10-Q 1 f10q-700.txt SECOND QUARTER 2000 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended July 1,2000 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transaction Period From to Commission File Number 001-08634 Temple-Inland Inc. (Exact name or registrant as specified in its charter) Delaware 75-1903917 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 303 South Temple Drive, Diboll, Texas 75941 (Address of principal executive offices) (Zip Code) (936) 829-5511 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of common shares outstanding Class as of July 1, 2000 Common Stock (par value $1.00 per share) 50,987,331 Page 1 of 28 The Exhibit Index appears on page 27. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Summarized Statements of Income Parent Company (Temple-Inland Inc.) Unaudited Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Revenues Net revenues $ 721 $ 642 $ 1,445 $ 1,234 Financial services earnings 48 34 83 61 ----- ----- ----- ----- 769 676 1,528 1,295 Costs and Expenses Cost of sales 580 515 1,156 1,006 Selling and administrative 65 64 135 128 ----- ----- ----- ----- 645 579 1,291 1,134 Operating Income 124 97 237 161 Interest expense (26) (22) (51) (44) Other 2 3 5 6 ----- ----- ----- ----- Income From Continuing Operations Before Taxes 100 78 191 123 Taxes on income 38 30 74 49 ----- ----- ----- ----- Income From Continuing Operations 62 48 117 74 Discontinued operations - (7) - (14) ----- ----- ----- ----- Net Income $ 62 $ 41 $ 117 $ 60 ===== ===== ===== ===== See notes to consolidated financial statements. 3 Summarized Balance Sheets Parent Company (Temple-Inland Inc.) Unaudited Second Quarter Year End 2000 1999 ---- ---- (in millions) ASSETS Current Assets Cash and cash equivalents $ 2 $ 51 Receivables, net of allowances of $10 in 2000 and $9 in 1999 372 328 Inventories: Work in process and finished goods 78 71 Raw materials 202 216 ------ ------ 280 287 Prepaid expenses 20 16 ------ ------ Total current assets 674 682 Investment in Temple-Inland Financial 1,063 1,023 Services Property and Equipment 3,278 3,309 Less accumulated depreciation (1,767) (1,759) ------ ------ Total property and equipment 1,511 1,550 Timber and timberlands, net of depletion 505 502 Other Assets 182 184 ------ ------ Total Assets $ 3,935 $ 3,941 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 144 $ 156 Other current liabilities 204 225 ------ ------ Total current liabilities 348 381 Long-Term Debt 1,329 1,253 Other Long-Term liabilities 423 380 Shareholders' Equity 1,835 1,927 ------ ------ Total Liabilities and Shareholders' $ 3,935 $ 3,941 Equity ====== ====== See notes to consolidated financial statements. 4 Summarized Statements of Cash Flows Parent Company (Temple-Inland Inc.) Unaudited First Six Months ---------------- 2000 1999 ---- ---- (in millions) Cash Provided by (Used for) Operations $ 109 $ 53 Cash Provided by (Used for) Investments Capital expenditures for property and equipment (102) (91) Capital contributions to financial services (10) (239) Dividends from financial services 30 - Acquisitions, net of cash acquired, and joint ventures (3) (4) Other 5 13 ----- ----- (80) (321) Cash Provided by (Used for) Financing Additions to debt 126 308 Payments of debt - (24) Purchase of stock for treasury (172) - Cash dividends paid to shareholders (34) (36) Other 2 11 ----- ----- (78) 259 ----- ----- Net decrease in cash and cash equivalents (49) (9) Cash and cash equivalents at beginning of 51 15 period ----- ----- Cash and cash equivalents end of period $ 2 $ 6 ===== ===== See notes to consolidated financial statements. 5 Summarized Statements of Income Financial Services Group Unaudited Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Interest Income Loans receivable and mortgage loans held for sale $ 213 $ 166 $ 415 $ 326 Securities and other 57 29 102 63 ----- ----- ----- ----- Total interest income 270 195 517 389 Interest Expense Deposits 120 88 229 173 Borrowed funds 52 39 100 83 ----- ----- ----- ----- Total interest expense 172 127 329 256 Net interest income 98 68 188 133 Provision for loan losses (10) (8) (25) (18) ----- ----- ----- ----- Net interest income after provision for loan losses 88 60 163 115 Noninterest income 73 67 135 131 Noninterest expense Compensation and benefits 43 41 85 83 Other 65 48 121 95 ----- ----- ----- ----- Total noninterest expense 108 89 206 178 Income before taxes and minority interest 53 38 92 68 Minority interest in income of consolidated subsidiary (5) (4) (9) (7) ----- ----- ----- ----- Income before taxes 48 34 83 61 Taxes on income 12 6 19 13 ----- ----- ----- ----- Net income $ 36 $ 28 $ 64 $ 48 ===== ===== ===== ===== See notes to consolidated financial statements. 