WEYERHAEUSER CO (WY) FY 2021 MD&A

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

WHAT YOU WILL FIND IN THIS MD&A

Our MD&A includes the following major sections:

For Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) related to the year ended December 31, 2019, refer to this same section in our 2020 annual report on Form 10-K as filed with the Securities and Exchange Commission on February 19, 2021.

ECONOMIC AND MARKET CONDITIONS AFFECTING OUR OPERATIONS

Overview

In March 2020, COVID-19 was officially declared a global pandemic by the World Health Organization, and a national emergency was declared by the United States. The immediate economic effects of the pandemic were severe, as U.S. gross domestic product (GDP) declined 31 percent in the second quarter of 2020 and the national unemployment rate soared to a record-high of nearly 15 percent in April 2020 driven by the restrictions imposed in response to the pandemic. Since that time the unemployment rate has fallen steadily, and U.S. GDP has rebounded significantly as states have continued to reopen their economies and loosen restrictions. Although market conditions across our businesses deteriorated rapidly in late first quarter and early second quarter 2020, they quickly rebounded as demand for housing and wood products proved resilient. Growth in repair and remodel demand and new residential construction activity resulted in increased demand for wood products. As a result, benchmark prices rose to record levels through May 2021 for most lumber products and into early July for oriented strand board (OSB). During the second quarter, lumber prices, followed by OSB, began a substantial correction as demand from the repair and remodel segment lessened during the summer months. Later in the third quarter, prices bottomed and began to rebound, and increased well above historical norms again by the end of 2021. Looking ahead to 2022, our market conditions and the strength of the broader U.S. economy will continue to be influenced by the trajectory of U.S. housing activity, repair and remodel activity, impacts from COVID-related restrictions, inflation trends, interest rates, and the nature and extent of future government stimulus including the recently-passed Infrastructure Investment and Jobs Act.

We have taken proactive steps to safeguard the health of our employees and preserve business continuity from the beginning of the pandemic. These actions have included detailed cleaning and disinfecting procedures, strict processes around masking, social distancing and personal hygiene, clear communication with our employees, contractors, vendors and visitors about our safety protocols, comprehensive guidance for response to any COVID-19 diagnoses or exposures in our operations, and a directive that employees work from home if feasible. In light of adjustments to federal, state and local health and safety restrictions, we began a phased-in approach to return some of our employees who have been working from home back to their work locations. We remain vigilant about employee safety and will continue to monitor developments, including but not limited to the spread of disease variants and their impact on local health systems.

Business Outlook

The demand for sawlogs within our Timberlands segment is directly affected by domestic production of wood-based building products. The strength of the U.S. housing market, especially new residential construction, strongly affects demand in our Wood Products segment, as does repair and remodeling activity. Seasonal weather patterns impact the level of construction activity in the U.S., which in turn affects demand for our logs and wood products. In the fourth quarter of 2021, weather conditions were favorable for harvest operations in the U.S. South. Our Timberlands segment, specifically the Western region, is also affected by export demand and trade policy. Japanese housing starts are a key driver of export log demand in Japan. The demand for pulpwood from our Timberlands segment is directly affected by the production of pulp, paper and OSB as well as the demand for biofuels, such as pellets made from pulpwood. The Timberlands segment is also influenced by the availability of harvestable timber. In general, Western log markets are highly tensioned while Southern log markets have more available supply. However, additional mill capacity being added in the U.S. South has led to tightening of markets in certain geographies.

On a seasonally adjusted annual basis, as reported by the U.S. Census Bureau, housing starts for fourth quarter 2021 averaged 1.644 million units, a 5.3 percent increase from third quarter 2021. Single family starts averaged 1.148 million units and multi-family starts averaged 496

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thousand units in fourth quarter 2021, which represented increases of 4.7 percent and 6.5 percent from the third quarter, respectively. Total housing starts of 1.595 million in 2021 were up 15.6 percent from 2020. Sales of newly built, single family homes averaged a seasonally adjusted annual rate of 728 thousand units for fourth quarter 2021, which is an increase of 4.2 percent from the third quarter. The continued strength of the housing market has been driven by low inventory, underlying demographic fundamentals, and low mortgage rates. Builders have struggled to keep pace due to material shortages and other constraints, which has contributed to a growing backlog of construction activity.

Repair and remodeling expenditures increased by 5.8 percent from third quarter to fourth quarter 2021 and increased by 13.5 percent for the full year compared to 2020 according to the Census Bureau Advance Retail Spending report. A rebound in do-it-yourself activity and continued strength in projects undertaken by professional contractors contributed to higher sales in the sector.

