10-Q 1 tin1st01q.txt 1ST QUARTER 2001 FORM 10-Q FOR TEMPLE-INLAND INC. 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 March 31, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition 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) 1300 South MoPac Expressway, Austin, Texas 78746 (Address of principal executive offices) (Zip Code) (512) 434-8000 (Registrant's telephone number, including area code) 303 South Temple Drive, Diboll, Texas 75941 (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 March 31, 2001 Common Stock (par value $1.00 per share) 49,259,781 The Exhibit Index appears on page 30 of this report. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SUMMARIZED STATEMENTS OF INCOME PARENT COMPANY (TEMPLE-INLAND INC.) Unaudited First Quarter 2001 2000 (in millions) NET REVENUES $ 681 $ 758 COSTS AND EXPENSES Cost of sales 612 609 Selling and administrative 65 68 ----- ----- 677 677 ----- ----- 4 81 FINANCIAL SERVICES EARNINGS 45 35 ----- ----- OPERATING INCOME 49 116 Interest expense (28) (25) ----- ----- INCOME BEFORE TAXES 21 91 Income taxes (9) (36) ----- ----- INCOME BEFORE ACCOUNTING CHANGE 12 55 Effect of accounting change (2) - ----- ----- NET INCOME $ 10 $ 55 ===== ===== See notes to consolidated financial statements. 3 SUMMARIZED BALANCE SHEETS PARENT COMPANY (TEMPLE-INLAND INC.) Unaudited First Year Quarter End 2001 2000 (in millions) ASSETS Current Assets Cash $ 1 $ 2 Receivables, net of allowances of $11 in 2001 and $10 in 2000 349 320 Inventories: Work in process and finished goods 131 61 Raw materials 116 192 ----- ----- 247 253 Prepaid expenses 24 25 ----- ----- Total current assets 621 600 ----- ----- Investment in Temple-Inland Financial Services 1,136 1,093 Property and Equipment Property and Equipment 3,396 3,346 Less allowances for depreciation (1,856) (1,822) ----- ----- 1,540 1,524 Timber and timberlands - less depletion 498 503 ----- ----- Total property and equipment 2,038 2,027 Other Assets 232 227 ----- ----- Total Assets $ 4,027 $ 3,947 ===== ===== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 115 $ 112 Other current liabilities 160 191 ----- ----- Total current liabilities 275 303 Long-Term Debt 1,466 1,381 Other Long-Term liabilities 442 430 Shareholders' Equity 1,844 1,833 ----- ----- Total Liabilities and Shareholders' Equity $ 4,027 $ 3,947 ===== ===== See notes to consolidated financial statements. 4 SUMMARIZED STATEMENTS OF CASH FLOW PARENT COMPANY (TEMPLE-INLAND INC.) Unaudited First Quarter 2001 2000 (in millions) CASH PROVIDED BY (USED FOR) OPERATIONS Net income $ 10 $ 55 Adjustments: Cumulative effect of accounting change 2 - Depreciation and depletion 44 50 Unremitted earnings from financial services (42) (28) Dividends from financial services 15 - Working capital changes (52) (82) Other 17 32 ----- ----- (6) 27 ----- ----- CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and equipment (61) (54) Capital contributions to financial services - (10) Other (4) (3) ----- ----- (65) (67) ----- ----- CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 85 108 Purchase of stock for treasury - (102) Cash dividends paid to shareholders (16) (17) Other 1 1 ----- ----- 70 (10) ----- ----- Net decrease in cash (1) (50) Cash at beginning of period 2 51 ----- ----- Cash at end of period $ 1 $ 1 ===== ===== See notes to consolidated financial statements. 5 SUMMARIZED STATEMENTS OF INCOME FINANCIAL SERVICES GROUP Unaudited First Quarter 2001 2000 (in millions) INTEREST INCOME Loans receivable and mortgage loans held for sale $ 233 $ 202 Securities and other 57 45 ----- ----- Total interest income 290 247 INTEREST EXPENSE Deposits 124 109 Borrowed funds 59 48 ----- ----- Total interest expense 183 157 ----- ----- NET INTEREST INCOME 107 90 Provision for loan losses (17) (15) ----- ----- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 90 75 ----- ----- NONINTEREST INCOME 82 62 NONINTEREST EXPENSE Compensation and benefits 49 39 Other 72 59 ----- ----- Total noninterest expense 121 98 ----- ----- INCOME BEFORE MINORITY INTEREST AND TAXES 51 39 Minority interest in income of consolidated subsidiaries (6) (4) ----- ----- INCOME BEFORE TAXES 45 35 Income taxes (3) (7) ----- ----- INCOME BEFORE ACCOUNTING CHANGE 42 28 Effect of accounting change (1) - ----- ----- NET INCOME $ 41 $ 28 ===== ===== See notes to consolidated financial statements. 6 SUMMARIZED BALANCE SHEETS FINANCIAL SERVICES GROUP Unaudited First Quarter Year End 2001 2000 (in millions) ASSETS Cash and cash equivalents $ 376 $ 320 Mortgage loans held for sale 547 232 Loans receivable, net of allowance for losses of $136 in 2001 and $118 in 2000 10,533 10,411 Securities available-for-sale 3,233 2,415 Securities held-to-maturity - 864 Other assets 990 1,082 ------- ------- TOTAL ASSETS $ 15,679 $ 15,324 ======= ======= LIABILITIES Deposits $ 9,429 $ 9,828 Securities sold under repurchase agreements 353 595 Federal Home Loan Bank advances 3,663 2,869 Other borrowings 217 210 Other liabilities 575 423 Stock issued by subsidiaries 306 306 ------- ------- TOTAL LIABILITIES 14,543 14,231 ------- ------- SHAREHOLDER'S EQUITY 1,136 1,093 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 15,679 $ 15,324 ======= ======= See notes to consolidated financial statements. 