6 Summarized Balance Sheets Financial Services Group Unaudited Second Quarter Year End 2000 1999 ---- ---- (in millions) ASSETS Cash and cash equivalents $ 317 $ 233 Mortgage loans held for sale 173 252 Loans and leases receivable, net of allowance for losses of $129 in 2000 and $113 in 1999 9,967 9,296 Securities available-for-sale 2,123 1,431 Securities held-to-maturity 952 1,061 Other assets 1,039 1,048 ----- ----- TOTAL ASSETS $ 14,571 $ 13,321 ====== ====== LIABILITIES Deposits $ 9,602 9,027 Securities sold under repurchase agreements 367 - Federal Home Loan Bank advances 2,616 2,403 Other borrowings 221 212 Other liabilities 476 430 Stock issued by subsidiary 226 226 ------ ------ TOTAL LIABILITIES 13,508 12,298 SHAREHOLDERS' EQUITY 1,063 1,023 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,571 $ 13,321 ====== ====== See notes to consolidated financial statements. 7 Summarized Statements of Cash Flows Financial Services Group Unaudited First Six Months ---------------- 2000 1999 ---- ---- (in millions) Cash Provided by (Used for) Operations $ 221 $ 232 Cash Provided by (Used for) Investments Maturities and redemptions of securities 255 329 Purchases of securities available-for-sale (769) (4) Loans and leases originated or acquired, net of principal collected (764) (804) Proceeds from sale of loans 135 3 Capital expenditures for property and equipment (18) (13) Acquisitions, net of cash acquired (19) (109) Other 12 (31) ----- ----- (1,168) (629) Cash Provided by (Used for) Financing Net increase in deposits 575 436 Securities sold under repurchase agreements and short-term borrowings, net 580 36 Additions to debt 17 14 Payments of debt (137) (350) Capital contributions from Parent Company 10 239 Dividends paid to Parent Company (30) - Other 16 20 ----- ----- 1,031 395 ----- ----- Net increase (decrease) in cash and cash equivalents 84 (2) Cash and cash equivalents at beginning of period 233 229 ----- ----- Cash and cash equivalents at end of period $ 317 $ 227 ===== ===== See notes to consolidated financial statements. 8 Consolidated Statements of Income Temple-Inland Inc. and Subsidiaries Unaudited Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions, except per share amounts) Revenues Manufacturing $ 721 $ 642 $1,445 $1,234 Financial services 343 262 652 520 ----- ----- ----- ----- 1,064 904 2,097 1,754 Costs and Expenses Manufacturing 645 579 1,291 1,134 Financial services 295 228 569 459 ----- ----- ----- ----- 940 807 1,860 1,593 Operating income 124 97 237 161 Parent company interest (26) (22) (51) (44) Other 2 3 5 6 ----- ----- ----- ----- Income From Continuing Operations Before Taxes 100 78 191 123 Taxes on income 38 30 74 49 ----- ----- ----- ----- Income From Continuing Operations 62 48 117 74 Discontinued operations - (7) - (14) ----- ----- ----- ----- Net Income $ 62 $ 41 $ 117 $ 60 ===== ===== ===== ===== Weighted average shares outstanding: Basic 51.7 55.8 52.3 55.7 ===== ===== ===== ===== Diluted 51.7 56.1 52.3 56.0 ===== ===== ===== ===== Earnings Per Share Basic: Income from continuing operations $ 1.20 $ .88 $ 2.24 $ 1.35 Discontinued operations - (.14) - (.27) ----- ----- ----- ----- Net Income $ 1.20 $ .74 $ 2.24 $ 1.08 ===== ===== ===== ===== Diluted: Income from continuing operations $ 1.20 $ .87 $ 2.24 $ 1.33 Discontinued operations - (.13) - (.26) ----- ----- ----- ----- Net Income $ 1.20 $ .74 $ 2.24 $ 1.07 ===== ===== ===== ===== Dividends paid per share of common stock $ .32 $ .32 $ .64 $ .64 ===== ===== ===== ===== See notes to consolidated financial statements. 9 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries Second Quarter 2000 Unaudited Parent Financial Company Services Consolidated ------- -------- ------------ (in millions) ASSETS Cash and cash equivalents $ 2 $ 317 $ 319 Mortgage loans held for sale - 173 173 Loans and leases receivable, net - 9,967 9,967 Securities available-for-sale - 2,123 2,123 Securities held-to-maturity - 952 952 Trade and other receivables 372 - 350 Inventories 280 - 280 Property and equipment 2,016 151 2,167 Other assets 202 888 1,050 Investment in Financial Services 1,063 - - ------ ------ ------ TOTAL ASSETS $ 3,935 $ 14,571 $ 17,381 ====== ====== ====== LIABILITIES Deposits $ - $ 9,602 $ 9,602 Securities sold under repurchase agreements and Federal Home Loan Bank advances - 2,983 2,983 Other liabilities 360 476 804 Long-term debt 1,329 221 1,550 Deferred income taxes 268 - 238 Post-retirement benefits 143 - 143 Stock issued by subsidiary - 226 226 ----- ------ ------ TOTAL LIABILITIES $ 2,100 $ 13,508 $ 15,546 ===== ====== SHAREHOLDERS' EQUITY Preferred stock - par value $1 per share: authorized 25,000,000 shares; none issued - Common stock - par value $1 per share; authorized 200,000,000 shares; issued 61,389,552 shares including shares held in the treasury 61 Additional paid-in capital 364 Accumulated other comprehensive income (loss) (36) Retained earnings 1,922 ------ 2,311 Cost of shares held in the treasury: 10,402,221 shares (476) ------ TOTAL SHAREHOLDERS' EQUITY 1,835 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,381 ====== See the notes to the consolidated financial statements. 