-----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, WNOVOVzKU12mkLoPqbpdS/hKUKWIMSn31lL2u1t53YIZIfw9gADj/JmDIdFsoGeO pIOwWzt65h5Xc7yWY+sLQQ== 0000731939-99-000050.txt : 19991117 0000731939-99-000050.hdr.sgml : 19991117 ACCESSION NUMBER: 0000731939-99-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991116 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: 99758230 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 2, 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 October 2, 1999 Common Stock (par value $1.00 per share) 55,852,175 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 1999 1998 1999 1998 (in millions) Revenues Net sales $ 669 $ 566 $ 1,903 $ 1,727 Financial services earnings 41 36 102 114 ------ ------ ------ ------ 710 602 2,005 1,841 Costs and expenses Cost of sales 525 472 1,531 1,423 Selling and administrative 69 66 197 191 ------ ------ ------ ------ 594 538 1,728 1,614 Operating income 116 64 277 227 Interest expense - net (25) (19) (69) (58) Other 5 1 11 4 ------ ------ ------ ------ Income from continuing operations before income taxes 96 46 219 173 Taxes on income 36 20 84 73 ------ ------ ------ ------ Income from continuing operations 60 26 135 100 Discontinued operations, net of tax: Loss from operations (1) (2) (16) (15) Loss on disposal (79) - (79) - ------ ------ ------ ------ Total discontinued operations (80) (2) (95) (15) Net income (loss) before cumulative effect of accounting change (20) 24 40 85 Cumulative effect of accounting change, net of tax - - - (3) ------ ------ ------ ------ Net income (loss) $ (20) $ 24 $ 40 $ 82 ====== ====== ====== ====== See notes to consolidated financial statements. 3 Summarized Balance Sheets Parent Company (Temple-Inland Inc.) Unaudited Third Quarter Year End 1999 1998 (in millions) ASSETS Current Assets Cash $ 2 $ 15 Receivables, less allowances of $10 million in 1999 and $13 million in 1998 366 264 Inventories: Work in process and finished goods 67 61 Raw materials 197 222 ------ ------ 264 283 Net assets of discontinued operations 579 677 Prepaid expenses 17 14 ------ ------ Total current assets 1,228 1,253 Investment in Financial Services 1,035 708 Property and Equipment Buildings 432 428 Machinery and equipment 2,738 2,706 Construction in progress 112 88 Less allowances for depreciation (1,747) (1,646) ------- ------ 1,535 1,576 Timber and timberlands--less depletion 506 499 Land 34 34 ------- ------ Total property and equipment 2,075 2,109 Other Assets 153 174 ------- ------ Total Assets $ 4,491 $ 4,244 ======= ====== See notes to consolidated financial statements. 4 Summarized Balance Sheets - Continued Parent Company (Temple-Inland Inc.) Unaudited Third Quarter Year End 1999 1998 (in millions) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 143 $ 126 Accrued expenses 189 167 Employee compensation and benefits 25 28 Current portion of long-term debt 6 2 ------ ------ Total current liabilities 363 323 Long-Term Debt 1,726 1,501 Deferred Income Taxes 261 266 Postretirement Benefits 145 145 Other Liabilities 11 11 Shareholders' Equity 1,985 1,998 ------ ------ Total Liabilities and Shareholders' Equity $ 4,491 $ 4,244 ======= ====== See notes to consolidated financial statements. 5 Summarized Statements of Cash Flows Parent Company (Temple-Inland Inc.) Unaudited First Nine Months 1999 1998 (in millions) Cash Provided by (Used for) Operations Net income $ 40 $ 82 Adjustments to reconcile net income to net cash: Cumulative effect of accounting change, net of tax - 3 Loss on disposal of discontinued operations, net of tax 79 - Depreciation and depletion 146 143 Deferred taxes 51 23 Unremitted earnings from financial services (91) (87) Receivables (113) (28) Inventories 16 10 Accounts payable and accrued expenses 16 (9) Change in net assets of discontinued operations 9 47 Other 11 (16) ------ ------ 164 168 Cash Provided by (Used for) Investments Capital expenditures for property and equipment (138) (115) Proceeds from sale of notes 11 - Proceeds from sale of property and equipment 18 4 Acquisitions and joint ventures, net (6) (113) Capital contributions to financial services (279) (40) Dividends from financial services 30 40 ------ ------ (364) (224) Cash Provided by (Used for) Financing Additions to debt 315 328 Payments of debt (86) (172) Purchase of stock for treasury - (48) Cash dividends paid to shareholders (54) (54) Other 12 3 ------ ------ 187 57 Net increase (decrease) in cash (13) 1 Cash at beginning of period 15 13 ------ ------ Cash at end of period $ 2 $ 14 ===== ===== See notes to consolidated financial statements. 