e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the Fiscal Year Ended December 29, 2007
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or
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the Transition Period
From to
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Commission File Number
001-08634
Temple-Inland Inc.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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75-1903917
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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1300 MoPac Expressway South,
3rd
Floor
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:
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Title of Each Class
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Name of Each Exchange On Which Registered
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Common Stock, $1.00 Par Value per Share,
non-cumulative
Preferred Share Purchase Rights
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New York Stock Exchange
New York Stock Exchange
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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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell
company (as defined in
Rule 12b-2
of the
Act). 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
June 29, 2007, was approximately $5,098,255,000. 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 22, 2008, there were 106,274,170 shares
of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys definitive proxy statement to be
prepared in connection with the 2008 Annual Meeting of
Shareholders are incorporated by reference into Part III of
this report.
PART I
Introduction
Temple-Inland Inc. is a Delaware corporation that was organized
in 1983. We manufacture corrugated packaging and building
products, which we report as separate operating segments. The
following chart presents our corporate structure at year-end
2007. 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, unless indicated
otherwise.
Our principal executive offices are located at 1300 MoPac
Expressway South,
3rd Floor,
Austin, Texas 78746. Our telephone number is
(512) 434-5800.
Financial
Information
Financial information about our principal operating segments and
revenues by geographic areas are shown in our notes to financial
statements contained in Item 8, and revenues and unit sales
by product line are contained in Item 7 of this Annual
Report on
Form 10-K.
Transformation
Plan
On February 25, 2007, our board of directors unanimously
authorized a transformation plan that included the spin-off of
our real estate business and our financial services business.
The spin-offs were completed on December 28, 2007 through
distributions to our stockholders of all of the shares of common
stock of Forestar Real Estate Group Inc., which holds all of the
assets and liabilities formerly associated with our real estate
business, and Guaranty Financial Group Inc., which holds all of
the assets and liabilities formerly associated with our
financial services business. Our consolidated financial
statements contained in this Annual Report on
Form 10-K
have been reclassified for all periods presented to report
Forestar and Guaranty as discontinued operations.
As part of the transformation plan, we also sold our strategic
timberland on October 31, 2007 for approximately
$2.38 billion. The total consideration consisted almost
entirely of notes due in 2027, which are
1
secured by irrevocable standby letters of credit. In December
2007, we pledged the notes as collateral for nonrecourse loans.
The net cash proceeds from the nonrecourse loans, after current
taxes and transaction costs, were approximately
$1.8 billion. We used these proceeds to pay a special
dividend to our shareholders of $10.25 per share and reduce debt
by approximately $700 million.
Narrative
Description of the Business
Corrugated Packaging. Our corrugated packaging
segment provided 77.5 percent of our 2007 consolidated net
revenues. Our vertically integrated corrugated packaging
operation includes:
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five linerboard mills,
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one corrugating medium mill, and
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64 converting facilities.
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We manufacture containerboard and convert it into a complete
line of corrugated packaging. We sold eight percent of the
containerboard we produced in 2007 in the domestic and export
markets. We converted the remaining internal production, in
combination with containerboard we purchased from other
producers, into corrugated containers at our converting
facilities. 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 converting facilities 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 packaging 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 over 9,500 corrugated packaging customers with 17,000
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.
Building Products. Our building products
segment provided 20.5 percent of our 2007 consolidated net
revenues. We manufacture a wide range of building products,
including:
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lumber,
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gypsum wallboard,
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particleboard,
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medium density fiberboard (or MDF), and
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fiberboard.
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We sell building 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 building
products segment. Most of our products are sold by account
managers and representatives to distributors, retailers, and
original equipment manufacturers. Sales of building products are
heavily dependent upon the level of residential housing
expenditures, including the repair and remodeling market.
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We also own a 50 percent interest in Del-Tin Fiber LLC, a
joint venture that produces MDF at a facility in El Dorado,
Arkansas.
Raw
Materials
Wood fiber, in various forms, is the principal raw material we
use in manufacturing our products. In October 2007, in
conjunction with our transformation plan, we sold our
1.5 million acres of strategic timberland and entered into
long-term fiber supply agreements with the purchaser. During
2007, owned timberland supplied approximately 41 percent of
our virgin wood fiber requirements. The balance of our virgin
wood fiber requirements was purchased from numerous landowners
and other timber owners, as well as other producers of wood
by-products. In 2008, we currently expect that we will purchase
at market prices approximately 50 percent of our wood fiber
requirements under our long-term fiber supply agreements, the
most significant of which were entered into in connection with
our timberland sale. The remainder of our virgin wood fiber
requirements will be purchased at market prices 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 wood fiber, but each mill is also able to use
recycled fiber for up to 15 percent of its wood fiber
requirements. The Ontario, California, and Maysville, Kentucky,
mills use only recycled fiber. The mill at New Johnsonville,
Tennessee, uses a combination of virgin wood and recycled fiber.
In 2007, recycled fiber represented approximately
36 percent of the total wood fiber needs of our
containerboard operations. We purchase recycled fiber at market
prices on the open market from numerous suppliers. We generally
produce more linerboard and less corrugating medium than is used
by our converting facilities. 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 market prices. 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
our Cumberland City plant. Synthetic gypsum acquired pursuant to
this agreement supplies all the synthetic gypsum required by our
Cumberland City and West Memphis plants. In 2007, our gypsum
wallboard plant in McQueeney, Texas, primarily used gypsum
obtained from its own quarry and gypsum acquired from the same
source that supplies the Fletcher, Oklahoma, plant. In 2008, we
expect the McQueeney plant will use synthetic gypsum and gypsum
from our quarry.
We believe the sources outlined above will be sufficient to
supply our raw material needs for the foreseeable future. We
hedge very little of our raw material costs. The wood fiber
market is difficult to predict and there can be no assurance of
the future direction of prices for virgin wood or recycled
fiber. Future increases in wood fiber prices could adversely
affect our results of operations.