10 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries Year End 1999 Parent Financial Company Services Consolidated ------- -------- ------------ (in millions) ASSETS Cash and cash equivalents $ 51 $ 233 $ 284 Mortgage loans held for sale - 252 252 Loans receivable, net - 9,296 9,296 Securities available-for-sale - 1,431 1,431 Securities held-to-maturity - 1,061 1,061 Trade and other receivables 328 - 319 Inventories 287 - 287 Property and equipment 2,052 145 2,197 Other assets 200 903 1,059 Investment in Financial Services 1,023 - - ------ ------ ------ TOTAL ASSETS $ 3,941 $ 13,321 $ 16,186 ====== ====== ====== LIABILITIES Deposits $ - $ 9,027 $ 9,027 Federal Home Loan Bank advances - 2,403 2,403 Other liabilities 392 430 799 Long-term debt 1,253 212 1,465 Deferred income taxes 226 - 196 Postretirement benefits 143 - 143 Stock issued by subsidiary - 226 226 ------ ------ ------ TOTAL LIABILITIES $ 2,014 $ 12,298 $ 14,259 ====== ====== SHAREHOLDERS' EQUITY Preferred stock - par value $1 per share: authorized 25,000,000 shares; none issued - Common stock - par value $1 per share; authorized 200,000,000 shares; issued 61,389,552 shares including shares held in the treasury 61 Additional paid-in capital 364 Accumulated other comprehensive income (loss) (31) Retained earnings 1,838 ------ 2,232 Cost of shares held in the treasury: 7,177,592 shares (305) ------ TOTAL SHAREHOLDERS' EQUITY 1,927 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,186 ====== See the notes to the consolidated financial statements. 11 Consolidated Statements of Cash Flows Temple-Inland Inc. and Subsidiaries Unaudited First Six Months ---------------- 2000 1999 ---- ---- (in millions) CASH PROVIDED (USED FOR) OPERATIONS $ 330 $ 285 CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and (120) (104) equipment Proceeds from sale of property and equipment 12 13 Maturities of securities available-for-sale 148 127 Maturities and redemptions of securities held-to-maturity 107 202 Purchases of securities available-for-sale (769) (4) Loans and leases originated or acquired, net of principal collected (764) (804) Acquisitions, net of cash acquired, and joint ventures (22) (113) Proceeds from sales of loans 135 3 Other 5 (31) ----- ----- (1,268) (711) CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 143 322 Payments of debt (137) (374) Securities sold under repurchase agreements and short-term borrowings, net 580 36 Purchase of stock for treasury (172) - Cash dividends paid to shareholders (34) (36) Net increase in deposits 575 436 Other 18 31 ----- ----- 973 415 ----- ----- Net increase (decrease) in cash and cash equivalents 35 (11) Cash and cash equivalents at beginning of period 284 244 ----- ----- Cash and cash equivalents at end of period $ 319 $ 233 ===== ===== See the notes to the consolidated financial statements. 12 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the financial statements and footnotes included in, or incorporated into, the Annual Report on Form 10-K of Temple-Inland Inc. (the "company") for the fiscal year ended January 1, 2000. The consolidated financial statements include the accounts of the company and its manufacturing and financial services subsidiaries. The consolidated net assets invested in financial services activities are subject, in varying degrees, to regulatory rules and restrictions. Accordingly, included as an integral part of the consolidated financial statements are separate summarized financial statements for the company's manufacturing and financial services groups. The Parent Company (Temple-Inland Inc.) summarized financial statements include the accounts of the company and its manufacturing subsidiaries. Temple Inland Financial Services Group is reflected in the summarized financial statements on the equity basis, except that the related earnings are presented before tax to be consistent with the consolidated financial statements. The Financial Services Group summarized financial statements include savings bank, mortgage banking, real estate and insurance brokerage operations. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform with current year's classification. Note B - EARNINGS PER SHARE Denominators used in computing earnings per share are as follows: Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Denominator for basic earnings per share - weighted average shares outstanding 51.7 55.8 52.3 55.7 Dilutive effect of stock options - .3 - .3 ----- ----- ----- ----- Denominator for diluted earnings per share 51.7 56.1 52.3 56.0 ===== ===== ===== ===== 13 NOTE C - COMPREHENSIVE INCOME Comprehensive income is as follows: Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Net income $ 62 $ 41 $ 117 $ 60 Other comprehensive income, net of income taxes: Unrealized gains (losses) on available-for-sale securities - (8) (4) (9) Foreign currency translation adjustments (2) - (1) 1 ---- ---- ---- ---- Other comprehensive income (2) (8) (5) (8) ---- ---- ---- ---- Comprehensive income $ 60 $ 33 $ 112 $ 52 ==== ==== ===== ===== NOTE D - ACQUISITIONS, JOINT VENTURES