-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/9VjOsOxeEvAxyxj0VgKU5YnSX5qGvkVbEwJBeVBPGXt2jlY7U2APwn1pyYRSMj D8RCwKXywpXmrv3V61b0pQ== /in/edgar/work/0000731939-00-500010/0000731939-00-500010.txt : 20001114 0000731939-00-500010.hdr.sgml : 20001114 ACCESSION NUMBER: 0000731939-00-500010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLE INLAND INC CENTRAL INDEX KEY: 0000731939 STANDARD INDUSTRIAL CLASSIFICATION: [2631 ] IRS NUMBER: 751903917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08634 FILM NUMBER: 759100 BUSINESS ADDRESS: STREET 1: 303 S TEMPLE DR STREET 2: P.O. DRAWER N CITY: DIBOLL STATE: TX ZIP: 75941 BUSINESS PHONE: 9368295511 MAIL ADDRESS: STREET 1: 303 SOUTH TEMPLE DR CITY: DIBOLL STATE: TX ZIP: 75941 10-Q 1 r10q-93000.txt THIRD 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 September 30,2000 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 September 30, 2000 Common Stock (par value $1.00 per share) 49,172,708 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 Third Quarter First Nine Months -------------- ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Revenues Net revenues $ 702 $ 668 $ 2,147 $ 1,902 Financial services earnings 50 41 133 102 ----- ---- ----- ----- 752 709 2,280 2,004 Costs and Expenses Cost of sales 595 525 1,751 1,530 Selling and administrative 48 68 183 197 Special charge 15 - 15 - ----- ---- ----- ----- 658 593 1,949 1,727 Operating Income 94 116 331 277 Interest expense (26) (25) (77) (69) Other 3 5 8 11 ----- ---- ----- ----- Income From Continuing Operations Before Taxes 71 96 262 219 Taxes on income 28 36 102 85 ----- ---- ----- ----- Income From Continuing Operations 43 60 160 134 Discontinued operation - (80) - (94) ----- ---- ----- ----- Net Income $ 43 $ (20) $ 160 $ 40 ===== ==== ===== ===== See notes to consolidated financial statements. 3 Summarized Balance Sheets Parent Company (Temple-Inland Inc.) Unaudited Third Quarter Year End End 2000 1999 ------ ------ (in millions) ASSETS Current Assets Cash and cash equivalents $ 3 $ 51 Receivables, net of allowances of $8 in 2000 and $9 in 1999 358 328 Inventories: Work in process and finished goods 75 71 Raw materials 195 216 ----- ----- 270 287 Prepaid expenses 21 16 ----- ----- Total current assets 652 682 Investment in Temple-Inland Financial Services 1,095 1,023 Property and Equipment 3,328 3,309 Less accumulated depreciation (1,805) (1,759) ----- ----- Total property and equipment 1,523 1,550 Timber and timberlands, net of depletion 507 502 Other Assets 216 184 ----- ----- Total Assets $ 3,993 $ 3,941 ===== ===== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 151 $ 156 Other current liabilities 197 225 ----- ----- Total current liabilities 348 381 Long-Term Debt 1,417 1,253 Other Long-Term Liabilities 431 380 Shareholders' Equity 1,797 1,927 ----- ----- Total Liabilities and Shareholders' $ 3,993 $ 3,941 Equity ===== ===== See notes to consolidated financial statements. 4 Summarized Statements of Cash Flows Parent Company (Temple-Inland Inc.) Unaudited First Nine Months 2000 1999 ------ ------ (in millions) Cash Provided by (Used for) Operations $ 213 $ 164 Cash Provided by (Used for) Investments Capital expenditures for property and equipment (175) (138) Capital contributions to financial services (10) (279) Dividends from financial services 50 30 Acquisitions, net of cash acquired, and joint ventures (3) (6) Other 12 29 ----- ----- (126) (364) Cash Provided by (Used for) Financing Additions to debt 168 315 Payments of debt (6) (86) Purchase of stock for treasury (250) - Cash dividends paid to shareholders (49) (54) Other 2 12 ----- ----- (135) 187 ----- ----- Net decrease in cash and cash equivalents (48) (13) Cash and cash equivalents at beginning of 51 15 period ----- ----- Cash and cash equivalents end of period $ 3 $ 2 ===== ===== See notes to consolidated financial statements. 5 Summarized Statements of Income Financial Services Group Unaudited First Nine Third Quarter Months 2000 1999 2000 1999 ---- ---- ---- ---- (in millions) Interest Income Loans receivable and mortgage loans held for sale $ 224 $ 187 $ 639 $ 513 Securities and other 54 33 156 96 ---- ---- ---- ---- Total interest income 278 220 795 609 Interest Expense Deposits 128 100 357 273 Borrowed funds 52 39 152 122 ---- ---- ---- ---- Total interest expense 180 139 509 395 Net interest income 98 81 286 214 Provision for loan losses (7) (6) (32) (24) ---- ---- ---- ---- Net interest income after provision for loan losses 91 75 254 190 Noninterest income 69 67 204 198 Noninterest expense Compensation and benefits 45 42 130 125 Other 61 55 182 150 ---- ---- ---- ---- Total noninterest expense 106 97 312 275 Income before taxes and minority interest 54 45 146 113 Minority interest in income of consolidated subsidiary (4) (4) (13) (11) ---- ---- ---- ---- Income before taxes 50 41 133 102 Taxes on income 9 (2) 28 11 ---- ---- ---- ---- Net income $ 41 $ 43 $ 105 $ 91 ==== ==== ==== ==== See notes to consolidated financial statements. 