In U.S. wood product markets, demand was steady during most of fourth quarter 2021 as dealer inventories remained tight. In the second half of the fourth quarter, lumber and OSB prices rebounded sharply from lows in the third quarter. In addition to steady demand, floods in British Columbia contributed to the increase in prices. The Random Lengths Framing Lumber Composite price averaged $691/MBF and the OSB Composite averaged $624/MSF in fourth quarter 2021.

Western log markets have shown continued strength in response to the increase in lumber prices and limited log supply. Douglas fir sawlog prices increased by 4 percent in fourth quarter 2021 compared with third quarter 2021 as reported by RISI Log Lines. The strength in Western log prices was supported by multiple factors including continued demand in export markets. In the South, sawlog prices increased by 1 percent from third quarter 2021 and 10 percent from fourth quarter 2020 as reported by TimberMart-South. While weather events contributed to some of this increase, transportation constraints and additional mill demand also contributed to more tensioned log markets.

Exchange rates, available supply from other countries and trade policy affect our export businesses. During fourth quarter 2021, continued disruptions in global shipping, diversion of European log and lumber supply to other markets, and bans on Australian log imports to China generally had a positive impact on China’s demand for logs imported from the U.S. In Japan, total housing starts increased 5.1 percent year to date through November compared to the same period in 2020, while the key Post and Beam segment saw an 8.9 percent increase. Decreased redwood lumber imports from Europe to Japan have continued to be favorable to our Japanese log export business.

Inflation affects our business, especially in increased costs for materials and labor, although there are also offsetting impacts including wood product prices and timberland’s effectiveness as an inflation hedge. Over the last twelve months, the Consumer Price Index (CPI) increased by 7.0 percent, while the Producer Price Index (final demand) increased by 9.7 percent.

Governments and businesses across the globe are taking action on climate change and are making significant commitments towards reducing greenhouse gas emissions to net zero. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts. We believe we are uniquely positioned to help entities achieve these commitments through natural climate solutions, including forest carbon sequestration and carbon capture and storage activities.

FINANCIAL PERFORMANCE SUMMARY

Net Sales by Segment

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Contribution to Earnings by Segment

RESULTS OF OPERATIONS

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

CONSOLIDATED RESULTS

HOW WE DID

Summary of Financial Results

COMPARING 2021 WITH 2020

Net Sales

Net sales increased $2,669 million — 35 percent — primarily due to:

Costs of Sales

Costs of sales increased $656 million — 12 percent — primarily due to increased freight costs and increased sales volumes across most product lines within our Wood Products segment, as well as increased freight costs and third-party log purchases within our Timberlands segment.

These increases were partially offset by a decrease in real estate acres sold within our Real Estate & ENR segment. Refer to additional analysis of fluctuations within our Wood Products, Timberlands and Real Estate, Energy and Natural Resources discussions below.

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Operating Income

Operating income increased $1,933 million — 113 percent — primarily due to a $2,013 million increase in consolidated gross margin (see discussion of components above), as well as an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires.

These changes were partially offset by a $150 million decrease in gain on sale of timberlands (refer to Note 4: Timberland Acquisitions and Divestitures).

Net Earnings

Net earnings increased $1,810 million — 227 percent — primarily due to:

These changes were partially offset by a $524 million increase in income tax expense (refer to Income Taxes below).

TIMBERLANDS

HOW WE DID

We report sales volumes and annual production data for our Timberlands segment in Our Business/What We Do/Timberlands.

Net Sales and Net Contribution to Earnings for Timberlands

COMPARING 2021 WITH 2020

Net Sales — Unaffiliated Customers

Net sales to unaffiliated customers increased $170 million — 12 percent — primarily due to a $149 million increase in Western log sales attributable to a 27 percent increase in sales realizations, partially offset by a 5 percent decrease in sales volumes, as well as a $16 million increase in Southern log sales attributable to a 5 percent increase in sales realizations, partially offset by a 2 percent decrease in sales volumes.

Intersegment Sales

Intersegment sales increased $64 million — 14 percent — primarily due to an 11 percent increase in sales realizations, as well as a 3 percent increase in sales volumes.

Costs of Sales

Costs of sales increased $159 million — 11 percent — primarily due to increased freight costs and third-party log purchases, partially offset by the decrease in third-party sales volumes, as discussed above.

