-----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, So8oU/WTu1DTJa0mKHV6d1WKOa7EJluubI5BYCEHR4w244wGGiQGQ7lV03cDB+UY M+DiIPLkCTz3GUHBEdQcMg== 0000731939-98-000016.txt : 19981123 0000731939-98-000016.hdr.sgml : 19981123 ACCESSION NUMBER: 0000731939-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 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: 98753775 BUSINESS ADDRESS: STREET 1: 303 S TEMPLE DR STREET 2: PO DRAWER N CITY: DIBOLL STATE: TX ZIP: 75941 BUSINESS PHONE: 4098295511 MAIL ADDRESS: STREET 1: 303 SOUTH TEMPLE DR CITY: DIBOLL STATE: TX ZIP: 75941 10-Q 1 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 October 3, 1998 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 of 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) (409) 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 October 3, 1998 Common Stock (par value $1.00 per share) 55,598,796 The Exhibit Index appears on page 25 of this report. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Summarized Statements of Income Parent Company (Temple-Inland Inc.) Unaudited Third Quarter First Nine Months 1998 1997 1998 1997 (in millions) Revenues Net sales $ 667.4 $ 678.2 $ 2,020.8 $ 2,014.3 Financial services earnings 36.1 37.4 113.8 99.3 ------- ------- --------- --------- 703.5 715.6 2,134.6 2,113.6 Costs and Expenses Cost of sales 554.3 602.4 1,701.3 1,771.7 Selling and administrative 80.3 66.0 210.9 193.7 ------- ------- --------- --------- 634.6 668.4 1,912.2 1,965.4 Operating Income 68.9 47.2 222.4 148.2 Interest - net (26.0) (27.3) (79.3) (83.4) Other 1.0 1.8 4.2 4.5 ------- ------- --------- --------- Income Before Taxes 43.9 21.7 147.3 69.3 Taxes on income 19.5 9.1 61.9 27.9 ------- ------- --------- --------- Net Income $ 24.4 $ 12.6 $ 85.4 $ 41.4 ======= ======= ========= ========= See notes to consolidated financial statements. 3 Summarized Balance Sheets Parent Company (Temple-Inland Inc.) Unaudited October 3, January 3, 1998 1998 (in millions) ASSETS Current Assets Cash $ 14 $ 13 Receivables, less allowances of $11 million in 1998 and $9 million in 1997 319 281 Inventories: Work in process and finished goods 95 109 Raw materials 229 230 ------ ------ 324 339 Prepaid expenses 20 15 ------ ------ Total current assets 677 648 Investment in Financial Services 670 576 Property and Equipment Buildings 573 554 Machinery and equipment 3,869 3,689 Less allowances for depreciation and amortization (2,245) (2,086) ------ ------ 2,197 2,157 Construction in progress 97 115 ------ ------ 2,294 2,272 Timber and timberlands--less depletion 514 507 Land 35 34 ------ ------ Total property and equipment 2,843 2,813 Other Assets 181 163 ------ ------ Total Assets $ 4,371 $ 4,200 ====== ====== See notes to consolidated financial statements. 4 Summarized Balance Sheets - Continued Parent Company (Temple-Inland Inc.) Unaudited October 3, January 3, 1998 1998 (in millions) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 126 $ 135 Accrued expenses 159 150 Employee compensation and benefits 22 23 Current portion of long-term debt 1 3 ------ ------ Total current liabilities 308 311 Long-Term Debt 1,595 1,438 Deferred Income Taxes 273 252 Postretirement Benefits 144 140 Other Liabilities 12 14 Shareholders' Equity 2,039 2,045 ====== ====== Total Liabilities and Shareholders' Equity $ 4,371 $ 4,200 ======= ======= See notes to consolidated financial statements. 5 Summarized Statements of Cash Flows Parent Company (Temple-Inland Inc.) Unaudited First Nine Months 1998 1997 (in millions) Cash Provided by (Used for) Operations Net income $ 85.4 $ 41.4 Adjustments to reconcile net income to net cash: Depreciation and depletion 193.9 190.1 Deferred taxes 22.8 5.2 Unremitted earnings of affiliates (86.4) (82.3) Receivables (34.7) (29.1) Inventories 20.0 4.8 Prepaid expenses (4.4) (4.8) Accounts payable and accrued expenses (6.6) 29.4 Other (12.2) (39.1) ------- ------- 177.8 115.6 Cash Provided by (Used for) Investments Capital expenditures (124.0) (170.6) Investment in joint ventures (7.0) (8.1) Sale of property and equipment 4.0 2.1 Capital contributions to financial services (40.0) (24.6) Dividends from financial services 40.0 225.0 Acquisition of two MDF plants (106.3) - Acquisition of California Financial Holding Company, net of cash acquired - (22.2) ------- ------- (233.3) 1.6 Cash Provided by (Used for) Financing Change in debt, net 155.6 (29.3) Purchase of stock for treasury (48.1) (44.5) Cash dividends paid to shareholders (53.6) (53.6) Other 2.7 8.7 ------- ------- 56.6 (118.7) Net increase (decrease) in cash and cash equivalents 1.1 (1.5) Cash and cash equivalents at beginning of period 13.4 14.3 ------- ------- Cash and cash equivalents at end of period $ 14.5 $ 12.8 ======= ======= See notes to consolidated financial statements. 