SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended March 31, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period
From to
Commission File Number 001-08634
Temple-Inland Inc.
(Exact name or registrant as specified in its charter)
Delaware 75-1903917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 South MoPac Expressway, Austin, Texas 78746
(Address of principal executive offices) (Zip Code)
(512) 434-8000
(Registrant's telephone number, including area code)
303 South Temple Drive, Diboll, Texas 75941
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Number of common shares outstanding
Class as of March 31, 2001
Common Stock (par
value $1.00 per share) 49,259,781
The Exhibit Index appears on page 30 of this report.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMARIZED STATEMENTS OF INCOME
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Quarter
2001 2000
(in millions)
NET REVENUES $ 681 $ 758
COSTS AND EXPENSES
Cost of sales 612 609
Selling and administrative 65 68
----- -----
677 677
----- -----
4 81
FINANCIAL SERVICES EARNINGS 45 35
----- -----
OPERATING INCOME 49 116
Interest expense (28) (25)
----- -----
INCOME BEFORE TAXES 21 91
Income taxes (9) (36)
----- -----
INCOME BEFORE ACCOUNTING CHANGE 12 55
Effect of accounting change (2) -
----- -----
NET INCOME $ 10 $ 55
===== =====
See notes to consolidated financial statements.
3
SUMMARIZED BALANCE SHEETS
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Year
Quarter End
2001 2000
(in millions)
ASSETS
Current Assets
Cash $ 1 $ 2
Receivables, net of allowances of $11
in 2001 and $10 in 2000 349 320
Inventories:
Work in process and finished goods 131 61
Raw materials 116 192
----- -----
247 253
Prepaid expenses 24 25
----- -----
Total current assets 621 600
----- -----
Investment in Temple-Inland Financial
Services 1,136 1,093
Property and Equipment
Property and Equipment 3,396 3,346
Less allowances for depreciation (1,856) (1,822)
----- -----
1,540 1,524
Timber and timberlands - less depletion 498 503
----- -----
Total property and equipment 2,038 2,027
Other Assets 232 227
----- -----
Total Assets $ 4,027 $ 3,947
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 115 $ 112
Other current liabilities 160 191
----- -----
Total current liabilities 275 303
Long-Term Debt 1,466 1,381
Other Long-Term liabilities 442 430
Shareholders' Equity 1,844 1,833
----- -----
Total Liabilities and Shareholders'
Equity $ 4,027 $ 3,947
===== =====
See notes to consolidated financial statements.
4
SUMMARIZED STATEMENTS OF CASH FLOW
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Quarter
2001 2000
(in millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 10 $ 55
Adjustments:
Cumulative effect of accounting change 2 -
Depreciation and depletion 44 50
Unremitted earnings from financial
services (42) (28)
Dividends from financial services 15 -
Working capital changes (52) (82)
Other 17 32
----- -----
(6) 27
----- -----
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures for property and
equipment (61) (54)
Capital contributions to financial
services - (10)
Other (4) (3)
----- -----
(65) (67)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 85 108
Purchase of stock for treasury - (102)
Cash dividends paid to shareholders (16) (17)
Other 1 1
----- -----
70 (10)
----- -----
Net decrease in cash (1) (50)
Cash at beginning of period 2 51
----- -----
Cash at end of period $ 1 $ 1
===== =====
See notes to consolidated financial statements.
5
SUMMARIZED STATEMENTS OF INCOME
FINANCIAL SERVICES GROUP
Unaudited
First Quarter
2001 2000
(in millions)
INTEREST INCOME
Loans receivable and mortgage loans
held for sale $ 233 $ 202
Securities and other 57 45
----- -----
Total interest income 290 247
INTEREST EXPENSE
Deposits 124 109
Borrowed funds 59 48
----- -----
Total interest expense 183 157
----- -----
NET INTEREST INCOME 107 90
Provision for loan losses (17) (15)
----- -----
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 90 75
----- -----
NONINTEREST INCOME 82 62
NONINTEREST EXPENSE
Compensation and benefits 49 39
Other 72 59
----- -----
Total noninterest expense 121 98
----- -----
INCOME BEFORE MINORITY INTEREST AND TAXES 51 39
Minority interest in income of consolidated
subsidiaries (6) (4)
----- -----
INCOME BEFORE TAXES 45 35
Income taxes (3) (7)
----- -----
INCOME BEFORE ACCOUNTING CHANGE 42 28
Effect of accounting change (1) -
----- -----
NET INCOME $ 41 $ 28
===== =====
See notes to consolidated financial statements.
6
SUMMARIZED BALANCE SHEETS
FINANCIAL SERVICES GROUP
Unaudited
First
Quarter Year End
2001 2000
(in millions)
ASSETS
Cash and cash equivalents $ 376 $ 320
Mortgage loans held for sale 547 232
Loans receivable, net of allowance for
losses of $136 in 2001 and $118 in
2000 10,533 10,411
Securities available-for-sale 3,233 2,415
Securities held-to-maturity - 864
Other assets 990 1,082
------- -------
TOTAL ASSETS $ 15,679 $ 15,324
======= =======
LIABILITIES
Deposits $ 9,429 $ 9,828
Securities sold under repurchase
agreements 353 595
Federal Home Loan Bank advances 3,663 2,869
Other borrowings 217 210
Other liabilities 575 423
Stock issued by subsidiaries 306 306
------- -------
TOTAL LIABILITIES 14,543 14,231
------- -------
SHAREHOLDER'S EQUITY 1,136 1,093
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $ 15,679 $ 15,324
======= =======
See notes to consolidated financial statements.
