-----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, KmCyelcMIHE2roMJenECkWGXcibh7072G8tGHu6qmzQcOWt9YbDPNCc6lFiHhgA6 xwOlyyL1oXJqz8sujwH3og== 0000731939-99-000026.txt : 19990518 0000731939-99-000026.hdr.sgml : 19990518 ACCESSION NUMBER: 0000731939-99-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990403 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLE INLAND INC CENTRAL INDEX KEY: 0000731939 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [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: 99627098 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 April 3, 1999 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) (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 April 3, 1999 Common Stock (par value $1.00 per share) 55,711,043 The Exhibit index appears on page 24 of this report. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Summarized Statements of Income Parent Company (Temple-Inland Inc.) Unaudited First Quarter 1999 1998 (in millions) Revenues Net sales $ 685 $ 682 Financial services earnings 27 37 ----- ----- 712 719 Costs and Expenses Costs of sales 586 584 Selling and administrative 67 65 ----- ----- 653 649 Operating Income 59 70 Interest - net (29) (26) Other 3 1 ----- ----- Income Before Taxes 33 45 Taxes on income 14 18 ----- ----- Income Before Accounting Change 19 27 Cumulative effect of accounting change, net of tax -- (3) ----- ----- Net Income $ 19 $ 24 ===== ===== See notes to consolidated financial statements. 3 Summarized Balance Sheets Parent Company (Temple-Inland Inc.) Unaudited First Quarter Year End 1999 1998 (in millions) ASSETS Current Assets Cash $ 13 $ 15 Receivables, less allowances of $13 million in 1999 and $13 million in 1998 358 297 Inventories: Work in process and finished goods 93 93 Raw materials 224 242 ----- ----- 317 335 Prepaid expenses 17 14 ----- ----- Total current assets 705 661 Investment in Financial Services 847 708 Property and Equipment Buildings 573 574 Machinery and equipment 3,846 3,829 Construction in progress 120 104 Less allowances for depreciation (2,291) (2,242) ------ ------ 2,248 2,265 Timber and timberlands--less depletion 502 499 Land 35 35 ------ ------ Total property and equipment 2,785 2,799 Other Assets 171 174 ------ ------ Total Assets $ 4,508 $ 4,342 ====== ====== See notes to consolidated financial statements. 4 Summarized Balance Sheets - Continued Parent Company (Temple-Inland Inc.) Unaudited First Quarter Year End 1999 1998 (in millions) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 132 $ 138 Accrued expenses 165 171 Employment compensation and benefits 15 28 Current portion of long-term debt 1 2 ----- ----- Total current liabilities 313 339 Long-Term Debt 1,764 1,583 Deferred Income Taxes 271 266 Postretirement Benefits 147 145 Other Liabilities 10 11 Shareholders' Equity 2,003 1,998 ------ ------ Total Liabilities and Shareholders' Equity $ 4,508 $ 4,342 ====== ====== See notes to consolidated financial statements. 5 Summarized Statements of Cash Flows Parent Company (Temple-Inland Inc.) Unaudited First Quarter 1999 1998 (in millions) Cash Provided by (Used for) Operations Net income $ 19 $ 24 Adjustments to reconcile net income to net cash: Cumulative effect of accounting change, net of tax -- 3 Depreciation and depletion 65 65 Deferred taxes 5 7 Unremitted earnings from financial services (20) (27) Receivables (60) (48) Inventories 18 (6) Accounts payable and accrued expenses (26) (15) Other (7) (15) ----- ----- (6) (12) ----- ----- Cash Provided by (Used for) Investments Capital expenditures for property and equipment (49) (36) Proceeds from sale of property and equipment 6 -- Acquisitions and joint ventures, net -- (2) Capital contributions to financial services (120) (40) ----- ----- (163) (78) ----- ----- Cash Provided by (Used for) Financing Additions to debt 305 239 Payments of debt (124) (113) Purchase of stock for treasury -- (19) Cash dividends paid to shareholders (18) (18) Other 4 2 ----- ----- 167 91 ----- ----- Net increase (decrease) in cash (2) 1 Cash at beginning of period 15 13 ----- ----- Cash at end of period $ 13 $ 14 ===== ===== See notes to consolidated financial statements. 