6 Summarized Statements of Income Temple-Inland Financial Services Unaudited Third Quarter First Nine Months 1998 1997 1998 1997 (in millions) Interest Income Loans receivable and mortgage loans held for sale $ 147.5 $ 143.9 $ 428.9 $ 384.7 Mortgage-backed and investment securities 35.1 42.9 115.3 117.1 Other earning assets 1.1 5.9 3.1 16.1 ------ ------ ------ ------ Total interest income 183.7 192.7 547.3 517.9 Interest Expense Deposits 90.3 89.3 269.1 240.4 Borrowed funds 30.9 42.2 98.3 115.3 ------ ------ ------ ------ Total interest expense 121.2 131.5 367.4 355.7 Net Interest Income 62.5 61.2 179.9 162.2 Provision for loan losses 1.1 .5 2.4 1.2 ------ ------ ------ ------ Net Interest Income After Provision For Loan Losses 61.4 60.7 177.5 161.0 Noninterest Income Loan servicing fees 19.3 22.3 61.2 54.4 Loan origination and marketing 34.4 15.7 84.3 32.1 Other 38.9 29.5 115.4 78.5 ------ ------ ------ ------ 92.6 67.5 260.9 165.0 Noninterest Expense Compensation and benefits 42.8 37.7 126.0 94.5 Other 71.1 50.4 188.7 128.5 ------ ------ ------ ------ Total noninterest expense 113.9 88.1 314.7 223.0 Income Before Taxes and Minority Interest 40.1 40.1 123.7 103.0 Minority interest in income of consolidated subsidiary (4.0) (2.7) (9.9) (3.7) ------ ------ ------ ------ Income Before Taxes 36.1 37.4 113.8 99.3 Taxes on income 8.7 5.5 27.4 17.0 ------ ------ ------ ------ Net Income $ 27.4 $ 31.9 $ 86.4 $ 82.3 ====== ====== ====== ====== See notes to consolidated financial statements. 7 Summarized Balance Sheets Temple-Inland Financial Services Unaudited October 3, January 3, 1998 1998 (in millions) ASSETS Cash and cash equivalents $ 178 $ 175 Mortgage loans held for sale 539 439 Loans receivable 7,220 6,451 Mortgage-backed and investment securities 2,383 2,806 Other assets 959 914 ------ ------ TOTAL ASSETS $ 11,279 $ 10,785 ======= ======= LIABILITIES Deposits $ 7,323 $ 7,375 Securities sold under repurchase agreements - 270 Federal Home Loan Bank advances 2,207 1,685 Other borrowings 209 167 Other liabilities 645 562 Preferred stock issued by subsidiary 225 150 ------ ------ TOTAL LIABILITIES 10,609 10,209 SHAREHOLDER'S EQUITY 670 576 ------ ------ TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 11,279 $ 10,785 ======= ======= See notes to consolidated financial statements. 8 Summarized Statements of Cash Flows Temple-Inland Financial Services Unaudited First Nine Months 1998 1997 (in millions) Cash Provided by (Used for) Operations Net income $ 86.4 $ 82.3 Adjustments to reconcile net income to net cash: Amortization, accretion and depreciation 68.7 31.1 Provision for loan losses 2.4 1.2 Mortgage loans held for sale (100.5) (155.4) Collections and remittances on loans serviced for others, net (11.1) 138.5 Other (36.4) (19.3) ------ ------ 9.5 78.4 Cash Provided by (Used for) Investments Purchases of securities available-for-sale (34.5) (96.8) Maturities of securities available-for-sale 228.1 61.4 Maturities of securities held-to-maturity 258.6 328.7 Proceeds from sale of securities available- for-sale 52.9 441.4 Loans originated or acquired - net of principal collected on loans (873.2) (1,045.5) Other (3.6) (2.1) ------ ------ (371.7) (312.9) Cash Provided by (Used for) Financing Net increase (decrease) in deposits (51.8) 55.1 Securities sold under repurchase agreements and short-term borrowings - net (248.0) (53.9) Change in debt, net 541.1 199.9 Capital contributions from parent 40.0 24.6 Proceeds from sale of subsidiary preferred stock 75.0 150.1 Dividends paid to parent (40.0) (225.0) Net increase in advances from borrowers for taxes and insurance 48.7 76.2 ------ ------ 365.0 227.0 Net increase (decrease) in cash and cash equivalents 2.8 (7.5) Cash and cash equivalents at beginning of period 175.1 214.4 ------ ------ Cash and cash equivalents at end of period $ 177.9 $ 206.9 ======= ======= See notes to consolidated financial statements. 