AND DISCONTINUED OPERATIONS The company has entered into a joint venture to produce lightweight gypsum facing paper. The joint venture has been modifying the Company's 285,000-ton corrugating medium mill in Newport, Indiana, to add production capacity for this gypsum facing paper. The conversion is expected to be completed during the third quarter of 2000. For a period of twelve months after the conversion, the Company will purchase, at market rates, all of the joint venture's production of corrugating medium. Near the end of the second quarter of 2000, the Company transferred ownership of the mill and associated debt of $50 million to the joint venture as part of its agreement to maintain its 50 percent interest in the joint venture. The fair value of the assets contributed exceeded their net carrying amount. This difference will be recognized in earnings over the life of the venture. On March 1, 2000, the Financial Services Group acquired American Finance Group, Inc. (AFG) for approximately $32 million cash, of which $29 million was paid at closing with the balance subject to final adjustment. AFG provides commercial and industrial equipment leasing and financing. AFG had total assets of $161 million and total liabilities of $132 million of which $128 million were repaid after acquisition. Pro forma results of operations assuming this acquisition took place at the beginning of 2000 would not be materially different from those reported. 14 During the fourth quarter of 1999, the company discontinued its bleached paperboard operation. Accordingly, the results of the bleached paperboard operation have been classified as discontinued operations, and prior periods have been restated. In connection with the sale of the bleached paperboard mill in December 1999, the company has agreed, subject to certain limitations, to indemnify the purchaser from certain liabilities and contingencies associated with the company's ownership and operations of the mill. The company does not believe that the resolution of these matters will have a material adverse effect on its consolidated operations or financial position. NOTE E - SEGMENT INFORMATION The company has three reportable segments: Paper, Building Products and Financial Services. Building Financial Corporate Paper Products Services and Other Total ----- -------- -------- --------- ------ (in millions) For the second quarter 2000 Revenues from external customers $ 511 $ 210 $ 343 $ - $ 1,064 Operating income 56 28 48 (8) 124 Financial Services, net interest income - - 98 - 98 Depreciation, depletion and amortization 34 14 9 2 59 ----------------------------------------------------------------------------- For the first six months of 2000 Revenues from external customers $ 1,012 $ 433 $ 652 $ - $ 2,097 Operating income 107 63 83 (16) 237 Financial Services, net interest income - - 188 - 188 Depreciation, depletion and amortization 67 31 15 3 116 ----------------------------------------------------------------------------- For the second quarter 1999 Revenues from external customers $ 444 $ 198 $ 262 $ - $ 904 Operating income 22 49 34 (8) 97 Financial Services, net interest income - - 68 - 68 Depreciation, depletion and amortization 34 14 5 1 54 ----------------------------------------------------------------------------- For the first six months of 1999 Revenues from external customers $ 864 $ 370 $ 520 $ - $ 1,754 Operating income 32 83 61 (15) 161 Financial Services, net interest income - - 133 - 133 Depreciation, depletion and amortization 68 28 10 2 108 ----------------------------------------------------------------------------- 15 NOTE F - CONTINGENCIES There are pending against the company and its subsidiaries lawsuits, claims and environmental matters arising in the regular course of business. In addition, the Internal Revenue Service is currently examining the company's consolidated income tax returns for the years 1993 through 1996. The company does not believe that the resolution of these matters will have a material adverse effect on its consolidated operations or financial position. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the quarter and for the first six months ended June 2000 and 1999. Summary Consolidated revenues for the second quarter 2000 were $1,064 million, up 18 percent over second quarter 1999. Income from continuing operations for the second quarter 2000 was $62 million or $1.20 per diluted share compared with $48 million or $.87 per diluted share for the second quarter 1999. Consolidated revenues for the first six months 2000 were $2,097 million, up 20 percent over the first six months 1999. Income from continuing operations for the first six months 2000 was $117 million, or $2.24 per diluted share compared with $74 million or $1.33 per diluted share for the first six months 1999. Business Segments The Company manages its operations through three business segments: Paper, Building Products, and Financial Services. A summary of the results of operations by business segment follows. Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Revenues Paper $ 511 $ 444 $ 1,012 $ 864 Building Products 210 198 433 370 Financial Services 343 262 652 520 ----- ----- ----- ----- Total revenues $1,064 $ 904 $ 2,097 $1,754 ====== ===== ====== ===== Income Paper $ 56 $ 22 $ 107 $ 32 Building Products 28 49 63 83 Financial Services 48 34 83 61 ----- ----- ----- ----- Segment operating income 132 105 253 176 Corporate expense (8) (8) (16) (15) Parent Company interest (26) (22) (51) (44) Other 2 3 5 6 ----- ----- ----- ----- Income from continuing operations before taxes 100 78 191 123 Taxes on income 38 30 74 49 ----- ----- ----- ----- Income from continuing operations 62 48 117 74 Discontinued operations - (7) - (14) ----- ----- ----- ----- Net income $ 62 $ 41 $ 117 $ 60 ===== ===== ===== ===== Each of these business segments is affected by the factors of supply and demand and changes in domestic and global economic conditions, including changes in interest rates, new housing starts, and home repair and remodeling activities. Unless otherwise noted, increases or decreases refer to second quarter 2000 amounts compared with second quarter 1999 amounts and first six months 2000 amounts compared with first six months 1999 amounts. The 1999 amounts have been restated to reflect the 17 discontinued bleached paperboard operation, which was sold in December 1999. For the second quarter 2000 Paper The Paper Group revenues were $511 million, up 15 percent. Average domestic box prices were up 19 percent while box shipments were 564,000 tons, down two percent, both due in part to an upgrading and realignment of the customer base as part of the Paper Group's ongoing revenue enhancement initiatives. Average linerboard prices were up 27 percent. Mill production was 629,000 tons, down six percent. The box plants used 92 percent of the mill containerboard production; the remainder of the mill production was sold in the domestic and export markets. As compared with the first quarter 2000, Paper Group revenues were up two percent with average box prices up six percent, box shipments down less than one percent, and linerboard prices up ten percent. Production, distribution, and administrative costs were $455 million, up eight percent due mainly to higher delivered costs for old corrugated containers (OCC), which accounts for approximately 45 percent of the Paper Group's fiber requirements, and to higher fuel prices. OCC costs were up 85 percent or $63 per ton. OCC costs continued to rise in the first two months of the quarter, but declined in June and have continued to decline into the third quarter. At quarter-end, OCC costs were $139 per ton compared to $112 per ton at the end of the first quarter 2000. During the quarter, production was curtailed by 43,000 tons due to market, maintenance, and operational factors. The Paper Group may curtail more production in future quarters for these reasons. The Paper Group has entered into a joint venture to convert its 285,000 ton corrugating medium mill in Newport, Indiana, to produce lightweight gypsum facing paper. The conversion is expected to be completed during the third quarter of 2000. For a period of twelve months after this conversion, the Paper Group has agreed to purchase at market rates all of the joint venture's corrugating medium production. Operating income was $56 million up 2.5 times due to the factors discussed above. Building Products The Building Products Group revenues were $210 million, up six percent. Lower lumber prices, down 16 percent, and gypsum prices, down 14 percent, offset higher prices for particleboard and MDF, both up nine percent. Particleboard and MDF shipments were up due to the operations of the Mt. Jewett facilities in 2000. Lumber shipments were up due to the reopening of the Diboll sawmill in mid-1999. Solid wood revenues were up due to deliveries under the long-term fiber supply agreement entered into in connection with the sale of the bleached paperboard mill in December 1999. As compared with the first quarter 2000, Building Products Group revenues were down six percent due in part to lower lumber and gypsum prices, down seven percent and 13 percent, respectively, 18 and lower lumber, particleboard, and MDF shipments. These trends of lower prices and shipments will likely continue during the third quarter. Production, distribution, and administrative costs were $182 million, up 22 percent due mainly to new manufacturing facilities, higher fuel costs, and higher production costs in the fiber cement joint venture. The Building Products Group is currently negotiating to acquire the interests of its partner in the fiber cement joint venture while continuing its efforts to achieve profitability and assessing its alternatives for this operation. During the quarter, production was curtailed at several manufacturing and production facilities due to market conditions. The Building Products Group may curtail