7
SUMMARIZED STATEMENTS OF CASH FLOWS
FINANCIAL SERVICES GROUP
Unaudited
First Quarter
2001 2000
(in millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 41 $ 28
Adjustments:
Cumulative effect of accounting change 1 -
Amortization, depreciation and accretion 18 16
Mortgage loans held for sale (315) 109
Collections and remittances on loans
serviced for others, net 129 (6)
Other (11) 26
----- -----
(137) 173
----- -----
CASH PROVIDED BY (USED FOR) INVESTMENTS
Maturities and redemptions of securities 149 132
Purchases of securities available-for-sale (35) (736)
Loans originated or acquired, net of
principal collected (493) (599)
Capital expenditures for property and
equipment (6) (7)
Acquisitions, net of cash acquired - (19)
Sales of loans 328 47
Proceeds from sale of servicing rights 43 -
Other 29 2
----- -----
15 (1,180)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits (367) 315
Securities sold under repurchase agreements
and short-term borrowings, net 557 786
Additions to debt 12 9
Payments of debt (9) (131)
Capital contributions from Parent Company - 10
Dividends paid to Parent Company (15) -
Other - 12
----- -----
178 1,001
----- -----
Net increase (decrease) in cash and cash
equivalents 56 (6)
Cash and cash equivalents at beginning of period 320 233
----- -----
Cash and cash equivalents at end of period $ 376 $ 227
===== =====
See notes to consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF INCOME
TEMPLE-INLAND INC. AND
SUBSIDIARIES
Unaudited
First Quarter
2001 2000
(in millions,
except per share
amounts)
REVENUES
Manufacturing $ 681 $ 758
Financial Services 372 309
----- -----
1,053 1,067
----- -----
COSTS AND EXPENSES
Manufacturing 677 677
Financial Services 327 274
----- -----
1,004 951
----- -----
OPERATING INCOME 49 116
Parent Company interest (28) (25)
----- -----
INCOME BEFORE TAXES 21 91
Income taxes (9) (36)
----- -----
INCOME BEFORE ACCOUNTING CHANGE 12 55
Effect of accounting change (2) -
----- -----
NET INCOME $ 10 $ 55
===== =====
EARNINGS PER SHARE
Basic:
Income before accounting change $ 0.24 $ 1.04
Effect of accounting change (0.04) -
----- -----
Net income $ 0.20 $ 1.04
===== =====
Diluted:
Income before accounting change $ 0.24 $ 1.04
Effect of accounting change (0.04) -
----- -----
Net income $ 0.20 $ 1.04
===== =====
DIVIDENDS PAID PER SHARE OF COMMON
STOCK $ 0.32 $ 0.32
===== =====
See notes to consolidated financial statements.
9
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
First Quarter 2001
Unaudited
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 1 $ 376 $ 377
Mortgage loans held for sale - 547 547
Loans receivable, net - 10,533 10,533
Securities available-for-sale - 3,233 3,233
Trade and other receivables 349 - 335
Inventories 247 - 247
Property and equipment 2,038 161 2,199
Other assets 256 829 1,064
Investment in Financial Services 1,136 - -
------ ------ ------
TOTAL ASSETS $ 4,027 $15,679 $18,535
====== ====== ======
LIABILITIES
Deposits $ - $ 9,429 $ 9,429
Securities sold under repurchase
agreements - 353 353
Federal Home Loan Bank advances - 3,663 3,663
Other liabilities 294 575 833
Long-term debt 1,466 217 1,683
Deferred income taxes 280 - 281
Postretirement benefits 143 - 143
Stock issued by subsidiaries - 306 306
------ ------ ------
TOTAL LIABILITIES $ 2,183 $14,543 $16,691
------ ------ ------
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share:
authorized 25,000,000 shares; none issued -
Common stock - par value $1 per share;
authorized 200,000,000 shares; issued 61,389,552
shares including shares held in the treasury 61
Additional paid-in capital 365
Accumulated other comprehensive income (loss) 6
Retained earnings 1,961
------
2,393
Cost of shares held in the treasury:
12,129,771 shares (549)
------
TOTAL SHAREHOLDERS' EQUITY 1,844
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,535
======
See the notes to the consolidated financial statements.
10
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Year End 2000
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 2 $ 320 $ 322
Mortgage loans held for sale - 232 232
Loans receivable, net - 10,411 10,411
Securities available-for-sale - 2,415 2,415
Securities held-to-maturity - 864 864
Trade and other receivables 320 - 309
Inventories 253 - 253
Property and equipment 2,027 157 2,184
Other assets 252 925 1,152
Investment in Financial Services 1,093 - -
------ ------ ------
TOTAL ASSETS $ 3,947 $ 15,324 $ 18,142
====== ====== ======
LIABILITIES
Deposits $ - $ 9,828 $ 9,828
Federal Home Loan Bank advances - 2,869 2,869
Securities sold under repurchase
agreements - 595 595
Other liabilities 315 423 706
Long-term debt 1,381 210 1,591
Deferred income taxes 276 - 272
Postretirement benefits 142 - 142
Stock issued by subsidiaries - 306 306
------ ------ ------
TOTAL LIABILITIES $ 2,114 $ 14,231 $ 16,309
------ ------ ------
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share:
authorized 25,000,000 shares; none issued -
Common stock - par value $1 per share;
authorized 200,000,000 shares; issued 61,389,552
shares including shares held in the treasury 61
Additional paid-in capital 365
Accumulated other comprehensive income (loss) (8)
Retained earnings 1,968
------
2,386
Cost of shares held in the treasury: 12,215,499
shares (553)
------
TOTAL SHAREHOLDERS' EQUITY 1,833
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,142
======
See the notes to the consolidated financial statements.