6 Summarized Statements of Income Financial Services Group Unaudited First Quarter 1999 1998 (in millions) Interest income Loans receivable and mortgage loans held for sale $ 160 $ 139 Mortgage-backed and investment securities 33 41 Other earnings assets 1 1 ---- ---- Total interest income 194 181 Interest expense Deposits 85 89 Borrowed funds 44 32 ---- ---- Total interest expense 129 121 Net interest income 65 60 Provision for loan losses 10 2 ---- ---- Net interest income after provision for loan losses 55 58 Noninterest income Loan servicing fees 18 23 Loan origination and marketing 27 22 Other 32 37 ---- ---- Total noninterest income 77 82 Noninterest expense Compensation and benefits 43 41 Other 59 59 ---- ---- Total noninterest expense 102 100 Income before taxes and minority interest 30 40 Minority interest in income of consolidated subsidiary (4) (3) ---- ---- Income before taxes 26 37 Taxes on income 6 10 ---- ---- Net income $ 20 $ 27 ==== ==== See notes to consolidated financial statements. 7 Summarized Balance Sheets Financial Services Group Unaudited First Quarter Year End 1999 1998 (in millions) ASSETS Cash and cash equivalents $ 150 $ 229 Mortgage loans held for sale 489 621 Loans receivable 8,533 8,101 Mortgage-backed and investment securities 2,325 2,485 Other assets 1,021 964 ------- ------- TOTAL ASSETS $ 12,518 $ 12,400 ======= ======= LIABILITIES Deposits $ 7,603 $ 7,338 Securities sold under repurchase agreements 198 - Federal Home Loan Bank advances 2,813 3,221 Other borrowings 210 210 Other liabilities 622 698 Preferred stock issued by subsidiary 225 225 ------- ------- TOTAL LIABILITIES 11,671 11,692 SHAREHOLDERS' EQUITY 847 708 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,518 $ 12,400 ======= ======= See notes to consolidated financial statements. 8 Summarized Statements of Cash Flows Financial Services Group Unaudited First Quarter 1999 1998 (in millions) Cash Provided by (Used for) Operations Net income $ 20 $ 27 Adjustments to reconcile net income to net cash: Provision for amortization, depreciation and accretion 21 18 Mortgage loans held for sale 132 (215) Collections and remittances on loans serviced for others, net (121) 70 Originated mortgage servicing rights (21) (12) Other 15 5 ------ ------ 46 (107) ------ ------ Cash Provided by (Used for) Investments Maturities of securities available-for-sale 68 55 Maturities and redemptions of securities held-to-maturity 90 63 Loans originated or acquired, net of principal collected on loans (446) (447) Proceeds from sale of securities available-for-sale - 18 Capital expenditures for property and equipment (6) (7) Other (15) 40 ------ ------ (309) (278) ------ ------ Cash Provided by (Used for) Financing Net increase (decrease) in deposits 265 (28) Securities sold under repurchase agreements and short-term borrowings, net (110) 352 Additions to debt 4 27 Payments of debt (103) (16) Capital contributions from Parent Company 120 40 Other 8 17 ------ ------ 184 392 ------ ------ Net increase (decrease) in cash and cash equivalents (79) 7 Cash and cash equivalents at beginning of period 229 175 ------ ------ Cash and cash equivalents at end of period $ 150 $ 182 ====== ====== See notes to consolidated financial statements. 9 Consolidated Statements of Income Temple-Inland Inc. and Subsidiaries Unaudited First Quarter 1999 1998 (in millions) Revenues Manufacturing $ 685 $ 682 Financial services 271 263 ------ ------ 956 945 Costs and Expenses Manufacturing 653 649 Financial services 244 226 ------ ------ 897 875 Operating Income 59 70 Parent Company interest - net (29) (26) Other 3 1 ------ ------ Income Before Taxes and Accounting Change 33 45 Taxes on income 14 18 ------ ------ Income Before Accounting Change 19 27 Cumulative effect of accounting change, net of tax - (3) ------ ------ Net Income $ 19 $ 24 ====== ====== Weighted average shares outstanding: Basic 55.7 56.0 Diluted 55.9 56.2 Earnings Per Share Basic: Income before accounting change $ 0.34 $ 0.47 Cumulative effect of accounting change, net of tax - (0.06) ------ ------ Net Income $ 0.34 $ 0.41 ====== ====== Diluted: Income before accounting change $ 0.33 $ 0.47 Cumulative effect of accounting change, net of tax - (0.06) ------ ------ Net Income $ 0.33 $ 0.41 ====== ====== Dividends paid per share of common stock $ 0.32 $ 0.32 ====== ====== See notes to consolidated financial statements. 10 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries First Quarter 1999 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 13 $ 150 $ 163 Mortgage loans held for sale - 489 489 Loans receivable - 8,533 8,533 Mortgage-backed and investment securities - 2,325 2,325 Trade and other receivables 358 - 350 Inventories 317 - 317 Property and equipment 2,785 131 2,916 Other assets 188 890 1,041 Investment in Financial Services 847 - - ------- ------- ------- TOTAL ASSETS $ 4,508 $ 12,518 $16,134 ======= ======= ======= LIABILITIES Deposits $ - $ 7,603 $ 7,603 Securities sold under repurchase agreements and Federal Home Loan Bank advances - 3,011 3,011 Other liabilities 323 622 923 Long-term debt 1,764 210 1,974 Deferred income taxes 271 - 248 Postretirement benefits 147 - 147 Preferred stock issued by subsidiary - 225 225 ------ ------ ------ TOTAL LIABILITIES $2,505 $ 11,671 $14,131 ====== ====== ------ 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 359 Accumulated other comprehensive income (loss) (17) Retained earnings 1,811 ------ 2,214 Cost of shares held in the treasury: 5,678,509 shares (211) ------ TOTAL SHAREHOLDERS' EQUITY 2,003 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,134 ====== See notes to consolidated financial statements. 