Weyerhaeuser, an integrated forest products company, is engaged in the growing and harvesting of timber; manufacturing, distribution and sale of forest products. It is also involved in real estate construction, development and related activities.The company has a diverse product portfolio which protects the company from adverse market conditions in any product segments. However imposition of countervailing and anti dumping duties on softwood lumber is exerting pressure on operating margins of the company.

Strengths

Substantial manufacturing capability

The company has substantial manufacturing capability for manufacturing of wood products, cellulose fibers and white papers, and containerboard, packaging and recycling.The wood products, cellulose fibers and white papers, and containerboard, packaging and recycling business segment has manufacturing facilities throughout the US and Canada. In the wood product segment the company has 28 manufacturing facilities for Softwood Lumber, two facilities for plywood, seven for veneer, nine for oriented strand board, eight for hardwood lumber, six joist and eleven for engineered solid section. The company has 6 manufacturing facilities for pulp, and one for liquid packaging board. The company’s huge manufacturing facilities enables it to meet the market demand.

Broad product portfolio

Weyerhaeuser has a broad product portfolio and is not over dependent on any of the business segments. Also all the segments are engaged in selling different type of products. In FY2007, the company’s largest segment, wood products, accounted for 34.9% of the total revenues, while other segments like containerboard, packaging and recycling (31.7%), real estate (14.5%), cellulose fiber (11.2%), and timberlands (5.6%) together accounting for 65.1% to the overall revenues. A broad product portfolio protects the company from adverse market conditions in any product segment which reduces its business risk.

Higher Returns

Weyerhaeuser experienced higher returns in FY2007. For FY2007, the company’s average returns on equity, asset, and investment were at 9.9%, 3.3%, and 0.1%, considerably higher than the previous year’s average of 5%, 1.7%, and 0% respectively. Similarly for the same period the company’s net margin at 4.8% was higher than the previous year’s average of 2.4%. Higher returns indicate operating efficiencies that help the company to enhance its profitability. Increasing net margin indicates the efficient cost management of the company. Higher returns and net margins enable the company to make its financial position strong.

Weaknesses

Legal proceedings

The company is involved in a number of legal proceedings. In FY2002, the Bankruptcy Court held the company liable for breaches of warranty and in the second quarter of FY2005 imposed damages of approximately $470 million. The company appealed the liability and damages determinations to the US District Court for the Northern District of Georgia, and posted a bond of $500 million.

A consolidated lawsuit was filed in US District Court in Pennsylvania in FY2006 seeking class action status for persons and entities that purchased oriented strand board (OSB) directly from Weyerhaeuser, Louisiana-Pacific, Georgia-Pacific, Potlatch, Ainsworth Lumber, Norbord and J.M. Huber, from 2002 through the present.The lawsuit alleges the defendants conspired to fix and raise OSB prices in the US during the class period and as a result, class members paid artificially inflated prices for OSB during that period. Additional lawsuits have also been filed and have been consolidated in the same court for discovery purposes on behalf of indirect purchasers of OSB in different states that have laws permitting such actions on behalf of indirect purchasers.The company’s involvement in a number of legal proceedings and adverse judgments in certain legal proceedings had a material adverse effect on the company’s financial condition.

Highly dependent on third parties

The company’s business is highly dependent on the transportation of a large number of products, both domestically and internationally. It relies primarily on third parties for transportation of the products manufacture and/or distribute as well as delivery of raw materials. In particular, a significant portion of the goods manufactured and raw materials that the company uses are transported by railroad or trucks, which are highly regulated.

Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm the company’s reputation, customer relationships and have a material adverse effect on financial condition and results of operation. In addition, an increase in transportation rates or fuel surcharges could materially adversely affect sales and profitability of the company.

Overdependence on US

Although the company has a global presence but its largest share of revenue is generated in the US market. The US accounted for around 81.5% of the company’s sales in the FY2007 and 83.1% in FY2006. The major competitors have more equitable distribution of revenues than the company. This overdependence makes the company vulnerable to the economic fluctuations of the US and might negatively affect its revenues.