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, petroleum coke, tire derived fuel,
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
84 percent of our energy requirements in 2007 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.
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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. It is likely that prices of natural gas will continue to
fluctuate in the future. We hedge very little of our energy
costs.
Employees
We have approximately 12,000 employees, of which
approximately 5,000 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 our principal
collective bargaining agreements:
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Approximate Number of
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Location
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Bargaining Unit(s)
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Employees Covered
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Expiration Dates
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Linerboard Mill, Orange, Texas
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United Steel, Paper and Forestry, Rubber, Manufacturing, Energy,
Allied Industrial and Service Workers International Union (or
USW), Local 1398, and USW, Local 391
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202 hourly production employees and 79 hourly
maintenance employees
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July 31, 2008
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Linerboard Mill, Bogalusa, Louisiana
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USW, Local 189, and International Brotherhood of Electrical
Workers (or IBEW), Local 1077
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338 hourly production employees and 26 electrical
maintenance employees
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July 31, 2009
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Linerboard Mill, Rome, Georgia
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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
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247 hourly production employees, 28 electrical maintenance
employees, 25 pipefitter maintenance employees, and 63
mechanical maintenance employees
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August 31, 2010
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Evansville, Indiana and Middletown, Ohio, Box Plants (or
Northern Multiple)
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USW, Local 1046 and USW, Local 114, respectively
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94 and 100 hourly production and maintenance employees,
respectively
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April 30, 2008
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Rome, Georgia and Orlando, Florida, Box Plants (or Southern
Multiple)
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USW Local 838 and USW Local 834, respectively
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112 and 101 hourly production and maintenance employees,
respectively
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December 1, 2008
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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
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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 $12 million in 2007. 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,
excluding expenditures related to the Maximum Achievable Control
Technology (or MACT) programs and landfill closures discussed
below, will be $9 million in 2008, $16 million in
2009, and $9 million in 2010. The estimated expenditures
could be significantly higher if more stringent laws and
regulations are implemented.
The U.S. Environmental Protection Agency (or EPA) has
issued extensive regulations governing air and water emissions
from the forest products industry. Compliance with these MACT
regulations will be required as they become enacted.
On September 13, 2004, EPA published the Boiler MACT,
regulations affecting industrial boilers and process heaters
burning all fuel types with the exception of small gas-fired
units. On July 30, 2007, the U.S. Court of Appeals for
the D.C. Circuit remanded and vacated the Boiler MACT. In
order to accurately gauge our liability regarding future related
regulations, we continue to monitor and are actively engaged in
the process the EPA is undertaking to develop new standards for
industrial boilers and process heaters.
The Plywood and Composite Wood Panel (or PCWP) MACT standards
were published July 30, 2004. Compliance with PCWP MACT was
required by October 1, 2008. On June 19, 2007, the
U.S. Court of Appeals for the D.C. Circuit rejected
the PCWP MACT low risk option and the one-year
compliance extension previously granted by EPA. As a result, the
PCWP MACT compliance date reverted back to the October 1,
2007 deadline contained in the standards published in 2004. We
have 12 building products facilities affected by the regulation.
In a limited number of cases, one year extension requests were
submitted to state regulatory agencies to allow for installation
of appropriate PCWP MACT pollution control equipment. All of our
extension requests were granted and we anticipate full
compliance. Capital expenditures to comply with PCWP MACT are
estimated at $6 million, of which we spent $2 million
in 2007.
We use company-owned landfills for disposal of non-hazardous
waste at three containerboard mills and two building 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, $27 million over the next
25 years to ensure proper closure of these landfills and
remediation of these two additional sites for which we have
established a reserve.
At one of these sites, we continue to work with environmental
consultants and the Louisiana Department of Environmental
Quality (DEQ) to remediate the source of contaminated water
discovered in a manhole adjacent to our facility in Bogalusa,
Louisiana. Phase II of the investigation process, which
involved drilling more and deeper test wells in the affected
area, is complete. Our investigation report, including a final
remediation plan, was approved by the Louisiana DEQ in December
2007. We have incurred $2 million in costs to date and
estimate that we will incur additional remediation expenses of
about $10 million, for which we have established a reserve.
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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 our
competitors are also subject to these regulations.
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 five
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 five
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 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
over 1,350 box plants in the United States. Our box plants
accounted for approximately 12.5 percent of total industry
shipments in 2007, 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.
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Executive
Officers of the Registrant
The names, ages, and titles of our executive officers are:
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Name
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Age
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Office
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Doyle R. Simons
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Chairman of the Board and Chief Executive Officer
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J. Patrick Maley III
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President and Chief Operating Officer
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Bart J. Doney
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Group Vice President
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Jack C. Sweeny
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Group Vice President
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Dennis J. Vesci
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Group Vice President
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Grant F. Adamson
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Chief Governance Officer
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J. Bradley Johnston
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Chief Administrative Officer
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Randall D. Levy
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Chief Financial Officer
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Scott Smith
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Chief Information Officer
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Leslie K. ONeal
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Vice President, Assistant General Counsel and Secretary
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Carolyn C. Sloan
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Vice President, Internal Audit
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C. Morris Davis
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General Counsel
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Troy L. Hester
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Principal Accounting Officer and Corporate Controller
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David W. Turpin
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Treasurer
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Doyle R. Simons became Chairman of the Board and Chief Executive
Officer on December 29, 2007. He was previously named
Executive Vice President in February 2005 following his service
as Chief Administrative Officer since November 2003. Since
joining the Company in 1992, Mr. Simons has served as Vice
President, Administration from November 2000 to November 2003
and Director of Investor Relations from 1994 through 2000.
J. Patrick Maley III became President and Chief
Operating Officer on December 29, 2007. He was previously
named 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.
Bart J. Doney became Group Vice President in February 2000.