11 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries Year End 1998 Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 15 $ 229 $ 244 Mortgage loans held for sale - 621 621 Loans receivable - 8,101 8,101 Mortgage-backed and investment securities - 2,485 2,485 Trade and other receivables 297 - 290 Inventories 335 - 335 Property and equipment 2,799 129 2,928 Other assets 188 835 986 Investment in Financial Services 708 - - ------- ------ ------- TOTAL ASSETS $ 4,342 $ 12,400 $ 15,990 ======= ====== ======= LIABILITIES Deposits $ - $ 7,338 $ 7,338 Federal Home Loan Bank advances - 3,221 3,221 Other liabilities 350 698 1,028 Long-term debt 1,583 210 1,793 Deferred income taxes 266 - 242 Postretirement benefits 145 - 145 Preferred stock issued by subsidiary - 225 225 ------- ------ ------- TOTAL LIABILITIES $ 2,344 $ 11,692 $ 13,992 ======= ====== ------- 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 357 Accumulated other comprehensive income (loss) (17) Retained earnings 1,810 ------ 2,211 Cost of shares held in the treasury: 5,785,139 shares (213) ------ TOTAL SHAREHOLDERS' EQUITY 1,998 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,990 ======= See notes to consolidated financial statements. 12 Consolidated Statements of Cash Flows Temple-Inland Inc. and Subsidiaries Unaudited First Quarter 1999 1998 (in millions) CASH PROVIDED (USED FOR) OPERATIONS Net income $ 19 $ 24 Adjustments to reconcile net income to net cash: Cumulative effect of accounting change, net of tax - 3 Depreciation and depletion 69 69 Amortization of goodwill 2 1 Deferred taxes 7 7 Amortization and accretion on financial instruments 16 13 Mortgage loans held for sale 132 (215) Receivables (60) (48) Inventories 18 (6) Accounts payable and accrued expenses (26) (15) Collections and remittances on loans serviced for others, net (121) 70 Originated mortgage servicing rights (21) (12) Other 5 (10) ------ ------ 40 (119) ------ ------ CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and equipment (55) (43) Proceeds from sale of property and equipment 6 7 Maturities of securities available-for-sale 68 55 Maturities and redemptions of securities held-to-maturity 90 63 Loans originated or acquired, net of principal collected on loans (446) (447) Proceeds from sale of securities available-for-sale - 18 Acquisitions and joint ventures, net - (2) Other (15) 33 ------ ------ (352) (316) ------ ------ CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 309 266 Payments of debt (227) (129) Securities sold under repurchase agreements and short-term borrowings, net (110) 352 Purchase of stock for treasury - (19) Cash dividends paid to shareholders (18) (18) Net increase (decrease) in deposits 265 (28) Other 12 19 ------ ------ 231 443 ------ ------ Net increase (decrease) in cash and cash equivalents (81) 8 Cash and cash equivalents at beginning of period 244 188 ------ ------ Cash and cash equivalents at end of period $ 163 $ 196 ====== ====== See the notes to the 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 2, 1999. 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. 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 (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 method. The Financial Services Group summarized financial statements include savings bank, mortgage banking, real estate development activities and insurance operations. The company will adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, effective at the beginning of 2000. This statement will require derivative positions to be recognized in the balance sheet at fair value. The company presently utilizes derivatives to manage interest rate risk and risk in its mortgage loan production operations. The company has not yet determined the effect on earnings or financial position of adopting this statement. 