6 Summarized Balance Sheets Financial Services Group Unaudited Third Quarter Year End End 2000 1999 ---- ---- (in millions) ASSETS Cash and cash equivalents $ 325 $ 233 Mortgage loans held for sale 221 252 Loans and leases receivable, net of allowance for losses of $124 in 2000 and $113 in 1999 10,199 9,296 Securities available-for-sale 2,037 1,431 Securities held-to-maturity 908 1,061 Other assets 1,066 1,048 ------ ------ TOTAL ASSETS $ 14,756 $ 13,321 ====== ====== LIABILITIES Deposits $ 9,744 $ 9,027 Securities sold under repurchase agreements 898 - Federal Home Loan Bank advances 2,094 2,403 Other borrowings 213 212 Other liabilities 486 430 Stock issued by subsidiary 226 226 ------ ------ TOTAL LIABILITIES 13,661 12,298 SHAREHOLDERS' EQUITY 1,095 1,023 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,756 $ 13,321 ====== ====== See notes to consolidated financial statements. 7 Summarized Statements of Cash Flows Financial Services Group Unaudited First Nine Months 2000 1999 ---- ---- (in millions) Cash Provided by (Used for) Operations $ 244 $ 375 Cash Provided by (Used for) Investments Maturities and redemptions of securities 381 531 Purchases of securities available-for-sale (813) (168) Proceeds from sale of securities available-for-sale - 144 Loans and leases originated or acquired, net of principal collected (909) (1,227) Proceeds from sale of loans 104 233 Capital expenditures for property and equipment (77) (19) Acquisitions, net of cash acquired (19) (109) Other 11 (24) ----- ----- (1,322) (639) Cash Provided by (Used for) Financing Net increase in deposits 717 679 Securities sold under repurchase agreements and short-term borrowings, net 599 100 Additions to debt 23 21 Payments of debt (162) (758) Capital contributions from Parent Company 10 279 Dividends paid to Parent Company (50) (30) Other 33 58 ----- ----- 1,170 349 ----- ----- Net increase in cash and cash equivalents 92 85 Cash and cash equivalents at beginning of period 233 229 ----- ----- Cash and cash equivalents at end of period $ 325 $ 314 ===== ===== See notes to consolidated financial statements. 8 Consolidated Statements of Income Temple-Inland Inc. and Subsidiaries Unaudited Third Quarter First Nine Months 2000 1999 2000 1999 ---- ---- ---- ---- (in millions, except per share amounts) Revenues Manufacturing $ 702 $ 668 $ 2,147 $ 1,902 Financial services 347 287 999 807 ----- ----- ----- ----- 1,049 955 3,146 2,709 Costs and Expenses Manufacturing 643 593 1,934 1,727 Special charge 15 - 15 - Financial services 297 246 866 705 ----- ----- ----- ----- 955 839 2,815 2,432 Operating income 94 116 331 277 Parent company interest (26) (25) (77) (69) Other 3 5 8 11 ----- ----- ----- ----- Income from Continuing Operations Before Taxes 71 96 262 219 Taxes on income 28 36 102 85 ----- ----- ----- ----- Income From Continuing Operations 43 60 160 134 Discontinued operations - (80) - (94) ----- ----- ----- ----- Net Income $ 43 $ (20)$ 160 $ 40 ===== ===== ===== ===== Weighted average shares outstanding: Basic 49.7 55.9 51.4 55.8 ===== ===== ===== ===== Diluted 49.7 56.1 51.4 56.0 ===== ===== ===== ===== Earnings Per Share Basic: Income from continuing operations $ .87 $ 1.07 $ 3.11 $ 2.42 Discontinued operation - (1.43) - (1.70) ----- ----- ----- ----- Net Income $ .87 $ (.36)$ 3.11 $ .72 ===== ===== ===== ===== Diluted: Income from continuing operations $ .87 $ 1.07 $ 3.11 $ 2.41 Discontinued operation - (1.43) - (1.69) ----- ----- ----- ----- Net Income $ .87 $ (.36)$ 3.11 $ .72 ===== ===== ===== ===== Dividends paid per share of common stock $ .32 $ .32 $ .96 $ .96 ===== ===== ===== ===== See notes to consolidated financial statements. 9 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries Third Quarter End 2000 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 3 $ 325 $ 328 Mortgage loans held for sale - 221 221 Loans and leases receivable, net - 10,199 10,199 Securities available-for-sale - 2,037 2,037 Securities held-to-maturity - 908 908 Trade and other receivables 358 - 342 Inventories 270 - 270 Property and equipment 2,030 156 2,186 Other assets 237 910 1,113 Investment in Financial Services 1,095 - - ----- ----- ----- TOTAL ASSETS $ 3,993 $ 14,756 $ 17,604 ===== ====== ====== LIABILITIES Deposits $ - $ 9,744 $ 9,744 Securities sold under repurchase agreements and Federal Home Loan Bank advances - 2,992 2,992 Other liabilities 361 486 822 Long-term debt 1,417 213 1,630 Deferred income