9 Consolidated Statements of Income Temple-Inland Inc. and Subsidiaries Unaudited Third Quarter First Nine Months 1998 1997 1998 1997 (In millions, except for per share data) Revenues Manufacturing net sales $ 667.4 $ 678.2 $ 2,020.8 $ 2,014.3 Financial services revenues 276.3 260.2 808.2 682.9 ------ ------ ------- ------- 943.7 938.4 2,829.0 2,697.2 Costs and Expenses Manufacturing costs and expenses 634.6 668.4 1,912.2 1,965.4 Financial services expenses 240.2 222.8 694.4 583.6 ------ ------ ------- ------- 874.8 891.2 2,606.6 2,549.0 Operating Income 68.9 47.2 222.4 148.2 Parent Company Interest - net (26.0) (27.3) (79.3) (83.4) Other 1.0 1.8 4.2 4.5 ------ ------ ------- ------ Income Before Taxes 43.9 21.7 147.3 69.3 Taxes on Income 19.5 9.1 61.9 27.9 ------ ------ ------- ------ Net Income $ 24.4 $ 12.6 $ 85.4 $ 41.4 ====== ====== ======= ====== Weighted Average Shares Outstanding: Basic 55.6 56.7 55.8 55.8 ====== ====== ======= ====== Diluted 55.6 56.9 55.9 56.1 ====== ====== ======= ====== Earnings Per Share: Basic $ .44 $ .22 $1.53 $ .74 ====== ====== ======= ====== Diluted $ .44 $ .22 $1.53 $ .74 ====== ====== ======= ====== Dividends Paid Per Share of Common Stock $ .32 $ .32 $ .96 $ .96 ====== ====== ======= ====== See notes to consolidated financial statements. 10 Consolidated Balance Sheets Temple-Inland Inc. and Subsidiaries October 3, 1998 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 14 $ 178 $ 192 Mortgage loans held for sale - 539 539 Loans receivable - 7,220 7,220 Mortgage-backed and investment securities - 2,383 2,383 Trade and other receivables 319 - 314 Inventories 324 - 324 Property & equipment 2,843 118 2,961 Other assets 201 841 1,005 Investment in financial services 670 - - ------ ------ ------ TOTAL ASSETS $ 4,371 $ 11,279 $14,938 ====== ====== ====== LIABILITIES Deposits $ - $ 7,323 $ 7,323 Securities sold under re- purchase agreements and Federal Home Loan Bank advances - 2,207 2,207 Other liabilities 320 645 941 Long-term debt 1,595 209 1,804 Deferred income taxes 273 - 255 Postretirement benefits 144 - 144 Preferred stock issued by subsidiary - 225 225 ------ ------ ------ TOTAL LIABILITIES $ 2,332 $ 10,609 12,899 ====== ======= 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 356 Accumulated other comprehensive income (loss) (13) Retained earnings 1,849 ------ 2,253 Cost of shares held in the treasury: 5,790,756 shares (214) ------ TOTAL SHAREHOLDERS' EQUITY 2,039 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,938 ====== See notes to the consolidated financial statements. 11 Consolidated Balance Sheets Temple-Inland Inc. and Subsidiaries January 3, 1998 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 13 $ 175 $ 188 Mortgage loans held for sale - 439 439 Loans receivable - 6,451 6,451 Mortgage-backed and investment securities - 2,806 2,806 Trade and other receivables 281 - 277 Inventories 339 - 339 Property & equipment 2,813 103 2,916 Other assets 178 811 948 Investment in financial services 576 - - ------ ------ ------ TOTAL ASSETS $ 4,200 $10,785 $14,364 ====== ====== ====== LIABILITIES Deposits $ - $ 7,375 $ 7,375 Securities sold under re- purchase agreements and Federal Home Loan Bank advances - 1,955 1,955 Other liabilities 325 562 871 Long-term debt 1,438 167 1,605 Deferred income taxes 252 - 223 Postretirement benefits 140 - 140 Preferred stock issued by subsidiary - 150 150 ------ ------ ------ TOTAL LIABILITIES $ 2,155 $10,209 12,319 ====== ====== 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 356 Accumulated other comprehensive income (loss) (20) Retained earnings 1,817 ------ 2,214 Cost of shares held in the treasury: 5,069,011 shares (169) ------ TOTAL SHAREHOLDERS' EQUITY 2,045 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,364 ====== See notes to the consolidated financial statements. 12 Consolidated Statements of Cash Flows Temple-Inland Inc. and Subsidiaries Unaudited First Nine Months 1998 1997 (in millions) Cash Provided by (Used for) Operations Net income $ 85.4 $ 41.4 Adjustments to reconcile net income to net cash: Depreciation and depletion 204.3 199.8 Amortization and accretion 58.3 21.3 Deferred taxes 28.2 7.1 Trade and other receivables (34.7) (29.1) Accounts payable and accrued expenses (6.6) 29.4 Inventories 20.0 4.8 Mortgage loans held for sale (100.5) (155.4) Collections and remittances on loans serviced for others - net (11.1) 138.5 Other (56.0) (63.8) ------- ------- 187.3 194.0 Cash Provided by (Used for) Investments Capital expenditures (148.1) (181.8) Purchases of securities available-for-sale (34.5) (96.8) Maturities of securities available-for-sale 228.1 61.4 Maturities of securities held-to-maturity 258.6 328.7 Proceeds from sale of