; Composite Products; Hardwood Lumber CUSTOMERS/SUPPLIERS 35
Slide 40: CITIZENSHIP W E Y E R H A E U S E R C O M PA N Y Southwest Georgia Received the Oregon Department of Fish and Wildlife and the Oregon Department of Forestry’s Fish and Wildlife Steward Award for Forest Lands in the industrial landowner category. The award recognizes private landowners that improve fish and wildlife resources through forest stewardship activities. Won the American Forest & Paper Association Environment and Energy Achievement Award for Pollution Prevention. The award recognizes the progress made by the forest products industry in the areas of environment, safety, energy and wildlife stewardship. Received the WD Littleford Award sponsored by the American Business Press. The award, given to recognize Weyerhaeuser’s commitment to environmental improvements, was shared with Chemical Engineering magazine. W E Y E R H A E U S E R C O M PA N Y Flint River, Georgia, Pulp Mill G R A N D E P R A R I E / G R A N D E C A C H E O P E R AT I O N S Alberta, Canada Achieved 100 percent environmental compliance in one of the most stringent provinces in Canada. The operations include a pulp mill, two sawmills and forestlands. Received the Arkansas Environmental Federation’s 1998 Waste Minimization/Pollution Award for water discharges improvement. The federation, an environmental education association focused on businesses, recognizes companies that take extra efforts to protect the environment. Designated Landowner of Merit by the Washington State Department of Natural Resources. This designation is awarded to forest landowners that demonstrate advanced forest management and planning skills, including superior compliance with Washington’s Forest Practices Rules and proactive resource protection. Was ranked number one in responsibility to the community and environment among forest and paper products companies by Fortune magazine’s Corporate Reputation Survey. P LY W O O D A N D L U M B E R M I L L Mountain Pine, Arkansas VA I L T R E E FA R M Western Timberlands Organization W E Y E R H A E U S E R C O M PA N Y 36
Slide 41: the 1998 financial report D E S C R I P T I O N O F T H E B U S I N E S S O F T H E C O M PA N Y 3 8 FINANCIAL REVIEW 43 R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N TA N T S 5 0 C O N S O L I D AT E D B A L A N C E S H E E T 5 2 C O N S O L I D AT E D S TAT E M E N T O F E A R N I N G S 5 1 C O N S O L I D AT E D S TAT E M E N T O F C A S H F L O W S 5 4 C O N S O L I D AT E D S AT E M E N T O F S H A R E H O L D E R S ’ I N T E R E S T S 5 6 HISTORICAL SUMMARY 72 N O T E S T O F I N A N C I A L S TAT E M E N T S 5 7
Slide 42: description of the business of the company Weyerhaeuser Company (the company) was incorporated in the state of Washington in January 1900 as Weyerhaeuser Timber Company. It is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, real estate development and construction, and other real estate related activities. The company has 35,000 employees, of whom 34,000 are employed in its timber-based businesses, and of this number, approximately 18,000 are covered by collective bargaining agreements, which generally are negotiated on a multi-year basis. Approximately 1,000 of the company’s employees are involved in the activities of its real estate and related assets segment. The major markets, both domestic and foreign, in which the company sells its products are highly competitive, with numerous strong sellers competing in each. Many of the BUSINESS SEGMENTS TIMBERLANDS company’s products also compete with substitutes for wood and wood fiber products. The company’s subsidiaries in the real estate and related assets segment operate in highly competitive markets, competing with numerous regional and national firms in real estate development and construction and other real estate related activities. In 1998, the company’s sales to customers outside the United States totaled $1.8 billion (including exports of $1.1 billion from the United States and $700 million of Canadian export and domestic sales), or 17 percent of total consolidated sales and revenues, compared with 20 percent in 1997. The company believes these sales contributed a higher proportion of aggregate operating profits. All sales to customers outside the United States are subject to risks related to international trade and to political, economic and other factors that vary from country to country. The company is engaged in the management of 5.1 million acres of company-owned and .2 million acres of leased commercial forestland in the United States (3.3 million acres in the South and 2 million acres in the Pacific Northwest), most of it highly productive and located extremely well to serve both domestic and international markets. The standing timber inventory on these lands is approximately 94 million cunits (a cunit is 100 cubic feet of solid wood). The relationship between cubic measurement and the quantity of end products that may be produced from timber varies according to the species, size and quality of timber, and will change through time as the mix of these variables changes. To sustain the timber supply from its fee timberlands, the company is engaged in extensive planting, suppression of nonmerchantable species, precommercial and commercial thinning, fertilization and operational pruning, all of which increase the yield from its fee timberland acreage. The company, through its wholly owned subsidiary, Weyerhaeuser New Zealand Inc., is responsible for the management and marketing activities of a New Zealand joint venture located on the northern end of the South Island consisting of 151,000 acres of Crown Forest License cutting rights and approximately 42,000 acres of freehold land. The company, through its wholly owned subsidiary, Weyerhaeuser Forestlands International, is a 50 percent owner in RII Weyerhaeuser World Timberfund, L.L.P a ., joint-venture partnership, which makes investments outside the United States. This joint venture owns 97 percent of a Uruguayan venture, Colonvade, S.A., which has acquired over 234,000 acres of private grazing land that is currently being converted into plantation forests. Dollar amounts in millions 1998 1997 1996 1995 1994 Sales to unaffiliated customers: Raw materials (logs, chips and timber) Other products $ $ 599 $ 37 636 $ 488 $ 487 $ 760 $ 37 797 $ 520 $ 535 $ 830 $ 37 867 $ 513 $ 503 $ 850 $ 32 882 $ 574 $ 560 $ 877 25 902 502 565 Intersegment sales Approximate contributions to earnings $ $ 38
Slide 43: WOOD PRODUCTS The company’s wood products businesses produce and sell softwood lumber, plywood and veneer; oriented strand board, composite and other panels; hardwood lumber; doors and treated products. These products are sold primarily through the company’s own sales organizations. Building materials are sold to wholesalers, retailers and industrial users. The raw materials required to produce these products are purchased from third parties, transferred at market price from the company’s timberlands, or Dollar amounts in millions obtained from long-term licensing arrangements covering approximately 27 million acres in Canada (of which 18.9 million acres are considered to be productive forestland). During the 1998 fourth quarter, the company changed its British Columbia lumber operations by permanently closing the Lumby sawmill, converting the Merritt mill to a planer-only operation and reconfiguring its remaining four sawmills to achieve improved production. 1998 1997 1996 1995 1994 Sales to unaffiliated customers: Softwood lumber Softwood plywood and veneer Oriented strand board, composite and other panels Hardwood lumber Engineered wood products Raw materials (logs, chips and timber) Other products Approximate contributions to earnings(1)(2) (1) (2) $ 1,793 $ 2,094 $ 1,988 $ 1,648 $ 1,880 452 502 519 591 636 765 594 667 752 750 240 272 235 193 175 330 284 233 207 157 228 232 220 228 91 667 599 511 430 401 $ 4,475 $ 4,577 $ 4,373 $ 4,049 $ 4,090 $ 183 $ 172 $ 302 $ 248 $ 469 After nonrecurring charges totaling $25 million for changes to the British Columbia lumber operations in 1998. After nonrecurring charges totaling $40 million associated with the closure of a lumber mill and two plywood facilities in 1997. PULP, PAPER AND PACKAGING The company’s pulp, paper and packaging businesses include: Pulp, which manufactures chemical wood pulp for world markets; Paper, which manufactures and markets a range of both coated and uncoated fine papers through paper merchants and printers; Containerboard Packaging, which manufactures linerboard and corrugating medium, primarily used in the production of corrugated packaging, and manufactures and markets industrial and agricultural packaging; Paperboard, which manufactures and markets bleached paperboard, used for production of liquid containers, to West Coast and Pacific Rim customers; and Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers. During the first quarter of 1998, the company completed the ownership restructure of its newsprint joint venture, North Pacific Paper Corporation (NORPAC). Through this restructuring, the ownership changed from 80 percent company ownership and 20 percent Nippon Paper Industries Co., Ltd., to 50 percent for each shareholder. The company provides raw materials, management, marketing and support services to this joint venture. The company took charges for the closure of the Longview, Washington, chlor-alkali facility and the streamlining of the pulp and paper operations in the 1998 fourth quarter. In the fourth quarter of 1998, the company completed the purchase of the Dryden, Ontario, Canada, uncoated freesheet mill and related assets from Bowater Inc. This facility has the capacity to produce 380,000 short tons of fine paper per year and a small amount of bleached softwood market pulp. Two lumber mills, with 200 million board feet of capacity, and timber licenses comprising 4.35 million acres were also part of this purchase. In 1998, the company’s 50 percent owned joint venture, SCA Weyerhaeuser Packaging Holding Company Asia Ltd., opened a newly constructed containerboard packaging facility in Shanghai, China. Construction continues on another facility in Wuhan, China, which is expected to open in 1999. 39
Slide 44: In the 1998 fourth quarter, the company and Wilton Connor Packaging, Inc., formed a joint venture, Wilton Connor LLC, based in Charlotte, North Carolina. This joint venture, in which the company has a 50 percent Dollar amounts in millions ownership interest, supplies full-service, value-added turnkey packaging solutions that assist product manufacturers in the areas of retail marketing and distribution. 1998 1997 1996 1995 1994 Sales to unaffiliated customers: Pulp Paper Paperboard and containerboard Packaging Newsprint(1) Recycling Other products Approximate contributions to earnings(2)(3) $ 935 $ 986 $ 954 $ 1,616 $ 1,012 869 842 803 1,001 664 298 301 281 325 240 1,894 1,781 1,921 1,863 1,495 37 416 451 508 356 191 189 140 266 121 88 94 98 103 178 $ 4,312 $ 4,609 $ 4,648 $ 5,682 $ 4,066 $ 150 $ 164 $ 307 $ 1,181 $ 211 (1)As of February 1998, the company’s ownership in its newsprint subsidiary changed from 80 percent to 50 percent; therefore, these results reflect one month’s sales. (2) After nonrecurring charges of $42 million associated with the closure of the Longview, Washington, chlor-alkali facility and streamlining pulp and paper operations in 1998. After the gain of $21 million on the sale of Saskatoon Chemicals, Ltd., and charges totaling $49 million for the closure of a corrugated medium machine and the restructuring of the recycling business in 1997. (3) REAL ESTATE AND RELATED ASSETS The company, through its subsidiary, Weyerhaeuser Real Estate Company (WRECO), is engaged in developing single-family housing and residential lots for sale, including development of master-planned communities. Dollar amounts in millions Operations are concentrated mainly in selected metropolitan areas in Southern California, Nevada, Washington, Texas, Maryland and Virginia. 1998 1997 1996 1995 1994 Sales to and revenues from unaffiliated customers: Single-family units Multi-family units Residential lots Commercial lots Commercial buildings Acreage Interest(1) Loan origination and servicing fees(1) Other Approximate contributions to earnings(2) (1) $ 834 $ 688 $ 573 $ 36 29 12 103 91 76 23 57 50 100 68 43 36 41 25 18 35 70 — 35 100 42 49 60 $ 1,192 $ 1,093 $ 1,009 $ $ 124 $ 111 $ 43 $ 563 $ 686 — 26 60 65 29 7 4 35 36 20 76 84 84 88 67 106 919 $ 1,117 (277) $ 18 Interest and loan origination and servicing fees relate principally to the company’s operations in financial services through its subsidiary, Weyerhaeuser Mortgage Company, which was sold in the second quarter of 1997. (2)After a $45 million gain on the sale of Weyerhaeuser Mortgage Company in 1997 and a charge of $290 million to dispose of certain real estate assets in 1995. CORPORATE AND OTHER Corporate and other includes marine transportation and general corporate expense. Dollar amounts in millions 1998 1997 1996 1995 1994 Sales to unaffiliated customers Approximate contributions to earnings(1)(2) (1) (2) $ $ 151 $ (225) $ 134 $ (186) $ 217 $ (183) $ 256 $ (217) $ 223 (142) After nonrecurring charges of $4 million for streamlining corporate operations in 1998. After a $10 million gain, which is the net effect of interest income from a favorable federal income tax decision and the loss incurred in the sale of Shemin Nurseries in 1997. 40
Slide 45: ENVIRONMENTAL MATTERS Since 1990, a number of fish and wildlife species that occur in streams and timberlands in the Pacific Northwest (Washington, Oregon, Idaho and northern California) have been listed as threatened or endangered in at least some portions of their ranges under the Endangered Species Act (ESA). These include the northern spotted owl, marbled murrelet, Umpqua River cutthroat trout, several Snake River salmon runs, coho salmon, bull trout and steelhead trout. Petitions have been filed to list other species and additional populations of some of those species as threatened or endangered under the ESA. A consequence of these listings has been, and a consequence of future listings may be, reductions in the sale and harvest of timber on federal timberlands in the Pacific Northwest. Federal and state requirements to protect habitat for threatened and endangered species have resulted in restrictions on timber harvest on some nonfederal timberlands in the Pacific Northwest, including some timberlands of the company. Additional regulatory actions taken by federal or state agencies to protect habitat for these species may, in the future, result in restrictions on timber harvests and other forest management practices in such states, including company timberlands in western Washington and western Oregon, could increase operating costs, and could affect timber supply and prices. The company believes that such restrictions will not have a significant effect on the company’s total harvest of timber or production of forest products in 1999, although they may have such an effect in the future. The listing of the red-cockaded woodpecker as an endangered species under the ESA had some effect on the harvest of public and private timber in the southeastern United States, but has had little effect on the company’s operations. Other ESA-listed species (e.g., American burying beetle and gopher tortoise) occur on or near some of the company’s southern timberlands, but have had little effect on the company’s operations. Other federal ESA listings, or designations of fish and wildlife species as endangered, threatened or otherwise sensitive under various state laws, could affect future timber harvests on some of the company’s timberlands and could affect timber supply and prices in some regions. In addition, regulations protecting wetlands may affect future harvest and forest management practices on some of the company’s timberlands, particularly in southeastern states. In February 1995, the company obtained U.S. Fish and Wildlife Service approval of a Habitat Conservation Plan (HCP) and Incidental Take Permit with respect to northern spotted owls on approximately 209,000 acres of its Oregon coastal timberlands, which is expected to remain in effect for at least 50 years. In December 1996, the company applied to the U.S. Fish and Wildlife Service and the National Marine Fisheries Service for a multiple-species HCP covering approximately 400,000 acres of company timberlands in western Oregon. If the HCP is approved and the related Incidental Take Permit is issued, the company would be authorized to “take” members of species currently listed or proposed for listing under the ESA and members of all or most species that may become listed in the future in the course of conducting forest management and other activities on those lands. Under both HCPs, there are limits on the amounts of covered lands that can be sold or exchanged unless the new owner agrees to be bound by the HCP and related documents or the agencies approve the change in ownership. The company also has obtained from the U.S. Fish and Wildlife Service an Incidental Take Permit for the American burying beetle covering approximately 25,000 acres of lands in Oklahoma and has entered into agreements with the U.S. Fish and Wildlife Service to reduce uncertainties under the ESA with respect to red-cockaded woodpeckers on some of its timberlands in North Carolina and northern spotted owls on some of its timberlands in Washington. Forest practice acts in some of the states in which the company has timber increasingly affect present or future harvest and forest management activities. For example, forest practice acts in Washington and Oregon limit the size of clearcuts; require that some timber be left unharvested in riparian areas and sometimes in other areas to protect water quality, fish habitat and wildlife; regulate construction of forest roads and conduct of other forest management activities; require reforestation following timber harvest; and contain procedures for state agencies to review and approve proposed forest practice activities. Other states and some local governments regulate certain forest practices through various permit programs. Each state in which the company owns timberlands has developed “best management practices” (BMPs) to reduce the effects of forest practices on water quality and aquatic habitats. Additional and more stringent regulations and regulatory programs may be adopted by various state and local governments to achieve water-quality standards under the Clean Water Act or to preserve aquatic habitats. These current or future forest practice acts, BMPs and other programs may reduce the volumes of timber that can be harvested, increase operating and administrative costs, and make it more difficult to respond to rapid changes in markets, extreme weather or other unexpected circumstances. However, the company does not anticipate that it will be disproportionately affected by these programs as 41