11
CONSOLIDATED STATEMENT OF CASH FLOWS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited
First Quarter
2001 2000
(in millions)
CASH PROVIDED (USED FOR) OPERATIONS
Net income $ 10 $ 55
Adjustments:
Cumulative effect of accounting change 2 -
Depreciation and depletion 49 55
Amortization of goodwill 2 2
Deferred taxes 3 14
Amortization and accretion on financial
instruments 8 10
Mortgage loans held for sale (315) 109
Working capital changes (52) (82)
Collections and remittances on loans
serviced for others, net 129 (6)
Other 6 40
----- -----
(158) 197
----- -----
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures for property and equipment (67) (61)
Maturities of securities available-for-sale 149 73
Maturities and redemptions of securities held-to-
maturity - 59
Purchases of securities available-for-sale (35) (736)
Loans originated or acquired, net of
principal collected (493) (599)
Acquisitions, net of cash acquired - (19)
Sales of loans 328 47
Proceeds from sale of servicing rights 43 -
Other 25 2
----- -----
(50) (1,234)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 97 117
Payments of debt (9) (131)
Securities sold under repurchase agreements and
short-term borrowings, net 557 786
Purchase of stock for treasury - (102)
Cash dividends paid to shareholders (16) (17)
Net increase (decrease) in deposits (367) 315
Other 1 13
----- -----
263 981
----- -----
Net increase (decrease) in cash and cash
equivalents 55 (56)
Cash and cash equivalents at beginning of period 322 284
----- -----
Cash and cash equivalents at end of period $ 377 $ 228
===== =====
See the notes to the consolidated financial statements.
12
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Therefore, these statements do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the
opinion of management, all adjustments (consisting only of normal
accruals) considered necessary for a fair presentation have been
included. Interim operating results are not necessarily
indicative of the results that may be expected for the entire
year. For further information, refer to the financial statements
and footnotes included in, or incorporated into, the Annual
Report on Form 10-K of Temple-Inland Inc. (the "Company") for the
fiscal year ended December 30, 2000.
The consolidated financial statements include the accounts of the
company and its manufacturing and financial services
subsidiaries. The consolidated net assets invested in financial
services activities are subject, in varying degrees, to
regulatory rules and restrictions. Accordingly, included as an
integral part of the consolidated financial statements are
separate summarized financial statements for the company's
manufacturing and financial services groups.
The Parent Company (Temple-Inland Inc.) summarized financial
statements include the accounts of the company and its
manufacturing subsidiaries (the parent company). The net assets
invested in Temple-Inland Financial Services Group is reflected
in the summarized financial statements on the equity basis.
Related earnings, however, are presented before tax to be
consistent with the consolidated financial statements. These
financial statements should be read in conjunction with the
Temple-Inland Inc. consolidated financial statements and the
Temple-Inland Financial Services summarized financial statements.
All material intercompany amounts and transactions have been
eliminated. Certain amounts have been reclassified to conform to
current year's classifications.
13
NOTE B - EARNINGS PER SHARE
Denominators used in computing earnings per share are as follows:
First Quarter
2001 2000
(In millions)
Denominator for basic earnings per share -
Weighted average common shares outstanding 49.3 52.9
Dilutive effect of stock options - -
----- -----
Denominator for diluted earnings per share 49.3 52.9
===== =====
NOTE C - COMPREHENSIVE INCOME
Comprehensive income consists of:
First Quarter
2001 2000
(in millions)
Net income $ 10 $ 55
Other comprehensive income, net of income taxes:
Effect of adopting FAS No. 133 -
Unrealized losses on held-to-maturity securities
re-designated as available-for-sale securities (16) -
Unrealized losses on derivative instruments
classified as cash flow hedges (4) -
Unrealized gains (losses) on:
Available-for-sale securities 33 (4)
Derivative instruments 1 -
Foreign currency translation adjustments - 1
----- -----
Other comprehensive income 14 (3)
----- -----
Comprehensive income $ 24 $ 52
===== =====
At first quarter-end 2001, accumulated other comprehensive income
included $3 million of unrealized after-tax losses on open
commodity derivative instruments classified as cash flow hedges.
It is expected that $2 million of these unrealized after-tax
losses will be recognized over the next 12 months as the hedged
transactions are completed.
14
NOTE D - SEGMENT INFORMATION
The company has three reportable segments: Paper, Building
Products and Financial Services.