securities available- for-sale 52.9 441.4 Loans originated or acquired - net of principal collected on loans (873.2) (1,045.5) Acquisition of two MDF plants (106.3) - Acquisition of California Financial Holding Company, net of cash acquired - (22.2) Other 17.5 3.1 ------- ------- (605.0) (511.7) Cash Provided by (Used for) Financing Additions to debt 934.3 420.3 Payments of debt (237.6) (249.7) Securities sold under repurchase agreements and short-term borrowings - net (248.0) (53.9) Cash dividends paid to shareholders (53.6) (53.6) Net increase (decrease) in deposits (51.8) 55.1 Net increase in advances from borrowers for taxes and insurance 48.7 76.2 Purchase of treasury stock (48.1) (44.5) Proceeds from sale of subsidiary preferred stock 75.0 150.1 Other 2.7 8.7 ------- ------- 421.6 308.7 Net increase (decrease) in cash and cash equivalents 3.9 (9.0) Cash and cash equivalents at beginning of period 188.5 228.7 ------- ------- Cash and cash equivalents at end of period $ 192.4 $ 219.7 ======= ======= See notes to consolidated financial statements. 13 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited interim consolidated 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 (consisting only of normal accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes included in, or incorporated into, Temple-Inland Inc.'s (the "company") Annual Report on Form 10-K for the fiscal year ended January 3, 1998. The consolidated financial statements include the accounts of Temple-Inland Inc. and all subsidiaries in which the company has more than a 50 percent equity ownership. However, because certain assets and liabilities are in separate corporate entities, the consolidated assets are not available to satisfy all consolidated liabilities. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform with current year.s classification. Included as an integral part of the consolidated financial statements are separate summarized financial statements for the company's primary business groups. The Parent Company's (Temple-Inland Inc.) summarized financial statements include the accounts of Temple-Inland Inc. and its manufacturing subsidiaries with the Financial Services subsidiaries and the 20 percent to 50 percent owned companies being reflected in the financial statements on the equity basis. The Temple-Inland Financial Services Group summarized financial statements include savings bank, mortgage banking, real estate development activities and insurance operations. Beginning in 1998, the company adopted Financial Accounting Standards Board Statement 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for reporting and the display of comprehensive income and its components; however, the adoption of this Statement had no impact on the company.s net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the company's available-for-sale securities, minimum pension liability adjustments and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders. equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. 14 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION--Continued Comprehensive income (unaudited) is as follows: Comprehensive Income (in thousands) Third Quarter First Nine Months 1998 1997 1998 1997 Net income $24,421 $12,559 $85,441 $41,360 Other comprehensive income, net of income taxes: Unrealized gains (losses) on securities 1,709 5,101 8,065 4,544 Minimum pension liability adjustments - - (988) - ----- ----- ----- ----- Comprehensive income $26,130 $17,660 $92,518 $45,904 ====== ====== ====== ====== In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, which requires costs of start-up and training activities to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The company plans to adopt the SOP during the fourth quarter 1998 which will require write-off of previously capitalized costs. In adopting the SOP, the company expects to record a charge for the cumulative effect of accounting change of approximately $3.0 million (net of taxes of $2.0 million). In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the company. NOTE B - EARNINGS PER SHARE Numerators and denominators used in computing earnings per share are as follows: Earnings Per Share (in thousands, except for per share data) Third Quarter First Nine Months 1998 1997 1998 1997 Numerator for basic and diluted earnings per share-net income $24,421 $12,559 $85,441 $41,360 ====== ====== ====== ====== Denominator for basic earnings per share - weighted