-----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, EpMJekkWVgfVSJP+WVOoosYe803YZbjHdqUxPfjSoz1hhNrBnb+TvJOPQEsBLPZu UXvnZsL2RMrLhM+oXBMGag== 0000731939-99-000029.txt : 19990812 0000731939-99-000029.hdr.sgml : 19990812 ACCESSION NUMBER: 0000731939-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990811 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: 99684319 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 July 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 July 3, 1999 Common Stock (par value $1.00 per share) 55,843,041 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 Second First Quarter Six Months 1999 1998 1999 1998 (in millions) Revenues Net sales $ 735 $ 671 $ 1,420 $ 1,353 Financial services earnings 34 41 61 78 ------- ------- ------- ------- 769 712 1,481 1,431 Costs and Expenses Cost of sales 609 562 1,195 1,146 Selling and administrative 68 66 135 131 ------- ------- ------- ------- 677 628 1,330 1,277 Operating Income 92 84 151 154 Interest expense - net (30) (27) (59) (53) Other 3 2 6 3 ------- ------- ------- ------- Income Before Taxes and Accounting Change 65 59 98 104 Taxes on income 24 24 38 42 ------- ------- ------- ------- Income Before Accounting Change 41 35 60 62 Cumulative effect of accounting change, net of tax - - - (3) ------- ------- ------- ------- Net Income $ 41 $ 35 $ 60 $ 59 ======= ======= ======= ======= See notes to consolidated financial statements. 3 Summarized Balance Sheets Parent Company (Temple-Inland Inc.) Unaudited Second Quarter Year End 1999 1998 (in millions) ASSETS Current Assets Cash $ 6 $ 15 Receivables, less allowances of $10 million in 1999 and $13 million in 1998 398 297 Inventories: Work in process and finished goods 94 93 Raw materials 211 242 ------ ------ 305 335 Prepaid expenses 15 14 ------ ------ Total current assets 724 661 Investment in Financial Services 985 708 Property and Equipment Buildings 574 574 Machinery and equipment 3,854 3,829 Construction in progress 118 104 Less allowances for depreciation (2,334) (2,242) ------ ------ 2,212 2,265 Timber and timberlands--less depletion 501 499 Land 35 35 ------ ------ Total property and equipment 2,748 2,799 Other Assets 171 174 ------ ------ Total Assets $ 4,628 $ 4,342 ====== ====== See notes to consolidated financial statements. 4 Summarized Balance Sheets - Continued Parent Company (Temple-Inland Inc.) Unaudited Second Quarter Year End 1999 1998 (in millions) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 121 $ 138 Accrued expenses 151 171 Employee compensation and benefits 22 28 Current portion of long-term debt 1 2 ------ ------ Total current liabillities 295 339 Long-Term Debt 1,868 1,583 Deferred Income Taxes 282 266 Postretirement Benefits 147 145 Other Liabilities 11 11 Shareholders' Equity 2,025 1,998 ------ ------ Total Liabilities and Shareholders' Equity $ 4,628 $ 4,342 ====== ====== See notes to consolidated financial statements. 5 Summarized Statements of Cash Flows Parent Company (Temple-Inland Inc.) Unaudited First Six Months 1999 1998 (in millions) Cash Provided by (Used for) Operations Net income $ 60 $ 59 Adjustments to reconcile net income to net cash: Cumulative effect of accounting change, net of tax - 3 Depreciation and depletion 131 130 Deferred taxes 16 17 Unremitted earnings from financial services (48) (59) Receivables (102) (38) Inventories 27 1 Accounts payable and accrued expenses (19) (24) Other - (18) ------ ------ 65 71 Cash Provided by (Used for) Investments Capital expenditures for property and equipment (103) (76) Proceeds from sale of property and equipment 13 2 Acquisitions and joint ventures, net (4) (1) Capital contributions to financial services (239) (40) Dividends from financial services - 25 ------ ------ (333) (90) Cash Provided by (Used for) Financing Additions to debt 308 274 Payments of debt (24) (172) Purchase of stock for treasury - (48) Cash dividends paid to shareholders (36) (36) Other 11 3 ------ ------ 259 21 Net increase (decrease) in cash (9) 2 Cash at beginning of period 15 13 ------ ------ Cash at end of period $ 6 $ 15 ====== ====== See notes to consolidated financial statements. 