6 Summarized Balance Sheets Financial Services Group Unaudited First Nine Third Quarter Months 1999 1998 1999 1998 (in millions) Interest income Loans receivable and mortgage loans held for sale $ 187 $ 148 $ 513 $ 429 Mortgage-backed and investment securities 31 35 92 115 Other earning assets 2 1 4 3 ----- ----- ----- ----- Total interest income 220 184 609 547 Interest expense Deposits 100 90 273 269 Borrowed funds 39 31 122 98 ----- ----- ----- ----- Total interest expense 139 121 395 367 Net interest income 81 63 214 180 Provision for loan losses 6 1 24 2 ----- ----- ----- ----- Net interest income after provision for loan losses 75 62 190 178 Noninterest income Loan servicing fees 20 19 57 61 Loan origination and marketing 14 34 61 84 Other 41 39 109 116 ----- ----- ----- ----- Total noninterest income 75 92 227 261 Noninterest expense Compensation and benefits 42 43 125 126 Other 63 71 179 189 ----- ----- ----- ----- Total noninterest expense 105 114 304 315 Income before taxes and minority interest 45 40 113 124 Minority interest in income of consolidated subsidiary (4) (4) (11) (10) ----- ----- ----- ----- Income before taxes 41 36 102 114 Taxes on income (2) 8 11 27 ----- ----- ----- ----- Net income $ 43 $ 28 $ 91 $ 87 ===== ===== ===== ===== See notes to consolidated financial statements. 7 Summarized Balance Sheets Financial Services Group Unaudited Third Quarter Year End 1999 1998 (in millions) ASSETS Cash and cash equivalents $ 314 $ 229 Mortgage loans held for sale 273 621 Loans receivable 9,519 8,101 Mortgage-backed and investment securities 2,386 2,485 Other assets 1,101 964 ------- ------- TOTAL ASSETS $13,593 $12,400 ====== ====== LIABILITIES Deposits $ 8,899 $ 7,338 Federal Home Loan Bank advances 2,623 3,221 Other borrowings 215 210 Other liabilities 596 698 Preferred stock issued by subsidiary 225 225 ------ ------ TOTAL LIABILITIES 12,558 11,692 SHAREHOLDERS' EQUITY 1,035 708 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,593 $12,400 ====== ====== See notes to consolidated financial statements. 8 Summarized Statements of Cash Flows Financial Services Group Unaudited First Nine Months 1999 1998 (in millions) Cash Provided by (Used for) Operations Net income $ 91 $ 87 Adjustments to reconcile net income to net cash: Provision for amortization, depreciation and accretion 53 69 Provision for loan losses 24 2 Mortgage loans held for sale 348 (101) Collections and remittances on loans serviced for others, net (194) (11) Originated mortgage servicing rights (48) (48) Minority interest in earnings of consolidated subsidiary 11 10 Other 90 12 ----- ----- 375 20 Cash Provided by (Used for) Investments Purchases of securities available-for-sale (168) (35) Maturities of securities available-for-sale 245 228 Maturities and redemptions of securities held-to-maturity 286 259 Loans originated or acquired, net of principal collected on loans (1,121) (873) Proceeds from sale of securities available- for-sale 144 53 Purchase of asset based lending loans (106) - Capital expenditures for property and equipment (19) (24) Acquisition of HF Bancorp, Inc., net of cash acquired (90) - Purchase of Fidelity Funding (19) - Proceeds from sale of loans 233 16 Other (24) 4 ----- ----- (639) (372) Cash Provided by (Used for) Financing Net increase (decrease) in deposits 679 (52) Securities sold under repurchase agreements and short-term borrowings, net 100 (248) Additions to debt 21 606 Payments of debt (758) (65) Capital contributions from Parent Company 279 40 Dividends paid to Parent Company (30) (40) Proceeds from sale of subsidiary preferred stock 1 75 Distributions to minority interest (11) (10) Net increase in advances from borrowers for taxes and insurance 68 49 ----- ----- 349 355 Net increase in cash and cash equivalents 85 3 Cash and cash equivalents at beginning of 229 175 period ----- ----- Cash and cash equivalents at end of period $ 314 $ 178 ===== ===== See notes to consolidated financial statements. 