7 SUMMARIZED STATEMENTS OF CASH FLOWS FINANCIAL SERVICES GROUP Unaudited First Quarter 2001 2000 (in millions) CASH PROVIDED BY (USED FOR) OPERATIONS Net income $ 41 $ 28 Adjustments: Cumulative effect of accounting change 1 - Amortization, depreciation and accretion 18 16 Mortgage loans held for sale (315) 109 Collections and remittances on loans serviced for others, net 129 (6) Other (11) 26 ----- ----- (137) 173 ----- ----- CASH PROVIDED BY (USED FOR) INVESTMENTS Maturities and redemptions of securities 149 132 Purchases of securities available-for-sale (35) (736) Loans originated or acquired, net of principal collected (493) (599) Capital expenditures for property and equipment (6) (7) Acquisitions, net of cash acquired - (19) Sales of loans 328 47 Proceeds from sale of servicing rights 43 - Other 29 2 ----- ----- 15 (1,180) ----- ----- CASH PROVIDED BY (USED FOR) FINANCING Net increase (decrease) in deposits (367) 315 Securities sold under repurchase agreements and short-term borrowings, net 557 786 Additions to debt 12 9 Payments of debt (9) (131) Capital contributions from Parent Company - 10 Dividends paid to Parent Company (15) - Other - 12 ----- ----- 178 1,001 ----- ----- Net increase (decrease) in cash and cash equivalents 56 (6) Cash and cash equivalents at beginning of period 320 233 ----- ----- Cash and cash equivalents at end of period $ 376 $ 227 ===== ===== See notes to consolidated financial statements. 8 CONSOLIDATED STATEMENTS OF INCOME TEMPLE-INLAND INC. AND SUBSIDIARIES Unaudited First Quarter 2001 2000 (in millions, except per share amounts) REVENUES Manufacturing $ 681 $ 758 Financial Services 372 309 ----- ----- 1,053 1,067 ----- ----- COSTS AND EXPENSES Manufacturing 677 677 Financial Services 327 274 ----- ----- 1,004 951 ----- ----- OPERATING INCOME 49 116 Parent Company interest (28) (25) ----- ----- INCOME BEFORE TAXES 21 91 Income taxes (9) (36) ----- ----- INCOME BEFORE ACCOUNTING CHANGE 12 55 Effect of accounting change (2) - ----- ----- NET INCOME $ 10 $ 55 ===== ===== EARNINGS PER SHARE Basic: Income before accounting change $ 0.24 $ 1.04 Effect of accounting change (0.04) - ----- ----- Net income $ 0.20 $ 1.04 ===== ===== Diluted: Income before accounting change $ 0.24 $ 1.04 Effect of accounting change (0.04) - ----- ----- Net income $ 0.20 $ 1.04 ===== ===== DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.32 $ 0.32 ===== ===== See notes to consolidated financial statements. 9 CONSOLIDATING BALANCE SHEETS TEMPLE-INLAND INC. AND SUBSIDIARIES First Quarter 2001 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 1 $ 376 $ 377 Mortgage loans held for sale - 547 547 Loans receivable, net - 10,533 10,533 Securities available-for-sale - 3,233 3,233 Trade and other receivables 349 - 335 Inventories 247 - 247 Property and equipment 2,038 161 2,199 Other assets 256 829 1,064 Investment in Financial Services 1,136 - - ------ ------ ------ TOTAL ASSETS $ 4,027 $15,679 $18,535 ====== ====== ====== LIABILITIES Deposits $ - $ 9,429 $ 9,429 Securities sold under repurchase agreements - 353 353 Federal Home Loan Bank advances - 3,663 3,663 Other liabilities 294 575 833 Long-term debt 1,466 217 1,683 Deferred income taxes 280 - 281 Postretirement benefits 143 - 143 Stock issued by subsidiaries - 306 306 ------ ------ ------ TOTAL LIABILITIES $ 2,183 $14,543 $16,691 ------ ------ ------ 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 365 Accumulated other comprehensive income (loss) 6 Retained earnings 1,961 ------ 2,393 Cost of shares held in the treasury: 12,129,771 shares (549) ------ TOTAL SHAREHOLDERS' EQUITY 1,844 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,535 ====== See the notes to the consolidated financial statements. 10 CONSOLIDATING BALANCE SHEETS TEMPLE-INLAND INC. AND SUBSIDIARIES Year End 2000 Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 2 $ 320 $ 322 Mortgage loans held for sale - 232 232 Loans receivable, net - 10,411 10,411 Securities available-for-sale - 2,415 2,415 Securities held-to-maturity - 864 864 Trade and other receivables 320 - 309 Inventories 253 - 253 Property and equipment 2,027 157 2,184 Other assets 252 925 1,152 Investment in Financial Services 1,093 - - ------ ------ ------ TOTAL ASSETS $ 3,947 $ 15,324 $ 18,142 ====== ====== ====== LIABILITIES Deposits $ - $ 9,828 $ 9,828 Federal Home Loan Bank advances - 2,869 2,869 Securities sold under repurchase agreements - 595 595 Other liabilities 315 423 706 Long-term debt 1,381 210 1,591 Deferred income taxes 276 - 272 Postretirement benefits 142 - 142 Stock issued by subsidiaries - 306 306 ------ ------ ------ TOTAL LIABILITIES $ 2,114 $ 14,231 $ 16,309 ------ ------ ------ 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 365 Accumulated other comprehensive income (loss) (8) Retained earnings 1,968 ------ 2,386 Cost of shares held in the treasury: 12,215,499 shares (553) ------ TOTAL SHAREHOLDERS' EQUITY 1,833 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,142 ====== See the notes to the consolidated financial statements. 