Slide 46: compared with typical owners of comparable timberlands or that these programs will significantly disrupt its planned operations over large areas or for extended periods. In addition, the company participates in the Sustainable Forestry InitiativeSM sponsored by the American Forest & Paper Association, a code of conduct designed to supplement government regulatory programs with voluntary landowner initiatives to further protect certain public resources and values. Compliance with the Sustainable Forestry Initiative SM may require some increases in operating costs. The combination of the forest management and harvest restrictions and effects described in the preceding paragraphs has increased operating costs, resulted in changes in the value of timber and logs from the company’s Pacific Northwest timberlands, and contributed to increases in the prices paid for wood products and wood chips during periods of high demand. One additional effect may be the continuation of some reduced usage of, and some substitution of other products for, lumber and plywood. The company does not believe that the restrictions and effects described in the above paragraphs have had, or in 1999 or 2000 will have, a significant effect on the company’s total harvest of timber, although they may have such an effect in the future. In addition to the foregoing, the company is subject to federal, state or provincial and local air, water and land pollution control, solid and hazardous waste management, disposal and remediation laws and regulations in all areas in which it has operations and to market demands with respect to chemical content of some products and use of recycled fiber. Compliance with these laws, regulations and demands usually involves capital expenditures as well as operating costs. The company cannot easily quantify future amounts of capital expenditures required to comply with these laws, regulations and demands, or the effects on operating costs, because in some instances compliance standards have not been developed or have not become final or definitive. In addition, compliance with standards frequently serves other purposes such as extension of facility life, increase in capacity, changes in raw material requirements, or increase in economic value of assets or products. While it is difficult to isolate the environmental component of most manufacturing capital projects, the company estimates that capital expenditures for environmental compliance were approximately $108 million (18 percent of total capital expenditures excluding acquisitions) in 1998. Based on its understanding of current regulatory requirements, the company expects that average expenditures will range from $100 million to $110 million (13 to 14 percent of total capital expenditures) in 1999 and 2000. The company is involved in the environmental investigation or remediation of numerous sites. Some of the sites are on property presently or formerly owned by the company where the company has the sole obligation to remediate the site or shares that obligation with one or more parties, others are third-party sites involving several parties who have a joint and several obligation to remediate the site, and some are superfund sites where the company has been named as a potentially responsible party. The company’s liability with respect to these sites ranges from insignificant at some sites to substantial at others, depending on the quantity, toxicity and nature of materials deposited by the company at the site and, with respect to some sites, the number and economic viability of the other responsible parties. The company spent approximately $12 million in 1998 and expects to spend $13 million in 1999 on environmental remediation of these sites. It is the company’s policy to accrue for environmental remediation costs when it is determined that it is probable that such an obligation exists and the amount of the obligation can be reasonably estimated. Based on currently available information and analysis, the company believes that it is reasonably possible that costs associated with all identified sites may exceed current accruals by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $90 million over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates upon which accruals are currently based and utilizes assumptions less favorable to the company among the range of reasonably possible outcomes. An Environmental Protection Agency (EPA) regulation under Title V of the Clean Air Act requires updated comprehensive operating permits at many of the company’s manufacturing operations. The company will continue to prepare the permit applications in 1999 and anticipates that it will be able to obtain the necessary permits. The EPA published proposed regulations on December 17, 1993, known as the “Cluster Rules,” which would establish maximum achievable control technology standards for noncombustion sources under the Clean Air Act, and revised wastewater effluent limitations under the Clean Water Act. The original proposal has been modified on two occasions. The final rule was approved by the administrator of the EPA in November 1997 and went into effect in early 1998. The Cluster Rules will require the company to commit over the next several years approximately $80 million of additional capital to further reduce air emissions and wastewater discharges. 42
Slide 47: financial review RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 Consolidated net sales and revenues for 1998 were $10.8 billion, a decrease of 4 percent over the prior year’s $11.2 billion. Lower average prices in the major products were the principal factor in this unfavorable variance compared with 1997. In total, revenue changes as a result of volume variances were unchanged from the prior year. 1998 net earnings were $294 million, or $1.48 basic earnings per common share, a 14 percent decrease from $342 million, or $1.72 basic earnings per common share in 1997. The 1998 results reflect an after-tax charge of $45 million, or 23 cents per common share, primarily associated with streamlining pulp and paper operations, the closure of the Longview chlor-alkali facility and changes to the British Columbia lumber operations. During the year, the company also incurred pretax charges of $42 million on Year 2000 remediation work. 1997 earnings included an after-tax net charge of $9 million, or 4 cents per common share, related to the closure of operating facilities, offset in part by the gain on sale of businesses. Diluted earnings per common share, which are based upon the inclusion of outstanding stock options in the weighted average number of shares outstanding, were $1.47 and $1.72 for 1998 and 1997, respectively. The timberlands segment’s operating earnings for 1998 were $487 million compared with $535 million in 1997. The current year’s results were hurt by a soft export market early in the year that weakened prices for both domestic and export logs. Net sales for the year were $636 million compared with $797 million in 1997. Export log prices did improve throughout the year and were above 1997 fourth-quarter levels at year-end. Operating earnings for the wood products segment were $208 million before the $25 million nonrecurring pretax charge associated with changes in the British Columbia lumber operations. This compares with the $212 million earned before nonrecurring pretax charges of $40 million for the closure of two plywood facilities and an export sawmill in 1997. This segment posted net sales of $4.5 billion for the year, comparable to $4.6 billion in the prior year. Oriented strand board enjoyed a strong year with both volumes and prices above 1997 levels. Lower prices for lumber, however, offset the effects of higher volume driven by domestic housing starts. The pulp, paper and packaging segment had operating earnings of $192 million in 1998 before the nonrecurring pretax $42 million charge associated with streamlining pulp and paper operations and the closure of the Longview, Washington, chlor-alkali facility. This is comparable to the $192 million earned in 1997 before a pretax nonrecurring charge of $28 million, which is the net of a $49 million charge for facility closures, offset in part by a $21 million gain on the sale of the Saskatoon, Saskatchewan, Canada, chemical business. Sales for the segment were $4.3 billion for the year compared with $4.6 billion in the prior year. Prices for most grades of pulp and paper were below 1997 levels. The ownership restructuring of the North Pacific Paper Corporation newsprint facility from a fully consolidated subsidiary to a 50 percent owned equity affiliate in February 1998 also unfavorably impacted segment sales for the year. The real estate and related assets segment posted operating earnings of $124 million in 1998, compared with 1997 earnings of $66 million, before the gain of $45 million on the sale of Weyerhaeuser Mortgage Company. Improved operating performance and the strong housing market contributed to stronger earnings. Net sales and revenues were $1.2 billion in 1998 compared with $1.1 billion in 1997. This increase was primarily from the sale of single-family units, offset in part by the elimination of loan origination and service fees generated in previous years by the mortgage banking business. The sale of commercial properties was essentially unchanged from year to year. Weyerhaeuser’s costs of products sold were $398 million or 5 percent less in 1998 than 1997. This is consistent with the reduction in Weyerhaeuser net sales and maintains the costs of products sold as a percentage of sales at 78 percent, the same as 1997. Charges of $71 million in 1998 and $89 million in 1997 for the closure or disposition of facilities were included in costs and expenses. The product inventory turnover rate was 11.8 turns for the year, slightly less than the 12.1 turns in 1997. The real estate and related assets segment costs and operating expenses rose in 1998 on par with the increase in sales and revenues. Selling, general and administrative expenses decreased by $43 million for 1998 due principally to the sale of the mortgage banking business. Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. There were no significant individual items in 1998. Significant items in 1997 for Weyerhaeuser were interest income of $18 million from a favorable federal income tax decision, a loss of $8 million from the sale of the wholesale nursery business 43
Slide 48: and a gain of $21 million from the sale of the Saskatoon chemical facility. The real estate and related assets segment had a gain of $45 million from the sale of the mortgage banking business in 1997. CHARGE FOR CLOSURE OR DISPOSITION OF FACILITIES adjustments to the nationwide system to meet the needs of internal and external customers in an increasingly competitive marketplace. Approximately 330 jobs are affected by these changes. • $15 million for the permanent closure of the corrugated medium machine and administrative reorganization at the Longview, Washington, plant site — The company determined that the machine was not large enough to be a cost-competitive operation and after examining the limited options available decided to permanently close the operation. No employees were affected in 1997 by the machine closure; however, the administrative reorganization displaced 29 employees. • $25 million for the closures of the Plymouth, North Carolina, and Philadelphia, Mississippi, plywood facilities — These closures were a part of the company’s long-term strategy to align its wood products manufacturing facilities with the changing future sources of raw materials. The company closed the Plymouth facility rather than modernize it due to market conditions and high raw material values. In addition, this facility lacked an independent energy source, a problem that would have required a substantial investment. Approximately 240 jobs were eliminated by this closure. The closure of the Philadelphia facility allowed the company to strengthen the production capability of a sawmill that operates on the same site. This was the company’s oldest and smallest plywood operation and was located in a very competitive woodbasket in which raw material costs have risen significantly in recent years. The closure resulted in the elimination of approximately 165 plywood related jobs. • $15 million for the closure of the Coos Bay, Oregon, export sawmill and scaling back of related logging operations — Changing customer requirements, including declining demand for post-and-beam style housing and increased customer acceptance of substitute products in the Japanese market, eroded demand for products from this mill. Japanese homebuilders are using more dimension lumber, laminated beams and prefabricated panels, a trend that will further erode demand for post-and-beam lumber. This closure resulted in the loss of an estimated 200 positions at the mill. These costs are categorized in the aggregate as follows: Dollar amounts in millions 1997 In 1998 and 1997, the company took pretax charges of $71 million and $89 million, respectively, for closure or disposition of facilities. The operating results of these facilities prior to these exit activities were not material to the company’s results of operations. The company expects the principal portion of these exit activities to be completed by 1999 year-end. These charges were related to the following facilities or activities: 1998: • $25 million for changes in the British Columbia lumber operations — Due to increased costs, the market impact of U.S. lumber quotas and the effect of the size and location of the mills on the business’ competitiveness, the company is repositioning its British Columbia lumber operations. This includes permanently closing a sawmill in Lumby, converting the Merritt mill to a planer-only operation, and reconfiguring the company’s remaining four sawmills in the province to achieve improved production capacity. Approximately 200 jobs are affected by these changes. • $22 million for closure of the Longview, Washington, chlor-alkali facility — The company is closing this facility by the end of the first quarter of 1999 because of current market conditions and the need to invest significant capital to ensure continued safe operation of the plant. This closure completes the company’s exit from chemical manufacturing. Approximately 100 jobs will be eliminated by this closure. • $20 million for pulp and paper operations reorganization — Streamlining efforts in these businesses will affect approximately 460 employees. • $4 million for corporate operations streamlining — The outsourcing of the company’s employee benefits administration and the closure of the urban waste recovery business will result in the elimination of approximately 80 positions. These costs are categorized in the aggregate as follows: Dollar amounts in millions 1998 Termination and other employee-related costs Dispositions of property and equipment at net book value Write-off of inventories Environmental cleanup Other exit activities 1997: $ 39 16 1 9 6 $ 71 • $34 million for the closure, consolidation or disposition of recycling facilities — The company is making Termination and other employee-related costs Dispositions of property and equipment at net book value Write-off of goodwill at net book value Write-off of inventories Environmental cleanup Leasehold termination costs Other exit activities $ 20 45 14 4 2 1 3 $ 89 44