9 Consolidated Statements of Income Temple-Inland Inc. and Subsidiaries Unaudited Third Quarter First Nine Months 1999 1998 1999 1998 (in millions) Revenues Manufacturing $ 669 $ 566 $ 1,903 $ 1,727 Financial services 295 276 836 808 ----- ----- ----- ----- 964 842 2,739 2,535 Costs and expenses Manufacturing 594 538 1,728 1,614 Financial services 254 240 734 694 ----- ----- ----- ----- 848 778 2,462 2,308 Operating income 116 64 277 227 Parent company interest - net (25) (19) (69) (58) Other 5 1 11 4 ----- ----- ----- ----- Income from continuing operations before taxes 96 46 219 173 Taxes on income 36 20 84 73 ----- ----- ----- ----- Income from continuing operations 60 26 135 100 Discontinued operations, net of tax: Loss from operations (1) (2) (16) (15) Loss on disposal (79) - (79) - ----- ----- ----- ----- Total discontinued operations (80) (2) (95) (15) Net income (loss) before cumulative effect of accounting change (20) 24 40 85 Cumulative effect of accounting change, net of tax - - - (3) ----- ----- ----- ----- Net income (loss) $ (20) $ 24 $ 40 $ 82 ===== ===== ===== ===== Weighted average shares outstanding: Basic 55.9 55.6 55.8 55.8 Diluted 56.1 55.6 56.0 55.9 Earnings Per Share Basic: Income before discontinued operations and cumulative effect of accounting change $ 1.07 $ 0.47 $ 2.42 $ 1.79 Discontinued operations, net of tax (1.43) (0.03) (1.70) (0.26) Cumulative effect of accounting change, net of tax - - - (0.06) ----- ----- ----- ----- Net income (loss) $(0.36) $ 0.44 $ 0.72 $ 1.47 ===== ===== ===== ===== Diluted: Income before discontinued operations and cumulative effect of accounting change $ 1.07 $ 0.47 $ 2.41 $ 1.79 Discontinued operations, net of tax (1.43) (0.03) (1.69) (0.26) Cumulative effect of accounting change, net of tax - - - (0.06) ----- ----- ----- ----- Net income (loss) $(0.36) $ 0.44 $ 0.72 $ 1.47 ===== ===== ===== ===== Dividends paid per share of common stock $ 0.32 $ 0.32 $ 0.96 $ 0.96 ===== ===== ===== ===== See notes to consolidated financial statements. 10 Consolidating Balance Sheets Temple-Inland Inc. and Subsidiaries Third Quarter 1999 Unaudited Parent Financial Company Services Consolidated (in millions) ASSETS Cash and cash equivalents $ 2 $ 314 $ 316 Mortgage loans held for sale - 273 273 Loans receivable - 9,519 9,519 Mortgage-backed and investment securities - 2,386 2,386 Trade and other receivables 366 - 358 Inventories 264 - 264 Net assets of discontinued operations 579 - 579 Property and equipment 2,075 142 2,217 Other assets 170 959 1,089 Investment in Financial Services 1,035 - - ------ ------ ------ TOTAL ASSETS $ 4,491 $ 13,593 $ 17,001 ====== ======= ======= LIABILITIES Deposits $ - $ 8,899 $ 8,899 Federal Home Loan Bank advances - 2,623 2,623 Other liabilities 374 596 953 Long-term debt 1,726 215 1,941 Deferred income taxes 261 - 230 Postretirement benefits 145 - 145 Preferred stock issued by subsidiary - 225 225 ------- ------- ------- TOTAL LIABILITIES $ 2,506 $ 12,558 $ 15,016 ======= ======= ------- 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 361 Accumulated other comprehensive income (loss) (28) Retained earnings 1,797 ------- 2,191 Cost of shares held in the treasury: 5,537,377 shares (206) ------- TOTAL SHAREHOLDERS' EQUITY 1,985 ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,001 ======= 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 264 - 257 Inventories 283 - 283 Net assets of discontinued operations 677 - 677 Property and equipment 2,109 129 2,238 Other assets 188 835 986 Investment in Financial Services 708 - - ------- ------ ------ TOTAL ASSETS $ 4,244 $12,400 $15,892 ======= ====== ====== LIABILITIES Deposits $ - $ 7,338 $ 7,338 Federal Home Loan Bank advances - 3,221 3,221 Other liabilities 334 698 1,012 Long-term debt 1,501 210 1,711 Deferred income taxes 266 - 242 Postretirement benefits 145 - 145 Preferred stock issued by subsidiary - 225 225 ------- ------ ------ TOTAL LIABILITIES $ 2,246 $11,692 $13,894 ======= ====== ------ 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 $ 15,892 ======= See notes to consolidated financial statements. 