11 CONSOLIDATED STATEMENT OF CASH FLOWS TEMPLE-INLAND INC. AND SUBSIDIARIES Unaudited First Quarter 2001 2000 (in millions) CASH PROVIDED (USED FOR) OPERATIONS Net income $ 10 $ 55 Adjustments: Cumulative effect of accounting change 2 - Depreciation and depletion 49 55 Amortization of goodwill 2 2 Deferred taxes 3 14 Amortization and accretion on financial instruments 8 10 Mortgage loans held for sale (315) 109 Working capital changes (52) (82) Collections and remittances on loans serviced for others, net 129 (6) Other 6 40 ----- ----- (158) 197 ----- ----- CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and equipment (67) (61) Maturities of securities available-for-sale 149 73 Maturities and redemptions of securities held-to- maturity - 59 Purchases of securities available-for-sale (35) (736) Loans originated or acquired, net of principal collected (493) (599) Acquisitions, net of cash acquired - (19) Sales of loans 328 47 Proceeds from sale of servicing rights 43 - Other 25 2 ----- ----- (50) (1,234) ----- ----- CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 97 117 Payments of debt (9) (131) Securities sold under repurchase agreements and short-term borrowings, net 557 786 Purchase of stock for treasury - (102) Cash dividends paid to shareholders (16) (17) Net increase (decrease) in deposits (367) 315 Other 1 13 ----- ----- 263 981 ----- ----- Net increase (decrease) in cash and cash equivalents 55 (56) Cash and cash equivalents at beginning of period 322 284 ----- ----- Cash and cash equivalents at end of period $ 377 $ 228 ===== ===== 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. Therefore, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal accruals) 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 December 30, 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 (the parent company). The net assets invested in Temple-Inland Financial Services Group is reflected in the summarized financial statements on the equity basis. Related earnings, however, are presented before tax to be consistent with the consolidated financial statements. These financial statements should be read in conjunction with the Temple-Inland Inc. consolidated financial statements and the Temple-Inland Financial Services summarized financial statements. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform to current year's classifications. 13 NOTE B - EARNINGS PER SHARE Denominators used in computing earnings per share are as follows: First Quarter 2001 2000 (In millions) Denominator for basic earnings per share - Weighted average common shares outstanding 49.3 52.9 Dilutive effect of stock options - - ----- ----- Denominator for diluted earnings per share 49.3 52.9 ===== ===== NOTE C - COMPREHENSIVE INCOME Comprehensive income consists of: First Quarter 2001 2000 (in millions) Net income $ 10 $ 55 Other comprehensive income, net of income taxes: Effect of adopting FAS No. 133 - Unrealized losses on held-to-maturity securities re-designated as available-for-sale securities (16) - Unrealized losses on derivative instruments classified as cash flow hedges (4) - Unrealized gains (losses) on: Available-for-sale securities 33 (4) Derivative instruments 1 - Foreign currency translation adjustments - 1 ----- ----- Other comprehensive income 14 (3) ----- ----- Comprehensive income $ 24 $ 52 ===== ===== At first quarter-end 2001, accumulated other comprehensive income included $3 million of unrealized after-tax losses on open commodity derivative instruments classified as cash flow hedges. It is expected that $2 million of these unrealized after-tax losses will be recognized over the next 12 months as the hedged transactions are completed. 14 NOTE D - SEGMENT INFORMATION The company has three reportable segments: Paper, Building Products and Financial Services. ------------------------------------------------------------------------- For the first quarter or at quarter Building Financial Corporate end 2001 Paper Products Services and Other Total -------------- ------- -------- -------- --------- ------- (in millions) Revenues from external customers $ 512 $ 169 $ 372 $ - $1,053 Operating income(a) 21 (9) 45 (8) 49 Financial Services, net interest income - - 107 - 107 Depreciation, depletion and amortization (a) 28 15 7 1 51 ------------------------------------------------------------------------- For the first quarter or at quarter end 2000 ------------- Revenues from external customers 520 238 309 - 1,067 Operating income 52 37 35 (8) 116 Financial Services, net interest income - - 90 - 90 Depreciation, depletion and amortization 33 17 6 1 57 ------------------------------------------------------------------------- (a) Includes a $7 million reduction in depreciation expense resulting from a change in the estimated useful lives of certain production equipment, of which $5 million applies to the paper segment and $2 million applies to the building products segment. NOTE E - 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 paper group is a party to a long-term power purchase agreement with Southern California Edison (Edison). Under this agreement, the paper group sold a portion of its peak electrical generating capacity from a co-generation facility operated in connection with its Ontario mill to Edison. Edison was to pay the paper group for electricity generated and sold to Edison. During the fourth quarter 2000 and the first quarter 2001, the Ontario mill generated and delivered electricity to Edison but has not been paid. As a result of this non-payment, during April 2001, the paper group notified Edison that the long-term power purchase agreement was terminated because of Edison's material breach of the agreement. At first quarter-end 2001, $5 million is due to the paper group under this agreement. Edison has contested the right of the paper group to terminate the power purchase agreement. The parties are currently in litigation to determine, among other matters, whether the 15 agreement has been terminated and whether the paper group may continue to have access through the interconnection services provided by Edison. 