Mr. Doney has served as an officer of our corrugated
packaging segment since 1990.
Jack C. Sweeny became Group Vice President in May 1996. Since
November 1982, Mr. Sweeny has served in various capacities
in our building products segment.
Dennis J. Vesci became Group Vice President in August 2005.
Mr. Vesci has served as an officer of our corrugated
packaging segment since 1998.
Grant F. Adamson became Chief Governance Officer in May 2006.
Mr. Adamson joined the Company in 1991 and has served in
various capacities including Assistant General Counsel.
J. Bradley Johnston became Chief Administrative Officer in
February 2005. Prior to that, Mr. Johnston served as
General Counsel from August 2002 through May 2006 and in various
capacities in our former financial services segment since 1993.
Randall D. Levy became Chief Financial Officer in May 1999.
Mr. Levy joined the Company in 1989 serving in various
capacities in our former financial services segment before being
named Chief Financial Officer.
Scott Smith became Chief Information Officer in February 2000.
Prior to that, Mr. Smith served in various capacities
within our former financial services segment since 1988.
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.
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Carolyn C. Sloan was named Vice President, Internal Audit, in
August 2005. Ms. Sloan joined the Company in 2001 as
Director, Internal Audit.
C. Morris Davis became General Counsel in May 2006.
Mr. Davis joined Temple-Inland after 39 years with the
law firm of McGinnis, Lochridge & Kilgore in Austin,
where he served seven years as the firms managing partner.
Troy L. Hester was named Principal Accounting Officer in August
2006. Mr. Hester has been with Temple-Inland since 1999 and
has served in various capacities including Controller-Financial
Services, Vice President Accounting Center, and was named
Corporate Controller in May 2006.
David W. Turpin has served as Treasurer since joining the
Company 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.
Available
Information
From our Internet website,
http://www.templeinland.com,
you may obtain additional information about us including:
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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);
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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); and
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corporate governance information that includes our
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corporate governance principles,
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audit committee charter,
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management development and executive compensation committee
charter,
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nominating and governance committee charter,
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standards of business conduct and ethics,
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code of ethics for senior financial officers, and
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information on how to communicate directly with our board of
directors.
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We will also provide printed copies of any of these documents to
any shareholder upon request. In addition, the materials we file
with the SEC may be read and copied at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC
20549. Information about the operation of the Public Reference
Room is available by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements, and
other information that is filed electronically with the SEC.
The
business segments in which we operate are highly
competitive.
The business segments 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, 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.
8
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 building products markets, we compete with many companies
that are substantially larger and have greater resources in the
manufacturing of building products.
The
profitability of our business is affected by changes in raw
material and other costs.
Virgin wood fiber and recycled fiber are the principal raw
materials we use to manufacture corrugated packaging and certain
of our building products. We purchase virgin wood fiber in
highly competitive, price sensitive markets. The price for wood
fiber 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 old corrugated containers,
especially from China, may cause a significant increase in the
cost of recycled 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 virgin wood fiber and
recycled fiber in economic proximity to our facilities, this may
not continue to be the case for any or all of our facilities.
Our profitability is also sensitive to changes in the prices of
energy and transportation. 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 building products industries are
cyclical in nature and experience periods of
overcapacity.
The operating results of our corrugated packaging and building
products segments reflect each such industrys general
cyclical pattern. While the cycles of each industry do not
historically coincide, demand and prices in each tend to drop
substantially in an economic downturn. The building products
industry is further influenced by the residential construction
and remodeling markets. Further, each industry periodically
experiences substantial overcapacity. 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 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
9
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, cash flows, and results of operations.
Downward
changes in demand for housing in the market regions where we
operate could decrease profitability in our building products
segment.
The residential homebuilding industry is sensitive to changes in
economic conditions, including interest rates and availability
of financing. Adverse changes in these conditions generally, or
in the market regions where we operate, could decrease demand
for new homes in these areas. Decline in housing demand could
have a negative effect on the pricing and demand for many of our
building products, particularly lumber and gypsum wallboard,
which could result in a decrease in our revenues and earnings.
If
certain internal restructuring transactions and the
distributions of Forestar and Guaranty are determined to be
taxable for U.S. federal income tax purposes, we and our
stockholders that are subject to U.S. federal income tax could
incur significant U.S. federal income tax
liabilities.
We entered into certain internal restructuring transactions in
preparation for the spin-offs of Forestar and Guaranty. These
transactions are complex and could cause us to incur significant
tax liabilities. We received a private letter ruling from the
IRS and opinions of tax counsel regarding the tax-free nature of
these transactions and the distributions. The ruling and
opinions rely on certain facts, assumptions, representations,
and undertakings, from us regarding the past and future conduct
of our businesses and other matters. If any of these are
incorrect or not otherwise satisfied, then we and our
stockholders may not be able to rely on the ruling or opinions
and could be subject to significant tax liabilities.
Notwithstanding the ruling and opinions, the IRS could determine
on audit that the distributions or the internal restructuring
transactions should be treated as taxable transactions if it
determines that any of these facts, assumptions,
representations, or undertakings are not correct or have been
violated, or if the distributions should become taxable for
other reasons, including as a result of significant changes in
stock ownership after the distribution.
If the
sale of our strategic timberland did not qualify for installment
method reporting for U.S. federal income tax purposes, we could
incur significant U.S. federal income tax liabilities the
payment of which we believe to be deferred.
We sold our strategic timberland in a manner intended for
U.S. federal income tax purposes to defer recognition of a
substantial portion of the gain on the sale. Under the
installment method, we will not be required to pay
U.S. federal income taxes on the deferred gain until we are
required to recognize the gain. We received opinions of tax
counsel regarding the timberland sale and the deferred gain. The
opinions rely on certain facts, assumptions, representations,
and undertakings from us regarding the past and future conduct
of our businesses and other matters. If any of these are
incorrect or not otherwise satisfied, then we may not be able to
rely on the opinions. Notwithstanding the opinions, the IRS
could determine on audit that the gain does not qualify for
deferral if it determines that any of these facts, assumptions,
representations, or undertakings are not correct or have been
violated or that the transaction otherwise does not qualify for
the installment method.