taxes 276 - 251 Postretirement benefits 142 - 142 Stock issued by subsidiary - 226 226 ----- ------ ------ TOTAL LIABILITIES $ 2,196 $ 13,661 $ 15,807 ===== ====== 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) (24) Retained earnings 1,949 ------ 2,350 Cost of shares held in the treasury: 12,216,844 shares (553) ------ TOTAL SHAREHOLDERS' EQUITY 1,797 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,604 ====== 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 Nine Months 2000 1999 (in millions) CASH PROVIDED (USED FOR) OPERATIONS $ 457 $ 539 CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and equipment (252) (157) Proceeds from sale of property and equipment 16 18 Maturities of securities available-for-sale 232 245 Maturities and redemptions of securities held-to-maturity 149 286 Purchases of securities available-for-sale (813) (168) Proceeds from the sale of securities available-for-sale - 144 Loans and leases originated or acquired, net of principal collected (909) (1,227) Acquisitions, net of cash acquired, and joint ventures (22) (115) Proceeds from sales of loans 104 233 Other 7 (13) ------ ------ (1,488) (754) CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 191 336 Payments of debt (168) (844) Securities sold under repurchase agreements and short-term borrowings, net 599 100 Purchase of stock for treasury (250) - Cash dividends paid to shareholders (49) (54) Net increase in deposits 717 679 Other 35 70 ------ ------ 1,075 287 ------ ------ Net increase in cash and cash equivalents 44 72 Cash and cash equivalents at beginning of period 284 244 ------ ------ Cash and cash equivalents at end of period $ 328 $ 316 ====== ====== 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: Third Quarter First Nine Months 2000 1999 2000 1999 (in millions) Denominator for basic earnings per share - weighted average shares outstanding 49.7 55.9 51.4 55.8 Dilutive effect of stock options - .2 - .2 ---- ---- ---- ---- Denominator for diluted earnings per share 49.7 56.1 51.4 56.0 ==== ==== ==== ==== 13 NOTE C - COMPREHENSIVE INCOME Comprehensive income is as follows: Third Quarter First Nine Months 2000 1999 2000 1999 (in millions) Net income $ 43 $(20) $ 160 $ 40 Other comprehensive income, net of income taxes: Unrealized gains (losses) on available-for-sale securities 10 (3) 6 (12) Foreign currency translation adjustments 1 - - 1 --- --- --- --- Other comprehensive income 11 (3) 6 (11) --- --- --- --- Comprehensive income $ 54 $(23) $ 166 $ 29 === === === === NOTE D - ACQUISITIONS, JOINT VENTURES AND DISCONTINUED OPERATIONS The company is in joint venture that produces lightweight gypsum facing paper. Near the end of the second quarter of 2000, the company transferred ownership of its corrugating medium mill in Newport, Indiana, 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. In the third quarter of 2000, the joint venture completed converting the corrugated medium mill to enable the mill to produce lightweight gypsum facing paper as well as corrugated medium. For a period of twelve months after the transfer, the company is obligated to purchase, at market rates, all of the corrugating medium produced by the venture that meets the company's specifications. During the third quarter of 2000, the company completed its assessment of its fiber cement joint venture and decided to exit this business by assuming control of the fiber cement joint venture and leasing most of the venture's assets to a third party. As a result, the company obtained control over $53 million of assets, which were subject to $53 million of liabilities and recorded a $15 million special charge that includes $11 million for assets excluded from the lease agreement that will be disposed of and $4 million of other costs. Following a six-month rental ramp-up period, the lease agreement provides for payment of $3.4 million per year over the balance of the 19.5- year lease term. 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 14 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. 