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 F - ACQUISITIONS During April 2001, the parent company announced that the paper group entered into a definitive agreement to acquire the corrugated packaging operations of Chesapeake Corporation for $120 million cash, subject to adjustment. These operations consist of ten corrugated container plants in seven states. It is anticipated that the acquisition will close during May 2001. NOTE G - NEW ACCOUNTING PRONOUNCEMENTS AND CHANGES IN ESTIMATES Derivatives Beginning January 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The cumulative effect of adopting this statement was to reduce first quarter 2001 net income by $2 million or $0.04 per diluted share and other comprehensive income, a component of shareholders' equity, by $4 million. As permitted by this statement, the company also changed the designation of its portfolio of held-to-maturity securities, which are carried at unamortized cost, to available- for-sale, which are carried at fair value. As a result, the $862 million carrying value of these securities was adjusted to their fair value with a corresponding after-tax reduction of $16 million in other comprehensive income. The company uses, to a limited degree, derivative instruments to mitigate its exposure to risk, including those associated with changes in product pricing, manufacturing costs and interest rates related to borrowings and investments in securities, as well as with mortgage production activities. Changes in the fair value of derivative instruments designated as cash flow hedges are deferred and recorded in other comprehensive income. These deferred gains or losses are recognized in income when the transactions being hedged are completed. The ineffective portion of these hedges, which is not material, is recognized in income. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in income, as are the changes in the fair value of the hedged item. Changes in the fair value of derivative instruments that are not designated as hedges for accounting purposes are recognized in income. The company does not use derivatives for trading purposes. 16 The parent company uses commodity derivative instruments principally to mitigate its exposure to changes in linerboard pricing and the cost of old corrugated containers. These instruments cover a small portion of the paper group's volumes and range in duration from a few months to three years. They are designated as cash flow hedges. The net fair values of these instruments at first quarter-end 2001 are $(5) million and are included in other long-term liabilities. The parent company also uses interest rate derivative instruments to mitigate its exposure to changes in interest rates on a portion of its borrowings. These instruments cover $50 million of commercial paper and other short-term borrowings and expire in 2008. They do not qualify as hedges. Changes in their fair value are included in interest expense. The net fair values of these instruments at first quarter-end 2001 are $(3) million and are included in other long-term liabilities. The financial services group uses interest rate derivative instruments to mitigate its exposure to changes in interest rates associated with adjustable rate assets with lifetime caps, such as adjustable rate mortgage loans or mortgage backed securities. These instruments have notional amounts totaling $242 million and expire in 2003. They do not qualify as hedges. Changes in their fair value are included in interest income. The net fair value of these instruments at first quarter-end 2001 is not significant. Due to the current interest rate environment and maturity and notional value of these instruments, their effect on operations is not expected to be material. The financial services group also uses forward sales commitments to mitigate its exposure to changes in interest rates between the time a mortgage loan commitment is made and the funding and sale of the loan to a third party. Those forward sales commitments matched against a portion of loans held for sale are designated as fair value hedges. Changes in their fair value are included in non-interest income. Those forward sales commitments matched against unfunded loan commitments and the related unfunded loan commitments do not qualify as hedges. Changes in their fair values are included in non-interest income. The net fair value of these instruments at first quarter-end 2001 is not significant. Depreciation Beginning January 2001, the parent company began computing depreciation of certain production equipment using revised estimated useful lives. These revisions ranged from a reduction of several years to a lengthening of up to five years. First quarter 2001 income includes $4 million, or $0.08 per diluted share, as a result of this change. The parent company expects that this change will increase 2001 net income by $16 million, or $0.32 per diluted share. 17 Goodwill During April 2001, the Financial Accounting Standards Board tentatively decided to adopt a non-amortization, impairment-only approach for goodwill, which if approved, would be effective as of June 30, 2001. Under this approach, amortization of goodwill would be precluded and goodwill would be measured for impairment. The effect of non-amortization of goodwill during the last six months of 2001 would be to increase 2001 net income by $4 million or $0.08 per diluted share. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the three months ended March 2001 and 2000. Summary Consolidated revenues for the first quarter 2001 were $1.1 billion, down slightly from first quarter 2000. Income before the effects of an accounting change for the first quarter 2001 was $12 million or $0.24 per diluted share compared with $55 million or $ 1.04 per diluted share for the first quarter 2000. Income for 2001 includes $4 million or $0.08 per diluted share reduction in depreciation expense resulting from a change in estimated useful lives of certain production equipment. The cumulative effect of adopting Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities was to reduce first quarter 2001 income by $2.0 million or $0.04 per diluted share. Net income for the first quarter 2001 was $10 million or $0.20 per diluted share compared with $55 million or $ 1.04 per diluted share for the first quarter 2000. 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. First Quarter 2001 2000 (in millions) Revenues -------- Paper $ 512 $ 520 Building Products 169 238 Financial Services 372 309 ----- ----- Total revenues $1,053 $1,067 ===== ===== Income ------ Paper $ 21 $ 52 Building Products (9) 37 Financial Services 45 35 ----- ----- Segment operating income (1) 57 124 Corporate and other (8) (8) Parent company interest (28) (25) ----- ----- Income before taxes 21 91 Income taxes (9) (36) ----- ----- Income before accounting change 12 55 Effect of accounting change (2) - ----- ----- Net income $ 10 $ 55 ===== ===== (1) Segment operating income for 2001 includes a $7 million reduction in depreciation expense resulting from a change in the estimated useful lives of certain production equipment, of which $5 million is applicable to Paper and $2 million to Building Products. 19 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 and the strength of the U.S. dollar. Unless otherwise noted, increases or decreases refer to first quarter 2001 amounts compared with first quarter 2000 amounts. First quarter 2000 amounts have been reclassified to conform to current year classifications. The Paper Group The Paper Group's revenues were $512 million, down 2 percent. Average box prices were up 8 percent while box shipments were 548,000 tons, down 3 percent. Average linerboard prices were up 8 percent. Compared with the fourth quarter 2000, revenues were about even. Linerboard prices were down slightly and box prices were flat. Volumes were up slightly for seasonal reasons. Production, distribution and administrative costs were $491 million, up 5 percent due to higher energy costs offset by declines in the cost of old corrugated containers (OCC) and the positive effect from lower depreciation expense. Energy costs were up $22 million due primarily to the higher cost of natural gas. OCC cost, which accounts for 38 percent of the Paper Group's fiber requirements, was down $9 million. OCC was $72 per ton at quarter end, down 37 percent. As a result of the lengthening of the estimated useful lives of certain production equipment, depreciation was reduced by $5 million. Compared with the fourth quarter 2000, costs were up about 4 percent due mainly to higher energy costs, which were up $18 million. Mill production was 519,000 tons, down 20 percent or 131,000 tons. Of the mill production, 18 percent was sold in the domestic and export markets. The Paper Group's converting operations used the remainder. The decrease in production was due to curtailments and the conversion of the Newport medium mill during the third quarter 2000. Production was curtailed by 98,000 tons due to market, maintenance and operational reasons compared with first quarter 2000 curtailments of 43,000 tons and fourth quarter 2000 curtailments of 135,000 tons. The Paper Group may curtail more production in future quarters for these reasons. First quarter-end 2001 inventories were down 45,000 tons and were about even with year-end 2000. During the quarter the Paper Group purchased 43,264 tons of medium from its Newport joint venture. The agreement to purchase medium from the Newport venture expires during June 2001. Operating income was $21 million, down 60 percent due to the factors discussed above. 20 During the quarter, the Paper Group announced the acquisition of the corrugated packaging operations of Chesapeake Corporation for approximately $120 million, subject to adjustment. This transaction is expected to close during May 2001. These acquired operations include ten corrugated container plants in seven states and should increase the Paper Group's integration level and customer base. The Paper Group is continuing its efforts to enhance return on investment. As part of this effort, the Paper Group is reviewing operations that are unable to meet return objectives to determine appropriate courses of action. The Building Products Group The Building Products Group's revenues were $169 million, down 29 percent. Average prices for all products were down with lumber prices down 19 percent, particleboard down 15 percent, gypsum down 53 percent and MDF down slightly. Shipments for all products except MDF were down with lumber shipments down 9 percent, particleboard down 15 percent and gypsum down 21 percent. MDF shipments were up slightly. Compared with the fourth quarter 2000, revenues were up 4 percent. Average prices for most products were down except lumber. Lumber prices were up 5 percent. Shipments for