Opportunities

Growing demand for OSB

Oriented strand board (OSB) has been fast replacing traditional plywood in North America, in FY2007. OSB is used in residential and commercial construction for walls, roof panels, sub floors, single-layer floors, structural insulated panels, floor joists and rim board. In North America it has captured 75% of the structural panel market for key applications. By 2006, production capacity in North America exceeded 24 million cubic meters.

The growth of production in the US was particularly strong, at about 5.5%, while production of Canadian mills advanced by slightly less than 5%.The total North American OSB annual production is projected to increase by approximately 8.0 billion square feet in the period from FY06-10 while plywood production is projected to decline by 7.8 billion square feet for the same period.The company being a producer of OSB could benefit from the growing demand for OSB.

Expanding home improvement market

The long-term outlook for the home improvement products market remains strong. Total market growth in FY2006-09 is expected to average 3.4% per year in constant dollars.With customer service centers across North America, Weyerhaeuser provides building materials and support to lumber dealers, home improvement warehouses, industrial manufacturers and the manufactured housing and recreational vehicle industries. High growth in the home improvement market would boost demand for the company’s products, thus enhancing its revenue and market share.

Booming packaging industry in emerging markets

The global packaging market is expected to grow at an annual rate of over 4% through FY2004-09. In particular, emerging markets such as India are expected to grow at high rates. The company exports its engineered building materials and industrial hardwood products to Europe and Asia.The

Indian packaging industry is set to reach $13 billion in FY09, an annualized growth of 14.2%. The packaging industry in the Central and Eastern Europe is also expected to witness high growth. Russia is likely to remain the region’s largest consumer, reaching $18.5 billion in FY2009. Expansion in emerging markets such as Australia, Europe, India, China and Japan would enable the company to reduce its dependence on North America.

Threats

Environmental regulation

The company’s business is subjected to numerous environmental laws and regulations.The company is involved in the environmental investigation or remediation of numerous sites.The company spent approximately $10 million in FY2006, and expects to spend equally in FY2008, on environmental remediation of these sites. Also, the United States Environmental Protection Agency (US EPA) has introduced regulations dealing with air emissions from pulp and paper manufacturing facilities, including regulations on hazardous air pollutants that require use of maximum achievable control technology (MACT) and controls for pollutants that contribute to smog and haze. The US EPA has also adopted MACT standards for air emissions from wood products facilities and industrial boilers. Compliance with these regulations will lead to higher costs and lower margins.

Lumber export taxes

The company paid significant lumber export taxes and/or countervailing and antidumping duties. In 2001, the Coalition for Fair Lumber Imports filed two petitions with the US Department of Commerce and the International Trade Commission claiming that production of softwood lumber in Canada was being subsidized by Canada and that imports from Canada were being dumped into the US market (sold at less than fair value). The Coalition asked that countervailing duty (CVD) and anti-dumping tariffs (AD) be imposed on softwood lumber imported from Canada.

During the FY2002-06, the company paid a total of $370 million in deposits for CVD and AD duties.

In 2006, the Canadian and the US governments announced a final settlement to this long-standing dispute. However, the Canadian softwood lumber facilities have to pay an export tax when the price of lumber is at or below a threshold price. The export tax could be as high as 22.5% if a province exceeds its total allotted export share. It is also expected that countervailing duty and antidumping tariffs, or similar types of tariffs could be imposed on the company in the future. The company may experience reduced revenues and margins in the softwood lumber business as a result of the application of the settlement agreement.

The Domtar transaction

The company combined its fine paper business and related assets with Domtar, a Canadian corporation, to form a new company, Domtar Corporation (Domtar). The transaction was tax-free to the company and its shareholders. In connection with the transaction, the company entered into a tax-sharing agreement with Domtar, for a two-year period, followed by closing of the transaction to avoid taking certain actions that might adversely affect the tax-free status of the transaction. To an extent, the tax-free status of the transaction was lost because of actions taken by Domtar. Domtar is generally required to indemnify the company for any resulting tax-related losses incurred. In future, the event conduct by Domtar would affect the tax-free status of the transaction and Domtar would unable to meet its obligation to indemnify the company and shareholders.