Slide 49: 1997 COMPARED WITH 1996 During 1997, the company’s consolidated net sales and revenues were $11.2 billion compared with $11.1 billion in the prior year. Sales were relatively even from year to year in all the operating segments, with increased volumes in most product lines offsetting unfavorable price variances. While the real estate and related assets segment included only four months of revenues from Weyerhaeuser Mortgage Company due to the sale of this business in May, the lost revenues were more than offset by increased revenues from real estate activity. Net earnings for the year were $342 million, or $1.72 basic earnings per common share, compared with $463 million, or $2.34 basic earnings per common share, in 1996. The 1997 earnings included an after-tax net charge of $9 million, or 4 cents per common share, related to the charges incurred for closures of operating facilities, offset in part by the gain on sale of businesses. Diluted earnings per common share, which is based upon the weighted average number of shares outstanding plus shares the company may be obligated to issue to satisfy stock options, were $1.72 and $2.33 for 1997 and 1996, respectively. 1997 operating earnings in the timberlands segment were $535 million compared with $503 million in 1996. The wood products segment earned $212 million, before nonrecurring charges totaling $40 million for the closure of two plywood facilities and an export sawmill in 1997, compared with $302 million in 1996. The combined decrease from year to year in these two segments was the combination of weak export demand for logs and lumber and lower domestic structural panel prices, offset somewhat by a stronger domestic lumber market. The pulp, paper and packaging segment had operating earnings of $192 million in 1997 before a net charge of $28 million compared with $307 million in the previous year. The net charge included a $49 million charge for the consolidation, closure or disposition of certain recycling facilities, the closure of a corrugated medium machine, and a gain of $21 million from the sale of a chemical facility in Saskatoon, Saskatchewan, Canada. Volume increases in all product lines were more than offset by weaker average prices when compared with 1996, although pulp, paper and packaging markets improved each quarter in 1997. The paper and packaging markets continued this improvement through the fourth quarter; however, pulp markets began to weaken during the quarter due to a decline in demand in Asia. The real estate and related assets segment earned $66 million for the year before a $45 million gain on the sale of the company’s wholly owned subsidiary, Weyerhaeuser Mortgage Company, reflecting stronger real estate markets, an increased focus on the home building and land development businesses, and improved operating efficiencies. The increase in Weyerhaeuser’s costs of products sold, as a percentage of sales, to 78 percent in 1997 compared with the prior year’s 75 percent can be attributed to the price weaknesses described above. Charges of $89 million incurred for the closure of production facilities were a factor in the increase in costs and expenses for 1997 over the prior year. The product inventory turnover rate was 12.1 turns for the year compared with 10.3 turns in 1996. The increase in costs and operating expenses in the real estate and related assets segment is consistent with the increased revenues from the strong real estate markets. Reduced selling, general and administrative expenses, compared with the prior year, are due primarily to the sale of the mortgage banking business. Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. Individual items significant in relation to net earnings in 1997 were: a gain of $45 million from the sale of the mortgage banking business, interest income of $18 million from the favorable federal income tax decision related to timber casualty losses incurred in the eruption of Mount St. Helens in 1980, a loss of $8 million from the sale of the wholesale nursery business, and a gain of $21 million from the sale of the Saskatoon chemical facility. There were no significant individual items in 1996. 45
Slide 50: 1996 COMPARED WITH 1995 Consolidated net sales and revenues were $11.1 billion in 1996, a decrease of 6 percent from the record $11.8 billion posted in 1995. This change is the net of decreases of $1 billion in the pulp, paper and packaging segment and $15 million in timberlands, offset in part by an increase of $324 million in wood products. Pulp, paper, corrugated packaging and recycled products experienced material unfavorable price variances offset, in part, by favorable volume variances in the packaging business related to the acquisition of nine facilities in late 1995. Wood products benefited from favorable price and volume variances in lumber. Net earnings for 1996 were $463 million, or $2.34 basic earnings per common share, compared with record earnings of $799 million, or $3.93 basic earnings per common share, in 1995. The 1995 earnings were net of an after-tax charge of $184 million ($290 million pretax), or 90 cents per common share, for the disposal of certain real estate assets in the real estate and related assets segment. Lower prices in the pulp, paper and packaging segment, which were in sharp contrast with the record 1995 levels, accounted for the decline in 1996 earnings. The timberlands segment operating earnings were $503 million, down from 1995 earnings of $560 million. Wood products segment earnings were $302 million in 1996, up significantly from 1995 earnings of $248 million. Tight supplies and disruptions related to countervailing duties on imports from Canada contributed to strong lumber results. The panel markets were negatively impacted by the excess capacity of oriented strand board as new facilities came on line in 1996. The pulp, paper and packaging segment reported operating earnings of $307 million in 1996 compared with a record performance of $1.2 billion in 1995. The downturn in pulp and paper prices, which began in the fourth LIQUIDITY AND CAPITAL RESOURCES GENERAL quarter of 1995 as customers cut back on purchases in order to reduce excess inventories, continued as prices were significantly lower than the prior year. The real estate and related assets segment earned $43 million from operations in 1996 compared with $13 million, before the charge for disposal of certain real estate assets, in 1995. Real estate benefited from several major commercial project closings and increased residential property sales along with reduced costs as the result of the disposition of certain impaired properties. Improved financial services results reflected the sale of capitalized servicing rights and increased loan originations in the company’s mortgage banking business. Weyerhaeuser’s costs of products sold, as a percentage of sales, increased to 75 percent in 1996 compared with 69 percent in 1995, reflecting the significant decline in pulp, paper and packaging pricing. Additionally, inventory turnover rates were lower in 1996 compared with the higher rates experienced in the peak price periods of 1995. The real estate and related assets segment costs and operating expenses in 1996 rose 7 percent over the 1995 level, consistent with the 10 percent increase in revenues from year to year. The decline in depreciation and amortization was directly related to the disposition of certain impaired assets and sale of substantially all of the capitalized servicing rights in the mortgage banking business. Selling, general and administrative expenses increased over 1995 primarily due to the opening of additional branch offices in 1996 by the mortgage banking business. Other income (expense) is an aggregation of both recurring and occasional nonoperating income and expense items and, as a result, may fluctuate from period to period. No individual income or expense item in 1995 or 1996 was significant in relation to net earnings. The company is committed to the maintenance of a sound, conservative capital structure. This commitment is based upon two considerations: the obligation to protect the underlying interests of its shareholders and lenders, and the desire to have access, at all times, to major financial markets. The important elements of the policy governing the company’s capital structure are as follows: • To view separately the capital structures of Weyerhaeuser Company, Weyerhaeuser Real Estate Company and related assets, given the very different nature of their assets and business activities. The amount of debt and equity associated with the capital structure of each will reflect the basic earnings capacity, real value and unique liquidity characteristics of the assets dedicated to that business. • The combination of maturing short-term debt and the structure of long-term debt will be managed judiciously to minimize liquidity risk. Long-term debt maturities are shown in Note 12 of Notes to Financial Statements. 46
Slide 51: OPERATIONS Consolidated net cash provided by operations was $1.1 billion in 1998, an increase of 8 percent over the prior year. $1 billion of this amount was provided by cash flow from operations before changes in working capital, while decreases in working capital accounted for $104 million. In 1997, cash flow from operations before changes in working capital provided $1.1 billion with working capital increases using $54 million. Cash flow from operations before changes in working capital by segment was as follows: Dollar amounts in millions 1998 1997 1996 affiliates, joint ventures and limited partnerships net credit of $42 million. In 1997, net earnings of $342 million and noncash charges from depreciation, amortization and fee stumpage of $628 million, deferred taxes of $75 million and noncash charges of $89 million for closure or disposition of facilities were the significant items in cash provided from operations before changes in working capital. Noncash credits came from the gain on disposition of businesses, principally $45 million from the sale of the mortgage banking business in the real estate and related assets segment. Weyerhaeuser’s 1998 working capital, net of the effects of the NORPAC equity restructuring from a fully consolidated subsidiary to an equity affiliate and the purchase of the Dryden paper mill and sawmills, decreased by $86 million. Cash was provided by decreases in receivables, inventories and prepaid expenses. In 1997, increases in receivables along with decreases in accounts payable and accrued liabilities were the principal items in a cash use of $44 million. Net working capital in the real estate and related assets segment provided funds of $18 million in 1998 compared with a $10 million use of funds in 1997. The principal cause was the decrease in mortgage-related financial instruments in 1998 as a result of the company’s exit from the mortgage banking business. Timberlands Wood products Pulp, paper and packaging Real estate and related assets Corporate and other $ 533 373 528 22 (438) $ 1,018 $ 606 384 566 9 (473) $ 1,092 $ 584 462 660 68 (527) $ 1,247 Consolidated cash flow from operations before changes in working capital in 1998 was provided by net earnings of $294 million along with noncash charges of $616 million from depreciation, amortization and fee stumpage, deferred taxes of $160 million, and noncash charges of $71 million for closure or disposition of facilities. This was offset in part by a noncash pension and other postretirement benefits net credit of $39 million and equity in income of INVESTING Capital expenditures in 1998, excluding acquisitions, were $615 million, down 6 percent from the $656 million spent in 1997. They are currently expected to approximate $785 million, excluding acquisitions, in 1999; however, these expenditures could be increased or decreased as a consequence of future economic conditions. Capital spending by segment, excluding acquisitions, over the past three years was as follows: Dollar amounts in millions 1998 1997 1996 $13 million, with an additional $2 million for working capital. Also in 1997, the company expended $190 million to acquire a 51 percent interest in a forestry joint venture in New Zealand. The cash needed to meet capital and other Weyerhaeuser needs in 1998 was generated by internal cash flow, proceeds from the NORPAC equity restructuring and dividends from subsidiaries, which are eliminated upon consolidation. In the real estate and related assets segment, proceeds from the sale of mortgage-related financial instruments, reduction of holdings in equity affiliates and sale of property accounted for the cash provided by investing activities. In 1997, the sale of the wholesale nursery business and the Saskatoon chemical facility provided $76 million of cash to Weyerhaeuser, while the sale of the mortgage banking business provided $192 million of cash to the real estate and related assets segment. Timberlands Wood products Pulp, paper and packaging Corporate and other $ 87 169 $ 75 239 $ 72 346 325 34 $ 615 315 27 $ 656 415 46 $ 879 In 1998, the company acquired the Dryden, Ontario, Canada, paper mill and sawmills at a cost of $494 million for property and equipment and $49 million for working capital. Acquisitions of property in 1997 amounted to 47
Slide 52: FINANCING During the year, Weyerhaeuser reduced its interestbearing debt by $35 million. Debt payments of $87 million were offset, in part, by the sale of $48 million of industrial revenue bonds. The company’s debt to total capital ratio was 39 percent at the end of the year compared with 38 percent at the prior year-end. The real estate and related assets segment reduced its long-term debt by $331 million during the year while increasing its short-term notes and commercial paper by a similar amount, leaving interest-bearing debt virtually unchanged from the end of 1997. Cash dividends of $319 million were paid during the year; comparable to the $317 million paid in 1997. Although common share dividends have exceeded the company’s target ratio in recent years, the intent, over time, is to pay dividends to common shareholders in the range MARKET RISK OF FINANCIAL INSTRUMENTS of 35 to 45 percent of common share earnings. Weyerhaeuser also received intercompany dividends of $190 million and $150 million from Weyerhaeuser Real Estate Company and Weyerhaeuser Financial Services, Inc., in 1998 and 1997, respectively. These dividends are eliminated on a consolidated basis. During the 1998 first quarter, the company expended $42 million to purchase 925,000 shares of its common stock. This completed the 11 million-share repurchase program that commenced in 1995. To ensure its ability to meet future commitments, Weyerhaeuser Company and Weyerhaeuser Real Estate Company have established unused bank lines of credit in the maximum aggregate sum of $1,050 million. Neither of the entities is a guarantor of the borrowings of the other under any of these credit facilities. As part of the company’s financing activity, derivative securities are sometimes used to achieve the desired mix of fixed versus floating rate debt and to manage the timing of finance opportunities. The company does not hold or issue derivative financial instruments for trading. The company’s derivative instruments, which are matched directly against outstanding borrowings, are “pay fixed, receive variable” interest rate swaps with highly rated counterparties in which the interest payments are Dollar amounts in millions Notional Amount Maturity Date Fixed Rate % calculated on a notional amount. The notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to these financial instruments; however, the company does not expect any counterparties to fail to meet their obligations. Interest rate swaps are described as follows: Variable Rate at December 27, 1998 % Based On Fair Value of Swap (1) $ 27 75 $102 (1) 5/1/99 12/6/99(2) 6.70 6.85 8.20 5.63 11.95% — Kenny index 30 day LIBOR $ .1 (3.1) $(3.0) The amount of the obligation under each swap is based on the assumption that such swap had terminated at the end of the fiscal period, and provides for the netting of amounts payable by and to the counterparty. In each case, the amount of such obligation is the net amount so determined. Includes the value of an option, by the counterparty, to extend for two years at maturity date. (2) CONTINGENCIES The company is a party to legal proceedings and environmental matters generally incidental to its business. Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome YEAR 2000 resulting from these proceedings and matters would not have a material effect on the company’s current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. (See Note 14 of Notes to Financial Statements.) Weyerhaeuser, like all other companies using computers and microprocessors, is faced with the task of addressing the Year 2000 problem before the end of 1999. The Year 2000 challenge arises from the nearly universal practice in the computer industry of using two digits rather than four digits to designate the calendar year (e.g., DD/MM/YY). This can lead to incorrect results when computer software performs arithmetic operations, comparisons or data field sorting involving years later than 1999. The company has conducted a comprehensive inventory to identify where 48