12 Consolidated Statements of Cash Flows Temple-Inland Inc. and Subsidiaries Unaudited First Nine Months 1999 1998 (in millions) CASH PROVIDED (USED FOR) OPERATIONS Net income $ 40 $ 82 Adjustments to reconcile net income to net cash: Loss on disposal of discontinued operations, net of tax 79 - Cumulative effect of accounting change, net of tax - 3 Depreciation and depletion 159 153 Amortization of goodwill 6 5 Provision for loan losses 24 2 Deferred taxes 54 28 Amortization and accretion on financial instruments 36 55 Mortgage loans held for sale 348 (101) Receivables (113) (28) Inventories 16 10 Accounts payable and accrued expenses 16 (9) Collections and remittances on loans serviced for others, net (194) (11) Change in net assets of discontinued operations 9 47 Originated mortgage servicing rights (48) (48) Other 107 - ----- ----- 539 188 CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures for property and equipment (157) (139) Proceeds from sale of notes 11 - Proceeds from sale of property and equipment 18 20 Purchases of securities available-for-sale (168) (35) Maturities of securities available-for-sale 245 228 Maturities and redemptions of securities held-to-maturity 286 259 Loans originated or acquired, net of principal collected on loans (1,121) (873) Proceeds from sale of securities available- for-sale 144 53 Purchase of asset based lending loans (106) - Manufacturing acquisitions and joint ventures, net (6) (113) Acquisition of HF Bancorp Inc., net of cash acquired (90) - Purchase of Fidelity Funding (19) - Proceeds from sale of loans 233 16 Other (24) (12) ------ ------ (754) (596) CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 336 934 Payments of debt (844) (237) Securities sold under repurchase agreements and short-term borrowings, net 100 (248) Purchase of stock for treasury - (48) Cash dividends paid to shareholders (54) (54) Net increase (decrease) in deposits 679 (52) Proceeds from sale of subsidiary preferred stock 1 75 Distributions to minority shareholders (11) (10) Other 80 52 ------ ------ 287 412 Net increase in cash and cash equivalents 72 4 Cash and cash equivalents at beginning of period 244 188 ------ ------ Cash and cash equivalents at end of period $ 316 $ 192 ====== ====== 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: Third First Nine Quarter Months 1999 1998 1999 1998 (in millions) Denominator for basic earnings per share Weighted average common shares outstanding 55.9 55.6 55.8 55.8 Dilutive effect of stock options .2 - .2 .1 ----- ----- ----- ----- Denominator for diluted earnings per share 56.1 55.6 56.0 55.9 ===== ===== ===== ===== NOTE C - COMPREHENSIVE INCOME Comprehensive income is as follows: Third First Nine Quarter Months 1999 1998 1999 1998 (in millions) Net income (loss) $(20) $24 $40 $82 Other comprehensive income, net of income taxes: Unrealized gains (losses) on available-for-sale securities (3) 2 (12) 8 Foreign currency translation adjustments - - 1 - Minimum pension liability adjustments - - - (1) ---- ---- ---- ---- Other comprehensive income (loss) (3) 2 (11) 7 ---- ---- ---- ---- Comprehensive income (loss) $(23) $ 26 $ 29 $ 89 ==== ==== ==== ==== 15 NOTE D - DISCONTINUED OPERATIONS On October 4, 1999, the Company announced it had entered into an agreement to sell its bleached paperboard business, including the mill located in Evadale, Texas to Westvaco Corporation for $625 million. Accordingly, the results of the bleached paperboard operation have been classified as discontinued operations, and prior periods have been restated. The Company recorded an after-tax loss of $79.0 million, net of income tax benefits of $48.5 million, in the third quarter for the estimated loss on disposal and operating losses. Revenues from the bleached paperboard operation were $97.3 million and $102.0 million for the third quarter 1999 and 1998, respectively, and $283.1 million and $293.7 million for the first nine months of 1999 and 1998, respectively. Loss