14 Effective with the beginning of 1999, the company adopted AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires the capitalization of qualifying internal and external costs incurred during the application development stage. All costs incurred during the preliminary project stage and post- implementation stage are to be expensed as incurred. The adoption of this statement did not have a material effect on the company's earnings or financial position. NOTE B - EARNINGS PER SHARE Denominators used in computing earnings per share are as follows: (in millions, except per share data) First Quarter 1999 1998 Denominator for basic earnings per share - weighted average common shares outstanding 55.7 56.0 Dilutive effect of stock options 0.2 0.2 ------ ------ Denominator for diluted earnings per share 55.9 56.2 ====== ====== NOTE C - COMPREHENSIVE INCOME Comprehensive income is as follows: First Quarter 1999 1998 (in millions) Net Income $ 19 $ 24 Other comprehensive income, net of income taxes: Unrealized gains (losses)on available-for-sale securities (1) 5 Foreign currency translation adjustments 1 - Minimum pension liability adjustments - (1) ---- ---- Other comprehensive income - 4 ---- ---- Comprehensive income $ 19 $ 28 ==== ==== 15 NOTE D - SEGMENT INFORMATION The company has three reportable segments: paper, building products and financial services. The paper segment manufactures corrugated packaging and bleached paperboard products. The building products segment manufactures a variety of building materials and manages the company's timber resources. The financial services segment operates a savings bank and also engages in mortgage banking, real estate development and insurance activities. These segments are managed as separate business units. The company evaluates performance based on operating income before special charges, corporate expenses and income taxes. Corporate interest expense is not allocated to business segments. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements. Corporate and other includes corporate expenses and special charges. For the first quarter or at Building Financial Corporate quarter end 1999 Paper Products Services and Other Total - ---------------- ----- -------- -------- --------- ----- (in millions) Revenues from external customers 513 172 271 - 956 Operating income 5 34 27 (7) 59 Financial Services, net interest income - - 65 - 65 Total assets 2,485 1,056 12,518 75 16,134 For the first quarter or at quarter end 1998 - ---------------- Revenues from external customers 528 154 263 - 945 Operating income 10 30 37 (7) 70 Financial Services, net interest income - - 60 - 60 Total assets 2,618 928 11,303 60 14,909 NOTE E - SPECIAL CHARGE During the fourth quarter of 1998, the Parent Company recorded a special charge of $47.4 million, which included $13.0 million related to work force reductions in the Paper Group, $24.5 million related to asset impairments, principally related to the Paper Group's South American operation, and $9.9 million of asset impairments related to the Building Products Group. Of the $13.0 million charge for work force reductions, which included termination benefits associated with the early retirement offer and severance amounts for the involuntary terminations, $11.00 million was utilized during the first quarter of 1999. 16 During the first quarter of 1999, the Company signed a letter of intent to sell its Argentina operation. The sale is subject to the negotiation of a definitive agreement and certain other conditions. Subject to final settlement, the Company expects to realize the carrying value of these assets. The sale of this operation is not expected to have a material effect on the Company's financial position or results of operation. NOTE F - CONTINGENCIES 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. 17 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: First Quarter 1999 1998 (in millions) Revenues Paper $ 513 $ 528 Building products 172 154 ------- ------ Manufacturing net sales 685 682 Financial services 271 263 ------- ------ Total revenues $ 956 $ 945 ======= ====== Income Paper $ 5 $ 10 Building products 34 30 ------- ------ 39 40 Financial services 27 37 ------- ------ Segment operating income 66 77 Corporate expenses (7) (7) Parent company interest - net (29) (26) Other - net 3 1 ------- ------ Income before taxes and accounting change 33 45 Taxes on income 14 18 ------- ------ Income before accounting change 19 27 Cumulative effect of accounting change, net of tax - (3) ------- ------ Net income $ 19 $ 24 ======= ====== First Quarter 1999 vs. First Quarter 1998 First quarter earnings of $19 million, or $.33 per diluted share, represent a 30 percent decrease from first quarter 1998 net income of $27 million, or $.47 per diluted share, before effect of