Slide 53: this problem may occur in its information technology, manufacturing and facilities systems. The company is engaged in modifying or replacing its affected systems in a manner that will minimize any detrimental effects on operations and has substantially completed its goal of correcting affected systems that would have a critical effect on its business operations. While some significant components remain uncorrected, the company believes that all such systems have been identified and has plans in place to correct such systems by the end of second quarter of 1999. The company expects to complete the testing and verification of such systems during 1999. While it is difficult at present to fully quantify the overall cost of this work, the company estimates that the overall cost of remediation could approach $100 million. The company presently believes that such costs will not have a material effect on the company’s current financial position or liquidity; however, in any given future reporting period, such costs could have a material effect on results of operations. Through the fourth quarter of 1998, the company has incurred $54 million of remediation costs, of which $1 million was incurred in 1997 and $11 million has been capitalized for new hardware and software. The company expects substantial additional costs to be incurred in the first and second quarters of 1999. Depending on whether suppliers, customers and other entities with which the company does business are able to successfully address the Year 2000 issue, the company’s results of operations could be materially adversely affected in any given future reporting period during which such a ACCOUNTING MATTERS PROSPECTIVE PRONOUNCEMENTS Year 2000 event occurred. As a result, the company is communicating with such entities to determine their state of readiness. The company is also developing contingency plans to allow primary operations of the company to continue if the company’s significant systems or such entities are disrupted by the Year 2000 problem. The company currently expects that its contingency plans will be developed by the end of the second quarter of 1999. In addition, the company has initiated a process to develop joint contingency plans with its customers and suppliers. The company currently expects that it will be prepared in the event of systems failures to continue to do business, although such operations may be at a higher cost. These estimates and conclusions contain forwardlooking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The company’s current estimates of the amount of time and the costs necessary to address the Year 2000 problem are based on the facts and circumstances existing at this time. The estimates were derived using multiple assumptions of future events, including the continued availability of certain resources, implementation success and other factors. New developments may occur that could affect the company’s estimates, such as the amount of planning and modification needed to achieve full resolution of the Year 2000 problem; the availability and cost of resources; the company’s ability to discover and correct all Year 2000 sensitive computer code and equipment; and the ability of suppliers, customers and other entities to bring their systems into compliance. During the year, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, which for the company is the fiscal year 2000. Also in 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee issued the following Statements of Position ACCOUNTING AND REPORTING STANDARDS COMMITTEE (SOP) that are effective for fiscal years beginning after December 15, 1998: • SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” • SOP 98-5, “Reporting on the Costs of StartUp Activities.” These statements are described in “Note 1. Summary of Significant Accounting Policies” of Notes to Financial Statements. During the year, the Accounting and Reporting Standards Committee, comprised of four outside directors, reviewed with the company’s management and with its independent public accountants the scope and results of the company’s internal and external audit activities and the adequacy of the company’s internal accounting controls. The committee also reviewed current and emerging accounting and reporting requirements and practices affecting the company. 49
Slide 54: report of independent public accountants To the shareholders of Weyerhaeuser Company: We have audited the accompanying consolidated balance sheets of Weyerhaeuser Company (a Washington corporation) and subsidiaries as of December 27, 1998, and December 28, 1997, and the related consolidated statements of earnings, cash flows and shareholders’ interest for each of the three years in the period ended December 27, 1998. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Weyerhaeuser Company and subsidiaries as of December 27, 1998, and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1998, in conformity with generally accepted accounting principles. Seattle, Washington, February 10, 1999 ARTHUR ANDERSEN LLP 50
Slide 55: consolidated statement of earnings For the three-year period ended December 27, 1998 Dollar amounts in millions except per-share figures 1998 1997 1996 Net sales and revenues: Weyerhaeuser Real estate and related assets Total net sales and revenues Costs and expenses: Weyerhaeuser: Costs of products sold Depreciation, amortization and fee stumpage Selling, general and administrative expenses Research and development expenses Taxes other than payroll and income taxes Charge for closure or disposition of facilities (Note 15) Charge for Year 2000 remediation Real estate and related assets: Costs and operating expenses Depreciation and amortization Selling, general and administrative expenses Taxes other than payroll and income taxes Total costs and expenses Operating income Interest expense and other: Weyerhaeuser: Interest expense incurred Less interest capitalized Equity in income (loss) of affiliates (Note 3) Other income (expense), net (Note 4) Real estate and related assets: Interest expense incurred Less interest capitalized Equity in income of joint ventures and limited partnerships (Note 3) Other income, net (Note 4) Earnings before income taxes Income taxes (Note 5) Net earnings Per common share (Note 2): Basic net earnings Diluted net earnings Dividends paid See notes on pages 57 through 73. $ 9,574 1,192 10,766 $ 10,117 1,093 11,210 $ 10,105 1,009 11,114 7,468 611 649 57 130 71 42 9,028 1,016 5 53 8 1,082 10,110 656 7,866 616 646 56 142 89 1 9,416 909 12 96 8 1,025 10,441 769 7,610 601 702 54 151 — — 9,118 726 16 173 11 926 10,044 1,070 264 7 28 15 77 61 14 23 463 169 $ $ $ $ 294 1.48 1.47 1.60 $ $ $ $ 271 15 (7) (10) 110 69 14 70 539 197 342 1.72 1.72 1.60 $ $ $ $ 273 21 5 (63) 132 65 5 22 720 257 463 2.34 2.33 1.60 51
Slide 56: consolidated balance sheet Dollar amounts in millions ASSETS December 27, 1998 December 28, 1997 Weyerhaeuser Current assets: Cash and short-term investments (Note 1) Receivables, less allowances of $5 and $6 Inventories (Note 7) Prepaid expenses Total current assets Property and equipment (Note 8) Construction in progress Timber and timberlands at cost, less fee stumpage charged to disposals Investments in and advances to equity affiliates (Note 3) Other assets and deferred charges $ 28 886 962 294 2,170 6,692 315 1,013 482 262 10,934 Real estate and related assets Cash and short-term investments, including restricted deposits of $16 in 1997 Receivables, less discounts and allowances of $6 and $6 Mortgage-related financial instruments, less discounts and allowances of $9 and $27 (Notes 1 and 13) Real estate in process of development and for sale (Note 9) Land being processed for development Investments in and advances to joint ventures and limited partnerships, less reserves of $4 and $6 (Note 3) Other assets 120 135 1,900 Total assets See notes on pages 57 through 73. $ 100 913 983 298 2,294 6,991 354 996 249 187 11,071 7 81 22 62 119 584 854 173 593 845 116 193 2,004 $ 13,075 $ 12,834 52
Slide 57: Dollar amounts in millions LIABILITIES AND SHAREHOLDERS’ INTEREST December 27, 1998 December 28, 1997 Weyerhaeuser Current liabilities: Notes payable Current maturities of long-term debt Accounts payable (Note 1) Accrued liabilities (Note 10) Total current liabilities Long-term debt (Notes 12 and 13) Deferred income taxes (Note 5) Deferred pension, other postretirement benefits and other liabilities (Note 6) Minority interest in subsidiaries Commitments and contingencies (Note 14) 6,788 Real estate and related assets Notes payable and commercial paper (Note 11) Long-term debt (Notes 12 and 13) Other liabilities Commitments and contingencies (Note 14) 1,520 Total liabilities Shareholders’ interest (Note 16): Common shares: authorized 400,000,000 shares, issued 206,072,890 shares, $1.25 par value Other capital Retained earnings Cumulative other comprehensive expense Treasury common shares, at cost: 7,063,917 and 6,586,939 Total shareholders’ interest Total liabilities and shareholders’ interest 258 416 4,372 (208) (312) 4,526 $ 12,834 258 407 4,397 (123) (290) 4,649 $ 13,075 8,308 1,522 8,426 564 701 255 228 1,032 262 6,904 $ 5 88 699 707 1,499 3,397 1,404 488 — $ 25 17 694 648 1,384 3,483 1,418 498 121 53
Slide 58: consolidated statement of cash flows For the three-year period ended December 27, 1998 Dollar amounts in millions Consolidated 1998 1997 1996 Cash provided by (used for) operations: Net earnings Noncash charges (credits) to income: Depreciation, amortization and fee stumpage Deferred income taxes, net Pension and other postretirement benefits Charge for closure or disposition of facilities Equity in (income) loss of affiliates, joint ventures and limited partnerships Decrease (increase) in working capital: Accounts receivable Inventories, real estate and land Prepaid expenses Mortgage-related financial instruments Accounts payable and accrued liabilities (Gain) loss on disposition of assets (Gain) loss on disposition of a business Other Cash provided by operations Cash provided by (used for) investing activities: Property and equipment Timber and timberlands Property and equipment and timber and timberlands from acquisitions Working capital from acquisitions Investments in and advances to equity affiliates Proceeds from sale of: Property and equipment (Note 15) Businesses Mortgage-related financial instruments Restructuring the ownership of a subsidiary Intercompany advances Other Cash provided by (used for) investing activities Cash provided by (used for) financing activities: Issuances of debt Sale of industrial revenue bonds Notes and commercial paper borrowings, net Cash dividends Intercompany cash dividends Payments on debt Purchase of treasury common shares Exercise of stock options Other Cash provided by (used for) financing activities Net increase (decrease) in cash and short-term investments Cash and short-term investments at beginning of year Cash and short-term investments at end of year Cash paid (received) during the year for: Interest, net of amount capitalized Income taxes See notes on pages 57 through 73. $ 294 616 160 (39) 71 (42) 1 56 16 28 3 (2) — (40) 1,122 (562) (53) (494) (49) 6 66 — 66 218 — (15) (817) 165 48 328 (319) — (577) (42) 19 (14) (392) (87) 122 $ 342 628 75 23 89 (7) (9) (13) (10) (64) 42 5 (58) (5) 1,038 (610) (46) (13) (2) (182) 85 268 55 — — (21) (466) 632 38 (577) (317) — (359) (22) 61 23 (521) 51 71 $ 463 617 181 34 — (10) 67 56 12 19 (113) 1 — (39) 1,288 (829) (50) (448) (33) (2) 74 — 106 — — 28 (1,154) 142 33 534 (317) — (513) (45) 20 (1) (147) (13) 84 $ $ $ 35 282 66 $ $ $ 122 287 21 $ $ $ 71 322 168 54
Slide 59: Weyerhaeuser Company 1998 1997 1996 1998 Real Estate and Related Assets 1997 1996 $ 214 611 149 (37) 71 (28) 30 40 16 — — 8 — 8 1,082 (560) (53) (494) (49) (41) 42 — — 218 (3) (13) (953) 6 48 (2) (319) 190 (87) (42) 19 (14) (201) (72) 100 $ 271 616 88 22 89 7 (17) 15 (10) — (32) 13 (13) (10) 1,039 (607) (46) (13) (2) (221) 39 76 — — 42 (18) (750) 618 38 (695) (317) 150 (78) (22) 61 23 (222) 67 33 $ 434 601 121 33 — (5) 75 (42) 12 — (86) 8 — (13) 1,138 (820) (50) (448) (33) (3) 61 — — — (26) 15 (1,304) 12 33 637 (317) — (174) (45) 20 (1) 165 (1) 34 $ 80 5 11 (2) — (14) (29) 16 — 28 3 (10) — (48) 40 (2) — — — 47 24 — 66 — 3 (2) 136 159 — 330 — (190) (490) — — — (191) (15) 22 $ 71 12 (13) 1 — (14) 8 (28) — (64) 74 (8) (45) 5 (1) (3) — — — 39 46 192 55 — (42) (3) 284 14 — 118 — (150) (281) — — — (299) (16) 38 $ 29 16 60 1 — (5) (8) 98 — 19 (27) (7) — (26) 150 (9) — — — 1 13 — 106 — 26 13 150 130 — (103) — — (339) — — — (312) (12) 50 $ $ $ 28 261 (4) $ $ $ 100 244 54 $ $ $ 33 255 188 $ $ $ 7 21 70 $ $ $ 22 43 (33) $ $ $ 38 67 (20) 55
Slide 60: consolidated statement of shareholders’ interest 1998 For the three-year period ended December 27, 1998 Dollar amounts in millions Total Comprehensive Income Total 1997 Comprehensive Income Total 1996 Comprehensive Income Common stock issued: Balance at end of year Other capital: Balance at beginning of year Stock options exercised Other transactions (net) Balance at end of year Retained earnings: Balance at beginning of year Net earnings Cash dividends on common shares Balance at end of year Cumulative other comprehensive expense: Balance at beginning of year Other comprehensive expense: Foreign currency translation adjustments Income tax benefit on foreign currency translation adjustments Excess additional pension liability Income tax benefit on excess additional pension liability Net other comprehensive expense Comprehensive income Balance at end of year Common stock held in treasury: Balance at beginning of year Purchase of treasury common shares Stock options exercised Balance at end of year Total shareholders’ interest: Balance at end of year $4,526 $4,649 $4,604 (290) (42) 20 (312) (340) (22) 72 (290) (323) (45) 28 (340) (208) (85) 5 (85) 209 (123) (30) — (30) 312 (93) (3) — (3) 460 13 (13) 14 — 1 — (90) (44) (4) (123) (93) (90) 4,397 294 (319) 4,372 $ 294 4,372 342 (317) 4,397 $ 342 4,226 463 (317) 4,372 $ 463 407 (1) 10 416 407 (11) 11 407 415 (8) — 407 $ 258 $ 258 $ 258 1998 1997 1996 Shares of common stock (in thousands): Issued at end of year In treasury: Balance at beginning of year Purchase of treasury common shares Stock options exercised Used in acquisition of capital assets Balance at end of year Outstanding at end of year See notes on pages 57 through 73. 206,073 6,587 925 (448) — 7,064 199,009 206,073 7,737 496 (1,646) — 6,587 199,486 206,073 7,303 1,086 (642) (10) 7,737 198,336 56