-------------------------------------------------------------------------
For the first quarter
or at quarter Building Financial Corporate
end 2001 Paper Products Services and Other Total
-------------- ------- -------- -------- --------- -------
(in millions)
Revenues from
external customers $ 512 $ 169 $ 372 $ - $1,053
Operating income(a) 21 (9) 45 (8) 49
Financial Services,
net interest income - - 107 - 107
Depreciation, depletion
and amortization (a) 28 15 7 1 51
-------------------------------------------------------------------------
For the first quarter
or at quarter
end 2000
-------------
Revenues from
external customers 520 238 309 - 1,067
Operating income 52 37 35 (8) 116
Financial Services,
net interest income - - 90 - 90
Depreciation, depletion
and amortization 33 17 6 1 57
-------------------------------------------------------------------------
(a) Includes a $7 million reduction in depreciation expense
resulting from a change in the estimated useful lives of certain
production equipment, of which $5 million applies to the paper
segment and $2 million applies to the building products segment.
NOTE E - CONTINGENCIES
There are pending against the company and its subsidiaries
lawsuits, claims and environmental matters arising in the regular
course of business. In addition, the Internal Revenue Service is
currently examining the company's consolidated income tax returns
for the years 1993 through 1996.
The paper group is a party to a long-term power purchase
agreement with Southern California Edison (Edison). Under this
agreement, the paper group sold a portion of its peak electrical
generating capacity from a co-generation facility operated in
connection with its Ontario mill to Edison. Edison was to pay
the paper group for electricity generated and sold to Edison.
During the fourth quarter 2000 and the first quarter 2001, the
Ontario mill generated and delivered electricity to Edison but
has not been paid. As a result of this non-payment, during April
2001, the paper group notified Edison that the long-term power
purchase agreement was terminated because of Edison's material
breach of the agreement. At first quarter-end 2001, $5 million
is due to the paper group under this agreement.
Edison has contested the right of the paper group to terminate
the power purchase agreement. The parties are currently in
litigation to determine, among other matters, whether the
15
agreement has been terminated and whether the paper group may
continue to have access through the interconnection services
provided by Edison.
The company does not believe that the resolution of these matters
will have a material adverse effect on its consolidated
operations or financial position.
NOTE F - ACQUISITIONS
During April 2001, the parent company announced that the paper
group entered into a definitive agreement to acquire the
corrugated packaging operations of Chesapeake Corporation for
$120 million cash, subject to adjustment. These operations
consist of ten corrugated container plants in seven states. It
is anticipated that the acquisition will close during May 2001.
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS AND CHANGES IN ESTIMATES
Derivatives
Beginning January 2001, the company adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The cumulative
effect of adopting this statement was to reduce first quarter
2001 net income by $2 million or $0.04 per diluted share and
other comprehensive income, a component of shareholders' equity,
by $4 million. As permitted by this statement, the company also
changed the designation of its portfolio of held-to-maturity
securities, which are carried at unamortized cost, to available-
for-sale, which are carried at fair value. As a result, the $862
million carrying value of these securities was adjusted to their
fair value with a corresponding after-tax reduction of $16
million in other comprehensive income.
The company uses, to a limited degree, derivative instruments to
mitigate its exposure to risk, including those associated with
changes in product pricing, manufacturing costs and interest
rates related to borrowings and investments in securities, as
well as with mortgage production activities. Changes in the fair
value of derivative instruments designated as cash flow hedges
are deferred and recorded in other comprehensive income. These
deferred gains or losses are recognized in income when the
transactions being hedged are completed. The ineffective portion
of these hedges, which is not material, is recognized in income.
Changes in the fair value of derivative instruments designated as
fair value hedges are recognized in income, as are the changes in
the fair value of the hedged item. Changes in the fair value of
derivative instruments that are not designated as hedges for
accounting purposes are recognized in income. The company does
not use derivatives for trading purposes.
16
The parent company uses commodity derivative instruments
principally to mitigate its exposure to changes in linerboard
pricing and the cost of old corrugated containers. These
instruments cover a small portion of the paper group's volumes
and range in duration from a few months to three years. They are
designated as cash flow hedges. The net fair values of these
instruments at first quarter-end 2001 are $(5) million and are
included in other long-term liabilities. The parent company also
uses interest rate derivative instruments to mitigate its
exposure to changes in interest rates on a portion of its
borrowings. These instruments cover $50 million of commercial
paper and other short-term borrowings and expire in 2008. They
do not qualify as hedges. Changes in their fair value are
included in interest expense. The net fair values of these
instruments at first quarter-end 2001 are $(3) million and are
included in other long-term liabilities.
The financial services group uses interest rate derivative
instruments to mitigate its exposure to changes in interest rates
associated with adjustable rate assets with lifetime caps, such
as adjustable rate mortgage loans or mortgage backed securities.
These instruments have notional amounts totaling $242 million and
expire in 2003. They do not qualify as hedges. Changes in their
fair value are included in interest income. The net fair value
of these instruments at first quarter-end 2001 is not
significant. Due to the current interest rate environment and
maturity and notional value of these instruments, their effect on
operations is not expected to be material.
The financial services group also uses forward sales commitments
to mitigate its exposure to changes in interest rates between the
time a mortgage loan commitment is made and the funding and sale
of the loan to a third party. Those forward sales commitments
matched against a portion of loans held for sale are designated
as fair value hedges. Changes in their fair value are included in
non-interest income. Those forward sales commitments matched
against unfunded loan commitments and the related unfunded loan
commitments do not qualify as hedges. Changes in their fair
values are included in non-interest income. The net fair value of
these instruments at first quarter-end 2001 is not significant.