accounting change. Revenues for the first quarter of 1999 were $956 million, compared with $945 million in the first quarter of 1998. The paper group reported operating income of $5 million in the quarter compared with operating income of $10 million in the first quarter of 1998 and an operating loss of $5 million in the fourth quarter of 1998. The decline from last year's first quarter was 18 due to lower prices for corrugated containers and bleached paperboard. Despite lower prices compared with the fourth quarter of 1998, the paper group reported improved results due to increased sales volume, margin enhancement initiatives, and initial results from the productivity improvement program. Corrugated box shipments increased approximately 5 percent for the quarter versus the same period last year. Prices for corrugated containers declined approximately 4 percent from last year's first quarter and 2 percent from the fourth quarter of 1998. The average price for bleached paperboard in the quarter was 6 percent below year-ago levels and down 2 percent from the prior quarter. During the first quarter of 1999, the paper group substantially completed its workforce reductions and utilized approximately $11.00 million of the $13.0 million that had been accrued. Also during the first quarter of 1999, the Company signed a letter of intent to sell its Argentina operation. The sale is subject to the negotiation of a definitive agreement and certain other conditions. Subject to final settlement, the Company expects to realize the carrying value of these assets. The sale of this operation is not expected to have a material effect on the Company's financial position or results of operation. The building products group reported first quarter operating income of $34 million, compared with operating income of $30 million in last year's first quarter. Revenues for the first quarter were $172 million, up $18 million from last year's first quarter revenues of $154 million. First quarter sales averages were above levels from the same period of last year across all product lines, except lumber. Although lumber prices decreased 4 percent from last year's first quarter, prices were up 10 percent from last year's fourth quarter. Operating losses for the building products group's three new medium density fiberboard facilities and its fiber cement operation had a negative effect on earnings in the quarter. The modernization of the Diboll sawmill, which was completed late in the quarter, also had a negative effect on earnings in the quarter. The financial services group reported first quarter operating earnings of $27 million compared with $37 million in the first quarter of 1998. Net interest income after provision for loan loss decreased by $3 million from the net effect of a $5 million increase in interest income, which was due to higher loan volumes, and an $8 million increase in the provision for loan loss. The increase in provision for loan loss is due to additional reserves required due to loan growth and the change in asset mix of the bank. Noninterest income decreased by $5 million due primarily to gains of $3 million on sale of commercial properties by the Real Estate group in 1998 that did not recur in 1999 and decreased gains of $1 million on sales of acquired property by the bank in 1999. Noninterest expense increased by $2 million from first quarter 1998 to support the growth of the bank. Gross and net interest expense was $3 million higher in the first quarter of 1999 compared with the same quarter in 1998 due to 19 higher levels of debt outstanding. Net interest expense was $29 million in the first quarter of 1999 compared with $26 million in the first quarter of 1998. Capital Resources and Liquidity 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, service existing debt, pay dividends and meet normal working capital requirements. During the first quarter of 1999, deposit campaigns by the bank increased deposits by approximately $265 million. Parent Company's debt increased by $181 million in the first quarter of 1999, mainly through issuance of $300 million of medium-term notes, $5 million of other notes and the $124 million payment of commercial paper and borrowings under bank credit agreements. A capital contribution of $120 million to Guaranty at the end of the first quarter provided additional capital to maintain Guaranty's regulatory capital requirements. Guaranty continues to meet all three regulatory capital requirements. 