We
have interest rate risk in connection with our financial assets
and nonrecourse financial liabilities of special purpose
entities.
In October 2007, we received $2.38 billion in notes due in
2027 from the sale of our timberland, which we later contributed
to two wholly-owned, bankruptcy-remote special purpose entities.
In December 2007, the special purpose entities pledged the notes
as collateral for $2.14 billion nonrecourse loans payable
in 2027. Both the notes and the borrowings require quarterly
interest payments based on variable interest rates that reset
quarterly. Because of the differences in references rates,
margins, and reset dates, there could be periods in which the
interest paid on the nonrecourse financial liabilities is
significantly more than the interested received on the financial
assets.
10
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We own and operate manufacturing facilities throughout the
United States, four converting plants in Mexico, and one in
Puerto Rico. We believe our manufacturing facilities are
suitable for their purposes and adequate for our business.
Additional information about selected facilities by business
segment follows:
Containerboard
Mills
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Annual
|
|
|
2007
|
|
Location
|
|
Product
|
|
Machines
|
|
|
Capacity
|
|
|
Production
|
|
|
|
|
|
|
|
|
(In tons)
|
|
|
Ontario, California
|
|
Linerboard and corrugating medium
|
|
|
1
|
|
|
|
336,000
|
|
|
|
334,479
|
|
Rome, Georgia
|
|
Linerboard
|
|
|
2
|
|
|
|
837,000
|
|
|
|
834,069
|
|
Orange, Texas
|
|
Linerboard and corrugating medium
|
|
|
2
|
|
|
|
730,000
|
|
|
|
725,546
|
|
Bogalusa, Louisiana
|
|
Linerboard
|
|
|
2
|
|
|
|
915,000
|
|
|
|
916,021
|
|
Maysville, Kentucky
|
|
Linerboard and corrugating medium
|
|
|
1
|
|
|
|
454,000
|
|
|
|
455,102
|
|
New Johnsonville, Tennessee
|
|
Corrugating medium
|
|
|
1
|
|
|
|
348,000
|
|
|
|
349,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,620,000
|
|
|
|
3,614,923
|
|
Newport, Indiana*
|
|
Corrugating medium, linerboard,
|
|
|
1
|
|
|
|
308,000
|
|
|
|
300,882
|
|
|
|
and gypsum facing paper
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 2007, we purchased 52,788 tons of corrugating medium and
linerboard and 42,136 tons of gypsum facing paper from the
venture. |
Converting
Facilities*
|
|
|
|
|
Corrugator
|
Location
|
|
Size
|
|
Phoenix, Arizona
|
|
98²
|
Fort Smith, Arkansas
|
|
87²
|
Fort Smith,
Arkansas(1)***
|
|
None
|
Bell, California
|
|
98²
|
Buena Park,
California(1)
|
|
85²
|
El Centro,
California(1)
|
|
87²
|
Gilroy,
California(1)
|
|
87²
|
Gilroy,
California(1)***
|
|
98²
|
Ontario, California
|
|
87²
|
Santa Fe Springs, California
|
|
98²
|
Santa Fe Springs,
California(1)**
|
|
87²
and
85²
|
Santa Fe Springs,
California(1)***
|
|
None
|
Tracy, California
|
|
110²
|
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
|
11
|
|
|
|
|
Corrugator
|
Location
|
|
Size
|
|
Chicago,
Illinois(1)***
|
|
None
|
Elgin, Illinois
|
|
78²
|
Elgin, Illinois***
|
|
None
|
Crawfordsville, Indiana
|
|
98²
|
Evansville, Indiana
|
|
98²
|
Indianapolis, Indiana
|
|
87²
|
Indianapolis, Indiana***
|
|
None
|
St. Anthony, Indiana***
|
|
None
|
Tipton, Indiana***
|
|
110²
|
Garden City, Kansas
|
|
98²
|
Kansas City, Kansas
|
|
87²
|
Bogalusa, Louisiana
|
|
98²
|
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
|
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
|
San Antonio, Texas***
|
|
98²
|
Petersburg, Virginia
|
|
87²
|
San Jose Iturbide, Mexico
|
|
98²
|
Monterrey, Mexico
|
|
87²
|
Los Mochis, Sinaloa, Mexico
|
|
87²
|
Guadalajara,
Mexico(1)***
|
|
None
|
12
|
|
|
* |
|
The annual capacity of the converting facilities 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 or sheet feeder plants. |
Additionally, we own a graphics resource center in Indianapolis,
Indiana, that has a 100 preprint press. We lease 37
warehouses located throughout much of the United States.
Building
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
|
|
|
165
|
|
Lumber
|
|
DeQuincy, Louisiana
|
|
|
198
|
|
|
|
|
|
|
|
|
Total lumber
|
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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
|
|
McQueeney, Texas
|
|
|
400
|
|
Gypsum Wallboard
|
|
Cumberland City, Tennessee
|
|
|
800
|
|
|
|
|
|
|
|
|
Total gypsum wallboard
|
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
Particleboard
|
|
Monroeville, Alabama
|
|
|
160
|
|
Particleboard
|
|
Thomson, Georgia
|
|
|
160
|
|
Particleboard
|
|
Diboll, Texas
|
|
|
160
|
|
Particleboard
|
|
Hope, Arkansas
|
|
|
200
|
|
Particleboard(1)(2)
|
|
Mt. Jewett, Pennsylvania
|
|
|
200
|
|
|
|
|
|
|
|
|
Total particleboard
|
|
|
|
|
880
|
|
|
|
|
|
|
|
|
MDF*
|
|
El Dorado, Arkansas
|
|
|
160
|
|
MDF(1)
|
|
Mt. Jewett, Pennsylvania
|
|
|
140
|
|
|
|
|
|
|
|
|
Total MDF
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
Fiberboard
|
|
Diboll, Texas
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The table shows the full capacity of this facility that is owned
by a joint venture in which we own a 50 percent interest. |
|
|
|
(1) |
|
Leased facilities. |
|
(2) |
|
Due to market conditions, we curtailed production at this
facility beginning in 2003 and made the decision in 2007 to
cease production permanently. |
13
Other
We occupy approximately 190,000 square feet of leased
office space in Austin, Texas. We own and occupy a
150,000 square feet office building in Diboll, Texas.