from operations for the third quarter of 1999 totaled $1.0 million, net of income tax benefits of $.4 million compared with $1.5 million loss for the third quarter of 1998, net of income tax benefits of $1.2 million. Loss from operations for the first nine months of 1999 was $15.8 million (net of income tax benefits of $9.6 million) compared with an operating loss of $14.6 million (net of income tax benefits of $11.1 million) in the first nine months of 1998. Interest cost of approximately $7 million per quarter has been allocated to the discontinued operations based on debt allocated to the bleached paperboard operation. Included in the estimated loss on disposal of the bleached paperboard operation is anticipated operating losses through the date of disposal of $3.8 million, net of income tax benefits of $2.3 million. The transaction is scheduled to close by the end of the year, subject to certain regulatory approvals and satisfaction of various conditions contained in the agreement. NOTE E - SEGMENT INFORMATION The Company has three reportable segments: paper, building products and financial services. The paper segment manufactures corrugated packaging. 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. All prior periods have been restated to reflect the discontinued operations of the bleached paperboard operation (Note D). 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. 16 Building Financial Corporate Paper Products Services and Other Total (in millions) For the third quarter 1999 Revenues from external customers 463 206 295 - 964 Operating income 29 53 41 (7) 116 Financial services, net interest income - - 81 - 81 - --------------------------------------------------------------------------- For the third quarter 1998 Revenues from external customers 411 155 276 - 842 Operating income 5 30 36 (7) 64 Financial Services, net interest income - - 63 - 63 - --------------------------------------------------------------------------- For the first nine months or at third quarter end 1999 Revenues from external customers 1,327 576 836 - 2,739 Operating income 61 136 102 (22) 277 Financial Services, net interest income - - 214 - 214 Total assets 2,261(a) 1,071 13,593 76 17,001 - --------------------------------------------------------------------------- For the first nine months or at third quarter end 1998 Revenues from external customers 1,262 465 808 - 2,535 Operating income 42 92 114 (21) 227 Financial services, net interest income - - 180 - 180 Total assets 2,449(a) 1,039 11,279 70 14,837 - --------------------------------------------------------------------------- (a) Includes net assets of discontinued operations. NOTE F - 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 (primarily Paper Group's Argentine 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, substantially all was utilized during the first nine months of 1999. During the second quarter of 1999, the Company sold its Argentine operation for $12.0 million, which approximated the carrying value of these assets. The sale proceeds included $1.0 million in cash 17 and $11.0 million in promissory notes, which were subsequently sold in the third quarter of 1999. NOTE G - 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. 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 Third Quarter Nine Months 1999 1998 1999 1998 (in millions) Revenues Paper $ 463 $ 411 $ 1,327 $ 1,262 Building products 206 155 576 465 ----- ----- ------ ------ Manufacturing net sales 669 566 1,903 1,727 Financial services 295 276 836 808 ----- ----- ------ ------ Total revenues $ 964 $ 842 $ 2,739 $ 2,535 ===== ===== ====== ====== Income Paper $ 29 $ 5 $ 61 42 Building products 53 30 136 92 ----- ----- ------ ------ 82 35 197 134 Financial services 41 36 102 114 ----- ----- ------ ------ Segment operating income 123 71 299 248 Corporate expenses (7) (7) (22) (21) Parent company interest - net (25) (19) (69) (58) Other - net 5 1 11 4 ----- ----- ------ ------ Income from continuing operations before taxes 96 46 219 173 Taxes on income 36 20 84 73 ----- ----- ------ ------ Income from continuing operations 60 26 135 100 Discontinued