average common shares outstanding 55,600 56,664 55,813 55,848 Dilutive effect of stock options 33 268 131 208 ------ ------ ------ ------ Denominator for diluted earnings per share 55,633 56,932 55,944 56,056 ====== ====== ====== ====== Net income per share - Basic $ .44 $ .22 $1.53 $ .74 ====== ====== ====== ====== Net income per share - Diluted $ .44 $ .22 $1.53 $ .74 ====== ====== ====== ====== 15 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C - OTHER MATTERS There are pending against the company and its subsidiaries lawsuits and claims arising in the regular course of business. In the opinion of management, recoveries, if any, by plaintiffs or claimants that may result from the foregoing litigation and claims will not be material in relation to the consolidated financial statements of the company and its subsidiaries. Late in the third quarter of 1998, the Financial Services Group entered into interest rate floor and collar agreements which are accounted for as hedges. These agreements generally pay the group on a $1.7 billion notional amount if constant maturity swap ("CMS") rates fall below 5.25 percent and generally require the group to pay on a notional amount of $850 million if CMS rates rise above 5.60 percent. The agreements expire within one year. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Results of operations, including information regarding the company's principal business segments, are shown below: Third Quarter First Nine Months 1998 1997 1998 1997 (in millions) Revenues Paper $ 512.4 $ 518.2 $ 1,555.4 $ 1,548.2 Building products 155.0 160.0 465.4 466.1 ------ ------ ------- ------- Manufacturing net sales 667.4 678.2 2,020.8 2,014.3 Financial services 276.3 260.2 808.2 682.9 ------ ------ ------- ------- Total revenues $ 943.7 $ 938.4 $ 2,829.0 $ 2,697.2 ====== ====== ======= ======= Income Paper $ 9.5 $ (19.0) $ 37.3 $ (36.2) Building products 29.8 34.7 92.0 103.2 ------ ------ ------- ------- Operating profit 39.3 15.7 129.3 67.0 Financial services 36.1 37.4 113.8 99.3 ------ ------ ------- ------- 75.4 53.1 243.1 166.3 Corporate expenses (6.5) (5.9) (20.7) (18.1) Parent Company interest - net (26.0) (27.3) (79.3) (83.4) Other - net 1.0 1.8 4.2 4.5 ------ ------ ------- ------- Income before taxes 43.9 21.7 147.3 69.3 Taxes on income 19.5 9.1 61.9 27.9 ------ ------ ------- ------- Net income $ 24.4 $ 12.6 $ 85.4 $ 41.4 ====== ====== ======= ======= 17 Third Quarter 1998 vs. Third Quarter 1997 Third quarter earnings for 1998 totaled $24.4 million, or $.44 per diluted share, an increase of 94 percent from prior year third quarter net income of $12.6 million, or $.22 per diluted share. Revenues for the period were $943.7 million. The Paper Group reported earnings of $9.5 million for the quarter compared with an operating loss of $19.0 million in last year's third quarter. The improvement in the Paper Group's earnings was primarily due to higher prices for containerboard and boxes. Average box prices for the corrugated packaging operation were up approximately 11 percent compared with the same period last year. Shipments of boxes, however, were down slightly from last year levels, and demand for containerboard in the export market was weak in the quarter. As a result, this operation again reduced production to control inventory levels. The Orange, Texas, linerboard mill was down approximately three weeks in the quarter primarily as a result of a damaged turbine from a power surge caused by a lightning strike. The mill has been repaired, but the resulting loss, including the cost of repair, was approximately $5.0 million. The price for bleached paperboard was down significantly from third quarter 1997 levels. Despite the lower prices, profitability for the bleached paperboard operation in the third quarter was down only marginally compared with a year ago as lower costs, improved product mix and increased sales volume offset most of the effect of declining prices. The Paper Group continued its program for restructuring its domestic and international operations and the assessment of alternatives for overhead reduction and margin enhancement. In November, the company announced personnel changes and organization realignment to accommodate this restructuring. The company anticipates continuing these efforts in the fourth quarter of 1998 and into 1999. The company anticipates charges for restructuring will be taken during the fourth quarter with such costs anticipated to be in the $40 million range. The Building Products Group reported operating earnings in the third quarter of $29.8 million compared with $34.7 million for the same period last year. Average lumber prices were down 19 percent from the third quarter of 1997, which reduced profitability for this segment by $9.9 million. Particleboard and gypsum prices and volumes improved from last year levels, partially offsetting the negative impact from the decline in lumber prices. The Financial Services Group recorded operating earnings for the quarter of $36.1 million, compared with $37.4 million in the third quarter of 1997. While the bank's loan portfolio grew in the quarter, the loan volumes at the bank have begun to moderate as the demand for single-family adjustable rate mortgages has decreased due to the low interest rate environment and flat yield curve. The mortgage bank continues to experience high levels of new mortgage originations, but also a significant level of prepayments. 18 Late in the third quarter the Financial Services Group entered into interest rate floor and collar agreements with notional amounts totaling $1.7 billion. These agreements are primarily intended to mitigate the adverse impact of potentially faster prepayments on a portion of its adjustable rate residential mortgage assets in the event of declining interest rates going forward. These agreements which expire in one year, did not materially affect operations during the third quarter. Net interest expense decreased to $26.0 million in the third quarter of 1998 compared with $27.3 million in last year's third quarter. Gross interest decreased from $27.8 million in 1997, to $26.3 million in 1998. Capitalized interest decreased slightly from $.5 million in the third quarter of 1997, to $.3 million in the third quarter of 1998. First Nine Months of 1998 vs. First Nine Months of 1997 Earnings for the first nine months of 1998 were $85.4 million, or $1.53 per diluted share compared with $41.4 million, or $.74 per diluted share for the first nine months of last year. Revenues of $2,829.0 million were up five percent from the 1997 first nine months' revenues of $2,697.2 million. The Paper Group earned $37.3 million compared with a loss of $36.2 million in the first nine months of 1997. Average box prices for the corrugated packaging operation were up for the first nine months of the year compared with the same period last year, while volumes were down slightly. Prices for bleached paperboard were slightly lower for the first nine months of 1998, compared with the same period last year. The Building Products Group earned $92.0 million in the first nine months of 1998, compared with $103.2 million in the first nine months of last year. Although significantly lower market prices for solid wood products and fiber products reduced earnings by a combined total of $21.3 million from the first nine months of 1997, the strong earnings of the particleboard and gypsum operations somewhat offset this decline. Earnings from the gypsum operation improved from last year due to higher market prices and increased shipment volumes. The particleboard operation experienced significantly higher shipment volumes in the first nine months of 1998, compared with the first nine months of 1997. Earnings for the Financial Services Group were $113.8 million for the period, an increase of $14.5 million from last year's comparable period. The bank's loan portfolio continued to grow and the credit quality of the loan portfolio remains strong. Capital Resources and Financial Condition The company's financial condition continues to be strong. Internally generated funds, existing credit facilities and the capacity to issue long-term debt are sufficient to fund projected capital expenditures, to service existing debt, to pay dividends and to meet normal working capital requirements. During the third quarter of 1998, the company completed the acquisition of the Pembroke, Ontario, and Clarion, Pennsylvania, medium density fiberboard plants from MacMillan Bloedel Limited for approximately Cdn 19 $160 million (U.S. $106.3 million). During the quarter, the company entered into a $61 million term note to finance this acquisition. During the first nine months of 1998, Parent Company's debt increased $155.6 million mainly through this term note, commercial paper and bank debt. Year-to-date 1998, the company has purchased $48.1 million or 850,500 of common shares as a part of the five million share repurchase plan. No shares were repurchased in the third quarter. Guaranty Federal Bank continues to meet all three regulatory capital requirements. New Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, which requires costs of start-up and training activities to be expensed as incurred. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The company plans to adopt the SOP during the fourth quarter 1998 which will require write-off of previously capitalized costs. In adopting the SOP, the company expects to record a charge for the cumulative effect of accounting change of approximately $3.0 million (net of taxes of $2.0 million). In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the company. Year 2000 Compliance The company's three lines of business, the Paper, Building Products, and Financial Services Groups, are dependent upon computer technology and programs for conducting business. Each line of business has for the past two years been working to ensure that the Year 2000 has no significant effect on its information, financial and manufacturing systems. To date, the company has spent $4.5 million on the Year 2000 compliance, and estimates the total spending will be approximately $12.8 million. These costs are being expensed as incurred and are not expected to have a material impact on the company's financial position. Year 2000 readiness for the operations in the Financial Services Group is subject to the review and oversight of various regulatory agencies. Their foremost requirement is that all critical systems must have substantially completed testing by December 31, 1998, and that both system testing and implementation be completed by June 30, 1999. The critical systems are those that service its portfolio of loans, mortgages, and customer deposits. Based upon project progress, the company is confident all regulatory requirements will be met and that any Year 2000 disruption is unlikely. If any disruption were to occur that significantly affected operations or customer service, the group will implement disaster recovery contingency plans. 20 The Paper and Building Products Groups have found few instances of date dependent information within their manufacturing processes. There is no indication at this time that production could be affected by date required fields that cannot be overridden or entered manually. A potential risk is that an external provider could have a year 2000 related problem that would affect the ability of the company to manufacture its products or serve its customers. For instance, should a utility provider not be able to supply power needs to a facility, some impact to normal operations would be expected. Larger facilities with self-power generation would be able to continue operations with a decline in production rates until outside power was restored. The company has the flexibility to produce products in multiple geographic locations, which allows for scheduling production and shipping from alternate locations should disruptions occur. Communications with these and other vendors are ongoing to assess the risk to the organization and identify the company's exposure to such outside influences. The company has not identified any such risk at this time. No interruption of services is expected within the administrative support systems. Most software for meeting business needs is purchased and Year 2000 modifications and testing is performed by the vendor. The company also tests these purchased systems for Year 2000 readiness. While there can be no guarantee that Year 2000 problems will not occur, the company believes its efforts have addressed the risks and that contingency plans will be in place for the unexpected. Forward-Looking Statements Statements in this report that are not historical are forward- looking statements that involve risks and uncertainties. The actual results achieved by Temple-Inland 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 be presented to and pursued by Temple-Inland and its subsidiaries; the availability and price of raw materials used by Temple-Inland and its subsidiaries; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond the control of Temple-Inland and its subsidiaries. 