6 Summarized Statements of Income Financial Services Group Unaudited Second Quarter First Six Months 1999 1998 1999 1998 (in millions) Interest income Loans receivable and mortgage loans held for sale $ 166 $ 142 $ 326 $ 281 Mortgage-backed and investment securities 28 39 61 80 Other earnings assets 1 1 2 2 ------ ----- ----- ----- Total interest income 195 182 389 363 Interest expense Deposits 88 90 173 179 Borrowed funds 39 35 83 67 ------ ----- ----- ----- Total interest expense 127 125 256 246 Net interest income 68 57 133 117 Provision for loan losses 8 (1) 18 1 ------ ----- ----- ----- Net interest income after provision for loan losses 60 58 115 116 Noninterest income Loan servicing fees 19 19 37 42 Loan origination and marketing 20 28 47 50 Other 36 40 68 77 ------ ----- ----- ----- Total noninterest income 75 87 152 169 Noninterest expense Compensation and benefits 40 42 83 83 Other 57 59 116 118 ------ ----- ----- ----- Total noninterest expense 97 101 199 201 Income before taxes and minority interest 38 44 68 84 Minority interest in income of consolidated subsidiary (3) (3) (7) (6) ------ ----- ----- ----- Income before taxes 35 41 61 78 Taxes on income 7 9 13 19 ------ ----- ----- ----- Net income $ 28 $ 32 $ 48 $ 59 ====== ===== ===== ===== See notes to consolidated financial statements. 7 Summarized Balance Sheets Financial Services Group Unaudited Second Quarter Year End 1999 1998 (in millions) ASSETS Cash and cash equivalents $ 227 $ 229 Mortgage loans held for sale 422 621 Loans receivable 9,461 8,101 Mortgage-backed and investment securities 2,437 2,485 Other assets 1,127 964 ------- ------- TOTAL ASSETS $ 13,674 $ 12,400 ======= ======= LIABILITIES Deposits $ 8,657 $ 7,338 Federal Home Loan Bank advances 2,959 3,221 Other borrowings 216 210 Other liabilities 632 698 Preferred stock issued by subsidiary 225 225 ------- ------- TOTAL LIABILITIES 12,689 11,692 SHAREHOLDERS' EQUITY 985 708 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,674 $ 12,400 ======= ======= See notes to consolidated financial statements. 8 Summarized Statements of Cash Flows Financial Services Group Unaudited First Six Months 1999 1998 (in millions) Cash Provided by (Used for) Operations Net income $ 48 $ 59 Adjustments to reconcile net income to net cash: Provision for amortization, depreciation and accretion 38 40 Provision for loan losses 18 1 Mortgage loans held for sale 199 (64) Collections and remittances on loans serviced for others, net (143) (41) Originated mortgage servicing rights (38) (31) Minority interest in earnings of consolidated subsidiary 7 6 Other 103 (16) ------ ------ 232 (46) Cash Provided by (Used for) Investments Purchases of securities available-for-sale (4) (33) Maturities of securities available-for-sale 127 155 Maturities and redemptions of securities held-to-maturity 202 157 Loans originated or acquired, net of principal collected on loans (698) (532) Purchase of asset-based lending loans (106) - Proceeds from sale of securities available-for-sale - 52 Capital expenditures for property and equipment (13) (16) Acquisition of HF Bancorp, Inc., net of cash acquired (90) - Purchase of Fidelity Funding (19) - Other (28) 53 ------ ------ (629) (164) Cash Provided by (Used for) Financing Net increase in deposits 436 10 Securities sold under repurchase agreements and short-term borrowings, net 36 111 Additions to debt 14 80 Payments of debt (350) (26) Capital contributions from Parent Company 239 40 Dividends paid to Parent Company - (25) Proceeds from sale of subsidiary preferred stock - 75 Distributions to minority interest (7) (6) Net increase in advances from borrowers for taxes and insurance 26 33 Other 1 - ------ ------ 395 292 Net increase (decrease) in cash and cash equivalents (2) 82 Cash and cash equivalents at beginning of period 229 175 ------ ------ Cash and cash equivalents at end of period $ 227 $ 257 ====== ====== See notes to consolidated financial statements. 9 Consolidated Statements of Income Temple-Inland Inc. and Subsidiaries Unaudited Second Quarter First Six Months 1999 1998 1999 1998 (in millions) Revenues Manufacturing $ 735 $ 671 $ 1,420 $ 1,353 Financial services 270 269 541 532 ------ ------ ------ ------ 1,005 940 1,961 1,885 Costs and Expenses Manufacturing 677 628 1,330 1,277 Financial services 236 228 480 454 ------ ------ ------ ------ 913 856 1,810 1,731 Operating Income 92 84 151 154 Parent company interest - net (30) (27) (59) (53) Other 3 2 6 3 ------ ------ ------ ------ Income Before Taxes and Accounting Change 65 59 98 104 Taxes on income 24 24 38 42 ------ ------ ------ ------ Income Before Accounting Change 41 35 60 62 Cumulative effect