more production in future quarters for this reason. Operating income was $28 million down 43 percent due to the factors discussed above. Financial Services The Financial Services Group revenues, which consist of interest and non-interest income, were $343 million, up 31 percent. Interest income was $270 million, up 38 percent and net interest income was $98 million, up 44 percent. These increases were mainly due to the growth and change in the mix of the loan portfolio. The average loan portfolio was $11.1 billion, up 20 percent. Of the increase, 60 percent was due to the acquisitions of Hemet Federal Savings and Loan Association and Fidelity Funding Inc. in June 1999 and American Finance Group, Inc. in March 2000. The remainder of the increase was due to internally generated growth principally in construction and development lending and commercial and business lending activities. The provision for loan losses was $10 million, up $2 million due mainly to the growth and change in the mix of the loan portfolio. At quarter end, the allowance for losses was $129 million compared with $111 million at the end of the second quarter 1999 and with $119 million at the end of the first quarter 2000. Non-interest income was $73 million, up nine percent due in part to higher loan fees offset by a decline in mortgage loan originations. Non-interest expense was $108 million, up 21 percent, mainly due to the acquired operations. At quarter end, the mortgage-servicing portfolio totaled $21 billion, down six percent from year-end 1999. As compared with the first quarter 2000, Financial Services revenues were up 11 percent with net interest income up nine percent, non-interest income up 18 percent, and non-interest expenses up ten percent. Operating income was $48 million, up 41 percent due to the factors discussed above. 19 Corporate, Interest, and Other Parent Company interest expense was up $4 million due to higher interest rates and higher average outstanding debt during the quarter. Income Taxes The effective tax rate was 38 percent compared to 39.5 percent in the first quarter 2000. This reflects the effect of adjusting the estimated annual effective tax rate from 39.5 percent to 39 percent based on current expectations of income and expenses for the year 2000. Average Shares Outstanding Average diluted shares outstanding were 51.7 million, down eight percent due mainly to the effects of the stock repurchase program started during the fourth quarter 1999. For the first six months 2000 Paper The Paper Group revenues were $1,012 million, up 17 percent. Average domestic box prices were up 19 percent while box shipments were 1,131 thousand tons, down two percent, both due in part to an upgrading and realignment of the customer base as part of the Paper Group's ongoing revenue enhancement initiatives. Average linerboard prices were up 27 percent. Mill production was 1,279 thousand tons, down five percent. The box plants used 89 percent of the mill containerboard production; the remainder of the mill production was sold in the domestic and export markets. Production, distribution, and administrative costs were $905 million, up nine percent due mainly to higher delivered costs for OCC, production issues, and higher fuel prices. OCC costs were up 71 percent or $52 per ton. During the first six months, production was curtailed by 85,000 tons due to market, maintenance, and operational factors. The Paper Group may curtail production in the future for these reasons. Operating income was $107 million up three times due to the factors discussed above. Building Products The Building Products Group revenues were $433 million, up 17 percent. Lower lumber prices, down nine percent, and gypsum prices, down three percent, offset higher prices for particleboard, up ten percent, and MDF, up 12 percent. Particleboard and MDF shipments were up due to the operations of the Mt. Jewett facilities. Lumber shipments were up due to the reopening of the Diboll sawmill in mid 1999. Solid wood revenues were up due to deliveries under the long-term fiber supply agreement entered into in connection with the sale of the bleached paperboard mill in December 1999. 20 Production, distribution, and administrative costs were $370 million, up 29 percent due mainly to additional manufacturing facilities, higher fuel costs, and higher production costs in the fiber cement joint venture. During the first six months of 2000, the Building Products Group began recognizing all of the fiber cement joint venture's operating losses, which totaled $10 million for the period. During the first six months, production was curtailed at several manufacturing and production facilities due to market conditions. The Building Products Group may curtail production in the future for this reason. Operating income was $63 million, down $20 million due to the factors discussed above. Financial Services The Financial Services Group revenues were $652 million up 25 percent. Interest income