operations, net of tax: Loss from operations (1) (2) (16) (15) Loss on disposal (79) - (79) - ----- ----- ------ ------ Total discontinued operations (80) (2) (95) (15) Net income (loss) before cumulative effect of accounting change (20) 24 40 85 Cumulative effect of accounting change, net of tax - - - (3) ----- ----- ----- ----- Net income (loss) $ (20) $ 24 $ 40 $ 82 ===== ===== ===== ===== 18 Third quarter 1999 vs. Third quarter 1998 Third quarter earnings from continuing operations for 1999 totaled $60 million, or $1.07 per diluted share, compared with third quarter 1998 earnings from continuing operations of $26 million, or $0.47 per diluted share. On October 4, 1999, the Company announced it had entered into an agreement to sell its bleached paperboard business, including the mill located in Evadale, Texas, to Westvaco Corporation for $625 million. Accordingly, the results of the bleached paperboard operation have been classified as discontinued operations, and prior periods have been restated. The Company recorded an after-tax loss of $80 million, which included the estimated loss on the disposal of the business and related third quarter operating losses. Including this loss, the net loss for the quarter was $20 million, or $0.36 per diluted share. The Paper Group, which now consists solely of corrugated packaging operations, reported operating income of $29 million compared with $5 million of operating income in the third quarter of 1998. During the quarter, the Paper Group began to implement the second corrugated box price increase of the year. Average prices in the quarter for corrugated boxes were up 4 percent compared with the third quarter of 1998. Corrugated box shipments during the quarter for the group increased approximately 3.1 percent over the same period last year. The average price for old corrugated containers (OCC), which the Company uses for approximately 45 percent of the total fiber requirements of the containerboard mills, was up roughly 50 percent in the third quarter compared with the second quarter. This translated into a negative impact on earnings of approximately $11 million. The Building Products Group reported operating income of $53 million compared with $30 million in last year's third quarter. The group benefited from strong demand during the quarter with shipments for all products above last year's third quarter levels. Particleboard shipments were at record levels in the quarter. Prices for all products except lumber improved in the third quarter when compared with the second quarter of 1999. Lumber prices were volatile, and the average price for lumber in the quarter was slightly below the prior quarter. The three new medium density fiberboard facilities and the fiber cement operation continued to improve operations and enhance their product mix in the quarter. The Financial Services Group recorded operating earnings for the quarter of $41 million compared with $36 million in the third quarter of 1998 and $34 million in the second quarter of 1999. The improvement from the prior quarter was a result of the growth of the bank, including the acquisition of Hemet Federal Savings and Loan Association, which was completed on June 29, 1999. Net interest income after provision for loan losses for the third 19 quarter of 1999 increased by $13 million, the net effect of an $18 million increase in net interest income (due to higher loan volumes) and a $5 million increase in the provision for loan losses. The increase in provision for loan losses 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 third quarter decreased by $17 million due primarily to decreased loan origination and servicing revenues of $19 million offset by a $2 million increase in other noninterest income. Noninterest expense decreased by $9 million from third quarter 1998 due primarily to decreased amortization expense. Parent Company net interest expense increased to $25 million in the third quarter of 1999 compared with $19 million in the third quarter of last year. The increase is primarily due to higher levels of debt outstanding. First nine months of 1999 vs. First nine months of 1998 Earnings