of accounting change, net of tax - - - (3) ------ ------ ------ ------ Net Income $ 41 $ 35 $ 60 $ 59 ====== ===== ====== ====== Weighted average shares outstanding: Basic 55.8 55.8 55.7 55.9 Diluted 56.1 56.0 56.0 56.1 Earnings Per Share Basic: Income before accounting change $ 0.74 $ 0.62 $ 1.08 $ 1.09 Cumulative effect of accounting change, net of tax - - - (0.06) ------ ------ ------ ------ Net Income $ 0.74 $ 0.62 $ 1.08 $ 1.03 ====== ====== ====== ====== Diluted: Income before accounting change $ 0.74 $ 0.62 $ 1.07 $ 1.09 Cumulative effect of accounting change, net of tax - - - (0.06) ------ ------ ------ ------ Net Income $ 0.74 $ 0.62 $ 1.07 $ 1.03 ====== ====== ====== ====== Dividends paid per share of common stock $ 0.32 $ 0.32 $ 0.64 $ 0.64 ====== ====== ====== ====== See notes to consolidated financial statements. 10 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries Second Quarter 1999 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 6 $ 227 $ 233 Mortgage loans held for sale - 422 422 Loans receivable - 9,461 9,461 Mortgage-backed and investment securities - 2,437 2,437 Trade and other receivables 398 - 391 Inventories 305 - 305 Property and equipment 2,748 140 2,888 Other assets 186 987 1,122 Investment in Financial Services 985 - - ------ ------- ------ TOTAL ASSETS $ 4,628 $ 13,674 $ 17,259 ====== ======= ====== LIABILITIES Deposits $ - $ 8,657 $ 8,657 Federal Home Loan Bank advances - 2,959 2,959 Other liabilities 306 632 910 Long-term debt 1,868 216 2,084 Deferred income taxes 282 - 252 Postretirement benefits 147 - 147 Preferred stock issued by subsidiary - 225 225 ------ ------- ------ TOTAL LIABILITIES $ 2,603 $ 12,689 $ 15,234 ====== ======= ------ 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 360 Accumulated other comprehensive income (loss) (25) Retained earnings 1,834 ------ 2,230 Cost of shares held in the treasury: 5,546,511 shares (205) ------ TOTAL SHAREHOLDERS' EQUITY 2,025 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,259 ====== 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 Six Months 1999 1998 (in millions) CASH PROVIDED (USED FOR) OPERATIONS Net income $ 60 $ 59 Adjustments to reconcile net income to net cash: Cumulative effect of accounting change, net of tax - 3 Depreciation and depletion 139 137 Amortization of goodwill 4 3 Provision for loan losses 18 1 Deferred taxes 18 19 Amortization and accretion on financial instruments 28 31 Mortgage loans held for sale 199 (64) Receivables (102) (38) Inventories 27 1 Accounts payable and accrued expenses (19) (24) Collections and remittances on loans serviced for others, net (143) (41) Originated mortgage servicing rights (38) (31) Other 106 (31) ----- ----- 297 25 CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and equipment (116) (92) Proceeds from sale of property and equipment 13 13 Purchases of securities available-for-sale (4) (33) Maturities of securities available-for-sale 127 155 Maturities and redemptions of securities held-to-maturity 202 157 Loans originated or acquired, net of principal collected on loans (698) (532) Purchase of asset-based lending loans (106) - Proceeds from sale of securities available-for-sale - 52 Manufacturing acquisitions and joint ventures, net (4) (1) Acquisition of HF Bancorp Inc., net of cash acquired (90) - Purchase of Fidelity Funding (19) - Other (28) 42 ------ ------ (723) (239) CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 322 354 Payments of debt (374) (198) Securities sold under repurchase agreements and short-term borrowings, net 36 111 Purchase of stock for treasury - (48) Cash dividends paid to shareholders (36) (36) Net increase in deposits 436 10 Proceeds from sale of subsidiary preferred stock - 75 Other 31 30 ------ ------ 415 298 Net increase (decrease) in cash and cash equivalents (11) 84 Cash and cash equivalents at beginning of period 244 188 ------ ------ Cash and cash equivalents at end of period $ 233 $ 272 ====== ====== 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, '""the Annual Report on Form 10-K of Temple-Inland Inc. (the "Company") for the fiscal year ended January 2, 1999. The consolidated financial statements include the accounts of the Company 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 the Company 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. In July 1999, the Financial Accounting Standards Board (FASB) delayed the