was $517 million, up 33 percent, and net interest income was $188 million, up 41 percent. These increases were mainly due to the growth and change in the mix of the loan portfolio. The average loan portfolio was $11 billion, up 20 percent. Of the increase, 60 percent was due to the acquisitions of Hemet Federal Savings and Loan Association and Fidelity Funding Inc. in June 1999 and American Finance Group, Inc. in March 2000. The remainder of the increase was due to internally generated growth principally in construction and development lending and commercial and business lending activities. The provision for losses was $25 million, up $7 million, due mainly to the growth and change in the mix of the loan portfolio. Non-interest income was $163 million, up 42 percent due mainly to higher loan fees offset by a decline in mortgage loan originations. Non-interest expense was $206 million, up 16 percent, mainly due to the acquired operations. Operating income was $83 million, up 36 percent due to the factors discussed above. Corporate, Interest, and Other Parent Company interest expense was up $7 million due to higher interest rates and higher average outstanding debt during this period. Income Taxes The effective tax rate was 39 percent compared to 40 percent in 1999. The effective tax rate is based on current expectations of income and expenses for the year 2000. The effective tax rate includes federal and state income taxes and the effects of non- deductible goodwill amortization and other items. 21 Average Shares Outstanding Average diluted shares outstanding were 52.3 million, down seven percent due mainly to the effects of the stock repurchase program started during the fourth quarter 1999. Capital Resources and Liquidity For the first six months ended June 2000 The consolidated net assets invested in the Financial Services Group are subject, in varying degrees, to regulatory rules and regulations. Accordingly, Parent Company and Financial Services capital resources and liquidity are discussed separately. Parent Company Operating Activities Cash from operations was $109 million, up 106 percent. The increase was due to greater earnings offset in part by increased working capital needs. Depreciation and amortization was $101 million and is expected to approximate $205 million for the year 2000. Investing Activities Capital expenditures were $102 million and are expected to approximate $240 million for the year 2000. A $30 million dividend was received from Financial Services in the second quarter while a $10 million capital contribution was made to Financial Services in the first quarter. Financing Activities In the fourth quarter 1999, the Board of Directors authorized the repurchase of up to 6.0 million shares. During the first six months 2000, 3.3 million shares were repurchased at a cost of $172 million. By the end of the second quarter, an aggregate of 5.0 million shares had been repurchased since the inception of this program at a cost of $272 million. It is likely that this repurchase authorization will be completed during the third quarter 2000. In August 2000, the Board of Directors authorized the repurchase of an additional 2.5 million shares. Dividends paid were $34 million or $.32 per share per quarter. Debt increased $126 million. As required by its joint venture agreement, the company contributed its Newport, Indiana, medium mill and associated debt of $50 million to the venture to maintain its 50 percent ownership interest. Cash Equivalents At year-end 1999, $50 million of the proceeds from the sale of the bleached paperboard operations were temporarily invested in cash equivalents. These were used during the first six months in investing and financing activities. Other The Parent Company has sufficient liquidity and capital resources to meet its anticipated needs. 22 Financial Services The principal sources of cash for the Financial Services Group are operating cash flows, deposits, and borrowings. The Financial Services Group uses these funds to invest in earning assets, generally loans and securities. Operating Activities Cash provided by operations was $221 million, down five percent. The increase in earnings and a reduction in mortgage servicing activities were offset by a decrease in originations of mortgage loans held for sale. Investing Activities Loans and securities, increased $1,143 million and was in line with expectations. Capital expenditures were $18 million and cash paid for acquisitions was $19 million. Financing Activities Deposits increased $575 million and borrowings increased $460 million. Dividends, net of capital contributions paid to the Parent Company totaled $20 million. Cash Equivalents Cash equivalents increased $84 million to $317 million. Other The Financial Services Group has sufficient liquidity and capital resources to meet its anticipated needs. At the end of the second quarter, the savings bank exceeded all applicable regulatory capital requirements. The Parent