Slide 61: notes to financial statements For the three-year period ended December 27, 1998 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION ACCOUNTING PRONOUNCEMENTS IMPLEMENTED The consolidated financial statements include the accounts of Weyerhaeuser Company and all of its majorityowned domestic and foreign subsidiaries. Significant intercompany transactions and accounts are eliminated. Investments in and advances to equity affiliates that are not majority owned or controlled are accounted for using the equity method. Certain of the consolidated financial statements and notes to financial statements are presented in two groupings: (1) Weyerhaeuser (the company), principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products, and (2) Real estate and related assets, principally engaged in real estate development and construction and other real estate related activities. NATURE OF OPERATIONS In 1998, the company implemented the following pronouncements of the Financial Accounting Standards Board (FASB): • Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of financial statements. • SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which requires companies to determine segments based on how management makes decisions about allocating resources to segments and measuring their performance. Disclosures for each segment are similar to those required under current standards, with the addition of certain quarterly requirements. This statement also requires entity-wide disclosure about products and services, the countries in which the company holds material assets and reports material revenues, and its significant customers. Previously reported segment information has been restated to conform to the requirements of this new pronouncement. • SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106,” which revises employers’ disclosures about pensions and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer considered useful. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS The company’s principal business segments, which account for the majority of sales, earnings and the asset base, are: • Timberlands, which is engaged in the management of 5.1 million acres of company-owned and .2 million acres of leased commercial forestland in the United States (3.3 million acres in the South and 2 million acres in the Pacific Northwest). • Wood products, which produces a full line of solid wood products that are sold primarily through the company’s own sales organizations to wholesalers, retailers and industrial users in North America, the Pacific Rim and Europe. It is also engaged in the management of 27 million acres of forestland in Canada under long-term licensing arrangements (of which 18.9 million acres are considered to be productive forestland). • Pulp, paper and packaging, which manufactures and sells pulp, paper, paperboard and containerboard in North American, Pacific Rim and European markets and packaging products for the domestic markets, and which operates an extensive wastepaper recycling system that serves company mills and worldwide markets. FISCAL YEAR-END In 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This The company’s fiscal year ends on the last Sunday of the year. Fiscal years 1996 through 1998 each had 52 weeks. 57
Slide 62: statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, which for the company is the fiscal year 2000. Assuming that the company’s current minimal involvement in derivatives and hedging activities continues after the implementation date of this statement, the company believes that the future adoption of this statement will not have a material impact on its results of operations or financial position. Also during 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee issued the following Statements of Position (SOP): • SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” which provides guidelines on the accounting for internally developed computer software. This SOP is effective for fiscal years beginning after December 15, 1998. The company believes that the future adoption of this SOP will not have a significant impact on its results of operations or financial position. • SOP 98-5, “Reporting on the Costs of Start-Up Activities,” which requires the costs of start-up activities be expensed as incurred. This SOP must be adopted in fiscal years beginning after December 15, 1998. When this SOP is adopted, the company must record a cumulative effect of a change in accounting principle to write off any unamortized start-up costs that remain on the balance sheet at the date the new SOP is adopted. The company estimates that the pretax impact of this pronouncement, when implemented in the first quarter of 1999, will be from $135 million to $145 million ($85 million to $92 million after-tax, or $.43 to $.46 basic earnings per common share). ESTIMATES approximate carrying value, no separate disclosure of fair value is shown. Financial instruments that potentially subject the company to concentrations of credit risk consist of real estate and related assets receivables and mortgage-related financial instruments, of which $68 million and $119 million are in the western geographical region of the United States at December 27, 1998, and December 28, 1997, respectively. DERIVATIVES The company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate and foreign exchange risks. These include: • Foreign exchange contracts, which are hedges for foreign denominated accounts receivable and accounts payable. These contracts generate gains or losses that are recognized at the contracts’ respective settlement dates. • Interest rate swaps entered into with major banks or financial institutions in which the company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The premiums received by the company on the sale of these swaps are treated as deferred income and amortized against interest expense over the term of the agreements. The company is exposed to credit-related gains or losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. The company deals only with highly rated counterparties. The notional amounts of these derivative financial instruments are $102 million and $492 million at December 27, 1998, and December 28, 1997, respectively. These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to the company through its use of derivatives. The exposure in a derivative contract is the net difference between what each party is required to pay based on the contractual terms against the notional amount of the contract, such as interest rates or exchange rates. The company’s use of derivatives does not have a significant effect on the company’s results of operations or its financial position. CASH AND SHORT-TERM INVESTMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS The company has, where appropriate, estimated the fair value of financial instruments. These fair value amounts may be significantly affected by the assumptions used, including the discount rate and estimates of cash flow. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. Where these estimates For purposes of cash flow and fair value reporting, shortterm investments with original maturities of 90 days or less are considered as cash equivalents. Short-term investments are stated at cost, which approximates market. 58
Slide 63: INVENTORIES book cash balances of $139 million and $185 million at December 27, 1998, and December 28, 1997, respectively. Such balances result from outstanding checks that had not yet been paid by the bank and are reflected in accounts payable in the consolidated balance sheets. INCOME TAXES Inventories are stated at the lower of cost or market. Cost includes labor, materials and production overhead. The last-in, first-out (LIFO) method is used to cost approximately half of domestic raw materials, in process and finished goods inventories. LIFO inventories were $253 million and $246 million at December 27, 1998, and December 28, 1997, respectively. The balance of domestic raw material and product inventories, all materials and supplies inventories, and all foreign inventories is costed at either the first-in, first-out (FIFO) or moving average cost methods. Had the FIFO method been used to cost all inventories, the amounts at which product inventories are stated would have been $228 million and $237 million greater at December 27, 1998, and December 28, 1997, respectively. PROPERTY AND EQUIPMENT Deferred income taxes are provided to reflect temporary differences between the financial and tax bases of assets and liabilities using presently enacted tax rates and laws. PENSION PLANS The company has pension plans covering most of its employees. The U.S. plan covering salaried employees provides pension benefits based on the employee’s highest monthly earnings for five consecutive years during the final 10 years before retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. Contributions to U.S. plans are based on funding standards established by the Employee Retirement Income Security Act of 1974 (ERISA). POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The company’s property accounts are maintained on an individual asset basis. Betterments and replacements of major units are capitalized. Maintenance, repairs and minor replacements are expensed. Depreciation is provided generally on the straight-line or unit-of-production method at rates based on estimated service lives. Amortization of logging railroads and truck roads is provided generally as timber is harvested and is based upon rates determined with reference to the volume of timber estimated to be removed over such facilities. The cost and related depreciation of property sold or retired is removed from the property and allowance for depreciation accounts and the gain or loss is included in earnings. TIMBER AND TIMBERLANDS In addition to providing pension benefits, the company provides certain health care and life insurance benefits for some retired employees and accrues the expected future cost of these benefits for its current eligible retirees and some employees. All of the company’s salaried employees and some hourly employees may become eligible for these benefits when they retire. RECLASSIFICATIONS Certain reclassifications have been made to conform prior years’ data to the current format. REAL ESTATE AND RELATED ASSETS Timber and timberlands are carried at cost less fee stumpage charged to disposals. Fee stumpage is the cost of standing timber and is charged to fee timber disposals as fee timber is harvested, lost as the result of casualty or sold. Depletion rates used to relieve timber inventory are determined with reference to the net carrying value of timber and the related volume of timber estimated to be available over the growth cycle. Timber carrying costs are expensed as incurred. The cost of timber harvested is included in the carrying values of raw material and product inventories, and in the cost of products sold as these inventories are disposed of. ACCOUNTS PAYABLE With the sale of the mortgage banking business in 1997, the financial services segment was no longer material to the results of the company. Therefore, the remaining activities in financial services that are principally real estate related were combined with real estate into one segment entitled real estate and related assets in 1997. Real estate held for sale is stated at the lower of cost or fair value, less costs to sell. The determination of fair value is based on appraisals and market pricing of comparable assets, when available, or the discounted value of estimated future cash flows from these assets. Real estate held for development is stated at cost to the extent it does not exceed the estimated undiscounted future net cash flows, in which case, it is carried at fair value. The company’s banking system provides for the daily replenishment of major bank accounts as checks are presented for payment. Accordingly, there were negative 59
Slide 64: Mortgage-related financial instruments include mortgage loans receivable, mortgage-backed certificates and other financial instruments. Mortgage-backed certificates (see Note 13) are carried at par value, adjusted for any unamortized discount or premium. These certificates and other financial instruments are pledged as collateral for the collateralized mortgage obligation NOTE 2. NET EARNINGS PER COMMON SHARE (CMO) bonds and are held by banks as trustees. Principal and interest collections are used to meet the interest payments and reduce the outstanding principal balance of the bonds. Related CMO bonds are the obligation of the issuer, and neither the company nor any affiliated company has guaranteed or is otherwise obligated with respect to the bonds. Basic net earnings per common share are based on the weighted average number of common shares outstanding during the respective periods. Diluted net earnings per common share are based on the weighted average number Dollar amounts in millions except per-share figures of common shares outstanding and stock options outstanding at the beginning of or granted during the respective periods. Net Earnings Weighted Average Shares (000) Per-Share Amount 1998: Basic Stock options granted Diluted 1997: Basic Stock options granted Diluted 1996: Basic Stock options granted Diluted $ $ $ $ $ $ 294 — 294 342 — 342 463 — 463 Year 198,914 336 199,250 198,967 573 199,540 198,318 486 198,804 Options to Purchase $ $ $ $ $ $ 1.48 1.47 1.72 1.72 2.34 2.33 Options for which the exercise price was greater than the average market price of common shares for the period were not included in the computation of diluted earnings per share. These options to purchase shares were as follows: Exercise Price 1998 1997 1996 1,332,080 586,539 150,000 150,000 1,216,400 4,700 1,178,400 $51.09 $56.78 $53.06 $53.06 $45.94 $47.13 $48.13 NOTE 3. EQUITY AFFILIATES WEYERHAEUSER The company’s investments in affiliated companies that are not majority owned or controlled are accounted for using the equity method. Investments carried at equity are: • Cedar River Paper Company — A 50 percent owned joint venture in Cedar Rapids, Iowa, that manufactures liner and medium containerboard from recycled fiber. • Nelson Forests Joint Venture — An investment in which the company owns a 51 percent financial interest and has a 50 percent voting interest, which holds Crown Forest License cutting rights and freehold land on the South Island of New Zealand. • SCA Weyerhaeuser Packaging Holding Company Asia Ltd. — A 50 percent owned joint venture formed to build or buy containerboard packaging facilities to serve manufacturers of consumer and industrial products in Asia. Currently, one facility is in operation and another is under construction in China. • RII Weyerhaeuser World Timberfund, L.L.P — A 50 . percent owned joint venture with institutional investors to make investments in timberlands and related assets outside the United States. The primary focus of this partnership is in pine forests in the Southern Hemisphere. • North Pacific Paper Corporation — A 50 percent owned joint venture that has a newsprint manufacturing facility in Longview, Washington. This venture was formed in February 1998 through a restructuring of the company’s 80 percent ownership, which was fully consolidated, to 50-50 ownership with Nippon Paper Industries Co., Ltd. 60
Slide 65: • Wilton Connor LLC — A 50 percent owned joint venture in Charlotte, North Carolina, formed in October 1998. This venture supplies full-service, value-added turnkey packaging solutions that assist product Dollar amounts in millions manufacturers in the areas of retail marketing and distribution. Unconsolidated financial information for affiliated companies that are accounted for by the equity method is as follows: December 27, 1998 December 28, 1997 Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net sales and revenues Operating income Net income (loss) The company provides goods and services to these affiliates, which vary by entity, in the form of raw materials, management and marketing fees, support services and shipping services. Additionally, the company purchases REAL ESTATE AND RELATED ASSETS $ 165 1,325 77 702 1998 $ 94 678 56 420 1997 $ 696 110 52 $ 214 14 (14) finished product from certain of these entities. The aggregate total of these transactions is not material to the results of operations of the company. Investments in and advances to joint ventures and limited partnerships that are not majority owned or controlled are accounted for using the equity method with taxes provided on undistributed earnings as Dollar amounts in millions appropriate. Unconsolidated financial information for joint ventures and limited partnerships that are accounted for by the equity method is as follows: December 27, 1998 December 28, 1997 Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net sales and revenues Operating income Net income The company may charge management and/or development fees to the joint ventures or limited NOTE 4. OTHER INCOME (EXPENSE), NET $ 1,755 230 1,241 136 1998 $ 1,689 284 1,306 145 1997 $ 244 133 103 $ 242 136 108 partnerships. The aggregate total of these transactions is not material to the results of operations of the company. Other income (expense) is an aggregation of both recurring and occasional income and expense items and, as a result, can fluctuate from year to year. Individual income (expense) items significant in 1997 in relation to net earnings were: Weyerhaeuser: • The interest income of $18 million from the favorable federal income tax decision related to timber casualty losses incurred in the eruption of Mount St. Helens in 1980. • The loss of $8 million from the sale of the wholesale nursery business. • The gain of $21 million from the sale of the Saskatoon chemical facility. Real estate and related assets: • The gain of $45 million from the sale of the mortgage banking business. There were no significant individual items in 1998 or 1996. 61