most products were up. Production, distribution and administrative costs were $178 million, down 12 percent due to lower volumes and the positive effect from lower depreciation expense offset by increases in energy costs. Weaker demand and the incident at the Mt. Jewett particleboard facility affected production volumes. It is expected that the Mt. Jewett facility will resume full production during the second quarter 2001. As a result of the lengthening of the estimated useful lives of certain production equipment, depreciation was reduced by $2 million. Energy costs were up $3 million due primarily to the higher cost of natural gas. Compared with the fourth quarter 2000, costs were up about 7 percent due partially to higher energy costs. Production was curtailed to varying degrees in all product lines due to market conditions during the first quarter 2001. Production averaged from a low of 63 percent to a high of 78 percent of capacity in the various product lines. The Building Products Group may curtail more production in future quarters for this reason. An operating loss of $9 million was incurred due to the factors discussed above. The Financial Services Group The Financial Services Group revenues, consisting of interest and non-interest income, were $372 million, up 20 percent, while operating income was $45 million, up 29 percent. Compared with 21 the fourth quarter 2000, revenues were up slightly while operating income was down 20 percent. The reduction in operating income from the fourth quarter 2000 was primarily due to losses from the sale of a portion of the mortgage servicing portfolio and the sale of an auto loan portfolio coupled with an increase in the provision for loan losses. Net interest income was $107 million, up 19 percent due to an increase in the net interest spread and an 11 percent increase in average earning assets. The provision for loan losses was $17 million, up 13 percent. The increase in the provision was the result of growth and a change in the mix of the loan portfolio and a decline in asset quality, primarily relating to certain large commercial and business loans and construction and development loans in the senior housing industry. Non-interest income, which consists primarily of income from real estate and insurance activities, loan related fees and service charges on deposits, was $82 million, up 32 percent. The increase was due to increases in mortgage origination, real estate and insurance activities and a focus on fee based products. This was offset by a $2 million loss on the sale of an auto loan portfolio and a $3 million loss on the sale of servicing rights on approximately $9 billion in mortgage loans. The servicing rights were sold in order to mitigate impairment risk in a declining interest rate environment. Non-interest expense was $121 million, up 24 percent. This increase was due to commission related activity, acquisitions in the asset based lending and leasing operations and increased real estate activity. 22 Asset Quality Several key measures are used to evaluate and monitor the asset quality of the Financial Services Group. These measures include the level of loan delinquencies, nonperforming loans and nonperforming assets. First Fourth Quarter Quarter ------------------------------------------------------------------------- 2001 2000 2000 (in millions) Accruing loan past due 30 - 89 days $ 199 $ 114 $ 170 Accruing loan past due 90 days or more 4 5 6 --------------------------- Accruing loans past due 30 days or more $ 199 $ 114 $ 170 =========================== Nonaccrual loans $ 152 $ 81 $ 65 Restructured loans - - - --------------------------- Nonperforming loans 152 81 65 Foreclosed property 2 10 3 --------------------------- Nonperforming assets $ 154 $ 91 $ 68 =========================== Allowance for loan losses $ 136 $ 119 $ 118 Net charge-offs - - - Nonperforming loan ratio 1.43% 0.81% 0.62% Nonperforming asset ratio 1.45% 0.91% 0.65% Allowance for loan losses/total loans 1.27% 1.19% 1.12% Allowance for loan losses/ nonperforming loans 89.20% 146.86% 179.73% Net loans charged off/average loans 0.02% 0.32% 0.35% The increase in the level of nonaccrual loans was primarily due to certain large loans in the construction and development and commercial and business portfolios. The loans in the construction and development portfolio are in the senior housing industry and the commercial and business loans are primarily asset-based transactions. These loans have substantial collateral and are being actively monitored. The increase in the allowance for loan losses was the result of a $17 million provision for loan losses, primarily related to growth and a change in the mix of the loan portfolio and the loans discussed above. The lower annualized net charge-off ratio was the result of a recovery of $2 million on a previously charged off loan. Operating income was $45 million, up 29 percent due to the factors discussed above. 