Company expects to maintain the savings bank capital at a level that exceeds the minimum required for designation as "well capitalized." From time to time, the Parent Company may make capital contributions to the savings bank or receive dividends from the savings bank. During the first six months 2000, the Parent Company contributed $10 million to the savings bank and received $30 million in dividends from the savings bank. Selected financial and regulatory capital data for the savings bank follows: June Year End 2000 1999 ------ ------ (in millions of dollars) Balance sheet data Total assets $14,130 $12,892 Total deposits 9,912 9,329 Shareholders' equity 912 857 Savings Bank Regulatory Minimum Regulatory capital ratios Tangible capital 7.8% 2.0% Leverage capital 7.8% 4.0% Risk-based capital 10.2% 8.0% 23 Statistical and other data Second Quarter First Six Months -------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net revenues (in millions) Paper $ 511 $ 444 $ 1,012 $ 864 Building products: (a) Pine lumber $ 72 $ 66 $ 156 $ 116 Plywood 15 18 30 36 Particleboard 58 42 115 84 Medium density fiberboard 22 14 44 25 Gypsum wallboard 25 38 54 72 Fiberboard 18 20 34 37 ---- ---- ---- ---- Total Building products $ 210 $ 198 $ 433 $ 370 ==== ==== ==== ==== Unit sales Paper (in thousands tons) (b) 685 720 1,398 1,424 Building products: (a) Pine lumber - MBF 167 157 345 289 Plywood - MSF (3/8" basis) 70 79 141 159 Particleboard - MSF (3/4" basis) 178 141 359 239 Medium density fiberboard-MSF (3/4" basis) 68 47 137 88 Gypsum wallboard - MSF 174 232 352 457 Fiberboard - MSF (1/2" basis) 106 125 203 231 (a) Net revenues and shipments do not include joint venture operations (b) Includes boxes sold and open market sales of linerboard Forward-Looking Statements Statements that are not historical are forward-looking statements that involve risks and uncertainties. The actual results achieved may differ significantly from those discussed. These differences can be caused by such matters as general economic, market, or business conditions; opportunities or lack thereof that may or may not be pursued; availability and price of raw materials; competition; changes in laws or regulations; and other factors, many of which are beyond the control of the Company. 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk: The company is subject to interest rate risk from the utilization of financial instruments such as adjustable-rate debt and other borrowings as well as the lending and deposit gathering activities of the Financial Services Group. The following table illustrates the estimated effect on pre-tax income of immediate, parallel, and sustained shifts in interest rates for the subsequent 12-month period at the end of the second quarter of 2000, with comparative information at year-end 1999: Increase (Decrease) Income Before Taxes --------------------------- (in millions) Second Quarter Year End Change in Interest Rates 2000 1999 ------------------------ --------------------------- +2% $ 1 $ (1) +1% 5 - 0% - - -1% (3) (1) -2% (18) (16) The change in exposure to interest rate risk from year-end 1999 is primarily due to increases in the Parent Company's adjustable- rate debt obligations, and growth in the Financial Services Group commercial loan and mortgage backed securities portfolios, funded by short-term borrowings and growth in deposits. Additionally, the fair value of the Financial Services Group's mortgage servicing rights is also affected by changes in interest rates. The company estimates that a one percent decline in interest rates from quarter-end levels would decrease the fair value of the mortgage servicing rights by approximately $32 million. Foreign Currency Risk: The company's exposure to foreign currency fluctuations on its financial instruments is not material because most of these instruments are denominated in U.S. dollars. Commodity Price Risk: The company has no significant financial instruments subject to commodity price risks. 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note F to Notes to Consolidated Financial Statements in Part I of this report is incorporated by reference thereto. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Regulation S-K Exhibit Number (27) Financial Data Schedules (b) Reports on Form 8-K. During the three months ended July 1, 2000, the Company did not file a current report on Form 8-K. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEMPLE-INLAND INC. (Registrant) Dated: August 15, 2000 By /s/ Louis R. Brill ----------------------------- Louis R. Brill Vice President and Chief Accounting Officer 27 EXHIBIT INDEX The following is an index of the exhibits filed herewith. The page reference set forth opposite the description of exhibits included in such index refer to the pages under the sequential numbering system prescribed by Rule 0-3(b) under the Securities Exchange Act of 1934. Regulation S-K Exhibit Sequential Number Page Number (27) Financial Data Schedules 28