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 agreed, subject to certain limitations, to indemnify the purchaser from certain liabilities and contingencies associated with the company's ownership and operation 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 third quarter 2000 Revenues from external customers $ 512 $ 190 $ 347 $ - $ 1,049 Operating income 57 10 50 (23)a 94 Financial Services, net interest income - - 98 - 98 Depreciation, depletion and amortization 33 15 8 2 58 - --------------------------------------------------------------------------- For the first nine months of 2000 Revenues from external customers $ 1,524 $ 623 $ 999 $ - $ 3,146 Operating income 164 73 133 (39)a 331 Financial Services, net interest income - - 286 - 286 Depreciation, depletion and amortization 100 46 23 5 174 - --------------------------------------------------------------------------- For the third quarter 1999 Revenues from external customers $ 462 $ 206 $ 287 $ - $ 955 Operating income 29 53 41 (7) 116 Financial Services, net interest income - - 81 - 81 Depreciation, depletion and amortization 34 14 6 3 57 - --------------------------------------------------------------------------- For the first nine months of 1999 Revenues from external customers $1,326 576 807 $ - $ 2,709 Operating income 61 136 102 (22) 277 Financial Services, net interest income - - 214 - 214 Depreciation, depletion and amortization 102 42 16 5 165 - --------------------------------------------------------------------------- a Includes a special charge of $15 million, which applies to the building products segment. 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. Note G - NEW ACCOUNTING PRONOUNCMENTS The company will be required to adopt Statements of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended, in 2001. This statement will require derivative positions to be recognized in the balance sheet at fair value. The company uses, to a limited extent, derivative instruments to mitigate exposure to certain interest rate and commodity price risks, but does not use derivatives for trading or speculative purposes. Adoption of Statement 133 is not expected to have a material effect on the company's financial statements. The company will be required to adopt the consensus of the Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs, that shipping and handling costs cannot be netted against revenues. The company currently nets shipping and handling costs against revenues. During the fourth quarter of 2000, the company will begin classifying such costs in cost of sales and will reclassify prior periods to conform to this presentation. This reclassification will have no effect on net income. 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 nine months ended September 2000 and 1999. Summary Consolidated revenues for the third quarter 2000 were $1,049 million, up 10 percent over third quarter 1999. Income from continuing operations for the third quarter 2000 was $43 million or $0.87 per diluted share compared with $60 million or $1.07 per diluted share. The quarter's results include a $15 million special charge related to the company's decision to exit the fiber cement business. Consolidated revenues for the first nine months 2000 were $3,146 million, up 16 percent over the first nine months of 1999. Income from continuing operations for the nine months 2000 was $160 million or $3.11 per diluted share compared with $134 million or $2.41 per diluted share. 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. Third Quarter First Nine Months 2000 1999 2000 1999 (in millions) Revenues Paper $ 512 $ 462 $ 1,524 $1,326 Building Products 190 206 623 576 Financial Services 347 287 999 807 ----- ---- ----- ----- Total revenues $ 1,049 $ 955 $ 3,146 $2,709 ===== ==== ===== ===== Income Paper $ 57 $ 29 $ 164 $ 61 Building Products 10 53 73 136 Financial Services 50 41 133 102 ----- ---- ----- ----- Segment operating income 117 123 370 299 Corporate expense (8) (7) (24) (22) Special charge (15) - (15) - Parent Company interest (26) (25) (77) (69) Other 3 5 8 11 ----- ---- ----- ----- Income from continuing operations before taxes 71 96 262 219 Taxes on income 28 36 102 85 ----- ---- ----- ----- Income from continuing operations 43 60 160 134 Discontinued operations - (80) - (94) ----- ---- ----- ----- Net income $ 43 $ (20) $ 160 $ 40 ===== ==== ===== ===== 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, home repair and remodeling activities, and the strength of the U.S. dollar. Unless otherwise noted, increases or decreases refer to third quarter 2000 amounts compared with third quarter 1999 amounts and first nine months 2000 amounts compared with first nine months 1999 amounts. 