from continuing operations for the first nine months of 1999 were $135 million, or $2.41 per diluted share, compared with $100 million, or $1.79 per diluted share for 1998. For the first nine months of 1999, net loss from discontinued operations, net of income tax benefits, totaled $95 million versus $15 million, net of income tax benefits, for the same period in 1998. Loss from discontinued operations for the first nine months of 1999 includes estimated loss on disposal of $79 million. Including discontinued operations, earnings for the first nine months of 1999 were $40 million, or $0.72 per diluted share compared with $85 million, or $1.53 per diluted share, before effect of accounting change. Revenues of $2.7 billion were up eight percent from the 1998 first nine months revenues of $2.5 billion. The Paper Group earned $61 million compared with operating income of $42 million in the first nine months of 1998. Increase in box shipments and a decrease in the average price for old corrugated containers (OCC) contributed to the improvement in earnings. Corrugated box shipments during the first nine months of 1999 increased approximately 3.9 percent versus the same period last year. The average price for old corrugated containers was down roughly 4.4 percent in the first nine months of 1999 when compared with the same period last year. Box prices for the first nine months of 1999 were approximately 0.2 percent lower than 1998 prices. The Building Products Group earned $136 million in the first nine months of 1999 compared with $92 million in the same period last year. Revenues for the first nine months of 1999 were $576 million, up $111 million from last year's first nine months revenues of $465 million. Sales averages across all product lines for the first nine months of 1999 were higher than last year. Operating losses for the building products group's three new medium density fiberboard facilities and its fiber cement 20 operation had a negative effect on earnings in first nine months of 1999. The Financial Services Group recorded operating earnings of $102 million in the first nine months of 1999, compared with $114 million in the first nine months of 1998. Net interest income after provision for loan losses increased by $12 million as a result of a $34 million increase in net interest income due to higher loan volumes offset by a $22 million increase in the provision for loan losses. Noninterest income decreased by $34 million due primarily to decreased loan origination income of $23 million, decreased loan servicing revenues of $4 million and decreased gains on sale of $2 million by the Real Estate group in 1999 compared to 1998. Noninterest expense decreased by $11 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 nine months of 1999, Parent Company's debt increased by $229 million, mainly through issuance of $300 million of medium-term notes, payment of $70 million of private placement debt, net decrease in other notes by $4 million and net increase of $3 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 1999 resulted in an increase in total assets of the Financial Services Group to $13.6 billion at September 30, 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 $8.9 billion at quarter end September 1999 due primarily to the deposits acquired of approximately $900 million and deposit campaigns by the bank during the first six months. A capital contribution of $120 million to the bank in the first quarter provided additional capital to maintain the bank's regulatory capital requirements. Parent Company contributed $119 million to the bank in the second quarter for the acquisition of HF Bancorp Inc. Parent Company contributed $40 million to the bank in the third quarter of 1999, and received dividends of $30 million from the bank. The savings bank continues to maintain the minimum levels of capital required for designation as well capitalized. Year 2000 Compliance Year 2000 projects are 97 percent completed and no disruption to operations is expected. Critical systems have been remediated, tested, and prepared for production status in the new millennium. 