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. In 1996, the Company began working to address the possible effects of the Year 2000 issue on its information, financial, and manufacturing systems. These efforts included inventory assessment, remediation, and testing with non-compliant hardware and software being modified or replaced. Implementation of the Company's overall Year 2000 project plan was approximately 80 percent complete as of March 31, 1999. To date, the company has spent $8 million on Year 2000 compliance and estimates the total spending will be approximately $11 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 review and oversight of various regulatory agencies. All critical systems have completed testing and implementation will be completed by June 30, 1999. 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 that would significantly affect operations or customer service were to occur, the group would implement its disaster recovery contingency plans. 20 The Paper and Building Products Groups have found few instances of date-dependent information within their manufacturing processes. No significant issues that will impact operations have been identified with the Company's manufacturing systems. 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 is 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. The Company has been surveying its major suppliers, vendors, and customers to assess the potential impact of these third-party entities on business operations. These groups have been prioritized based on their relative criticality to the Company's operations. To date, no significant compliance issues have been identified with third-party relationships. The Company's business units will continue to evaluate key third-parties throughout 1999, identifying and considering various contingency options to include inventory buildup, alternate suppliers, and substitute raw materials. 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 supplier. The company also tests these purchased systems for Year 2000 readiness. The Company's core business systems have been replaced during the last three years with current technology. These systems include financials, forest fiber accounting, banking automation, and maintenance planning and control systems. 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 are 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 21 other factors, many of which are beyond the control of Temple- Inland and its subsidiaries. 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 pretax income of immediate, parallel and sustained shifts in interest risks for the subsequent 12-month period at the end of the first quarter of 1999 with comparative information at year end 1998: Increase / (Decrease) in Income before Taxes ( in millions) First Quarter Year End Change in Interest Rates 1999 1998 +2% $(31) $(26) +1% $( 9) $( 1) 0% $ - $ - -1% $ 5 $ 10 -2% $ 23 $ 29 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 $51 million or approximately 18 percent. 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 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. Not Applicable. Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. The Company held its annual meeting of stockholders on May 7, 1999, 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 Matter For or and Withheld Broker Non-votes 1. Election of four directors (a) Anthony M. Frank 44,173,480 442,548 -- (b) William B. Howes 44,171,836 444,192 -- (c) Walter P. Stern 44,173,046 444,982 -- (d) Charlotte Temple 44,168,905 447,123 -- 2. Ratification of appointment of Ernst & Young LLP 44,486,045 18,968 111,415 3. Ratification of adoption of First Amendment to the Company's 1997 Stock Option Plan 41,328,957 3,097,389 190,082 4. Stockholder proposal regarding retention of investment banker 12,881,190 27,394,034 4,341,204 Item 5. Other Information. None 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 three months ended April 3, 1999, the Company filed one current report on Form 8-K. This Form 8-K was filed on February 19, 1999, to report under Item 5 of Form 8-K the renewal of the Company's stockholder rights plan. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registration has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEMPLE-INLAND INC. (Registrant) Dated: May 17, 1999 By /s/ David H. Dolben ------------------------ David H. Dolben Vice President and Chief Accounting Officer 24 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 25 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 3-MOS JAN-01-2000 APR-03-1999 163 0 350 0 317 0 2,916 0 16,134 0 1,974 0 0 61 1,942 16,134 685 956 653 897 0 0 29 33 14 19 0 0 0 19 0.34 0.33
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