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Weyerhaeuser Co. ([url=http://www.zacks.com/stock/quote/wy]WY[/url]) reported its financial results for the second quarter of 2010. Net income in the quarter was $42.0 million or 20 cents per share, compared with a net loss of $125.0 million or 59 cents per share in the second quarter of 2009. Earnings per share (EPS) surpassed the Zacks Consensus Estimate of 13 cents.

Earnings per share in the second quarter of 2010 excludes approximately $33 million, or 16 cents per share of after-tax charge related to an early extinguishment of debt and an after-tax gain of $5 million, or 3 cents per share on the sale of its Wood Products asset.

Revenue

In the second quarter, net sales were $1,805 million, reflecting growth of 29.8% over $1,391 million reported in the second quarter of 2009, based on stronger Forest Products and Real Estate revenues.

In the second quarter, Timberland revenue increased 8.2% year over year to $225 million and accounted for 12.5% of total revenue. Revenue from Wood Products was up 32.8% to $789 million and represented 43.7% of total revenue.

Revenue generated from Cellulose Fibers, roughly 25.9% of total revenue, increased 34.1% to $468 million, while Real Estate, roughly 14.2% of total revenue, rose 29.1% to $257 million. Finally, revenue from corporate and other sources, 3.7% of total revenue, was $66 million, up 61% year over year.

Margins

Total costs and expenses, as a percentage of revenue was roughly 90.9% compared with 104.5% in the second quarter of 2009. Operating income improved year over year from a loss of $62 million to $164 million in the quarter, while operating margins were roughly 9.1% in the second quarter of 2010.

Balance Sheet

Exiting the second quarter, Weyerhaeuser had cash and cash equivalents (Forest Products and Real Estate) of approximately $1,846 million compared with $2,160 million in the first quarter of 2010. Long-term debt was approximately $5,124 million versus $5,671 million in the first quarter of 2010.

Cash Flow


Cash flow from operating activities was approximately $243 million versus $126 million in the second quarter of 2009. Capital expenditure was $39 million, flat compared with the year-ago quarter and down from $62 million in the first quarter of 2010.

Weyerhaeuser is one of the leading U.S. forest products companies, primarily engaged in growing and harvesting timber; manufacture, distribution and sale of forest products; and real estate development and construction.

The company moved a step forward in its plan to convert into a real estate investment trust (REIT) by rewarding shareholders through a one-time dividend payment amounting to $5.6 billion. The special dividend includes a regular quarterly dividend payment of approximately $11 million.

We believe the conversion to a REIT will benefit Weyerhaeuser over the long term as it lowers its tax liabilities and increases competitiveness in managing its timber portfolio. These along with effective cost-control initiatives, a solid balance sheet, and robust guidance will lead to higher growth in the quarters ahead.

However, the company faces stiff competition from Canfor Corporation, International Paper Co. ([url=http://www.zacks.com/stock/quote/ip]IP[/url]) and Louisiana-Pacific Corp. ([url=http://www.zacks.com/stock/quote/lpx]LPX[/url]). Also, the industry’s sensitiveness to macroeconomic conditions remains a cause of concern. We are currently maintaining a Neutral recommendation on Weyerhaeuser, which is supported by Zacks #3 Rank (Hold).

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