21 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 impact 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 1998 with comparative information at year end 1997: Increase/(Decrease) in Income Before Taxes (in millions) Change in Interest Rates 1998 1997 +2% $(23) $ 4 +1% $ (6) $ 9 - $ - $ - -1% $ 2 $(12) -2% $ 22 $(14) The change in exposure to interest rate risk from year end 1997 is due primarily to the Financial Services Group entering into various interest rate floor and collar agreements to hedge the prepayment risk inherent in a portion of its adjustable rate mortgage assets and an increase in the company's adjustable rate debt. At year end 1997, the sensitivity of the Financial Services Group's earnings to changes in interest rates was inverse to the impact of interest rate changes on the company's adjustable rate debt. By substantially decreasing the earnings volatility of the Financial Services Group to interest rate changes through the use of floor and collar agreements, the company's sensitivity to interest rate risk at the end of the third quarter of 1998 is primarily driven by changes in rates on the company's adjustable rate debt. Additionally, the fair value (estimated at $234 million at the end of the third quarter of 1998) of the Financial Services Group's mortgage servicing rights is also affected by changes in interest rates. The fair value of the servicing rights has declined by $36 million (13 percent) since year end 1997 due to the recent decline in interest rates and the smaller size of the servicing portfolio. The company estimates that a one percent decline in interest rates from current levels would decrease the fair value of the mortgage servicing rights by an additional $40 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 financial instruments subject to commodity price risks. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note C to Notes to Consolidated Financial Statements in Part I of this report is incorporated by reference thereto. Item 2. Changes in Securities. Not Applicable. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Item 5. Other Information. On November 14, 1998, the company entered into an Agreement and Plan of Merger (the "Merger Agreement") with HF Bancorp, Inc. ("HFB"), the parent corporation of Hemet Federal Savings & Loan Association ("Hemet") headquartered in Hemet, California, by which HFB will be merged into the company or, under certain circumstances, a subsidiary of the company will be merged into HFB. The transaction, which is subject to approval by the HFB stockholders and by regulatory authorities, is expected to close during the second quarter of 1999. Terms of the Merger Agreement provide for HFB stockholders to receive $18.50 per share in the form of common stock of the company or cash, for a total consideration of approximately $120 million. Subject to certain limitations, each HFB stockholder will be given the election to have the consideration for their shares paid in company common stock, cash, or a combination of the two. The company, however, will issue no more than 1,225,000 shares of common stock in the transaction. If the HFB stockholders electing to receive common stock of the company do not represent a sufficient portion of the total consideration in order for the transaction to receive favorable tax treatment to the HFB stockholders, the entire merger consideration will be paid only in cash. When the transaction is completed, the operations of Hemet, which has approximately $1.0 billion in assets and operates 18 branches in southern California, principally in Riverside and San Diego counties, will be merged into Guaranty. In connection with execution of the Merger Agreement, HFB granted the company an option, exercisable under certain circumstances, to purchase 1,273,000 shares of HFB common stock, representing approximately 19.9 percent of the shares presently outstanding, at a price of approximately $16.00 per share. 23 PART II. OTHER INFORMATION --Continued Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Regulation S-K Exhibit Number (27) Financial Data Schedule (b) Reports on Form 8-K. During the nine months ended October 3, 1998, the company did not file any reports on Form 8-K. 24 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) Date: November 17, 1998 By /s/ David H. Dolben David H. Dolben Vice President and Chief Accounting Officer 25 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 Schedule 26 EX-27 2
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-02-1999 OCT-03-1998 192 0 314 0 324 0 2,961 0 14,938 0 1,804 0 0 61 1,978 14,938 2,021 2,829 1,912 2,607 0 0 79 147 62 85 0 0 0 85 1.53 1.53
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