Slide 66: NOTE 5. INCOME TAXES Earnings before income taxes are comprised of the following: Dollar amounts in millions 1998 1997 1996 Domestic earnings Foreign earnings $413 50 $463 $432 107 $539 $614 106 $720 Provisions for income taxes include the following: Dollar amounts in millions 1998 1997 1996 Federal: Current Deferred State: Current Deferred Foreign: Current Deferred $ (7) 138 131 8 10 18 8 12 20 $169 $ 65 86 151 6 3 9 45 (8) 37 $197 $ 41 166 207 2 16 18 33 (1) 32 $257 A reconciliation between the federal statutory tax rate and the company’s effective tax rate follows: 1998 1997 1996 Statutory tax on income State income taxes, net of federal tax benefit All other, net Effective income tax rate 35.0% 2.8 (1.3) 36.5% 35.0% 1.3 .2 36.5% 35.0% 2.4 (1.7) 35.7% The net deferred income tax (liabilities) assets include the following components: Dollar amounts in millions December 27, 1998 December 28, 1997 Current (included in prepaid expenses) Noncurrent Real estate and related assets (included in other assets) Total The deferred tax (liabilities) assets are comprised of the following: Dollar amounts in millions $ $ 98 (1,404) 16 (1,290) $ $ 90 (1,418) 28 (1,300) December 27, 1998 December 28, 1997 Depreciation Depletion Capitalized interest and taxes — real estate development Other Total deferred tax (liabilities) Pension and other postretirement benefits Charges for impairment of long-lived assets Alternative minimum tax credit carryforward Other Total deferred tax assets $ $ As of December 27, 1998, the company has available approximately $69 million of alternative minimum tax credit carryforward, which does not expire, and foreign tax credit carryforwards of $1 million, $1 million and $1 million expiring in 2001, 2002 and 2003, respectively. (1,260) (207) (68) (240) (1,775) 100 39 69 277 485 (1,290) $ $ (1,352) (176) (71) (189) (1,788) 128 43 63 254 488 (1,300) The company intends to reinvest undistributed earnings of certain foreign subsidiaries; therefore, no U.S. taxes have been provided. These earnings totaled approximately $789 million at the end of 1998. While it is not practicable to determine the income tax liability that would result from repatriation, it is estimated that withholding taxes payable upon repatriation would approximate $40 million. 62
Slide 67: NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The company sponsors several qualified and nonqualified pension and other postretirement benefit plans for its employees. The following table provides a reconciliation Dollar amounts in millions 1998 of the changes in the plans’ benefit obligations and fair value of plan assets over the two-year period ending December 27, 1998: Pension 1997 Other Postretirement Benefits 1998 1997 Reconciliation of benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial (gain)/loss Foreign currency exchange rate changes Benefits paid Plan curtailments, settlements and special termination benefits Plan amendments Business combinations and divestitures Benefit obligation at end of year Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year (actual) Actual return on plan assets Foreign currency exchange rate changes Employer contributions Plan participants’ contributions Benefits paid Plan settlements Business combinations and divestitures Fair value of plan assets at end of year (estimated) $ 1,736 54 134 — 97 (15) (143) 3 62 94 2,022 $ 1,594 57 128 — 57 (6) (129) 1 36 (2) 1,736 $ 213 4 19 3 53 (1) (15) — (2) 3 277 $ 232 5 16 2 (27) (1) (14) — — — 213 $ $ $ $ $ 2,420 481 (13) 7 — (138) — 92 2,849 $ 1,959 584 (5) 6 — (124) (2) — 2,418 $ 2 — — — — — — — 2 $ 2 — — — — — — — 2 $ $ $ $ The company funds its qualified pension plans and accrues for nonqualified pension benefits and health and life Dollar amounts in millions December 27, 1998 postretirement benefits. The funded status of these plans at December 27, 1998, and December 28, 1997, is as follows: Pension December 28, 1997 Other Postretirement Benefits December 27, 1998 December 28, 1997 Funded status Unrecognized net liability/(asset) Unrecognized prior service cost Unrecognized net (gain)/loss Unrecognized net transition (asset)/obligation Prepaid/(accrued) benefit cost Amounts recognized in balance sheet consist of: Prepaid benefit cost Accrued benefit liability Intangible asset Cumulative other comprehensive expense Net amount recognized $ 827 1 142 (991) (15) (36) $ 683 2 97 (867) (19) (104) $ (260) — (2) (2) — (264) $ (200) — — (55) — (255) $ $ $ $ $ 21 (75) 10 8 (36) Approximately 1,500 employees are covered by unionadministered multi-employer pension plans to which the company makes negotiated contributions based generally $ The assets of the U.S. and Canadian pension plans, as of December 27, 1998, and December 28, 1997, consist of a highly diversified mix of equity, fixed income and real estate securities. 63
Slide 68: on fixed amounts per hour per employee. Contributions to these plans were $5 million in 1998, $7 million in 1997 and $5 million in 1996. The company sponsors multiple defined benefit postretirement plans for its U.S. employees. Medical plans have various levels of coverage and plan participant contributions. Life insurance plans are noncontributory. Canadian employees are covered under multiple defined benefit postretirement plans that provide medical and life insurance benefits. Weyerhaeuser sponsors various defined contribution plans for U.S. salaried and hourly employees. The basis for determining plan contribution varies by plan. The amounts charged to operations and contributed to the plans for participating employees were $37 million, $34 million and $32 million in 1998, 1997 and 1996, respectively. The assumptions used in the measurement of the company’s benefit obligations are as follows: Pension 1998 1997 1996 Other Postretirement Benefits 1998 1997 1996 Discount rate Expected return on plan assets Rate of compensation increase: Salaried Hourly For measurement purposes, a 7.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. Beginning in 1999, the rate The components of net periodic benefit costs are: 7.25% 11.50% 4.50% 3.00% 7.75% 11.50% 4.50% 3.00% 7.75% 11.50% 4.50% 3.00% 7.25% 5.75% 4.50% 3.00% 7.75% 5.75% 4.50% 3.00% 7.75% 5.75% 4.50% 3.00% is assumed to decrease by 0.5 percent annually to a level of 4.5 percent for the year 2004 and all years thereafter. Pension Dollar amounts in millions 1998 1997 1996 Other Postretirement Benefits 1998 1997 1996 Service cost Interest cost Expected return on plan assets Amortization of (gain)/loss Amortization of prior service cost Amortization of unrecognized transition (asset)/obligation (Gain)/loss due to closure, sale and other $ 54 134 (236) (23) 14 (4) 1 $ (60) $ 56 128 (194) 8 10 (4) 1 $5 $ 51 115 (171) 14 7 (4) 2 $ 14 $ 4 18 — (1) — $ 5 15 — (2) — $ 5 16 — (1) — — — $ 21 — — $ 18 — — $ 20 The accrued (prepaid) pension costs for the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plan(s) with accumulated benefit obligations in excess of plan assets were $178 million, $203 million and $102 million, respectively, as of December 27, 1998, and $54 million, $81 million and $4 million, respectively, as of December 28, 1997. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percent change in assumed health care cost trend rates would have the following effects: As of December 27, 1998 Dollar amounts in millions 1% Increase 1% Decrease Effect on total of service and interest cost components Effect on accumulated postretirement benefit obligation $ 1 12 $ (1) (11) NOTE 7. INVENTORIES Dollar amounts in millions December 27, 1998 December 28, 1997 Logs and chips Lumber, plywood and panels Pulp, newsprint and paper Containerboard, paperboard and packaging Other products Materials and supplies $ $ 108 143 190 96 150 275 962 $ $ 103 154 185 107 152 282 983 64
Slide 69: NOTE 8. PROPERTY AND EQUIPMENT Dollar amounts in millions December 27, 1998 December 28, 1997 Property and equipment, at cost: Land Buildings and improvements Machinery and equipment Rail and truck roads Other Less allowance for depreciation and amortization 157 1,667 9,732 555 111 12,222 5,530 $ 6,692 $ $ 158 1,721 9,954 550 97 12,480 5,489 $ 6,991 NOTE 9. REAL ESTATE IN PROCESS OF DEVELOPMENT AND FOR SALE Properties held by the company’s real estate and related assets segment include: Dollar amounts in millions December 27, 1998 December 28, 1997 Dwelling units Residential lots Commercial lots Commercial projects Acreage Other inventories $ $ 180 237 120 27 19 1 584 $ $ 207 223 79 56 27 1 593 NOTE 10. ACCRUED LIABILITIES Dollar amounts in millions December 27, 1998 December 28, 1997 Payroll — wages and salaries, incentive awards, retirement and vacation pay Taxes — Social Security and real and personal property Interest Income taxes Other $ $ 305 46 87 16 253 707 $ $ 268 53 91 42 194 648 NOTE 11. SHORT-TERM DEBT BORROWINGS LINES OF CREDIT Real estate and related assets segment short-term borrowings were $564 million with a weighted average interest rate of 5.5 percent at December 27, 1998, and $228 million with a weighted average interest rate of 5.7 percent at December 28, 1997. The company has short-term bank credit lines that provide for borrowings of up to the total amount of $650 million and $425 million, all of which could be availed of by the company and Weyerhaeuser Real Estate Company (WRECO) at December 27, 1998, and December 28, 1997, respectively. No portions of these lines have been availed of by the company or WRECO at December 27, 1998, or December 28, 1997. None of the entities referred to herein is a guarantor of the borrowings of the others. 65
Slide 70: NOTE 12. LONG-TERM DEBT DEBT Weyerhaeuser long-term debt, including the current portion, is as follows: Dollar amounts in millions December 27, 1998 December 28, 1997 83⁄8% debentures due 2007 7.50% debentures due 2013 7.25% debentures due 2013 71⁄8% debentures due 2023 9.05% notes due 2003 81⁄2% debentures due 2025 7.95% debentures due 2025 6.95% debentures due 2017 6.95% debentures due 2027 Industrial revenue bonds, rates from 2.5% (variable) to 9.85% (fixed), due 1999–2028 Medium-term notes, rates from 6.43% to 8.91%, due 1999–2005 Commercial paper/credit agreements Other $ 150 250 250 250 200 300 250 300 300 779 246 192 18 3,485 88 $ 150 250 250 250 200 300 250 300 300 784 246 194 26 3,500 17 $ Portion due within one year Long-term debt maturities are (millions): 1999 2000 2001 2002 2003 Thereafter $ $ $ $ 88 100 81 199 210 2,807 Real estate and related assets segment long-term debt, including the current portion, is as follows: Dollar amounts in millions December 27, 1998 December 28, 1997 Notes payable, unsecured; weighted average interest rates are approximately 6.9% and 7% Bank and other borrowings, unsecured; weighted average interest rates are approximately 5.5% and 5.9% Notes payable, secured; weighted average interest rates are approximately 8.4% and 8.2% Collateralized mortgage obligation bonds $ 531 100 13 57 701 121 $ 652 250 30 100 1,032 350 $ Portion due within one year Long-term debt maturities are (millions): 1999 2000 2001 2002 2003 Thereafter LINES OF CREDIT $ $ $ $ 121 127 262 80 78 33 The company’s lines of credit include a five-year revolving credit facility agreement entered into in 1997 with a group of banks that provides for borrowings of up to the total amount of $400 million, all of which is available to the company. Borrowings are at LIBOR plus a spread or other such interest rates mutually agreed to between the borrower and lending banks. Weyerhaeuser Financial Services, Inc. (WFS), a wholly owned subsidiary, paid down a revolving credit facility agreement effective June 1998. $75 million was outstanding under this facility at December 28, 1997. WFS has 66
Slide 71: negotiated a new set of term credit facility agreements with a group of banks that provide for borrowings of up to $175 million. At December 27, 1998, $100 million had been drawn and is outstanding. To the extent that these credit commitments expire more than one year after the balance sheet date and are unused, an equal amount of commercial paper is classifiable as NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS long-term debt. Amounts so classified are shown in the tables in this note. No portion of these lines has been availed of by the company, WRECO or WFS at December 27, 1998, or December 28, 1997, except as noted above. The company’s compensating balance agreements were not significant. December 27, 1998 Dollar amounts in millions Carrying Value Fair Value December 28, 1997 Carrying Value Fair Value Weyerhaeuser: Financial liabilities: Long-term debt (including current maturities) Real estate and related assets: Financial assets: Mortgage loans receivable Mortgage-backed certificates and other pledged financial instruments Total financial assets Financial liabilities: Long-term debt (including current maturities) $ 3,485 $ 3,820 $ 3,500 $ 3,859 53 66 119 58 69 127 64 109 173 74 117 191 701 718 1,032 1,044 The methods and assumptions used to estimate fair value of each class of financial instruments for which it is practicable to estimate that value are as follows: • Long-term debt, including the real estate and related assets segment, is estimated based on quoted market prices for the same issues or on the discounted value of the future cash flows expected to be paid using incremental rates of borrowing for similar liabilities. NOTE 14. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS • Mortgage loans receivable are estimated based on the discounted value of estimated future cash flows using current rates for loans with similar terms and risks. • Mortgage-backed certificates and other pledged financial instruments (pledged to secure collateralized mortgage obligations) are estimated using the quoted market prices for securities backed by similar loans and restricted deposits held at cost. In June 1998, a lawsuit was filed against the company in Superior Court, San Francisco County, California, on behalf of a purported class of individuals and entities that own property in the United States on which exterior hardboard siding manufactured by the company has been installed since 1981. The action alleges the company manufactured and distributed defective hardboard siding, breached express warranties and consumer protection statutes, and failed to disclose to consumers the alleged defective nature of its hardboard siding. The action seeks compensatory and punitive damages, costs and reasonable attorney fees. In December 1998, the complaint was amended, narrowing the purported class to individuals and entities in the state of California. On February 4, 1999, the court entered an order certifying the class. The company intends to seek a review of that order. In September 1998, a lawsuit purporting to be a class action involving hardboard siding was filed against the company in Superior Court, King County, Washington. The complaint was amended in January 1999 to allege a class consisting of individuals and entities that own homes or other structures in the United States on which exterior hardboard siding manufactured by the company at its former Klamath Falls, Oregon facility, had been installed from January 1981. The amended complaint alleges the company manufactured defective hardboard siding, engaged in unfair trade practices and failed to disclose to customers the alleged defective nature of its hardboard siding. The amended complaint seeks compensatory damages, punitive or treble damages, restitution, attorney fees, costs of the suit and such other relief as may be appropriate. The company is a defendant in approximately twenty-four other hardboard siding cases, one of which purports to be a statewide class action on behalf of purchasers of single or multifamily residences in Iowa that contain the company’s hardboard siding. 67