At year-end 2007, property and equipment having a net book value
of $2 million were subject to liens in connection with
$14 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. 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. A summary of our more significant
legal matters is set forth below.
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. In addition, complaints
containing allegations similar to those in the class action were
filed by certain opt-out plaintiffs. Over the last several
years, we have paid a total of $13 million to settle the
class action and a majority of the opt-out claims. In December
2007, we agreed to participate in binding arbitration in an
effort to resolve most of the remaining claims. As a result of
the arbitration, we paid $48 million on the claims
submitted to arbitration and to settle all remaining opt-out
claims in the federal litigation.
One related Kansas state court claim for approximately
$26 million in statutory damages, which could be trebled
under applicable state law, is still pending against us.
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 11 lawsuits seeking damages
for various personal injuries allegedly caused by either
exposure to the released gas or fears of exposure. These 11
lawsuits have been consolidated under Louisiana state rules for
purpose of discovery and are set for trial in third quarter
2008. We are vigorously defending against these allegations.
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. The
number of claims has remained relatively constant in the past
few years despite the fact that the majority of the claims
relate to a facility we sold at the end of 1999.
Other
We are also defending two cases in California state court
alleging violations of that states on-duty meal break
laws. In 2007, we settled three additional meal break cases.
14
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We did not submit any matter to a vote of our shareholders in
fourth quarter 2007.
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. The
high and low sales prices for our Common Stock and dividends
paid in each fiscal quarter in the two most recent fiscal years
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Price Range
|
|
|
|
|
|
Price Range
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
First Quarter
|
|
$
|
63.61
|
|
|
$
|
44.29
|
|
|
$
|
0.28
|
|
|
$
|
47.92
|
|
|
$
|
40.83
|
|
|
$
|
0.25
|
|
Second Quarter
|
|
$
|
64.45
|
|
|
$
|
59.00
|
|
|
$
|
0.28
|
|
|
$
|
47.68
|
|
|
$
|
38.12
|
|
|
$
|
0.25
|
|
Third Quarter
|
|
$
|
66.28
|
|
|
$
|
49.17
|
|
|
$
|
0.28
|
|
|
$
|
45.48
|
|
|
$
|
39.78
|
|
|
$
|
0.25
|
|
Fourth Quarter*
|
|
$
|
57.51
|
|
|
$
|
29.09
|
|
|
$
|
10.53
|
|
|
$
|
46.71
|
|
|
$
|
37.84
|
|
|
$
|
0.25
|
|
For the Year
|
|
$
|
66.28
|
|
|
$
|
29.09
|
|
|
$
|
11.37
|
|
|
$
|
47.92
|
|
|
$
|
37.84
|
|
|
$
|
1.00
|
|
|
|
|
* |
|
Includes a special dividend of $10.25 per share paid in December
2007. |
Shareholders
Our stock transfer records indicated that as of
February 22, 2008, there were approximately 4,750 holders
of record of our Common Stock.
Dividend
Policy
As indicated above, we paid quarterly dividends during each of
the two most recent years in the amounts shown. In addition to
our regular quarterly dividend, we paid a special dividend of
$10.25 per share in December 2007 as part of our transformation
plan. On February 1, 2008, the Board of Directors declared
a quarterly dividend on our Common Stock of $0.10 per share
payable on March 14, 2008, to shareholders of record on
February 29, 2008. 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 (10/1/2007 10/31/2007)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
6,650,000
|
|
Month 2 (11/1/2007 11/30/2007)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
6,650,000
|
|
Month 3 (12/1/2007 12/31/2007)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
6,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On August 4, 2006, we announced that our Board of Directors
authorized the repurchase of up to 6,000,000 shares of our
common stock. We have purchased 4,350,000 shares under this
authorization, which has no expiration date. On February 2,
2007, we announced that our Board of Directors authorized the |
15
|
|
|
|
|
purchase of up to an additional 5,000,000 shares of our
common stock, increasing the maximum number of shares yet to be
purchased under our repurchase plans to 6,650,000 shares.
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. |
Performance
Graph
We composed an index of our peers consisting of AbitibiBowater
Inc., Caraustar Industries, Inc., Domtar Corporation,
International Paper Company, MeadWestvaco Corporation, Packaging
Corporation of America, Smurfit-Stone Container Corporation, and
Weyerhaeuser Corporation (Peer Index). During the five preceding
years, our cumulative total stockholder return compared to the
Standard & Poors 500 Stock Index and to the Peer
Index was as shown in the following table:
Assumes $100
invested on the last trading day in fiscal year 2002
*Total return assumes reinvestment of dividends
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.