Operating Income and Net Contribution to Earnings

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Operating income and net contribution to earnings increased $9 million — 2 percent — primarily due to an $80 million timber casualty loss recorded in third quarter 2020 related to the Oregon wildfires, the change in the components of gross margin as discussed above, and a $32 million gain on the sale of timberlands in the North Cascades region of Washington recorded in third quarter 2021, partially offset by a $182 million gain on the sale of certain southern Oregon timberlands recorded in fourth quarter 2020.

REAL ESTATE, ENERGY AND NATURAL RESOURCES

HOW WE DID

We report acres sold and average price per acre for our Real Estate, Energy and Natural Resources segment in Our Business/What We Do/Real Estate, Energy and Natural Resources.

Net Sales and Net Contribution to Earnings for Real Estate, Energy and Natural Resources

The volume of real estate sales is a function of many factors, including:

In any period, the average sales price per acre will vary based on the location and physical characteristics of parcels sold.

COMPARING 2021 WITH 2020

Net Sales

Net sales increased $68 million — 25 percent — primarily attributable to increases in mitigation bank sales, the average price per acre sold and energy and natural resources sales.

Costs of Sales

Costs of sales decreased $56 million — 34 percent — primarily attributable to a decrease in the amount of acres sold.

Net Contribution to Earnings

Net contribution to earnings increased $124 million — 144 percent — attributable to the change in the components of gross margin, as discussed above.

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WOOD PRODUCTS

HOW WE DID

We report sales volumes and annual production data for our Wood Products segment in Our Business/What We Do/Wood Products.

Net Sales and Net Contribution to Earnings for Wood Products

COMPARING 2021 WITH 2020

Net Sales

Net sales increased $2,431 million — 42 percent — primarily due to:

Costs of Sales

Costs of sales increased $587 million — 14 percent — primarily attributable to increased freight costs, sales volumes and raw material costs for most products.

Operating Income and Net Contribution to Earnings

Operating income and net contribution to earnings increased $1,871 million — 140 percent — primarily due to the change in the components of gross margin, as discussed above.

UNALLOCATED ITEMS

Unallocated Items are gains or charges related to company-level initiatives or previous businesses that are not allocated to our current business segments. They include all or a portion of items such as:

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Net Charge to Earnings for Unallocated Items

Net charge to earnings decreased by $200 million — 44 percent — primarily due to a $271 million decrease in non-operating pension and other post-employment benefit costs primarily attributable to a $253 million decrease in pension settlement charges (refer to Note 9: Pension and Other Post-Employment Benefit Plans).

This decrease was partially offset by a $53 million increase in other, primarily due to increased costs for group insurance, as well as a $20 million increase in unallocated corporate function and variable compensation expense.

INTEREST EXPENSE

Our net interest expense incurred for the last two years was:

Interest expense decreased by $130 million compared to 2020 primarily due to $92 million of charges related to the early extinguishment of debt (refer to Note 12: Long-Term Debt, Net) recorded in 2020, with no similar activity in 2021. The remaining change was due to a decrease in average outstanding debt in 2021 compared to 2020.

INCOME TAXES

As a REIT, we generally are not subject to federal corporate level income taxes on REIT taxable income that is distributed to shareholders. Historical distributions to shareholders, including amounts and tax characteristics, are summarized in the table below.

We are required to pay corporate income taxes on earnings of our TRSs, which include our Wood Products segment and portions of our Timberlands and Real Estate & ENR segments' earnings. Our provision for income taxes is primarily driven by earnings generated by our TRSs.

Our provision for income taxes the last two years was:

During 2020, we recorded a $60 million tax benefit related to the noncash pretax settlement charge recorded in connection with our U.S. pension plan. Refer to Note 20: Income Taxes and Note 9: Pension and Other Post-Employment Benefit Plans for further information.

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LIQUIDITY AND CAPITAL RESOURCES

We are committed to maintaining an appropriate capital structure that provides flexibility and enables us to protect the interests of our shareholders and meet our obligations to our lenders, while also maintaining access to all major financial markets. As of December 31, 2021, we had $1.9 billion in cash and cash equivalents and $1.5 billion of availability on our line of credit, which expires in January 2025. We believe we have sufficient liquidity to meet our cash requirements for the foreseeable future.

CASH FROM OPERATIONS

Consolidated net cash from operations was:

COMPARING 2021 WITH 2020

Net cash from operations increased by $1,630 million, primarily due to:

These changes were partially offset by a $433 million increase in cash paid for income taxes.

Pension Contributions and Benefit Payments Made and Expected

During 2021, we contributed a total of $59 million to our pension and post-employment plans, compared to a total of $30 million during 2020.

For 2022, we expect to contribute approximately $30 million to our pension and post-employment benefit plans. Refer to Note 9: Pension and Other Post-Employment Benefit Plans for further information.