21 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 times to reflect the correct date manufactured, but these have no impact on the production process. The Company has reviewed the Year 2000 readiness of its major suppliers and no major problems have been found that would have an impact upon business operations. Contingency plans have been 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. Should any disruption occur that would significantly affect operations or customer service, the group would implement its disaster recovery contingency plans, which activate backup processing and business support functions at designated recovery sites. Employee and customer awareness activities have been taken to insure proper awareness and preparedness. In preparation for the Year 2000 transition, each business unit has prepared resource and event plans to assure a smooth rollover into the Year 2000. Staffing will be in place twenty-four hours daily beginning on December 31 to resolve any Year 2000 issues. Year 2000 Project expenditures to date for all lines of business total $10.5 million. The Company believes its efforts have addressed the risks associated with Year 2000 exposure and that business contingency plans will handle unexpected items. 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 other companies; changes in laws or regulations; and other 22 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 rates for the subsequent 12-month period at the end of the third quarter of 1999 with comparative information at year end 1998: Increase / (Decrease) in Income before Taxes ( in millions) Third Quarter Year End Change in Interest Rates 1999 1998 +2% $ (10) $ (26) +1% $ ( 1) $ ( 1) 0% $ - $ - -1% $ - $ 10 -2% $ (13) $ 29 The change in exposure to interest rate risk from year end 1998 is due primarily to a decrease in the Parent Company's adjustable- rate debt portfolio and the diminishing impact of interest rate hedge contracts at the savings bank that are significantly closer to maturity. 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 $55 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. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note G to Notes to Consolidated Financial Statements in Part I of this report is incorporated by reference thereto. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Regulation S-K Exhibit Number (27) Financial Data Schedules (b) Reports on Form 8-K. During the three months ended October 2, 1999, the Company did not file a current report 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) Dated: November 15, 1999 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 Schedules 26-29 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. 1000000 YEAR JAN-03-1998 JAN-03-1998 188 0 245 0 280 0 2,174 0 14,270 0 1,523 0 0 61 1,984 14,270 2,311 3,256 2,259 3,072 0 0 82 108 49 59 (8) 0 0 51 0.91 0.90
EX-27 3
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. 1000000 3-MOS 6-MOS 9-MOS YEAR JAN-02-1999 JAN-02-1999 JAN-02-1999 JAN-02-1999 APR-04-1998 JUL-04-1998 OCT-03-1998 JAN-02-1999 196 272 192 244 0 0 0 0 290 275 275 257 0 0 0 0 292 287 274 283 0 0 0 0 2,164 2,156 2,261 2,238 0 0 0 0 14,813 14,594 14,837 15,892 0 0 0 0 1,661 1,681 1,722 1,711 0 0 0 0 0 0 0 0 61 61 61 61 1,977 1,966 1,975 1,937 14,813 14,594 14,837 15,892 586 1,161 1,727 2,255 849 1,693 2,535 3,364 545 1,076 1,614 2,179 771 1,530 2,308 3,134 0 0 0 0 0 0 0 0 19 39 58 78 60 127 173 158 25 53 73 70 35 74 100 88 (9) (13) (15) (21) 0 0 0 0 (3) (3) (3) (3) 23 58 82 64 0.41 1.03 1.47 1.16 0.41 1.03 1.47 1.15
EX-27 4
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 6-MOS JAN-01-2000 JAN-01-2000 APR-03-1999 JUL-03-1999 163 233 0 0 311 352 0 0 263 251 0 0 2,239 2,219 0 0 16,039 17,164 0 0 1,892 2,002 0 0 0 0 61 61 1,942 1,964 16,039 17,164 592 1,234 863 1,775 555 1,134 799 1,614 0 0 0 0 22 44 45 123 19 48 26 75 (7) (15) 0 0 0 0 19 60 0.34 1.08 0.33 1.07
EX-27 5
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-01-2000 OCT-02-1999 316 0 358 0 264 0 2,217 0 17,001 0 1,941 0 0 61 1,924 17,001 1,903 2,739 1,728 2,462 0 0 69 219 84 135 (95) 0 0 40 0.72 0.72
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