16
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006(a)
|
|
|
2005
|
|
|
2004
|
|
|
2003(b)
|
|
|
|
(Dollars in millions, except per share)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
3,044
|
|
|
$
|
2,977
|
|
|
$
|
2,825
|
|
|
$
|
2,736
|
|
|
$
|
2,700
|
|
Building products
|
|
|
806
|
|
|
|
1,119
|
|
|
|
898
|
|
|
|
851
|
|
|
|
684
|
|
Timber and timberland
|
|
|
76
|
|
|
|
89
|
|
|
|
120
|
|
|
|
107
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
3,926
|
|
|
$
|
4,185
|
|
|
$
|
3,843
|
|
|
$
|
3,694
|
|
|
$
|
3,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
287
|
|
|
$
|
255
|
|
|
$
|
120
|
|
|
$
|
96
|
|
|
$
|
18
|
|
Building products
|
|
|
8
|
|
|
|
221
|
|
|
|
125
|
|
|
|
129
|
|
|
|
2
|
|
Timber and timberland
|
|
|
65
|
|
|
|
63
|
|
|
|
72
|
|
|
|
52
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
360
|
|
|
|
539
|
|
|
|
317
|
|
|
|
277
|
|
|
|
62
|
|
Items not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(100
|
)
|
|
|
(107
|
)
|
|
|
(91
|
)
|
|
|
(79
|
)
|
|
|
(73
|
)
|
Share-based compensation
|
|
|
(34
|
)
|
|
|
(38
|
)
|
|
|
(21
|
)
|
|
|
(12
|
)
|
|
|
(6
|
)
|
Gain on sale of timberland
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income
(expense)(c)
|
|
|
(188
|
)
|
|
|
26
|
|
|
|
(85
|
)
|
|
|
(42
|
)
|
|
|
(133
|
)
|
Other non-operating income
(expense)(c)
|
|
|
(35
|
)
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Net interest income on financial assets and nonrecourse
financial liabilities of special purpose
entities(d)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on debt
|
|
|
(111
|
)
|
|
|
(123
|
)
|
|
|
(109
|
)
|
|
|
(125
|
)
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
1,955
|
|
|
|
390
|
|
|
|
11
|
|
|
|
19
|
|
|
|
(293
|
)
|
Income tax (expense)
benefit(e)
|
|
|
(753
|
)
|
|
|
(103
|
)
|
|
|
7
|
|
|
|
8
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,202
|
|
|
|
287
|
|
|
|
18
|
|
|
|
27
|
|
|
|
(29
|
)
|
Discontinued
operations(f)
|
|
|
103
|
|
|
|
181
|
|
|
|
158
|
|
|
|
133
|
|
|
|
131
|
|
Effect of accounting
change(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,305
|
|
|
$
|
468
|
|
|
$
|
176
|
|
|
$
|
160
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
11.12
|
|
|
$
|
2.59
|
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
$
|
(0.27
|
)
|
Discontinued
operations(f)
|
|
|
0.96
|
|
|
|
1.63
|
|
|
|
1.38
|
|
|
|
1.18
|
|
|
|
1.21
|
|
Effect of accounting
change(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12.08
|
|
|
$
|
4.22
|
|
|
$
|
1.54
|
|
|
$
|
1.42
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common
share(h)
|
|
$
|
11.37
|
|
|
$
|
1.00
|
|
|
$
|
0.90
|
|
|
$
|
1.22
|
|
|
$
|
0.68
|
|
Average diluted shares outstanding
|
|
|
108.1
|
|
|
|
110.8
|
|
|
|
114.5
|
|
|
|
112.4
|
|
|
|
108.4
|
|
Common shares outstanding at year-end
|
|
|
106.1
|
|
|
|
104.9
|
|
|
|
111.0
|
|
|
|
112.2
|
|
|
|
109.2
|
|
Depreciation and amortization
|
|
$
|
214
|
|
|
$
|
225
|
|
|
$
|
218
|
|
|
$
|
219
|
|
|
$
|
233
|
|
Capital expenditures
|
|
$
|
237
|
|
|
$
|
204
|
|
|
$
|
220
|
|
|
$
|
219
|
|
|
$
|
134
|
|
At Year-End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing assets
|
|
$
|
3,559
|
|
|
$
|
3,627
|
|
|
$
|
3,411
|
|
|
$
|
3,522
|
|
|
$
|
3,474
|
|
Financial assets of special purpose entities
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
16,847
|
|
|
|
18,219
|
|
|
|
16,622
|
|
|
|
17,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,942
|
|
|
$
|
20,474
|
|
|
$
|
21,630
|
|
|
$
|
20,144
|
|
|
$
|
21,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt (long-term excluding current maturities and nonrecourse
financial liabilities of special purpose entities)
|
|
$
|
852
|
|
|
$
|
1,584
|
|
|
$
|
1,498
|
|
|
$
|
1,485
|
|
|
$
|
1,611
|
|
Nonrecourse financial liabilities of special purpose entities
|
|
$
|
2,140
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Liability for pension and postretirement benefits
|
|
$
|
256
|
|
|
$
|
366
|
|
|
$
|
407
|
|
|
$
|
432
|
|
|
$
|
396
|
|
Shareholders equity
|
|
$
|
780
|
|
|
$
|
2,189
|
|
|
$
|
2,080
|
|
|
$
|
2,107
|
|
|
$
|
1,988
|
|
Ratio of debt to total capitalization
|
|
|
52
|
%
|
|
|
42
|
%
|
|
|
42
|
%
|
|
|
41
|
%
|
|
|
45
|
%
|
|
|
|
(a) |
|
In January 2006, we purchased our partners 50 percent
interest in Standard Gypsum LP for $150 million and assumed
debt of $28 million. Unaudited pro forma information
assuming this acquisition and related financing had occurred at
the beginning of 2005 follows: revenues $4.04 billion;
income from continuing operations $32 million; and income
from continuing operations, per diluted share $0.28. These pro
forma results are not necessarily an indication of what actually
would have occurred if the acquisition and financing
transactions had been completed at the beginning of the periods
presented and are not intended to be indicative of future
results. |
17
|
|
|
(b) |
|
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 2003 amounts have
been reclassified to reflect this change. |
|
(c) |
|
Other operating and non-operating income (expense) consists of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions)
|
|
|
Other operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation costs (advisory and legal fees, change of control
and employee related)
|
|
$
|
(69
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Closure and sale of converting and production facilities and
sale of non-strategic assets
|
|
|
(55
|
)
|
|
|
(4
|
)
|
|
|
(50
|
)
|
|
|
(27
|
)
|
|
|
(83
|
)
|
Litigation
|
|
|
(56
|
)
|
|
|
(6
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Environmental remediation
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Softwood Lumber Agreement
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane related costs and, in 2006, related insurance proceeds
|
|
|
|
|
|
|
2
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
Consolidation of administrative functions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
(48
|
)
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(188
|
)
|
|
$
|
26
|
|
|
$
|
(85
|
)
|
|
$
|
(42
|
)
|
|
$
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges related to early repayment of debt
|
|
$
|
(40
|
)
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
(8
|
)
|
Tax litigation and other settlements
|
|
|
|
|
|
|
89
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(35
|
)
|
|
$
|
93
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
In October 2007, we received $2.38 billion in notes from
the sale of our timberland, which we later contributed to two