INVESTING IN OUR BUSINESS

Cash from investing activities includes items such as:

Consolidated net cash from investing activities was:

COMPARING 2021 WITH 2020

Net cash from investing activities decreased by $510 million, primarily due to:

These changes were partially offset by a $276 million decrease in cash paid for timberlands acquisitions.

Summary of Capital Spending by Business Segment

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We expect our capital expenditures for 2022 to be approximately $440 million. The amount we spend on capital expenditures could change due to:

FINANCING

Cash from financing activities includes items such as:

Consolidated net cash from financing activities was:

COMPARING 2021 WITH 2020

Net cash from financing activities increased $28 million in 2021, primarily due to:

These changes were largely offset by the following:

LONG-TERM DEBT

Our consolidated long-term debt (including current portion) was:

The decrease in our long-term debt during 2021 is attributable to the repayment of our $225 million variable-rate term loan and our $150 million 9.00 percent notes.

The weighted average interest rate and the weighted average maturity on our long-term debt as of December 31, 2021 were 6.06 percent and 6.7 years, respectively.

See Note 12: Long-Term Debt, Net for more information.

LINE OF CREDIT

In January 2020, we refinanced and extended our $1.5 billion five-year senior unsecured revolving credit facility, which expires in January 2025. As of December 31, 2021 and December 31, 2020, we had no outstanding borrowings on the revolving credit facility and we were in compliance with the revolving credit facility covenants.

Our revolving credit agreement utilizes the London Inter-bank Offered Rate (LIBOR) as a basis for one of the interest rate options available to the company to apply to outstanding borrowings. Publication of USD LIBOR is expected to cease between January 1, 2022 and July 1, 2023. We plan to transition our revolving credit facility to an alternate reference rate in 2022. We have included provisions in our revolving credit agreement that specifically contemplate the transition from LIBOR to a replacement benchmark rate.

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Our Covenants

Our key covenants include the requirement to maintain:

Our total adjusted shareholders' equity is comprised of:

Our capitalization is comprised of:

As of December 31, 2021, we had:

When calculating compliance in accordance with financial debt covenants as of December 31, 2021 and December 31, 2020, we excluded the full amount of accumulated other comprehensive loss of $479 million and $822 million, respectively. See Note 15: Shareholders’ Interest for further information on accumulated other comprehensive loss.

There are no other significant financial debt covenants related to our third-party debt.

CREDIT RATINGS

As of December 31, 2021, our long-term issuer credit rating was BBB and Baa2 from S&P and Moody’s, respectively.

OPTION EXERCISES

Our cash proceeds from the exercise of stock options were:

Our average stock price was $36.06 and $26.04 in 2021 and 2020, respectively.

DIVIDENDS

We paid cash dividends on common shares of:

The increase in dividends paid is primarily due to the interim supplemental dividend of $375 million paid in the fourth quarter of 2021, as well as the temporary suspension of our quarterly dividend payments in the second and third quarter of 2020. On January 28, 2022, our board of directors declared a supplemental dividend of $1.45 per share based on 2021 financial results. The dividend is payable on February 28, 2022 to shareholders of record as of the close of business on February 18, 2022.

SHARE REPURCHASES

We repurchased over 2.7 million shares for approximately $100 million (including transaction fees) during the year ended December 31, 2021. As of December 31, 2021, we had remaining authorization of $927 million for future share repurchases. We did not repurchase shares in 2020. For further information on share repurchases see Note 15: Shareholders’ Interest.

OUR CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

More details about our contractual obligations and commercial commitments are in Note 9: Pension and Other Post-Employment Benefit Plans, Note 11: Line of Credit, Note 12: Long-Term Debt, Net, Note 14: Legal Proceedings, Commitments and Contingencies and Note 20: Income Taxes.

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Significant Contractual Obligations as of December 31, 2021

Significant contractual obligations as of December 31, 2021 include our long-term debt obligations and lease obligations. Refer to Note 12: Long Term Debt, Net and Note 17: Leases, respectively, for further information. Additional significant contractual obligations are included below.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements have not had — and are not reasonably likely to have — a material effect on our current or future financial condition, results of operations or cash flows. Note 8: Related Parties and Note 11: Line of Credit contain our disclosures of:

ENVIRONMENTAL MATTERS, LEGAL PROCEEDINGS AND OTHER CONTINGENCIES

See Note 14: Legal Proceedings, Commitments and Contingencies.