Slide 72: ENVIRONMENTAL It is the company’s policy to accrue for environmental remediation costs when it is determined that it is probable that such an obligation exists and the amount of the obligation can be reasonably estimated. Based on currently available information and analysis, the company believes that it is reasonably possible that costs associated with all identified sites may exceed current accruals by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $90 million over several years. This estimate of the upper end of the range of reasonably possible additional costs is much less certain than the estimates upon which accruals are currently based, and utilizes assumptions less favorable to the company among the range of reasonably possible outcomes. In estimating both its current accruals for environmental remediation and the possible range of additional future costs, the company has assumed that it will not bear the entire cost of remediation of every site to the exclusion of other known potentially responsible parties who may be jointly and severally liable. The ability of other potentially responsible parties to participate has been taken into account, based generally on each party’s financial condition and probable contribution on a per-site basis. No amounts have been recorded for potential recoveries from insurance carriers. The company is a party to legal proceedings and environmental matters generally incidental to its business. NOTE 15. CLOSURE, DISPOSITION OR SALE OF FACILITIES Although the final outcome of any legal proceeding or environmental matter is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that the ultimate outcome resulting from these proceedings and matters, including those described in this note, would not have a material effect on the company’s current financial position, liquidity or results of operations; however, in any given future reporting period, such proceedings or matters could have a material effect on results of operations. OTHER ITEMS The company’s 1998 capital expenditures, excluding acquisitions, were $615 million and are expected to approximate $785 million in 1999; however, the 1999 expenditure level could be increased or decreased as a consequence of future economic conditions. During the normal course of business, the company’s subsidiaries included in its real estate and related assets segment have entered into certain financial commitments comprised primarily of guarantees made on $40 million of partnership borrowings and limited recourse obligations associated with $98 million of sold mortgage loans. The fair value of the recourse on these loans is estimated to be $4 million, which is based upon market spreads for sales of similar loans without recourse or estimates of the credit risk of the associated recourse obligation. In 1998 and 1997, the company took pretax charges of $71 million and $89 million, respectively, for the closure or disposition of facilities. (See “Charge for Closure or Disposition of Facilities” in the company’s Financial Review, page 44.) In 1996, the company sold its Klamath Falls, Oregon, hardboard, particleboard and plywood manufacturing operations; 600,000 acres of predominantly pine timberlands; and its nursery and seed orchard facilities. NOTE 16. SHAREHOLDERS’ INTEREST PREFERRED AND PREFERENCE SHARES Proceeds from the sale of the property and equipment in this transaction amounted to $33 million. The resulting gain on this transaction was not material to the company’s pretax income. The timberlands portion of this transaction involved a like-kind exchange for other timberlands, primarily private commercial timberlands in southeastern Louisiana and southern Mississippi previously owned by Cavenham Forest Industries. The company is authorized to issue: • 7,000,000 preferred shares having a par value of $1.00 per share, of which none were issued and outstanding at December 27, 1998, and December 28, 1997; and • 40,000,000 preference shares having a par value of $1.00 per share, of which none were issued and outstanding at December 27, 1998, and December 28, 1997. The preferred and preference shares may be issued in one or more series with varying rights and preferences including dividend rates, redemption rights, conversion terms, sinking fund provisions, values in liquidation and voting rights. When issued, the outstanding preferred and preference shares rank senior to outstanding common shares as to dividends and assets available on liquidation. 68
Slide 73: NOTE 17. STOCK-BASED COMPENSATION PLAN The company’s Long-Term Incentive Compensation Plan (the “Plan”) was approved at the 1992 Annual Meeting of Shareholders. The Plan provides for the purchase of the company’s common stock at its market price on the date of grant by certain key officers and other employees of the company and its subsidiaries who are selected from time to time by the Compensation Committee of the Board of Directors. No more than 10 million shares may be issued under the Plan. The term of options granted under the Plan may not exceed 10 years from the grant date. Grantees are 25 percent vested after one year, 50 percent after two years, 75 percent after three years, and 100 percent after four years. The company accounts for all options under APB Opinion No. 25 and related interpretations, under which no compensation has been recognized. Had compensation costs for the Plan been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” net income and earnings per share would have been reduced to the following pro forma amounts: 1998 1997 1996 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to fiscal year 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants: 1998 1997 1996 Risk-free interest rate Expected life Expected volatility Expected dividend yield 5.60% 4.3 years 27.08% 3.03% 6.42% 4.9 years 26.21% 3.44% 5.81% 6.4 years 25.61% 3.48% Changes in the number of shares subject to option are summarized as follows: 1998 1997 1996 Net income (in millions): As reported Pro forma Basic earnings per common share: As reported Pro forma Diluted earnings per common share: As reported Pro forma $ 294 279 $ 342 332 $ 463 454 $ 1.48 1.40 $ 1.72 1.67 $ 2.34 2.29 $ 1.47 1.40 $ 1.72 1.66 $ 2.33 2.28 Shares (in thousands): Outstanding, beginning of year Granted Exercised Forfeited Expired Outstanding, end of year Exercisable, end of year Weighted average exercise price: Outstanding, beginning of year Granted Exercised Forfeited Expired Outstanding, end of year Weighted average grant date fair value of options 5,848 1,981 512 95 — 7,222 5,304 6,243 1,563 1,864 91 3 5,848 4,309 5,972 1,222 925 26 — 6,243 5,022 $43.32 52.85 38.98 50.37 — 46.15 12.31 $40.56 46.54 36.70 44.68 37.75 43.32 11.26 $38.17 45.94 32.11 43.46 — 40.56 11.40 The following table summarizes information about stock options outstanding at December 27, 1998: Price Range Options Outstanding Options Exercisable Weighted Average Exercise Price Weighted Average Remaining Contractual Life $20–$35 $35–$46 $47–$57 228 4,012 2,982 7,222 228 4,012 1,064 5,304 $25.34 $43.44 $51.38 1.77 years 6.55 years 8.01 years NOTE 18. BUSINESS SEGMENTS The company is principally engaged in the growing and harvesting of timber and the manufacture, distribution and sale of forest products. The business segments are timberlands (including logs, chips and timber); wood products (including softwood lumber, plywood and veneer; composite panels; oriented strand board; hardwood lumber; treated products; doors; raw materials; and building materials distribution); pulp, paper and packaging (including pulp, paper, containerboard, packaging, paperboard and recycling); and real estate and related assets. The timber-based businesses involve a high degree of integration among timber operations; building materials conversion facilities; and pulp, paper, containerboard and paperboard primary manufacturing and secondary conversion facilities. This integration includes extensive transfers of raw materials, semi-finished materials and end products between and among these groups. The company’s accounting policies for segments are the same as those described in “Note 1. Summary of Significant Accounting Policies.” Management evaluates segment performance based on the contributions to earnings of the respective segments. Accounting for segment profitability in integrated manufacturing sites involves allocation of joint conversion and common facility costs based upon the extent of usage by the respective product lines at that facility. Transfer of products between segments is accounted for at current market values. 69
Slide 74: An analysis and reconciliation of the company’s business segment information to the respective information in the consolidated financial statements is as follows: For the three-year period ended December 27, 1998 Dollar amounts in millions 1998 1997 1996 Sales to and revenues from unaffiliated customers: Timberlands Wood products Pulp, paper and packaging Real estate and related assets Corporate and other Intersegment sales: Timberlands Wood products Pulp, paper and packaging Corporate and other Total sales and revenues Intersegment eliminations $ $ $ 636 4,475 4,312 1,192 151 10,766 488 184 74 13 759 11,525 (759) 10,766 487 183 150 124 (225) 719 (324) 68 463 (169) 294 55 188 348 5 20 616 25 42 4 71 $ $ $ 797 4,577 4,609 1,093 134 11,210 520 190 95 35 840 12,050 (840) 11,210 535 172 164 111 (186) 796 (341) 84 539 (197) 342 72 171 353 12 20 628 40 49 — 89 $ $ $ 867 4,373 4,648 1,009 217 11,114 513 246 88 35 882 11,996 (882) 11,114 503 302 307 43 (183) 972 (338) 86 720 (257) 463 79 148 355 16 19 617 — — — — $ Approximate contribution (charge) to earnings:(1) Timberlands Wood products Pulp, paper and packaging Real estate and related assets Corporate and other Interest expense(1) Less capitalized interest Earnings before income taxes Income taxes $ Depreciation, amortization and fee stumpage: Timberlands Wood products Pulp, paper and packaging Real estate and related assets Corporate and other Noncash charges for closure or disposition of facilities: Wood products Pulp, paper and packaging Corporate and other Equity in income/(loss) from equity affiliates, joint ventures and limited partnerships: Timberlands Pulp, paper and packaging Real estate and related assets Capital expenditures (including acquisitions): Timberlands Wood products Pulp, paper and packaging Real estate and related assets Corporate and other Investments in and advances to equity affiliates, joint ventures and limited partnerships: Timberlands Pulp, paper and packaging Real estate and related assets (less reserves) Assets: Timberlands Wood products Pulp, paper and packaging Real estate and related assets Corporate and other Less: Intersegment eliminations $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1 27 14 42 87 212 776 2 32 1,109 $ $ $ 3 (10) 14 7 75 240 327 3 24 669 $ $ $ — 5 5 10 505 361 415 9 37 1,327 $ $ $ $ $ $ 218 264 120 602 1,675 2,129 6,346 1,900 1,164 13,214 (380) 12,834 $ $ $ 216 33 116 365 1,676 2,128 6,589 2,004 1,160 13,557 (482) 13,075 $ $ $ — 35 115 150 1,578 2,080 6,721 2,628 1,184 14,191 (595) 13,596 $ $ Certain reclassifications have been made to conform prior years’ data to the current format. (1)Interest expense of $17 million, $40 million and $67 million in 1998, 1997 and 1996, respectively, is included in the determination of “approximate contribution to earnings” and excluded from “interest expense” for financial services businesses. 70
Slide 75: NOTE 19. GEOGRAPHICAL AREAS The company attributes sales to and revenues from unaffiliated customers in different geographical areas on the basis of the location of the customer. Export sales from the United States consist principally of pulp, paperboard, logs, lumber and wood chips to Japan; containerboard, pulp, lumber and recycling material to other Pacific Rim countries; and pulp and hardwood lumber to Europe. Long-lived assets consist of timber and timberlands and property and equipment used in the generation of revenues in the different geographical areas. Selected information related to the company’s operations by geographical area is as follows: For the three-year period ended December 27, 1998 Dollar amounts in millions 1998 1997 1996 Sales to and revenues from unaffiliated customers: United States Japan(1) Canada Europe Other foreign countries Export sales from the United States: Japan(1) Other Earnings before income taxes: United States Foreign entities Long-lived assets: United States Canada Other foreign countries (1) $ 8,999 604 514 338 311 $ 10,766 $ $ $ $ $ 501 588 1,089 413 50 463 6,649 1,345 26 8,020 $ 8,985 1,032 510 354 329 $ 11,210 893 634 1,527 432 107 539 7,426 903 12 8,341 $ 8,676 1,320 473 323 322 $ 11,114 1,185 573 1,758 614 106 720 7,562 930 5 8,497 $ $ $ $ $ $ $ $ $ $ $ $ $ 1998 export sales to Japan include only one month’s sales of newsprint due to the company’s change in ownership of its newsprint subsidiary from 80 percent to 50 percent in February. NOTE 20. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Dollar amounts in millions except per-share figures First Quarter Second Quarter Third Quarter Fourth Quarter Year Net sales: 1998 1997 Operating income: 1998 1997 Earnings before income taxes: 1998 1997 Net earnings: 1998 1997 Net earnings per common share: Basic 1998 1997 Diluted 1998 1997 Dividends per common share: 1998 1997 Market prices — high/low: 1998 1997 $ 2,603 2,608 188 104 135 33 85 21 $ 2,676 2,909 161 212 109 172 69 109 $ 2,736 2,823 225 233 175 180 110 114 $ 2,751 2,870 82 220 44 154 30 98 $10,766 11,210 656 769 463 539 294 342 .43 .10 .43 .10 .40 .40 5715⁄16–4415⁄16 505⁄8–441⁄2 .34 .56 .34 .55 .40 .40 617⁄16–449⁄16 551⁄4 –425⁄8 .56 .57 .55 .57 .40 .40 477⁄16–363⁄4 6315⁄16–515⁄8 .15 .49 .15 .49 .40 .40 519⁄16–413⁄4 603⁄4–461⁄16 1.48 1.72 1.47 1.72 1.60 1.60 617⁄16–363⁄4 6315⁄16–425⁄8 71
Slide 76: NOTE 21. HISTORICAL SUMMARY Dollar amounts in millions except per-share figures PER COMMON SHARE: 1998 1997 1996 1995 1994 Basic net earnings (loss) from continuing operations, before extraordinary item and effect of accounting changes Extraordinary item(4) Effect of accounting changes Basic net earnings (loss) Diluted net earnings (loss) from continuing operations, before extraordinary item and effect of accounting changes Extraordinary item(4) Effect of accounting changes Diluted net earnings (loss) Dividends paid Shareholders’ interest (end of year) FINANCIAL POSITION: $ $ $ $ 1.48 — — 1.48 1.72 — — 1.72 2.34 — — 2.34 3.93 — — 3.93 2.86 — — 2.86 $ $ $ $ $ $ 1.47 — — 1.47 1.60 22.74 1.72 — — 1.72 1.60 23.30 2.33 — — 2.33 1.60 23.21 3.92 — — 3.92 1.50 22.57 2.86 — — 2.86 1.20 20.86 Total assets: Weyerhaeuser Real estate and related assets Long-term debt (net of current portion): Weyerhaeuser: Long-term debt Capital lease obligations Convertible subordinated debentures Limited recourse income debenture Real estate and related assets: Long-term debt Shareholders’ interest Percent earned on shareholders’ interest OPERATING RESULTS: $ 10,934 $ 1,900 $ 12,834 11,071 2,004 13,075 10,968 2,628 13,596 10,359 2,894 13,253 9,750 3,408 13,158 $ $ $ $ $ $ $ 3,397 2 — — 3,399 580 4,526 6.4% 3,483 2 — — 3,485 682 4,649 7.4% 3,546 2 — — 3,548 814 4,604 10.2% 2,983 2 — — 2,985 1,608 4,486 18.2% 2,713 — — — 2,713 1,873 4,290 14.3% Net sales and revenues: Weyerhaeuser Real estate and related assets Net earnings (loss) from continuing operations before extraordinary item and effect of accounting changes: Weyerhaeuser Real estate and related assets Extraordinary item(4) Effect of accounting changes Net earnings (loss) STATISTICS (UNAUDITED): $ 9,574 $ 1,192 $ 10,766 10,117 1,093 11,210 10,105 1,009 11,114 10,869 919 11,788 9,281 1,117 10,398 $ $ $ $ $ $ 214 80 294(1) — — 294 35,032 1,645 347 437 5,099 27,002 19,559 — — 198,914 271 71 342(2) — — 342 35,778 1,706 355 478 5,171 23,715 20,981 — — 198,967 434 29 463 — — 463 39,020 1,781 370 557 5,326 22,863 22,528 — — 198,318 981 (182)(3) 799 — — 799 39,558 1,779 408 736 5,302 22,866 23,446 — — 203,525 576 13 589 — — 589 36,665 1,610 357 618 5,587 17,849 24,131 — — 205,543 Number of employees Salaries and wages Employee benefits Total taxes Timberlands (thousands of acres): U.S. fee ownership Long-term license arrangements Number of shareholder accounts at year-end: Common Preferred Preference Average common and common equivalent shares outstanding (thousands) $ $ $ 72