Depreciation
Beginning January 2001, the parent company began computing
depreciation of certain production equipment using revised
estimated useful lives. These revisions ranged from a reduction
of several years to a lengthening of up to five years. First
quarter 2001 income includes $4 million, or $0.08 per diluted
share, as a result of this change. The parent company expects
that this change will increase 2001 net income by $16 million, or
$0.32 per diluted share.
17
Goodwill
During April 2001, the Financial Accounting Standards Board
tentatively decided to adopt a non-amortization, impairment-only
approach for goodwill, which if approved, would be effective as
of June 30, 2001. Under this approach, amortization of goodwill
would be precluded and goodwill would be measured for impairment.
The effect of non-amortization of goodwill during the last six
months of 2001 would be to increase 2001 net income by $4 million
or $0.08 per diluted share.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended March 2001 and 2000.
Summary
Consolidated revenues for the first quarter 2001 were $1.1
billion, down slightly from first quarter 2000. Income before
the effects of an accounting change for the first quarter 2001
was $12 million or $0.24 per diluted share compared with $55
million or $ 1.04 per diluted share for the first quarter 2000.
Income for 2001 includes $4 million or $0.08 per diluted share
reduction in depreciation expense resulting from a change in
estimated useful lives of certain production equipment. The
cumulative effect of adopting Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities was to reduce first quarter 2001 income by
$2.0 million or $0.04 per diluted share. Net income for the
first quarter 2001 was $10 million or $0.20 per diluted share
compared with $55 million or $ 1.04 per diluted share for the
first quarter 2000.
Business Segments
The Company manages its operations through three business
segments, Paper, Building Products, and Financial Services.
A summary of the results of operations by business segment
follows.
First Quarter
2001 2000
(in millions)
Revenues
--------
Paper $ 512 $ 520
Building Products 169 238
Financial Services 372 309
----- -----
Total revenues $1,053 $1,067
===== =====
Income
------
Paper $ 21 $ 52
Building Products (9) 37
Financial Services 45 35
----- -----
Segment operating income (1) 57 124
Corporate and other (8) (8)
Parent company interest (28) (25)
----- -----
Income before taxes 21 91
Income taxes (9) (36)
----- -----
Income before accounting change 12 55
Effect of accounting change (2) -
----- -----
Net income $ 10 $ 55
===== =====
(1) Segment operating income for 2001 includes a $7 million
reduction in depreciation expense resulting from a change in the
estimated useful lives of certain production equipment, of which
$5 million is applicable to Paper and $2 million to Building
Products.
19
Each of these business segments is affected by the factors of
supply and demand and changes in domestic and global economic
conditions, including changes in interest rates, new housing
starts, and home repair and remodeling activities and the
strength of the U.S. dollar.
Unless otherwise noted, increases or decreases refer to first
quarter 2001 amounts compared with first quarter 2000 amounts.
First quarter 2000 amounts have been reclassified to conform to
current year classifications.
The Paper Group
The Paper Group's revenues were $512 million, down 2 percent.
Average box prices were up 8 percent while box shipments were
548,000 tons, down 3 percent. Average linerboard prices were up
8 percent. Compared with the fourth quarter 2000, revenues were
about even. Linerboard prices were down slightly and box prices
were flat. Volumes were up slightly for seasonal reasons.
Production, distribution and administrative costs were $491
million, up 5 percent due to higher energy costs offset by
declines in the cost of old corrugated containers (OCC) and the
positive effect from lower depreciation expense. Energy costs
were up $22 million due primarily to the higher cost of natural
gas. OCC cost, which accounts for 38 percent of the Paper
Group's fiber requirements, was down $9 million. OCC was $72 per
ton at quarter end, down 37 percent. As a result of the
lengthening of the estimated useful lives of certain production
equipment, depreciation was reduced by $5 million. Compared with
the fourth quarter 2000, costs were up about 4 percent due mainly
to higher energy costs, which were up $18 million.
Mill production was 519,000 tons, down 20 percent or 131,000
tons. Of the mill production, 18 percent was sold in the
domestic and export markets. The Paper Group's converting
operations used the remainder. The decrease in production was
due to curtailments and the conversion of the Newport medium mill
during the third quarter 2000. Production was curtailed by
98,000 tons due to market, maintenance and operational reasons
compared with first quarter 2000 curtailments of 43,000 tons and
fourth quarter 2000 curtailments of 135,000 tons. The Paper Group
may curtail more production in future quarters for these reasons.
First quarter-end 2001 inventories were down 45,000 tons and were
about even with year-end 2000. During the quarter the Paper
Group purchased 43,264 tons of medium from its Newport joint
venture. The agreement to purchase medium from the Newport
venture expires during June 2001.
Operating income was $21 million, down 60 percent due to the
factors discussed above.
20
During the quarter, the Paper Group announced the acquisition of
the corrugated packaging operations of Chesapeake Corporation for
approximately $120 million, subject to adjustment. This
transaction is expected to close during May 2001. These acquired
operations include ten corrugated container plants in seven
states and should increase the Paper Group's integration level
and customer base. The Paper Group is continuing its efforts to
enhance return on investment. As part of this effort, the Paper
Group is reviewing operations that are unable to meet return
objectives to determine appropriate courses of action.
The Building Products Group
The Building Products Group's revenues were $169 million, down 29
percent. Average prices for all products were down with lumber
prices down 19 percent, particleboard down 15 percent, gypsum
down 53 percent and MDF down slightly. Shipments for all
products except MDF were down with lumber shipments down 9
percent, particleboard down 15 percent and gypsum down 21
percent. MDF shipments were up slightly. Compared with the
fourth quarter 2000, revenues were up 4 percent. Average prices
for most products were down except lumber. Lumber prices were up
5 percent. Shipments for most products were up.
Production, distribution and administrative costs were $178
million, down 12 percent due to lower volumes and the positive
effect from lower depreciation expense offset by increases in
energy costs. Weaker demand and the incident at the Mt. Jewett
particleboard facility affected production volumes. It is
expected that the Mt. Jewett facility will resume full production
during the second quarter 2001. As a result of the lengthening
of the estimated useful lives of certain production equipment,
depreciation was reduced by $2 million. Energy costs were up $3
million due primarily to the higher cost of natural gas.
Compared with the fourth quarter 2000, costs were up about 7
percent due partially to higher energy costs.
Production was curtailed to varying degrees in all product lines
due to market conditions during the first quarter 2001.
Production averaged from a low of 63 percent to a high of 78
percent of capacity in the various product lines. The Building
Products Group may curtail more production in future quarters for
this reason.
An operating loss of $9 million was incurred due to the factors
discussed above.
The Financial Services Group
The Financial Services Group revenues, consisting of interest and
non-interest income, were $372 million, up 20 percent, while
operating income was $45 million, up 29 percent. Compared with
21
the fourth quarter 2000, revenues were up slightly while
operating income was down 20 percent. The reduction in operating
income from the fourth quarter 2000 was primarily due to losses
from the sale of a portion of the mortgage servicing portfolio
and the sale of an auto loan portfolio coupled with an increase
in the provision for loan losses.
Net interest income was $107 million, up 19 percent due to an
increase in the net interest spread and an 11 percent increase in
average earning assets.
The provision for loan losses was $17 million, up 13 percent. The
increase in the provision was the result of growth and a change
in the mix of the loan portfolio and a decline in asset quality,
primarily relating to certain large commercial and business loans
and construction and development loans in the senior housing
industry.
Non-interest income, which consists primarily of income from real
estate and insurance activities, loan related fees and service
charges on deposits, was $82 million, up 32 percent. The
increase was due to increases in mortgage origination, real
estate and insurance activities and a focus on fee based
products. This was offset by a $2 million loss on the sale of an
auto loan portfolio and a $3 million loss on the sale of
servicing rights on approximately $9 billion in mortgage loans.
The servicing rights were sold in order to mitigate impairment
risk in a declining interest rate environment.
Non-interest expense was $121 million, up 24 percent. This
increase was due to commission related activity, acquisitions in
the asset based lending and leasing operations and increased real
estate activity.
22
Asset Quality
Several key measures are used to evaluate and monitor the asset
quality of the Financial Services Group. These measures include
the level of loan delinquencies, nonperforming loans and
nonperforming assets.
First Fourth
Quarter Quarter
-------------------------------------------------------------------------
2001 2000 2000
(in millions)
Accruing loan past due 30 - 89 days $ 199 $ 114 $ 170
Accruing loan past due 90 days or more 4 5 6
---------------------------
Accruing loans past due 30 days or more $ 199 $ 114 $ 170
===========================
Nonaccrual loans $ 152 $ 81 $ 65
Restructured loans - - -
---------------------------
Nonperforming loans 152 81 65
Foreclosed property 2 10 3
---------------------------
Nonperforming assets $ 154 $ 91 $ 68
===========================
Allowance for loan losses $ 136 $ 119 $ 118
Net charge-offs - - -
Nonperforming loan ratio 1.43% 0.81% 0.62%
Nonperforming asset ratio 1.45% 0.91% 0.65%
Allowance for loan losses/total loans 1.27% 1.19% 1.12%
Allowance for loan losses/
nonperforming loans 89.20% 146.86% 179.73%
Net loans charged off/average loans 0.02% 0.32% 0.35%
The increase in the level of nonaccrual loans was primarily due
to certain large loans in the construction and development and
commercial and business portfolios. The loans in the construction
and development portfolio are in the senior housing industry and
the commercial and business loans are primarily asset-based
transactions. These loans have substantial collateral and are
being actively monitored.
The increase in the allowance for loan losses was the result of a
$17 million provision for loan losses, primarily related to
growth and a change in the mix of the loan portfolio and the
loans discussed above. The lower annualized net charge-off ratio
was the result of a recovery of $2 million on a previously
charged off loan.
Operating income was $45 million, up 29 percent due to the
factors discussed above.
23
Corporate and Interest
Parent Company interest expense was up $3 million due to higher
levels of debt outstanding partially offset by a slight decrease
in interest rates.
Income Taxes
The effective tax rate is 43 percent and is based on current
expectations of income and expenses for the year 2001. The
effective tax rate includes federal and state income taxes and
the effects of non-deductible goodwill amortization and other
items.
Accounting Change
The cumulative effect of adopting Statement of Financial
Accounting Standards No. 133, Accounting for Derivative and
Hedging Activities, as amended was to reduce net income by $2
million, net of a deferred tax benefit of $1 million.
Average Shares Outstanding
Average diluted shares outstanding were 49.3 million, down 7
percent due to the effects of the share repurchases under the
share repurchase programs authorized during the fourth quarter
1999 and the third quarter 2000.
Capital Resources and Liquidity
The consolidated net assets invested in the Financial Services
Group are subject, in varying degrees, to regulatory rules and
regulations. Accordingly, Parent Company and the Financial
Services Group capital resources and liquidity are discussed
separately.
Parent Company
Operating Activities
Cash used in operations was $6 million. This was due to lower
earnings offset in part by lower working capital needs and a $15
million dividend from the Financial Services Group.
24
Investing Activities
Capital expenditures were $61 million. Capital expenditures are
expected to approximate $200 million for the year 2001.
Financing Activities
Dividends paid were $16 million or $.32 per share. Debt
increased $85 million from year-end levels. Subsequent to first
quarter-end, $200 million of 9.0% term notes were repaid using
$100 million of short-term borrowings and $100 million from an
existing three-year revolving credit agreement. In addition, a
new $150 million five-year term loan is being arranged, of which
$120 million will be used to fund the announced acquisition of
the Chesapeake Corporation's corrugated packaging operations.
There were no repurchases of shares under the August 2000 Board
of Directors authorization to repurchase 2.5 million shares. To
date at total of .75 million shares have been repurchased under
this authorization.
Other
The parent company has sufficient liquidity and capital resources
to meet its anticipated needs.
Financial Services
The principal sources of cash for the Financial Services Group
are operating cash flows, deposits, and borrowings. The
Financial Services Group uses these funds to invest in earning
assets, generally loans and securities.
Operating Activities
Cash used in operations was $137 million. This was due to higher
earnings and an increase in cash for mortgage loans serviced for
others offset by an increase in mortgage loans held for sale.
Investing Activities
Loans originated or acquired increased $493 million and were
offset by $328 million received primarily from the sale of an
auto loan portfolio. Securities decreased by $114 million and
$29 million was received from the sale of servicing rights on $9
billion in mortgage loans.
Financing Activities
Deposits decreased $367 million while borrowings increased $557
million. The decrease in deposits was due to the competitive
markets and the decision to pursue other funding sources such as
Federal Home Loan Bank advances. A $15 million dividend was paid
to the parent company.
25
Other
The Financial Services Group has sufficient liquidity and capital
resources to meet its anticipated needs. At quarter- end, the
savings bank exceeded all applicable regulatory capital
requirements. The parent company expects to maintain the savings
bank capital at a level that exceeds the minimum required for
designation as "well capitalized" under the capital adequacy
regulations of the Office of Thrift Supervision. From time to
time, the parent company may make capital contributions to the
savings bank or receive dividends from the savings bank. During
the quarter the parent company made no capital contributions to
the savings bank and received $15 million in dividends from the
savings bank.
Selected financial and regulatory capital data for the savings
bank follows:
First Quarter End Year End
2001 2000
(in millions of dollars)
Balance sheet data
Total assets $ 15,200 $ 14,885
Total deposits 9,821 10,088
Shareholders' equity 969 931
Regulatory
Savings Bank Minimum
Regulatory capital ratios
Tangible capital 7.8% 2.0%
Leverage capital 7.8% 4.0%
Risk-based capital 10.5% 8.0%
Energy and Related Matters
Energy costs continued to rise during the first quarter 2001 and
were approximately $25 million higher compared with first quarter
2000 and $19 million higher compared with fourth quarter 2000.
The company anticipates that energy costs will be down slightly
in the second quarter 2001, but that the general upward trend in
energy costs could resume in the third quarter 2001. The company
continues to explore alternative arrangements and fuel sources in
an effort to contain energy costs.
The energy situation in California has been well publicized. The
paper group is a party to a long-term power purchase agreement
with Southern California Edison (Edison). Under this agreement,
the paper group sold a portion of its peak electrical generating
capacity from a co-generation facility operated in connection
with its Ontario mill to Edison. Edison was to pay the paper
group for electricity generated and sold to Edison. During the
fourth quarter 2000 and the first quarter 2001, the Ontario mill
26
generated and delivered electricity to Edison but has not been
paid. As a result of this non-payment, during April 2001, the
paper group notified Edison that the long-term power purchase
agreement was terminated because of Edison's material breach of
the agreement. At first quarter-end 2001, approximately $5
million is due to the paper group under this agreement.
Edison has contested the right of the paper group to terminate
the power purchase agreement. The parties are currently in
litigation to determine, among other matters, whether the
agreement has been terminated and whether the paper group may
continue to have access through the interconnection services
provided by Edison. All litigation has an element of uncertainty
and the final outcome of any legal proceeding cannot be predicted
with any degree of certainty. In addition, as the owner of a co-
generation facility in California, the company is subject to
additional risks associated with any state or federal regulatory
actions that may be taken in an effort to address the energy
situation in California. With these limitations in mind, the
company presently believes that any ultimate liability from these
legal or regulatory proceedings or rulings would not have a
material adverse effect on the business or financial condition of
the company.