effective date of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, to fiscal years beginning after June 15, 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 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: Second First Six Quarter Months 1999 1998 1999 1998 (in millions) Denominator for basic earnings per share Weighted average common shares outstanding 55.8 55.8 55.7 55.9 Dilutive effect of stock options .3 .2 .3 .2 ---- ---- ---- ---- Denominator for diluted earnings per share 56.1 56.0 56.0 56.1 ==== ==== ==== ==== NOTE C - COMPREHENSIVE INCOME Comprehensive income is as follows: Second First Six Quarter Months 1999 1998 1999 1998 (in millions) Net income $41 $35 $60 $59 Other comprehensive income, net of income taxes: Unrealized gains (losses) on available-for-sale securities (8) 1 (9) 6 Foreign currency translation adjustments - - 1 - Minimum pension liability adjustments - - - (1) --- --- --- --- Other comprehensive income (8) 1 (8) 5 --- --- --- --- Comprehensive income $33 $36 $52 $64 === === === === 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 15 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. Building Financial Corporate Paper Products Services and Other Total (in millions) For the second quarter 1999 - --------------------------- Revenues from external customers 537 198 270 - 1,005 Operating income 17 49 34 (8) 92 Financial services, net interest income - - 68 - 68 - ----------------------------------------------------------------------- For the second quarter 1998 - --------------------------- Revenues from external customers 515 156 269 - 940 Operating income 18 32 41 (7) 84 Financial Services, net interest income - - 57 - 57 - ----------------------------------------------------------------------- For the first six months or at second quarter end 1999 - --------------------------- Revenues from external customers 1,050 370 541 - 1,961 Operating income 22 83 61 (15) 151 Financial Services, net interest income - - 133 - 133 Total assets 2,440 1,074 13,674 71 17,259 - ----------------------------------------------------------------------- For the first six months or at second quarter end 1998 - --------------------------- Revenues from external customers 1,043 310 532 - 1,885 Operating income 28 62 78 (14) 154 Financial services, net interest income - - 117 - 117 Total assets 2,577 922 11,125 66 14,690 - ----------------------------------------------------------------------- NOTE E - SPECIAL CHARGE During the fourth quarter of 1998, the 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 16 work force reductions, which included termination benefits associated with the early retirement offer and severance amounts for the involuntary terminations, $12.4 million was utilized during the first six months of 1999. The remaining accrual amount of $ .6 million is expected to be fully utilized in year 2000. During the second quarter of 1999, the Company sold its Argentine operation for $12.0 million (of which $1.0 million was received in cash and $11.0 million in promissory notes), which approximated the carrying value of these assets. 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: Second Quarter First Six Months 1999 1998 1999 1998 (in millions) Revenues Paper $ 537 $ 515 $ 1,050 $ 1,043 Building products 198 156 370 310 ------ ------ ------ ------ Manufacturing net sales 735 671 1,420 1,353 Financial services 270 269 541 532 ------ ------ ------ ------ Total revenues $ 1,005 $ 940 $ 1,961 $ 1,885 ====== ====== ====== ====== Income Paper $ 17 $ 18 $ 22 $ 28 Building products 49 32 83 62 ------ ------ ------ ------ 66 50 105 90 Financial services 34 41 61 78 ------ ------ ------ ------ Segment operating income 100 91 166 168 Corporate expenses (8) (7) (15) (14) Parent company interest - net (30) (27) (59) (53) Other - net 3 2 6 3 ------ ------ ------ ------ Income before taxes and accounting change 65 59 98 104 Taxes on income 24 24 38 42 ------ ------ ------ ------ Net income before accounting change 41 35 60 62 Cumulative effect of accounting change, net of tax - - - (3) ------ ------ ------ ------ Net income $ 41 $ 35 $ 60 $ 59 ====== ====== ====== ====== Second quarter 1999 vs. Second quarter 1998 Second quarter earnings for 1999 totaled $41 million, or $0.74 per diluted share, compared with second quarter 1998 earnings of $35 million, or $0.62 per diluted share. Revenues for the period were $1 