wholly-owned, bankruptcy-remote special purpose entities. In
December 2007, the special purpose entities pledged the notes as
collateral for $2.14 billion nonrecourse loans payable in
2027. Both the notes and the borrowings require quarterly
interest payments based on variable interest rates that reset
quarterly. We include these two special purpose entities in our
consolidated financial statements. |
|
(e) |
|
Income taxes include one-time tax benefits of: $7 million
in 2007, of which $3 million is related to changes to the
State of Texas margin tax and $4 million is related to the
resolution of state income tax matters; $36 million in
2006, of which $6 million is related to the State of Texas
margin tax and $30 million is related to the non-taxable
tax litigation settlement; $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. |
|
(f) |
|
Discontinued operations include the operations of our financial
services and real estate segments, which were spun off to our
shareholders on December 28, 2007, and the non-strategic
operations obtained in the Gaylord acquisition, including the
multi-wall bag business and kraft paper mill which were sold in
January 2003 and the chemical business which was sold in August
2007. The resolution and settlement of environmental and other
indemnifications we provided in the 1999 sale of the bleached
paperboard operation are also included in 2004. |
|
(g) |
|
In 2003, we adopted Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement
Obligations, which resulted in an after-tax cumulative
effect charge of $1 million. |
|
|
|
In 2006, (i) we adopted the modified prospective
application of SFAS No. 123 (revised December 2004),
Share-Based Payment, which decreased 2006 income before
taxes by $6 million; (ii) we began applying the
guidance in Emerging Issues Task Force (EITF) Issue
No. 04-13,
Accounting for Purchases and Sales |
18
|
|
|
|
|
of Inventory with the Same Counterparty, which decreased
income before taxes by $7 million in 2006 and
$2 million in 2007; and (iii) we adopted
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
which increased our liability for pension and postretirement
benefits by $76 million, decreased prepaid expenses and
other assets by $16 million, decreased deferred income
taxes by $35 million, and decreased shareholders
equity by $57 million. |
|
|
|
In 2007, (i) we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, which
increased assets by $2 million, reduced liabilities by
$3 million and increased beginning retained earnings by
$5 million (we also reclassified $11 million from
deferred income taxes to other long-term liabilities),
(ii) we adopted the measurement provisions of
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
which reduced beginning retained earnings by
$5 million, and (iii) we adopted FASB Staff Position
No. AUG AIR-1, Accounting for Planned Major Maintenance
Activities, electing the expense-as-incurred method which
had no effect on our annual earnings or financial position. |
|
(h) |
|
Includes special dividends of $10.25 per share in 2007 and $0.50
per share in 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,
likely, 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;
|
|
|
|
fluctuations in costs and expenses including the costs of raw
materials, purchased energy, and freight;
|
|
|
|
demand for new housing;
|
|
|
|
accuracy of accounting assumptions related to impaired assets,
pension and postretirement costs, and contingency reserves;
|
|
|
|
competitive actions by other companies;
|
|
|
|
changes in laws or regulations;
|
|
|
|
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. Except as required by law, 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
19
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 total
segment operating income, less general and administrative
expenses and share-based compensation not allocated to segments;
divided by total assets, less certain assets and certain current
liabilities. As a result of our transformation in 2007, we
modified the return portion of this calculation. The ROI for all
prior years has been recalculated to reflect this change. 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. 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. They include asset impairments, contingency reserves,
and pension accounting. 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
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 6.875 percent, particular
consideration is given to our asset allocation because
approximately 80 percent of our plan assets are debt
related with a duration that closely matches that of our benefit
obligation. Another important consideration is the discount rate
used to determine the present value of our benefit obligation,
currently 6.125 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
25 basis point change in the discount rate would affect the
projected benefit obligation by about $42 million and the
interest cost on the projected benefit obligation by about
$5 million. However, due to our move in late 2007 to a more
matched position between our plan assets and our projected
benefit obligation, we would expect a 25 basis point change in
the discount rate to affect the funded status of our plan by
only $12 million and the total net periodic benefit expense
by only $2 million.
|
|
|
|
Contingency reserves are established for potential losses
related to litigation, environmental remediation, and disputes
with taxing authorities, among other items. Estimating these
reserves requires us to make certain judgments and assumptions
regarding actual or potential claims, interpretations to be made
by courts or
|
20
|
|
|
|
|
regulatory bodies, and other factors and events that are outside
our control. Changes and inaccuracies in our interpretations and
actions of others could require us to revise the reserves we
previously provided.
|
New
Accounting Pronouncements and Change in Measurement Date of our
Defined Benefit and Postretirement Plans
In the last three years, we adopted a number of new accounting
pronouncements, including in 2007, FASB Staff Position
No. AUG AIR-1, Accounting for Planned Major Maintenance
Activities; FIN 48, Accounting for Uncertainty in
Income Taxes; and a fiscal year-end measurement date for
valuing plan assets and obligations for our defined benefit and
postretirement benefit plans as required by
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans. In
addition, there are four new accounting pronouncements that we
will be required to adopt in 2008 and 2009, 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.