Slide 77: 1993 1992 1991 1990 1989 1988 2.58 .25 — 2.83 1.83 — — 1.83 (.50) — (.30) (.80) 1.87 — — 1.87 1.56 — — 1.56 2.68 — — 2.68 2.56 .25 — 2.81 1.20 19.34 1.82 — — 1.82 1.20 17.85 (.50) — (.30) (.80) 1.20 17.25 1.87 — — 1.87 1.20 19.21 1.56 — — 1.56 1.20 18.55 2.68 — — 2.68 1.15 18.14 9,087 3,670 12,757 8,566 9,720 18,286 7,551 9,435 16,986 7,556 8,800 16,356 7,371 8,605 15,976 6,983 8,401 15,384 2,998 — — — 2,998 2,086 3,966 15.2% 2,659 — 193 188 3,040 2,411 3,646 10.4% 2,195 — 193 204 2,592 2,421 3,489 (4.4)% 2,168 7 193 204 2,572 2,637 3,864 9.8% 1,502 23 — 204 1,729 2,006 4,148 8.3% 1,644 37 — 198 1,879 2,318 4,044 14.6% 8,315 1,230 9,545 7,744 1,522 9,266 7,167 1,606 8,773 7,447 1,619 9,066 8,355 1,826 10,181 7,861 1,467 9,328 459 68 527 52 — 579 36,748 1,585 347 577 5,512 17,845 25,282 — — 204,866 332 40 372 — — 372 39,022 1,580 323 443 5,592 18,828 26,334 — — 203,373 (25) (76) (101)(5) — (61) (162) 38,669 1,476 321 173 5,488 13,491 26,937 — — 201,578 340 54 394 — — 394 40,621 1,531 318 446 5,592 13,491 28,187 — — 203,673 377 (36) 341(6) — — 341 45,214 1,563 325 403 5,664 13,324 29,847 12 443 204,331 516 50 566 — — 566 46,976 1,423 292 511 5,775 13,324 30,379 25 351 207,785 (1) 1998 results reflect nonrecurring charges of $71 million less related tax effect of $26 million, or $45 million. 1997 results reflect net nonrecurring charges of $13 million less related tax effect of $4 million, or $9 million. 1995 results reflect a charge for disposal of certain real estate assets of $290 million less related tax effect of $106 million, or $184 million. 1993 results reflect an extraordinary net gain as a result of extinguishing certain debt obligations of $86 million less related tax effect of $34 million, or $52 million. 1991 results reflect restructuring and other charges of $445 million less related tax effect of $162 million, or $283 million. 1989 results reflect net nonrecurring items of $401 million less related tax effect of $141 million, or $260 million. (2) (3) (4) (5) (6) 73
Slide 78: weyerhaeuser company foundation In 1998, the Weyerhaeuser Company Foundation celebrated its 5 0 T H Y E A R O F C O R P O R AT E P H I L A N T H R O P Y . Since 1948, the Foundation has invested more than $122 million in grants to help fund thousands of projects and has supported volunteer efforts on hundreds of other activities—all with the goal of making a positive difference in the quality of people’s lives. The Weyerhaeuser Company Foundation is one of the few sources of corporate giving in small communities across the United States and Canada. We believe Weyerhaeuser’s success is linked to the health and well-being of the communities where we do business and where our employees live, work and play. With the input of more than 95 local employee-advisory committees, the Weyerhaeuser Company Foundation carefully directs millions of dollars annually to these communities. Our grants support needs such as education, human services, community development, arts and culture, and the environment.The increasing number of requests we receive each year reminds us that we can do only so much with the funds we have. What we do, however, has a significant positive impact—especially when paired with volunteer efforts. For that reason, and to bring volunteerism into the foreground of corporate philanthropy, we’re proud to be “Making Waves” ( Weyerhaeuser Active Volunteer Employees ). Through this program, employees make “waves” in their communities by initiating volunteer projects and nominating local nonprofit organizations for cash awards.To date, more than 100 projects involving hundreds of volunteers, and representing more than 100,000 volunteer hours, have been completed. This is just one small way the Weyerhaeuser Company Foundation helps us thank the many people and communities where we maintain operations, shows the neighborly face of a large company, and shares our many skills and talents. G R A N T S AWA R D E D B Y G E O G R A P H Y (thousands of dollars) DOLLAR AMOUNT P E R C E N TA G E Northwest ( Oregon and Washington ) South ( Alabama, Arkansas, Georgia, Mississippi, North Carolina and Oklahoma ) Other ( United States, Canada and other international ) Total G R A N T S AWA R D E D B Y P R I O R I T Y (thousands of dollars) $ 2,577 1,802 2,680 $ 7,059 36% 26% 38% 100% DOLLAR AMOUNT Education Civic, Community, Environment Culture and Arts United Way Other Health and Human Services Total $ 2,607 1,933 580 914 1,025 $ 7,059 74
Slide 79: board of directors PHILIP M HAWLEY t e r m e x p i r e s 2 0 01 STEVEN R ROGEL Rogel, 56, has been president, chief executive officer and a director of the company since December 1, 1997. He had previously served as president and chief executive officer of Willamette Industries since 1995. He is also a director of Fred Meyer, Inc., and the Pacific Harbors Council Boy Scouts of America and a trustee of Pacific University. (1)(5) WILLIAM D RUCKELSHAUS Hawley, 73, a director of the company since 1989, is chairman and chief executive officer of Krause Furniture, Inc. (retailing ). He was chairman and chief executive officer of Broadway Stores, Inc (formerly Carter Hawley Hale Stores, Inc), until his retirement in 1993. He was chairman of the California Retailers Association in the period 1993–95. He is a director of Aeromovel USA, Inc, and a trustee of the Haynes Foundation. (3)(4) R T. H O N . D O N A L D F M A Z A N K O W S K I Ruckelshaus, 66, a director of the company since 1989, has been chairman of Browning-Ferris Industries, Inc. (waste services), since October 1988 and was chief executive officer until his retirement in 1995. He has been president of William D Ruckelshaus Associates since 1987. He was administrator, Environmental Protection Agency, in the period 1983–85 and a senior vice president of Weyerhaeuser Company in the period 1976–83. He is also a director of Cummins Engine Company, Inc, Coinstar, Inc, Monsanto Company,Nordstrom, Inc, and Solutia,Inc, (1)(2)(4) RICHARD H SINKFIELD Mazankowski, 63, a director of the company since 1997, was a Member of Parliament, Government of Canada, from 1968-93, and served as a Deputy Prime Minister from 1986-93 and Minister of Finance from 1991-93. He is also a director of the Power Group of Companies, Canadian Utilities Ltd, Shaw Communications Inc, IMC Global, Inc, Gulf Canada Resources Ltd, Gulf Indonesia Resources Ltd, Golden Star Resources Ltd, Canada Brokerlink, Great West Life Assurance, Investor’s Group, and Weyerhaeuser Canada Ltd, a wholly owned subsidiary of the company. He is also a member of the Board of Governors of the University of Alberta. (2) term expires 1999 MARTHA R INGRAM Sinkfield, 56, a director of the company since 1993, is an executive vice president and a director of United Auto Group, Inc (automobile retailing), a senior partner in the law firm of Rogers and Hardin in Atlanta and has been a partner in the firm since 1976. He is also a director of the Metropolitan Atlanta Community Foundation, Inc, and the Atlanta College of Art. He is a member of the Board of Trust of Vanderbilt University and the Board of Governors of the State Bar of Georgia. He is a former chairman of the board of Atlanta Urban League, Inc. (2) J A M E S N S U L L I VA N Ingram, 63, a director of the company since 1995, has been chairman of Ingram Industries Inc (book and video distribution, inland barging and insurance) since 1995, a member of the board since 1981 and was director of Public Affairs in the period 1979–95. She is also a director of Ingram Micro, Inc, Baxter International, Inc, and First American Corporation. Mrs Ingram was the chairman of the 1996 Tennessee Bicentennial Commission and serves on the boards of Vassar College, Ashley Hall and Vanderbilt University. (2) JOHN I KIECKHEFER Sullivan, 61, a director of the company since 1998, is vice chairman of the board of Chevron Corporation (international oil company) where he has been a director since 1998. He joined Chevron in 1961 as a process engineer, was elected a vice president in 1983 and assumed his present position in 1989. He is a member of the Board of Trustees of the University of San Francisco, the California Academy of Sciences, and the Committee for Economic Development. Mr Sullivan is a director of the American Petroleum Institute and the United Way of the Bay Area.(3) Kieckhefer, 54, a director of the company since 1990, has been president of Kieckhefer Associates, Inc (investment and trust management), since 1989 and was senior vice president prior to that time. He has been engaged in commercial cattle operations since 1967 and is a trustee of J W Kieckhefer Foundation, an Arizona charitable trust. (3) GEORGE H WEYERHAEUSER t e r m e x p i r e s 2 0 00 W JOHN DRISCOLL Driscoll, 69, a director of the company since 1979, was chairman of Rock Island Company (private investment company) until his retirement in 1994. He is also a director of Comshare Incorporated, Northern States Power Company, The St Paul Companies, Inc, and John Nuveen & Company. (3)(4) Weyerhaeuser, 72, a director of the company since 1960, has been chairman of Weyerhaeuser Company since 1988. Mr Weyerhaeuser joined the company in 1949, became its president in 1966 and was its chief executive officer in the period 1966–91. He is also a director of The Boeing Company, Chevron Corporation and SAFECO Corporation, and is a member of The Business Council. (1)(4) (1) Member of the Executive Committee. Mr Weyerhaeuser is chairman. (2) Member of the Accounting and Reporting Standards Committee. Mr Ruckelshaus is chairman. (3) Member of the Compensation Committee. Mr Hawley is chairman. (4) Member of the Nominating and Management Organization Committee. Mr Driscoll is chairman. (5) Mr Rogel has been elected chairman effective April 20, 1999. 75
Slide 80: corporate SENIOR OFFICERS data WILLIAM R CORBIN RICHARD E HANSON THOMAS M LUTHY STEVEN R ROGEL President and Chief Executive Officer ( Chairman, President & Chief Executive Officer effective April 20, 1999 ) Executive Vice President, Wood Products RICHARD C GOZON Senior Vice President, Timberlands STEVEN R HILL Senior Vice President GEORGE H WEYERHAEUSER JR Executive Vice President, Pulp, Paper and Packaging WILLIAM C STIVERS Senior Vice President, Human Resources MACK L HOGANS Senior Vice President, Technology Executive Vice President and Chief Financial Officer Senior Vice President, Corporate Affairs TIMBERLANDS WOOD PRODUCTS & DISTRIBUTION P U L P, PA P E R A N D PA C K A G I N G C O R P O R AT E J CARL JESSUP LEE T ALFORD CHARLES E CARPENTER CREIGH H AGNEW Vice President, South SCOTT R MARSHALL Vice President, Mississippi/Louisiana Operations BILL BLANKENSHIP Vice President, Fine Paper, Newsprint and Bleached Paperboard CARL W GEIST JR Vice President, Policy, Finance and Strategic Planning R E X M CC U L L O U G H Vice President, Government Affairs and Corporate Contributions RICHARD B BANKHEAD Vice President, Appearance Wood Business Group JAMES M BRANSON Vice President, Pulp GEORGE D HENSON Vice President, Engineering J O H N S C O AT E S Vice President, Forestry Research J O H N P M CM A H O N Vice President, Plywood RODNEY J DEMPSTER Vice President, Process Improvement MICHAEL A JACKSON Vice President, Timberlands, External and Regulatory Affairs J A C K P. TAY L O R J R Vice President, Oriented Strand Board—West LY N N E E N D I C O T T Vice President, Recycling JAMES R KELLER Vice President and Managing Director, Pension Fund Investments ROBERT A DOWDY Vice President, West Vice President, Southern Lumber REYNOLD HERT Vice President, Containerboard Packaging PA U L J K I F F E Vice President and General Counsel RICHARD L ERICKSON Vice President, Canadian Lumber D A N I E L M M CC O R M I C K Vice President, Manufacturing RICHARD E LODMILL Vice President, Environment, Health and Safety J U D D H AV E R F I E L D Vice President, Chemicals SUSAN M MERSEREAU Vice President, Composite Products HOWARD S MECK Vice President, Quality, Business Services and Aviation MONTYE C MALE Vice President, Oriented Strand Board—East EDWARD P ROGEL Vice President, Organizational Effectiveness, Containerboard Packaging and Recycling PETER W SHERLAND Vice President, Communications R O S E M A R Y F M AT T I C K Vice President, Human Resources D AV I D K S H A R P Vice President, Finance and Planning Vice President, Procurement and Supply Management S A N D Y D M CD A D E Vice President, Western Lumber D AV I D T S T I L L Secretary HENRY M MONTREY Vice President, Corporate R&D THOMAS A PED Vice President and General Manager, Building Materials Distribution Vice President, Information Technology, Chief Information Officer LARRY W POLLOCK Vice President and Director of Taxes DARIEN E ROSEEN Vice President, Strategic Planning K E N N E T H J S TA N C AT O Vice President and Controller R I C H A R D J TA G G A R T Vice President and Treasurer GREGORY H YUCKERT Vice President, Labor Relations WEYERHAEUSER REAL E S TAT E C O M PA N Y W E Y E R H A E U S E R A S I A LT D WEYERHAEUSER FORESTLANDS I N T E R N AT I O N A L C STEPHEN LEWIS H JAMES FITZGERALD CONOR W BOYD President W E Y E R H A E U S E R C A N A D A LT D . President WESTWOOD SHIPPING LINES President WA S H I N G T O N D C O F F I C E C W I L L I A M G AY N O R ARNFINN GISKE FREDERICK S BENSON President and Chief Executive Officer President Vice President, Federal and International Government Affairs 76
Slide 81: shareholder information C O R P O R AT E M A I L I N G A D D R E S S A N D T E L E P H O N E Weyerhaeuser Company PO Box 2999 Tacoma, Washington 98477-2999 253-924-2345 WEYERHAEUSER WORLD WIDE WEB ADDRESS STOCK EXCHANGES AND SYMBOLS http://www.weyerhaeuser.com ANNUAL MEETING Weyerhaeuser Company Common Stock is listed on the New York Stock Exchange (NYSE), the Chicago Stock Exchange and the Pacific Stock Exchange. The company’s NYSE symbol is WY. ANNUAL REPORTS, FORM 10-K April 20, 1999 George Hunt Walker Weyerhaeuser Building Federal Way, Washington Proxy material will be mailed on or about March 9, 1999 to each holder of record of voting shares. TRANSFER AGENT AND REGISTRAR To order a copy of Weyerhaeuser’s 1998 Annual Report, Form 10-K or the 1998 Annual Environmental Performance Report, call 800-551-4803, or write: Weyerhaeuser Company CH 1K35C PO Box 2999 Tacoma, Washington 98477-2999 A copy will be provided at no charge. I N V E S T O R R E L AT I O N S C O N TA C T ChaseMellon Shareholder Services, LLC Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 SHAREHOLDER SERVICES For address changes, to request information on electronic deposit of dividends, to obtain information about your account, to obtain the quarterly earnings, or to request information on the Dividend Investment Plan, please call: Inside the United States 800-561-4405 800-231-8354 hearing-impaired Outside the United States 201-329-8660 201-329-8354 hearing-impaired GENERAL INQUIRIES Richard J Taggart 253-924-2058 Bruce D Amundson 253-924-3047 F O R WA R D L O O K I N G S TAT E M E N T S Design: Rigsby Design, Houston, Texas; Photography: Chris Shinn; Executive Photography: Gary Darby and Dave Putnam, Weyerhaeuser Photography Group. ChaseMellon Shareholder Services, LLC Shareholder Relations PO Box 3315 South Hackensack, New Jersey 07606 ChaseMellon has the ability to respond to many shareholder inquiries via the Internet. Its web address is http://www.chasemellon.com This annual report may contain statements concerning the company’s future results and performance that are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those projected, including, but not limited to, the effect of general economic conditions, including the level of interest rates and housing starts; market demand for the company’s products; the effect of forestry, land use, environmental and other governmental regulations; the risk of losses from fires, floods and other natural disasters and the company’s ability to execute management’s strategy as described in this annual report. The company is also a large exporter and is affected by changes in economic activity in Europe and Asia, particularly Japan, and by changes in currency exchange rates and restrictions on international trade. These and other factors that could cause or contribute to actual results differing materially from such forward looking statements are discussed in greater detail in this annual report and other Securities and Exchange Commission filings of the company. This report is printed entirely on Weyerhaeuser papers. Soy-based inks were used which are more easily separated from the paper fiber in the repulping process. The cover and main text portions of the report are printed on Weyerhaeuser Cougar. The entire report can be recycled in most high-grade office paper recycling programs. Thank you for recycling. “The future is growing” is a trademark of Weyerhaeuser Company.
Slide 82: To learn more about how Weyerhaeuser is becoming the world’s best forest products company, visit us online at w w w. w e y e r h a e u s e r . c o m For a report on the environment and Weyerhaeuser’s enduring values; visit

   
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