17 The 1999 amounts have been restated to reflect the discontinued bleached paperboard operation, which was sold in December 1999. For the third quarter 2000 Paper The Paper Group revenues were $512 million, up 11 percent. Average domestic box prices were up 17 percent while box shipments were 546,000 tons, down four 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. Slower demand also contributed to the decrease in box shipments. Average linerboard prices were up 18 percent. Mill production was 537,000 tons, down 21 percent. The box plants used 98 percent of the mill containerboard production; the remainder of the mill production was sold in the domestic and export markets. As compared with the second quarter 2000, Paper Group revenues were down slightly with average box prices up 3 percent, box shipments down 3 percent, and linerboard prices about even. Production, distribution, and administrative costs were $455 million, up five percent due to effects of production curtailments, joint venture start-up costs associated with the conversion of the Newport, Indiana, containerboard mill, and higher energy costs. These were partially offset by lower delivered costs for old corrugated containers (OCC), which accounts for about 38 percent of the Paper Group's fiber requirements. OCC costs were down 15 percent or $16 per ton. OCC costs began to decline near the end of the second quarter 2000, declined throughout the third quarter and have continued to decline into the fourth quarter. For the quarter, OCC costs averaged $91 per ton compared with $107 per ton and with $139 per ton in the second quarter 2000. During the quarter, production was curtailed by 85,000 tons due to market, maintenance, and operational factors, compared with 43,000 tons in the second quarter 2000. The Paper Group may continue to curtail more production in future quarters for these reasons. The Paper Group's joint venture conversion of its 285,000-ton corrugating medium mill in Newport, Indiana, to produce lightweight gypsum facing paper was completed during the third quarter of 2000. For a period of twelve months, the Paper Group is obligated to purchase, at market rates, all of the corrugating medium produced by the venture that meets the company's specifications. During the third quarter, the Paper Group purchased 26,000 tons of corrugated medium from the venture. Operating income was $57 million up almost 2 times due to the factors discussed above. Building Products The Building Products Group revenues were $190 million, down eight percent. Lower lumber prices, down 22 percent, and gypsum prices, down 35 percent, more than offset higher prices for particleboard, up two percent, and MDF, up four percent. Gypsum shipments were down 24 percent. Particleboard and MDF shipments were up due to the operations of the Mt. Jewett facilities in 18 2000. As compared with the second quarter 2000, Building Products Group revenues were down ten percent due in part to lower lumber, particleboard, and gypsum prices, down nine percent, five percent and 22 percent, respectively, and lower particleboard and MDF shipments. Gypsum shipments were about even. These trends of lower prices and shipments will likely continue during the fourth quarter. Production, distribution, and administrative costs were $180 million, up 18 percent due mainly to new manufacturing facilities, higher energy costs, and $4 million of operating losses from the fiber cement joint venture. During the third quarter 2000, the Building Products Group completed its assessment of its fiber cement joint venture and decided to exit this business by assuming control of the joint venture and leasing most of its assets to a third party. As a result, the company recognized a $15 million special charge that includes $11 million for assets excluded from the lease agreement that will be disposed of and $4 million for other costs. Following a six-month rental ramp-up period the lease agreement provides for payments of $3.4 million per year over the balance of 19.5-year lease term. During the quarter, production was curtailed at several manufacturing and production facilities, primarily at the gypsum facilities, due to market conditions. The Building Products Group may curtail more production in future quarters for this reason. Operating income excluding the $15 million special charge was $10 million down $43 million due to the factors discussed above. Financial Services The Financial Services Group revenues, which consist of interest and non-interest income, were $347 million, up 21 percent. Interest income was $278 million, up 26 percent and net interest income was $98 million, up 21 percent. These increases were mainly due to the growth and change in the mix of the loan portfolio due primarily to growth in construction and development and commercial and business lending activities. The provision for loan losses was $7 million, up $1 million due mainly to the growth and change in the mix of the loan portfolio. At quarter end, the allowance for losses was $124 million compared with $116 million and with $129 million at the end of the second quarter 2000. Non-interest income was $69 million, up three percent due primarily to lease income related to the acquisition of American Finance Group, Inc., offset by a decline in fees and gains related to mortgage loan originations. Non-interest expense was $106 million, up nine percent, mainly due to the acquired operations. At quarter end, the mortgage-servicing portfolio totaled $20 billion, down 14 percent and down 11 percent from year end 1999. As compared with the second quarter 2000, Financial Services Group revenues were up slightly with net interest income about even, non-interest income down 5 percent, and non-interest expenses down 2 percent. 