billion, compared with $940 million in the second quarter of 1998. The Paper Group reported operating earnings of $17 million compared with $18 million of operating earnings in last year's second quarter. Corrugated container prices were relatively flat compared with the second quarter of 1998 but were up approximately 4 percent versus this year's first quarter. Shipment volumes of corrugated containers were up approximately 3 percent compared with the second quarter of last year. Prices for old corrugated containers (OCC), which supply approximately 45 percent of the total fiber needs of the containerboard mills, began to rise in 18 the quarter and this trend has continued into the third quarter. Prices for some grades of bleached paperboard began to rise late in the quarter, but the average paper price per ton remained below second quarter 1998 prices. The Building Products Group reported operating income of $49 million compared with $32 million in last year's second quarter. The group achieved this all-time record earnings despite start-up losses for its three new medium density fiberboard facilities and its fiber cement operation. Second quarter sales averages for all product categories were above the same period last year. These improved averages were attributable to price increases within the market segments, and a more profitable product mix, particularly in particleboard and plywood. The Financial Services Group recorded operating earnings for the quarter of $34 million compared with $41 million in the second quarter of 1998. Net interest income increased by $2 million, the net effect of an $11 million increase in income (due to higher loan volumes) and a $9 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, the change in asset mix of the bank and required reserves on the mortgage warehouse portfolio. Noninterest income for the second quarter decreased by $12 million due primarily to a decrease in loan production volumes of $8 million and a $4 million decrease in other noninterest income. Noninterest expense decreased by $4 million from second quarter 1998 due primarily to decreases in amortization and real estate expenses. Net interest expense of the Company increased to $30 million in the second quarter of 1999 compared with $27 million in the second quarter of last year. The increase is primarily due to higher levels of debt outstanding. First half of 1999 vs. First half of 1998 Earnings for the first six months of 1999 were $60 million, or $1.07 per diluted share compared with $62 million, or $1.09 per diluted share, before effect of accounting change. Revenues of $2.0 billion were up four percent from the 1998 first half revenues of $1.9 billion. The Paper Group earned $22 million compared with operating income of $28 million in the first six months of 1998. The decline from last year's first six months earnings was due to lower prices for corrugated containers and bleached paperboard. Corrugated container prices were 2 percent lower than 1998 prices and bleached paperboard prices were 4 percent lower than 1998 average prices. However, prices for some grades of bleached paperboard began to rise late in June, so the full effect will not be realized until the third quarter. Prices for corrugated containers should continue to improve in the third quarter. 19 The Building Products Group earned $83 million in the first half of 1999 compared with $62 million in the first half of last year. Revenues for the first six months of 1999 were $370 million, up $60 million from last year's first six months revenues. Sales averages across all product lines for the first six months of 1999 were higher than last year. Operating losses for the group's three new medium density fiberboard facilities and its fiber cement operation had a negative effect on earnings in first half of 1999. The Financial Services Group recorded operating earnings of $61 million in the first six months of 1999, compared with $78 million in the first six months of 1998. Net interest income decreased by $1 million from the net effect of a $16 million increase in income due to higher loan volumes, and a $17 million increase in the provision for loan loss. Noninterest income decreased by $17 million due primarily to decreased loan servicing revenues of $5 million, decreased loan origination income of $3 million, decreased gains on sale of $3 million by the real estate group in 1999 compared with 1998 and decreased gains of $2 million on sales of acquired property by the bank in 1999. Noninterest expense decreased by $2 million in 1999 compared with 1998. 