23 Corporate and Interest Parent Company interest expense was up $3 million due to higher levels of debt outstanding partially offset by a slight decrease in interest rates. Income Taxes The effective tax rate is 43 percent and is based on current expectations of income and expenses for the year 2001. The effective tax rate includes federal and state income taxes and the effects of non-deductible goodwill amortization and other items. Accounting Change The cumulative effect of adopting Statement of Financial Accounting Standards No. 133, Accounting for Derivative and Hedging Activities, as amended was to reduce net income by $2 million, net of a deferred tax benefit of $1 million. Average Shares Outstanding Average diluted shares outstanding were 49.3 million, down 7 percent due to the effects of the share repurchases under the share repurchase programs authorized during the fourth quarter 1999 and the third quarter 2000. Capital Resources and Liquidity The consolidated net assets invested in the Financial Services Group are subject, in varying degrees, to regulatory rules and regulations. Accordingly, Parent Company and the Financial Services Group capital resources and liquidity are discussed separately. Parent Company Operating Activities Cash used in operations was $6 million. This was due to lower earnings offset in part by lower working capital needs and a $15 million dividend from the Financial Services Group. 24 Investing Activities Capital expenditures were $61 million. Capital expenditures are expected to approximate $200 million for the year 2001. Financing Activities Dividends paid were $16 million or $.32 per share. Debt increased $85 million from year-end levels. Subsequent to first quarter-end, $200 million of 9.0% term notes were repaid using $100 million of short-term borrowings and $100 million from an existing three-year revolving credit agreement. In addition, a new $150 million five-year term loan is being arranged, of which $120 million will be used to fund the announced acquisition of the Chesapeake Corporation's corrugated packaging operations. There were no repurchases of shares under the August 2000 Board of Directors authorization to repurchase 2.5 million shares. To date at total of .75 million shares have been repurchased under this authorization. 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 used in operations was $137 million. This was due to higher earnings and an increase in cash for mortgage loans serviced for others offset by an increase in mortgage loans held for sale. Investing Activities Loans originated or acquired increased $493 million and were offset by $328 million received primarily from the sale of an auto loan portfolio. Securities decreased by $114 million and $29 million was received from the sale of servicing rights on $9 billion in mortgage loans. Financing Activities Deposits decreased $367 million while borrowings increased $557 million. The decrease in deposits was due to the competitive markets and the decision to pursue other funding sources such as Federal Home Loan Bank advances. A $15 million dividend was paid to the parent company. 25 Other The Financial Services Group has sufficient liquidity and capital resources to meet its anticipated needs. At quarter- end, 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 quarter the parent company made no capital contributions to the savings bank and received $15 million in dividends from the savings bank. Selected financial and regulatory capital data for the savings bank follows: First Quarter End Year End 2001 2000 (in millions of dollars) Balance sheet data Total assets $ 15,200 $ 14,885 Total deposits 9,821 10,088 Shareholders' equity 969 931 Regulatory Savings Bank Minimum Regulatory capital ratios Tangible capital 7.8% 2.0% Leverage capital 7.8% 4.0% Risk-based capital 10.5% 8.0% Energy and Related Matters Energy costs continued to rise during the first quarter 2001 and were approximately $25 million higher compared with first quarter 2000 and $19 million higher compared with fourth quarter 2000. The company anticipates that energy costs will be down slightly in the second quarter 2001, but that the general upward trend in energy costs could resume in the third quarter 2001. The company continues to explore alternative arrangements and fuel sources in an effort to contain energy costs. The energy situation in California has been well publicized. The paper group is a party to a long-term power purchase agreement with Southern California Edison (Edison). Under this agreement, the paper group sold a portion of its peak electrical generating capacity from a co-generation facility operated in connection with its Ontario mill to Edison. Edison was to pay the paper group for electricity generated and sold to Edison. During the fourth quarter 2000 and the first quarter 2001, the Ontario mill 26 generated and delivered electricity to Edison but has not been paid. As a result of this non-payment, during April 2001, the paper group notified Edison that the long-term power purchase agreement was terminated because of Edison's material breach of the agreement. At first quarter-end 2001, approximately $5 million is due to the paper group under this agreement. Edison has contested the right of the paper group to terminate the power purchase agreement. The parties are currently in litigation to determine, among other matters, whether the agreement has been terminated and whether the paper group may continue to have access through the interconnection services provided by Edison. All litigation has an element of uncertainty and the final outcome of any legal proceeding cannot be predicted with any degree of certainty. In addition, as the owner of a co- generation facility in California, the company is subject to additional risks associated with any state or federal regulatory actions that may be taken in an effort to address the energy situation in California. With these limitations