19 Operating income was $50 million, up 22 percent due to the factors discussed above. Corporate, Interest, and Other Parent Company interest expense was up $1 million due to higher interest rates and higher average outstanding debt during the quarter. Income Taxes The effective tax rate was 39 percent based on current expectations of income and expenses for the year 2000. Average Shares Outstanding Average diluted shares outstanding were 49.7 million, down 11 percent compared with third quarter 1999 and down four percent compared with second quarter 2000 due mainly to the effects of the stock repurchase programs authorized during the third quarter 2000 and the fourth quarter 1999. For the first nine months 2000 Paper The Paper Group revenues were $1,524 million, up 15 percent. Average domestic box prices were up 18 percent while box shipments were 1,677 thousand tons, down three 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. Slower demand also contributed to the decrease in box shipments. Average linerboard prices were up 23 percent. Mill production was 1,816 thousand tons, down 10 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. Production, distribution, and administrative costs were $1,360 million, up eight percent due mainly to the effects of production curtailments, higher delivered costs for OCC, production issues, and higher energy prices. Average OCC costs were up 36 percent or $31 per ton. During the first nine months, production was curtailed by 170,000 tons due to market, maintenance, and operational factors. The Paper Group may curtail production in the future for these reasons. Operating income was $164 million, up almost 3 times due to the factors discussed above. Building Products The Building Products Group revenues were $623 million, up eight percent. Lower lumber prices, down 14 percent, and gypsum prices, down 14 percent, offset higher prices for particleboard, up seven percent, and MDF, up 10 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. 20 Production, distribution, and administrative costs were $550 million, up 25 percent due mainly to additional manufacturing facilities, higher energy costs, and $13 million of operating losses from the fiber cement joint venture. During the third quarter 2000, the company exited the fiber cement business and recognized a $15 million special charge. During the first nine months, production was curtailed at several manufacturing and production facilities, primarily at the gypsum facilities, due to market conditions. The Building Products Group may curtail production in the future for this reason. Operating income was $73 million, down 46 percent due to the factors discussed above. Financial Services The Financial Services Group revenues were $999 million up 24 percent. Interest income was $795 million, up 31 percent, and net interest income was $286 million, up 34 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 17 percent. Of the increase, 23 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 $32 million, up $8 million, due mainly to the growth and change in the mix of the loan portfolio. Non-interest income was $204 million, up 3 percent due mainly to lease income related to the acquisition of American Finance Group, Inc., offset by a decline in fees and gains related to mortgage loan originations. Non-interest expense was $312 million, up 13 percent, mainly due to the acquired operations. Operating income was $133 million, up 30 percent due to the factors discussed above. Corporate, Interest, and Other Parent Company interest expense was up $8 million due to higher interest rates and higher average outstanding debt during this period. Income Taxes The effective tax rate was 39 percent for 2000 and 1999. 