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 first six months of 1999, the Company's debt increased by $284 million, mainly through issuance of $300 million of medium- term notes, net decrease in other notes by $7 million, and payments of $9 million in commercial paper and borrowings under bank credit agreements. The acquisition of HF Bancorp Inc., for a cash purchase price of $119 million in the second quarter of 1999, resulted in an increase in total assets of the Financial Services Group to $13.7 billion at June 1999. Loans acquired totaling approximately $600 million as well as the continued growth of the loan portfolio were the significant components of the increase. Total deposits increased to $8.7 billion at quarter end June 1999 due primarily to the deposits acquired of approximately $900 million and deposit campaigns by Guaranty Federal Bank, F.S.B. ("Guaranty") during the first six months. A capital contribution of $120 million to Guaranty in the first quarter provided additional capital to maintain 'Guaranty's regulatory capital requirements. The Company contributed $119 million to Guaranty in the second quarter for the acquisition of HF Bancorp Inc. Guaranty continues to meet all three regulatory capital requirements. 20 Year 2000 Compliance Year 2000 projects are 95 percent completed and no disruption to operations is expected. Critical systems have been remediated, tested, and prepared for production status in the new millennium. Business and administrative systems supporting all lines of business are ready for Year 2000. Predominately, these are purchased software solutions, and the vendor is responsible for compliance processing. Year 2000 upgrades have been installed with no date exceptions. The Company has not found any critical date dependencies in its manufacturing operations that would inhibit the ability to manufacture products. Some processes will require manual date entry at appropriate time to reflect correct date of manufacture but these have no control of the production process. The Company continues to review the Year 2000 readiness of its major suppliers and any potential impact to the Company. No major problems have risen that would have an impact upon business operations. Contingency plans are being developed to prepare for any major suppliers' inability to provide required products and services. These plans include building inventories of critical supplies and identifying alternate sources. 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 was completed by June 30, 1999. The group 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, which activate backup processing and business support functions at designated recovery sights. Year 2000 Project expenditures to date for all lines of business total $9.2 million. 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 the Company 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 the Company and its subsidiaries; the availability and price of raw materials used by the Company and its subsidiaries; competitive actions by 21 other companies; changes in laws or regulations; and other factors, many of which are beyond the control of the Company 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 second quarter of 1999 with comparative information at year end 1998: Increase / (Decrease) in Income before Taxes ( in millions) Second Quarter Year End Change in Interest Rates 1999 1998 +2% $ (27) $ (26) +1% $ ( 8) $ ( 1) 0% $ - $ - -1% $ ( 4) $ 10 -2% $ 5 $ 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 $52 million or approximately 17 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. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Regulation S-K Exhibit Number (27) Financial Data Schedule (b) Reports on Form 8-K. During the three months ended July 3, 1999, the Company did not file a current report on Form 8-K. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEMPLE-INLAND INC. (Registrant) Dated: August 11, 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 6-MOS JAN-1-2000 JUL-03-1999 233 0 391 0 305 0 2,888 0 17,259 0 2,084 0 0 61 1,964 17,259 1,420 1,961 1,330 1,810 0 0 59 98 38 60 0 0 0 60 1.08 1.07
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