ACCOUNTING MATTERS

CRITICAL ACCOUNTING POLICIES

In the preparation of our financial statements we follow established accounting policies and make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain. Accounting policies whose application may have a significant effect on the reported results of operations and financial position are considered critical accounting policies.

In accounting, we base our judgments and estimates on:

Actual results, however, may differ from the estimated amounts we have recorded.

Our most critical accounting policies relate to our:

Details about our other significant accounting policies — what we use and how we estimate — are in Note 1: Summary of Significant Accounting Policies.

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DISCOUNT RATES FOR PENSION AND POST-EMPLOYMENT BENEFIT PLANS

Discount rates are used to estimate the net present value of our pension and other post-employment plan obligations. These rates are determined at the measurement date by matching current spot rates of high-quality corporate bonds with maturities similar to the timing of expected cash outflows for benefits. The selection of discount rates requires judgment as well as the involvement of actuarial specialists. These specialists assist with selecting yield curves based on published indices for high-quality corporate bonds and projecting the timing and amount of cash flows associated with our obligations to ultimately support our determination of an appropriate discount rate for each plan.

Our discount rates as of December 31, 2021 are:

Pension expenses for 2022 will be based on the 2.9 percent and 3.1 percent assumed discount rates for the U.S. pension plan and the Canadian pension plan, respectively, and the 2.6 percent and 3.0 percent assumed discount rates for the U.S. and Canadian post-employment benefit plans, respectively.

Our discount rates are important in determining the cost of our plans. A 50 basis point decrease in our discount rate would increase expense or reduce a credit by approximately:

IMPAIRMENT OF LONG-LIVED ASSETS

We review the carrying value of long-lived assets whenever an event or a change in circumstance indicates that the carrying value of the asset or asset group may not be recoverable through future operations. The carrying value is the original cost, less accumulated depreciation and any past impairments recorded. Refer to Note 4: Timberland Acquisitions and Divestitures for information on an impairment recognized in 2019.

If we evaluate recoverability, we are required to estimate future cash flows and residual values of the asset or asset group. Key assumptions used in developing these estimates would include probability of alternative outcomes, product pricing, raw material cost and product sales.

An impairment occurs when the carrying value of a long-lived asset is greater than the amount that could be recovered from the estimated future cash flows of the asset and greater than fair market value (the amount we could receive if we were to sell the asset). Key assumptions used in developing estimates of fair value would include the estimated future cash flows used to assess recoverability, discount rates and probability of alternative outcomes.

CONTINGENT LIABILITIES

We are subject to lawsuits, investigations and other claims related to environmental, product and other matters, and are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as the amount or range of potential loss.

We record contingent liabilities when:

Assessing probability of loss and estimating the amount of loss can require analysis of multiple factors, such as:

In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that a loss may have been incurred.

Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If estimated probable future losses or actual losses exceed our recorded liability for such claims, we record additional charges. These exposures and proceedings can be significant and the ultimate negative outcomes could be material to our operating results or cash flows in any given quarter or year. See Note 14: Legal Proceedings, Commitments and Contingencies for more information.

PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

A summary of prospective accounting pronouncements is in Note 1: Summary of Significant Accounting Policies.

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PERFORMANCE MEASURES

We use Adjusted EBITDA as a key performance measure to evaluate the performance of the consolidated company and our business segments. This measure should not be considered in isolation from, and is not intended to represent an alternative to, our results reported in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, we believe Adjusted EBITDA provides meaningful supplemental information for our investors about our operating performance, better facilitates period to period comparisons and is widely used by analysts, lenders, rating agencies and other interested parties. Our definition of Adjusted EBITDA may be different from similarly titled measures reported by other companies. Adjusted EBITDA, as we define it, is operating income adjusted for depreciation, depletion, amortization, basis of real estate sold and special items.

Adjusted EBITDA by Segment

We reconcile Adjusted EBITDA to net earnings for the consolidated company and to operating income for the business segments, as those are the most directly comparable U.S. GAAP measures for each.

The table below reconciles Adjusted EBITDA by segment to net earnings for the year ended December 31, 2021:

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The table below reconciles Adjusted EBITDA by segment to net earnings for the year ended December 31, 2020:

We also reconcile net earnings before special items to net earnings and net earnings per diluted share before special items to net earnings per diluted share, as those are the most directly comparable U.S. GAAP measures. We believe the measures provide meaningful supplemental information for investors about our operating performance, better facilitate period to period comparisons, and are widely used by analysts, lenders, rating agencies and other interested parties.

The table below reconciles net earnings before special items to net earnings:

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The table below reconciles net earnings per diluted share before special items to net earnings per diluted share: