e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Fiscal Year Ended
December 31, 2005
|
|
|
|
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
|
For the Transition Period
From
to
|
Commission File Number
001-08634
Temple-Inland Inc.
(Exact Name of Registrant as
Specified in its Charter)
|
|
|
Delaware
|
|
75-1903917
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
1300 MoPac Expressway South
Austin, Texas 78746
(Address of principal executive
offices, including Zip code)
Registrants telephone number, including area code:
(512) 434-5800
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange On Which
Registered
|
|
Common Stock, $1.00 Par Value
per Share,
non-cumulative
Preferred Share Purchase Rights
|
|
New York Stock Exchange
The Pacific Exchange
New York Stock Exchange
The Pacific Exchange
|
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of
1934. Yes o No þ
Indicate by check mark 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 such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell
company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the registrant, based on the closing sales
price of the Common Stock on the New York Stock Exchange on
July 1, 2005, was approximately $3,696,000,000. For
purposes of this computation, all officers, directors, and five
percent beneficial owners of the registrant (as indicated in
Item 12) are deemed to be affiliates. Such
determination should not be deemed an admission that such
directors, officers, or five percent beneficial owners are, in
fact, affiliates of the registrant.
As of February 28, 2006, there were 110,857,380 shares
of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys definitive proxy statement to be
prepared in connection with the Annual Meeting of Shareholders
to be held May 5, 2006, are incorporated by reference into
Part III of this report.
PART I
Introduction
Temple-Inland Inc. is a holding company that, through its
subsidiaries, operates three business segments:
|
|
|
|
|
Corrugated packaging,
|
|
|
|
Forest products, and
|
|
|
|
Financial services.
|
Beginning in first quarter 2006, we will classify into a fourth
business segment our real estate operations that are currently
included within our forest products and financial services
segments.
Temple-Inland Inc. is a Delaware corporation that was organized
in 1983. The following chart presents the ownership structure
for our significant subsidiaries as of the end of 2005. It does
not contain all our subsidiaries, many of which are dormant or
immaterial entities. A list of our subsidiaries is filed as an
exhibit to this annual report on
Form 10-K.
All subsidiaries shown are 100 percent owned by their
immediate parent company listed in the chart.
Our principal executive offices are located at 1300 MoPac
Expressway South, Austin, Texas 78746. Our telephone number is
(512) 434-5800.
Additional information about us may be obtained from our
Internet website, the address of which is
http://www.templeinland.com.
We provide access through the website to our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
including amendments to these reports, and other documents as
soon as reasonably practicable after we file them with the
Securities and Exchange Commission (or SEC). In addition,
beneficial ownership reports filed by officers, directors, and
principal security holders under Section 16(a) of the
Securities Exchange Act of 1934, as amended (or the Exchange
Act), are also available through our website. Our website also
contains a corporate governance section that includes our
|
|
|
|
|
corporate governance principles,
|
|
|
|
audit committee charter,
|
|
|
|
management development and executive compensation committee
charter,
|
1
|
|
|
|
|
nominating and governance committee charter,
|
|
|
|
standards of business conduct and ethics,
|
|
|
|
code of ethics for senior financial officers, and
|
|
|
|
information on how to communicate directly with our board of
directors.
|
We will also provide printed copies of any of these documents to
any shareholder upon request.
Financial
Information
Our results of operations, including information regarding our
principal business segments, are shown in the financial
statements and the notes thereto contained in Item 8 of
this Annual Report on
Form 10-K.
Certain statistical information required by Securities Act
Industry Guide 3 and revenues and unit sales by product line and
geographic area are contained in Items 6 and 8 of this
Annual Report on
Form 10-K.
Narrative
Description of the Business
Corrugated Packaging. Our corrugated packaging
segment provided 58 percent of our consolidated net
revenues for 2005. Our vertically integrated corrugated
packaging operation includes:
|
|
|
|
|
five linerboard mills,
|
|
|
|
one corrugating medium mill, and
|
|
|
|
67 converting and other facilities.
|
We manufacture containerboard and convert it into a complete
line of corrugated packaging. Approximately eight percent of the
containerboard we produced in 2005 was sold in the domestic and
export markets. We converted the remaining internal production,
in combination with external containerboard we purchased, into
corrugated containers at our box plants. While we have the
capacity to convert more containerboard than we produce, we
routinely buy and sell various grades of containerboard
depending on our product mix.
Our nationwide network of box plants produces a wide range of
products from commodity brown boxes to intricate die cut
containers that can be printed with multi-color graphics. Even
though the corrugated box business is characterized by commodity
pricing, each order for each customer is a custom order. Our
corrugated packaging is sold to a variety of customers in the
food, paper, glass containers, chemical, appliance, and plastics
industries, among others.
We also manufacture bulk containers constructed of multi-wall
corrugated board for extra strength, which are used for bulk
shipments of various materials.
We serve about 8,400 corrugated packaging customers with
approximately 13,000 shipping destinations. We have no single
customer to which sales equal ten percent or more of
consolidated revenues or the loss of which would have a material
adverse effect on our corrugated packaging segment.
Sales of corrugated packaging track changing population patterns
and other demographics. Historically, there has been a
correlation between the demand for corrugated packaging and
orders for nondurable goods.
We also own a 50 percent interest in Premier Boxboard
Limited LLC, a joint venture that produces light-weight gypsum
facing paper and corrugating medium at a mill in Newport,
Indiana.
During 2005, we closed converting facilities in Antioch,
California; Newark, Delaware; Atlanta, Georgia; and Louisville,
Kentucky, as we continued efforts to improve our asset
utilization and enhance return on investment from corrugated
packaging. These closures were part of our initiatives,
announced in November 2003, to lower costs and improve
profitability from corrugated packaging. We will continue to
consolidate converting facilities, eliminate positions, and
improve asset utilization as part of these initiatives.
Forest Products. Our forest products segment
provided 21 percent of our consolidated net revenues for
2005 and manages our forest resources of approximately two
million acres of timberland in Texas, Louisiana, Georgia, and
Alabama (including our approximately 203,000 acres of
high-value land principally located near Atlanta, Georgia). We
manufacture a wide range of building products, including:
|
|
|
|
|
lumber,
|
|
|
|
gypsum wallboard,
|
|
|
|
particleboard,
|
|
|
|
fiberboard, and
|
|
|
|
medium density fiberboard (or MDF).
|
2
Our timberland is an important source of wood fiber used in
manufacturing both forest products and corrugated packaging.
We sell forest products throughout the continental United
States, with the majority of sales occurring in the southern
United States. We have no single customer to which sales equal
ten percent or more of consolidated revenues or the loss of
which would have a material adverse effect on our forest
products segment. Most of our products are sold by account
managers and representatives to distributors, retailers, and
original equipment manufacturers. The forest products business
is heavily dependent upon the level of residential housing
expenditures, including the repair and remodeling market.
At the end of 2005, we owned a 50 percent interest in each
of two joint ventures: Del-Tin Fiber LLC, which produces MDF at
a facility in Arkansas; and Standard Gypsum LP, which produces
gypsum wallboard at a plant and related quarry in Texas and a
plant in Tennessee. In early 2006, we purchased our
partners interest in Standard Gypsum, which is now a
wholly-owned operation.
We have designated approximately 203,000 acres of our
timberland principally located near Atlanta, Georgia, as
high-value with the potential for real estate development. We
are creating the infrastructure and securing entitlements on
this high-value land that will allow us over time to realize
value from these lands through sale, joint venture, or
development. Beginning in first quarter 2006, these assets and
activities will be reclassified into a fourth operating segment,
Real Estate, that will also include real estate operations that
are currently included within our financial services segment.
Financial Services. Our financial services
segment provided 21 percent of our consolidated net
revenues for 2005. We provide financial services in the areas of:
|
|
|
|
|
consumer and commercial banking,
|
|
|
|
real estate development, and
|
|
|
|
insurance.
|
Guaranty is a federally-chartered stock savings bank that
conducts its business through banking centers in Texas and
California and lends in diverse geographic markets. Our 98 Texas
banking centers are concentrated in the metropolitan areas of
Houston, Dallas/Fort Worth, San Antonio, and Austin,
as well as the central and eastern regions of the state. Our 51
California banking centers are concentrated in Southern
California and the Central Valley. We provide deposit products
to the general public, invest in single-family adjustable-rate
mortgages and mortgage-backed securities, lend money for the
construction of real estate projects and the financing of
business operations, and provide a variety of other financial
products and services to consumers and businesses.
Our primary financial services revenues are interest earned on
loans and securities, as well as fees received in connection
with loans and deposit services. Our major financial services
expenses are interest paid on consumer deposits and other
borrowings and personnel costs. Like other financial
institutions, this business segment is significantly influenced
by general economic conditions; the monetary, fiscal, and
regulatory policies of the federal government; and the policies
of financial institution regulatory authorities. Deposit flows
and costs of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending
activities are affected by the demand for mortgage financing and
for other types of loans as well as market conditions. We
primarily seek assets with interest rates that adjust
periodically rather than assets with long-term fixed rates.
Guaranty is required to maintain minimum capital levels in
accordance with regulations of the Office of Thrift Supervision
(or OTS) established to ensure capital adequacy of savings
institutions. We believe that as of year-end 2005, Guaranty met
or exceeded all of these capital adequacy requirements. To
remain in the lowest tier of Federal Deposit Insurance
Corporation insurance premiums, Guaranty must meet a leverage
capital ratio of at least five percent of adjusted total assets.
At year-end 2005, the leverage capital ratio was
6.94 percent of adjusted total assets.
As we previously disclosed, in 2004 the OTS and Guaranty entered
into a Stipulation and Consent to the Issuance of an Order to
Cease and Desist for Affirmative Relief (or Consent Order)
related to findings and required corrective actions associated
with Guarantys mortgage origination activities. Under the
Consent Order, Guaranty agreed, among other things, to take
certain actions primarily related to its repositioned mortgage
origination activities, including strengthening its regulatory
compliance controls and management,
3
enhancing its suspicious activity reporting and regulatory
training programs, and implementing improved risk assessment and
loan application register programs. Guaranty has implemented the
corrective actions required by the Consent Order. Additionally,
we further repositioned our mortgage origination activities in
2005, substantially reducing the volume of activity to which the
corrective actions apply. The Consent Order remains in effect,
but has had no significant ongoing impact on the operations of
Guaranty or its ability to pay dividends to the parent company.
We have not incurred any significant financial loss as a result
of this matter and have no reason to believe that the matters
addressed in the Consent Order will have a significant effect on
Guarantys long-term operations or cash flows. We will
originate mortgage loans through certain retail channels,
including the retail branches of Guaranty, and we will continue
to restructure our mortgage origination capabilities.
Through subsidiaries of Guaranty, we act as agent in the sale of
commercial and personal lines of property, casualty, life, and
group health insurance products. We also administer the
marketing and distribution of several mortgage-related personal
life, accident, and health insurance programs. In addition, we
sell annuities primarily to customers of Guaranty.
We are involved in the development of over 60 residential
subdivisions in Texas, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. We also own, either directly or
through joint venture interests, three commercial properties.
Beginning in first quarter 2006, most of these assets and
activities will be reclassified into a fourth operating segment,
Real Estate, that will also include real estate operations that
are currently included within our forest products segment.
Raw
Materials
Our main raw material resource is wood fiber. We own or lease
approximately two million acres of timberland located in Texas,
Louisiana, Georgia, and Alabama. In 2005, wood fiber required
for our corrugated packaging and forest products operations was
supplied from these lands and as a by-product of our solid wood
operations to the extent shown below:
|
|
|
|
|
|
|
Percentage
|
|
|
|
Supplied
|
|
Raw Material
|
|
Internally
|
|
|
Sawtimber
|
|
|
55
|
%
|
Pine Pulpwood
|
|
|
38
|
%
|
The balance of our wood fiber requirements for these operations
was purchased from numerous landowners and other timber owners,
as well as other producers of wood by-products.
Linerboard and corrugating medium are the principal materials
used to make corrugated boxes. Our mills at Rome, Georgia and
Bogalusa, Louisiana, only manufacture linerboard. Our Ontario,
California; Maysville, Kentucky; and Orange, Texas, mills are
traditionally linerboard mills, but can also manufacture
corrugating medium. Our New Johnsonville, Tennessee, mill only
manufactures corrugating medium. The principal raw material used
by the Rome, Georgia; Orange, Texas; and Bogalusa, Louisiana,
mills is virgin fiber, but each mill is also able to use
recycled fiber for up to 15 percent of its raw material
requirements. The Ontario, California, and Maysville, Kentucky,
mills use only recycled fiber. The mill at New Johnsonville,
Tennessee, uses a combination of virgin and recycled fiber. In
2005, recycled fiber represented approximately 36 percent
of the total fiber needs of our containerboard operations. The
price of recycled fiber fluctuates due to normal supply and
demand for the raw material and for the finished product. We
purchase recycled fiber on the open market from numerous
suppliers. Price fluctuations reflect the competitiveness of
these markets. We generally produce more linerboard and less
corrugating medium than is converted at our box plants. The
deficit of corrugating medium is filled through open market
purchases
and/or
trades, and we sell any excess linerboard in the open market.
We obtain gypsum for our wallboard operations in Fletcher,
Oklahoma, from one outside source through a long-term purchase
contract. At our gypsum wallboard plants in West Memphis,
Arkansas, and Cumberland City, Tennessee, synthetic gypsum is
used as a raw material. Synthetic gypsum is a by-product of
coal-burning electrical power plants. We have a long-term supply
agreement for synthetic gypsum produced at a Tennessee Valley
Authority electrical plant located adjacent to the Cumberland
City plant. Synthetic gypsum acquired pursuant to this agreement
supplies all the synthetic gypsum required by the
Cumberland City plant and our
4
West Memphis plant. The gypsum wallboard plant in McQueeney,
Texas, primarily uses gypsum obtained from its own quarry and
gypsum acquired from the same source that supplies the Fletcher,
Oklahoma, plant.
We believe the sources outlined above will be sufficient to
supply our raw material needs for the foreseeable future.
Energy
Electricity and steam requirements at our manufacturing
facilities are either supplied by a local utility or generated
internally through the use of a variety of fuels, including
natural gas, fuel oil, coal, wood bark, and other waste products
resulting from the manufacturing process. By utilizing these
waste products and other wood by-products as a biomass fuel to
generate electricity and steam, we were able to generate
approximately 72 percent of our energy requirements during
2005 at our mills in Rome, Georgia; Bogalusa, Louisiana; and
Orange, Texas. In some cases where natural gas or fuel oil is
used, our facilities possess a dual capacity enabling the use of
either fuel as a source of energy.
The natural gas needed to run our natural gas fueled power
boilers, package boilers, and turbines is acquired pursuant to a
multiple vendor solicitation process that provides for the
purchase of gas, primarily on a firm basis with a few operations
on an interruptible basis, at rates favorable to spot market
rates. Natural gas prices continued to rise during 2005 with
some fairly dramatic spikes related to hurricanes and other
natural disasters. It is likely that prices of natural gas will
continue to fluctuate in the future. We hedge very little of our
energy costs.
In an effort to reduce our exposure to changing prices of
natural gas, we recently completed capital projects at our
Bogalusa, Rome, and Orange mills that will modify existing
boilers to allow us to increase significantly the use of wood
bark and waste fuel for steam generation. These projects, which
cost approximately $42 million, have enabled us to reduce
our natural gas usage and should continue to produce benefits in
2006.
Employees
We have approximately 15,500 employees. Approximately 5,325 of
our employees are covered by collective bargaining agreements.
These agreements generally run for a term of three to six years
and have varying expiration dates. The following table
summarizes certain information about collective bargaining
agreements that cover a significant number of employees:
|
|
|
|
|
|
|
Location
|
|
Bargaining Unit(s)
|
|
Employees Covered
|
|
Expiration Dates
|
|
Linerboard Mill, Orange, Texas
|
|
United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union (or USW), Local 1398, and USW, Local
391
|
|
Approximately 220 hourly
production employees and 100 hourly maintenance employees
|
|
July 31, 2008
|
Linerboard Mill, Bogalusa,
Louisiana
|
|
USW, Local 189, and International
Brotherhood of Electrical Workers (or IBEW), Local 1077
|
|
Approximately 335 hourly
production employees, and 28 electrical maintenance employees
|
|
July 31, 2009
|
Linerboard Mill, Rome, Georgia
|
|
USW, Local 804, IBEW, Local 613,
United Association of Journeymen & Apprentices of
the Plumbing & Pipefitting Industry Local 72, and
International Association of Machinists & Aerospace
Workers, Local 414
|
|
Approximately 255 hourly
production employees, 30 electrical maintenance employees,
28 pipefitter maintenance employees, and 66 mechanical
maintenance employees
|
|
August 28, 2006
|
5
|
|
|
|
|
|
|
Location
|
|
Bargaining Unit(s)
|
|
Employees Covered
|
|
Expiration Dates
|
|
Evansville, Indiana and
Middletown, Ohio, Box Plants (or Northern Multiple)
|
|
USW, Local 1046 and USW, Local
114, respectively
|
|
Approximately 104 and
99 hourly production and maintenance employees, respectively
|
|
April 30, 2008
|
Rome, Georgia and Orlando,
Florida, Box Plants (or Southern Multiple)
|
|
USW Local 838 and USW Local 834,
respectively
|
|
Approximately 128 and
90 hourly production and maintenance employees, respectively
|
|
December 1, 2008
|
We have additional collective bargaining agreements with
employees at various other manufacturing facilities. These
agreements each cover a relatively small number of employees and
are negotiated on an individual basis at each such facility.
We consider our relations with our employees to be good.
Environmental
Protection
We are committed to protecting the health and welfare of our
employees, the public, and the environment and strive to
maintain compliance with all state and federal environmental
regulations in a manner that is also cost effective. When we
construct new facilities or modernize existing facilities, we
generally use state of the art technology for air and water
emissions. This forward-looking approach is intended to minimize
the effect that changing regulations have on capital
expenditures for environmental compliance.
Our operations are subject to federal, state, and local
provisions regulating discharges into the environment and
otherwise related to the protection of the environment.
Compliance with these provisions, primarily the Federal Clean
Air Act, Clean Water Act, Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (or CERCLA), as amended
by the Superfund Amendments and Reauthorization Act of 1986 (or
SARA), and Resource Conservation and Recovery Act (or RCRA),
requires us to invest substantial funds to modify facilities to
assure compliance with applicable environmental regulations.
Capital expenditures directly related to environmental
compliance totaled $5 million in 2005. This amount does not
include capital expenditures for environmental control
facilities made as a part of major mill modernizations and
expansions or capital expenditures made for another purpose that
have an indirect benefit on environmental compliance.
Future expenditures for environmental control facilities will
depend on new laws and regulations and other changes in legal
requirements and agency interpretations thereof, as well as
technological advances. We expect the prominence of
environmental regulation and compliance to continue for the
foreseeable future. Given these uncertainties, we currently
estimate that capital expenditures for environmental purposes
during the period 2006 through 2008 will average $8 million
each year, excluding expenditures related to the Maximum
Achievable Control Technology (or MACT) programs and landfill
closures discussed below. The estimated expenditures could be
significantly higher if more stringent laws and regulations are
implemented.
On April 15,1998, the U.S. Environmental Protection
Agency (or EPA) issued extensive regulations governing air and
water emissions from the pulp and paper industry (or Cluster
Rule). Compliance with the MACT phases of the Cluster Rule will
be required at certain intervals through 2008.
We estimate we will spend approximately $10 million,
$7 million of which was spent in 2005, to meet the
requirements of the second phase of MACT I, which covers
Hazardous Air Pollutant (or HAP) emissions from High Volume Low
Concentration sources at three containerboard mills. We do not
anticipate any difficulty meeting the compliance deadline of
April 2006.
On September 13, 2004, EPA published the Boiler MACT. This
regulation affects industrial boilers and process heaters
burning all fuel types with the exception of small gas-fired
units. However, large existing gas-fired units and liquid fuel
(oil) fired units need only submit an initial notification.
Affected units with emission standards include new gas-fired and
liquid fuel units and all large solid fuel units at major
sources for HAPs. Compliance methods vary from verification by
testing that the affected unit does not emit a regulated amount
of HAPs to adding additional control equipment. Compliance is
required by September 2007. We have 12 boilers at ten
containerboard and forest products facilities that are now being
evaluated to determine appropriate compliance measures and
costs. We estimate capital expenditures to comply with the
Boiler MACT standards to be $3 million.
6
The Plywood and Composite Wood Panel (or PCWP) MACT standards
were published July 30, 2004, and also limit emissions of
HAPs. The rule offers several options for compliance including
emission control device performance, production based emission
limits, emission averaging, and a low risk subcategory. The
initial notices of applicability were filed prior to the
January 26, 2005 deadline, with PCWP MACT compliance
required by October 1, 2008. We have nine forest products
facilities affected by the regulation. These are now being
evaluated to determine appropriate compliance measures. Capital
expenditures are estimated at $12 million.
We use company-owned landfills for disposal of non-hazardous
waste at three containerboard mills and two forest products
facilities. We also have two additional sites that we are
remediating. Based on third-party cost estimates, we expect to
spend, on an undiscounted basis, $28 million over the next
25 years to ensure proper closure of these landfills and
remediation of these two additional sites.
In addition to these capital expenditures, we spend a
significant amount on ongoing maintenance costs to continue
compliance with environmental regulations. We do not believe,
however, that these capital expenditures or maintenance costs
will have a material adverse effect on our earnings. In
addition, expenditures for environmental compliance should not
have a material effect on our competitive position, because
other companies are also subject to these regulations.
As previously disclosed, we are working with an environmental
consulting firm and the Louisiana Department of Environmental
Quality to investigate the source of contaminated water
discovered in a manhole adjacent to our facilities in Bogalusa,
Louisiana, and develop a remediation plan. At this time, we are
not able to predict whether we will be subject to any monetary
sanctions arising out of this matter or the amount of any such
monetary sanctions. Based on the latest, but limited,
information we have, we believe it is probable that we will
incur remediation costs in connection with this matter, but we
are not able to predict the extent of remediation that may be
required. We have established an initial reserve of
$4 million for the continued investigation of this matter
and related remediation costs. Of this amount, $3 million
applies to the chemical business, which is included in
discontinued operations. As our investigation continues, our
estimate of remediation costs could change, which would result
in future adjustments to the reserve established for this
matter. We currently have no reason to believe that this matter
will have a material effect on our financial position or
long-term results of operations or cash flows.
Our facilities are periodically inspected by environmental
authorities. We are required to file with these authorities
periodic reports on the discharge of pollutants. Occasionally,
one or more of these facilities may operate in violation of
applicable pollution control standards, which could subject the
company to fines or penalties. We believe that any fines or
penalties that may be imposed as a result of these violations
will not have a material adverse effect on our earnings or
competitive position. No assurance can be given, however, that
any fines levied in the future for any such violations will not
be material.
Under CERCLA, liability for the cleanup of a Superfund site may
be imposed on waste generators, site owners and operators, and
others regardless of fault or the legality of the original waste
disposal activity. While joint and several liability is
authorized under CERCLA, as a practical matter, the cost of
cleanup is generally allocated among the many waste generators.
We are named as a potentially responsible party in four
proceedings relating to the cleanup of hazardous waste sites
under CERCLA and similar state laws, excluding sites for which
our records disclose no involvement or for which our potential
liability has been finally determined. In all but one of these
sites, we are either designated as a de minimus potentially
responsible party or believe our financial exposure is
insignificant. We have conducted investigations of all four
sites, and currently estimate that the remediation costs to be
allocated to us are about $2 million and should not have a
material effect on our earnings or competitive position. There
can be no assurance that we will not be named as a potentially
responsible party at additional Superfund sites in the future or
that the costs associated with the remediation of those sites
would not be material.
Competition
We operate in highly competitive industries. The commodity
nature of our manufactured products gives us little control over
market pricing or market demand for our products. The level of
competition in a given product or market may be affected by
economic factors, including interest rates, housing starts, home
repair and remodeling activities, and the strength of the
dollar, as well as other market factors including supply and
demand for these products, geographic location and the operating
efficiencies of competitors. Our competitive
7
position is influenced by varying factors depending on the
characteristics of the products involved. The primary factors
are product quality and performance, price, service, and product
innovation.
The corrugated packaging industry is highly competitive with
approximately 1,400 box plants in the United States. Our
box plants accounted for approximately 13.5 percent of
total industry shipments during 2005, making us the third
largest producer of corrugated packaging in the United States.
Although corrugated packaging is dominant in the national
distribution process, our products also compete with various
other packaging materials, including products made of paper,
plastics, wood, and metals.
In building products markets, we compete with many companies
that are substantially larger and have greater resources in the
manufacturing of building products.
Our savings bank competes with commercial banks, savings and
loan associations, mortgage banks, and other lenders. We also
compete with real estate investment and development companies in
our real estate activities and with insurance agencies in our
property, casualty, life, and health insurance activities. The
financial services industry is a highly competitive business,
and a number of entities with which we compete have greater
resources.
Executive
Officers of the Registrant
Set forth below are the names, ages, and titles of the persons
who serve as executive officers of the Company:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Office
|
|
Kenneth M. Jastrow, II
|
|
|
58
|
|
|
Chairman of the Board and Chief
Executive Officer
|
Doyle R. Simons
|
|
|
42
|
|
|
Executive Vice President
|
J. Patrick Maley III
|
|
|
44
|
|
|
Executive Vice President
|
James M. DeCosmo
|
|
|
47
|
|
|
Group Vice President
|
Bart J. Doney
|
|
|
56
|
|
|
Group Vice President
|
Kenneth R. Dubuque
|
|
|
57
|
|
|
Group Vice President
|
Jack C. Sweeny
|
|
|
59
|
|
|
Group Vice President
|
Dennis J. Vesci
|
|
|
58
|
|
|
Group Vice President
|
Randall D. Levy
|
|
|
54
|
|
|
Chief Financial Officer
|
Louis R. Brill
|
|
|
64
|
|
|
Chief Accounting Officer and Vice
President
|
Scott Smith
|
|
|
51
|
|
|
Chief Information Officer
|
J. Bradley Johnston
|
|
|
50
|
|
|
Chief Administrative Officer and
General Counsel
|
Leslie K. ONeal
|
|
|
50
|
|
|
Vice President, Assistant General
Counsel and Secretary
|
David W. Turpin
|
|
|
55
|
|
|
Treasurer
|
Kenneth M. Jastrow, II became Chairman of the Board and
Chief Executive Officer on January 1, 2000.
Mr. Jastrow previously served in various capacities since
1991, including President, Chief Operating Officer, Chief
Financial Officer, and Group Vice President.
Doyle R. Simons was named Executive Vice President in February
2005 following his service as Chief Administrative Officer since
November 2003. Mr. Simons served as Vice President,
Administration from November 2000 to November 2003 and Director
of Investor Relations from 1994 through 2003.
J. Patrick Maley III became Executive Vice
President Paper in November 2004 following his
appointment as Group Vice President in May 2003. Prior to
joining the Company, Mr. Maley served in various capacities
from 1992 to 2003 at International Paper, including director of
manufacturing for the containerboard and kraft division, mill
manager of the Androscoggin coated paper mill in Jay, Maine;
staff manufacturing services director of the containerboard and
kraft division; and segment general manager of the container
business.
James M. DeCosmo became Group Vice President in May 2005.
Mr. DeCosmo joined Temple-Inland in 1999 as Director of
Forest Management for the eastern region forest operations and
in November 2000 was promoted to Vice President, Forest for our
forest products segment with responsibility for our two million
acres of timberland.
8
Bart J. Doney became Group Vice President in February 2000.
Mr. Doney has served as Executive Vice President of our
corrugated packaging segment since June 1998, Senior Vice
President from 1996 until 1998, and Vice President, Sales and
Administration, Containerboard Division from 1990 to 1996.
Kenneth R. Dubuque became Group Vice President in February 2000.
In October 1998, Mr. Dubuque was named President and Chief
Executive Officer of Guaranty. From 1996 until 1998,
Mr. Dubuque served as Executive Vice President and
Manager International Trust and Investment of
Mellon Bank Corporation. From 1991 until 1996, he served as
Chairman, President and Chief Executive Officer of the Maryland,
Virginia, and Washington, D.C., operating subsidiary of
Mellon Bank Corporation.
Jack C. Sweeny became Group Vice President in May 1996. Since
November 1982, Mr. Sweeny has served in various capacities
in our forest products segment.
Dennis J. Vesci became Group Vice President in August 2005.
Mr. Vesci previously served as Senior Vice President of
Sales and Marketing for our corrugated packaging segment since
November 1998.
Randall D. Levy became Chief Financial Officer in May 1999.
Mr. Levy joined Guaranty in 1989 serving in various
capacities, including Treasurer and most recently as Chief
Operating Officer from 1994 through 1999.
Louis R. Brill became Vice President and Controller in December
1999 and was named Chief Accounting Officer in May 2000. Before
joining us in 1999, Mr. Brill was a partner of
Ernst & Young LLP for 25 years.
Scott Smith became Chief Information Officer in February 2000.
Prior to that, Mr. Smith was Treasurer of Guaranty from
November 1993 to December 1999 and Chief Information Officer of
our financial services segment from August 1995 to June 1999.
Mr. Smith also served in various capacities at Guaranty
since 1999, including Chief Financial Officer from June 2001
until December 2002.
J. Bradley Johnston became General Counsel in August 2002
and was also named Chief Administrative Officer in February
2005. Prior to that, Mr. Johnston served as General Counsel
of Guaranty from January 1995 through May 1999, as General
Counsel of our financial services segment from May 1997 through
July 2002 and Chief Administrative Officer of our financial
services segment and Guaranty from May 1999 through July 2002.
Leslie K. ONeal was named Vice President in August 2002
and became Secretary in February 2000 after serving as Assistant
Secretary since 1995. Ms. ONeal also serves as
Assistant General Counsel, a position she has held since 1985.
David W. Turpin became Treasurer in June 1991.
The Board of Directors annually elects officers to serve until
their successors have been elected and have qualified or as
otherwise provided in our Bylaws.
|
|
|
The
industries in which we operate are highly
competitive.
|
All of the industries in which we operate are highly competitive
and are affected to varying degrees by supply and demand factors
and economic conditions, including changes in interest rates,
new housing starts, home repair and remodeling activities, loan
collateral values (particularly real estate), and the strength
of the U.S. dollar. Given the commodity nature of our
manufactured products, we have little control over market
pricing or market demand. No single company is dominant in any
of our industries.
Our corrugated packaging competitors include large,
vertically-integrated paperboard and packaging products
companies and numerous smaller companies. Because these products
are globally traded commodities, the industries in which we
compete are particularly sensitive to price fluctuations as well
as other factors, including innovation, design, quality, and
service, with varying emphasis on these factors depending on the
product line. To the extent that one or more of our competitors
become more successful with respect to any key competitive
factor, our business could be materially adversely affected.
Although corrugated packaging is dominant in the national
distribution process, our products also compete with various
other packaging materials, including products made of paper,
plastics, wood, and various types of metal.
In the forest products markets, our forest products segment
competes with many companies that are substantially larger and
have greater resources in the manufacturing of forest products.
9
The financial services industry is also a highly competitive
business, and a number of entities with which we compete are
substantially larger and have greater resources than we do. Our
financial services segment competes with commercial banks,
savings and loan associations, mortgage banks, and other lenders
in our savings bank activities; with real estate investment and
development companies in our real estate activities; and with
insurance agencies in our insurance activities.
Our
manufacturing segments are affected by the cost of certain raw
materials and energy.
Virgin wood fiber and recycled fiber are the principal raw
materials we use to manufacture corrugated packaging. The
portion of our virgin fiber requirements that do not come from
our timberland or that are not produced as a by-product from our
forest products operations are purchased in highly competitive,
price sensitive markets. The price for these materials has
historically fluctuated on a cyclical basis and has often
depended on a variety of factors over which we have no control,
including environmental and conservation regulations, natural
disasters, the price and level of imported timber and the
continuation of any applicable tariffs, and weather. In
addition, the increase in demand for products manufactured, in
whole or in part, from recycled fiber, including old corrugated
containers, has caused an occasional tightness in the supply of
recycled fiber. It may also cause a significant increase in the
cost of such fiber used in the manufacture of recycled
containerboard and related products. Such costs are likely to
continue to fluctuate. While we have not experienced any
significant difficulty in obtaining wood fiber and recycled
fiber in economic proximity to our mills, this may not continue
to be the case for any or all of our mills.
The cost of producing our products is also sensitive to the
price of energy. While we have attempted to contain energy costs
through internal generation and in some instances the use of
by-products from our manufacturing processes as fuel, no
assurance can be given that such efforts will be successful in
the future or that energy prices will not rise to levels that
would have a material adverse effect on our results of
operations. We hedge very little of our energy needs.
The
corrugated packaging and forest products industries are cyclical
in nature and experience periods of overcapacity.
The operating results of our paper and forest products segments
reflect each such industrys general cyclical pattern.
While the cycles of each industry do not necessarily coincide,
demand and prices in each tend to drop substantially in an
economic downturn. The forest products industry is further
influenced by the residential construction and remodeling
markets. Further, each industry has had substantial overcapacity
for several years. Both industries are capital intensive, which
leads to high fixed costs and generally results in continued
production as long as prices are sufficient to cover marginal
costs. These conditions have contributed to substantial price
competition and volatility in these industries, even when demand
is strong. Any increased production by our competitors could
further depress prices for our products. From time to time, we
have closed certain of our facilities or have taken downtime
based on prevailing market demand for our products and may
continue to do so, reducing our total production levels. Certain
of our competitors have also temporarily closed or reduced
production at their facilities, but can reopen
and/or
increase production capacity at any time, which could exacerbate
the overcapacity in these industries and depress prices.
Our
manufacturing activities are subject to environmental
regulations and liabilities that could have a negative effect on
our operating results.
Our manufacturing operations are subject to federal, state, and
local provisions regulating the discharge of materials into the
environment and otherwise related to the protection of the
environment. Compliance with these provisions has required us to
invest substantial funds to modify facilities to ensure
compliance with applicable environmental regulations. In other
sections of this Annual Report on
Form 10-K,
we provide certain estimates of expenditures we expect to make
for environmental compliance in the next few years. However, we
could incur additional significant expenditures due to changes
in law or the discovery of new information, and such
expenditures could have a material adverse effect on our
financial condition and results of operations.
Our
financial services segment operates in a highly regulated
environment and may be adversely affected by changes in federal
and local laws and regulations.
Our financial services segment is subject to regulation,
supervision, and examination by federal and state banking
authorities. The regulations enforced by these authorities are
intended to protect customers and federal
10
deposit insurance funds, not creditors, stockholders, or other
security holders. Regulations affecting banks and financial
services companies are continuously changing, and any change in
applicable regulations or federal or state legislation could
have a negative effect on our financial services segment.
Further, regulators have significant discretion and power to
prevent or remedy unsafe or unsound practices or violations of
laws by federal savings banks and their holding companies
(including the power to appoint a conservator or receiver for
the bank) or to require changes in various aspects of their
operation at any time, including restrictions on the payment of
dividends to the parent company. Any exercise of such regulatory
discretion could have a negative effect on our financial
condition or the results of our operations.
We previously disclosed that our savings bank subsidiary,
Guaranty Bank, agreed to enter into a Stipulation and Consent to
the Issuance of an Order to Cease and Desist for Affirmative
Relief with its banking regulator, the OTS, on December 22,
2004. Under this consent order, Guaranty agreed, among other
things, to take certain actions primarily related to its
repositioned mortgage origination activities, including
strengthening its regulatory compliance controls and management,
enhancing its suspicious activity reporting and regulatory
training programs, and implementing improved risk assessment and
loan application register programs. The consent order remains in
effect and the OTS continues to evaluate Guarantys
compliance. Any failure by Guaranty to meet the requirements of
the consent order in a timely fashion, or any additional
requirements imposed or supervisory actions taken by the OTS,
could have a material adverse effect on our financial condition
or the results of our operations.
Fluctuations
in interest rates could reduce our financial services
segments profitability.
Fluctuations in interest rates are not predictable or
controllable. The majority of Guarantys assets and
liabilities are monetary in nature and may be adversely affected
by changes in interest rates. Like most financial institutions,
changes in interest rates can affect our net interest income as
well as the value of our assets and liabilities. A significant
change in the general level of interest rates may adversely
affect our net yield on interest-earning assets because our
interest-bearing assets and liabilities do not reprice in
tandem. In addition, periodic and lifetime caps may limit
interest rate changes on our mortgage-backed securities and
loans that pay interest at adjustable rates.
Additionally, an increase in interest rates may, among other
things, reduce the demand for loans and our ability to originate
loans. A decrease in the general level of interest rates may
affect us through, among other things, increased prepayments on
our loan and mortgage-backed securities portfolios and increased
competition for deposits. Accordingly, changes in the level of
market interest rates will likely affect our net interest income
and our overall results.
If our
allowance for loan losses is not sufficient to cover actual loan
losses, the income from our financial services segment could
decrease.
Our loan customers may fail to repay their loans according to
the terms of these loans, and the collateral securing the
payment of these loans may be insufficient to assure repayment.
Such loan losses could have a material adverse effect on our
operating results. We make various assumptions, estimates, and
judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and the value of
the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the
allowance for loan losses, we rely on a number of factors,
including our own experience and our evaluation of economic
conditions. If our assumptions prove to be incorrect, our
current allowance for loan losses may not be sufficient to cover
losses inherent in our loan portfolio and adjustments may be
necessary that would have a material adverse effect on our
operating results.
We
face risks related to the composition of our financial services
segments loan portfolio.
Commercial real estate, multi-family, and commercial business
loans, which represent about one-third of our loan portfolio,
generally expose a lender to greater risk of loss than one- to
four-family residential mortgage loans because such loans
involve larger loan balances to single borrowers or groups of
related borrowers. The repayment of commercial business loans
often depends on the successful operations and income streams of
the borrowers. Many of Guarantys commercial real estate or
multi-family borrowers have more than one loan outstanding with
Guaranty. Consequently, an adverse development with respect to
one loan, credit relationship, or geographic market can expose
Guaranty to a significantly greater risk of loss compared to an
adverse development with respect to a single one- to four-family
residential mortgage loan.
11
Additionally, Guarantys commercial business portfolio
includes approximately $700 million in loans to companies
that operate in the energy sector. Although the majority of
these loans are collateralized by oil and gas reserves,
significant changes in energy prices or unsuccessful hedge
programs by Guarantys borrowers could affect collateral
values.
Approximately one-half of our one- to four-family residential
loan portfolio consists of loans in the state of California. We
would be adversely affected by a reduction in the value of real
estate located in California that serves as collateral for our
loans. We may be forced to increase our allowances for loan
losses and may suffer additional loan losses as a result of any
such reduction in collateral values. The adverse impact from a
reduction in real estate values in California may be greater for
Guaranty than that suffered by other financial institutions with
a more geographically diverse loan portfolio.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We own and operate manufacturing facilities throughout the
United States, four converting plants in Mexico, and a box plant
in Puerto Rico. In 2005, we sold our MDF facility in Canada.
Additional descriptions of selected properties are set forth in
the following charts:
Containerboard
Mills
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Annual
|
|
|
2005
|
|
Location
|
|
Product
|
|
Machines
|
|
|
Capacity
|
|
|
Production
|
|
|
|
|
|
|
|
|
(In tons)
|
|
|
Ontario, California
|
|
Linerboard and corrugating medium
|
|
|
1
|
|
|
|
335,730
|
|
|
|
343,243
|
|
Rome, Georgia
|
|
Linerboard
|
|
|
2
|
|
|
|
823,400
|
|
|
|
812,865
|
|
Orange, Texas
|
|
Linerboard and corrugating medium
|
|
|
2
|
|
|
|
730,320
|
|
|
|
633,164
|
|
Bogalusa, Louisiana
|
|
Linerboard
|
|
|
2
|
|
|
|
877,100
|
|
|
|
857,276
|
|
Maysville, Kentucky
|
|
Linerboard and corrugating medium
|
|
|
1
|
|
|
|
427,785
|
|
|
|
430,336
|
|
New Johnsonville, Tennessee
|
|
Corrugating medium
|
|
|
1
|
|
|
|
335,730
|
|
|
|
336,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,530,065
|
|
|
|
3,413,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newport, Indiana*
|
|
Corrugating medium and gypsum
facing paper
|
|
|
1
|
|
|
|
305,100
|
|
|
|
297,056
|
|
|
|
|
* |
|
The table shows the full capacity of this facility that is owned
by a joint venture in which we own a 50 percent interest.
In 2005, we purchased 68,601 tons of corrugating medium and
31,972 tons of gypsum facing paper from the venture. |
Corrugated
Packaging Plants*
|
|
|
|
|
Corrugator
|
Location
|
|
Size
|
|
Phoenix, Arizona
|
|
98²
|
Fort Smith, Arkansas
|
|
87²
|
Fort Smith,
Arkansas(1)***
|
|
None
|
Bell, California
|
|
97²
|
Buena Park,
California(1)
|
|
85²
|
City of Industry, California**
|
|
87²
and 98²
|
El Centro,
California(1)
|
|
87²
|
Gilroy,
California(1)
|
|
87²
|
Gilroy,
California(1)
|
|
98²
|
Ontario, California
|
|
87²
|
Santa Fe Springs, California
|
|
97²
|
Santa Fe Springs, California**
|
|
87²
87² and
78²
|
12
|
|
|
|
|
Corrugator
|
Location
|
|
Size
|
|
Santa Fe Springs,
California***
|
|
None
|
Tracy, California**
|
|
87²
and 87²
|
Union City,
California(1)***
|
|
None
|
Wheat Ridge, Colorado
|
|
87²
|
Orlando, Florida
|
|
98²
|
Tampa,
Florida(1)
|
|
78²
|
Rome, Georgia
|
|
98²
|
Carol Stream, Illinois
|
|
87²
|
Chicago, Illinois
|
|
87²
|
Chicago, Illinois***
|
|
None
|
Elgin, Illinois
|
|
78²
|
Elgin, Illinois***
|
|
None
|
Crawfordsville, Indiana
|
|
98²
|
Evansville, Indiana
|
|
98²
|
Indianapolis, Indiana
|
|
87²
|
St. Anthony, Indiana***
|
|
None
|
Tipton,
Indiana(1)
|
|
110²
|
Garden City, Kansas
|
|
98²
|
Kansas City, Kansas
|
|
87²
|
Bogalusa, Louisiana
|
|
97²
|
Minden, Louisiana
|
|
98²
|
Minneapolis, Minnesota
|
|
87²
|
St. Louis, Missouri
|
|
87²
|
St. Louis, Missouri
|
|
98²
|
Milltown, New
Jersey(1)***
|
|
None
|
Spotswood, New Jersey
|
|
98²
|
Binghamton, New York
|
|
87²
|
Buffalo, New York***
|
|
None
|
Scotia, New York***
|
|
None
|
Utica, New York***
|
|
None
|
Warren County, North Carolina
|
|
98²
|
Madison, Ohio***
|
|
None
|
Marion, Ohio
|
|
87²
|
Middletown, Ohio
|
|
98²
|
Streetsboro, Ohio
|
|
98²
|
Biglerville, Pennsylvania
|
|
98²
|
Hazleton, Pennsylvania
|
|
98²
|
Kennett Square, Pennsylvania***
|
|
None
|
Littlestown, Pennsylvania***
|
|
None
|
Scranton, Pennsylvania
|
|
68²
|
Vega Alta, Puerto Rico
|
|
87²
|
Lexington, South Carolina
|
|
98²
|
Ashland City,
Tennessee(1)***
|
|
None
|
Elizabethton,
Tennessee(1)***
|
|
None
|
Dallas, Texas
|
|
98²
|
Edinburg, Texas
|
|
87²
|
San Antonio, Texas
|
|
98²
|
13
|
|
|
|
|
Corrugator
|
Location
|
|
Size
|
|
San Antonio, Texas
|
|
98²
|
Petersburg, Virginia
|
|
87²
|
San Jose Iturbide, Mexico
|
|
98²
|
Monterrey, Mexico
|
|
87²
|
Los Mochis, Sinaloa, Mexico
|
|
80²
|
Guadalajara,
Mexico(1)***
|
|
None
|
|
|
|
* |
|
The annual capacity of the box plants is a function of the
product mix, customer requirements and the type of converting
equipment installed and operating at each plant, each of which
varies from time to time. |
|
** |
|
These plants each contain more than one corrugator. |
|
*** |
|
Sheet plants. |
Additionally, we own a graphics resource center in Indianapolis,
Indiana, that has a 100²
preprint press, and a fulfillment center in Gettysburg,
Pennsylvania. We lease 50 warehouses located throughout much of
the United States.
Forest
Products
|
|
|
|
|
|
|
|
|
|
|
Rated Annual
|
|
Description
|
|
Location
|
|
Capacity
|
|
|
|
|
|
(In millions of
|
|
|
|
|
|
board feet)
|
|
|
Lumber
|
|
Diboll, Texas
|
|
|
199
|
*
|
Lumber
|
|
Pineland, Texas
|
|
|
310
|
**
|
Lumber
|
|
Buna, Texas
|
|
|
198
|
|
Lumber
|
|
Rome, Georgia
|
|
|
151
|
|
Lumber
|
|
DeQuincy, Louisiana
|
|
|
198
|
|
|
|
|
* |
|
Includes separate finger jointing capacity of 20 million
board feet. |
|
** |
|
Includes separate stud mill capacity of 110 million board
feet. |
|
|
|
|
|
|
|
|
|
|
|
Rated Annual
|
|
Description
|
|
Location
|
|
Capacity
|
|
|
|
|
|
(In millions of
|
|
|
|
|
|
square feet)
|
|
|
Gypsum Wallboard
|
|
West Memphis, Arkansas
|
|
|
440
|
|
Gypsum Wallboard
|
|
Fletcher, Oklahoma
|
|
|
460
|
|
Gypsum
Wallboard(3)
|
|
McQueeney, Texas
|
|
|
400
|
|
Gypsum
Wallboard(3)
|
|
Cumberland City, Tennessee
|
|
|
700
|
|
Particleboard
|
|
Monroeville, Alabama
|
|
|
160
|
|
Particleboard
|
|
Thomson, Georgia
|
|
|
150
|
|
Particleboard
|
|
Diboll, Texas
|
|
|
150
|
|
Particleboard
|
|
Hope, Arkansas
|
|
|
200
|
|
Particleboard(1)(2)
|
|
Mt. Jewett, Pennsylvania
|
|
|
200
|
|
Fiberboard
|
|
Diboll, Texas
|
|
|
460
|
|
MDF*
|
|
El Dorado, Arkansas
|
|
|
150
|
|
MDF(1)
|
|
Mt. Jewett, Pennsylvania
|
|
|
120
|
|
|
|
|
* |
|
The table shows the full capacity of this facility that is owned
by a joint venture in which we own a 50 percent interest. |
14
|
|
|
(1) |
|
Leased facilities. |
|
(2) |
|
Due to market conditions, we indefinitely curtailed production
at this facility beginning in 2003. |
|
(3) |
|
During 2005, this facility was owned by a joint venture in which
we owned a 50 percent interest. In January 2006, we
purchased our partners 50 percent interest in the
joint venture. |
Timber
and Timberland*
(In acres)
|
|
|
|
|
Pine Plantations
|
|
|
1,167,573
|
|
Natural Pine
|
|
|
78,398
|
|
Hardwood
|
|
|
105,263
|
|
Special Use/Non-Forested
|
|
|
661,509
|
|
|
|
|
|
|
Total
|
|
|
2,012,743
|
|
|
|
|
|
|
|
|
|
* |
|
Includes approximately 230,000 acres of leased land. |
We believe our plants, mills, and manufacturing facilities are
suitable for their purposes and adequate for our business.
We further classify our timberland as either strategic
timberland, non-strategic timberland, or high-value land with
real estate development potential. At year-end 2005, we held
20,000 acres of non-strategic land, which will be sold over
time, 203,000 acres of high-value land, and
1.8 million acres of strategic timberland. The
1.8 million acres of strategic timberland are important to
our converting operations and play a key role in our
competitiveness and ability to meet environmental certification
requirements relating to sound forest management techniques and
chain of custody. We are creating the infrastructure and
securing entitlements on the 203,000 acres of high-value
land that will allow us over time to realize value from these
lands through sale, joint venture, or development.
In connection with our timber holdings, we also own mineral
rights on 388,000 acres in Texas and Louisiana and
351,000 acres in Alabama and Georgia. Revenue from our
mineral rights consists solely of lease and royalty payments,
and was approximately $30 million in 2005.
We also own certain office buildings, including approximately
445,000 square feet of office space in Austin, Texas, and
150,000 square feet of space in Diboll, Texas.
At year-end 2005, property and equipment having a net book value
of $5 million were subject to liens in connection with
$45 million of debt.
|
|
Item 3.
|
Legal
Proceedings
|
General
We are involved in various legal proceedings that arise from
time to time in the ordinary course of doing business. A summary
of our more significant legal matters is set forth below. We
believe that adequate reserves have been established for any
probable losses and that the outcome of any of these proceedings
should not have a material adverse effect on our financial
position or long-term results of operations or cash flows. It is
possible, however, that charges related to these matters could
be significant to results of operations or cash flows in any
single accounting period.
Antitrust
Litigation
On May 14, 1999, we and eight other linerboard
manufacturers were named as defendants in a consolidated class
action complaint that alleged a civil violation of
Section 1 of the Sherman Act. We executed a settlement
agreement on April 11, 2003, with the representatives of
the class, which received final approval by the trial court. We
paid a total of $8 million into escrow to fulfill the terms
of the class action settlement.
Twelve individual complaints containing allegations similar to
those in the class action have been filed by certain opt-out
plaintiffs and over 3,000 of their named subsidiaries against
the original defendants in the class action. In July 2005, we
entered into a settlement agreement with five of the opt-out
plaintiffs and their subsidiaries that resulted in our paying
$5 million to these plaintiffs. In December 2005, the other
defendants in the remaining opt-out cases settled with the
majority of the plaintiff groups in those cases. Discovery on
the
15
remaining cases is ongoing with trial set for 2007. In 2005, we
increased our reserve for this matter by $13 million.
Bogalusa
Litigation
On October 15, 2003, a release of nitrogen dioxide and
nitrogen oxide took place at our linerboard mill in Bogalusa,
Louisiana. The mill followed appropriate protocols for handling
this type of event, notifying the Louisiana Department of
Environmental Quality, the U.S. Environmental Protection
Agency and local law enforcement officials. The federal and
state environmental agencies have analyzed the reports we
prepared and have not indicated that they will take any action
against us.
To date, we have been served with seven lawsuits seeking damages
for various personal injuries allegedly caused by either
exposure to the released gas or fears of exposure. These seven
lawsuits have been consolidated into a cumulative case under
Louisiana state rules. We intend to vigorously defend against
these allegations.
Tax-exempt
bonds
The Internal Revenue Service (or IRS) has announced that it is
targeting for examination the tax-exempt status of solid waste
disposal bonds issued to finance capital expenditures that
involve paper, pulpwood, and sawdust. Over the years, we have
financed about $250 million of capital expenditures using
tax-exempt solid waste disposal bonds, including
$85 million of capital expenditures of joint ventures in
which we held a 50% interest. Currently, $41 million of
these bonds are outstanding and included in long-term debt on
our balance sheet.
The IRS is examining five of these solid waste disposal bond
issues aggregating $134 million: $30 million City of
Maysville, Kentucky bonds issued in 1992, $21 million City
of Hope, Arkansas bonds issued in 1994, $8 million
Waxahachie Industrial Development Authority bonds issued in
1998, $46 million Industrial Development Board of Stewart
County, Tennessee bonds issued in 1999 through our Standard
Gypsum joint venture, and $29 million Union County,
Arkansas bonds issued in 1997 through our Del-Tin joint venture.
All of these issues were previously redeemed except for the City
of Maysville bonds, which are outstanding.
These audits are all in the early stages of examination, with
the exception of the City of Hope bonds, for which the IRS has
issued a preliminary adverse determination, which we are
appealing, and the Waxahachie Industrial Development Authority
bonds, which the IRS has concluded without adjustment due to the
fact that the bonds were redeemed in 2000. In connection with
the routine examination of our consolidated tax returns for the
2001 2003 audit cycle, the IRS has proposed an
after tax adjustment of $3 million due to the disallowance
of the interest deductions we took for interest paid on these
bonds during those years.
Asbestos
We are a defendant in various lawsuits involving alleged
workplace exposure to asbestos. These cases involve exposure to
asbestos in premises owned or operated by us. We do not
manufacture any products that contain asbestos and all our cases
in this area are limited to workplace exposure claims.
Historically, our aggregate annual settlements related to
asbestos claims have been approximately $1 million. We have
experienced an increase in the number of asbestos claims
asserted against us, and these claims are on the rise generally
in the United States against owners or operators of premises
allegedly containing asbestos.
Other
Litigation
In 1988, we formed Guaranty (then known as Guaranty Federal
Savings Bank) to acquire substantially all the assets and
deposit liabilities of three thrift institutions from the
Federal Savings and Loan Insurance Corporation, as receiver of
those institutions. In connection with the acquisition, the
government entered into an assistance agreement with us in which
various tax benefits were promised. In 1993, Congress enacted
narrowly targeted legislation to eliminate a portion of the
promised tax benefits. We filed suit against the United States
in the U.S. Court of Federal Claims alleging, among other
things, that the 1993 legislation breached our contract and that
we are entitled to monetary damages. This lawsuit is currently
in the discovery and motion stage and, if it were to go to
trial, we would not expect to resolve it for several years. We,
however, are currently in settlement negotiations with the
government that we hope will lead to a more timely resolution of
this matter.
16
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We did not submit any matter to a vote of our shareholders
during the fourth quarter of our fiscal year ended
December 31, 2005.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our Common Stock is traded on the New York Stock Exchange and
The Pacific Exchange. The table below sets forth the high and
low sales price for our Common Stock during each fiscal quarter
in the two most recent fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Price Range
|
|
|
Price Range
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
First Quarter
|
|
$
|
42.36
|
|
|
$
|
31.58
|
|
|
$
|
0.225
|
|
|
$
|
33.25
|
|
|
$
|
28.80
|
|
|
$
|
0.18
|
|
Second Quarter
|
|
$
|
37.60
|
|
|
$
|
32.34
|
|
|
$
|
0.225
|
|
|
$
|
34.70
|
|
|
$
|
29.76
|
|
|
$
|
0.18
|
|
Third Quarter
|
|
$
|
41.06
|
|
|
$
|
36.30
|
|
|
$
|
0.225
|
|
|
$
|
35.01
|
|
|
$
|
32.18
|
|
|
$
|
0.18
|
|
Fourth Quarter
|
|
$
|
45.28
|
|
|
$
|
35.70
|
|
|
$
|
0.225
|
|
|
$
|
34.59
|
|
|
$
|
28.63
|
|
|
$
|
0.68
|
*
|
For the Year
|
|
$
|
45.28
|
|
|
$
|
31.58
|
|
|
$
|
0.90
|
|
|
$
|
35.01
|
|
|
$
|
28.63
|
|
|
$
|
1.22
|
|
The amounts in this table have been adjusted to reflect our
two-for-one
stock split effected on April 1, 2005.
|
|
|
* |
|
Includes special dividend of $0.50 per share paid
December 15, 2004. |
Shareholders
Our stock transfer records indicated that as of
February 28, 2006, there were approximately 5,000 holders
of record of our Common Stock.
Dividend
Policy
As indicated above, we paid quarterly dividends during each of
the two most recent fiscal years in the amounts shown. On
February 3, 2006, the Board of Directors declared a
quarterly dividend on our Common Stock of $0.25 per share
payable on March 15, 2006, to shareholders of record on
March 1, 2006. The Board periodically reviews the dividend
policy, and the declaration of dividends will necessarily depend
upon our earnings and financial requirements and other factors
within the discretion of the Board.
Issuer
Purchases of Equity
Securities(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Shares That
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
May yet be
|
|
|
|
Total
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Purchased
|
|
|
|
Number of
|
|
|
Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Plans or
|
|
|
Plans
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
or Programs
|
|
|
Month 1
(10/1/2005 10/31/2005)
|
|
|
300,000
|
|
|
$
|
36.52
|
|
|
|
300,000
|
|
|
|
4,700,000
|
|
Month 2
(11/1/2005 11/30/2005)
|
|
|
425,000
|
|
|
$
|
37.29
|
|
|
|
425,000
|
|
|
|
4,275,000
|
|
Month 3
(12/1/2005 12/31/2005)
|
|
|
775,000
|
|
|
$
|
44.17
|
|
|
|
775,000
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,500,000
|
|
|
$
|
40.69
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On August 5, 2005, we announced that our Board of Directors
authorized the repurchase of up to 6,000,000 shares of our
common stock. The plan has no expiration date. We have no other
repurchase plans or programs. We have no plans or programs that
expired during the period covered by the table above and no
plans or programs that we intend to terminate prior to
expiration or under which we no longer intend to make further
purchases. |
17
Other
See Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters for
disclosure regarding securities authorized for issuance under
equity compensation plans.
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003(a)
|
|
|
2002(b)
|
|
|
2001(b)
|
|
|
|
(Dollars in millions, except per
share)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
2,819
|
|
|
$
|
2,736
|
|
|
$
|
2,700
|
|
|
$
|
2,587
|
|
|
$
|
2,082
|
|
Forest products
|
|
|
1,031
|
|
|
|
971
|
|
|
|
801
|
|
|
|
787
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total manufacturing
|
|
|
3,850
|
|
|
|
3,707
|
|
|
|
3,501
|
|
|
|
3,374
|
|
|
|
2,808
|
|
Financial services
|
|
|
1,038
|
|
|
|
1,043
|
|
|
|
1,152
|
|
|
|
1,144
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,888
|
|
|
$
|
4,750
|
|
|
$
|
4,653
|
|
|
$
|
4,518
|
|
|
$
|
4,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
120
|
|
|
$
|
96
|
|
|
$
|
18
|
|
|
$
|
85
|
|
|
$
|
101
|
|
Forest products
|
|
|
238
|
|
|
|
215
|
|
|
|
67
|
|
|
|
49
|
|
|
|
13
|
|
Financial services
|
|
|
220
|
|
|
|
207
|
|
|
|
186
|
|
|
|
171
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
578
|
|
|
|
518
|
|
|
|
271
|
|
|
|
305
|
|
|
|
298
|
|
Expenses not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(91
|
)
|
|
|
(79
|
)
|
|
|
(73
|
)
|
|
|
(32
|
)
|
|
|
(27
|
)
|
Share-based compensation
|
|
|
(26
|
)
|
|
|
(14
|
)
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Other operating income
(expense)(c)
|
|
|
(90
|
)
|
|
|
(76
|
)
|
|
|
(138
|
)
|
|
|
(13
|
)
|
|
|
1
|
|
Other non-operating income
(expense)(c)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
|
|
Parent company interest
|
|
|
(109
|
)
|
|
|
(125
|
)
|
|
|
(135
|
)
|
|
|
(133
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
262
|
|
|
|
224
|
|
|
|
(90
|
)
|
|
|
114
|
|
|
|
171
|
|
Income (taxes)
benefit(d)
|
|
|
(86
|
)
|
|
|
(67
|
)
|
|
|
192
|
|
|
|
(45
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
176
|
|
|
|
157
|
|
|
|
102
|
|
|
|
69
|
|
|
|
107
|
|
Discontinued
operations(e)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Effect of accounting
change(f)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(11
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
|
$
|
57
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.54
|
|
|
$
|
1.39
|
|
|
$
|
0.94
|
|
|
$
|
0.66
|
|
|
$
|
1.17
|
|
Discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
Effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.11
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.54
|
|
|
$
|
1.42
|
|
|
$
|
0.93
|
|
|
$
|
0.54
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common
share(g)
|
|
$
|
0.90
|
|
|
$
|
1.22
|
|
|
$
|
0.68
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
Average diluted shares outstanding
|
|
|
114.5
|
|
|
|
112.4
|
|
|
|
108.4
|
|
|
|
104.8
|
|
|
|
98.6
|
|
Common shares outstanding at
year-end
|
|
|
111.0
|
|
|
|
112.2
|
|
|
|
109.2
|
|
|
|
107.6
|
|
|
|
98.6
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company
|
|
$
|
221
|
|
|
$
|
223
|
|
|
$
|
238
|
|
|
$
|
224
|
|
|
$
|
188
|
|
Financial services
|
|
|
28
|
|
|
|
31
|
|
|
|
32
|
|
|
|
36
|
|
|
|
40
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company
|
|
$
|
224
|
|
|
$
|
223
|
|
|
$
|
137
|
|
|
$
|
112
|
|
|
$
|
184
|
|
Financial services
|
|
|
41
|
|
|
|
41
|
|
|
|
33
|
|
|
|
16
|
|
|
|
26
|
|
At Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company
|
|
$
|
4,887
|
|
|
$
|
4,900
|
|
|
$
|
4,862
|
|
|
$
|
5,188
|
|
|
$
|
4,331
|
|
Financial services
|
|
|
18,031
|
|
|
|
16,440
|
|
|
|
17,661
|
|
|
|
18,016
|
|
|
|
15,738
|
|
Long-term debt (excluding current
maturities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company
|
|
$
|
1,498
|
|
|
$
|
1,485
|
|
|
$
|
1,611
|
|
|
$
|
1,883
|
|
|
$
|
1,339
|
|
Financial services
|
|
|
2,135
|
|
|
|
2,868
|
|
|
|
3,408
|
|
|
|
3,322
|
|
|
|
992
|
|
Preferred stock issued by
subsidiaries
|
|
$
|
305
|
|
|
$
|
305
|
|
|
$
|
305
|
|
|
$
|
305
|
|
|
$
|
305
|
|
Shareholders equity
|
|
$
|
2,080
|
|
|
$
|
2,107
|
|
|
$
|
1,988
|
|
|
$
|
1,964
|
|
|
$
|
1,907
|
|
Ratio of total debt to total
capitalization parent company
|
|
|
42
|
%
|
|
|
41
|
%
|
|
|
45
|
%
|
|
|
49
|
%
|
|
|
41
|
%
|
18
|
|
|
|
|
Throughout Selected Financial Data
and Managements Discussion and Analysis of Financial
Condition and Results of Operations, we refer to parent company
financial information, which includes only Temple-Inland and our
manufacturing subsidiaries with our financial services
subsidiaries reported on the equity method.
|
|
|
|
Share and per share amounts for all
years have been adjusted to reflect our
two-for-one
stock split on April 1, 2005.
|
|
|
|
(a) |
|
The 2003 fiscal year, which ended
on January 3, 2004, had 53 weeks. The extra week did
not have a significant effect on earnings or financial position.
As a result of the consolidation of our administrative functions
and adoption of a shared services concept, beginning 2004, we
changed the way we allocate costs to our business segments. The
effect of this change was to increase segment operating income
and to increase unallocated expenses by a like amount. The year
2003 amounts have been reclassified to reflect this change as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year 2003
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Reclassifications
|
|
|
Reclassified
|
|
|
|
(In millions)
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
(7
|
)
|
|
$
|
25
|
|
|
$
|
18
|
|
Forest products
|
|
|
57
|
|
|
|
10
|
|
|
|
67
|
|
Financial services
|
|
|
186
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
236
|
|
|
|
35
|
|
|
|
271
|
|
Unallocated expenses
|
|
|
(326
|
)
|
|
|
(35
|
)
|
|
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(90
|
)
|
|
$
|
|
|
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
It was not practical to reclassify years prior to 2003.
Corrugated packaging segment operating income has been adjusted
to reflect a change in method of accounting for inventories.
|
|
|
|
(b) |
|
In 2002, we acquired Gaylord
Container Corporation (March), a box plant in Puerto Rico
(March), certain assets of Mack Packaging Group, Inc. (May), and
Fibre Innovations LLC (November). Also in May 2002, we sold
8.2 million shares of common stock, $345 million of
Upper
DECSsm
units, and
$500 million of Senior Notes due 2012. In the aggregate,
these transactions significantly increased the assets and
operations of our corrugated packaging segment and changed our
capital structure. Unaudited pro forma information for 2002
assuming these acquisitions and related financing transactions
had occurred at the beginning of 2002 follows: total revenues
$4,461 million, income from continuing operations
$54 million, and income from continuing operations, per
diluted share $0.52. We derived this pro forma information by
adjusting for the effects of the purchase price allocations and
financing transactions described above and the reclassification
of the discontinued operations. The pro forma information does
not reflect the effects of capacity closures, cost savings or
other synergies realized. These pro forma results are not
necessarily an indication of what actually would have occurred
if the acquisitions and financing transactions had been
completed at the beginning of 2002 and are not intended to be
indicative of future results.
|
|
|
|
In 2001, we acquired the corrugated
packaging operations of Chesapeake Corporation and Elgin
Corrugated Box Company (May) and ComPro Packaging LLC
(October). Unaudited pro forma results of operations, assuming
these acquisitions had been effected as of the beginning of
2001, would not have been materially different from what we
reported.
|
19
|
|
|
(c) |
|
Other operating and non-operating
income and expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In millions)
|
|
|
Other operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closure and sale of converting and
production facilities and sale of non-strategic assets
|
|
$
|
(53
|
)
|
|
$
|
(27
|
)
|
|
$
|
(83
|
)
|
|
$
|
|
|
|
$
|
1
|
|
Hurricane related costs
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation of administrative
functions
|
|
|
|
|
|
|
(11
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
Financial services mortgage
origination and servicing repositioning and other asset
impairments
|
|
|
(5
|
)
|
|
|
(34
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
|
|
Antitrust litigation and other
|
|
|
(16
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(90
|
)
|
|
$
|
(76
|
)
|
|
$
|
(138
|
)
|
|
$
|
(13
|
)
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges related to early repayment
of debt
|
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
(8
|
)
|
|
$
|
(11
|
)
|
|
$
|
|
|
Litigation settlement
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
(11
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
Income taxes includes one-time tax
benefits of $16 million in 2005 related to the sale of our
Pembroke, Canada MDF facility and $20 million in 2004 and
$165 million in 2003 related to the resolution and
settlement of prior years tax examinations.
|
|
(e) |
|
Discontinued operations include in
2005, 2004, 2003, and 2002 the non-strategic operations obtained
in the Gaylord acquisition including the retail bag business,
which was sold in May 2002; the multi-wall bag business and
kraft paper mill, which were sold in January 2003; and the
chemical business. The resolution and settlement of
environmental and other indemnifications we provided in the 1999
sale of the bleached paperboard operation is also included in
2004.
|
|
(f) |
|
Effect of accounting change
includes the effects of adopting (i) in 2003, Statement of
Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations, which
resulted in an after tax charge of $1 million or
$0.01 per share for the cumulative effect of adoption;
(ii) in 2002, SFAS No. 142, Goodwill and Other
Intangible Assets, which resulted in an after tax charge of
$11 million or $0.11 per share; and (iii) in
2001, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, which
resulted in an after tax charge of $2 million or
$0.02 per diluted share. As a result of the adoption of
SFAS No. 142 in 2002, year 2002 and thereafter amounts
are not comparable to prior years due to the amortization of
goodwill and trademarks in the prior years. In 2003, we also
voluntarily adopted the prospective transition method of
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an
amendment of FASB Statement No. 123, which decreased
2003 net income by $1 million or $0.01 per share.
|
|
|
|
|
|
In addition, in first quarter 2005,
we changed our method of accounting for our corrugated packaging
inventories from the LIFO method to the average cost method,
which approximates FIFO. As required by generally accepted
accounting principles, we have adjusted prior years
selected financial data to reflect the retrospective application
of the average cost method. Please read Note 1 to the
Consolidated Financial Statements for further information.
|
|
|
|
(g) |
|
Includes a $0.50 per share
special dividend in December 2004.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking
statements within the meaning of the federal securities
laws. These forward-looking statements are identified by their
use of terms and phrases such as believe,
anticipate, could, estimate,
intend, may, plan,
expect, and similar expressions, including
references to assumptions. These statements reflect
managements current views with respect to future events
and are subject to risk and uncertainties. We note that a
variety of factors and uncertainties could cause our actual
results to differ significantly from the results discussed in
the forward-looking statements. Factors and uncertainties that
might cause such differences include, but are not limited to:
|
|
|
|
|
general economic, market or business conditions;
|
|
|
|
the opportunities (or lack thereof) that may be presented to us
and that we may pursue;
|
|
|
|
the availability and price of raw materials we use;
|
20
|
|
|
|
|
fluctuations in the cost of purchased energy;
|
|
|
|
fluctuations in the costs we incur to transport the raw
materials we use and the products we manufacture;
|
|
|
|
assumptions related to pension and postretirement costs;
|
|
|
|
assumptions related to accounting for impaired assets;
|
|
|
|
the collectibility of loans and accounts receivable and related
provisions for losses;
|
|
|
|
competitive actions by other companies;
|
|
|
|
changes in laws or regulations and actions or restrictions of
regulatory agencies;
|
|
|
|
the accuracy of certain judgments and estimates concerning our
integration of acquired operations;
|
|
|
|
our ability to execute certain strategic and business
improvement initiatives; and
|
|
|
|
other factors, many of which are beyond our control.
|
Our actual results, performance, or achievement probably will
differ from those expressed in, or implied by, these
forward-looking statements, and accordingly, we can give no
assurances that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of
them do so, what impact they will have on our results of
operations or financial condition. In view of these
uncertainties, you are cautioned not to place undue reliance on
these forward-looking statements. We expressly disclaim any
obligation to publicly revise any forward-looking statements
contained in this report to reflect the occurrence of events
after the date of this report.
Non-GAAP Financial
Measure
Return on investment (ROI) is an important internal measure for
us because it is a key component of our evaluation of overall
performance and the performance of our business segments.
Studies have shown that there is a direct correlation between
shareholder value and ROI and that shareholder value is created
when ROI exceeds the cost of capital. ROI allows us to evaluate
our performance on a consistent basis as the amount we earn
relative to the amount invested in our business segments. A
significant portion of senior managements compensation is
based on achieving ROI targets.
In evaluating overall performance, we define ROI as operating
income, adjusted for significant unusual items, divided by
parent company total assets, less certain assets and certain
current liabilities. In evaluating segment performance, we
define ROI as segment operating income divided by segment assets
less segment current liabilities. We do not believe there is a
comparable GAAP financial measure to our definition of ROI. The
reconciliation of our ROI calculation to amounts reported under
GAAP is included in a later section of Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Despite its importance to us, ROI is a non-GAAP financial
measure that has no standardized definition and as a result may
not be comparable with other companies measures using the
same or similar terms. Also there may be limits in the
usefulness of ROI to investors. As a result, we encourage you to
read our consolidated financial statements in their entirety and
not to rely on any single financial measure.
Accounting
Policies
Critical
Accounting Estimates
In preparing our financial statements, we follow generally
accepted accounting principles, which in many cases require us
to make assumptions, estimates and judgments that affect the
amounts reported. Our significant accounting policies are
included in Note 1 to the Consolidated Financial Statements
and Note A to the Parent Company and Financial Services
Summarized Financial Statements. Many of these principles are
relatively straightforward. There are, however, a few accounting
policies that are critical because they are important in
determining our financial condition and results, and they are
difficult for us to apply. Within the parent company, they
include asset impairments and pension accounting, and within
financial services, they include the allowance for loan losses
and, through 2004, mortgage servicing rights. The difficulty in
applying these policies arises from the assumptions, estimates
and judgments that we have to make currently about matters that
are inherently uncertain, such as future economic conditions,
operating results and valuations, as well as our intentions. As
the difficulty increases, the level of precision decreases,
meaning actual results can, and probably will, be different from
those currently estimated. We base our assumptions, estimates
and
21
judgments on a combination of historical experiences and other
factors that we believe are reasonable. We have discussed the
selection and disclosure of these critical accounting estimates
with our Audit Committee.
|
|
|
|
|
Measuring assets for impairment requires estimating intentions
as to holding periods, future operating cash flows and residual
values of the assets under review. Changes in our intentions,
market conditions or operating performance could require us to
revise the impairment charges we previously provided.
|
|
|
|
The expected long-term rate of return on pension plan assets is
an important assumption in determining pension expense. In
selecting that rate, currently 8.50 percent, consideration
is given to both historical returns and our estimate of returns
over the next quarter century. The actual rate of return on plan
assets for the last ten years was 10.6 percent. Another
important consideration is the discount rate used to determine
the present value of our benefit obligations, currently
5.50 percent. Differences between actual and expected rates
of return and changes in the discount rate will affect future
pension expense and funded status. For example, a 50 basis
point change in the estimated expected rate of return would
affect annual pension expense by $5 million, and a
50 basis point change in the discount rate would affect the
funded status by $90 million and annual pension expense by
$10 million.
|
|
|
|
Allowances for loan losses are based on historical experiences
and evaluations of future cash flows and collateral values and
are subject to regulatory scrutiny. Changes in general economic
conditions or loan specific circumstances will inevitably change
those evaluations.
|
As a result of the 2004 sale of our third party mortgage
servicing portfolio, accounting for mortgage servicing rights is
no longer considered a critical accounting estimate.
New
Accounting Pronouncements and Change in Method of Accounting for
Certain Inventories
In the last three years, we adopted a number of new accounting
pronouncements, and in 2005, we changed our method of accounting
for our corrugated packaging inventories and retrospectively
applied the new method to prior year financial statements. In
addition there are three new accounting pronouncements that we
will be required to adopt in 2006, none of which we expect to
have a significant effect on our financial position, results of
operations or cash flows. Please read Note 1 to the
Consolidated Financial Statements for additional information.
Results
of Operations for the Years 2005, 2004 and 2003
Summary
Our mission is to be the best by consistently exceeding customer
expectations, maximizing asset utilization, lowering operating
costs and improving efficiency. We are a market-driven,
customer-focused company.
Our three key strategies are:
|
|
|
|
|
focusing on corrugated packaging from an integrated platform,
which eliminates mill downtime and lowers costs through improved
asset utilization,
|
|
|
|
maximizing the value of our timberland through accelerated fiber
growth that is aligned with well-located converting operations
and developing significant real estate opportunities on
high-value land, and
|
|
|
|
realizing earnings and cash flow from financial services, which
is a low-cost, low-risk provider of financial services.
|
Actions we took in 2005 to implement our key strategies included:
|
|
|
|
|
We closed four corrugated packaging converting facilities and
sold our Pembroke, Canada MDF facility to reduce costs and
improve asset utilization. These actions affected over 500
employees.
|
|
|
|
We modified and enhanced two of our linerboard mills to increase
mill reliability and reduce reliance on natural gas as an energy
source.
|
|
|
|
We further repositioned our mortgage origination activities.
These actions affected over 250 employees, and along with the
mortgage repositioning efforts in 2004, will further reduce
costs and exposure to changing market conditions. Our future
mortgage origination efforts will focus on direct mortgage
lending to consumers through our banking centers, and we will
continue to restructure our mortgage origination capabilities.
|
22
|
|
|
|
|
We announced that in 2006 we intend to classify as a fourth
business segment our real estate operations that are currently
included within our forest products and financial services
segments. This action will increase the visibility and
transparency of our real estate operations.
|
A summary of our consolidated results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per
share)
|
|
|
Consolidated revenues
|
|
$
|
4,888
|
|
|
$
|
4,750
|
|
|
$
|
4,653
|
|
Income from continuing operations
|
|
|
176
|
|
|
|
157
|
|
|
|
102
|
|
Income from continuing operations
per diluted share
|
|
|
1.54
|
|
|
|
1.39
|
|
|
|
0.94
|
|
ROI
|
|
|
8.9
|
%
|
|
|
8.5
|
%
|
|
|
1.2
|
%
|
Significant items affecting income from continuing operations
included:
|
|
|
|
|
In 2005, we continued to see the benefits in our manufacturing
operations of our initiatives to lower costs, improve asset
utilization, and increase operating efficiencies and the
benefits in our financial services operations from repositioning
our mortgage origination and servicing activities. Costs,
principally energy, freight and chemicals, however, continued to
escalate for our manufacturing operations. The increased costs
offset some of the benefits from our initiatives in our
manufacturing operations and lower health care costs
attributable to the implementation of a new health plan design.
Actions taken to lower costs, improve asset utilization, and
increase operating efficiencies resulted in charges and expenses
of $58 million, principally related to the closure of four
corrugated packaging converting facilities, the further
repositioning of our mortgage origination activities and the
sale of our Pembroke, Canada MDF facility. As a result of the
sale of the MDF facility, we recognized a one-time tax benefit
of $16 million. During 2005, Hurricanes Katrina and Rita
forced us to curtail operations at seven of our converting and
production facilities for varying periods, which we estimate
adversely affected segment operating income by about
$11 million due to production downtime and
start-up
expenses. In addition, during 2005, we recognized hurricane
related losses and other unusual expenses of $32 million.
The hurricane costs principally related to impairment of our
Texas and Louisiana forests, facility damage, and employee and
community assistance and other unusual expenses principally
related to antitrust litigation and the early repayment of debt.
|
|
|
|
In 2004, we began to see the benefits in our manufacturing
operations of our initiatives to lower costs and improve asset
utilization and operating efficiencies. In addition, market
demand strengthened, resulting in higher prices for most of our
forest products, and prices for corrugated packaging began to
improve in the second quarter of the year. Our financial
services operations benefited from improved asset quality, which
resulted in a recovery of previously recorded provisions for
credit losses. This was partially offset by declining mortgage
origination activities. Actions taken to lower costs and improve
asset utilization and operating efficiencies resulted in charges
and expenses of $76 million, principally related to the
converting and production facility closures and the
repositioning of our mortgage origination activities and sale of
our third-party mortgage servicing portfolio. We also recognized
a one-time tax benefit of $20 million resulting from the
settlement of prior years tax examinations.
|
|
|
|
In 2003, weak industry box demand and lower prices, continued
excess capacity in most of our forest products, and higher
energy and pension costs negatively affected our manufacturing
revenues and earnings. The negative effect was partially offset
by improvements in financial services earnings. Actions taken to
lower costs and improve asset utilization and operating
efficiencies resulted in charges and expenses of
$138 million principally related to the sale or closure of
under-performing assets and the consolidation of administrative
functions. We also recognized a one-time tax benefit of
$165 million resulting from the resolution and settlement
of prior years tax examinations.
|
Business
Segments
We currently manage our operations through three business
segments:
|
|
|
|
|
Corrugated packaging,
|
|
|
|
Forest products, and
|
|
|
|
Financial services.
|
23
Our operations are affected to varying degrees by supply and
demand factors and economic conditions including changes in
interest rates, new housing starts, home repair and remodeling
activities, loan collateral values (particularly real estate),
and the strength of the U.S. dollar. Given the commodity
nature of our manufactured products, we have little control over
market pricing or market demand.
As previously announced, beginning first quarter 2006, we will
classify into a fourth business segment our real estate
operations. As a result, we anticipate transferring into the new
real estate segment about $300 million in real estate
assets currently included in our financial services segment and
about $100 million of high-value timberlands and other
assets currently included in our forest products segment.
Corrugated
Packaging
We manufacture linerboard and corrugating medium that we convert
into corrugated packaging and sell in the open market. Our
corrugated packaging segment revenues are principally derived
from the sale of corrugated packaging products and, to a lesser
degree, from the sale of linerboard in the domestic and export
markets.
A summary of our corrugated packaging results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
$
|
2,819
|
|
|
$
|
2,736
|
|
|
$
|
2,700
|
|
Costs and expenses
|
|
|
(2,699
|
)
|
|
|
(2,640
|
)
|
|
|
(2,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
120
|
|
|
$
|
96
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment ROI
|
|
|
5.6
|
%
|
|
|
4.7
|
%
|
|
|
0.8
|
%
|
Hurricanes Katrina and Rita adversely affected 2005 segment
operating results by about $10 million principally related
to mill production downtime and
start-up
expenses at our Bogalusa, Louisiana and Orange, Texas linerboard
mills.
Corrugated packaging pricing, which includes freight and is net
of discounts, increased in 2005 compared with 2004, reflecting
price increases implemented in the second half of 2004. In
second quarter 2005, corrugated packaging prices declined
reflecting lower industry volumes. However, in fourth quarter
2005, corrugated packaging prices began to improve as a result
of a linerboard price increases driven by capacity closures,
stronger industry volumes and lower inventories. In first
quarter 2006, we began to implement two corrugated packaging
price increases. Our corrugated packaging shipments increased
due to market share growth. Linerboard sales and shipments to
third parties were down because more of our production was used
in our converting facilities, which is consistent with our
strategy to convert more of the linerboard we produce in our own
converting facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Corrugated packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
(1
|
)%
|
Shipments, average week
|
|
|
2
|
%
|
|
|
6
|
%
|
|
|
(1
|
)%
|
Industry shipments, average
week(a)
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
Linerboard
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
(6
|
)%
|
|
|
11
|
%
|
|
|
(1
|
)%
|
Shipments, tons
|
|
|
(18
|
)%
|
|
|
(44
|
)%
|
|
|
17
|
%
|
|
|
|
(a) |
|
Source: Fibre Box Association |
About one percentage point of the 2005 and 2004 increase in
corrugated packaging shipments is attributable to growth in our
converting operations in Mexico.
Costs and expenses were up two percent in 2005 compared with
2004 and down two percent in 2004 compared with 2003. Higher
volumes and prices for most raw materials were partially offset
by lower health care costs and cost reductions attributable to
the closure of converting facilities, workforce reductions and
24
increased mill reliability and efficiency, which resulted in
lower maintenance costs and improved raw material yield and
energy usage.
Fluctuations in our significant cost and expense components
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Wood fiber
|
|
$
|
22
|
|
|
$
|
(7
|
)
|
|
$
|
30
|
|
Recycled fiber
|
|
|
(6
|
)
|
|
|
27
|
|
|
|
(11
|
)
|
Energy, principally natural gas
|
|
|
30
|
|
|
|
7
|
|
|
|
51
|
|
Freight
|
|
|
40
|
|
|
|
32
|
|
|
|
65
|
|
Depreciation
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
12
|
|
Health care
|
|
|
(16
|
)
|
|
|
|
|
|
|
3
|
|
Pension and postretirement
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
23
|
|
The costs of our outside purchases of wood and recycled fiber,
energy, and freight fluctuate based on the market prices we pay
for these commodities. It is likely that these costs will
continue to fluctuate in 2006.
The changes in depreciation in 2005 and 2004 were principally
due to the closure of converting facilities, and the change in
2003 was principally due to the facilities we acquired in 2002.
Information about our converting facilities and mills follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Number of converting facilities
(at year-end)
|
|
|
65
|
|
|
|
69
|
|
|
|
74
|
|
Mill capacity, in million tons
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
3.3
|
|
Mill production, in million tons
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
3.2
|
|
Percent mill production used
internally
|
|
|
92
|
%
|
|
|
90
|
%
|
|
|
82
|
%
|
Percent of total fiber
requirements sourced from recycled fiber
|
|
|
36
|
%
|
|
|
36
|
%
|
|
|
34
|
%
|
Corrugating medium purchases from
our Premier Boxboard Limited LLC joint venture, in thousand tons
|
|
|
68
|
|
|
|
100
|
|
|
|
157
|
|
As a result of Hurricanes Katrina and Rita, our 2005 mill
production was adversely affected by about 42,000 tons.
Forest
Products
We own or lease two million acres of timberland in Texas,
Louisiana, Georgia, and Alabama. We grow timber, cut the timber
and convert it into products. We are creating the infrastructure
and securing entitlements necessary for real estate development
of our designated high-value timberland in Georgia, principally
near Atlanta. We manufacture lumber, gypsum wallboard,
particleboard, fiberboard and medium density fiberboard (MDF).
Our forest products segment revenues are principally derived
from the sales of these products and, to a lesser degree, from
sales of fiber and high-value lands. We also owned
50 percent interests in a gypsum wallboard joint venture
and an MDF joint venture. In January 2006, we acquired the
remaining 50 percent interest in the gypsum wallboard joint
venture.
A summary of our forest products results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
$
|
1,031
|
|
|
$
|
971
|
|
|
$
|
801
|
|
Costs and expenses
|
|
|
(793
|
)
|
|
|
(756
|
)
|
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
238
|
|
|
$
|
215
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment ROI
|
|
|
25.4
|
%
|
|
|
22.0
|
%
|
|
|
6.3
|
%
|
Hurricane Rita adversely affected 2005 segment operating results
by about $1 million principally related to downtime and
start-up
expenses at four of our Texas and Louisiana lumber converting
facilities.
25
Pricing, which includes freight and is net of discounts, and
shipments improved for most product lines due to the continued
strength in the housing and repair and remodeling markets. There
is some uncertainty as to whether that strength will continue
throughout 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Lumber:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
5
|
%
|
|
|
22
|
%
|
|
|
4
|
%
|
Shipments
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
14
|
%
|
Gypsum:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
16
|
%
|
|
|
24
|
%
|
|
|
2
|
%
|
Shipments
|
|
|
12
|
%
|
|
|
19
|
%
|
|
|
(5
|
)%
|
Particleboard:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
(1
|
)%
|
|
|
28
|
%
|
|
|
(4
|
)%
|
Shipments
|
|
|
8
|
%
|
|
|
(1
|
)%
|
|
|
(8
|
)%
|
MDF:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
(1
|
)%
|
|
|
7
|
%
|
|
|
1
|
%
|
Shipments
|
|
|
(20
|
)%
|
|
|
11
|
%
|
|
|
(20
|
)%
|
Comparisons of MDF and particleboard shipments are affected by
the sale of our Pembroke MDF facility in second quarter 2005,
the indefinite closure of our Clarion MDF facility in third
quarter 2003 and the subsequent sale of this facility in second
quarter 2004, and the indefinite closure of our Mt. Jewett
particleboard facility in second quarter 2003.
Segment operating income also includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Our share of gypsum and MDF joint
venture operating income
|
|
$
|
28
|
|
|
$
|
21
|
|
|
$
|
1
|
|
Hunting, mineral and recreational
lease income
|
|
|
32
|
|
|
|
22
|
|
|
|
18
|
|
Gain on sale of about
4,500 acres of conservation timberland
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Gain on sale of about
7,000 acres to an affiliated real estate joint venture
|
|
|
6
|
|
|
|
|
|
|
|
|
|
The operating results from the gypsum and MDF joint ventures
generally fluctuate in relation to the price and shipment
changes noted above. Mineral income is generally derived from
leases and royalty interests and fluctuates based on changes in
the market prices for energy. It is likely prices will continue
to fluctuate in 2006.
In 2005, we sold about 7,000 acres of timber and timberland
to a joint venture in which one of our financial services
subsidiaries owns 50 percent and an unrelated public
company owns the other 50 percent. This acreage was sold
pursuant to the terms of a long-standing option agreement, which
was about to expire. The joint venture intends to hold the land
for future development and sale. We recognized about half of the
$10 million gain in income in 2005 and anticipate
recognizing the remainder in the future as this land is sold.
At year-end 2005, our high-value timberland consisted of about
203,000 acres located in Georgia, principally near Atlanta.
Information regarding our high-value land sales follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
High-value land:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acres sold
|
|
|
3,067
|
|
|
|
2,919
|
|
|
|
2,436
|
|
Profit included in segment
operating income
|
|
$
|
20
|
|
|
$
|
19
|
|
|
$
|
12
|
|
Costs and expenses were up five percent in 2005 compared with
2004 and up three percent in 2004 compared with 2003. Higher
volumes and higher prices for most raw materials offset lower
health care costs and cost reductions attributable to the sale
of our Pembroke MDF facility in June 2005 and our Clarion MDF
facility in May 2004.
26
Fluctuations in our significant cost and expense components
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Wood fiber
|
|
$
|
19
|
|
|
$
|
22
|
|
|
$
|
(6
|
)
|
Energy, principally natural gas
|
|
|
13
|
|
|
|
4
|
|
|
|
4
|
|
Freight
|
|
|
11
|
|
|
|
9
|
|
|
|
(1
|
)
|
Chemicals
|
|
|
14
|
|
|
|
3
|
|
|
|
(2
|
)
|
Depreciation
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
1
|
|
Health care
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
1
|
|
Pension and postretirement
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
3
|
|
Our goal is to increase use of wood fiber from our timberlands
and reduce our reliance on outside purchases. The cost of our
outside purchases of fiber and energy, freight, and chemicals
fluctuates based on the market prices we pay for these
commodities. It is likely that these costs will continue to
fluctuate in 2006.
Information about our timber harvest and converting and
manufacturing facilities follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Timber harvest, in million tons:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sawtimber
|
|
|
2.4
|
|
|
|
2.5
|
|
|
|
2.4
|
|
Pulpwood
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5.7
|
|
|
|
5.9
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of converting and
manufacturing facilities (at year-end)
|
|
|
17
|
|
|
|
18
|
|
|
|
19
|
|
Average operating rates for all
product lines excluding sold or closed facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
102
|
%
|
|
|
95
|
%
|
|
|
93
|
%
|
Low
|
|
|
91
|
%
|
|
|
85
|
%
|
|
|
72
|
%
|
As a result of Hurricane Rita, our 2005 timber harvest was
adversely affected by about 60,000 tons. However, our 2005
average operating rates were not significantly affected. In
addition, we incurred about $7 million in losses due to
damage to our timberlands, which is not included in segment
operating income. It is unlikely that this damage will
significantly affect the long-term value of our timberlands.
Financial
Services
We own a savings bank, Guaranty Bank, which includes an
insurance agency subsidiary, and engage in real estate
development activities. Guaranty makes up the predominant amount
of our financial services segment operating income, revenues,
assets, and liabilities.
In general, we gather funds from depositors, borrow money, and
invest the resulting cash in loans and securities. We focus our
investing and deposit gathering activities in products and
geographic areas that promote a relatively stable source of
earnings. We attempt to minimize the potential effect of
interest rate and credit quality cycles by investing principally
in adjustable rate residential housing assets and maintaining an
asset and liability profile that is relatively unaffected by
movements in interest rates. In general, we do not purchase or
write derivative financial instrument contracts other than
short-term contracts to originate and to hedge mortgage loans
that we intend to sell.
In our loan portfolio, we emphasize products with collateral and
rate characteristics that we have significant experience
managing and principally invest in assets with adjustable rates
or that reprice in three to five years. Our deposit gathering
activities are focused in two primary markets, Texas and
California, both of which offer substantial opportunity for
cost-effective growth. Limiting the markets and products in
which we participate and avoiding complex financial instruments
allows us to limit our infrastructure costs. We, however, incur
substantial costs to operate in a regulated environment and
comply with the extensive laws and regulations to which Guaranty
is subject.
27
In late 2004, we repositioned our mortgage origination
activities, sold our third-party mortgage servicing portfolio,
and outsourced servicing of our single-family portfolio loans.
In late 2005, we further repositioned our mortgage origination
activities by eliminating our wholesale mortgage origination
network.
A summary of our financial services results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Net interest income
|
|
$
|
390
|
|
|
$
|
401
|
|
|
$
|
377
|
|
Segment operating income
|
|
|
220
|
|
|
|
207
|
|
|
|
186
|
|
Segment ROI
|
|
|
19.6
|
%
|
|
|
18.4
|
%
|
|
|
15.8
|
%
|
Although we were forced to close temporarily a few Texas banking
centers in 2005 as a result of Hurricane Rita, we did not
sustain any significant facility damage. These closures did not
significantly affect our segment operating income.
Net
Interest Income and Earning Assets and Deposits
Our net interest income is the interest we earn on loans
(including amortization of loan fees and deferred costs),
securities and other interest-earning assets, minus the interest
we pay for deposits and borrowings and dividends we pay on
preferred stock issued by subsidiaries. Our net interest margin
is the average yield on our earning assets, calculated by
dividing net interest income by our average earning assets for
the period. Net interest margin is principally influenced by the
relative rates of our interest earning assets and interest
bearing liabilities and the amount of noninterest bearing
deposits, other liabilities and equity used to fund our assets.
Information concerning our net interest margin follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Average
|
|
|
Yield/
|
|
|
Average
|
|
|
Yield/
|
|
|
Average
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
Earning assets
|
|
$
|
15,355
|
|
|
|
5.21
|
%
|
|
$
|
15,916
|
|
|
|
4.51
|
%
|
|
$
|
16,104
|
|
|
|
4.52
|
%
|
Interest bearing liabilities
|
|
|
14,373
|
|
|
|
(2.85
|
)%
|
|
|
15,099
|
|
|
|
(2.10
|
)%
|
|
|
15,370
|
|
|
|
(2.29
|
)%
|
Impact of noninterest bearing funds
|
|
|
|
|
|
|
0.18
|
%
|
|
|
|
|
|
|
0.10
|
%
|
|
|
|
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
2.51
|
%
|
|
|
|
|
|
|
2.34
|
%
|
In general, we position our balance sheet to minimize interest
rate sensitivity thereby producing a relatively consistent net
interest margin. As we are currently positioned, if interest
rates remain relatively stable, it is likely that our net
interest margin will remain near its current level. However, if
interest rates change significantly, it is likely that our net
interest margin will decline. Please read Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
for further information.
As a result of our interest rate position, increases in market
interest rates in 2005 did not significantly affect our net
interest margin. In 2005, our net interest margin increased
slightly, principally as a result of increased noninterest
bearing deposits. In 2004, our net interest margin improved over
2003, partially due to repricing of maturing higher rate
certificates of deposit to lower market rates and partially due
to an increase in lower rate transaction accounts along with a
decrease in certificates of deposit. In general, we pay lower
rates on interest bearing transaction accounts than certificates
of deposit.
28
The following table summarizes the composition of our earning
assets and deposits:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Residential housing assets:
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
280
|
|
|
$
|
510
|
|
Loans
|
|
|
7,003
|
|
|
|
6,897
|
|
Securities
|
|
|
6,512
|
|
|
|
4,982
|
|
|
|
|
|
|
|
|
|
|
Total residential housing assets
|
|
|
13,795
|
|
|
|
12,389
|
|
Other earning assets
|
|
|
3,204
|
|
|
|
3,015
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
16,999
|
|
|
$
|
15,404
|
|
|
|
|
|
|
|
|
|
|
Residential housing assets as a
percentage of earning assets
|
|
|
81
|
%
|
|
|
80
|
%
|
Noninterest bearing deposit
accounts
|
|
$
|
803
|
|
|
$
|
519
|
|
Interest bearing deposit accounts
|
|
|
3,639
|
|
|
|
4,618
|
|
Certificates of deposit
|
|
|
4,759
|
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
9,201
|
|
|
$
|
8,964
|
|
|
|
|
|
|
|
|
|
|
The increase in earning assets at year-end 2005 was a result of
mortgage-backed security purchases we made in third and fourth
quarter 2005. As a result of the repositioning of our mortgage
wholesale network, we do not anticipate we will acquire new
single-family loans in 2006 in an amount equal to anticipated
loan prepayments. We will likely re-invest proceeds from loan
payments and prepayments into mortgage-backed securities that
have similar interest rate risk characteristics. Additionally,
we anticipate increased funding on commercial real estate loan
commitments in 2006. The decrease in loans held for sale at
year-end 2005 was a result of our mortgage origination activity
repositioning in 2004. We expect further decreases in loans held
for sale in 2006 as a result of the 2005 repositioning of our
wholesale mortgage origination network.
A portion of our loans consists of adjustable-rate mortgages
that have various monthly payment options (Option ARMs). These
loans generally include the ability to select from fully
amortizing payments, interest-only payments and payments less
than the interest accrual rate, which can result in negative
amortization increasing the principal amount of the loan.
Negative amortization is subject to various limitations,
typically including a 110 percent maximum principal balance
as a percent of original principal balance, which limits the
maximum
loan-to-value
ratio (LTV) that can be reached. We underwrite borrowers on
Option ARMs at fully amortizing payment amounts, and the maximum
principal balance limitation restricts negative amortization to
88 percent of LTV. At year-end 2005, loans held for sale
and loans included $1.1 billion of Option ARMs. In 2005, we
recognized $4 million in interest income on
$0.5 billion in loans from borrowers that elected negative
amortization payment options. Negative amortization interest
recognized in 2004 and 2003 was not significant.
Additionally, the mortgage-backed securities we purchased in
2005 and a portion of the securities we have purchased in
previous years have Option ARMs as the underlying assets. The
outstanding principal balance of these securities at year-end
2005 was $3.5 billion. Of these securities,
$0.6 billion were issued by U.S. Government Sponsored
Enterprises (FNMA, FHLMC) and $2.9 billion are senior
tranches of private-label offerings. All of the securities bear
AAA ratings from nationally recognized securities rating
organizations.
In late 2005, the federal banking regulators, including the
Office of Thrift Supervision (OTS), which supervises Guaranty,
published proposed guidance on lending standards that, if
adopted, would affect lending and investing in Option ARMs. The
proposed guidance outlines various underwriting and risk
management activities appropriate for participating in
non-traditional lending activities. We do not
believe the proposed guidance, if adopted, would significantly
affect our lending programs.
29
Information regarding the geographic distribution and original
LTV of our single-family mortgage loan portfolio follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
California
|
|
$
|
1,730
|
|
|
$
|
1,983
|
|
Texas
|
|
|
303
|
|
|
|
385
|
|
Florida
|
|
|
154
|
|
|
|
112
|
|
All other states
|
|
|
925
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage loans
|
|
$
|
3,112
|
|
|
$
|
3,560
|
|
|
|
|
|
|
|
|
|
|
Weighted average original LTV
|
|
|
73
|
%
|
|
|
74
|
%
|
At year-end 2005, we had $34 million in single-family loans
in areas affected by Hurricanes Katrina, Rita, and Wilma. Of
these, approximately $13 million had flood insurance
policies. We have received very few notices from borrowers
related to these loans regarding property damage affecting the
collateral value or the borrowers ability to pay. We do
not anticipate any significant loan losses as a result of these
hurricanes.
Asset
Quality and Allowance for Loan Losses
Various asset quality measures we monitor are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Non-performing loans
|
|
$
|
35
|
|
|
$
|
50
|
|
|
$
|
65
|
|
Restructured operating lease assets
|
|
|
|
|
|
|
37
|
|
|
|
40
|
|
Foreclosed real estate
|
|
|
2
|
|
|
|
4
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets
|
|
$
|
37
|
|
|
$
|
91
|
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a
percentage of total loans
|
|
|
0.35
|
%
|
|
|
0.51
|
%
|
|
|
0.71
|
%
|
Non-performing assets ratio
|
|
|
0.37
|
%
|
|
|
0.93
|
%
|
|
|
1.42
|
%
|
Allowance for loan losses as a
percentage of non-performing loans
|
|
|
213
|
%
|
|
|
170
|
%
|
|
|
172
|
%
|
Allowance for loan losses as a
percentage of total loans
|
|
|
0.75
|
%
|
|
|
0.88
|
%
|
|
|
1.22
|
%
|
In 2005, we recognized $4 million, and in 2004 we
recognized $6 million, in interest income as a result of
payoffs received on loans for which we had previously applied
interest payments received to reduce the carrying amount.
Our allowance for losses on loans not determined to be
individually impaired is based on estimated percentages of
losses that have been incurred in the portfolio. These estimated
percentages are based on historical charge-off rates adjusted
for current market and environmental factors that we believe are
not reflected in historical data. We evaluate these estimated
percentages annually and more frequently when portfolio
characteristics change significantly.
Considerations that influence our judgments regarding the
adequacy of the allowance for loan losses and the amounts
charged to expense include:
|
|
|
|
|
conditions affecting borrower liquidity and collateral values
for impaired loans,
|
|
|
|
risk characteristics for groups of loans that are not considered
individually impaired but we believe have probable potential
losses,
|
|
|
|
risk characteristics for homogeneous pools of loans, and
|
|
|
|
other risk factors that we believe are not apparent in
historical information.
|
30
The following table summarizes changes in the allowance for
credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
85
|
|
|
$
|
111
|
|
|
$
|
132
|
|
Provision (credit) for loan losses
|
|
|
7
|
|
|
|
(12
|
)
|
|
|
43
|
|
Net charge-offs
|
|
|
(18
|
)
|
|
|
(7
|
)
|
|
|
(64
|
)
|
Transfer to reserve for unfunded
credit commitments
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
74
|
|
|
|
85
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded credit commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Provision for commitment-related
credit losses
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Transfer from allowance for loan
losses
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined allowances for credit
losses at year-end
|
|
$
|
81
|
|
|
$
|
92
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan losses
|
|
$
|
7
|
|
|
$
|
(12
|
)
|
|
$
|
43
|
|
Commitment-related credit losses
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined provision (credit) for
credit losses
|
|
$
|
10
|
|
|
$
|
(12
|
)
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of
average loans outstanding
|
|
|
0.21
|
%
|
|
|
0.07
|
%
|
|
|
0.66
|
%
|
In 2005, we recorded a provision for credit losses principally
as a result of the deterioration of the loan and lease discussed
below that we also charged off. Other than these items, the
overall credit quality of our loan portfolio continued to
improve in 2005. Considering this credit quality improvement, we
reduced our allowance on commercial real estate and multi-family
loans and decreased our provision for credit losses by
$5 million. As a result of these charge-offs and the
allowance reductions, our allowance for loan losses as a
percentage of loans has decreased. However, because of the
overall improved credit quality of our portfolio, our allowance
as a percent of non-performing loans has increased. In 2004, we
recorded a credit to provision expense as a result of similar
credit quality improvements.
Charge-offs in 2005 included $6 million related to a
direct-financing lease transaction with an automotive parts
manufacturer that declared bankruptcy. The bankruptcy trustee
for the lessee rejected the lease and returned possession of the
leased equipment to us. We sold the equipment, incurring a loss
for which we have filed a claim with the bankruptcy court along
with claims for other contractually due amounts. We sold our
rights associated with the rejected lease to a third party,
which will ultimately result in a recovery of a portion of our
loss. Because that sale contract contains provisions that result
in substantial uncertainty about the amount we will ultimately
receive, we have not recognized any related recovery as of
year-end 2005. We also have another lease with the same lessee
with a net carrying amount at year-end 2005 of $7 million.
That lease had not been rejected as of year-end 2005, however
communications with the lessee subsequent to year-end 2005
indicate it is likely the lessee will either reject the lease or
we will be required to renegotiate its terms.
Our non-performing loans at year-end 2005 do not include the
lease discussed above and a loan to a chemical manufacturer that
also had characteristics indicating potential credit problems
that could result in this loan being classified as
non-performing in the future. The loan had an unpaid principal
balance at year-end 2005 of $11 million and is secured by
accounts receivable, inventory, equipment, and real estate. The
borrower is over advanced against eligible collateral in the
amount of $2 million, and we have had difficulty resolving
the matter with the borrower.
Charge-offs in 2005 also included $7 million on an
asset-based loan that was restructured in 2003. The borrower has
continued to have financial difficulty since the restructuring,
and we do not expect significant future payments.
31
Charge-offs in 2004 related principally to foreclosed real
estate loans and several smaller asset-based lending loans.
Charge-offs in 2003 related principally to two commercial real
estate loans, two commercial and business loans, restructured
aircraft leases, and several asset-based lending loans.
In 2003, we restructured two leveraged direct financing leases
on cargo aircraft in which we are the lessor. Due to a reduction
in the lease payments, we reclassified the leases as operating
leases, recorded the aircraft on our balance sheet, wrote them
down to fair value and designated them as non-performing assets.
We are depreciating the aircraft over their remaining expected
useful lives. The net carrying value of the aircraft was
$32 million at year-end 2005, and we anticipate the
carrying value will be $11 million at the end of the lease
terms in 2009. The lessee has made all lease payments in
accordance with the restructured terms. As a result of the
lessees improved financial performance, we no longer
classify the restructured operating lease assets as
non-performing assets.
Virtually all of our commercial real estate loans are
collateralized and performing in accordance with contractual
terms. However, the borrowers on $87 million of our senior
housing and commercial real estate loans have completed
construction and are nearing maturity of automatic or
subsequently approved extensions. We underwrote most of these
loans with the expectation that the borrowers would secure
permanent financing or sell the collateral before or upon
maturity of our loan. Some of the borrowers with completed
projects have not been able to achieve the
lease-up
schedules originally anticipated. Although the current real
estate environment is improving and we continue to receive a
large number of payoffs on real estate loans, it is likely that
we will further extend some of these loans. We typically require
loans to be current on all interest and other contractual
payments and generally require substantial third-party
guarantees or other credit support to grant such extensions. In
2004, we foreclosed and sold collateral securing four real
estate loans, resulting in charge-offs and subsequent asset
write-downs of $9 million. It is possible that we will have
to foreclose on additional commercial real estate loans in the
future.
Noninterest
Income and Noninterest Expenses
Fluctuations in our noninterest income and expense components
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan origination and sale of loans
|
|
$
|
(118
|
)
|
|
$
|
(128
|
)
|
|
$
|
58
|
|
Servicing rights amortization and
impairment
|
|
|
(40
|
)
|
|
|
(19
|
)
|
|
|
|
|
Real estate operations, net of
cost of sales
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
15
|
|
The decrease in 2005 in loan origination and sale of loans and
servicing rights amortization and impairment was due to the
repositioning of our mortgage origination activities and sale of
our third party-mortgage servicing in late 2004, which also
substantially reduced our noninterest expense. The decrease in
2004 was principally due to the decline in mortgage loan
origination activity as refinancing slowed considerably in 2004.
Income from our real estate operations, which includes sales of
real estate less cost of sales and our equity in earnings of
real estate partnerships, was comparable in 2005 to 2004. In
2005, our real estate operations included our share of earnings
from partnership investments we made in a number of condominium
conversion projects in Florida, whereas in 2004 it included a
gain on the sale of a multifamily housing development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
(86
|
)
|
|
$
|
(57
|
)
|
|
$
|
25
|
|
Real estate operations, excluding
compensation
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
1
|
|
A significant portion of our compensation expense in years prior
to 2005 was related to our mortgage loan origination activity
and was variable with origination volume. The decrease in
compensation and benefits
32
expense in 2005 was principally a result of the repositioning of
our mortgage activities. Changes in 2004 and 2003 were
principally related to changes in mortgage loan origination
volume.
In 2005, we began a program to expand our banking center network
by constructing new retail bank branches in key markets. In
future years, these new branches will provide us with additional
deposit funding, including noninterest bearing deposits, and
will increase our noninterest income, but will also increase our
noninterest expense as a result of additional compensation and
depreciation expense. In 2005, we opened six branches.
Additionally, at year-end 2005 we had two branches under
construction and plans for an additional six new branches in
2006.
Real estate operations expense decreased in 2005 because we
recorded impairment charges in 2004 on several assets held for
sale, and 2004 included operating expenses of a multifamily
housing development prior to its sale in mid-2004.
Information regarding our mortgage loan origination activities
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Loans originated and retained
|
|
$
|
855
|
|
|
$
|
1,617
|
|
|
$
|
2,089
|
|
Loans originated for sale to third
parties
|
|
|
1,815
|
|
|
|
5,227
|
|
|
|
10,813
|
|
We no longer retain the rights to service loans nor do we retain
any other interest in loans sold to third parties.
Please read Statistical and Other Data for additional
information about our business segments and bank statistical
disclosures.
Expenses
Not Allocated to Segments
Unallocated expenses represent expenses managed on a
company-wide basis and include corporate general and
administrative expense, share-based compensation, other
operating and non-operating income (expense), and parent company
interest expense.
The change in general and administrative expenses was
principally due to an increase in incentive compensation and
supply chain initiatives and, in 2004, to $3 million in
expenses related to our assessment of internal controls over
financial reporting mandated by the Sarbanes-Oxley Act of 2002.
The change in share-based compensation is due to the effects of
prospectively expensing stock options using the fair value
method beginning in 2003 and the increased use of share-based
compensation coupled with an increase in the market price of our
common stock.
Other operating income (expense) not allocated to business
segments principally consists of costs associated with the
closure of production and converting facilities, consolidation
of administrative functions, repositioning our mortgage
origination and servicing activities, losses on sales of
non-strategic assets, and in 2005, costs associated with the
Gulf Coast hurricanes and antitrust litigation. Please read
Note E to the Parent Company Summarized Financial
Statements and Note L to the Financial Services Summarized
Financial Statements and Litigation
Matters Antitrust Litigation for additional
information.
The actions to close facilities, consolidate administrative
functions, and reposition our mortgage origination and servicing
activities were taken to lower costs, improve operating
effectiveness, increase asset utilization, and as it relates to
the mortgage origination and servicing activities, to reduce our
exposure to changing market conditions. We began to see the
benefits of these actions in 2004 and 2005, and it is likely
that trend will continue into 2006. We will continue our efforts
to enhance return on investment by lowering costs, improving
operating efficiencies and increasing asset utilization. As a
result, we will continue to review operations that are unable to
meet return objectives and determine appropriate courses of
action, including consolidating and closing converting
facilities and selling under-performing assets.
Other non-operating income (expense) principally consists of
interest and other income and costs associated with debt tender
offers, call premiums and write-offs of unamortized financing
fees related to refinancing of borrowings in 2005 and early
repayments of borrowings in 2004 and 2003.
The change in parent company interest expense was due to a
change in the mix of our long-term debt. At year-end 2005, we
had $1.5 billion of debt with fixed interest rates that
averaged 7.02 percent and $34 million of debt with
variable interest rates that averaged 4.49 percent. This
compares with $1.4 billion of debt with
33
fixed interest rates that averaged 7.38 percent and
$51 million of debt with variable interest rates that
averaged 3.71 percent at year-end 2004.
Income
Taxes
Our effective tax rate, which is income tax as a percentage of
income from continuing operations before taxes, was a tax
expense of 33 percent in 2005, a tax expense of
31 percent in 2004, and a tax benefit of 200 percent
in 2003. These rates reflect one-time benefits of six percent in
2005 resulting from the sale of a foreign subsidiary and eight
percent in 2004 and 170 percent in 2003 resulting from the
resolution of tax examinations and claims discussed below. The
American Job Creation Act of 2004 did not significantly affect
our 2005 effective tax rate.
In 2004, the Internal Revenue Service concluded its examination
of our tax returns for the years 1997 through 2000, and we
resolved several state income tax examinations. In 2003, the
Internal Revenue Service concluded its examination of our tax
returns through 1996, including matters related to net operating
losses and minimum tax credit carryforwards, which resulted from
certain deductions following the 1988 acquisition of Guaranty
and for which no financial accounting benefit had been
recognized. Also in 2003, we resolved certain state tax refund
claims for the years 1991 through 1994. As a result, valuation
allowances and tax accruals previously provided for these
matters were no longer required, and in fourth quarter 2004 we
recognized a one-time benefit of $20 million and in second
quarter 2003 we recognized a one-time benefit of
$165 million.
Based on our current expectations of income and expense, it is
likely that our 2006 effective tax rate will approximate
38 percent.
Average
Shares Outstanding
The change in average shares outstanding was principally due to
the exercise of employee stock options, the settlement of the
Upper DECS equity purchase contracts, and repurchases of common
stock. The change in average diluted shares outstanding was
principally due to the above factors and the dilutive effect of
employee stock options resulting from the increase in the market
price of our common stock in 2005 and 2004.
Capital
Resources and Liquidity for the Year 2005
We separately discuss our capital resources and liquidity for
Temple-Inland and our manufacturing subsidiaries, which we refer
to as the parent company, and our financial services
subsidiaries in order for the reader to better understand our
different businesses and because almost all of the net assets
invested in financial services are subject to regulatory rules
and regulations including restrictions on the payment of
dividends to the parent company.
Sources
and Uses of Cash
Consolidated cash from operations was $644 million in 2005,
$484 million in 2004, and $915 million in 2003.
Consolidated cash from operations represents the sum of parent
company and financial services cash from operations, less the
dividends from financial services, which are eliminated upon
consolidation. Dividends received from financial services were
$25 million in 2005, $105 million in 2004, and
$166 million in 2003.
34
Parent
Company Sources and Uses of Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
We received cash from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
395
|
|
|
$
|
438
|
|
|
$
|
195
|
|
Dividends from financial
services(a)
|
|
|
25
|
|
|
|
105
|
|
|
|
166
|
|
Working capital changes
|
|
|
(23
|
)
|
|
|
(103
|
)
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From operations
|
|
|
397
|
|
|
|
440
|
|
|
|
421
|
|
Sale of non-strategic and other
assets
|
|
|
49
|
|
|
|
42
|
|
|
|
64
|
|
Exercise of options and in 2005
the settlement of equity purchase contracts
|
|
|
393
|
|
|
|
62
|
|
|
|
13
|
|
Borrowings, net
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources
|
|
|
852
|
|
|
|
544
|
|
|
|
498
|
|
We used cash to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduce debt and other obligations,
net
|
|
|
|
|
|
|
(191
|
)
|
|
|
(276
|
)
|
Return to shareholders through
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
(102
|
)
|
|
|
(136
|
)
|
|
|
(73
|
)
|
Repurchase of common stock
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
Reinvest in the business through
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(224
|
)
|
|
|
(223
|
)
|
|
|
(137
|
)
|
Joint ventures
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uses
|
|
|
(858
|
)
|
|
|
(555
|
)
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
(6
|
)
|
|
$
|
(11
|
)
|
|
$
|
3
|
|
|
|
|
(a) |
|
Dividends we receive from financial services are eliminated in
the consolidated statements of cash flows. |
We operate in cyclical industries and our operating cash flows
vary accordingly. Our principal operating cash requirements are
for compensation, wood and recycled fiber, energy, interest and
taxes. In 2005 and 2004, we experienced improved pricing and
shipments for most of our products compared with decreases
experienced during most of 2003. Our discontinued operations
sources and uses of cash, which is principally derived from
operating activities, was not significant. The dividends we
receive from financial services are dependent on its level of
earnings and capital needs and are subject to regulatory
approval and restrictions. It is likely that we will receive
significantly higher dividends in 2006 than we did in 2005.
Working capital is subject to cyclical operating needs, the
timing of collection of receivables and the payment of payables
and expenses and, to a lesser extent, to seasonal fluctuations
in our operations.
In 2005 and 2004, many of our employees took advantage of the
increasing spread between the market price of our common stock
and the exercise price of employee stock options and exercised
their stock options. As a result, we issued 1,833,688 net
shares of common stock in 2005 and 2,359,568 net shares in
2004 to employees exercising options. In addition, in 2005, we
issued 10,875,739 shares of our common stock and received
$345 million in cash in conjunction with the final
settlement of our Upper DECS equity purchase contracts.
In 2005, market conditions provided the opportunity to lengthen
our debt maturity profile in a cost effective manner. As a
result, we issued $250 million of debt due in 2016 and
$250 million of debt due in 2018. The proceeds were used to
retire debt due in 2006 and 2007. In 2004 and 2003, we used
portions of our available funds to retire higher interest rate
debt and long-term timber rights purchase obligations.
We paid cash dividends to shareholders of $0.90 per share
in 2005, $1.22 per share in 2004 (including a $0.50 per
share special dividend in December 2004), and $0.68 per
share in 2003. In February 2005, our Board of Directors approved
a repurchase program of up to 12 million shares. In August
2005, our Board of
35
Directors approved a repurchase program of up to an additional
6 million shares. In 2005, we repurchased 14.5 million
shares for $536 million, including $9 million included
in other current liabilities that was settled after year end.
The repurchased shares were added to treasury shares at an
average price of $36.93 per share.
Capital expenditures and timberland reforestation and
acquisitions were 101 percent of depreciation and
amortization in 2005, 100 percent in 2004, and
58 percent in 2003. Most of the 2005 expenditures relate to
initiatives to increase reliability and efficiency at our
linerboard mills. Capital expenditures and timberland
reforestation and acquisitions are expected to approximate
$197 million in 2006 or about 84 percent of expected
2006 depreciation and amortization.
Financial
Services Sources and Uses of Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
We received cash from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
202
|
|
|
$
|
161
|
|
|
$
|
266
|
|
Changes in loans held for sale,
and other
|
|
|
70
|
|
|
|
(12
|
)
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From operations
|
|
|
272
|
|
|
|
149
|
|
|
|
660
|
|
Change in deposits and borrowings
|
|
|
1,632
|
|
|
|
(707
|
)
|
|
|
(449
|
)
|
Sale of non-strategic assets and
collection of mortgage servicing rights sale receivables
|
|
|
46
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources
|
|
|
1,950
|
|
|
|
(544
|
)
|
|
|
211
|
|
We used cash to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay dividends to the parent
company(a)
|
|
|
(25
|
)
|
|
|
(105
|
)
|
|
|
(166
|
)
|
Reinvest in the business through:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and securities, net of
payments
|
|
|
(1,756
|
)
|
|
|
495
|
|
|
|
(68
|
)
|
Capital expenditures, acquisitions
and other uses
|
|
|
(91
|
)
|
|
|
138
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uses
|
|
|
(1,872
|
)
|
|
|
528
|
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
78
|
|
|
$
|
(16
|
)
|
|
$
|
(59
|
)
|
|
|
|
(a) |
|
Dividends we pay to the parent company are eliminated in the
consolidated statements of cash flows. |
Our principal operating cash requirements are for compensation,
interest, and taxes. Changes in loans held for sale are subject
to the timing of the origination and subsequent sale of the
loans and the level of refinancing activity. As a result of the
repositioning of our mortgage origination activities, it is
likely that the cash flow related to these activities will
increase in 2006 as we sell the remaining loans held for sale
and will decrease thereafter.
The changes in deposits and borrowings and the amounts invested
in loans and securities generally move in tandem because we use
deposits and borrowings to fund these investments. Fluctuations
over the last several years are principally due to changes in
the volume of refinancing activities as well as the level of
suitable commercial lending and securities purchase
opportunities.
In 2005, our asset growth limited the amount of dividends that
we were able to pay because of the associated increased
regulatory capital requirements. It is likely that our earning
assets will remain near the same level in 2006 as in 2005. As a
result, it is likely that we will pay significantly higher
dividends to the parent company in 2006 than we did in 2005.
Liquidity
and Contractual Obligations
Almost all of the net assets invested in financial services are
subject to regulatory rules and restrictions including
restrictions on the payment of dividends to the parent company.
As a result, all consolidated assets are not available to
satisfy all consolidated liabilities. To provide a clearer
understanding of our different businesses, we discuss our
contractual obligations for the parent company and financial
services separately. At
36
year-end 2005 our consolidated contractual obligations separated
between the parent company and financial services consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due or Expiring by
Year
|
|
|
|
Total
|
|
|
2006
|
|
|
2007-8
|
|
|
2009-10
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Parent Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt*
|
|
$
|
1,501
|
|
|
$
|
18
|
|
|
$
|
114
|
|
|
$
|
320
|
|
|
$
|
1,049
|
|
Capital lease obligations*
|
|
|
528
|
|
|
|
15
|
|
|
|
30
|
|
|
|
30
|
|
|
|
453
|
|
Less, related municipal bonds we
own*
|
|
|
(528
|
)
|
|
|
(15
|
)
|
|
|
(30
|
)
|
|
|
(30
|
)
|
|
|
(453
|
)
|
Contractual interest payments on
fixed rate long-term debt
|
|
|
740
|
|
|
|
103
|
|
|
|
197
|
|
|
|
155
|
|
|
|
285
|
|
Operating leases
|
|
|
286
|
|
|
|
39
|
|
|
|
61
|
|
|
|
48
|
|
|
|
138
|
|
Purchase obligations
|
|
|
322
|
|
|
|
82
|
|
|
|
129
|
|
|
|
98
|
|
|
|
13
|
|
Other long-term liabilities*
|
|
|
8
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total parent company
|
|
$
|
2,857
|
|
|
$
|
243
|
|
|
$
|
505
|
|
|
$
|
622
|
|
|
$
|
1,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and savings deposit
accounts*
|
|
$
|
4,442
|
|
|
$
|
4,442
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit*
|
|
|
4,759
|
|
|
|
4,031
|
|
|
|
431
|
|
|
|
296
|
|
|
|
1
|
|
FHLB borrowings, repurchase
agreements
and other borrowings*
|
|
|
7,103
|
|
|
|
5,671
|
|
|
|
1,232
|
|
|
|
100
|
|
|
|
100
|
|
Preferred stock issued by
subsidiaries*
|
|
|
305
|
|
|
|
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
Contractual interest payments
|
|
|
345
|
|
|
|
163
|
|
|
|
97
|
|
|
|
62
|
|
|
|
23
|
|
Operating leases
|
|
|
63
|
|
|
|
12
|
|
|
|
21
|
|
|
|
16
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial services
|
|
$
|
17,017
|
|
|
$
|
14,319
|
|
|
$
|
2,086
|
|
|
$
|
474
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
19,874
|
|
|
$
|
14,562
|
|
|
$
|
2,591
|
|
|
$
|
1,096
|
|
|
$
|
1,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes items included in our balance sheet. |
Parent
Company Liquidity and Contractual Obligations
Our sources of short-term funding are our operating cash flows,
dividends received from financial services, and borrowings under
our committed credit agreements and existing accounts receivable
securitization facility. Our contractual obligations due in 2006
will likely be repaid from our operating cash flow or from our
unused borrowing capacity. At year-end 2005, we had
$914 million in unused borrowing capacity under our credit
agreements and accounts receivable securitization facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
|
Credit
|
|
|
Securitization
|
|
|
|
|
|
|
Agreements
|
|
|
Facility
|
|
|
Total
|
|
|
Committed
|
|
$
|
700
|
|
|
$
|
250
|
|
|
$
|
950
|
|
Less: borrowings and commitments
|
|
|
(5
|
)
|
|
|
(31
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused borrowing capacity at
year-end
|
|
$
|
695
|
|
|
$
|
219
|
|
|
$
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our committed credit agreements include a $600 million
revolving credit facility that expires in 2010. The remainder of
the committed agreements expire in July 2007. In January 2006,
we exercised our option to increase the commitments under our
revolving credit facility by $150 million, increasing total
committed credit capacity to $1,085 million. Also in
January 2006, we used $150 million of our credit facilities
to fund the purchase of the remaining 50 percent interest
in Standard Gypsum LP. Following the purchase we paid off
$56 million of the ventures long-term debt, of which
$28 million was related to the purchased interest.
Our accounts receivable securitization facility expires in 2008.
Under this facility, a wholly-owned subsidiary purchases, on an
on-going basis, substantially all of our trade receivables. As
we need funds, the
37
subsidiary draws under its revolving credit agreement, pledges
the trade receivables as collateral, and remits the proceeds to
us. In the event of liquidation of the subsidiary, its creditors
would be entitled to satisfy their claims from the
subsidiarys pledged receivables prior to distributions
back to us. We included this subsidiary in our parent company
and consolidated financial statements.
Our debt agreements, accounts receivable securitization
facility, and credit agreements contain terms, conditions and
financial covenants customary for such agreements including
minimum levels of interest coverage and limitations on leverage.
At year-end 2005, we complied with these terms, conditions and
financial covenants. None of the agreements are restricted as to
availability based on our long-term debt ratings.
On February 3, 2006, our Board of Directors increased the
quarterly dividend rate to $0.25 per share from
$0.221/2
per share.
In the 1990s, we entered into two sale-lease back transactions
of production facilities with municipalities. We entered into
these transactions to mitigate property and similar taxes
associated with these facilities. The municipalities purchased
these facilities from us for $188 million, our carrying
value, and we leased the facilities back from the municipalities
under lease agreements, which expire in 2022 and 2025.
Concurrently, we purchased $188 million of interest bearing
bonds issued by these municipalities. The bond terms are
identical to the lease terms, are secured by payments under the
capital lease obligations, and the municipalities are obligated
only to the extent the underlying lease payments are made by us.
The interest rate implicit in the leases is the same as the
interest rate on the bonds. As a result, the present value of
the capital lease obligations is $188 million, the same as
the principal amount of the bonds. Since there is no legal right
of offset, the $188 million of bonds are included in other
assets and the $188 million present value of the capital
lease obligations are included in other long-term liabilities.
There is no net effect from these transactions as we are in
substance both the obligor on, and the holder of, the bonds.
Operating leases represent pre-tax obligations and include
$168 million for the lease of particleboard and MDF
facilities in Mt. Jewett Pennsylvania, which expire in 2019. The
rest of our operating lease obligations are for timberland,
facilities and equipment.
Purchase obligations are pre-tax, market priced obligations
principally for gypsum and timber used in our manufacturing and
converting processes and for major committed capital
expenditures.
We have other long-term liabilities, principally defined benefit
and postretirement medical obligations and deferred income taxes
that are not included in the table because they do not have
scheduled maturities. At year-end 2005, the pre-tax pension
liability was $270 million and the pre-tax postretirement
medical liability was $137 million. Please read Pension,
Postretirement Medical and Health Care Matters for
additional information. We do not expect any significant changes
in our deferred tax liability in 2006. However, it is possible
that in 2006 we will have used all our alternative minimum tax
credit carryforwards. As a result, it is likely that in 2006 and
thereafter, we will pay federal income taxes at a
35 percent rate as compared with the 20 percent rate
we have paid for a number of years.
We have interest rate derivative instruments outstanding at
year-end 2005. These interest rate instruments expire in 2008.
They are non-exchange traded and are valued using either
third-party resources or models. At year-end 2005, the aggregate
fair value of our interest rate instruments was a
$3 million liability. Our commodity derivative instruments
expired in 2005.
Financial
Services Liquidity and Contractual Obligations
Our sources of short-term funding are our operating cash flows,
new deposits, borrowings under our existing agreements and, if
necessary, sales of assets. Assets that can be readily converted
to cash, or against which we can readily borrow, include
short-term investments, loans, mortgage loans held for sale, and
securities. At year-end 2005, we had available liquidity of
$3 billion. Our contractual obligations due in 2006 will
likely be repaid from operating cash flow and retention of
deposits.
Our transaction and savings deposit accounts are shown as
maturing in 2006. These accounts do not have a contractual
maturity, but rather, are due on demand. Most of the
certificates of deposit that mature in 2006 are short-term (one
year or less) and a high percentage of the depositors have
historically renewed at maturity, although they have no
contractual obligation to do so.
38
Unless renegotiated, the terms of the preferred stock issued by
subsidiaries make it likely that we will redeem the preferred
stock in 2007 at the liquidation preference amount of
$305 million.
Loans and securities aggregating $8.8 billion are pledged
as collateral on Federal Home Loan Bank (or FHLB)
borrowings. Based upon this collateral, we have the ability to
borrow an additional $1.9 billion from the FHLB, which is
included in our available liquidity.
Operating lease obligations are principally for facilities and
equipment.
Off-Balance
Sheet Arrangements
Parent
Company
It is not our practice to enter into off-balance sheet
arrangements. From time to time, however, we do so to facilitate
our operating activities. At year-end 2005, our off-balance
sheet unfunded arrangements, excluding contractual interest
payments, operating leases and purchase and other obligations
included in the table of contractual obligations, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiring by Year
|
|
|
|
Total
|
|
|
2006
|
|
|
2007-8
|
|
|
2009-10
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Joint venture guarantees
|
|
$
|
104
|
|
|
$
|
28
|
|
|
$
|
15
|
|
|
$
|
61
|
|
|
$
|
|
|
Performance bonds and recourse
obligations
|
|
|
76
|
|
|
|
69
|
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
180
|
|
|
$
|
97
|
|
|
$
|
19
|
|
|
$
|
63
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We participate in three joint ventures engaged in manufacturing
and selling paper and forest products. Our partner in each of
these ventures is a publicly-held company unrelated to us. At
year-end 2005, these ventures had $102 million in long-term
debt and $56 million of debt included in current
maturities, along with various letters of credit. We guaranteed
$104 million of the joint ventures debt service
obligations and letters of credit. Our joint venture partners
also provided guarantees and letters of credit. Generally we
would be called upon to fund the guarantees due to the lack of
specific performance by the joint ventures, such as non-payment
of debt. As a result of the purchase of the remaining
50 percent interest in Standard Gypsum LP in January 2006
and the payment of its $56 million credit agreement,
$28 million of the joint venture guarantees have been
eliminated.
Performance bonds are primarily for workers compensation
and general liability claims.
We had guaranteed the repayment of $20 million of
borrowings by a financial services subsidiary. This borrowing
was refinanced after year-end and the guarantee was eliminated.
In addition, $305 million preferred stock issued by two
subsidiaries of Guaranty is automatically exchanged into
preferred stock of Guaranty upon the occurrence of certain
regulatory events or administrative actions. If such exchange
occurs, certain shares are automatically surrendered to us in
exchange for our senior notes and certain shares, at our option,
are either exchanged for our senior notes or are purchased by us.
Financial
Services
In the normal course of business, we enter into off-balance
sheet arrangements, such as commitments to extend credit for
loans, leases, and letters of credit. These commitments carry
substantially the same risk as loans. We generally require
collateral upon funding of these commitments, the receipt of
which provides assets that generally increase our liquidity by
increasing our borrowing capacity. These commitments normally
include provisions allowing us to exit the commitment under
certain circumstances. At year-end 2005, our off-
39
balance sheet unfunded arrangements, excluding contractual
interest and operating leases included in the table of
contractual obligations, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiring by Year
|
|
|
|
Total
|
|
|
2006
|
|
|
2007-8
|
|
|
2009-10
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Single-family mortgage loans
|
|
$
|
204
|
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Unused lines of credit
|
|
|
2,209
|
|
|
|
272
|
|
|
|
823
|
|
|
|
1,020
|
|
|
|
94
|
|
Unfunded portion of credit
commitments
|
|
|
4,141
|
|
|
|
2,341
|
|
|
|
1,626
|
|
|
|
162
|
|
|
|
12
|
|
Commitments to originate
commercial loans
|
|
|
571
|
|
|
|
148
|
|
|
|
304
|
|
|
|
117
|
|
|
|
2
|
|
Letters of credit
|
|
|
382
|
|
|
|
148
|
|
|
|
89
|
|
|
|
142
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,507
|
|
|
$
|
3,113
|
|
|
$
|
2,842
|
|
|
$
|
1,441
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Adequacy and Other Regulatory Matters
At year-end 2005, Guaranty met or exceeded all applicable
regulatory capital requirements. We expect to maintain
Guarantys capital at a level that exceeds the minimum
required for designation as well capitalized under
the capital adequacy regulations of the OTS. From time to time,
the parent company may make capital contributions to or receive
dividends from Guaranty. Please read Note M to the
Financial Services Summarized Financial Statements for
additional information.
At year-end 2005, Guaranty had outstanding preferred stock of
subsidiaries with a carrying amount and liquidation value of
$305 million. This preferred stock will be automatically
exchanged into Guaranty preferred stock if the OTS determines
Guaranty is or will become undercapitalized in the near term or
upon the occurrence of certain administrative actions. If such
an exchange were to occur, the parent company must issue senior
notes in exchange for the Guaranty preferred stock in an amount
equal to the liquidation preference of the preferred stock
exchanged. With respect to certain of these shares, the parent
company has the option to issue senior notes or purchase the
shares. At year-end 2005, $303 million of the subsidiary
preferred stock qualified as core capital and the remainder
qualified as Tier 2 capital.
As previously disclosed, in 2004 the OTS and Guaranty entered
into a Stipulation and Consent to the Issuance of an Order to
Cease and Desist for Affirmative Relief (Consent Order) related
to findings and required corrective actions associated with
Guarantys mortgage origination activities. Under the
Consent Order, Guaranty agreed, among other things, to take
certain actions primarily related to its repositioned mortgage
origination activities, including strengthening its regulatory
compliance controls and management, enhancing its suspicious
activity reporting and regulatory training programs, and
implementing improved risk assessment and loan application
register programs. Guaranty has implemented the corrective
actions necessitated by the Consent Order. Additionally, we
further repositioned our mortgage origination activities in
2005, substantially reducing the volume of activity to which the
corrective actions apply. The Consent Order remains in effect,
but has had no significant on-going impact on the operations of
Guaranty or its ability to pay dividends to the parent company.
We have not incurred any significant financial loss as a result
of this matter and have no reason to believe that the matters
addressed in the Consent Order will have a significant effect on
Guarantys long-term operations or cash flows.
Pension,
Postretirement Medical and Health Care Matters
Our non-cash pension expense was $50 million in 2005,
$50 million in 2004, and $43 million in 2003. For the
year 2006, we expect our non-cash pension expense to be about
$47 million.
For accounting purposes, we measure the defined benefit plans
projected benefit obligation, value the plan assets, and
determine the funded status as of September 30 of each
year. We measure our projected benefit obligation using current
mortality tables and an appropriate discount rate. At September
2005, the projected benefit obligation of our defined benefit
plans exceeded the fair value of plan assets by
$347 million compared with $355 million at September
2004. The change was principally due to a 50 basis point
decrease in the discount rate to 5.50 percent offset by
better than expected return on plan assets (15 percent
compared with an expected rate of 8.50 percent) and larger
plan assets due in part to the $60 million of voluntary,
discretionary contributions we made in 2005. The pension
liability recognized for accounting purposes was
$270 million at year-end 2005 compared with
$289 million at year-end 2004. Unrecognized actuarial
losses, which principally
40
represent the delayed recognition of the effect of changes in
the assumed discount rate and differences between expected and
actual experience, were $337 million at year-end 2005 and
$331 million at year-end 2004. These losses, to the extent
they exceed ten percent of the greater of the projected benefit
obligation or plan assets, will be recognized prospectively over
the remaining service period, currently estimated at nine years,
and will be affected by further changes, if any, in the discount
rate and differences between expected and actual experience. We
expect the amount to be recognized and included in 2006 pension
expense will be about $25 million, the same as included in
2005 pension expense.
For ERISA funding purposes, we measure the projected benefit
obligation and value the plan assets as of January 1 of each
year. We measure our projected benefit obligations using a
discount rate that approximates the expected return on plan
assets and value our plan assets using a five year moving
average. At January 1, 2005, the projected benefit
obligation approximated the fair value of the plan assets. As a
result, our ERISA cash-funding requirement was about
$1 million in 2005, and we expect our cash-funding
requirement to be minimal in 2006. We made voluntary,
discretionary contributions of $60 million to the defined
benefit plans in 2005 and it is likely that we will make
additional voluntary, discretionary contributions to the defined
benefit plans in 2006 of $60 million, $15 million per
quarter.
Postretirement medical expense was $8 million in 2005,
$10 million in 2004, and $12 million in 2003. For
accounting purposes we measure the projected benefit obligation
using current mortality tables and an appropriate discount rate,
currently 5.50 percent. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 was enacted in
December 2003. This act expands Medicare to include, for the
first time, coverage for prescription drugs. Our postretirement
benefit plans provide for medical coverage, including a
prescription drug subsidy, for certain participants. The effect
of the act was to reduce the liability for postretirement
medical cost by $9 million and reduce postretirement
medical expense by about $2 million.
Effective January 2005, we implemented a new consumer driven
health plan option for our employees. About 41 percent of
our employees elected this option. We believe implementing this
option will reduce or help mitigate our rising health care
costs. In 2005, the total cost of providing health coverage was
about $120 million of which we incurred $84 million
and our employees incurred $36 million. In 2004, the total
cost of providing health coverage was $150 million, of
which we incurred $114 million and our employees incurred
$36 million. The reduction in total health care cost is
principally due to the implementation of a new health plan
design, including the consumer driven health plan option, and a
decrease in employees. It is unlikely that this trend will
continue in 2006.
Energy
and the Effects of Inflation
Energy costs increased $43 million in 2005,
$11 million in 2004, and $55 million in 2003,
principally due to changes in natural gas prices. Our energy
costs fluctuate based on the market prices we pay for these
commodities. We hedge very little of our energy needs. It is
likely that these costs will continue to fluctuate during 2006.
Inflation has had minimal effects on operating results the last
three years. Our fixed assets, timber and timberland, are
carried at their historical costs. If carried at current
replacement costs, depreciation expense and the cost of timber
cut or timberland sold would be significantly higher than what
we reported.
Environmental
Protection
Our operations are subject to federal, state, and local
provisions regulating discharges into the environment and
otherwise related to the protection of the environment.
Compliance with these provisions requires us to invest
substantial funds to modify facilities to assure compliance with
applicable environmental regulations. A more detailed discussion
regarding our compliance with environment regulation can be
found in Business Environmental
Regulation.
Litigation
Matters
We are involved in various legal proceedings that arise from
time to time in the ordinary course of doing business. In our
opinion, the possibility of a material loss from any of these
proceedings is considered to be remote, and we do not expect
that the effect of these proceedings will be material to our
financial position, results of operations, or cash flow. It is
possible, however, that charges related to these matters could
be significant to results of operations or cash flows in any one
accounting period. A more detailed discussion regarding our most
significant litigation matters can be found in Legal
Proceedings.
41
Calculation
of Non-GAAP Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Corrugated
|
|
|
Forest
|
|
|
Financial
|
|
|
|
Company
|
|
|
Packaging
|
|
|
Products
|
|
|
Services
|
|
|
|
(Dollars in millions)
|
|
|
Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income or segment
operating income determined in accordance with GAAP
|
|
$
|
371
|
(a)
|
|
$
|
120
|
|
|
$
|
238
|
|
|
$
|
220
|
|
Adjustments for significant unusual
items
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As defined
|
|
$
|
371
|
|
|
$
|
120
|
|
|
$
|
238
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year total assets,
segment assets or investment in financial services determined in
accordance with GAAP
|
|
$
|
4,900
|
|
|
$
|
2,459
|
|
|
$
|
1,008
|
|
|
$
|
1,121
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (excluding
current portion of long-term debt)
|
|
|
(510
|
)
|
|
|
(323
|
)
|
|
|
(71
|
)
|
|
|
N/A
|
|
Assets held for sale
|
|
|
(34
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Municipal bonds related to capital
leases included in other assets
|
|
|
(188
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As defined
|
|
$
|
4,168
|
|
|
$
|
2,136
|
|
|
$
|
937
|
|
|
$
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROI
|
|
|
8.9
|
%
|
|
|
5.6
|
%
|
|
|
25.4
|
%
|
|
|
19.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income or segment
operating income determined in accordance with GAAP
|
|
$
|
349
|
(a)
|
|
$
|
96
|
|
|
$
|
215
|
|
|
$
|
207
|
|
Adjustments for significant unusual
items
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As defined
|
|
$
|
349
|
|
|
$
|
96
|
|
|
$
|
215
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year total assets,
segment assets or investment in financial services determined in
accordance with GAAP
|
|
$
|
4,862
|
|
|
$
|
2,374
|
|
|
$
|
1,035
|
|
|
$
|
1,123
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (excluding
current portion of long-term debt)
|
|
|
(503
|
)
|
|
|
(319
|
)
|
|
|
(57
|
)
|
|
|
N/A
|
|
Assets held for sale
|
|
|
(50
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Municipal bonds related to capital
leases included in other assets
|
|
|
(188
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As defined
|
|
$
|
4,121
|
|
|
$
|
2,055
|
|
|
$
|
978
|
|
|
$
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROI
|
|
|
8.5
|
%
|
|
|
4.7
|
%
|
|
|
22.0
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income or segment
operating income determined in accordance with GAAP
|
|
$
|
53
|
(a)
|
|
$
|
18
|
|
|
$
|
67
|
|
|
$
|
186
|
|
Adjustments for significant unusual
items
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As defined
|
|
$
|
53
|
|
|
$
|
18
|
|
|
$
|
67
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year total assets,
segment assets or investment in financial services determined in
accordance with GAAP
|
|
$
|
5,188
|
|
|
$
|
2,555
|
|
|
$
|
1,132
|
|
|
$
|
1,178
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (excluding
current portion of long-term debt)
|
|
|
(488
|
)
|
|
|
(306
|
)
|
|
|
(65
|
)
|
|
|
N/A
|
|
Assets held for sale
|
|
|
(78
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Municipal bonds related to capital
leases included in other assets
|
|
|
(188
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As defined
|
|
$
|
4,434
|
|
|
$
|
2,249
|
|
|
$
|
1,067
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROI
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
|
|
6.3
|
%
|
|
|
15.8
|
%
|
|
|
|
(a) |
|
Net of expenses not allocated to segments of $207 million
in 2005, $169 million in 2004, and $218 million in
2003. |
42
Statistical
and Other Data
Parent
Company
Revenues and unit sales of our manufacturing segments, excluding
joint venture operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
2,728
|
|
|
$
|
2,625
|
|
|
$
|
2,509
|
|
Linerboard
|
|
|
91
|
|
|
|
111
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,819
|
|
|
$
|
2,736
|
|
|
$
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Pine
lumber(a)
|
|
$
|
312
|
|
|
$
|
295
|
|
|
$
|
240
|
|
Particleboard
|
|
|
195
|
|
|
|
182
|
|
|
|
143
|
|
Medium density fiberboard
|
|
|
87
|
|
|
|
111
|
|
|
|
93
|
|
Gypsum wallboard
|
|
|
143
|
|
|
|
110
|
|
|
|
75
|
|
Fiberboard
|
|
|
83
|
|
|
|
77
|
|
|
|
71
|
|
Other
|
|
|
211
|
|
|
|
196
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,031
|
|
|
$
|
971
|
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging, thousands of
tons
|
|
|
3,437
|
|
|
|
3,366
|
|
|
|
3,206
|
|
Linerboard, thousands of tons
|
|
|
264
|
|
|
|
320
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, thousands of tons
|
|
|
3,701
|
|
|
|
3,686
|
|
|
|
3,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Pine lumber, million board
feet(a)
|
|
|
777
|
|
|
|
769
|
|
|
|
761
|
|
Particleboard, million square feet
|
|
|
640
|
|
|
|
595
|
|
|
|
598
|
|
Medium density fiberboard, million
square feet
|
|
|
202
|
|
|
|
254
|
|
|
|
228
|
|
Gypsum wallboard, million square
feet
|
|
|
859
|
|
|
|
766
|
|
|
|
643
|
|
Fiberboard, million square feet
|
|
|
431
|
|
|
|
407
|
|
|
|
434
|
|
|
|
|
(a) |
|
We have reclassified some prior year revenue and unit sales to
conform to this years classification |
43
Financial
Services
Information regarding our financial services segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Ratio
information
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
tax(a)
|
|
|
1.32
|
%
|
|
|
1.21
|
%
|
|
|
1.03
|
%
|
After
tax(c)
|
|
|
0.82
|
%
|
|
|
0.63
|
%
|
|
|
0.64
|
%
|
Return on equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
tax(b)
|
|
|
18.74
|
%
|
|
|
18.21
|
%
|
|
|
15.90
|
%
|
After
tax(d)
|
|
|
11.63
|
%
|
|
|
9.57
|
%
|
|
|
9.91
|
%
|
Dividend payout
ratio(e)
|
|
|
18
|
%
|
|
|
96
|
%
|
|
|
143
|
%
|
Equity to assets
ratio(f)
|
|
|
7.06
|
%
|
|
|
6.62
|
%
|
|
|
6.50
|
%
|
|
|
|
(a) |
|
Segment operating income divided by average total assets |
|
(b) |
|
Segment operating income divided by average equity |
|
(c) |
|
Net income divided by average total assets |
|
(d) |
|
Net income divided by average equity |
|
(e) |
|
Dividends paid to the parent company divided by net income |
|
(f) |
|
Average equity divided by average assets |
44
Average balances, interest income and expense, and rates by
major balance sheet categories were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in millions)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
139
|
|
|
$
|
1
|
|
|
|
0.74
|
%
|
|
$
|
167
|
|
|
$
|
3
|
|
|
|
1.50
|
%
|
|
$
|
162
|
|
|
$
|
3
|
|
|
|
1.60
|
%
|
Securities
|
|
|
4,932
|
|
|
|
209
|
|
|
|
4.24
|
%
|
|
|
5,627
|
|
|
|
222
|
|
|
|
3.95
|
%
|
|
|
5,275
|
|
|
|
218
|
|
|
|
4.14
|
%
|
Loans(a)(b)
|
|
|
9,934
|
|
|
|
574
|
|
|
|
5.78
|
%
|
|
|
9,504
|
|
|
|
460
|
|
|
|
4.84
|
%
|
|
|
9,625
|
|
|
|
453
|
|
|
|
4.71
|
%
|
Loans held for sale
|
|
|
350
|
|
|
|
16
|
|
|
|
4.49
|
%
|
|
|
618
|
|
|
|
33
|
|
|
|
5.33
|
%
|
|
|
1,042
|
|
|
|
54
|
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
15,355
|
|
|
$
|
800
|
|
|
|
5.21
|
%
|
|
|
15,916
|
|
|
$
|
718
|
|
|
|
4.51
|
%
|
|
|
16,104
|
|
|
$
|
728
|
|
|
|
4.52
|
%
|
Other assets
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,604
|
|
|
|
|
|
|
|
|
|
|
$
|
17,184
|
|
|
|
|
|
|
|
|
|
|
$
|
18,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
$
|
3,697
|
|
|
$
|
51
|
|
|
|
1.38
|
%
|
|
$
|
4,466
|
|
|
$
|
51
|
|
|
|
1.13
|
%
|
|
$
|
4,038
|
|
|
$
|
46
|
|
|
|
1.13
|
%
|
Savings deposits
|
|
|
235
|
|
|
|
2
|
|
|
|
0.70
|
%
|
|
|
247
|
|
|
|
2
|
|
|
|
0.72
|
%
|
|
|
238
|
|
|
|
2
|
|
|
|
0.86
|
%
|
Time (certificates of deposit)
|
|
|
4,407
|
|
|
|
136
|
|
|
|
3.10
|
%
|
|
|
3,579
|
|
|
|
89
|
|
|
|
2.51
|
%
|
|
|
4,488
|
|
|
|
134
|
|
|
|
2.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
8,339
|
|
|
|
189
|
|
|
|
2.27
|
%
|
|
|
8,292
|
|
|
|
142
|
|
|
|
1.71
|
%
|
|
|
8,764
|
|
|
|
182
|
|
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan
Bank borrowings
|
|
|
5,375
|
|
|
|
187
|
|
|
|
3.49
|
%
|
|
|
5,128
|
|
|
|
138
|
|
|
|
2.69
|
%
|
|
|
3,685
|
|
|
|
119
|
|
|
|
3.23
|
%
|
Securities sold under repurchase
agreements
|
|
|
144
|
|
|
|
4
|
|
|
|
2.63
|
%
|
|
|
1,155
|
|
|
|
15
|
|
|
|
1.31
|
%
|
|
|
2,415
|
|
|
|
29
|
|
|
|
1.22
|
%
|
Other debt
|
|
|
208
|
|
|
|
13
|
|
|
|
6.06
|
%
|
|
|
217
|
|
|
|
10
|
|
|
|
4.76
|
%
|
|
|
199
|
|
|
|
10
|
|
|
|
4.86
|
%
|
Preferred stock issued by
subsidiaries
|
|
|
307
|
|
|
|
17
|
|
|
|
5.44
|
%
|
|
|
307
|
|
|
|
12
|
|
|
|
3.87
|
%
|
|
|
307
|
|
|
|
11
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
6,034
|
|
|
|
221
|
|
|
|
3.66
|
%
|
|
|
6,807
|
|
|
|
175
|
|
|
|
2.57
|
%
|
|
|
6,606
|
|
|
|
169
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
14,373
|
|
|
$
|
410
|
|
|
|
2.85
|
%
|
|
|
15,099
|
|
|
$
|
317
|
|
|
|
2.10
|
%
|
|
|
15,370
|
|
|
$
|
351
|
|
|
|
2.29
|
%
|
Noninterest bearing demand deposits
|
|
|
699
|
|
|
|
|
|
|
|
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
16,604
|
|
|
|
|
|
|
|
|
|
|
$
|
17,184
|
|
|
|
|
|
|
|
|
|
|
$
|
18,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin
|
|
|
|
|
|
$
|
390
|
|
|
|
2.54
|
%
|
|
|
|
|
|
$
|
401
|
|
|
|
2.51
|
%
|
|
|
|
|
|
$
|
377
|
|
|
|
2.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes nonaccruing loans |
|
(b) |
|
Interest includes recognized loan fees of $27 million in
2005, $27 million in 2004, and $28 million in 2003 |
45
Changes in net interest income attributable to changes in volume
and rates were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Compared with 2004
|
|
|
2004 Compared with 2003
|
|
|
|
Increase (Decrease) Due
To
|
|
|
Increase (Decrease) Due
To
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Securities
|
|
|
(29
|
)
|
|
|
16
|
|
|
|
(13
|
)
|
|
|
(12
|
)
|
|
|
16
|
|
|
|
4
|
|
Loans
|
|
|
21
|
|
|
|
93
|
|
|
|
114
|
|
|
|
(6
|
)
|
|
|
13
|
|
|
|
7
|
|
Loans held for sale
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
(17
|
)
|
|
|
(22
|
)
|
|
|
1
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(21
|
)
|
|
|
103
|
|
|
|
82
|
|
|
|
(40
|
)
|
|
|
30
|
|
|
|
(10
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand
|
|
|
(10
|
)
|
|
|
10
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Savings deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time (certificates of deposit)
|
|
|
23
|
|
|
|
24
|
|
|
|
47
|
|
|
|
(25
|
)
|
|
|
(20
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on deposits
|
|
|
13
|
|
|
|
34
|
|
|
|
47
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
(40
|
)
|
Federal Home Loan Bank
Borrowings
|
|
|
7
|
|
|
|
42
|
|
|
|
49
|
|
|
|
41
|
|
|
|
(22
|
)
|
|
|
19
|
|
Securities sold under repurchase
agreements
|
|
|
(19
|
)
|
|
|
8
|
|
|
|
(11
|
)
|
|
|
(16
|
)
|
|
|
2
|
|
|
|
(14
|
)
|
Other debt
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock issued by
subsidiaries
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1
|
|
|
|
92
|
|
|
|
93
|
|
|
|
5
|
|
|
|
(39
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(22
|
)
|
|
$
|
11
|
|
|
$
|
(11
|
)
|
|
$
|
(45
|
)
|
|
$
|
69
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan portfolio consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In millions)
|
|
|
Single-family mortgage
|
|
$
|
3,112
|
|
|
$
|
3,560
|
|
|
$
|
3,255
|
|
|
$
|
2,470
|
|
|
$
|
1,987
|
|
Single-family mortgage warehouse
|
|
|
757
|
|
|
|
580
|
|
|
|
387
|
|
|
|
522
|
|
|
|
547
|
|
Single-family construction
|
|
|
1,665
|
|
|
|
1,303
|
|
|
|
889
|
|
|
|
1,004
|
|
|
|
991
|
|
Multifamily and senior housing
|
|
|
1,469
|
|
|
|
1,454
|
|
|
|
1,769
|
|
|
|
1,858
|
|
|
|
1,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential housing
|
|
|
7,003
|
|
|
|
6,897
|
|
|
|
6,300
|
|
|
|
5,854
|
|
|
|
5,452
|
|
Commercial real estate
|
|
|
758
|
|
|
|
709
|
|
|
|
1,015
|
|
|
|
1,891
|
|
|
|
2,502
|
|
Commercial and business
|
|
|
843
|
|
|
|
746
|
|
|
|
585
|
|
|
|
740
|
|
|
|
819
|
|
Energy lending
|
|
|
756
|
|
|
|
717
|
|
|
|
562
|
|
|
|
420
|
|
|
|
116
|
|
Asset-based lending and leasing
|
|
|
395
|
|
|
|
428
|
|
|
|
499
|
|
|
|
696
|
|
|
|
842
|
|
Consumer and other
|
|
|
164
|
|
|
|
206
|
|
|
|
176
|
|
|
|
199
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
9,919
|
|
|
|
9,703
|
|
|
|
9,137
|
|
|
|
9,800
|
|
|
|
9,986
|
|
Less allowance for loan losses
|
|
|
(74
|
)
|
|
|
(85
|
)
|
|
|
(111
|
)
|
|
|
(132
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
9,845
|
|
|
$
|
9,618
|
|
|
$
|
9,026
|
|
|
$
|
9,668
|
|
|
$
|
9,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Construction and commercial and business loans by maturity date
at year-end 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Based
|
|
|
|
|
|
|
Single-Family
|
|
|
Multifamily and
|
|
|
Commercial Real
|
|
|
Lending and
|
|
|
|
|
|
|
Construction
|
|
|
Senior Housing
|
|
|
Estate
|
|
|
Leasing
|
|
|
|
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Due within one year
|
|
$
|
1,248
|
|
|
$
|
117
|
|
|
$
|
1,099
|
|
|
$
|
44
|
|
|
$
|
632
|
|
|
$
|
|
|
|
$
|
1,132
|
|
|
$
|
19
|
|
|
$
|
4,291
|
|
After one but within five years
|
|
|
221
|
|
|
|
79
|
|
|
|
224
|
|
|
|
8
|
|
|
|
119
|
|
|
|
5
|
|
|
|
742
|
|
|
|
14
|
|
|
|
1,412
|
|
After five years
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
36
|
|
|
|
2
|
|
|
|
|
|
|
|
79
|
|
|
|
8
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,469
|
|
|
$
|
196
|
|
|
$
|
1,381
|
|
|
$
|
88
|
|
|
$
|
753
|
|
|
$
|
5
|
|
|
$
|
1,953
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$1,665
|
|
$1,469
|
|
$758
|
|
$1,994
|
|
$
|
5,886
|
|
Changes in our allowance for loan losses and summary of
nonaccrual and other loans were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In millions)
|
|
|
Balance at beginning of year
|
|
$
|
85
|
|
|
$
|
111
|
|
|
$
|
132
|
|
|
$
|
139
|
|
|
$
|
118
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage
|
|
|
(2
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Multifamily and senior housing
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential housing loans
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(11
|
)
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
(6
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
Commercial and business
|
|
|
(11
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(31
|
)
|
|
|
(18
|
)
|
Asset-based lending and leasing
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
(57
|
)
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Consumer and other
|
|
|
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(23
|
)
|
|
|
(15
|
)
|
|
|
(73
|
)
|
|
|
(54
|
)
|
|
|
(31
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage warehouse
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
3
|
|
Multifamily and senior housing
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential housing loans
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
Commercial real estate
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and business
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based lending and leasing
|
|
|
1
|
|
|
|
5
|
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
Consumer and other
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
5
|
|
|
|
8
|
|
|
|
9
|
|
|
|
7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(18
|
)
|
|
|
(7
|
)
|
|
|
(64
|
)
|
|
|
(47
|
)
|
|
|
(27
|
)
|
Provision (credit) for loan losses
|
|
|
7
|
|
|
|
(12
|
)
|
|
|
43
|
|
|
|
40
|
|
|
|
46
|
|
Acquisitions and bulk purchases of
loans, net of adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Transfer to reserve for unfunded
credit commitments
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
74
|
|
|
$
|
85
|
|
|
$
|
111
|
|
|
$
|
132
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
35
|
|
|
$
|
50
|
|
|
$
|
65
|
|
|
$
|
126
|
|
|
$
|
166
|
|
Accruing loans past-due
90 days or more
|
|
|
8
|
|
|
|
1
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
Net charge-offs as a percentage of
average loans outstanding
|
|
|
0.21
|
%
|
|
|
0.07
|
%
|
|
|
0.66
|
%
|
|
|
0.48
|
%
|
|
|
0.25
|
%
|
47
The allowance for loan losses by loan category was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
|
|
as a %
|
|
|
|
|
|
as a %
|
|
|
|
|
|
as a %
|
|
|
|
|
|
as a %
|
|
|
|
|
|
as a %
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Allowance
|
|
|
Loans
|
|
|
Allowance
|
|
|
Loans
|
|
|
Allowance
|
|
|
Loans
|
|
|
Allowance
|
|
|
Loans
|
|
|
Allowance
|
|
|
Loans
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Single-family mortgage
|
|
$
|
9
|
|
|
|
31
|
%
|
|
$
|
8
|
|
|
|
37
|
%
|
|
$
|
7
|
|
|
|
36
|
%
|
|
$
|
7
|
|
|
|
26
|
%
|
|
$
|
8
|
|
|
|
20
|
%
|
|
|
|
|
Single-family mortgage warehouse
|
|
|
1
|
|
|
|
8
|
%
|
|
|
1
|
|
|
|
6
|
%
|
|
|
1
|
|
|
|
4
|
%
|
|
|
1
|
|
|
|
5
|
%
|
|
|
3
|
|
|
|
5
|
%
|
|
|
|
|
Single-family construction
|
|
|
9
|
|
|
|
17
|
%
|
|
|
10
|
|
|
|
13
|
%
|
|
|
6
|
|
|
|
10
|
%
|
|
|
7
|
|
|
|
10
|
%
|
|
|
6
|
|
|
|
10
|
%
|
|
|
|
|
Multifamily and senior housing
|
|
|
11
|
|
|
|
15
|
%
|
|
|
15
|
|
|
|
15
|
%
|
|
|
28
|
|
|
|
19
|
%
|
|
|
38
|
|
|
|
19
|
%
|
|
|
42
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential
|
|
|
30
|
|
|
|
71
|
%
|
|
|
34
|
|
|
|
71
|
%
|
|
|
42
|
|
|
|
69
|
%
|
|
|
53
|
|
|
|
60
|
%
|
|
|
59
|
|
|
|
54
|
%
|
|
|
|
|
Commercial real estate
|
|
|
5
|
|
|
|
8
|
%
|
|
|
8
|
|
|
|
7
|
%
|
|
|
18
|
|
|
|
11
|
%
|
|
|
18
|
|
|
|
19
|
%
|
|
|
19
|
|
|
|
25
|
%
|
|
|
|
|
Commercial and business
|
|
|
7
|
|
|
|
8
|
%
|
|
|
7
|
|
|
|
8
|
%
|
|
|
10
|
|
|
|
13
|
%
|
|
|
12
|
|
|
|
12
|
%
|
|
|
14
|
|
|
|
9
|
%
|
|
|
|
|
Energy lending
|
|
|
3
|
|
|
|
7
|
%
|
|
|
3
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based lending and leasing
|
|
|
8
|
|
|
|
4
|
%
|
|
|
9
|
|
|
|
5
|
%
|
|
|
9
|
|
|
|
5
|
%
|
|
|
23
|
|
|
|
7
|
%
|
|
|
21
|
|
|
|
9
|
%
|
|
|
|
|
Consumer and other
|
|
|
|
|
|
|
2
|
%
|
|
|
1
|
|
|
|
2
|
%
|
|
|
1
|
|
|
|
2
|
%
|
|
|
2
|
|
|
|
2
|
%
|
|
|
2
|
|
|
|
3
|
%
|
|
|
|
|
Not allocated
|
|
|
21
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74
|
|
|
|
100
|
%
|
|
$
|
85
|
|
|
|
100
|
%
|
|
$
|
111
|
|
|
|
100
|
%
|
|
$
|
132
|
|
|
|
100
|
%
|
|
$
|
139
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
Our current level of interest rate risk is primarily due to the
lending and funding activities of our financial services
segment. The following table illustrates the estimated effect on
our pre-tax income of immediate, parallel and sustained shifts
in interest rates for the next
12-months at
year-end 2005, with comparative year-end 2004 information. This
estimate considers the effects of changing prepayment speeds,
repricing characteristics and average balances over the next
12 months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Income
Before Taxes
|
|
|
|
At Year-End 2005
|
|
|
At Year-End 2004
|
|
Change in
|
|
Parent
|
|
|
Financial
|
|
|
Parent
|
|
|
Financial
|
|
Interest Rates
|
|
Company
|
|
|
Services
|
|
|
Company
|
|
|
Services
|
|
|
|
(In millions)
|
|
|
+2%
|
|
$
|
|
|
|
$
|
(31
|
)
|
|
$
|
1
|
|
|
$
|
(21
|
)
|
+1%
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(1
|
)
|
−1%
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(34
|
)
|
−2%
|
|
|
|
|
|
|
(49
|
)
|
|
|
n/a
|
|
|
|
n/a
|
|
We did not present a two percent interest rate decrease scenario
at year-end 2004 because of the then current low interest rate
environment. The analysis assumes that debt reductions from
contractual payments will be replaced with short-term variable
rate debt. However, that may not be the financing alternative we
choose to follow.
Parent company interest rate risk is related to our long-term
debt and our interest rate swaps. Because parent company debt is
primarily fixed rate, interest rate changes are not expected to
affect earnings significantly. However, interest rate changes
will affect the value of the interest rate swap agreements
(currently $50 million notional amount). We believe that
any changes in value would not be significant.
Our financial services segment is subject to interest rate risk
to the extent interest earning assets and interest bearing
liabilities repay or reprice at different times or in differing
amounts or both. Our financial services segment interest rate
sensitivity has changed from year-end 2004 due principally to
balance sheet growth in mortgage assets, primarily Option ARMs
that reset monthly to an index that lags market rate
48
movements, the purchase of which was funded with short-term
borrowings. Also contributing to the change in sensitivity is a
shorter maturity profile on our certificate of deposit portfolio.
Foreign
Currency Risk
We do not have significant exposure to foreign currency
fluctuations on our financial instruments because most of these
instruments are denominated in U.S. dollars.
Commodity
Price Risk
From time to time we use commodity derivative instruments to
mitigate our exposure to changes in product pricing and
manufacturing costs. These instruments cover a small portion of
our volume and range in duration from three months to three
years. Considering the fair value of these instruments at
year-end 2005, we believe the potential loss in fair value
resulting from a hypothetical ten percent change in the
underlying commodity prices would not be significant.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
Temple-Inland Inc. and
Subsidiaries:
|
|
|
|
|
|
|
|
53
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
Parent Company (Temple-Inland Inc.
and our manufacturing subsidiaries):
|
|
|
|
|
|
|
|
77
|
|
|
|
|
78
|
|
|
|
|
79
|
|
|
|
|
80
|
|
Financial Services:
|
|
|
|
|
|
|
|
88
|
|
|
|
|
89
|
|
|
|
|
90
|
|
|
|
|
91
|
|
49
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of Temple-Inland, is responsible for establishing
and maintaining adequate internal control over financial
reporting. Management has designed our internal control over
financial reporting to provide reasonable assurance that our
published financial statements are fairly presented, in all
material respects, in conformity with generally accepted
accounting principles.
Management is required by paragraph (c) of
Rule 13a-15
of the Securities Exchange Act of 1934, as amended, to assess
the effectiveness of our internal control over financial
reporting as of the end of each fiscal year. In making this
assessment, management used the Internal
Control Integrated Framework issued in July
1994 by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Management conducted the required assessment of the
effectiveness of our internal control over financial reporting
as of the end of our fiscal year. Based upon this assessment,
management believes that our internal control over financial
reporting is effective as of year-end 2005.
Ernst & Young LLP, the independent registered public
accounting firm that audited our financial statements included
in this
Form 10-K,
has audited managements assessment of internal control
over financial reporting. Their attestation report on that
assessment follows this report of management.
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Temple-Inland
Inc.:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting, that Temple-Inland Inc. and
subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Temple-Inland Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Temple-Inland
Inc. and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Temple-Inland Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Temple-Inland Inc. and
subsidiaries as of December 31, 2005 and January 1,
2005 and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2005 and our report
dated March 3, 2006 expressed an unqualified opinion
thereon.
Ernst & Young LLP
Austin, Texas
March 3, 2006
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Temple-Inland Inc.:
We have audited the accompanying consolidated balance sheets of
Temple-Inland Inc. and subsidiaries as of December 31, 2005
and January 1, 2005, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Temple-Inland Inc. and subsidiaries at
December 31, 2005 and January 1, 2005, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial
Statements, in 2005 the Company changed its method of accounting
for certain inventories.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Temple-Inland Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 3, 2006 expressed an unqualified
opinion thereon.
Ernst & Young LLP
Austin, Texas
March 3, 2006
52
TEMPLE-INLAND
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End 2005
|
|
|
|
Parent
|
|
|
Financial
|
|
|
|
|
|
|
Company
|
|
|
Services
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3
|
|
|
$
|
441
|
|
|
$
|
444
|
|
Trade receivables, net of
allowance for doubtful accounts of $14
|
|
|
411
|
|
|
|
|
|
|
|
411
|
|
Inventories
|
|
|
425
|
|
|
|
|
|
|
|
425
|
|
Timber and timberland
|
|
|
498
|
|
|
|
|
|
|
|
498
|
|
Loans held for sale
|
|
|
|
|
|
|
280
|
|
|
|
280
|
|
Loans, net of allowance for losses
of $74
|
|
|
|
|
|
|
9,845
|
|
|
|
9,845
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
654
|
|
|
|
654
|
|
Securities
held-to-maturity
|
|
|
|
|
|
|
5,558
|
|
|
|
5,558
|
|
Investment in Federal Home
Loan Bank stock
|
|
|
|
|
|
|
300
|
|
|
|
300
|
|
Real estate
|
|
|
|
|
|
|
322
|
|
|
|
322
|
|
Property, premises, and equipment
|
|
|
1,632
|
|
|
|
194
|
|
|
|
1,826
|
|
Goodwill
|
|
|
236
|
|
|
|
159
|
|
|
|
395
|
|
Other intangible assets
|
|
|
|
|
|
|
31
|
|
|
|
31
|
|
Prepaid expenses and other assets
|
|
|
452
|
|
|
|
247
|
|
|
|
644
|
|
Investment in financial services
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,887
|
|
|
$
|
18,031
|
|
|
$
|
21,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities
|
|
$
|
724
|
|
|
$
|
192
|
|
|
$
|
896
|
|
Long-term debt and other borrowings
|
|
|
1,498
|
|
|
|
211
|
|
|
|
1,709
|
|
Deposits
|
|
|
|
|
|
|
9,201
|
|
|
|
9,201
|
|
Federal Home Loan Bank
borrowings
|
|
|
|
|
|
|
6,892
|
|
|
|
6,892
|
|
Deferred income taxes
|
|
|
178
|
|
|
|
|
|
|
|
143
|
|
Pension liability
|
|
|
270
|
|
|
|
|
|
|
|
270
|
|
Postretirement benefits
|
|
|
137
|
|
|
|
|
|
|
|
137
|
|
Preferred stock issued by
subsidiaries
|
|
|
|
|
|
|
305
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,807
|
|
|
|
16,801
|
|
|
|
19,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 123,605,344 shares, including shares held in the
treasury
|
|
|
|
|
|
|
|
|
|
|
124
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
445
|
|
Accumulated other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
(189
|
)
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,521
|
|
Cost of shares held in the
treasury: 12,630,953 shares
|
|
|
|
|
|
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
$
|
21,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the consolidated financial statements.
53
TEMPLE-INLAND
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End 2004
|
|
|
|
Parent
|
|
|
Financial
|
|
|
|
|
|
|
Company
|
|
|
Services
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9
|
|
|
$
|
363
|
|
|
$
|
372
|
|
Trade receivables, net of
allowance for doubtful accounts of $16
|
|
|
400
|
|
|
|
|
|
|
|
400
|
|
Inventories
|
|
|
431
|
|
|
|
|
|
|
|
431
|
|
Timber and timberland
|
|
|
496
|
|
|
|
|
|
|
|
496
|
|
Loans held for sale
|
|
|
|
|
|
|
510
|
|
|
|
510
|
|
Loans, net of allowance for losses
of $85
|
|
|
|
|
|
|
9,618
|
|
|
|
9,618
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
841
|
|
|
|
841
|
|
Securities
held-to-maturity
|
|
|
|
|
|
|
3,864
|
|
|
|
3,864
|
|
Investment in Federal Home
Loan Bank Stock
|
|
|
|
|
|
|
277
|
|
|
|
277
|
|
Real estate
|
|
|
|
|
|
|
307
|
|
|
|
307
|
|
Property, premises, and equipment
|
|
|
1,738
|
|
|
|
167
|
|
|
|
1,905
|
|
Goodwill
|
|
|
236
|
|
|
|
146
|
|
|
|
382
|
|
Other intangible assets
|
|
|
|
|
|
|
26
|
|
|
|
26
|
|
Prepaid expenses and other assets
|
|
|
469
|
|
|
|
321
|
|
|
|
715
|
|
Investment in financial services
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,900
|
|
|
$
|
16,440
|
|
|
$
|
20,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses
and other liabilities
|
|
$
|
740
|
|
|
$
|
340
|
|
|
$
|
1,052
|
|
Long-term debt and other borrowings
|
|
|
1,485
|
|
|
|
206
|
|
|
|
1,691
|
|
Deposits
|
|
|
|
|
|
|
8,964
|
|
|
|
8,964
|
|
Federal Home Loan Bank
borrowings
|
|
|
|
|
|
|
4,717
|
|
|
|
4,717
|
|
Securities sold under repurchase
agreements
|
|
|
|
|
|
|
787
|
|
|
|
787
|
|
Deferred income taxes
|
|
|
136
|
|
|
|
|
|
|
|
89
|
|
Pension liability
|
|
|
289
|
|
|
|
|
|
|
|
289
|
|
Postretirement benefits
|
|
|
143
|
|
|
|
|
|
|
|
143
|
|
Preferred stock issued by
subsidiaries
|
|
|
|
|
|
|
305
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,793
|
|
|
|
15,319
|
|
|
|
18,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 122,779,104 shares, including shares held in the
treasury
|
|
|
|
|
|
|
|
|
|
|
123
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
350
|
|
Accumulated other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
(192
|
)
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
2,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
Cost of shares held in the
treasury: 10,592,914 shares
|
|
|
|
|
|
|
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
$
|
20,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, additional paid-in capital and common shares
issued and held in treasury have been adjusted to reflect our
two-for-one
stock split on April 1, 2005.
Please read the notes to the consolidated financial statements.
54
TEMPLE-INLAND
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per
share)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
3,850
|
|
|
$
|
3,707
|
|
|
$
|
3,501
|
|
Financial services
|
|
|
1,038
|
|
|
|
1,043
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,888
|
|
|
|
4,750
|
|
|
|
4,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
(3,694
|
)
|
|
|
(3,531
|
)
|
|
|
(3,629
|
)
|
Financial services
|
|
|
(823
|
)
|
|
|
(870
|
)
|
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,517
|
)
|
|
|
(4,401
|
)
|
|
|
(4,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
371
|
|
|
|
349
|
|
|
|
53
|
|
Parent company interest
|
|
|
(109
|
)
|
|
|
(125
|
)
|
|
|
(135
|
)
|
Other non-operating income
(expense)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES
|
|
|
262
|
|
|
|
224
|
|
|
|
(90
|
)
|
Income tax (expense) benefit
|
|
|
(86
|
)
|
|
|
(67
|
)
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING
OPERATIONS
|
|
|
176
|
|
|
|
157
|
|
|
|
102
|
|
Discontinued operations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE ACCOUNTING
CHANGE
|
|
|
176
|
|
|
|
160
|
|
|
|
102
|
|
Effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
112.6
|
|
|
|
111.4
|
|
|
|
108.4
|
|
Diluted
|
|
|
114.5
|
|
|
|
112.4
|
|
|
|
108.4
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.56
|
|
|
$
|
1.40
|
|
|
$
|
0.94
|
|
Discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
Effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.56
|
|
|
$
|
1.43
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.54
|
|
|
$
|
1.39
|
|
|
$
|
0.94
|
|
Discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
Effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.54
|
|
|
$
|
1.42
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and earnings per
share data have been adjusted to reflect our
two-for-one
stock split on April 1, 2005.
Please read the notes to the consolidated financial statements.
55
TEMPLE-INLAND
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
CASH PROVIDED BY (USED FOR)
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
249
|
|
|
|
254
|
|
|
|
270
|
|
Net, amortization and accretion of
financial instruments, discounts and premiums
|
|
|
18
|
|
|
|
58
|
|
|
|
82
|
|
Provision (credit) for credit losses
|
|
|
10
|
|
|
|
(12
|
)
|
|
|
43
|
|
Deferred taxes (benefit)
|
|
|
51
|
|
|
|
38
|
|
|
|
(195
|
)
|
Other non-cash charges and credits,
net
|
|
|
50
|
|
|
|
26
|
|
|
|
71
|
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Other
|
|
|
19
|
|
|
|
73
|
|
|
|
67
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(16
|
)
|
|
|
(45
|
)
|
|
|
(8
|
)
|
Inventories
|
|
|
|
|
|
|
(52
|
)
|
|
|
47
|
|
Prepaid expenses and other
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Accounts payable and accrued
expenses
|
|
|
(9
|
)
|
|
|
|
|
|
|
30
|
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations
|
|
|
(2,379
|
)
|
|
|
(6,898
|
)
|
|
|
(12,955
|
)
|
Sales
|
|
|
2,595
|
|
|
|
6,920
|
|
|
|
13,447
|
|
Collections on loans serviced for
others, net
|
|
|
(122
|
)
|
|
|
(32
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644
|
|
|
|
484
|
|
|
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR)
INVESTING
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(265
|
)
|
|
|
(264
|
)
|
|
|
(170
|
)
|
Sale of non-strategic assets and
operations
|
|
|
45
|
|
|
|
66
|
|
|
|
69
|
|
Securities
available-for-sale,
net
|
|
|
180
|
|
|
|
285
|
|
|
|
576
|
|
Securities
held-to-maturity,
net
|
|
|
(1,627
|
)
|
|
|
817
|
|
|
|
(1,164
|
)
|
Loans originated or acquired, net
of principal collected
|
|
|
(310
|
)
|
|
|
(644
|
)
|
|
|
453
|
|
Proceeds from sale of loans and
mortgage servicing rights
|
|
|
47
|
|
|
|
51
|
|
|
|
67
|
|
Branch acquisitions
|
|
|
|
|
|
|
148
|
|
|
|
|
|
Acquisitions, net of cash acquired,
and joint ventures
|
|
|
(26
|
)
|
|
|
(20
|
)
|
|
|
(10
|
)
|
Other
|
|
|
(6
|
)
|
|
|
45
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,962
|
)
|
|
|
484
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR)
FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to debt
|
|
|
530
|
|
|
|
375
|
|
|
|
978
|
|
Payments of debt
|
|
|
(1,264
|
)
|
|
|
(999
|
)
|
|
|
(1,240
|
)
|
Borrowings under accounts
receivable securitization facility, net
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
39
|
|
Payment of other long-term
liabilities
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
Deposits, net
|
|
|
238
|
|
|
|
113
|
|
|
|
(500
|
)
|
Repurchase agreements and
short-term borrowings, net
|
|
|
2,126
|
|
|
|
(308
|
)
|
|
|
(2
|
)
|
Cash dividends paid to shareholders
|
|
|
(102
|
)
|
|
|
(136
|
)
|
|
|
(73
|
)
|
Repurchase of common stock
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
48
|
|
|
|
62
|
|
|
|
13
|
|
Settlement of equity purchase
contracts
|
|
|
345
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(21
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,388
|
|
|
|
(971
|
)
|
|
|
(791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
principally operating activities
|
|
|
2
|
|
|
|
(24
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
72
|
|
|
|
(27
|
)
|
|
|
(56
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
372
|
|
|
|
399
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
444
|
|
|
$
|
372
|
|
|
$
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the consolidated financial statements.
56
TEMPLE-INLAND
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Income
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Balance at beginning of year
2003 as originally reported
|
|
$
|
61
|
|
|
$
|
368
|
|
|
$
|
(136
|
)
|
|
$
|
2,000
|
|
|
$
|
(344
|
)
|
|
$
|
1,949
|
|
Effect of
two-for-one
stock split
|
|
|
62
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of change in method of
accounting for inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
2003, as adjusted
|
|
|
123
|
|
|
|
306
|
|
|
|
(136
|
)
|
|
|
2,015
|
|
|
|
(344
|
)
|
|
|
1,964
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
101
|
|
Unrealized gains on securities
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the
year 2003, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common
stock $0.68 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
(73
|
)
|
Share-based
compensation 1,053,022 shares
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
30
|
|
Exercise of stock
options 528,744 shares
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
13
|
|
Reclassification of deferred
compensation
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2003, as
adjusted
|
|
$
|
123
|
|
|
$
|
315
|
|
|
$
|
(185
|
)
|
|
$
|
2,043
|
|
|
$
|
(308
|
)
|
|
$
|
1,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
160
|
|
Unrealized gains on securities
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the
year 2004, as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common
stock $1.22 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136
|
)
|
|
|
|
|
|
|
(136
|
)
|
Share-based
compensation 632,338 shares
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
35
|
|
Exercise of stock
options 2,359,568 shares
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
62
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2004, as
adjusted
|
|
$
|
123
|
|
|
$
|
350
|
|
|
$
|
(192
|
)
|
|
$
|
2,067
|
|
|
$
|
(241
|
)
|
|
$
|
2,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
Unrealized gains on securities
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the
year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common
stock $0.90 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
(102
|
)
|
Share-based
compensation 578,774 shares
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
32
|
|
Exercise of stock
options 1,833,688 net shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
48
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Settlement of equity purchase
contracts 10,875,739 shares
|
|
|
1
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
345
|
|
Repurchase of common
stock 14,500,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(536
|
)
|
|
|
(536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end
2005
|
|
$
|
124
|
|
|
$
|
445
|
|
|
$
|
(189
|
)
|
|
$
|
2,141
|
|
|
$
|
(441
|
)
|
|
$
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the consolidated financial statements.
57
TEMPLE-INLAND
INC. AND SUBSIDIARIES
Note 1 Summary
of Significant Accounting Policies
Basis
of Presentation
Our consolidated financial statements are our primary financial
statements and include the accounts of Temple-Inland, our
manufacturing and financial services subsidiaries and beginning
in 2004, variable interest entities of which we are the primary
beneficiary. We also present, as an integral part of the
consolidated financial statements, summarized financial
statements of Temple-Inland and our manufacturing subsidiaries,
which we refer to as the parent company summarized financial
statements, and summarized financial statements of our financial
services subsidiaries as well as the significant accounting
policies unique to each. We do so to provide a clearer
presentation of our different businesses and because almost all
of the net assets invested in financial services are subject to
regulatory rules and restrictions including restrictions on the
payment of dividends to the parent company. As a result, all
consolidated assets are not available to satisfy all
consolidated liabilities.
You should read our parent company summarized financial
statements and financial services summarized financial
statements along with these consolidated financial statements.
We prepare our financial statements in accordance with generally
accepted accounting principles, which require us to make
estimates and assumptions about future events. Actual results
can, and probably will, differ from those we currently estimate.
We eliminate all material intercompany accounts and
transactions. We account for our investment in other entities in
which we have significant influence over operations and
financial policies using the equity method.
Our fiscal year ends on the Saturday closest to
December 31, which from time to time means that a fiscal
year will include 53 weeks instead of 52 weeks. Fiscal
year 2005, which ended on December 31, 2005, had
52 weeks. Fiscal year 2004, which ended on January 1,
2005, had 52 weeks. Fiscal year 2003, which ended on
January 3, 2004, had 53 weeks. The additional week in
2003 did not have a significant effect on earnings or financial
position. For regulatory reasons, our financial services
subsidiaries fiscal years end on December 31.
We translate the balance sheets of our international operations
where the functional currency is other than the U.S. dollar
into U.S. dollars at year-end exchange rates. We include
adjustments resulting from financial statement translation in
other comprehensive income. For our other international
operations where the functional currency is the
U.S. dollar, we translate inventories and property, plant
and equipment values at the historical rate of exchange, while
we translate other assets and liabilities at year-end exchange
rates. We include translation adjustments for these operations,
which are not significant, in earnings. We translate income and
expense items into U.S. dollars at average rates of
exchange prevailing during the year. We include gains and losses
resulting from foreign currency transactions, which are not
significant, in earnings.
We have reclassified some prior year amounts to conform to this
years classifications.
Cash
and Cash Equivalents
Cash and cash equivalents include cash and other short-term
instruments with original maturities of three months or less.
Capitalized
Software
We capitalize purchased software costs as well as the direct
internal and external costs associated with software we develop
for our own use. We amortize these capitalized costs using the
straight-line method over estimated useful lives ranging from
three to seven years. The carrying value of capitalized software
was $49 million at year-end 2005 and $54 million at
year-end 2004 and is included in other assets. The amortization
of these capitalized costs was $21 million in 2005,
$23 million in 2004, and $25 million in 2003 and is
included in cost of sales, general and administrative expense,
and noninterest expense.
Derivatives
We use, from time to time and then only to a limited degree,
derivative instruments to mitigate our exposure to risks
associated with changes in product pricing, manufacturing costs,
and interest rates related to
58
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
borrowings and investments in securities, as well as mortgage
origination activities. We do not enter into derivatives for
trading purposes. We defer and include in other comprehensive
income changes in the fair value of derivative instruments
designated as cash flow hedges until the hedged transactions are
completed. At that time, we recognize these deferred gains or
losses in income. We recognize the ineffective portion of these
hedges, which is not significant, in income. We recognize
changes in the fair value of derivative instruments designated
as fair value hedges in income, as well as changes in the fair
value of the hedged item. We recognize changes in the fair value
of derivative instruments that are not designated as hedges in
other non-operating income (expense). We include the carrying
value of derivative instruments in other assets and other
liabilities.
Derivative financial instruments are designated and documented
as hedges at the inception of the contract and on an ongoing
basis. We assess and measure the effectiveness of derivative
instruments, using correlation ratios, at inception and on an
ongoing basis. If a derivative instrument ceases to be highly
effective as a hedge, we stop using hedge accounting. If the
derivative instrument is terminated or settled prior to the
expected maturity or realization of the underlying item, we stop
using hedge accounting.
Fair
Value of Financial Instruments
In the absence of quoted market prices, we estimate the fair
value of financial instruments. Our estimates are affected by
the assumptions we make, including the discount rate and
estimates of the amount and timing of future cash flows. Where
these fair values approximate carrying value, no separate
disclosure of fair value is shown.
Goodwill
and Other Intangible Assets
We do not amortize goodwill and other indefinite lived
intangible assets. Instead, we measure these assets for
impairment based on estimated fair values at least annually or
more frequently if impairment indicators exist. We perform the
annual impairment measurement as of the beginning of the fourth
quarter of each year. Intangible assets with finite useful lives
are amortized over their estimated lives.
Impairment
of Long-Lived Assets
We review long-lived assets held for use for impairment when
events or circumstances indicate that their carrying value may
not be recoverable. Impairment exists if the carrying amount of
the long-lived asset is not recoverable from the undiscounted
cash flows expected from its use and eventual disposition. We
determine the amount of the impairment loss by comparing the
carrying value of the long-lived asset to its estimated fair
value. We carry assets held for sale at the lower of carrying
value or estimated fair value less costs to sell. In the absence
of quoted market prices, we determine fair value generally based
on the present value of future cash flows expected from the use
and eventual disposition of the long-lived asset.
Income
Taxes
We provide deferred income taxes using current tax rates for
temporary differences between the financial accounting carrying
value of assets and liabilities and their tax accounting
carrying values.
Share-Based
Compensation
We expense the fair value of shares awarded under our restricted
stock and performance and phantom stock plans over the vesting
period. We determine fair value based on the market value of our
common stock on the date of grant. Awards based on the market
value of our common stock but settled in cash are included in
other liabilities and are periodically marked to market with a
corresponding offset to share-based compensation expense.
Beginning January 2003, we voluntarily adopted the prospective
transition method of accounting for share-based compensation
contained in SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment
of FASB Statement No. 123. The principal effect of
adopting the prospective transition method is that the fair
value of stock options granted in 2003 and thereafter is charged
to expense
59
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the option-vesting period. As a result of the adoption of
this prospective transition method, 2003 net income was reduced
by $1 million or less than $0.02 per share. We include
share-based compensation expense in general and administrative
expense for our manufacturing segments and noninterest expense
for our financial services segments.
Prior to 2003, we used the intrinsic value method in accounting
for stock options. As a result, no share-based compensation
expense related to stock options is reflected in prior
years net income, as all stock options granted had an
exercise price equal to the market value of the underlying
common stock on the date of grant. Therefore, the cost related
to share-based compensation recognized in net income for 2005,
2004, and 2003 is less than would have been recognized if the
fair value method had been applied to all stock options granted.
The following table illustrates the effect on net income and
earnings per share as if the fair value method had been applied
to all stock options granted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per
share)
|
|
|
Net income, as reported
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
Add: Share-based compensation
expense, net of related tax effects, included in the
determination of reported net income*
|
|
|
19
|
|
|
|
20
|
|
|
|
21
|
|
Deduct: Total share-based
compensation expense, net of related tax effects, determined
under the fair value based method for all awards*
|
|
|
(23
|
)
|
|
|
(27
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
172
|
|
|
$
|
153
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, adjusted to
reflect our
two-for-one
stock split on April 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$
|
1.56
|
|
|
$
|
1.43
|
|
|
$
|
0.93
|
|
Basic, pro forma
|
|
$
|
1.53
|
|
|
$
|
1.37
|
|
|
$
|
0.84
|
|
Diluted, as reported
|
|
$
|
1.54
|
|
|
$
|
1.42
|
|
|
$
|
0.93
|
|
Diluted, pro forma
|
|
$
|
1.50
|
|
|
$
|
1.36
|
|
|
$
|
0.84
|
|
|
|
|
* |
|
Includes treasury stock contributions to fulfill our obligation
for matching contributions to our 401(k) plans of
$3 million in 2005 and $12 million in 2004, net of
related tax effects. |
We estimated the fair value of the options granted in 2005,
2004, and 2003 using the Black-Scholes-Merton option-pricing
model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Expected dividend yield
|
|
|
2.3
|
%
|
|
|
2.9
|
%
|
|
|
2.5
|
%
|
Expected stock price volatility
|
|
|
28.2
|
%
|
|
|
28.8
|
%
|
|
|
29.3
|
%
|
Risk-free interest rate
|
|
|
4.2
|
%
|
|
|
4.4
|
%
|
|
|
3.9
|
%
|
Expected life of options
|
|
|
8.0 years
|
|
|
|
8.0 years
|
|
|
|
8.0 years
|
|
Weighted average estimated fair
value of options granted
|
|
$
|
11.15
|
|
|
$
|
8.34
|
|
|
$
|
6.20
|
|
Please read Pending Accounting Pronouncements for
further information about accounting for share-based
compensation beginning in 2006.
Asset
Retirement Obligations and Environmental
Obligations
Beginning January 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations. This
statement requires the recognition of legal obligations
associated with the retirement of long-lived assets when the
obligation is incurred. At that time, we record the estimated
present value of the retirement obligation and increase the
carrying value of the long-lived asset by a like amount. Over
time, we accrete or increase the liability to its settlement
value and we depreciate or decrease the asset to zero. When we
settle the obligation we recognize a gain or loss for any
difference between the settlement amount and the then recorded
obligation.
60
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effect of adopting this statement was to increase other
long-term liabilities by $4 million for the estimated
present value of the retirement obligation, increase property,
plant and equipment by $3 million for the unamortized
present value of the retirement obligation, and to reduce
2003 net income by $1 million or less than
$0.01 per share for the cumulative effect of adoption. At
year-end 2005, we adopted FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations an
interpretation of FASB Statement No. 143. This
interpretation clarified that the term conditional asset
retirement obligation refers to a legal obligation to
perform an asset retirement obligation in which the timing
and/or
method of settlement are conditional on future events that may
or may not be within our control. As a result, even though the
timing
and/or
method of settlement may be uncertain, the retirement obligation
should be recognized if it can be reasonably estimated. The
effect on earnings and financial position of adopting this
interpretation was not significant.
Our asset retirement obligations consist principally of costs to
remediate landfills we operate and of costs to reforest leased
timberlands. The present value of these asset retirement
obligations was $15 million at year-end 2005 and
$12 million at year-end 2004 and is included in other
long-term liabilities. In 2005, we revised our estimate of cost
to reforest leased timberlands and as a result increased the
present value of the retirement obligation by $3 million
with a corresponding increase in timber and timberlands.
Accretion expense in 2005 was not significant.
Many of our manufacturing facilities contain asbestos and lead
paint. We are currently not required to remove any of these
materials, but we could be required to do so in the future if we
were to demolish or undertake major renovations of these
facilities. At this time, we have no such plans, which makes it
impractical to estimate the fair value of any related asset
retirement obligations. Accordingly, a liability has not been
recognized for these asset retirement obligations.
In addition, we record environmental remediation liabilities on
an undiscounted basis when environmental assessments or
remediation are probable and we can reasonably estimate the
cost. We adjust these liabilities as further information is
obtained or circumstances change. Accrued remediation
liabilities were $5 million at year-end 2005 and
$12 million at year-end 2004 and are included in accrued
liabilities, and another $3 million at year-end 2005 are
included in liabilities of discontinued operations.
Guarantees
Beginning January 2003, we adopted FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements, Including Indirect Guarantees of Indebtedness of
Others an Interpretation of FASB Statements No. 5, 57 and
107 and Rescission of FASB Interpretation No. 34. This
interpretation established standards for the recognition of a
liability for the fair value of guarantors obligations and
the disclosure of additional information about guarantees. The
effect on earnings and financial position of adopting this
interpretation was not significant.
Liabilities
and Equity Instruments
In third quarter 2003, we adopted SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
statement requires that certain financial instruments that
embody obligations of the issuer and have characteristics of
both liabilities and equity be classified and measured as
liabilities. The effect on earnings and financial position of
adopting this statement was not significant. Provisions of this
statement that address the accounting for certain mandatorily
redeemable non-controlling interests have been deferred
indefinitely pending further FASB action. The deferred
provisions would principally affect the way we account for
minority interests in partnerships we control; the
classification of such interests as liabilities, which we
presently do; and accounting for changes in the fair value of
the minority interest by a charge to earnings, which we
currently do not do. While the effect of the deferred provisions
would be dependent on the changes in the fair value of the
partnerships net assets, it is possible that the future
effects could be significant. Because the minority interests are
not readily marketable, it is difficult to determine their fair
value. However, we believe the difference between the carrying
value of the minority interests and their estimated fair value
was not significant at year-end 2005 or 2004.
61
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Variable
Interest Entities
In first quarter 2004, we adopted FASB Interpretation
No. 46 (revised December 2003), Consolidation of
Variable Interest Entities an Interpretation of ARB
No. 51. This interpretation provides guidance for
determining whether an entity is a variable interest entity and
which beneficiary of the variable interest entity, if any,
should consolidate the variable interest entity. The effect on
earnings or financial position of adopting this interpretation
was not significant.
Change
in Method of Accounting For Certain Inventories
In first quarter 2005, we changed our method of accounting for
our corrugated packaging inventories from the LIFO method to the
average cost method, which approximates FIFO. As a result of our
ongoing efforts to reduce costs permanently and increase asset
utilization, we believe the average cost method is preferable
because it will: (i) increase the transparency of our
financial reporting through a more balanced income statement and
balance sheet presentation; (ii) result in the valuation of
all of our inventories at current cost in our financial
statements; and (iii) conform all of our inventories to a
single method of accounting.
As required by generally accepted accounting principles, we have
adjusted the balance sheet to reflect the retrospective
application of the average cost method as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
Deferred Income Taxes
|
|
|
Retained Earnings
|
|
|
|
As Originally
|
|
|
As
|
|
|
As Originally
|
|
|
As
|
|
|
As Originally
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjusted
|
|
|
Reported
|
|
|
Adjusted
|
|
|
Reported
|
|
|
Adjusted
|
|
|
|
(In millions)
|
|
|
Year-end 2004
|
|
$
|
406
|
|
|
$
|
431
|
|
|
$
|
79
|
|
|
$
|
89
|
|
|
$
|
2,052
|
|
|
$
|
2,067
|
|
Year-end 2003
|
|
$
|
330
|
|
|
$
|
366
|
|
|
$
|
7
|
|
|
$
|
23
|
|
|
$
|
2,023
|
|
|
$
|
2,043
|
|
As required by generally accepted accounting principles, we have
also adjusted prior years segment operating results and
income statements to reflect the retrospective application of
the average cost method as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging
|
|
|
Income From
|
|
|
|
|
|
|
Segment Operating
Income
|
|
|
Continuing Operations
|
|
|
Per Diluted Share
|
|
|
|
As Originally
|
|
|
As
|
|
|
As Originally
|
|
|
As
|
|
|
As
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjusted
|
|
|
Reported
|
|
|
Adjusted
|
|
|
Reported
|
|
|
Adjusted
|
|
|
|
(In millions, except per
share)
|
|
|
Year 2004
|
|
$
|
105
|
|
|
$
|
96
|
|
|
$
|
162
|
|
|
$
|
157
|
|
|
$
|
1.44
|
|
|
$
|
1.39
|
|
Year 2003
|
|
|
11
|
|
|
|
18
|
|
|
|
97
|
|
|
|
102
|
|
|
|
0.89
|
|
|
|
0.94
|
|
Pending
Accounting Pronouncements
The Financial Accounting Standards Board has issued
SFAS No. 123 (revised December 2004), Share-Based
Payment, which requires that the cost of all employee stock
options, as well as other equity-based compensation
arrangements, be reflected in the financial statements based on
their estimated fair value; SFAS No. 151, Inventory
Cost, an amendment of ARB No. 43, Chapter 4, which
clarifies accounting for abnormal inventory costs and allocation
of fixed production overhead costs; and SFAS No. 154,
Accounting Changes and Error Corrections, which provides
guidance on accounting and reporting of changes in accounting
principles and corrections of errors. These statements will be
effective for us beginning first quarter 2006.
We do not expect that the adoption of these statements will have
a significant effect on our earnings or financial position. The
effects of SFAS No. 123R will be significantly
mitigated because we already charge to expense, generally over
the vesting period, the fair value of employee stock options
granted in 2003, 2004, and 2005. Also we intend to adopt this
statement using the modified prospective application method,
which we will apply only to new awards, modification of existing
awards, or unvested awards. However, upon adoption, we will be
required to charge to expense the cost of new or modified awards
over a period generally shorter than we have been using because
many of our awards provide for accelerated or continued vesting
62
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
when the employee is eligible for retirement. In addition, this
statement requires that any tax benefits realized as a result of
the exercise of employee stock options be reflected as a
financing cash flow instead of an operating cash flow. We have
classified as an operating cash flow $7 million in 2005 and
$5 million in 2004 of tax benefits attributable to the
exercise of employee stock options.
We have adjusted the financial statements and related notes and
share and per share information for all years presented to
reflect the
two-for-one
stock split on April 1, 2005.
In May 2005, we completed our obligations under the equity
purchase contracts we issued in conjunction with the May 2002
offering of Upper
DECSSM
units. As a result, we issued 10.9 million shares of common
stock based on an applicable price of $31.72 per share
(0.8 million shares in February 2005 and 10.1 millions
shares in May 2005) and received $345 million in cash.
In 2005, we repurchased 14.5 million shares of common stock
for $536 million, including $9 million included in
other current liabilities that we settled after year end. We
repurchased 2.5 million shares under an August 5, 2005
Board of Directors authorization to repurchase up to
6 million shares and we repurchased 12 million shares
under a February 4, 2005 Board of Directors
authorization to repurchase up to 12 million shares. The
repurchased shares were added to treasury stock at an average
cost of $36.93 per share.
Pursuant to the Shareholder Rights Plan, each share of common
stock outstanding is coupled with one-quarter of a preferred
stock purchase right (Right). Each Right entitles our
shareholders to purchase, under certain conditions, one
one-hundredth of a share of newly issued Series A Junior
Participating Preferred Stock at an exercise price of $200.
Rights will be exercisable only if someone acquires beneficial
ownership of 20 percent or more of our common shares or
commences a tender or exchange offer, upon consummation of which
they would beneficially own 25 percent or more of our
common shares. We will generally be entitled to redeem the
Rights at $0.01 per Right at any time until the
10th business day following public announcement that a
20 percent position has been acquired. The Rights will
expire on February 20, 2009.
Please read Note 6 for information about additional shares
of common stock that could be issued under terms of our
share-based compensation programs.
|
|
Note 3
|
Fair
Value of Financial Instruments
|
Carrying value and the estimated fair value of our financial
instruments are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In millions)
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
9,845
|
|
|
$
|
9,804
|
|
|
$
|
9,618
|
|
|
$
|
9,629
|
|
Securities
held-to-maturity
|
|
|
5,558
|
|
|
|
5,512
|
|
|
|
3,864
|
|
|
|
3,865
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
9,201
|
|
|
$
|
9,172
|
|
|
$
|
8,964
|
|
|
$
|
8,962
|
|
FHLB borrowings
|
|
|
6,892
|
|
|
|
6,856
|
|
|
|
4,717
|
|
|
|
4,719
|
|
Fixed-rate long-term debt
|
|
|
1,484
|
|
|
|
1,534
|
|
|
|
1,437
|
|
|
|
1,646
|
|
Other off-balance sheet
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
Differences between carrying value and fair value are primarily
due to instruments that provide fixed interest rates or contain
fixed interest rate elements. Inherently, such instruments are
subject to fluctuations in fair value due to subsequent
movements in interest rates. The fair value of securities
held-to-maturity
and off-balance-sheet instruments are based on quoted market
prices where available or on financial models using
63
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market-based inputs. We value other financial instruments using
expected cash flows, discounted using rates that represent
current rates for similar instruments. We excluded all other
financial instruments from the table because they are either
carried at fair value or have fair values that approximate their
carrying amount due to their short-term nature.
At year-end 2005, we had guaranteed joint venture obligations
principally related to fixed-rate debt instruments totaling
$104 million. The estimated fair value of these guarantees
is not significant.
Income tax (expense) benefit on income from continuing
operations consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(18
|
)
|
|
$
|
(6
|
)
|
|
$
|
46
|
|
State and other
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
(15
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(58
|
)
|
|
|
(51
|
)
|
|
|
150
|
|
State and other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
(52
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
$
|
(86
|
)
|
|
$
|
(67
|
)
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (paid) refunded, net
|
|
$
|
(44
|
)
|
|
$
|
(1
|
)
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, we recognized a one-time tax benefit of
$16 million as a result of the sale of our Pembroke, Canada
MDF facility. In 2004, the Internal Revenue Service concluded
its examination of our tax returns for the years 1997 through
2000, and we resolved several state income tax examinations. In
2003, the Internal Revenue Service concluded its examination of
our tax returns through 1996, including matters related to net
operating losses and minimum tax credit carryforwards, which
resulted from certain deductions following the 1988 acquisition
of Guaranty and for which no financial accounting benefit had
been recognized. Also in 2003, we resolved state tax refund
claims for the years 1991 through 1994. As a result, valuation
allowances and tax accruals previously provided for these
matters were no longer required. In fourth quarter 2004, we
recognized a one-time benefit of $20 million, and in second
quarter 2003, we recognized a one-time benefit of
$165 million. Of these one-time benefits, cash refunds of
previously paid taxes plus related interest were
$20 million in 2004 and $26 million in 2003. The
remainder was a non-cash benefit.
The Internal Revenue Service has completed the examination of
our tax returns for the years 2001 through 2003 and is currently
processing our case. In connection with this examination, the
IRS proposed an after tax adjustment of $3 million related
to the disallowance of the interest deductions we took in those
years for interest paid on certain tax exempt bonds. We continue
to defend the tax-exempt status of these bonds. The final result
of the 2001 to 2003 examination, which is subject to Joint
Committee on Taxation review, is not expected to have a
significant impact on our financial position or results of
operations or cash flow.
64
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Earnings from continuing operations consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Earnings (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
255
|
|
|
$
|
215
|
|
|
$
|
(88
|
)
|
Non-U.S.
|
|
|
7
|
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262
|
|
|
$
|
224
|
|
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the effective
income tax rate on continuing operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Federal statutory rate
|
|
|
(35
|
)%
|
|
|
(35
|
)%
|
|
|
35
|
%
|
State, net of federal benefit
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Other
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)%
|
|
|
(39
|
)%
|
|
|
30
|
%
|
Sale of foreign subsidiary
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Resolution and settlement of prior
year tax examinations
|
|
|
|
|
|
|
8
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate (expense) benefit
|
|
|
(33
|
)%
|
|
|
(31
|
)%
|
|
|
200
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of deferred taxes are:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Deferred Tax
Liabilities:
|
|
|
|
|
|
|
|
|
Property, equipment and intangible
assets
|
|
$
|
(331
|
)
|
|
$
|
(337
|
)
|
Timber and timberland
|
|
|
(54
|
)
|
|
|
(32
|
)
|
Asset leasing
|
|
|
(16
|
)
|
|
|
(18
|
)
|
U.S. taxes on unremitted
foreign earnings
|
|
|
(11
|
)
|
|
|
(10
|
)
|
Other
|
|
|
(42
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(454
|
)
|
|
|
(435
|
)
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Alternative minimum tax credits
|
|
|
18
|
|
|
|
46
|
|
Foreign and state net operating
loss carryforwards
|
|
|
28
|
|
|
|
43
|
|
Pension and postretirement benefits
|
|
|
154
|
|
|
|
158
|
|
Employee benefits
|
|
|
40
|
|
|
|
33
|
|
Allowance for credit losses and bad
debts
|
|
|
33
|
|
|
|
37
|
|
Accruals not deductible until paid
|
|
|
40
|
|
|
|
44
|
|
Other
|
|
|
29
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
342
|
|
|
|
392
|
|
Less valuation allowance
|
|
|
(31
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
311
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax
Liability
|
|
$
|
(143
|
)
|
|
$
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
Our foreign and state net operating loss carryforwards will
expire from 2006 through 2025. A valuation allowance is provided
for these foreign and state net operating loss carryforwards.
The decrease in the valuation allowance in 2005 is principally
due to the sale of our Pembroke, Canada MDF facility. Our
65
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
alternative minimum tax credits may be carried forward
indefinitely. We have not provided a deferred tax liability on
$31 million of
pre-1988 tax
bad debt reserves.
The exercise of stock options by our employees generated a tax
benefit for us of $7 million in 2005, $5 million in
2004, and less than $1 million in 2003. This tax benefit
was added to additional paid-in capital and reduced our current
taxes payable.
|
|
Note 5
|
Employee
Benefit Plans
|
The annual expense of our employee benefit plans consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Defined contribution
|
|
$
|
22
|
|
|
$
|
26
|
|
|
$
|
28
|
|
Defined benefit
|
|
|
50
|
|
|
|
50
|
|
|
|
43
|
|
Postretirement medical
|
|
|
8
|
|
|
|
10
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80
|
|
|
$
|
86
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our defined contribution plans include 401(k) matching plans
that covers substantially all employees, which are fully funded;
a retirement plan that covers substantially all financial
services employees, which is fully funded; and a supplemental
plan for key employees, which is unfunded.
Our defined benefit plans cover salaried and hourly employees
within the parent company and its manufacturing subsidiaries.
Salaried and nonunion hourly employee benefits are based on
compensation and years of service, while union hourly plans are
based on negotiated benefits and years of service. Our policy is
to fund these plans on an actuarial basis to accumulate assets
sufficient to meet the benefits to be paid in accordance with
ERISA requirements, though from time to time we may make
voluntary, discretionary contributions. We also provide a
supplemental defined benefit plan for key employees that
provides benefits based on compensation and years of service.
This supplemental defined benefit plan is unfunded.
Our postretirement medical plan provides medical benefits to
eligible salaried and hourly employees who begin drawing
retirement benefits immediately after termination of employment.
The postretirement medical plan is unfunded. The Medicare
Prescription Drug, Improvement and Modernization Act of 2003 was
enacted in December 2003. This act expands Medicare to include,
for the first time, coverage for prescription drugs. Our
postretirement benefit plans provide for medical coverage,
including a prescription drug subsidy, for certain participants.
The effect of the act was to reduce the 2004 liability for
future postretirement medical costs by $9 million and our
postretirement medical costs by $2 million.
Additional information about our defined benefit and
postretirement medical plans follow.
Obligations
and Funded Status
We measure the defined benefit and postretirement medical plans
benefit obligation, value the plan assets, and determine funded
status and annual expense as of September 30 of each year.
The projected benefit obligation represents the present value of
benefits earned adjusted for projected future compensation
increases to the date of retirement. The fair value of plan
assets represents the fair value, generally market value at
September 30, of all plan assets. The funded status
represents the difference between the projected benefit
66
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligation and the fair value of the plan assets. A summary of
the changes in the projected benefit obligation, plan assets and
funded status follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Projected benefit obligation at
beginning of year
|
|
$
|
(1,237
|
)
|
|
$
|
(1,143
|
)
|
|
$
|
(146
|
)
|
|
$
|
(152
|
)
|
Service cost
|
|
|
(25
|
)
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Interest cost
|
|
|
(72
|
)
|
|
|
(71
|
)
|
|
|
(8
|
)
|
|
|
(9
|
)
|
Plan amendments
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Medicare act
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Actuarial gain (loss)
|
|
|
(79
|
)
|
|
|
(58
|
)
|
|
|
(11
|
)
|
|
|
(4
|
)
|
Benefits paid by the plan
|
|
|
63
|
|
|
|
59
|
|
|
|
14
|
|
|
|
17
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end
of year
|
|
|
(1,351
|
)
|
|
|
(1,237
|
)
|
|
|
(155
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
|
882
|
|
|
|
847
|
|
|
|
|
|
|
|
|
|
Actual return
|
|
|
123
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
Benefits paid by the plan
|
|
|
(63
|
)
|
|
|
(59
|
)
|
|
|
(14
|
)
|
|
|
(17
|
)
|
Contributions we made
|
|
|
62
|
|
|
|
2
|
|
|
|
12
|
|
|
|
14
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of
year
|
|
|
1,004
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status, (excess) of
projected benefit obligation over fair value of plan assets
|
|
|
(347
|
)
|
|
|
(355
|
)
|
|
|
(155
|
)
|
|
|
(146
|
)
|
Contributions we made after the
annual measurement date
|
|
|
15
|
|
|
|
15
|
|
|
|
5
|
|
|
|
3
|
|
Losses and costs to be recognized
over future service periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
337
|
|
|
|
331
|
|
|
|
31
|
|
|
|
21
|
|
Prior service costs
|
|
|
18
|
|
|
|
20
|
|
|
|
(18
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets (liabilities) recognized
in the balance sheet
|
|
$
|
23
|
|
|
$
|
11
|
|
|
$
|
(137
|
)
|
|
$
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets, (liabilities) and cumulative pre-tax charges to other
comprehensive income recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Defined Benefits
|
|
|
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Intangible asset
|
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
|
|
Liability
|
|
|
(270
|
)
|
|
|
(289
|
)
|
|
|
(137
|
)
|
|
|
(143
|
)
|
Accumulated other comprehensive
income cumulative pre-tax charge
|
|
|
275
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
23
|
|
|
$
|
11
|
|
|
$
|
(137
|
)
|
|
$
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Increase (decrease) in minimum
pension liability included as a pre-tax change to other
comprehensive income
|
|
$
|
(6
|
)
|
|
$
|
9
|
|
|
$
|
62
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
67
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional
Information
The accumulated benefit obligation represents the present value
of benefits earned without regard to projected future
compensation increases. All of our defined benefit plans have an
accumulated benefit obligation in excess of plan assets as
follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Projected benefit obligation
|
|
$
|
(1,351
|
)
|
|
$
|
(1,237
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(1,290
|
)
|
|
$
|
(1,186
|
)
|
Fair value of plan assets
|
|
|
1,004
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
Funded status, (excess) of
accumulated benefit obligation over fair value of plan assets
|
|
$
|
(286
|
)
|
|
$
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
The projected benefit obligation of the unfunded supplemental
retirement plan included in the above table was $51 million
at year-end 2005 and $44 million at year-end 2004, and the
accumulated benefit obligation was $49 million at year-end
2005 and $42 million at year-end 2004.
Components
of Annual Defined Benefit Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Service
costs benefits earned during the period
|
|
$
|
25
|
|
|
$
|
24
|
|
|
$
|
23
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Interest cost on projected benefit
obligation
|
|
|
72
|
|
|
|
71
|
|
|
|
66
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
Expected return on plan assets
|
|
|
(72
|
)
|
|
|
(69
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Amortization of actuarial net loss
|
|
|
23
|
|
|
|
22
|
|
|
|
15
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit expense
|
|
$
|
50
|
|
|
$
|
50
|
|
|
$
|
43
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2003, we recognized an additional $3 million expense
related to special termination pension benefits and
$1 million related to special termination postretirement
benefits from the consolidation of administrative functions and
closure of facilities. We included these in other operating
expense.
Assumptions
The assumptions we used to determine defined benefit obligations
at the annual measurement date of September 30 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
Discount rate
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
3.70
|
%
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
The assumptions we used to determine annual defined benefit
expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
6.375
|
%
|
|
|
6.75
|
%
|
|
|
6.00
|
%
|
|
|
6.375
|
%
|
|
|
6.75
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.70
|
%
|
|
|
3.40
|
%
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount rate is what we use to determine the present value
of the benefit obligations. To arrive at this rate, we use the
average of the Moodys AA corporate bond rate for September
of each year adjusted to
68
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reflect the effect of compounding. We believe that this rate is
a reasonable proxy for the rate necessary to accumulate funds
required to pay the benefits when due.
The expected long-term rate of return on plan assets is an
assumption we make reflecting the anticipated weighted average
rate of earnings on the plan assets over the long-term. To
arrive at this rate, we developed estimates of the key
components underlying capital asset returns including:
market-based estimates of inflation, real risk-free rates of
return, yield curve structure, credit risk premiums and equity
risk premiums. As appropriate, these components were used to
develop benchmark estimates of expected long-term rates of
return for each asset class, which were portfolio weighted. To
reflect the active management approach we employ, a return
premium of 0.25 percent was added to the weighted average
benchmark portfolio return. Our actual return on plan assets was
15.0 percent in 2005, 11.6 percent in 2004, and
17.9 percent in 2003.
We used the 1994 Group Annuity Mortality Tables to determine
benefit obligations and annual defined benefit expense.
The assumed health care costs trend rates we used to determine
the expense of the postretirement medical plans were:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Year
|
|
|
|
2005
|
|
|
2004
|
|
|
Health care trend rate assumed for
the next year
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Rate to which the cost trend rate
is assumed to decline (ultimate trend rate)
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Year that the rate reaches the
ultimate trend rate
|
|
|
2012
|
|
|
|
2011
|
|
These assumed health care cost trend rates have a significant
effect on the amounts reported for the postretirement medical
plans. For example, a one-percentage-point change in assumed
health care cost trend rates would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
1 Percentage
|
|
|
1 Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(In millions)
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Total service and interest cost
components
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
Postretirement projected benefit
obligation
|
|
|
13
|
|
|
|
11
|
|
Plan
Assets
The defined benefit plan weighted-average asset allocations and
the range of target allocations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Plan
|
|
|
|
Range of
|
|
|
Assets at
|
|
|
|
Target
|
|
|
Year-End
|
|
|
|
Allocations
|
|
|
2005
|
|
|
2004
|
|
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
50-61
|
%
|
|
|
56
|
%
|
|
|
61
|
%
|
Debt securities
|
|
|
30-34
|
%
|
|
|
36
|
|
|
|
32
|
|
Real estate
|
|
|
0-5
|
%
|
|
|
2
|
|
|
|
1
|
|
Other
|
|
|
0-5
|
%
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The defined benefit investment strategies have been developed as
part of a comprehensive asset/liability management process that
considers the interaction between both the assets and
liabilities of the plan. These strategies consider not only the
expected risk and returns on plan assets, but also the detailed
actuarial projections of liabilities as well as plan-level
objectives such as projected contributions, expense and funded
status.
69
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The principal pension investment strategies include asset
allocation and active asset management. The range of target
asset allocations have been determined after giving
consideration to the expected returns of each asset class, the
expected variability or volatility of the asset class returns
over time, and the complementary nature or correlation of the
asset classes within the portfolio. The strategy also employs an
active management approach for the portfolio. Each asset class
is managed by one or more external money managers with the
objective of generating returns, net of management fees, that
exceed market-based benchmarks.
Equity securities include 761,996 shares of Temple-Inland
common stock totaling $31 million or three percent of total
plan assets as of the 2005 measurement date and $26 million
or three percent of total plan assets as of the 2004 measurement
date.
Cash
Flows
We expect to contribute $60 million in cash to our defined
benefit plans and $16 million in cash to our postretirement
medical plans in 2006. We have minimal ERISA funding
requirements for 2006. The $60 million expected to be
contributed to the defined benefit plans are anticipated
voluntary, discretionary contributions. The postretirement
medical plans are not subject to minimum regulatory funding
requirements. Since the postretirement plans are unfunded, the
expected $16 million contribution represents the estimated
health claims to be paid for plan participants in 2006.
At year-end 2005, the plans are expected to make the following
benefit payments over the next ten years:
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In millions)
|
|
|
2006
|
|
$
|
66
|
|
|
$
|
16
|
|
2007
|
|
|
70
|
|
|
|
15
|
|
2008
|
|
|
73
|
|
|
|
13
|
|
2009
|
|
|
77
|
|
|
|
13
|
|
2010
|
|
|
80
|
|
|
|
12
|
|
2011-2015
|
|
|
448
|
|
|
|
56
|
|
|
|
Note 6
|
Share-Based
Compensation
|
We have share-based compensation plans for key employees and
directors that permit awards of restricted stock, performance or
phantom shares payable in cash or common stock and options to
purchase shares of common stock.
At year-end 2005, we had awarded 567,200 shares of
restricted stock and 1,262,047 performance and phantom shares.
We had another 992,214 shares available for future awards
of either restricted stock or performance or phantom shares.
Restricted shares, which are included in our outstanding shares,
generally vest after three to six years of employment while
performance and phantom shares generally vest after three years
of employment. These awards are generally payable upon vesting
unless deferred by the employee.
70
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options to purchase shares of our common stock have a ten-year
term and become exercisable in steps generally over one to four
years. Options are granted with an exercise price equal to the
market value of our common stock on the date of grant. A summary
of stock option activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(Shares in thousands)
|
|
|
Outstanding beginning of year
|
|
|
7,826
|
|
|
$
|
26
|
|
|
|
9,430
|
|
|
$
|
26
|
|
|
|
8,670
|
|
|
$
|
27
|
|
Granted
|
|
|
1,062
|
|
|
|
37
|
|
|
|
1,078
|
|
|
|
30
|
|
|
|
1,940
|
|
|
|
22
|
|
Exercised
|
|
|
(1,911
|
)
|
|
|
27
|
|
|
|
(2,434
|
)
|
|
|
27
|
|
|
|
(612
|
)
|
|
|
25
|
|
Forfeited
|
|
|
(145
|
)
|
|
|
27
|
|
|
|
(248
|
)
|
|
|
19
|
|
|
|
(568
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
6,832
|
|
|
|
28
|
|
|
|
7,826
|
|
|
|
26
|
|
|
|
9,430
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
3,571
|
|
|
|
27
|
|
|
|
3,514
|
|
|
|
27
|
|
|
|
4,050
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise prices for options outstanding at year-end 2005
range from $14 to $38. The weighted average remaining
contractual life of these options is six years. An additional
2,076,254 shares of our common stock were available for
grant at year-end 2005, 3,006,904 shares at year-end 2004
and 3,905,404 shares at year-end 2003.
In addition, we contributed treasury stock to fulfill our 401(k)
matching obligation in 2004 and first quarter 2005.
|
|
Note 7
|
Earnings
Per Share
|
We computed earnings per share by dividing income by weighted
average shares outstanding using the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Earnings for basic and diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
176
|
|
|
$
|
157
|
|
|
$
|
102
|
|
Discontinued operations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic
|
|
|
112.6
|
|
|
|
111.4
|
|
|
|
108.4
|
|
Dilutive effect of equity purchase
contracts (Note 2)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
(Note 6)
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted
|
|
|
114.5
|
|
|
|
112.4
|
|
|
|
108.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8
|
Accumulated
Other Comprehensive Income (Loss)
|
The components of and changes in other comprehensive income
(loss) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
on Available-
|
|
|
Minimum
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
For-Sale
|
|
|
Pension
|
|
|
Translation
|
|
|
Derivative
|
|
|
|
|
|
|
Securities
|
|
|
Liability
|
|
|
Adjustment
|
|
|
Instruments
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Balance at beginning of year 2003
|
|
$
|
16
|
|
|
$
|
(128
|
)
|
|
$
|
(21
|
)
|
|
$
|
(3
|
)
|
|
$
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year
|
|
|
(9
|
)
|
|
|
(62
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(76
|
)
|
Deferred taxes on changes
|
|
|
3
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change for 2003
|
|
|
(6
|
)
|
|
|
(38
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2003
|
|
$
|
10
|
|
|
$
|
(166
|
)
|
|
$
|
(26
|
)
|
|
$
|
(3
|
)
|
|
$
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
6
|
|
|
|
(11
|
)
|
Deferred taxes on changes
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change for 2004
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
3
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2004
|
|
$
|
5
|
|
|
$
|
(171
|
)
|
|
$
|
(26
|
)
|
|
$
|
|
|
|
$
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
5
|
|
Deferred taxes on changes
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change for 2005
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2005
|
|
$
|
2
|
|
|
$
|
(168
|
)
|
|
$
|
(22
|
)
|
|
$
|
(1
|
)
|
|
$
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are involved in various legal proceedings that arise from
time to time in the ordinary course of doing business and
believe that adequate reserves have been established for any
probable losses. We do not believe that the outcome of any of
these proceedings should have a significant adverse effect on
our financial position or long-term results of operations or
cash flows. It is possible, however, that charges related to
these matters could be significant to the results or cash flows
in any one accounting period.
As a result of our periodic assessment of loss contingencies
taking into account settlements by other defendants in the
remaining opt out cases, we increased our reserve for pending
antitrust litigation by $13 million in 2005.
|
|
Note 10
|
Segment
Information
|
We have three business segments: corrugated packaging, forest
products, and financial services. Corrugated packaging
manufactures containerboard and corrugated packaging. Forest
products manages our timber resources and manufactures a variety
of building products. Financial services operates a savings bank
and an insurance agency and engages in real estate development
activities. In first quarter 2006, we anticipate classifying as
a fourth business segment real estate operations that are
currently included within our forest products and financial
services segments.
We evaluate performance based on operating income before
unallocated expenses and income taxes. Unallocated expenses
represent expenses managed on a company-wide basis and include
corporate general and administrative expense; share-based
compensation; other operating and non-operating income
(expense); and parent company interest expense. Other operating
income (expense) includes gain or loss on sale of assets,
72
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
asset impairments and unusual expenses. The accounting policies
of the segments are the same as those described in the
accounting policy notes to the financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses Not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
Corrugated
|
|
|
Forest
|
|
|
Financial
|
|
|
Segments and
|
|
|
|
|
|
|
Packaging
|
|
|
Products
|
|
|
Services
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
For the year or at year-end
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,819
|
|
|
$
|
1,031
|
|
|
$
|
1,038
|
|
|
$
|
|
|
|
$
|
4,888
|
|
Depreciation and amortization
|
|
|
160
|
|
|
|
50
|
|
|
|
28
|
|
|
|
11
|
|
|
|
249
|
|
Income (loss) before taxes
|
|
|
120
|
|
|
|
238
|
|
|
|
220
|
|
|
|
(316
|
)(a)
|
|
|
262
|
|
Financial services, net interest
income
|
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
390
|
|
Total assets
|
|
|
2,318
|
|
|
|
970
|
|
|
|
18,031
|
|
|
|
314
|
|
|
|
21,633
|
|
Investment in equity method
investees and joint ventures
|
|
|
11
|
|
|
|
36
|
|
|
|
76
|
|
|
|
|
|
|
|
123
|
|
Capital expenditures
|
|
|
126
|
|
|
|
77
|
|
|
|
41
|
|
|
|
21
|
|
|
|
265
|
|
Goodwill
|
|
|
236
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
395
|
|
|
|
|
For the year or at year-end
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,736
|
|
|
$
|
971
|
|
|
$
|
1,043
|
|
|
$
|
|
|
|
$
|
4,750
|
|
Depreciation and amortization
|
|
|
159
|
|
|
|
55
|
|
|
|
31
|
|
|
|
9
|
|
|
|
254
|
|
Income (loss) before taxes
|
|
|
96
|
|
|
|
215
|
|
|
|
207
|
|
|
|
(294
|
)(a)
|
|
|
224
|
|
Financial services, net interest
income
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
401
|
|
Total assets
|
|
|
2,459
|
|
|
|
1,008
|
|
|
|
16,440
|
|
|
|
237
|
|
|
|
20,144
|
|
Investment in equity method
investees and joint ventures
|
|
|
13
|
|
|
|
33
|
|
|
|
54
|
|
|
|
|
|
|
|
100
|
|
Capital expenditures
|
|
|
146
|
|
|
|
47
|
|
|
|
41
|
|
|
|
30
|
|
|
|
264
|
|
Goodwill
|
|
|
236
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
382
|
|
|
|
|
For the year or at year-end
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,700
|
|
|
$
|
801
|
|
|
$
|
1,152
|
|
|
$
|
|
|
|
$
|
4,653
|
|
Depreciation and amortization
|
|
|
167
|
|
|
|
64
|
|
|
|
32
|
|
|
|
7
|
|
|
|
270
|
|
Income (loss) before
taxes(b)
|
|
|
18
|
|
|
|
67
|
|
|
|
186
|
|
|
|
(361
|
)(a)
|
|
|
(90
|
)
|
Financial services, net interest
income
|
|
|
|
|
|
|
|
|
|
|
377
|
|
|
|
|
|
|
|
377
|
|
Total assets
|
|
|
2,375
|
|
|
|
1,035
|
|
|
|
17,661
|
|
|
|
296
|
|
|
|
21,367
|
|
Investment in equity method
investees and joint ventures
|
|
|
7
|
|
|
|
30
|
|
|
|
40
|
|
|
|
|
|
|
|
77
|
|
Capital expenditures
|
|
|
96
|
|
|
|
35
|
|
|
|
33
|
|
|
|
6
|
|
|
|
170
|
|
Goodwill
|
|
|
237
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
378
|
|
|
|
|
|
|
|
(a) |
|
Expenses not allocated to segments consists of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
General and administrative
|
|
$
|
(91
|
)
|
|
$
|
(79
|
)
|
|
$
|
(73
|
)
|
Share-based compensation
|
|
|
(26
|
)
|
|
|
(14
|
)
|
|
|
(7
|
)
|
Other operating income (expense)
|
|
|
(90
|
)
|
|
|
(76
|
)
|
|
|
(138
|
)
|
Other non-operating income (expense)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Parent company interest
|
|
|
(109
|
)
|
|
|
(125
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(316
|
)
|
|
$
|
(294
|
)
|
|
$
|
(361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income (expense)
applies to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
(38
|
)
|
|
$
|
(19
|
)
|
|
$
|
(70
|
)
|
Forest products
|
|
|
(27
|
)
|
|
|
(12
|
)
|
|
|
(24
|
)
|
Financial services
|
|
|
(5
|
)
|
|
|
(34
|
)
|
|
|
(5
|
)
|
Unallocated
|
|
|
(20
|
)
|
|
|
(11
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(90
|
)
|
|
$
|
(76
|
)
|
|
$
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read Note E to the Parent Company Summarized
Financial Statements and Note L to the Financial Services
Summarized Financial Statements for further information about
other operating income (expense). |
73
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(b) |
|
As a result of the consolidation of our administrative functions
and adoption of a shared services concept, beginning first
quarter 2004, we changed the way we allocate costs to the
business segments. The effect of this change was to increase
segment operating income and to increase unallocated expenses by
a like amount. Year 2003 amounts have been reclassified to
reflect this change. |
Revenues and property and equipment based on the location of our
operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
Geographic Information
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,705
|
|
|
$
|
4,566
|
|
|
$
|
4,501
|
|
Mexico
|
|
|
156
|
|
|
|
132
|
|
|
|
113
|
|
Canada(a)
|
|
|
27
|
|
|
|
52
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,888
|
|
|
$
|
4,750
|
|
|
$
|
4,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,787
|
|
|
$
|
1,810
|
|
|
$
|
1,864
|
|
Mexico
|
|
|
38
|
|
|
|
39
|
|
|
|
40
|
|
Canada(a)
|
|
|
1
|
|
|
|
56
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,826
|
|
|
$
|
1,905
|
|
|
$
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In 2005, we sold our MDF facility located in Pembroke, Canada,
and as a result, we have no significant assets or ongoing
operations in Canada. |
|
|
Note 11
|
Summary
of Quarterly Results of Operations (Unaudited)
|
Selected quarterly financial results for 2005 and 2004 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions, except per
share)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,203
|
|
|
$
|
1,255
|
|
|
$
|
1,218
|
|
|
$
|
1,212
|
|
Manufacturing net revenues
|
|
|
967
|
|
|
|
1,003
|
|
|
|
947
|
|
|
|
933
|
|
Manufacturing gross profit
|
|
|
140
|
|
|
|
154
|
|
|
|
118
|
|
|
|
95
|
|
Financial services income before
taxes
|
|
|
47
|
|
|
|
51
|
|
|
|
67
|
|
|
|
50
|
|
Income from continuing
operations(a)
|
|
$
|
45
|
|
|
$
|
68
|
|
|
$
|
37
|
|
|
$
|
26
|
|
Discontinued operations
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
45
|
|
|
$
|
69
|
|
|
$
|
38
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.40
|
|
|
$
|
0.60
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
Discontinued operations
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.40
|
|
|
$
|
0.61
|
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.39
|
|
|
$
|
0.59
|
|
|
$
|
0.32
|
|
|
$
|
0.23
|
|
Discontinued operations
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.39
|
|
|
$
|
0.60
|
|
|
$
|
0.33
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Income from continuing operations includes the following pre-tax
costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions)
|
|
|
Other operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converting and production facility
closures
|
|
$
|
(11
|
)
|
|
$
|
(28
|
)
|
|
$
|
(5
|
)
|
|
$
|
(9
|
)
|
Antitrust litigation
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
Proxy contest
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane related costs
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
Contract termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Repositioning of mortgage
origination and servicing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Other charges
|
|
|
(2
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(24
|
)
|
|
$
|
(29
|
)
|
|
$
|
(27
|
)
|
|
$
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges related to early repayment
of debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
Interest and other income
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
The sum of earnings per share for the quarters does not equal
earnings per share for the year due to the use of average shares
outstanding to compute these amounts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions, except per
share)
|
|
|
2004(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,154
|
|
|
$
|
1,218
|
|
|
$
|
1,194
|
|
|
$
|
1,184
|
|
Manufacturing net revenues
|
|
|
893
|
|
|
|
940
|
|
|
|
955
|
|
|
|
919
|
|
Manufacturing gross profit
|
|
|
86
|
|
|
|
126
|
|
|
|
141
|
|
|
|
108
|
|
Financial services income before
taxes
|
|
|
53
|
|
|
|
59
|
|
|
|
16
|
|
|
|
45
|
|
Income from continuing
operations(a)
|
|
$
|
12
|
|
|
$
|
54
|
|
|
$
|
39
|
|
|
$
|
52
|
|
Discontinued operations
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12
|
|
|
$
|
55
|
|
|
$
|
40
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.49
|
|
|
$
|
0.35
|
|
|
$
|
0.46
|
|
Discontinued operations
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.11
|
|
|
$
|
0.50
|
|
|
$
|
0.36
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.48
|
|
|
$
|
0.35
|
|
|
$
|
0.45
|
|
Discontinued operations
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.11
|
|
|
$
|
0.49
|
|
|
$
|
0.36
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Income from continuing operations includes the following pre-tax
costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions)
|
|
|
Other operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converting and production facility
closures
|
|
$
|
(14
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
|
$
|
(6
|
)
|
Consolidation and supply chain
initiatives
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Repositioning of mortgage
origination and servicing
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(13
|
)
|
Other charges
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(19
|
)
|
|
$
|
(5
|
)
|
|
$
|
(25
|
)
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges related to early repayment
of debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
2004 information has been adjusted to reflect the retrospective
application of the change in method of accounting for certain
inventories, the effect of which is summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
Income from Continuing
|
|
|
|
|
|
|
Gross Profit
|
|
|
Operations
|
|
|
Per Diluted Share
|
|
|
|
As
|
|
|
Retrospective
|
|
|
As
|
|
|
Retrospective
|
|
|
As
|
|
|
Retrospective
|
|
|
|
Reported
|
|
|
Application
|
|
|
Reported
|
|
|
Application
|
|
|
Reported
|
|
|
Application
|
|
|
|
(In millions, except per
share)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
88
|
|
|
$
|
86
|
|
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Second quarter
|
|
|
128
|
|
|
|
126
|
|
|
|
55
|
|
|
|
54
|
|
|
|
0.49
|
|
|
|
0.48
|
|
Third quarter
|
|
|
143
|
|
|
|
141
|
|
|
|
40
|
|
|
|
39
|
|
|
|
0.36
|
|
|
|
0.35
|
|
Fourth quarter
|
|
|
111
|
|
|
|
108
|
|
|
|
54
|
|
|
|
52
|
|
|
|
0.47
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
470
|
|
|
$
|
461
|
|
|
$
|
162
|
|
|
$
|
157
|
|
|
$
|
1.44
|
|
|
$
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
The sum of earnings per share for the quarters does not equal
earnings per share for the year due to the use of average shares
outstanding to compute these amounts. |
|
|
Note 12
|
Subsequent
Events
|
In January 2006, we purchased our partners 50 percent
interest in Standard Gypsum LP for $150 million. We also
paid off the partnerships credit agreement in the amount
of $56 million, of which $28 million was related to
the purchased interest. As a result, we will begin including the
financial position, results of operations and cash flows of
Standard Gypsum in our consolidated financial statements.
Previously we had accounted for our interest in Standard Gypsum
using the equity method.
The following unaudited pro forma information assumes this
acquisition and related financing transaction had occurred at
the beginning of the period presented:
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions, except per
share)
|
|
|
Parent company revenues
|
|
$
|
4,020
|
|
|
$
|
3,861
|
|
Income from continuing operations
|
|
|
184
|
|
|
|
161
|
|
Income from continuing operations,
per diluted share
|
|
$
|
1.61
|
|
|
$
|
1.44
|
|
These pro forma results are preliminary and are not necessarily
an indication of what actually would have occurred if the
acquisition and financing transaction had been completed at the
beginning of the period presented and are not intended to be
indicative of future results.
76
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3
|
|
|
$
|
9
|
|
Trade receivables, net of allowance
for doubtful accounts of $14 in 2005 and $16 in 2004
|
|
|
411
|
|
|
|
400
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Work in process and finished goods
|
|
|
95
|
|
|
|
130
|
|
Raw materials
|
|
|
224
|
|
|
|
202
|
|
Supplies and other
|
|
|
106
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
425
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
82
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
921
|
|
|
|
938
|
|
Investment in Financial
Services
|
|
|
1,230
|
|
|
|
1,121
|
|
Timber and Timberland
|
|
|
498
|
|
|
|
496
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
|
618
|
|
|
|
637
|
|
Machinery and equipment
|
|
|
3,336
|
|
|
|
3,327
|
|
Construction in progress
|
|
|
62
|
|
|
|
86
|
|
Less allowances for depreciation
|
|
|
(2,384
|
)
|
|
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
1,632
|
|
|
|
1,738
|
|
Goodwill
|
|
|
236
|
|
|
|
236
|
|
Assets Held for Sale
|
|
|
34
|
|
|
|
34
|
|
Other Assets
|
|
|
336
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,887
|
|
|
$
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
199
|
|
|
$
|
212
|
|
Accrued employee compensation and
benefits
|
|
|
101
|
|
|
|
93
|
|
Accrued interest
|
|
|
19
|
|
|
|
24
|
|
Accrued property taxes
|
|
|
24
|
|
|
|
21
|
|
Other accrued expenses
|
|
|
129
|
|
|
|
153
|
|
Liabilities of discontinued
operations
|
|
|
9
|
|
|
|
7
|
|
Current portion of long-term debt
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
484
|
|
|
|
513
|
|
Long-Term Debt
|
|
|
1,498
|
|
|
|
1,485
|
|
Deferred Income Taxes
|
|
|
178
|
|
|
|
136
|
|
Pension Liability
|
|
|
270
|
|
|
|
289
|
|
Postretirement
Benefits
|
|
|
137
|
|
|
|
143
|
|
Other Long-Term
Liabilities
|
|
|
240
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,807
|
|
|
|
2,793
|
|
Shareholders
Equity
|
|
|
2,080
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
$
|
4,887
|
|
|
$
|
4,900
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the parent company summarized financial
statements.
77
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
NET REVENUES
|
|
$
|
3,850
|
|
|
$
|
3,707
|
|
|
$
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(3,343
|
)
|
|
|
(3,246
|
)
|
|
|
(3,235
|
)
|
Selling
|
|
|
(96
|
)
|
|
|
(104
|
)
|
|
|
(116
|
)
|
General and administrative
|
|
|
(209
|
)
|
|
|
(167
|
)
|
|
|
(151
|
)
|
Other operating income (expense)
|
|
|
(46
|
)
|
|
|
(14
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,694
|
)
|
|
|
(3,531
|
)
|
|
|
(3,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
176
|
|
|
|
(128
|
)
|
FINANCIAL SERVICES
EARNINGS
|
|
|
215
|
|
|
|
173
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
371
|
|
|
|
349
|
|
|
|
53
|
|
Interest expense
|
|
|
(109
|
)
|
|
|
(125
|
)
|
|
|
(135
|
)
|
Other non-operating income
(expense)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES
|
|
|
262
|
|
|
|
224
|
|
|
|
(90
|
)
|
Income tax (expense) benefit
|
|
|
(86
|
)
|
|
|
(67
|
)
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING
OPERATIONS
|
|
|
176
|
|
|
|
157
|
|
|
|
102
|
|
Discontinued operations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE ACCOUNTING
CHANGE
|
|
|
176
|
|
|
|
160
|
|
|
|
102
|
|
Effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the parent company summarized financial
statements.
78
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
CASH PROVIDED BY (USED FOR)
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
221
|
|
|
|
223
|
|
|
|
238
|
|
Non-cash share-based compensation
|
|
|
31
|
|
|
|
35
|
|
|
|
30
|
|
Non-cash pension and postretirement
expense
|
|
|
58
|
|
|
|
60
|
|
|
|
55
|
|
Cash contribution to pension and
postretirement plans
|
|
|
(76
|
)
|
|
|
(30
|
)
|
|
|
(16
|
)
|
Deferred income taxes (benefit)
|
|
|
41
|
|
|
|
63
|
|
|
|
(188
|
)
|
Net earnings of financial services
|
|
|
(136
|
)
|
|
|
(109
|
)
|
|
|
(116
|
)
|
Dividends from financial services
|
|
|
25
|
|
|
|
105
|
|
|
|
166
|
|
Earnings of joint ventures
|
|
|
(39
|
)
|
|
|
(28
|
)
|
|
|
(6
|
)
|
Dividends from joint ventures
|
|
|
43
|
|
|
|
20
|
|
|
|
8
|
|
Other non-cash charges (credits)
|
|
|
50
|
|
|
|
26
|
|
|
|
71
|
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Other
|
|
|
26
|
|
|
|
18
|
|
|
|
17
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(16
|
)
|
|
|
(45
|
)
|
|
|
(8
|
)
|
Inventories
|
|
|
|
|
|
|
(52
|
)
|
|
|
47
|
|
Prepaid expenses and other
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Accounts payable and accrued
expenses
|
|
|
(9
|
)
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
397
|
|
|
|
440
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR)
INVESTING
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(224
|
)
|
|
|
(223
|
)
|
|
|
(137
|
)
|
Sales of non-strategic assets and
operations and proceeds from sale of property and equipment
|
|
|
45
|
|
|
|
66
|
|
|
|
69
|
|
Acquisitions, net of cash acquired,
and joint ventures
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
Other
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
|
(162
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR)
FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of debt
|
|
|
(502
|
)
|
|
|
(133
|
)
|
|
|
(321
|
)
|
Borrowings under accounts
receivable securitization facility, net
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
39
|
|
Payments of other long-term
liabilities
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
Other additions to debt
|
|
|
500
|
|
|
|
21
|
|
|
|
6
|
|
Cash dividends paid to shareholders
|
|
|
(102
|
)
|
|
|
(136
|
)
|
|
|
(73
|
)
|
Repurchase of common stock
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
48
|
|
|
|
62
|
|
|
|
13
|
|
Settlement of equity purchase
contracts
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
|
|
(265
|
)
|
|
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of discontinued
operations, principally operating activities
|
|
|
2
|
|
|
|
(24
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(6
|
)
|
|
|
(11
|
)
|
|
|
3
|
|
Cash and cash equivalents at
beginning of year
|
|
|
9
|
|
|
|
20
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the parent company summarized financial
statements.
79
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
Note A Summary
of Significant Accounting Policies
Basis
of Presentation
Our parent company summarized financial statements include the
accounts of Temple-Inland and our manufacturing subsidiaries. We
include our financial services subsidiaries using the equity
method because almost all of the net assets invested in
financial services are subject to regulatory rules and
restrictions, including restrictions on the payment of dividends
to the parent company. These summarized financial statements are
an integral part of our consolidated financial statements, which
are our primary financial statements. You should read these
summarized financial statements along with our consolidated
financial statements and our financial services summarized
financial statements.
Inventories
We carry inventories at the lower of cost or market. We
determine cost using principally the average cost method, which
approximates the
first-in,
first-out method.
Property
and Equipment
We carry property and equipment at cost less accumulated
depreciation. We capitalize the cost of significant additions
and improvements, and we expense the cost of repairs and
maintenance. We expense incremental planned major mill
maintenance costs ratably during the year. We capitalize
interest costs incurred on major construction projects. We
depreciate these assets using the straight-line method over
their estimated useful lives as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
|
Estimated
|
|
|
At Year-End
|
|
Classification
|
|
Useful Lives
|
|
|
2005
|
|
|
|
|
|
|
(In millions)
|
|
|
Land and land improvements
|
|
|
|
|
|
$
|
55
|
|
Buildings
|
|
|
15 to 40 years
|
|
|
|
282
|
|
Machinery and equipment:
|
|
|
|
|
|
|
|
|
Paper machines
|
|
|
22 years
|
|
|
|
673
|
|
Mill equipment
|
|
|
5 to 25 years
|
|
|
|
85
|
|
Converting equipment
|
|
|
5 to 15 years
|
|
|
|
411
|
|
Construction in progress
|
|
|
N/A
|
|
|
|
62
|
|
Other production equipment
|
|
|
10 to 25 years
|
|
|
|
8
|
|
Transportation equipment
|
|
|
3 to 15 years
|
|
|
|
37
|
|
Office and other equipment
|
|
|
2 to 10 years
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,632
|
|
|
|
|
|
|
|
|
|
|
We include in property and equipment $114 million of assets
subject to capital leases. We depreciate these assets and any
improvements to leased assets using the straight-line method
over the shorter of their lease term or their estimated useful
lives. We expense operating leases ratably over the lease term.
Timber
and Timberland
We carry timber and timberland at cost, less the cost of timber
cut. We capitalize the costs we pay to purchase timber and
timberland, and we allocate that cost to the timber, timberland,
and if applicable, to mineral rights, based on estimated
relative fair values, which in the case of significant
purchases, we base on third-party appraisals.
We expense the cost of timber cut based on the relationship of
the timber carrying value to the estimated volume of recoverable
timber multiplied by the amount of timber cut. We include the
cost of timber cut in depreciation expense. We determine the
estimated volume of recoverable timber using statistical
information and other data related to growth rates and yields
gathered from physical observations, models, and other
80
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
information gathering techniques. Changes in yields are
generally due to adjustments in growth rates and similar matters
and are accounted for prospectively as changes in estimates. We
manage our timber assets utilizing the concepts of sustainable
forestry the replacement of timber cut through
nurtured forest plantations. We capitalize costs incurred in
developing viable seedling plantations (up to two years from
planting), such as site preparation, seedlings, planting,
fertilization, insect and wildlife control, and herbicide
application. We expense all other costs, such as property taxes
and costs of forest management personnel, as incurred. Once the
seedling plantation is viable, we expense all costs to maintain
the viable plantations, such as fertilization, herbicide
application, insect and wildlife control and thinning, as
incurred. We capitalize costs incurred to initially build roads
as land improvements, and we expense as incurred costs to
maintain these roads.
We determine the carrying value of timberland sold using the
area method, which is based on the relationship of carrying
value of timberland to total acres of timberland multiplied by
acres of timberland sold. We determine the carrying value of
timber sold by the average cost method, which is based on the
relationship of timber carrying value to the estimate of
recoverable timber multiplied by the amount of timber sold.
Revenue
We recognize product revenue upon passage of title, which occurs
at the time the product is delivered to the customer, the price
is fixed and determinable and we are reasonably sure of
collection. Other revenue, which is not significant, is
recognized when the service has been performed, the value is
determinable and we are reasonably sure of collection.
We include the amounts billed to customers for shipping in net
revenues and the related costs in cost of sales.
Note B Long-Term
Debt
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Borrowings under bank credit
agreements average interest rate of 4.88% in
2005 and 4.38% in 2004
|
|
$
|
3
|
|
|
$
|
14
|
|
Accounts receivable securitization
facility average interest rate of 3.28% in 2005
and 1.35% in 2004
|
|
|
31
|
|
|
|
16
|
|
8.13% to 8.38% Notes, payable
in 2006
|
|
|
15
|
|
|
|
100
|
|
5.003% Senior notes associated
with Upper
DECSsm,
payable in 2007
|
|
|
5
|
|
|
|
345
|
|
6.75% Notes, payable in 2009
|
|
|
300
|
|
|
|
300
|
|
7.875% Senior notes, payable
in 2012, net of discounts
|
|
|
498
|
|
|
|
497
|
|
6.375% Senior notes, payable
in 2016, net of discounts
|
|
|
249
|
|
|
|
|
|
6.625% Senior notes, payable
in 2018, net of discounts
|
|
|
248
|
|
|
|
|
|
Revenue bonds, payable 2007 through
2024 average interest rate of 5.92% in 2005 and
5.40% in 2004
|
|
|
96
|
|
|
|
119
|
|
Other indebtedness due through
2011 average interest rate of 7.13% in 2005 and
7.12% in 2004
|
|
|
56
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,501
|
|
|
|
1,488
|
|
Less current portion of long-term
debt
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,498
|
|
|
$
|
1,485
|
|
|
|
|
|
|
|
|
|
|
At year-end 2005, we had $700 million in committed credit
agreements. These committed agreements include a
$600 million credit agreement that expires in 2010. The
remaining $100 million of credit agreements expire at
varying dates in 2006 and 2008. At year-end 2005, our unused
capacity under these facilities was $695 million. In
January 2006, we exercised our option to increase the
commitments under our revolving credit agreement by
$150 million, increasing total committed credit capacity to
$1,085 million.
81
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
At year-end 2005, we had a $250 million accounts receivable
securitization facility that expires in May 2008. Under this
facility, a wholly-owned subsidiary purchases, on an on-going
basis, substantially all our manufacturing trade receivables. As
we need funds, the subsidiary draws under its revolving credit
arrangement, pledges the trade receivables as collateral, and
remits the proceeds to us. In the event of liquidation of the
subsidiary, its creditors would be entitled to satisfy their
claims from the subsidiarys assets prior to distributions
back to us. At year-end 2005, the subsidiary owned
$366 million in net trade receivables against which it had
borrowed $31 million under this facility. At year-end 2005,
the unused capacity under this facility was $219 million.
We include this subsidiary in our parent company and
consolidated financial statements.
Our debt agreements, accounts receivable securitization facility
and credit agreements contain terms, conditions and financial
covenants customary for such agreements including minimum levels
of interest coverage and limitations on leverage. At year-end
2005, we had complied with the terms, conditions, and financial
covenants of these agreements. None of our credit agreements or
the accounts receivable securitization facility are restricted
as to availability based on the ratings of our long-term debt.
Our long-term debt is currently rated investment grade. At
year-end 2005, property and equipment having a book value of
$5 million were subject to liens in connection with
$45 million of debt.
Stated maturities of our debt during the next five years are (in
millions): 2006 $18; 2007 $70;
2008 $44; 2009 $319;
2010 $1 and thereafter $1,049.
We have classified $15 million of 2006 maturities as
long-term based on our intent and ability to refinance them on a
long-term basis.
In December 2005, we issued $250 million 6.375% senior
notes due 2016 and $250 million 6.625% senior notes
due 2018. The proceeds of these issues were used to complete a
cash tender offer for $85 million of 8.13% to
8.38% notes payable in 2006 and $340 million of
5.003% senior notes payable in 2007 associated with Upper
DECS and to pay down other indebtedness. We incurred
$6 million in costs related to these tender offers, which
is included in other non-operating (income) expense. In May and
June 2004, we redeemed all three series of the 9.38% and
9.88% senior subordinated and senior notes issued by
Gaylord. The principal amount held by third parties was
$44 million. We also repaid $100 million of
7.25% notes in 2004.
We capitalized and deducted from interest expense interest
incurred on major construction projects of $1 million in
2005, $1 million in 2004, and $1 million in 2003. We
paid interest of $109 million in 2005, $123 million in
2004, and $144 million in 2003.
Note C Joint
Ventures
Our significant joint venture investments at year-end 2005 are:
Del-Tin Fiber LLC, a 50 percent owned venture that produces
medium density fiberboard in El Dorado, Arkansas; Standard
Gypsum LP, a 50 percent owned venture that produces gypsum
wallboard at facilities in McQueeney, Texas and Cumberland City,
Tennessee; and Premier Boxboard Limited LLC, a 50 percent
owned venture that produces gypsum facing paper and corrugating
medium in Newport, Indiana. The joint venture partner in each of
these ventures is a publicly-held company unrelated to us.
82
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Combined summarized financial information for these joint
ventures follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Current assets
|
|
$
|
64
|
|
|
$
|
57
|
|
Total assets
|
|
|
350
|
|
|
|
353
|
|
Current
liabilities(a)
|
|
|
93
|
|
|
|
94
|
|
Long-term debt
|
|
|
102
|
|
|
|
102
|
|
Equity
|
|
|
155
|
|
|
|
158
|
|
Our investment in joint ventures:
|
|
|
|
|
|
|
|
|
50% share in joint ventures
equity
|
|
$
|
77
|
|
|
$
|
79
|
|
Unamortized basis difference
|
|
|
(35
|
)
|
|
|
(37
|
)
|
Other
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
$
|
45
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes current maturities of debt of $56 million in 2005
and $62 million in 2004. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Net revenues
|
|
$
|
378
|
|
|
$
|
328
|
|
|
$
|
242
|
|
Operating income
|
|
|
85
|
|
|
|
61
|
|
|
|
18
|
|
Earnings (loss)
|
|
|
74
|
|
|
|
51
|
|
|
|
7
|
|
Our equity in earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
50% share of earnings (loss)
|
|
$
|
37
|
|
|
$
|
26
|
|
|
$
|
4
|
|
Amortization of basis difference
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (loss) of joint
ventures
|
|
$
|
39
|
|
|
$
|
28
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We and our joint venture partners contribute to these ventures
and receive distributions from them equally. In 2005, we
contributed $5 million to these ventures and received
$43 million in distributions, and in 2004 we contributed
$2 million and received $20 million in distributions.
Our investment in these joint ventures is included in other
assets, and our equity in their earnings is included in other
operating income (expense). Our investment in and our equity in
their earnings differs from our 50 percent interest due to
the difference between the fair value of net assets contributed
to the Premier Boxboard joint venture and our carrying value of
those assets. When we contributed the Newport, Indiana,
corrugating medium mill and its associated debt to the Premier
Boxboard joint venture in 2000, the fair value of the net assets
exceeded our carrying value by $55 million. The joint
venture recorded the contributed assets at fair value. We did
not recognize a gain as a result of the contribution of assets,
thus creating a difference in the carrying value of our
investment and our underlying equity in the venture. We are
amortizing this difference over the same period as the
underlying mill assets are being depreciated by the joint
venture to reflect depreciation of the mill as if it were
consolidated by us at its historical carrying value. At year-end
2005, the unamortized basis difference was $35 million.
We provide marketing and management services to two of these
ventures. Fees for these services were $8 million in 2005,
$6 million in 2004 and $6 million in 2003 and are
included as a reduction of cost of sales and selling expense. We
also purchase, at market rates, finished products from one of
these joint ventures. These purchases aggregated
$40 million in 2005, $50 million in 2004 and
$52 million in 2003.
Please read Note 12 to the Consolidated Financial
Statements regarding the purchase of the remaining
50 percent interest in Standard Gypsum LP in January 2006.
83
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Also in 2005, we sold about 7,000 acres of timber and
timberland to a joint venture in which one of our financial
services subsidiaries owns 50 percent and an unrelated
public company owns the other 50 percent. This acreage was
sold pursuant to the terms of a long-standing option agreement,
which was about to expire. The joint venture intends to hold the
land for future development and sale. We recognized about half
of the $10 million gain in income in 2005 and anticipate
recognizing the remainder in the future as this land is sold.
Note D Assets
Held for Sale
Assets held for sale includes assets of discontinued operations
and other non-strategic assets held for sale.
At year-end 2005, the discontinued operations consist of the
chemical business obtained in the 2002 acquisition of Gaylord.
The disposition of the Gaylord chemical business has been
delayed primarily due to its class action litigation that was
settled in 2004. The assets and liabilities of discontinued
operations include:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Working capital
|
|
$
|
5
|
|
|
$
|
2
|
|
Property and equipment
|
|
|
8
|
|
|
|
13
|
|
Revenues from discontinued operations were $22 million in
2005, $17 million in 2004, and $18 million in 2003.
Income from discontinued operations was break even in 2005,
$3 million in 2004, and break even in 2003. Income from
discontinued operations in 2005 included a pre-tax charge of
$3 million related to estimated environmental remediation
issues at the chemical business. Income from discontinued
operations in 2004 included pre-tax items of: a $2 million
gain from the early settlement of a note we received in the 2003
sale of the retail bag business; a $2 million charge for
workers compensation liabilities related to the retail bag
business; a $5 million charge to adjust the carrying value
of assets to current estimates of fair value less cost to sell;
and a $10 million gain from the settlement of environmental
and other indemnifications we provided in the 1999 sale of our
bleached paperboard mill.
The carrying value of assets held for sale was $12 million
at year-end 2005 and $12 million at year-end 2004.
Note E Other
Operating Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Equity in earnings of joint ventures
|
|
$
|
39
|
|
|
$
|
28
|
|
|
$
|
6
|
|
Closure of production and
converting facilities and sale of non-strategic assets
|
|
|
(53
|
)
|
|
|
(27
|
)
|
|
|
(83
|
)
|
Hurricane related costs
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
Antitrust litigation
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Proxy contest
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Contract termination
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Consolidation of administrative
functions
|
|
|
|
|
|
|
(11
|
)
|
|
|
(48
|
)
|
Other
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(46
|
)
|
|
$
|
(14
|
)
|
|
$
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue our efforts to enhance return on investment by
lowering costs, improving operating efficiencies, and increasing
asset utilization. As a result, we continue to review operations
that are unable to meet return objectives and determine
appropriate courses of action, including consolidating and
closing facilities and selling under-performing assets. In 2005,
we closed four corrugated packaging facilities, Antioch,
California; Atlanta, Georgia; Louisville, Kentucky; and Newark,
Delaware; sold our Pembroke, Canada MDF facility; and effected
other workforce reductions. These actions affected approximately
500 employees. As a result, we recognized losses of
$53 million, including $38 million in impairments and
losses on sales, $8 million in severance and retention
obligations, and $7 million in other exit costs. The loss
on the sale of
84
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
the Pembroke MDF facility was $25 million, and other exit
costs associated with the sale were $1 million. As a result
of the sale of the Pembroke facility, we recognized a one-time
tax benefit of $16 million.
In 2005, Hurricanes Katrina and Rita adversely affected our
operations. In addition to being forced to
curtail production and incur start up costs at several
facilities, we recognized losses and unusual expenses of
$16 million, including $7 million in impairments
related to our Texas and Louisiana forests, $6 million in
facility damages and $3 million in employee and community
assistance and other costs. The forest and facility losses
represent our initial assessment of the book value of timber
damaged less estimated recoveries and the book value of facility
damages excluding any insurance recoveries. It is likely that
the amount of losses recognized will change as we refine our
assessments of damages and recoveries.
In 2004, we closed or announced the closure of five corrugated
packaging facilities and sold our Clarion MDF facility and
certain assets used in our specialty packaging operations. As a
result, we recognized losses of $27 million, including
$14 million in impairments and losses on sales and
$13 million in severance and other exit costs. These
actions affected over 800 employees.
In 2003, we indefinitely shutdown our Clarion MDF facility and
our Mt. Jewett particleboard plant, closed or were in the
process of closing three converting facilities, decided to sell
certain specialty converting assets, sold a number of
non-strategic assets and effected significant workforce
reductions at these and other facilities. As a result, we
recognized losses of $83 million, including
$65 million in asset impairments and losses on sales, and
$18 million of severance and other exit costs. These
actions affected over 300 employees.
In 2003 and 2004, we consolidated our administrative functions
and implemented a shared service concept and supply chain
initiatives. Expenses associated with these actions consisted
principally of severance, most of which was paid in 2003, and
professional fees. In 2004, we revised our estimate of
contractual relocation expense and reduced our accrual for
involuntary employee terminations by $5 million.
Activity within our accruals for exit costs was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
or
|
|
|
Cash
|
|
|
End of
|
|
|
|
of Year
|
|
|
Revisions
|
|
|
Payments
|
|
|
Year
|
|
|
|
(In millions)
|
|
|
Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
(8
|
)
|
|
$
|
1
|
|
Contract termination penalties
|
|
|
6
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
2
|
|
Environmental compliance
|
|
|
8
|
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
2
|
|
Demolition
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24
|
|
|
$
|
4
|
|
|
$
|
(16
|
)
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
(16
|
)
|
|
$
|
2
|
|
Contract termination penalties
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Environmental compliance
|
|
|
11
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
8
|
|
Demolition
|
|
|
11
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37
|
|
|
$
|
9
|
|
|
$
|
(22
|
)
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, we resolved our contract termination issues and reduced
our associated accrual for penalties by $4 million, with an
offset to other operating income. We paid the final agreed
penalty of $2 million in January 2006.
Note F Commitments
and Contingencies
We lease timberland, manufacturing and other facilities and
equipment under operating lease agreements. Future minimum
rental commitments under non-cancelable operating leases having
a remaining term in excess of one year are (in millions):
2006 $39; 2007 $33;
2008 $28; 2009 $25;
2010 $23 and thereafter $138.
Total rent expense was $46 million in 2005,
$56 million in 2004, and $52 million in 2003.
85
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
We also lease two production facilities under sale-lease back
transactions with two municipalities. The municipalities
purchased the production facilities from us in 1992 and 1995 for
$188 million, our carrying value, and we leased the
facilities back from the municipalities under lease agreements,
which expire in 2022 and 2025. Concurrently, we purchased
$188 million of interest bearing bonds issued by these
municipalities. The bond terms are identical to the lease terms,
are secured by payments under the capital lease obligation, and
the municipalities are obligated only to the extent the
underlying lease payments are made by us. The interest rate
implicit in the lease is the same as the interest rate on the
bonds. As a result, the present value of the capital lease
obligation is $188 million, the same as the principal
amount of the bonds. Because there is no legal right of offset,
the bonds are included in other assets at their cost of
$188 million and the $188 million present value of the
sale-lease back obligations are included in other long-term
liabilities. The implicit interest expense on the leases and the
interest income on the bonds are included in other non-operating
income (expense). There is no net effect from these transactions
as we are in substance both the obligor on, and the holder of,
the bonds.
At year-end 2005, we had unconditional purchase obligations,
principally for gypsum and timber, aggregating $322 million
that will be paid over the next five years.
In connection with our joint venture operations, we have
guaranteed debt service and other obligations and letters of
credit aggregating $104 million at year-end 2005. Generally
we would fund these guarantees for lack of specific performance
by the joint ventures, such as non-payment of debt.
The preferred stock issued by subsidiaries of Guaranty is
automatically exchanged into preferred stock of Guaranty upon
the occurrence of certain regulatory events or administrative
actions. If such exchange occurs, certain shares are
automatically surrendered to us in exchange for our senior notes
and certain shares, at our option, are either exchanged for our
senior notes or are purchased by us. At year-end 2005, the
outstanding preferred stock issued by these subsidiaries totaled
$305 million. Please read Note I of the Financial
Services Summarized Financial Statements for further information.
Note G Derivative
Instruments and Variable Interest Entities
We have used interest rate agreements in the normal course of
business to mitigate the risk inherent in interest rate
fluctuations by entering into contracts with major
U.S. securities firms. In 2001, we designated a
$50 million notional amount interest rate swap agreement as
a hedge of interest cash flows anticipated from specific
borrowings. Under this swap agreement, which matures in 2008, we
pay a fixed interest rate of 6.55 percent and receive a
floating interest rate. The floating rate on these swaps was
4.14 percent at year-end 2005. In 2004, we determined that
not all of the hedged anticipated interest cash flows were
probable to occur due to reductions in variable rate borrowings.
As a result, we exchanged the $50 million notional amount
swap agreement for two separate swap agreements with terms
identical to the original swap agreement having notional amounts
of $22 million, which we designated as a hedge of interest
cash flows anticipated from specific borrowings, and
$28 million, which we did not designate as a hedge. As a
result of the termination of the hedge designation on the
$28 million notional amount, we reclassified
$4 million from other comprehensive income and charged
interest expense. Changes in the fair value of the hedged
transaction decreased other comprehensive income by
$1 million in 2005 and increased other comprehensive income
by $1 million in 2004. There was no hedge ineffectiveness
in 2005. We have included the ineffective portion of the hedged
amount of $1 million in 2004 in interest expense. The
ineffective portion was not significant in 2003. Changes in the
fair value of the $28 million non-hedged swap were
$2 million of income in 2005 and less than $1 million
of expense in 2004 and are included in other non-operating
income (expense). At year-end 2005, the fair value of these
interest rate swaps was a $3 million liability. The amount
included in accumulated other comprehensive income to be
reclassified to earnings in 2006 in conjunction with the hedged
cash flows is not expected to be significant.
We also have used, to a limited degree, derivative instruments
to mitigate our exposure to changes in anticipated cash flows
from sale of products and manufacturing costs. These derivative
contracts have notional
86
PARENT
COMPANY (TEMPLE-INLAND INC. AND OUR MANUFACTURING
SUBSIDIARIES)
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
amounts that represent less than one percent of our annual sales
of linerboard and purchases of recycled fiber. In 2005,
operating income increased $1 million as a result of
linerboard and recycled fiber derivatives. In 2004, operating
income increased $1 million as a result of the linerboard
and recycled fiber derivatives. There was no hedge
ineffectiveness in 2005 or 2004 related to our linerboard and
recycled fiber derivatives. These instruments expired in 2005.
In 1999, we entered into an agreement to lease particleboard and
medium density fiberboard facilities in Mt. Jewett,
Pennsylvania. The lease is for 20 years and includes fixed
price purchase options in 2014 and at the end of the lease. The
option prices were intended to approximate the estimated fair
values of the facilities at those dates and do not represent a
guarantee of the facilities residual values. After
exhaustive efforts, we were unable to determine whether the
lease is with a variable interest entity or if there is a
primary beneficiary because the unrelated third-party lessors
will not provide the necessary financial information. We account
for the lease as an operating lease, and at year-end 2005 our
financial interest was limited to our obligation to make the
remaining $168 million of contractual lease payments,
$11 million per year through 2008 and $13 million per
year thereafter.
Note H Other
Information
Our allowance for doubtful accounts was $14 million at
year-end 2005, $16 million at year-end 2004 and
$14 million at year-end 2003. The provision for doubtful
accounts was $4 million in 2005, $5 million in 2004
and $6 million in 2003. Accounts charged-off, net of
recoveries were $6 million in 2005, $3 million in 2004
and $5 million in 2003.
87
FINANCIAL
SERVICES
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
441
|
|
|
$
|
363
|
|
Loans held for sale
|
|
|
280
|
|
|
|
510
|
|
Loans, net of allowance for losses
of $74 in 2005 and $85 in 2004
|
|
|
9,845
|
|
|
|
9,618
|
|
Securities
available-for-sale
|
|
|
654
|
|
|
|
841
|
|
Securities
held-to-maturity
|
|
|
5,558
|
|
|
|
3,864
|
|
Investment in Federal Home
Loan Bank stock
|
|
|
300
|
|
|
|
277
|
|
Real estate
|
|
|
322
|
|
|
|
307
|
|
Premises and equipment, net
|
|
|
194
|
|
|
|
167
|
|
Accounts, notes and accrued
interest receivable
|
|
|
130
|
|
|
|
170
|
|
Goodwill
|
|
|
159
|
|
|
|
146
|
|
Other intangible assets
|
|
|
31
|
|
|
|
26
|
|
Other assets
|
|
|
117
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
18,031
|
|
|
$
|
16,440
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Deposits
|
|
$
|
9,201
|
|
|
$
|
8,964
|
|
Federal Home Loan Bank
borrowings
|
|
|
6,892
|
|
|
|
4,717
|
|
Securities sold under repurchase
agreements
|
|
|
|
|
|
|
787
|
|
Other liabilities
|
|
|
192
|
|
|
|
340
|
|
Other borrowings
|
|
|
211
|
|
|
|
206
|
|
Preferred stock issued by
subsidiaries
|
|
|
305
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
16,801
|
|
|
|
15,319
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS
EQUITY
|
|
|
1,230
|
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
$
|
18,031
|
|
|
$
|
16,440
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to the financial services summarized
financial statements.
88
FINANCIAL
SERVICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale
|
|
$
|
589
|
|
|
$
|
493
|
|
|
$
|
507
|
|
Securities
available-for-sale
|
|
|
51
|
|
|
|
57
|
|
|
|
69
|
|
Securities
held-to-maturity
|
|
|
155
|
|
|
|
165
|
|
|
|
149
|
|
Other earning assets
|
|
|
5
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
800
|
|
|
|
718
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(189
|
)
|
|
|
(142
|
)
|
|
|
(182
|
)
|
Borrowed funds
|
|
|
(221
|
)
|
|
|
(175
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(410
|
)
|
|
|
(317
|
)
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
390
|
|
|
|
401
|
|
|
|
377
|
|
(Provision) credit for credit
losses
|
|
|
(10
|
)
|
|
|
12
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After
(Provision) Credit For Credit Losses
|
|
|
380
|
|
|
|
413
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan origination and sale of loans
|
|
|
22
|
|
|
|
140
|
|
|
|
268
|
|
Real estate operations
|
|
|
58
|
|
|
|
59
|
|
|
|
55
|
|
Insurance commissions and fees
|
|
|
61
|
|
|
|
47
|
|
|
|
43
|
|
Service charges on deposits
|
|
|
44
|
|
|
|
42
|
|
|
|
35
|
|
Operating lease income
|
|
|
6
|
|
|
|
10
|
|
|
|
11
|
|
Loan servicing fees
|
|
|
|
|
|
|
31
|
|
|
|
32
|
|
Amortization and impairment of
servicing rights
|
|
|
|
|
|
|
(40
|
)
|
|
|
(59
|
)
|
Other
|
|
|
47
|
|
|
|
36
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
238
|
|
|
|
325
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
(183
|
)
|
|
|
(269
|
)
|
|
|
(326
|
)
|
Loan servicing and origination,
other than compensation
|
|
|
|
|
|
|
(13
|
)
|
|
|
(15
|
)
|
Real estate operations, other than
compensation
|
|
|
(28
|
)
|
|
|
(36
|
)
|
|
|
(43
|
)
|
Insurance operations, other than
compensation
|
|
|
(15
|
)
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Occupancy
|
|
|
(24
|
)
|
|
|
(29
|
)
|
|
|
(30
|
)
|
Information systems and technology
|
|
|
(15
|
)
|
|
|
(18
|
)
|
|
|
(26
|
)
|
Charges related to asset
impairments and severance
|
|
|
(5
|
)
|
|
|
(34
|
)
|
|
|
(5
|
)
|
Other
|
|
|
(133
|
)
|
|
|
(155
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
(403
|
)
|
|
|
(565
|
)
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Taxes
|
|
|
215
|
|
|
|
173
|
|
|
|
181
|
|
Income tax (expense)
|
|
|
(79
|
)
|
|
|
(64
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
136
|
|
|
$
|
109
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to financial services summarized financial
statements.
89
FINANCIAL
SERVICES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
CASH PROVIDED BY (USED FOR)
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
136
|
|
|
$
|
109
|
|
|
$
|
116
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
22
|
|
|
|
23
|
|
|
|
24
|
|
Depreciation of leased assets
|
|
|
6
|
|
|
|
8
|
|
|
|
8
|
|
Amortization and impairment of
servicing rights
|
|
|
|
|
|
|
40
|
|
|
|
59
|
|
Provision (credit) for credit losses
|
|
|
10
|
|
|
|
(12
|
)
|
|
|
43
|
|
Net amortization and accretion of
financial instruments, discounts and premiums
|
|
|
18
|
|
|
|
18
|
|
|
|
23
|
|
Deferred income taxes
|
|
|
10
|
|
|
|
(25
|
)
|
|
|
(7
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations
|
|
|
(2,379
|
)
|
|
|
(6,898
|
)
|
|
|
(12,955
|
)
|
Sales
|
|
|
2,595
|
|
|
|
6,920
|
|
|
|
13,447
|
|
Collections on loans serviced for
others, net
|
|
|
(122
|
)
|
|
|
(32
|
)
|
|
|
(77
|
)
|
Other
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
149
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR)
INVESTING
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(3
|
)
|
|
|
|
|
|
|
(9
|
)
|
Principal payments and maturities
|
|
|
183
|
|
|
|
285
|
|
|
|
585
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(2,966
|
)
|
|
|
(910
|
)
|
|
|
(3,278
|
)
|
Principal payments and maturities
|
|
|
1,339
|
|
|
|
1,727
|
|
|
|
2,114
|
|
Loans originated or acquired, net
of collections
|
|
|
(310
|
)
|
|
|
(644
|
)
|
|
|
453
|
|
Collection of mortgage servicing
rights sale receivables
|
|
|
46
|
|
|
|
14
|
|
|
|
|
|
Sales of loans
|
|
|
1
|
|
|
|
37
|
|
|
|
67
|
|
Acquisitions, net of cash acquired
|
|
|
(21
|
)
|
|
|
(15
|
)
|
|
|
(1
|
)
|
Branch acquisitions
|
|
|
|
|
|
|
148
|
|
|
|
|
|
Capital expenditures
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
(33
|
)
|
Other
|
|
|
(8
|
)
|
|
|
45
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,780
|
)
|
|
|
646
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR)
FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits, net
|
|
|
238
|
|
|
|
113
|
|
|
|
(500
|
)
|
Repurchase agreements and
short-term borrowings, net
|
|
|
2,126
|
|
|
|
(308
|
)
|
|
|
(2
|
)
|
Long-term FHLB and other borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
30
|
|
|
|
354
|
|
|
|
972
|
|
Payments
|
|
|
(762
|
)
|
|
|
(866
|
)
|
|
|
(919
|
)
|
Dividends paid to parent company
|
|
|
(25
|
)
|
|
|
(105
|
)
|
|
|
(166
|
)
|
Other
|
|
|
(21
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,586
|
|
|
|
(811
|
)
|
|
|
(621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
78
|
|
|
|
(16
|
)
|
|
|
(59
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
363
|
|
|
|
379
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
441
|
|
|
$
|
363
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
396
|
|
|
$
|
305
|
|
|
$
|
348
|
|
Please read the notes to the financial services summarized
financial statements.
90
FINANCIAL
SERVICES
Note A Summary
of Significant Accounting Policies
Basis
of Presentation
Our financial services summarized financial statements include
the accounts of our financial services subsidiaries, which
operate a savings bank, Guaranty, and conduct real estate
activities. Guaranty is the predominant financial services
subsidiary and its assets and operations, along with those of
its insurance agency subsidiary, are subject to regulatory rules
and restrictions, including restrictions on the payment of
dividends to the parent company. These summarized financial
statements are an integral part of our consolidated financial
statements, which are our primary financial statements. You
should read these summarized financial statements along with our
consolidated financial statements and our parent company
summarized financial statements.
Cash
and Cash Equivalents
Guaranty is required by banking regulations to hold a minimum
amount of cash based on the level of deposits it holds. At
year-end 2005, Guaranty was required to hold $48 million in
cash.
Loans
Held for Sale
Loans held for sale consist primarily of single-family
residential loans collateralized by the underlying property and
are intended for sale in the secondary market. We carry loans
held for sale that we have designated as the hedged item under
effective derivative hedges (typically forward sales of loans or
securities) at cost, increased or decreased for changes in fair
value after the date of hedge designation. We carry all other
loans held for sale at the lower of aggregate cost or fair
value. We include changes in fair value and realized gains and
losses in loan origination and sale of loans.
Loans
We carry loans at unpaid principal balances, net of deferred
fees and origination costs and any discounts or premiums on
purchased loans. We amortize deferred fees and costs, as well as
any premiums and discounts, using the interest method over the
remaining period to contractual maturity adjusted for
anticipated or actual prepayments. We recognize any unamortized
amounts if a loan is repaid or sold. We include amortization and
unamortized amounts recognized in interest income. We recognize
interest on loans as earned. We stop accruing interest when we
have substantial uncertainty about our ability to collect all
contractual principal and interest or when payment has not been
received for ninety days or more unless the asset is both well
secured and in the process of collection. When we stop accruing
interest, we reverse all uncollected interest previously
recognized. Thereafter, we accrue interest income only if, and
when, collections are anticipated to be sufficient to repay both
principal and interest.
Allowance
for Loan Losses
The allowance for loan losses represents our estimate of
probable loan losses as of the balance sheet date. Our periodic
evaluation of the adequacy of the allowance is based on our past
loan loss experience, known and inherent risks in the portfolio,
adverse situations that we believe have affected the
borrowers ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
We regularly assess the credit quality of our loans by assigning
judgmental grades to each loan. Single-family mortgage loans are
graded principally based on payment status, while larger
non-homogeneous commercial loans are graded based on various
factors including the borrowers financial strength and
payment history, the financial stability of any guarantors and,
for secured loans, the realizable value of any collateral.
Commercial loans are graded at least annually and upon
identification of any significant new information regarding a
loan. Loans for which borrower payment performance, collateral
uncertainties or other factors indicate the potential for other
than full repayment are graded in categories representing higher
risk.
We estimate probable losses on loans specifically evaluated for
impairment (generally identified through our loan grading
process) by comparing the carrying amount of the loan to the
loans observable market price,
91
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
estimated present value of total expected future cash flows
discounted at the loans effective rate, or the fair value
of the collateral if the loan is collateral dependent.
We estimate unidentified probable losses for pools of loans with
similar risk characteristics, such as product type, market,
aging and collateral based on historic trends in delinquencies,
charge-offs and recoveries, and factors relevant to collateral
values. Our allowance for loan losses on pools of loans is based
on estimated percentages of losses that have been incurred in
these pools. These estimated percentages are based on historical
charge-off rates, adjusted for current market and environmental
factors that we believe are not reflected in historical data. We
evaluate these estimated percentages annually and more
frequently when portfolio characteristics change significantly.
We also estimate unidentified probable losses based on our
assessment of general economic conditions and specific economic
factors in individual markets and other risk factors that may
not be reflected in the information used to determine the other
components of our allowance for loan losses, such as inherent
delays in obtaining information regarding a borrowers
financial condition or changes in their unique business
conditions; the subjective nature of individual loan
evaluations, collateral assessments and the interpretation of
economic trends; and the uncertainty of assumptions used to
establish allowances for homogeneous groups of loans.
When available information confirms that a portion or all of a
specific loan is uncollectible, we charge the amount against the
allowance for loan losses. The existence of some or all of the
following criteria will generally confirm that a loss has been
incurred: the loan is significantly delinquent and the borrower
has not evidenced the ability or intent to bring the loan
current; we have no recourse to the borrower, or if we do, the
borrower has insufficient assets to pay the debt; or the fair
value of the loan collateral is significantly below the current
loan balance and there is little or no near-term prospect for
improvement.
Foreclosed
Assets
We carry foreclosed assets at the lower of the related loan
balance or fair value of the foreclosed asset, less estimated
selling costs, at the date of the foreclosure. If the fair value
is less than the loan balance at the time of foreclosure, we
charge the difference to the allowance for loan losses.
Subsequent to foreclosure, we evaluate properties for
impairment, recognize any impairment and reduce the carrying
value of the properties. It is likely that the amount we
ultimately recover from foreclosed assets may differ from our
carrying value because of future market value changes or because
of changes in our strategy for sale or development of the
property. We include foreclosed assets in real estate, and we
include any impairments recognized in other noninterest expense.
Securities
We determine the appropriate classification of securities at the
time of purchase and confirm the designation of these securities
as of each balance sheet date. We classify securities as
held-to-maturity
and carry them at amortized cost when we have both the intent
and ability to hold the securities to maturity. Otherwise, we
classify securities as
available-for-sale
and carry them at fair value and include any unrealized gains
and losses, net of tax, in accumulated other comprehensive
income until realized. We consider any unrealized losses for
which we do not expect the security value to recover during our
anticipated holding period (in many cases through maturity) to
be
other-than-temporary,
expense them and reduce the carrying value of the security.
We recognize interest on securities as earned. We adjust the
cost of securities classified as
held-to-maturity
or
available-for-sale
for amortization of premiums and accretion of discounts using
the interest method over the estimated lives of the securities.
We include the amortization and accretion in interest income. We
recognize gains or losses on securities sold at the trade date
based on the specific-identification method and include any
gains and losses in other noninterest income.
92
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Transfers
and Servicing of Financial Assets
We sell loans to secondary markets by delivering loans to third
parties or through the delivery into pools of mortgage loans
that are being securitized into a mortgage-backed security. We
recognize a gain or loss when we sell the loans through either
of these methods, and we remove the loans from the balance
sheet. We include the gain or loss in loan origination and sales
of loans. When we sell loans, we sell the loans and related
servicing rights at the same time. In 2004 and prior years we
would retain the rights to service some of the loans and sell
them later or earn fees by servicing the loans. When we retained
the servicing rights, we allocated a portion of the cost of the
loan to the servicing rights based on the relative fair value of
the loans and the servicing rights. We do not retain any other
interest in loans sold. We based the fair value of mortgage
servicing rights retained on the current market value of
servicing rights for other mortgage loans being traded in the
market with the same or similar characteristics such as loan
type, size, escrow and geographic location. We amortized any
mortgage servicing rights in proportion to, and over the period
of, estimated net servicing revenues.
At year-end 2004, we had sold substantially all of our rights to
service mortgage loans for third parties. Prior to that, we
regularly reviewed our capitalized mortgage servicing rights for
impairment. We stratified our mortgage servicing rights based on
predominant risk characteristics such as loan type and interest
rate and compared the fair value of each stratum of mortgage
servicing rights to its amortized cost. If the fair value was
less than the amortized cost, we recognized an impairment
charge. We recognized recoveries in fair value up to the amount
of the amortized costs of a stratum as an offset to any
impairment charge. For our impairment reviews, we calculated the
fair value of the mortgage servicing rights internally using
discounted cash flow models supported by third-party valuations
and, if available, quoted market prices for comparable mortgage
servicing rights.
Real
Estate
Real estate consists primarily of land and commercial properties
held for development and sale and investments in real estate
partnerships. We assess real estate held for use and real estate
held for development and sale for impairment when impairment
indicators exist. We carry properties held for sale at the lower
of cost or fair value, less cost to sell. Generally we
capitalize interest costs and property taxes, as well as
improvements and other development costs, during the development
period. We determine the cost of land sold using the relative
sales value method.
Real estate income consists of income from commercial properties
and net gains on sales of real estate, primarily residential
land developed for sale, and our equity in the earnings of real
estate partnerships. We recognize income from commercial
properties as earned. We recognize gains from sales of real
estate when a sale is consummated, the buyers initial and
continuing investments are adequate, any receivables are
probable of collection, and the usual risks and rewards of
ownership have been transferred to the buyer. If we determine
that the earnings process is not complete, we defer recognition
of any gains until earned.
Premises
and Equipment
We carry premises and equipment at cost, less accumulated
depreciation and amortization computed principally using the
straight-line method over the estimated useful lives of the
assets.
Other
Intangible Assets
We have a trademark that we consider to have an indefinite life,
and we test it for impairment at least annually. We have core
deposit intangibles and other intangible assets (principally
insurance agency customer relationships) with finite lives that
we amortize using the straight-line method over their estimated
useful lives of five to ten years.
Securities
Sold Under Repurchase Agreements
We enter into agreements under which we sell securities subject
to an obligation to repurchase the same or similar securities.
Under these arrangements, we transfer legal control over the
assets but still retain
93
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
effective control through an agreement that both entitles and
obligates us to repurchase the assets. As a result, we account
for securities sold under repurchase agreements as financing
arrangements and reflect the obligation to repurchase the
securities as a liability while continuing to include the
securities as assets.
Other
Revenue Recognition
We recognize insurance commissions and fees as earned. We
recognized loan servicing fees in income as we collected monthly
principal and interest payments from mortgagors. We expensed the
cost of loan servicing as incurred. At year-end 2004, we had
sold substantially all of our third-party mortgage servicing
rights.
Income
Taxes
The tax sharing agreement with the parent company allocates
current and deferred taxes to our financial services
subsidiaries as if they filed a separate tax return.
Note B Acquisitions
and Intangible Assets
In first quarter 2005, we acquired an insurance agency for
$18 million cash and potential earn-out payments of
$8 million. We allocated the purchase price to the acquired
assets and liabilities based on their estimated fair values with
$13 million allocated to goodwill and $10 million to
other intangible assets.
In first quarter 2004, we acquired an insurance agency for
$15 million cash. We allocated the purchase price to the
acquired assets and liabilities based on their estimated fair
values with $10 million allocated to goodwill. In third
quarter 2004, we acquired two bank branches and
$150 million in deposits for a $5 million premium. We
allocated $3 million of the premium to goodwill and the
remainder to other intangible assets.
We allocated the purchase price to the assets acquired and
liabilities assumed based on our estimates of their fair values
at the date of the acquisitions. We included the operating
results of the acquisitions in our financial statements from the
acquisition dates. Unaudited pro forma results of operations,
assuming the acquisitions had been effected as of the beginning
of the applicable year, would not have differed significantly
from those reported.
The carrying value of our indefinite lived intangible asset, a
trademark, was $6 million at year-end 2005 and 2004. The
net carrying value of our finite lived intangibles, principally
core deposit and customer relationships, was $25 million at
year-end 2005 and $20 million at year-end 2004. The
amortization of finite lived intangibles was $5 million in
2005, $4 million in 2004, and $4 million in 2003. We
estimate amortization for the next five years as follows: (in
millions) 2006 $5; 2007 $4;
2008 $3; 2009 $3; and
2010 $2.
94
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Note C Loans
Loans consist of:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Single-family mortgage
|
|
$
|
3,112
|
|
|
$
|
3,560
|
|
Single-family mortgage warehouse
|
|
|
757
|
|
|
|
580
|
|
Single-family construction
|
|
|
1,665
|
|
|
|
1,303
|
|
Multifamily and senior housing
|
|
|
1,469
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Total residential
|
|
|
7,003
|
|
|
|
6,897
|
|
Commercial real estate
|
|
|
758
|
|
|
|
709
|
|
Commercial and business
|
|
|
843
|
|
|
|
746
|
|
Energy lending
|
|
|
756
|
|
|
|
717
|
|
Asset-based lending and leasing
|
|
|
395
|
|
|
|
428
|
|
Consumer and other
|
|
|
164
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
9,919
|
|
|
|
9,703
|
|
Less allowance for loan losses
|
|
|
(74
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
9,845
|
|
|
$
|
9,618
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgages are loans made to owners to finance the
purchase of a house. Our single-family mortgage loans include
$1.0 billion at year-end 2005 and $0.5 billion at
year-end 2004 of adjustable-rate mortgages that have various
monthly payment options (Option ARMs). These loans generally
include the ability to select from fully amortizing payments,
interest-only payments and payments less than the interest
accrual rate, which can result in negative amortization
increasing the principal amount of the loan. Negative
amortization is subject to various limitations, typically
including a 110 percent maximum principal balance as a
percent of original principal balance, which limits the
loan-to-value
ratio that can be reached. In 2005, we recognized
$4 million of interest income on $0.5 billion in loans
from borrowers that elected negative amortization payment
options. Negative amortization interest we recognized in 2004
and 2003 was not significant.
The following table shows the geographic distribution of our
single-family mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
California
|
|
$
|
1,730
|
|
|
$
|
1,983
|
|
Texas
|
|
|
303
|
|
|
|
385
|
|
Florida
|
|
|
154
|
|
|
|
112
|
|
All other states
|
|
|
925
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,112
|
|
|
$
|
3,560
|
|
|
|
|
|
|
|
|
|
|
Single-family mortgage warehouse loans provide financing to
mortgage lenders to support the funding of loans from
origination to sale. Single-family construction loans finance
the development and construction of single-family homes,
condominiums and town homes, including the acquisition and
development of home lots. Multifamily and senior housing loans
are for the development, construction and lease of apartment
projects and housing for independent, assisted and
memory-impaired residents.
Commercial real estate loans primarily finance the development,
construction and lease of office, retail and industrial projects
and are geographically diversified. Commercial and business
loans finance middle-market business operations. Energy lending
finances small to medium sized oil and gas producers and other
participants in energy production and distribution activities.
Asset-based lending and leasing primarily includes
95
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
inventory and receivable-based loans and direct financing leases
on equipment. Consumer and other loans are primarily composed of
loans secured by second liens on single-family homes.
At year-end 2005, we had unfunded commitments on outstanding
loans of $4.1 billion and commitments to originate loans of
$0.6 billion. To meet the needs of our customers, we also
issue standby and other letters of credit. Our credit risk in
issuing letters of credit is essentially the same as that
involved in extending loans to customers. We hold collateral to
support letters of credit when we believe appropriate. At
year-end 2005, we had issued outstanding letters of credit
totaling $382 million. Of this amount, $370 million
were standby letters of credit, with a weighted average term of
approximately three years, that represent our obligation to
guarantee payment of a specified financial obligation or to make
payments based on another entitys failure to perform under
an obligating agreement. The amount, if any, we will ultimately
have to fund is uncertain. We recognize fees associated with
letters of credit as a liability and recognize the fees as
income over the period of the agreement. Fees recognized are
included in other noninterest income. Fees generally approximate
the initial fair value of the agreement. At year-end 2005, we
did not have a significant amount of deferred fees related to
these agreements.
At year-end 2005, we had $336 million of real estate
construction loans and $250 million of unfunded commitments
to single-asset entities that meet the definition of a variable
interest entity. All of these loans are secured by financial
guarantees or tri-party take out commitments from substantive
third parties. We are not the primary beneficiary of any of
these entities. Our loss exposure is the committed loan amount.
In 2003, we restructured two leveraged, direct financing leases
of aircraft in which we were the lessor. Due to a reduction in
the lease payments, we reclassified the leases as operating
leases and included the leased aircraft in other assets at their
estimated fair value of $42 million. We expensed the
$10 million difference between the aircrafts fair
value and our recorded investment in the financing leases. We
are depreciating the aircraft over their remaining expected
useful lives of eight years. The net carrying value of the
aircraft was $32 million at year-end 2005, and we
anticipate the carrying value will be $11 million at the
end of the lease terms in 2009.
Activity in the allowance for credit losses was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
85
|
|
|
$
|
111
|
|
|
$
|
132
|
|
Provision (credit) for loan losses
|
|
|
7
|
|
|
|
(12
|
)
|
|
|
43
|
|
Charge-offs
|
|
|
(23
|
)
|
|
|
(15
|
)
|
|
|
(73
|
)
|
Recoveries
|
|
|
5
|
|
|
|
8
|
|
|
|
9
|
|
Transfer to reserve for unfunded
credit commitments
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
74
|
|
|
|
85
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded credit commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Provision for commitment-related
credit losses
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Transfer from allowance for loan
losses
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined allowances for credit
losses at year-end
|
|
$
|
81
|
|
|
$
|
92
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan losses
|
|
$
|
7
|
|
|
$
|
(12
|
)
|
|
$
|
43
|
|
Commitment-related credit losses
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined provision (credit) for
credit losses
|
|
$
|
10
|
|
|
$
|
(12
|
)
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Information regarding the unpaid principal balance of past due,
nonaccrual, restructured and impaired loans:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Past due 90 days or more and
accruing interest
|
|
$
|
8
|
|
|
$
|
1
|
|
Recorded investment in nonaccrual
loans
|
|
|
35
|
|
|
|
50
|
|
Restructured loans included in
nonaccrual loans
|
|
|
1
|
|
|
|
9
|
|
Impaired loans
|
|
|
1
|
|
|
|
9
|
|
Allowance for loss on impaired loans
|
|
|
|
|
|
|
3
|
|
Average recorded investment in
impaired loans
|
|
|
4
|
|
|
|
9
|
|
We did not recognize a significant amount of interest income on
impaired loans in 2005, 2004, or 2003. Interest income we would
have recognized on nonaccrual loans had they been performing in
accordance with contractual terms was not significant in 2005,
2004, or 2003.
In 2003, we determined that certain single-family mortgage loans
originated by our mortgage banking operations and sold to
third-party investors likely did not satisfy our representations
and warranties related to those loans. We repurchased these
loans and foreclosed on the related collateral or otherwise
disposed of the loans, resulting in losses of $2 million.
We recorded a $2 million receivable to reflect anticipated
recoveries under our fidelity bond insurance coverage, and we
have filed claims with the insurance carrier for these amounts.
The amount we will ultimately recover under the claims is not
certain, but we do not expect it to be significantly different
from the recorded receivable.
97
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Note D Securities
Securities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Year-End
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Yield
|
|
|
|
(Dollars in millions)
|
|
|
At year-end 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21
|
|
|
|
|
|
U.S. Government Sponsored
Enterprises (FNMA, FHLMC)
|
|
|
615
|
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
619
|
|
|
|
|
|
Private issuer
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643
|
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
647
|
|
|
|
4.59
|
%
|
U.S. Government debt securities
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
4.85
|
%
|
Equity securities
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
650
|
|
|
$
|
8
|
|
|
$
|
(4
|
)
|
|
$
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
115
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
114
|
|
|
|
|
|
U.S. Government Sponsored
Enterprises (FNMA, FHLMC)
|
|
|
2,276
|
|
|
|
3
|
|
|
|
(35
|
)
|
|
|
2,244
|
|
|
|
|
|
Private issuer
|
|
|
3,167
|
|
|
|
1
|
|
|
|
(14
|
)
|
|
|
3,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,558
|
|
|
$
|
4
|
|
|
$
|
(50
|
)
|
|
$
|
5,512
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
28
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
29
|
|
|
|
|
|
U.S. Government Sponsored
Enterprises (FNMA, FHLMC)
|
|
|
789
|
|
|
|
11
|
|
|
|
(5
|
)
|
|
|
795
|
|
|
|
|
|
Private issuer
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828
|
|
|
|
12
|
|
|
|
(5
|
)
|
|
|
835
|
|
|
|
3.99
|
%
|
Corporate debt securities
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
5.91
|
%
|
Equity securities
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
834
|
|
|
$
|
12
|
|
|
$
|
(5
|
)
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
166
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
165
|
|
|
|
|
|
U.S. Government Sponsored
Enterprises (FNMA, FHLMC)
|
|
|
3,289
|
|
|
|
20
|
|
|
|
(12
|
)
|
|
|
3,297
|
|
|
|
|
|
Private issuer
|
|
|
409
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,864
|
|
|
$
|
20
|
|
|
$
|
(19
|
)
|
|
$
|
3,865
|
|
|
|
4.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans underlying mortgage-backed securities have
adjustable interest rates and generally have contractual
maturities ranging from 15 to 40 years with principal and
interest installments due monthly. The actual maturities of
mortgage-backed securities may differ from the contractual
maturities of the underlying loans because issuers or mortgagors
may have the right to call or prepay their securities or loans.
The private issuer mortgage-backed securities are senior-tranche
securities considered investment grade quality by third-party
rating agencies. The collateral underlying these securities is
primarily single-family residential properties. At year-end
2005, securities issued by U.S. Government Sponsored
Enterprises, principally FNMA and FHLMC, had a carrying value of
$2.9 billion.
The mortgage-backed securities we purchased in 2005, and a
portion of the securities we have purchased in prior years, have
Option ARMs as the underlying assets. The outstanding principal
balance of these
98
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
securities at year-end 2005 was $3.5 billion. Of these
securities, $0.6 billion are U.S. Government Sponsored
Enterprise (FNMA, FHLMC) issued and $2.9 billion are
private-issuer senior-tranche offerings.
At year-end 2005, we held $221 million and at year-end 2004
we held $190 million of securities formed by pooling loans
that we previously held in our loan portfolio. Included in these
amounts were $83 million that we formed by pooling loans in
2005 and $13 million that we formed by pooling loans in
2003. We did not retain any securities formed by pooling loans
in 2004. We record these securities at the carrying value of the
mortgage loans at the time of securitization.
At year-end 2003, the carrying values of
available-for-sale
mortgage-backed securities, debt securities, and equity
securities were $1.1 billion, $3 million, and
$242 million. The carrying value of
held-to-maturity
mortgage-backed securities at year-end 2003 was
$5.3 billion.
Our securities with gross unrealized losses at year-end 2005,
aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss
position, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
12 Months
|
|
|
12 Months or More
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
(Losses)
|
|
|
Value
|
|
|
(Losses)
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Sponsored
Enterprises
|
|
$
|
24
|
|
|
$
|
|
|
|
$
|
184
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
68
|
|
|
$
|
(1
|
)
|
U.S. Government Sponsored
Enterprises
|
|
|
1,119
|
|
|
|
(13
|
)
|
|
|
882
|
|
|
|
(22
|
)
|
Private issuer
|
|
|
1,875
|
|
|
|
(9
|
)
|
|
|
231
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,013
|
|
|
$
|
(22
|
)
|
|
$
|
1,181
|
|
|
$
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,037
|
|
|
$
|
(22
|
)
|
|
$
|
1,365
|
|
|
$
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We consider the unrealized losses temporary and have not charged
them to expense because:
|
|
|
|
|
The unrealized losses are, in general, a result of changes in
market interest rates and not changes in credit quality. The
securities are guaranteed directly or indirectly by the
U.S. Government or U.S. Government Sponsored
Enterprises, or are senior-tranche mortgage-backed securities
considered investment grade quality by third-party rating
agencies. We do not believe any of these unrealized losses are
related to credit or other concerns about the collectibility of
contractual amounts due.
|
|
|
|
The mortgage-backed securities cannot be settled at maturity or
through prepayment in such a way that we would not recover
substantially all of our recorded investment. We do not have
significant purchase premiums on the securities. Additionally,
we have no specific plans to sell these mortgage-backed
securities and we have the ability to hold them to maturity.
|
99
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Note E Real
Estate
Real estate consists of:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Real estate held for development
and sale
|
|
$
|
219
|
|
|
$
|
231
|
|
Income producing properties
|
|
|
42
|
|
|
|
46
|
|
Investments in real estate
partnerships
|
|
|
76
|
|
|
|
54
|
|
Foreclosed real estate
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339
|
|
|
|
335
|
|
Accumulated depreciation
|
|
|
(17
|
)
|
|
|
(21
|
)
|
Valuation allowance
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
$
|
322
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
Please read Note H to the Financial Services Summarized
Financial Statements for information related to real estate
borrowings. At year-end 2005, we have interests (ranging from 25
to 50 percent) in a number of real estate partnerships that
we account for using the equity method. We provide development
services for some of these partnerships. We have not recognized
any significant fees for these services. Our equity in earnings
of partnerships in 2005 and 2004 included a number of
partnerships in which we owned a five to ten percent interest.
Our investments in these partnerships were liquidated prior to
year-end 2005. Combined summarized financial information for
these partnerships follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Real estate
|
|
$
|
184
|
|
|
$
|
319
|
|
Total assets
|
|
|
240
|
|
|
|
378
|
|
Debt
|
|
|
76
|
|
|
|
188
|
|
Total liabilities
|
|
|
77
|
|
|
|
203
|
|
Equity
|
|
|
163
|
|
|
|
175
|
|
Our investment in partnerships:
|
|
|
|
|
|
|
|
|
Our share of partnership equity
|
|
$
|
82
|
|
|
$
|
62
|
|
Unrecognized deferred gain
|
|
|
(8
|
)
|
|
|
(10
|
)
|
Subordinated debt
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Investment in partnerships
|
|
$
|
76
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Revenues
|
|
$
|
145
|
|
|
$
|
56
|
|
|
$
|
40
|
|
Earnings
|
|
|
84
|
|
|
|
42
|
|
|
|
15
|
|
Our equity in earnings (reported in
real estate operations)
|
|
|
14
|
|
|
|
12
|
|
|
|
8
|
|
In 2003, we contributed real estate with a $15 million
carrying value to a newly-formed partnership in exchange for
$15 million cash and a 50 percent interest in the
partnership. We deferred the $15 million gain on the sale
and are recognizing it as the partnership sells the real estate
to third parties. We recognized $2 million in 2005,
$2 million in 2004, and $2 million in 2003.
100
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Note F Premises
and Equipment
Premises and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
At Year-End
|
|
Classification
|
|
Useful Lives
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In millions)
|
|
|
Land
|
|
|
|
|
|
$
|
43
|
|
|
$
|
37
|
|
Buildings
|
|
|
10 - 40 years
|
|
|
|
148
|
|
|
|
131
|
|
Leasehold improvements
|
|
|
5 - 20 years
|
|
|
|
24
|
|
|
|
23
|
|
Furniture, fixtures and equipment
|
|
|
3 - 10 years
|
|
|
|
91
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
289
|
|
Less accumulated depreciation and
amortization
|
|
|
|
|
|
|
(112
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194
|
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease equipment and facilities under operating lease
agreements. Our future minimum rental commitments under
non-cancelable leases with a remaining term in excess of one
year, net of related sublease income, were (in millions):
2006 $12; 2007 $11;
2008 $10; 2009 $8;
2010 $8; thereafter $14. Total
rent expense was $14 million in 2005, $21 million in
2004, and $21 million in 2003.
Note G Deposits
Deposits consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Stated
|
|
|
|
|
|
Stated
|
|
|
|
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
|
(Dollars in millions)
|
|
|
Noninterest bearing demand
|
|
|
N/A
|
|
|
$
|
803
|
|
|
|
N/A
|
|
|
$
|
519
|
|
Interest bearing demand
|
|
|
1.35
|
%
|
|
|
3,416
|
|
|
|
0.98
|
%
|
|
|
4,377
|
|
Savings deposits
|
|
|
0.80
|
%
|
|
|
223
|
|
|
|
0.68
|
%
|
|
|
241
|
|
Certificates of deposit
|
|
|
3.54
|
%
|
|
|
4,759
|
|
|
|
2.56
|
%
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,201
|
|
|
|
|
|
|
$
|
8,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled maturities of time deposits at year-end 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100,000 Or
|
|
|
Less Than
|
|
|
|
|
|
|
More
|
|
|
$100,000
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
3 months or less
|
|
$
|
455
|
|
|
$
|
929
|
|
|
$
|
1,384
|
|
Over 3 through 6 months
|
|
|
355
|
|
|
|
701
|
|
|
|
1,056
|
|
Over 6 through 12 months
|
|
|
485
|
|
|
|
1,106
|
|
|
|
1,591
|
|
Over 12 months
|
|
|
189
|
|
|
|
539
|
|
|
|
728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,484
|
|
|
$
|
3,275
|
|
|
$
|
4,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end 2005, the scheduled maturities of time deposits were
(in millions): 2006 $4,031;
2007 $337; 2008 $94;
2009 $264; 2010 $32;
thereafter $1.
Note H Borrowings
Guaranty borrows under agreements with the Federal Home
Loan Bank of Dallas (FHLB), and the borrowings are secured
by a blanket-floating lien on certain of Guarantys loans
and by securities Guaranty maintains on deposit at the FHLB.
101
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Information concerning short-term and long-term Federal Home
Loan Bank borrowings and repurchase agreements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Short-term FHLB
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
4,968
|
|
|
$
|
2,055
|
|
|
$
|
1,823
|
|
Weighted average interest rate
|
|
|
4.0
|
%
|
|
|
2.1
|
%
|
|
|
1.0
|
%
|
For the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily balance
|
|
$
|
3,084
|
|
|
$
|
2,161
|
|
|
$
|
858
|
|
Maximum month-end balance
|
|
$
|
4,968
|
|
|
$
|
2,908
|
|
|
$
|
1,871
|
|
Weighted average interest rate
|
|
|
3.4
|
%
|
|
|
1.4
|
%
|
|
|
1.2
|
%
|
Long-term FHLB
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
1,924
|
|
|
$
|
2,662
|
|
|
$
|
3,169
|
|
Weighted average interest rate
|
|
|
3.7
|
%
|
|
|
3.7
|
%
|
|
|
3.6
|
%
|
Repurchase Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
At year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
|
|
|
$
|
787
|
|
|
$
|
1,327
|
|
Weighted average interest rate
|
|
|
|
|
|
|
2.3
|
%
|
|
|
1.1
|
%
|
For the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily balance
|
|
$
|
144
|
|
|
$
|
1,155
|
|
|
$
|
2,415
|
|
Maximum month-end balance
|
|
$
|
711
|
|
|
$
|
1,696
|
|
|
$
|
3,060
|
|
Weighted average interest rate
|
|
|
2.5
|
%
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
Borrowings of our real estate and insurance operations consist
of:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Subordinated
debentures average rate of 6.47% in 2005 and
4.63% in 2004, payable in 2013 through 2014
|
|
$
|
100
|
|
|
$
|
100
|
|
Senior bank credit
facility average rate of 6.04% in 2005 and
3.94% in 2004, payable in 2006, primarily real estate related
|
|
|
74
|
|
|
|
65
|
|
Other indebtedness due through 2014
at interest rates from 4.50% to 10.25%, secured primarily by
real estate
|
|
|
37
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211
|
|
|
$
|
206
|
|
|
|
|
|
|
|
|
|
|
The parent company has guaranteed $20 million of the senior
bank credit facility.
Interest expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Short-term FHLB borrowings
|
|
$
|
103
|
|
|
$
|
31
|
|
|
$
|
10
|
|
Long-term FHLB borrowings
|
|
|
84
|
|
|
|
107
|
|
|
|
109
|
|
Repurchase agreements
|
|
|
4
|
|
|
|
15
|
|
|
|
29
|
|
Preferred stock issued by
subsidiaries
|
|
|
17
|
|
|
|
12
|
|
|
|
11
|
|
Other borrowings
|
|
|
13
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
221
|
|
|
$
|
175
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Stated maturities of borrowings are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due or Expiring by
Year
|
|
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
FHLB borrowings
|
|
$
|
6,892
|
|
|
$
|
5,588
|
|
|
$
|
955
|
|
|
$
|
250
|
|
|
$
|
99
|
|
|
$
|
|
|
|
$
|
|
|
Other borrowings
|
|
|
211
|
|
|
|
83
|
|
|
|
4
|
|
|
|
23
|
|
|
|
1
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,103
|
|
|
$
|
5,671
|
|
|
$
|
959
|
|
|
$
|
273
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note I Preferred
Stock Issued by Subsidiaries
Guaranty has two subsidiaries that qualify as real estate
investment trusts, Guaranty Preferred Capital Corporation (GPCC)
and Guaranty Preferred Capital Corporation II
(GPCC II). Both are authorized to issue floating rate and
fixed rate preferred stock. These preferred stocks have a
liquidation preference of $1,000 per share, dividends that
are non-cumulative and payable when declared, and are
automatically exchanged into Guaranty preferred stock under
similar terms and conditions if federal banking regulators
determine that Guaranty is, or will become, undercapitalized in
the near term or an administrative body takes an action that
will prevent GPCC or GPCC II from paying full quarterly
dividends or redeeming any preferred stock. If such an exchange
occurs, the parent company must, for all affected GPCC preferred
stockholders and may, at its option, for all affected
GPCC II preferred stockholders, issue its senior notes in
exchange for the Guaranty preferred stock in an amount equal to
the liquidation preference, plus certain adjustments, of the
preferred stock exchanged. If the parent company elects not to
issue its senior notes to all affected GPCC II preferred
stockholders, it must purchase all their exchanged Guaranty
preferred stock for cash in an amount equal to the liquidation
preference, plus certain adjustments. The terms and conditions
of the senior notes are similar to those of the Guaranty
preferred stock exchanged except that the rate on the senior
notes received by the former GPCC preferred stockholders is
fixed instead of floating. GPCC has issued 225,000 shares
of floating rate preferred stock for $225 million cash.
GPCC II issued 35,000 shares of floating rate
preferred stock and 45,000 shares of 9.15 percent
fixed rate preferred stock for $80 million cash. Prior to
May 2007, at the option of the subsidiaries, these shares may be
redeemed in whole or in part for $1,000 per share cash plus
certain adjustments. Unless renegotiated, terms of the preferred
stock of both subsidiaries make it likely that we will redeem
the preferred stock in 2007.
At year-end 2005, the liquidation preference of the outstanding
preferred stock issued by the subsidiaries was $305 million
and is included in Preferred stock issued by subsidiaries. Total
dividends paid on this preferred stock were $17 million in
2005, $12 million in 2004 and $11 million in 2003, and
are included in interest expense on borrowed funds. The weighted
average dividend rate paid to GPCC preferred shareholders was
4.71 percent in 2005, 2.85 percent in 2004 and
2.60 percent in 2003. The weighted average floating
dividend rate paid to GPCC II floating rate preferred
shareholders was 5.69 percent in 2005, 3.83 percent in
2004, and 3.58 percent in 2003.
Note J Mortgage
Loan Servicing
We sold all of our third-party mortgage servicing rights in
December 2004 and recognized a loss of $11 million, which
is included in charges related to asset impairments and
severance in noninterest expense. We serviced mortgage loans for
third parties of approximately $8.1 billion as of year-end
2003.
103
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
Capitalized mortgage servicing rights, net of accumulated
amortization, were:
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Balance, beginning of year
|
|
$
|
100
|
|
|
$
|
120
|
|
Additions
|
|
|
19
|
|
|
|
44
|
|
Amortization expense
|
|
|
(28
|
)
|
|
|
(63
|
)
|
Sales
|
|
|
(91
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Valuation allowance
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
Note K Derivative
Instruments
We enter into interest rate lock commitments with mortgage
borrowers for loans we intend to sell and loans we intend to
keep. We record interest rate lock commitments for loans we
intend to sell as derivatives at fair value in the balance
sheet, with changes in fair value included in loan origination
and sale of loans income. At inception, we value these interest
rate lock commitments at zero. Subsequent value estimates are
made using quoted market prices for equivalent rate loans,
adjusted for the percentage likelihood the interest rate lock
commitment will ultimately become a funded mortgage loan. We
also enter into forward commitments to sell loans and
mortgage-backed securities to hedge the value of the interest
rate lock commitments and loans held for sale. We typically
designate forward sale commitments that hedge mortgage loans
held for sale as fair-value hedges if we can demonstrate the
sale commitment is highly effective at offsetting changes in
value of the mortgage loans. Hedge ineffectiveness was not
significant in 2005, 2004, and 2003. At year-end 2005, we had
commitments to originate or purchase mortgage loans totaling
$105 million and commitments to sell mortgage loans
totaling $134 million.
Note L Noninterest
Expense
In 2004 and 2005, we took actions to reduce costs and our
exposure to changing market conditions, including a slow-down in
refinancing activity. In late 2004, we repositioned our mortgage
origination activities to focus on originating mortgage loans
for our own portfolio and, to a lesser extent, for sale to
others, through brokers and correspondent networks and in
certain retail channels, including the retail branches of
Guaranty. As a result, we closed or sold 145 mortgage
origination outlets and terminated over 1,300 employees. In late
2005, we further repositioned our mortgage origination
activities by eliminating our wholesale origination network.
These actions affected 250 employees and resulted in the sale or
closure of 11 mortgage origination outlets subsequent to
year-end 2005. As a result, we recognized charges and expenses
of $5 million in 2005 and $34 million in 2004. It is
likely that we will incur additional charges and expenses in
2006. Our future mortgage origination efforts will focus on
direct mortgage lending to consumers through our banking
centers, and we will continue to restructure our mortgage
origination capabilities.
Charges related to asset impairments and severance included in
noninterest expense consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Severance
|
|
$
|
2
|
|
|
$
|
9
|
|
|
$
|
4
|
|
Loss on closure of origination
facilities
|
|
|
|
|
|
|
11
|
|
|
|
|
|
Loss on sale of mortgage servicing
rights
|
|
|
|
|
|
|
11
|
|
|
|
|
|
Other
|
|
|
3
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5
|
|
|
$
|
34
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
FINANCIAL
SERVICES
NOTES TO
SUMMARIZED FINANCIAL
STATEMENTS (Continued)
A summary of the activity within our accruals for exit costs
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
|
|
|
Cash
|
|
|
End of
|
|
|
|
of Year
|
|
|
Additions
|
|
|
Payments
|
|
|
Year
|
|
|
|
(In millions)
|
|
|
Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
2
|
|
Contract termination penalties
|
|
|
2
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
Other
|
|
|
6
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
(7
|
)
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
(6
|
)
|
|
$
|
3
|
|
Contract termination penalties
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Other
|
|
|
|
|
|
|
8
|
|
|
|
(2
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
19
|
|
|
$
|
(8
|
)
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense included in noninterest expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Furniture, fixtures and equipment
|
|
$
|
20
|
|
|
$
|
22
|
|
|
$
|
22
|
|
Leased equipment depreciation
|
|
|
6
|
|
|
|
8
|
|
|
|
8
|
|
Advertising and promotional
|
|
|
20
|
|
|
|
22
|
|
|
|
19
|
|
Travel and other employee
|
|
|
11
|
|
|
|
11
|
|
|
|
13
|
|
Professional services
|
|
|
16
|
|
|
|
21
|
|
|
|
14
|
|
Other
|
|
|
60
|
|
|
|
71
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noninterest expense
|
|
$
|
133
|
|
|
$
|
155
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note M Capital
Adequacy and Other Regulatory Matters
Guaranty is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on our financial
statements. The payment of dividends to the parent company from
Guaranty is subject to proper regulatory notification or
approval.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Guaranty must meet specific
capital guidelines that involve quantitative measures of
Guarantys assets, liabilities and certain
off-balance-sheet items such as unfunded credit commitments, as
calculated under regulatory accounting practices. Capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings
and other factors. At year-end 2005, Guaranty met or exceeded
all of its capital adequacy requirements.
At year-end 2005, the most recent notification from regulators
categorized Guaranty as well capitalized. The
following table sets forth Guarantys actual capital
amounts and ratios along with the minimum capital
105
amounts and ratios Guaranty must maintain to meet capital
adequacy requirements and to be categorized as well
capitalized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
For Categorization
|
|
|
|
|
|
|
Adequacy
|
|
|
As Well
|
|
|
|
Actual
|
|
|
Requirements
|
|
|
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in millions)
|
|
|
At year-end 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Ratio (Risk-based
capital/Total risk-weighted assets)
|
|
$
|
1,293
|
|
|
|
10.54
|
%
|
|
³$
|
981
|
|
|
|
³ 8.00
|
%
|
|
³ $
|
1,227
|
|
|
|
³10.00
|
%
|
Tier 1 (Core) Risk-Based Ratio
(Core capital/Total risk-weighted assets)
|
|
$
|
1,213
|
|
|
|
9.89
|
%
|
|
³ $
|
491
|
|
|
|
³ 4.00
|
%
|
|
³ $
|
736
|
|
|
|
³6.00
|
%
|
Tier 1 (Core) Leverage Ratio
(Core capital/Adjusted tangible assets)
|
|
$
|
1,213
|
|
|
|
6.94
|
%
|
|
³ $
|
699
|
|
|
|
³ 4.00
|
%
|
|
³$
|
874
|
|
|
|
³5.00
|
%
|
Tangible Ratio (Tangible
equity/Tangible assets)
|
|
$
|
1,213
|
|
|
|
6.94
|
%
|
|
³$
|
350
|
|
|
|
³2.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
At year-end 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Ratio (Risk-based
capital/Total risk-weighted assets)
|
|
$
|
1,219
|
|
|
|
10.83
|
%
|
|
³ $
|
901
|
|
|
|
³8.00
|
%
|
|
³$
|
1,126
|
|
|
|
³10.00
|
%
|
Tier 1 (Core) Risk-Based Ratio
(Core capital/Total risk-weighted assets)
|
|
$
|
1,096
|
|
|
|
9.74
|
%
|
|
³$
|
450
|
|
|
|
³4.00
|
%
|
|
³$
|
675
|
|
|
|
³6.00
|
%
|
Tier 1 (Core) Leverage Ratio
(Core capital/Adjusted tangible assets)
|
|
$
|
1,096
|
|
|
|
6.89
|
%
|
|
³ $
|
636
|
|
|
|
³4.00
|
%
|
|
³$
|
795
|
|
|
|
³5.00
|
%
|
Tangible Ratio (Tangible
equity/Tangible assets)
|
|
$
|
1,096
|
|
|
|
6.89
|
%
|
|
³$
|
318
|
|
|
|
³2.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
As we previously disclosed, in 2004 the OTS and Guaranty entered
into a Stipulation and Consent to the Issuance of an Order to
Cease and Desist for Affirmative Relief (Consent Order) related
to findings and required corrective actions associated with its
mortgage origination activities. Under the Consent Order,
Guaranty agreed, among other things, to take certain actions
primarily related to its repositioned mortgage origination
activities, including strengthening its regulatory compliance
controls and management, enhancing its suspicious activity
reporting and regulatory training programs, and implementing
improved risk assessment and loan application register programs.
Guaranty has implemented the corrective actions necessitated by
the Consent Order. Additionally, we further repositioned our
mortgage origination activities in 2005, substantially reducing
the volume of activity to which the corrective actions apply.
The Consent Order remains in effect, but has had no significant
on-going impact on the operations of Guaranty or its ability to
pay dividends to the parent company. We have not incurred any
significant financial loss as a result of this matter and have
no reason to believe that the matters addressed in the Consent
Order will have a significant effect on Guarantys
long-term operations or cash flows.
106
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
We have had no changes in or disagreements with our independent
registered public accounting firm to report under this item.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Disclosure controls and procedures
Our chief executive officer and chief financial officer
participated with our management in an evaluation of our
disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e))
as of the end of the period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our chief executive officer and chief
financial officer have concluded that our disclosure controls
and procedures are adequate and effective to ensure that the
information required to be disclosed by us in the reports we
file or submit under the Exchange Act, is recorded, processed,
summarized, and reported within the time periods specified in
the SECs rules and forms.
(b) Internal control over financial reporting
Managements report on internal control over financial
reporting and the attestation report of our independent
registered public accounting firm on that report are included in
Item 8. Financial Statements and Supplementary Data.
During the fourth quarter of our fiscal year, there was no
change to our internal control over financial reporting that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Set forth below is certain information about the members of our
Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year First
|
|
|
|
|
|
|
Elected to
|
|
|
Name
|
|
Age
|
|
the Board
|
|
Principal Occupation
|
|
Kenneth M. Jastrow, II
|
|
|
58
|
|
|
|
1998
|
|
|
Chairman and Chief Executive
Officer of Temple-Inland Inc.
|
Afsaneh M. Beschloss
|
|
|
50
|
|
|
|
2002
|
|
|
President and Chief Executive
Officer of The Rock CreekGroup
|
Dr. Donald M. Carlton
|
|
|
68
|
|
|
|
2003
|
|
|
Former President and Chief
Executive Officer of Radian International LLC
|
Cassandra C. Carr
|
|
|
61
|
|
|
|
2004
|
|
|
Senior Advisor, Public Strategies,
Inc.
|
E. Linn Draper, Jr.
|
|
|
64
|
|
|
|
2004
|
|
|
Former Chairman, President and
Chief Executive Officer of AmericanElectric Power Company, Inc.
|
Larry R. Faulkner
|
|
|
60
|
|
|
|
2005
|
|
|
President of Houston Endowment Inc.
|
James T. Hackett
|
|
|
52
|
|
|
|
2000
|
|
|
Chairman, President and Chief
Executive Officer ofAnadarko Petroleum Corporation
|
Jeffrey M. Heller
|
|
|
66
|
|
|
|
2004
|
|
|
President and Chief Operating
Officer of Electronic Data Systems, Inc.
|
James A. Johnson
|
|
|
62
|
|
|
|
2000
|
|
|
Vice Chairman of Perseus LLC
|
W. Allen Reed
|
|
|
58
|
|
|
|
2000
|
|
|
Chairman of the Board of General
Motors Asset Management Corporation
|
Arthur Temple III
|
|
|
64
|
|
|
|
1983
|
|
|
Chairman of the Board of First
Bank & Trust, East Texas and the T.L.L. Temple
Foundation
|
Larry E. Temple
|
|
|
70
|
|
|
|
1991
|
|
|
Attorney-at-law
|
107
The remaining information required by this item is incorporated
herein by reference from our definitive proxy statement,
involving the election of directors, to be filed pursuant to
Regulation 14A with the SEC not later than 120 days
after the end of the fiscal year covered by this
Form 10-K
(or Definitive Proxy Statement). Information required by this
item concerning executive officers is included in Part I of
this report.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference from our Definitive Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth information as of the fiscal year
ended December 31, 2005, with respect to compensation plans
under which our Common Stock may be issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Securities
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
to be Issued Upon
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Exercise of Outstanding
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Options, Warrants and
|
|
|
Warrants and
|
|
|
Reflected in Column(a))
|
|
Plan Category
|
|
Rights(a)
|
|
|
Rights(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
9,160,337
|
|
|
$
|
24.75
|
|
|
|
3,068,468
|
|
Equity compensation plans not
approved by security holders
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,160,337
|
|
|
$
|
24.75
|
|
|
|
3,068,468
|
|
Beginning January 2003, we voluntarily adopted the prospective
transition method of accounting for stock-based compensation
contained in SFAS No. 148, Accounting for
Stock-Based Compensation Transition and
Disclosure, an amendment of FASB Statement No. 123. The
principal effect of adopting the prospective transition method
is that the fair value of stock options granted in 2003 and
thereafter is charged to expense over the vesting period.
The Financial Accounting Standards Board has issued
SFAS No. 123 (revised December 2004), Share based
payment, which requires that the cost of all employee stock
options, as well as other equity-based compensation
arrangements, be reflected in the financial statements based on
their estimated fair value. SFAS No. 123R will be
effective for us beginning first quarter 2006. The effects of
SFAS No. 123R on our earnings or financial position
will be significantly mitigated because we were already charging
to expense, over the vesting period, the fair value of employee
stock options granted in 2003, 2004, and 2005.
The remaining information required by this item is incorporated
by reference from our Definitive Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item is incorporated by
reference from our Definitive Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference from our Definitive Proxy Statement.
108
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents Filed as Part of Report.
1. Financial Statements
Our consolidated financial statements are included in
Part II, Item 8 of this Annual Report on
Form 10-K.
2. Financial Statement Schedules
All schedules are omitted as the required information is either
inapplicable or the information is presented in our consolidated
financial statements and notes thereto in Item 8 above.
3. Exhibits
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
3
|
.01
|
|
|
|
Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.01 to
registration statement on
Form S-1
(Reg.
No. 2-87570)
filed by the Company with the Commission on November 2,
1983)
|
|
3
|
.02
|
|
|
|
Certificate of Amendment to the
Certificate of Incorporation of the Company, effective
May 4, 1987 (incorporated by reference to Exhibit 4.01
to post-effective amendment No. 2 to registration statement
on
Form S-8
(Reg.
No. 2-88202)
filed by the Company with the Commission on November 16,
1987)
|
|
3
|
.03
|
|
|
|
Certificate of Amendment to the
Certificate of Incorporation of the Company, effective
May 5, 1990 (incorporated by reference to Exhibit 4.01
to post-effective amendment No. 2 to registration statement
on
Form S-8
(Reg.
No. 33-25650)
filed by the Company with the Commission on June 14, 1990)
|
|
3
|
.04
|
|
|
|
By-laws of the Company as amended
and restated May 2, 2002 (incorporated by reference to
Exhibit 3.1 to the Companys
Form 10-Q
for the quarter ended September 28, 2002, and filed with
the Commission on November 12, 2002)
|
|
4
|
.01
|
|
|
|
Form of Specimen Common Stock
Certificate of the Company (incorporated by reference to
Exhibit 4.03 to registration statement on
Form S-8
(Reg.
No. 33-27286)
filed by the Company with the Commission on March 2, 1989)
|
|
4
|
.02
|
|
|
|
Indenture dated as of
September 1, 1986, between the Registrant and Chemical
Bank, as Trustee (or Senior Notes Indenture) (incorporated
by reference to Exhibit 4.01 to registration statement on
Form S-1 (Reg. No. 33-8362)
filed by the Company with the Commission on August 29, 1986)
|
|
4
|
.03
|
|
|
|
First Supplemental Indenture to the
Senior Notes Indenture, dated as of April 15, 1988,
between the Company and JPMorgan Chase Bank, N.A. (formerly
known as The Chase Manhattan Bank and Chemical Bank), as Trustee
(incorporated by reference to Exhibit 4.02 to registration
statement on
Form S-3,
Registration
No. 33-20431,
filed with the Commission on March 2, 1988)
|
|
4
|
.04
|
|
|
|
Second Supplemental Indenture to
the Senior Notes Indenture, dated as of December 27,
1990, between the Company and JPMorgan Chase Bank, N.A.
(formerly known as The Chase Manhattan Bank and Chemical Bank),
as Trustee (incorporated by reference to Exhibit 4.03 to
Form 8-K,
filed with the Commission on December 27, 1990)
|
|
4
|
.05
|
|
|
|
Third Supplemental Indenture to the
Senior Notes Indenture, dated as of May 9, 1991,
between the Company and JPMorgan Chase Bank, N.A. (formerly
known as The Chase Manhattan Bank and Chemical Bank), as Trustee
(incorporated by reference to Exhibit 4 to
Form 10-Q
for the quarter ended June 29, 1991, filed with the
Commission on August 7, 1991)
|
|
4
|
.06
|
|
|
|
Form of Fixed-rate Medium Term
Note, Series D, of the Company (incorporated by reference
to Exhibit 4.05 to registration statement on
Form S-3
(Reg.
No. 33-43978)
filed by the Company with the Commission on November 14,
1991)
|
|
4
|
.07
|
|
|
|
Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Stock, dated February 16, 1989 (incorporated by
reference to Exhibit 4.04 to the Companys
Form 10-K
for the year ended December 31, 1988, and filed with the
Commission on March 21, 1989)
|
|
4
|
.08
|
|
|
|
Rights Agreement, dated
February 20, 1999, between the Company and Equiserve Trust
Company, N.A. (f/k/a First Chicago Trust Company of New York),
as Rights Agent (incorporated by reference to Exhibit 1 to
the Companys registration statement on Form 8A filed
with the Commission on February 19, 1999)
|
|
4
|
.09
|
|
|
|
Form of Fixed-rate Medium Term
Note, Series F, of the Company (incorporated by reference
to Exhibit 4.05 to the Companys
Form 8-K
filed with the Commission on June 3, 1998)
|
109
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
4
|
.10
|
|
|
|
|
Form of 5.003% Senior Note due
2007 of the Company (incorporated by reference to
Exhibit 4.2 to the Companys
Form 8-K
filed with the Commission on May 3, 2002)
|
|
4
|
.11
|
|
|
|
|
Form of 7.875% Senior Notes
due 2012 of the Company (incorporated by reference to
Exhibit 4.1 to the Companys
Form 8-K
filed with the Commission on May 3, 2002)
|
|
4
|
.12
|
|
|
|
|
Form of 6.375% Senior Notes
due 2016 of the Company (incorporated by reference to
Exhibit 4.1 to the Companys
Form 8-K
filed with the Commission on December 6, 2005)
|
|
4
|
.13
|
|
|
|
|
Form of 6.625% Senior Notes
due 2018 of the Company (incorporated by reference to
Exhibit 4.2 to the Companys
Form 8-K
filed with the Commission on December 6, 2005)
|
|
10
|
.01
|
|
|
|
|
Credit Agreement dated
July 28, 2005, with Bank of America, N.A., as
administrative agent and L/C Issuer; Citibank, N.A. and The
Toronto Dominion Bank, as co-syndication agents; BNP Paribas and
The Bank Of Nova Scotia, as co-documentation agents; Banc of
America Securities LLC and Citigroup Global Markets Inc., as
joint lead arrangers and joint book managers; and the lenders
party thereto (incorporated by reference to the Companys
Current Report on
Form 8-K
filed with the Commission on August 1, 2005)
|
|
10
|
.02
|
*
|
|
|
|
Temple-Inland Inc. 1993 Stock
Option Plan (incorporated by reference to the Companys
definitive proxy statement in connection with the Annual Meeting
of Shareholders held May 6, 1994, and filed with the
Commission on March 21, 1994)
|
|
10
|
.03
|
*
|
|
|
|
Temple-Inland Inc. 1997 Stock
Option Plan (incorporated by reference to the Companys
Definitive Proxy Statement in connection with the Annual Meeting
of Shareholders held May 2, 1997, and filed with the
Commission on March 17, 1997), as amended May 7, 1999
(incorporated by reference to the Companys definitive
proxy statement in connection with the Annual Meeting of
Shareholders held May 7, 1999, and filed with the
Commission on March 26, 1999)
|
|
10
|
.04
|
*
|
|
|
|
Temple-Inland Inc. 1997 Restricted
Stock Plan (incorporated by reference to the Companys
Definitive Proxy Statement in connection with the Annual Meeting
of Shareholders held May 2, 1997, and filed with the
Commission on March 17, 1997)
|
|
10
|
.05
|
*
|
|
|
|
Temple-Inland Inc. 2001 Stock
Incentive Plan (incorporated by reference to the Companys
definitive proxy statement in connection with the Annual Meeting
of Shareholders held May 4, 2001, and filed with the
Commission on March 23, 2001)
|
|
10
|
.06
|
*
|
|
|
|
Temple-Inland Inc. 2003 Stock
Incentive Plan (incorporated by reference to Appendix A of
the Companys definitive proxy statement dated
March 31, 2003, and prepared in connection with the annual
meeting of stockholders held May 2, 2003)
|
|
10
|
.07
|
*
|
|
|
|
Form of Nonqualified Stock Option
Agreement issued pursuant to the Temple-Inland Inc. 2003 Stock
Incentive Plan (incorporated by reference to Exhibit 10.23
to the Companys
Form 10-K
for the year ended January 3, 2004, and filed with the
Commission on February 23, 2004)
|
|
10
|
.08
|
*
|
|
|
|
Revised Form of Performance Stock
Units Agreement issued pursuant to the Temple-Inland Inc. 2003
Stock Incentive Plan (1)
|
|
10
|
.09
|
*
|
|
|
|
Revised Form of Restricted Stock
Unit Agreement issued pursuant to the Temple-Inland Inc. 2003
Stock Incentive Plan (1)
|
|
10
|
.10
|
*
|
|
|
|
Revised Form of Nonqualified Stock
Option Agreement for Non-Employee Directors issued pursuant to
the Temple-Inland Inc. 2003 Stock Incentive Plan (1)
|
|
10
|
.11
|
*
|
|
|
|
Temple-Inland Inc. Stock Deferral
and Payment Plan (as amended and restated effective
February 2, 2001) (incorporated by reference to the
Companys definitive proxy statement in connection with the
Annual Meeting of Shareholders held May 4, 2001, and filed
with the Commission on March 23, 2001)
|
|
10
|
.12
|
*
|
|
|
|
Temple-Inland Inc. Directors
Fee Deferral Plan (incorporated by reference to the
Companys definitive proxy statement in connection with the
Annual Meeting of Shareholders held May 4, 2001, and filed
with the Commission on March 23, 2001)
|
|
10
|
.13
|
*
|
|
|
|
Temple-Inland Inc. Supplemental
Executive Retirement Plan (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended June 30, 2001 filed with the
Commission on August 14, 2001)
|
|
10
|
.14
|
*
|
|
|
|
Employment Agreement between the
company and Kenneth M. Jastrow, II, dated February 11,
2005 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on February 11, 2005)
|
|
10
|
.15
|
*
|
|
|
|
Employment Agreement and Change in
Control Agreement dated June 1, 2003, between the Company
and J. Patrick Maley III (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended September 28, 2003, and filed with
the Commission on November 12, 2003)
|
110
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
10
|
.16
|
*
|
|
|
|
Letter Agreement with M. Richard
Warner dated November 4, 2005 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on November 7, 2005)
|
|
10
|
.17
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Kenneth M.
Jastrow, II (incorporated by reference to
Exhibit 10.22 to the Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001), as amended on
February 11, 2005 (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed with the Commission on February 11, 2005)
|
|
10
|
.18
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Bart J. Doney
(incorporated by reference to Exhibit 10.25 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.19
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Kenneth R. Dubuque
(incorporated by reference to Exhibit 10.26 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.20
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Jack C. Sweeny
(incorporated by reference to Exhibit 10.29 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.21
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and M. Richard Warner
(incorporated by reference to Exhibit 10.30 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.22
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Randall D. Levy
(incorporated by reference to Exhibit 10.31 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.23
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Louis R. Brill
(incorporated by reference to Exhibit 10.32 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.24
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Scott Smith
(incorporated by reference to Exhibit 10.33 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.25
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Doyle R. Simons
(incorporated by reference to Exhibit 10.34 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.26
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and David W. Turpin
(incorporated by reference to Exhibit 10.35 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.27
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Leslie K.
ONeal (incorporated by reference to Exhibit 10.36 to
the Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.28
|
*
|
|
|
|
Change in Control Agreement dated
November 1, 2002, between the Company and J. Bradley
Johnston (incorporated by reference to Exhibit 10.24 to the
Companys
Form 10-K
for the year ended December 28, 2002, and filed with the
Commission on March 20, 2003)
|
|
21
|
|
|
|
|
|
Subsidiaries of the Company (1)
|
|
23
|
|
|
|
|
|
Consent of Ernst & Young
LLP (1)
|
|
31
|
.1
|
|
|
|
|
Certification of Chief Executive
Officer pursuant to Exchange Act
rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (1)
|
|
31
|
.2
|
|
|
|
|
Certification of Chief Financial
Officer pursuant to Exchange Act
rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (1)
|
|
32
|
.1
|
|
|
|
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (1)
|
|
32
|
.2
|
|
|
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (1)
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
(1) |
|
Filed herewith |
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Temple-Inland Inc.
(Registrant)
|
|
|
|
By:
|
/s/ Kenneth
M. Jastrow, II
|
Kenneth M. Jastrow, II
Chairman of the Board and
Chief Executive Officer
Date: March 7, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
/s/ Kenneth
M. Jastrow, II
Kenneth
M. Jastrow, II
|
|
Director, Chairman of the
Board,
and Chief Executive Officer
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Randall
D. Levy
Randall
D. Levy
|
|
Chief Financial Officer
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Louis
R. Brill
Louis
R. Brill
|
|
Vice President and
Chief Accounting Officer
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Afsaneh
M. Beschloss
Afsaneh
M. Beschloss
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Donald
M. Carlton
Donald
M. Carlton
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Cassandra
C. Carr
Cassandra
C. Carr
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ E.
Linn Draper, Jr.
E.
Linn Draper, Jr.
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Larry
R. Faulkner
Larry
R. Faulkner
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ James
T. Hackett
James
T. Hackett
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Jeffrey
M. Heller
Jeffrey
M. Heller
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ James
A. Johnson
James
A. Johnson
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ W.
Allen Reed
W.
Allen Reed
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Arthur
Temple III
Arthur
Temple III
|
|
Director
|
|
|
March 7, 2006
|
|
|
|
|
|
|
|
|
/s/ Larry
E. Temple
Larry
E. Temple
|
|
Director
|
|
|
March 7, 2006
|
|
112
EXHIBIT
INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
3
|
.01
|
|
|
|
Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.01 to
registration statement on
Form S-1
(Reg.
No. 2-87570)
filed by the Company with the Commission on November 2,
1983)
|
|
3
|
.02
|
|
|
|
Certificate of Amendment to the
Certificate of Incorporation of the Company, effective
May 4, 1987 (incorporated by reference to Exhibit 4.01
to post-effective amendment No. 2 to registration statement
on
Form S-8
(Reg.
No. 2-88202)
filed by the Company with the Commission on November 16,
1987)
|
|
3
|
.03
|
|
|
|
Certificate of Amendment to the
Certificate of Incorporation of the Company, effective
May 5, 1990 (incorporated by reference to Exhibit 4.01
to post-effective amendment No. 2 to registration statement
on
Form S-8
(Reg.
No. 33-25650)
filed by the Company with the Commission on June 14, 1990)
|
|
3
|
.04
|
|
|
|
By-laws of the Company as amended
and restated May 2, 2002 (incorporated by reference to
Exhibit 3.1 to the Companys
Form 10-Q
for the quarter ended September 28, 2002, and filed with
the Commission on November 12, 2002)
|
|
4
|
.01
|
|
|
|
Form of Specimen Common Stock
Certificate of the Company (incorporated by reference to
Exhibit 4.03 to registration statement on
Form S-8
(Reg.
No. 33-27286)
filed by the Company with the Commission on March 2, 1989)
|
|
4
|
.02
|
|
|
|
Indenture dated as of
September 1, 1986, between the Registrant and Chemical
Bank, as Trustee (or Senior Notes Indenture) (incorporated
by reference to Exhibit 4.01 to registration statement on
Form S-1
(Reg.
No. 33-8362)
filed by the Company with the Commission on August 29, 1986)
|
|
4
|
.03
|
|
|
|
First Supplemental Indenture to
the Senior Notes Indenture, dated as of April 15,
1988, between the Company and JPMorgan Chase Bank, N.A.
(formerly known as The Chase Manhattan Bank and Chemical Bank),
as Trustee (incorporated by reference to Exhibit 4.02 to
registration statement on
Form S-3,
Registration
No. 33-20431,
filed with the Commission on March 2, 1988)
|
|
4
|
.04
|
|
|
|
Second Supplemental Indenture to
the Senior Notes Indenture, dated as of December 27,
1990, between the Company and JPMorgan Chase Bank, N.A.
(formerly known as The Chase Manhattan Bank and Chemical Bank),
as Trustee (incorporated by reference to Exhibit 4.03 to
Form 8-K,
filed with the Commission on December 27, 1990)
|
|
4
|
.05
|
|
|
|
Third Supplemental Indenture to
the Senior Notes Indenture, dated as of May 9, 1991,
between the Company and JPMorgan Chase Bank, N.A. (formerly
known as The Chase Manhattan Bank and Chemical Bank), as Trustee
(incorporated by reference to Exhibit 4 to
Form 10-Q
for the quarter ended June 29, 1991, filed with the
Commission on August 7, 1991)
|
|
4
|
.06
|
|
|
|
Form of Fixed-rate Medium Term
Note, Series D, of the Company (incorporated by reference
to Exhibit 4.05 to registration statement on
Form S-3
(Reg.
No. 33-43978)
filed by the Company with the Commission on November 14,
1991)
|
|
4
|
.07
|
|
|
|
Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Stock, dated February 16, 1989 (incorporated by
reference to Exhibit 4.04 to the Companys
Form 10-K
for the year ended December 31, 1988, and filed with the
Commission on March 21, 1989)
|
|
4
|
.08
|
|
|
|
Rights Agreement, dated
February 20, 1999, between the Company and Equiserve Trust
Company, N.A. (f/k/a First Chicago Trust Company of New York),
as Rights Agent (incorporated by reference to Exhibit 1 to
the Companys registration statement on Form 8A filed
with the Commission on February 19, 1999)
|
|
4
|
.09
|
|
|
|
Form of Fixed-rate Medium Term
Note, Series F, of the Company (incorporated by reference
to Exhibit 4.05 to the Companys
Form 8-K
filed with the Commission on June 3, 1998)
|
|
4
|
.10
|
|
|
|
Form of 5.003% Senior Note
due 2007 of the Company (incorporated by reference to
Exhibit 4.2 to the Companys
Form 8-K
filed with the Commission on May 3, 2002)
|
|
4
|
.11
|
|
|
|
Form of 7.875% Senior Notes
due 2012 of the Company (incorporated by reference to
Exhibit 4.1 to the Companys
Form 8-K
filed with the Commission on May 3, 2002)
|
|
4
|
.12
|
|
|
|
Form of 6.375% Senior Notes
due 2016 of the Company (incorporated by reference to
Exhibit 4.1 to the Companys
Form 8-K
filed with the Commission on December 6, 2005)
|
|
4
|
.13
|
|
|
|
Form of 6.625% Senior Notes
due 2018 of the Company (incorporated by reference to
Exhibit 4.2 to the Companys
Form 8-K
filed with the Commission on December 6, 2005)
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
10
|
.01
|
|
|
|
|
Credit Agreement dated
July 28, 2005, with Bank of America, N.A., as
administrative agent and L/C Issuer; Citibank, N.A. and The
Toronto Dominion Bank, as co-syndication agents; BNP Paribas and
The Bank Of Nova Scotia, as co-documentation agents; Banc of
America Securities LLC and Citigroup Global Markets Inc., as
joint lead arrangers and joint book managers; and the lenders
party thereto (incorporated by reference to the Companys
Current Report on
Form 8-K
filed with the Commission on August 1, 2005)
|
|
10
|
.02
|
*
|
|
|
|
Temple-Inland Inc. 1993 Stock
Option Plan (incorporated by reference to the Companys
definitive proxy statement in connection with the Annual Meeting
of Shareholders held May 6, 1994, and filed with the
Commission on March 21, 1994)
|
|
10
|
.03
|
*
|
|
|
|
Temple-Inland Inc. 1997 Stock
Option Plan (incorporated by reference to the Companys
Definitive Proxy Statement in connection with the Annual Meeting
of Shareholders held May 2, 1997, and filed with the
Commission on March 17, 1997), as amended May 7, 1999
(incorporated by reference to the Companys definitive
proxy statement in connection with the Annual Meeting of
Shareholders held May 7, 1999, and filed with the
Commission on March 26, 1999)
|
|
10
|
.04
|
*
|
|
|
|
Temple-Inland Inc. 1997 Restricted
Stock Plan (incorporated by reference to the Companys
Definitive Proxy Statement in connection with the Annual Meeting
of Shareholders held May 2, 1997, and filed with the
Commission on March 17, 1997)
|
|
10
|
.05
|
*
|
|
|
|
Temple-Inland Inc. 2001 Stock
Incentive Plan (incorporated by reference to the Companys
definitive proxy statement in connection with the Annual Meeting
of Shareholders held May 4, 2001, and filed with the
Commission on March 23, 2001)
|
|
10
|
.06
|
*
|
|
|
|
Temple-Inland Inc. 2003 Stock
Incentive Plan (incorporated by reference to Appendix A of
the Companys definitive proxy statement dated
March 31, 2003, and prepared in connection with the annual
meeting of stockholders held May 2, 2003)
|
|
10
|
.07
|
*
|
|
|
|
Form of Nonqualified Stock Option
Agreement issued pursuant to the Temple-Inland Inc. 2003 Stock
Incentive Plan (incorporated by reference to Exhibit 10.23
to the Companys
Form 10-K
for the year ended January 3, 2004, and filed with the
Commission on February 23, 2004)
|
|
10
|
.08
|
*
|
|
|
|
Revised Form of Performance Stock
Units Agreement issued pursuant to the Temple-Inland Inc. 2003
Stock Incentive Plan (1)
|
|
10
|
.09
|
*
|
|
|
|
Revised Form of Restricted Stock
Unit Agreement issued pursuant to the Temple-Inland Inc. 2003
Stock Incentive Plan (1)
|
|
10
|
.10
|
*
|
|
|
|
Revised Form of Nonqualified Stock
Option Agreement for Non-Employee Directors issued pursuant to
the Temple-Inland Inc. 2003 Stock Incentive Plan (1)
|
|
10
|
.11
|
*
|
|
|
|
Temple-Inland Inc. Stock Deferral
and Payment Plan (as amended and restated effective
February 2, 2001) (incorporated by reference to the
Companys definitive proxy statement in connection with the
Annual Meeting of Shareholders held May 4, 2001, and filed
with the Commission on March 23, 2001)
|
|
10
|
.12
|
*
|
|
|
|
Temple-Inland Inc. Directors
Fee Deferral Plan (incorporated by reference to the
Companys definitive proxy statement in connection with the
Annual Meeting of Shareholders held May 4, 2001, and filed
with the Commission on March 23, 2001)
|
|
10
|
.13
|
*
|
|
|
|
Temple-Inland Inc. Supplemental
Executive Retirement Plan (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended June 30, 2001 filed with the
Commission on August 14, 2001)
|
|
10
|
.14
|
*
|
|
|
|
Employment Agreement between the
company and Kenneth M. Jastrow, II, dated February 11,
2005 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on February 11, 2005)
|
|
10
|
.15
|
*
|
|
|
|
Employment Agreement and Change in
Control Agreement dated June 1, 2003, between the Company
and J. Patrick Maley III (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
for the quarter ended September 28, 2003, and filed with
the Commission on November 12, 2003)
|
|
10
|
.16
|
*
|
|
|
|
Letter Agreement with M. Richard
Warner dated November 4, 2005 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on November 7, 2005)
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
10
|
.17
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Kenneth M.
Jastrow, II (incorporated by reference to
Exhibit 10.22 to the Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001), as amended on
February 11, 2005 (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed with the Commission on February 11, 2005)
|
|
10
|
.18
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Bart J. Doney
(incorporated by reference to Exhibit 10.25 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.19
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Kenneth R. Dubuque
(incorporated by reference to Exhibit 10.26 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.20
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Jack C. Sweeny
(incorporated by reference to Exhibit 10.29 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.21
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and M. Richard Warner
(incorporated by reference to Exhibit 10.30 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.22
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Randall D. Levy
(incorporated by reference to Exhibit 10.31 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.23
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Louis R. Brill
(incorporated by reference to Exhibit 10.32 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.24
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Scott Smith
(incorporated by reference to Exhibit 10.33 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.25
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Doyle R. Simons
(incorporated by reference to Exhibit 10.34 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.26
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and David W. Turpin
(incorporated by reference to Exhibit 10.35 to the
Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.27
|
*
|
|
|
|
Change in Control Agreement dated
October 2, 2000, between the Company and Leslie K.
ONeal (incorporated by reference to Exhibit 10.36 to
the Companys
Form 10-K
for the year ended December 30, 2000, and filed with the
Commission on March 5, 2001)
|
|
10
|
.28
|
*
|
|
|
|
Change in Control Agreement dated
November 1, 2002, between the Company and J. Bradley
Johnston (incorporated by reference to Exhibit 10.24 to the
Companys
Form 10-K
for the year ended December 28, 2002, and filed with the
Commission on March 20, 2003)
|
|
21
|
|
|
|
|
|
Subsidiaries of the
Company (1)
|
|
23
|
|
|
|
|
|
Consent of Ernst & Young
LLP (1)
|
|
31
|
.1
|
|
|
|
|
Certification of Chief Executive
Officer pursuant to Exchange Act
rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (1)
|
|
31
|
.2
|
|
|
|
|
Certification of Chief Financial
Officer pursuant to Exchange Act
rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (1)
|
|
32
|
.1
|
|
|
|
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (1)
|
|
32
|
.2
|
|
|
|
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (1)
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
(1) |
|
Filed herewith |