in mind, the company presently believes that any ultimate liability from these legal or regulatory proceedings or rulings would not have a material adverse effect on the business or financial condition of the company. Forward Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The actual results achieved by Temple-Inland Inc. may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include general economic, market, or business conditions; the opportunities or lack thereof that may or may not be presented to and pursued by Temple-Inland Inc. and its subsidiaries; availability and price of raw materials used by Temple-Inland Inc. and its subsidiaries; competitive actions by other companies; changes in laws or regulations; energy costs and regulatory actions that may be taken in an effort to alleviate the energy situation in California; and other factors, many of which are beyond the control of Temple-Inland Inc. and subsidiaries. 27 Statistical and other data (a) First Quarter 2001 2000 Net revenues (in millions) Paper $ 512 $ 520 ===== ====== Building products: Pine lumber $ 48 $ 65 Particleboard 47 62 Medium density fiberboard 26 25 Gypsum wallboard 13 32 Fiberboard 13 19 Other 22 35 ----- ------ Total building products $ 169 $ 238 ===== ====== Unit sales Paper (in thousand tons) (b) 641 713 Building products: Pine lumber - mbf 162 178 Particleboard - msf (3/4" basis) 154 181 Medium density fiberboard - msf (3/4" basis) 71 69 Gypsum wallboard - msf 141 178 Fiberboard - msf (1/2" basis) 79 97 (a) Revenues and unit sales do not include joint venture operations (b) Includes boxes sold and open market sales of linerboard 28 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 first quarter-end 2001, with comparative information at year-end 2000: Increase (Decrease) in Income Before Taxes (in millions) First Quarter Year End Change in Interest Rates 2001 2000 ------------------------ ----------------------------- +2% $ (21) $ (7) +1% (7) (1) 0% - - -1% 2 (1) -2% 5 (13) The change in exposure to interest rate risk from year-end 2000 is primarily due to shorter durations of the Financial Services Group's funding sources. The operations of the Financial Services Group's savings bank are subject to interest rate risk to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Because approximately 91 percent of the savings bank's assets at quarter-end 2001 have adjustable rates, this risk is significantly mitigated. However, the savings bank is also subject to prepayment risk inherent in a portion of its single-family adjustable-rate mortgage-backed assets. A substantial portion of the savings bank's investments in adjustable-rate mortgage-backed assets have annual and lifetime caps that subject the savings bank to interest rate risk should rates rise above certain levels. From time to time, to optimize net interest income while maintaining acceptable levels of interest rate and liquidity risk, the savings bank may enter into various interest rate contracts to better match assets and liabilities. Additionally, the fair value of the Financial Services Group's mortgage servicing rights (estimated at $159 million at first quarter-end 2001) is also affected by changes in interest rates. 29 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 $25 million. During the first quarter 2001, the Financial Services Group sold servicing rights on $9 billion of mortgage loans in order to mitigate this risk. At first quarter-end 2001, the Financial Services Group serviced $10 billion of mortgage loans compared with $19.5 billion at year-end 2000. 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 From time to time the company uses commodity derivative instruments to mitigate its exposure to changes in product pricing and manufacturing costs. These instruments cover a small portion of the company's volume and range in duration from three months to three years. Based on the fair value of these instruments at first quarter-end 2001, the potential loss in fair value resulting from a hypothetical 10 percent change in the underlying commodity prices would not be significant. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note E 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. The Company held its annual meeting of stockholders on May 4, 2001, at which a quorum was present. The table below sets forth the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes for each matter voted upon at that meeting. Against Abstentions or and Broker Matter For Withheld Non-votes 1. Election of four directors (a) Bobby R. Inman 43,299,201 602,036 - (b) Kenneth M. Jastrow, II 43,338,206 563,031 - (c) James A. Johnson 43,309,286 591,951 - (d) Herbert A. Sklenar 43,305,949 595,288 - 2. Ratification of appointment of Ernst & Young LLP. 43,300,900 388,920 211,417 3. Ratification of adoption of the Company's 2001 Stock Incentive Plan. 33,817,012 9,842,192 242,033 4. Ratification of adoption of the Company's Stock Deferral Plan. 37,379,884 6,188,267 333,086 5. Ratification of adoption of the Company's Directors' Fee Deferral Plan. 37,018,342 6,527,119 355,776 Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None (b) Reports on Form 8-K. During the three months ended March 31, 2001, the Company did not file a current report on Form 8-K. 31 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: May 15, 2001 By /s/ Louis R. Brill ------------------------- Louis R. Brill Vice President and Chief Accounting Officer