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 51.4 million, down eight percent due mainly to the effects of the stock repurchase programs authorized during the third quarter 2000 and the fourth quarter 1999. Capital Resources and Liquidity For the nine months ended September 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 $213 million, up 30 percent. The increase was due to greater earnings offset in part by increased working capital needs. Depreciation and amortization was $151 million and is expected to approximate $202 million for the year 2000. Investing Activities Capital expenditures were $175 million and are expected to approximate $225 million for the year 2000. Dividends received from Financial Services totaled $50 million, with $30 million received in the second and $20 million received in the third 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. This repurchase authorization was completed during the third quarter 2000. In August 2000, the Board of Directors authorized the repurchase of an additional 2.5 million shares. During the first nine months of 2000, 5.1 million shares were repurchased at a cost of $250 million. By the end of the third quarter, an aggregate of 6.75 million shares had been repurchased since the inception of these programs at a cost of $350 million. Dividends paid were $49 million or $.32 per share per quarter. Debt increased $162 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. In connection with assuming control of the fiber cement joint venture, the company obtained control over $53 million of assets which were subject to $53 million of debt. 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 nine months in investing and financing activities. 22 Other The Parent Company has sufficient liquidity and capital resources to meet its anticipated needs. 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 $244 million, down 35 percent. The decrease in originations of mortgage loans held for sale was partially offset by an increase in earnings and a reduction in use of cash for mortgage loans serviced for others. Investing Activities Loans and securities increased $1,237 million and was in line with expectations. The increase in loans and securities was primarily attributable to increased construction and development and commercial and business lending activities and purchases of securities. Capital expenditures were $77 million and cash paid for acquisitions was $19 million. Financing Activities Deposits increased $717 million and borrowings increased $460 million. Dividends, net of capital contributions, paid to the Parent Company totaled $40 million. Cash Equivalents Cash equivalents increased $92 million to $325 million. Other The Financial Services Group has sufficient liquidity and capital resources to meet its anticipated needs. At the end of the third 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" under the capital adequacy regulations of the Office of Thrift Supervision. 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 nine months 2000, the Parent Company contributed $10 million to the savings bank and received $50 million in dividends from the savings bank. 23 Selected financial and regulatory capital data for the savings bank follows: Third Quarter End Year End 2000 1999 (in millions of dollars) Balance sheet data Total assets $14,319 $12,892 Total deposits 10,062 9,329 Shareholders' equity 941 857 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% Statistical and other data (a) Third Quarter First Nine Months 2000 1999 2000 1999 Net revenues (in millions) Paper $ 512 $ 462 $ 1,524 $ 1,326 Building products: Pine lumber $ 50 $ 65 $ 169 $ 175 Plywood 12 17 42 53 Particleboard 53 42 168 126 Medium density fiberboard 20 17 64 42 Gypsum wallboard 20 41 74 113 Fiberboard 15 18 49 55 Other 20 6 57 12 ---- ---- ---- ---- Total Building products $ 190 $ 206 $ 623 $ 576 ==== ==== ==== ==== Unit sales Paper (in thousand tons) (b) 653 701 2,051 2,125 Building products: Pine lumber - MBF 166 167 511 456 Plywood - MSF (3/8" basis) 68 70 209 229 Particleboard - MSF (3/4" basis) 170 143 529 432 Medium density fiberboard - MSF (3/4" basis) 58 51 195 139 Gypsum wallboard - MSF 173 238 525 695 Fiberboard - MSF (1/2" basis 93 113 296 344 (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 and their effect on the prices of the company's products; 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 third quarter of 2000, with comparative information at year-end 1999: Increase (Decrease) Income Before Taxes (in millions) Third Quarter Year End Change in Interest Rates 2000 1999 +2% $ (5) $ (1) +1% (1) - 0% - - -1% (9) (1) -2% (19) (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 September 30, 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: November 14, 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 EX-27 2 art5sept00.frm THIRD QUARTER 2000 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from consolidated balance sheets and consolidated income statements for Temple-Inland Inc. and subsidiaries and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS Jan-02-2000 Dec-30-2000 Sep-30-2000 328 0 342 0 270 0 2,186 0 17,604 0 1,630 0 0 61 1,736 17,604 2,147 3,146 1,934 2,815 0 0 77 262 102 160 0 0 0 160 3.11 3.11
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