Forward Looking Statements
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that
involve risks and uncertainties. The actual results achieved by
Temple-Inland Inc. may differ significantly from the results
discussed in the forward-looking statements. Factors that might
cause such differences include general economic, market, or
business conditions; the opportunities or lack thereof that may
or may not be presented to and pursued by Temple-Inland Inc. and
its subsidiaries; availability and price of raw materials used by
Temple-Inland Inc. and its subsidiaries; competitive actions by
other companies; changes in laws or regulations; energy costs and
regulatory actions that may be taken in an effort to alleviate
the energy situation in California; and other factors, many of
which are beyond the control of Temple-Inland Inc. and
subsidiaries.
27
Statistical and other data (a)
First Quarter
2001 2000
Net revenues (in millions)
Paper $ 512 $ 520
===== ======
Building products:
Pine lumber $ 48 $ 65
Particleboard 47 62
Medium density fiberboard 26 25
Gypsum wallboard 13 32
Fiberboard 13 19
Other 22 35
----- ------
Total building products $ 169 $ 238
===== ======
Unit sales
Paper (in thousand tons) (b) 641 713
Building products:
Pine lumber - mbf 162 178
Particleboard - msf
(3/4" basis) 154 181
Medium density fiberboard -
msf (3/4" basis) 71 69
Gypsum wallboard - msf 141 178
Fiberboard - msf
(1/2" basis) 79 97
(a) Revenues and unit sales do not include joint venture
operations
(b) Includes boxes sold and open market sales of linerboard
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk
The company is subject to interest rate risk from the utilization
of financial instruments such as adjustable-rate debt and other
borrowings as well as the lending and deposit gathering
activities of the Financial Services Group. The following table
illustrates the estimated effect on pre-tax income of immediate,
parallel, and sustained shifts in interest rates for the
subsequent 12-month period at first quarter-end 2001, with
comparative information at year-end 2000:
Increase (Decrease) in Income
Before Taxes
(in millions)
First Quarter Year End
Change in Interest Rates 2001 2000
------------------------ -----------------------------
+2% $ (21) $ (7)
+1% (7) (1)
0% - -
-1% 2 (1)
-2% 5 (13)
The change in exposure to interest rate risk from year-end 2000
is primarily due to shorter durations of the Financial Services
Group's funding sources.
The operations of the Financial Services Group's savings bank are
subject to interest rate risk to the extent that interest-earning
assets and interest-bearing liabilities mature or reprice at
different times or in differing amounts. Because approximately
91 percent of the savings bank's assets at quarter-end 2001 have
adjustable rates, this risk is significantly mitigated. However,
the savings bank is also subject to prepayment risk inherent in a
portion of its single-family adjustable-rate mortgage-backed
assets. A substantial portion of the savings bank's investments
in adjustable-rate mortgage-backed assets have annual and
lifetime caps that subject the savings bank to interest rate risk
should rates rise above certain levels. From time to time, to
optimize net interest income while maintaining acceptable levels
of interest rate and liquidity risk, the savings bank may enter
into various interest rate contracts to better match assets and
liabilities.
Additionally, the fair value of the Financial Services Group's
mortgage servicing rights (estimated at $159 million at first
quarter-end 2001) is also affected by changes in interest rates.
29
The company estimates that a one percent decline in interest
rates from quarter-end levels would decrease the fair value of
the mortgage servicing rights by approximately $25 million.
During the first quarter 2001, the Financial Services Group sold
servicing rights on $9 billion of mortgage loans in order to
mitigate this risk. At first quarter-end 2001, the Financial
Services Group serviced $10 billion of mortgage loans compared
with $19.5 billion at year-end 2000.
Foreign Currency Risk
The company's exposure to foreign currency fluctuations on its
financial instruments is not material because most of these
instruments are denominated in U.S. dollars.
Commodity Price Risk
From time to time the company uses commodity derivative
instruments to mitigate its exposure to changes in product
pricing and manufacturing costs. These instruments cover a small
portion of the company's volume and range in duration from three
months to three years. Based on the fair value of these
instruments at first quarter-end 2001, the potential loss in fair
value resulting from a hypothetical 10 percent change in the
underlying commodity prices would not be significant.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note E to Notes to
Consolidated Financial Statements in Part I of this
report is incorporated by reference thereto.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on
May 4, 2001, at which a quorum was present. The table
below sets forth the number of votes cast for, against
or withheld, as well as the number of abstentions and
broker non-votes for each matter voted upon at that
meeting.
Against Abstentions
or and Broker
Matter For Withheld Non-votes
1. Election of four directors
(a) Bobby R. Inman 43,299,201 602,036 -
(b) Kenneth M. Jastrow, II 43,338,206 563,031 -
(c) James A. Johnson 43,309,286 591,951 -
(d) Herbert A. Sklenar 43,305,949 595,288 -
2. Ratification of appointment of
Ernst & Young LLP. 43,300,900 388,920 211,417
3. Ratification of adoption of the
Company's 2001 Stock Incentive
Plan. 33,817,012 9,842,192 242,033
4. Ratification of adoption of the
Company's Stock Deferral Plan. 37,379,884 6,188,267 333,086
5. Ratification of adoption of the
Company's Directors' Fee Deferral
Plan. 37,018,342 6,527,119 355,776
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K. During the three months
ended March 31, 2001, the Company did not file a
current report on Form 8-K.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TEMPLE-INLAND INC.
(Registrant)
Dated: May 15, 2001 By /s/ Louis R. Brill
-------------------------
Louis R. Brill
Vice President and
Chief Accounting Officer