Transformation
On December 28, 2007, we completed our transformation plan
that was approved by our board of directors in February 2007. A
summary of the significant elements of the transformation plan
follows:
|
|
|
|
|
On October 31, 2007, we sold 1.55 million acres of
timberland for $2.38 billion to an investment entity
affiliated with The Campbell Group, LLC and recognized a pre-tax
gain of $2.053 billion, which is included in other
operating income. The acreage sold consisted of
1.38 million acres owned in fee and leases covering
175,000 acres. The total consideration consisted almost
entirely of notes due in 2027 that are secured by irrevocable
letters of credit issued by independent financial institutions.
We also entered into a
20-year
fiber supply agreement for pulpwood and a
12-year
fiber supply agreement for sawtimber. Both agreements are at
market prices and are subject to extension.
|
|
|
|
We contributed the notes and irrevocable letters of credit
received in connection with the sale of our timberland to two
wholly-owned, bankruptcy-remote special purpose entities. On
December 3, 2007, the special purpose entities pledged the
notes received from the sale of the timberland as collateral for
$2.14 billion nonrecourse loans payable in 2027. The net
cash proceeds, after alternative minimum and other taxes related
to sale of the timberland and transactions costs, were
$1.8 billion. We used $1.1 billion of the net cash
proceeds to pay a $10.25 per share special cash dividend to our
shareholders in December 2007. The remaining $700 million
was used to reduce debt. We have concluded that we are the
primary beneficiary of these special purpose entities. As a
result, we include these special purpose entities in our
consolidated financial statements.
|
|
|
|
On December 28, 2007, we completed the spin-off of our real
estate segment, Forestar Real Estate Group Inc. (Forestar), and
our financial services segment, Guaranty Financial Group Inc.
(Guaranty). These spin-offs were effected through tax-free
distributions of one share of Forestar and one share of Guaranty
for every three shares of Temple-Inland common stock. These
spin-offs reduced retained earnings by $1.6 billion. Our
financial information has been reclassified to reflect Forestar
and Guaranty as discontinued operations for all periods
presented.
|
The transformation plan significantly changed our capital
structure and operations. At year-end 2007, Temple-Inland is a
manufacturing company focused on corrugated packaging and
building products.
Results
of Operations for the Years 2007, 2006, and 2005
Summary
Our two key objectives are:
|
|
|
|
|
Maximizing ROI and
|
|
|
|
Profitably growing our business
|
21
We will accomplish our key objectives through execution of our
strategic initiatives. Our key strategic initiatives in
corrugated packaging are:
|
|
|
|
|
Maintaining full integration,
|
|
|
|
Driving for low cost through asset utilization and manufacturing
excellence,
|
|
|
|
Improving mix and margins through sales excellence, and
|
|
|
|
Growing our business.
|
Our key strategic initiatives in building products are:
|
|
|
|
|
Delivering a tailored portfolio of building products,
|
|
|
|
Driving for low cost through manufacturing excellence,
|
|
|
|
Serving growing markets with favorable demographics, and
|
|
|
|
Promoting sales excellence.
|
In 2007, consistent with our key strategic initiatives:
|
|
|
|
|
We had record production in our containerboard mills through
manufacturing excellence.
|
|
|
|
We continued to drive for low cost.
|
|
|
|
We improved asset utilization in our box plants through
manufacturing excellence.
|
|
|
|
We grew our box shipments by one percent through sales
excellence (excluding shipments from Performance Sheets, which
was sold in August 2006).
|
A summary of our consolidated results from continuing operations
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions, except per share)
|
|
|
Consolidated revenues
|
|
$
|
3,926
|
|
|
$
|
4,185
|
|
|
$
|
3,843
|
|
Income from continuing operations
|
|
|
1,202
|
|
|
|
287
|
|
|
|
18
|
|
Income from continuing operations, per diluted share
|
|
|
11.12
|
|
|
|
2.59
|
|
|
|
0.16
|
|
ROI
|
|
|
7.8
|
%
|
|
|
13.4
|
%
|
|
|
7.2
|
%
|
In 2007, significant items affecting income from continuing
operations included:
|
|
|
|
|
In connection with our transformation plan, we recognized a
$2.053 billion gain on sale of our strategic timberland,
and we incurred $109 million in expenses primarily related
to early repayment of debt, change of control agreements and
other employee payments, and legal and advisory services.
|
|
|
|
We experienced higher prices for our corrugated packaging
products; however, we experienced lower prices and volumes for
most of our building products.
|
|
|
|
While we continue to see the benefit in our manufacturing
operations from our initiatives to lower costs, improve asset
utilization, and increase operating efficiencies, the higher
cost of recycled fiber used at our containerboard mills offset
some of the benefits.
|
|
|
|
We recognized $120 million in charges, including
$64 million as a result of the decision to cease production
permanently at our Mt. Jewett particleboard facility and
$56 million for the settlement of antitrust and other
litigation.
|
In 2006, significant items affecting income from continuing
operations included:
|
|
|
|
|
We continued to see benefits in our manufacturing operations
from our initiatives to lower costs, improve asset utilization,
and increase operating efficiencies.
|
22
|
|
|
|
|
We experienced improved markets for our corrugated packaging and
building products, principally gypsum wallboard and
particleboard. We acquired our partners 50 percent
interest in Standard Gypsum LP in January.
|
|
|
|
Charges related to facility closures and environmental
remediation at a paper mill site totaled $12 million.
|
|
|
|
We realized one-time cash gains of $89 million related to
the settlement of tax litigation and $42 million related to
the Softwood Lumber Agreement entered into between the
U.S. and Canada.
|
In 2005, significant items affecting income from continuing
operations included:
|
|
|
|
|
We continued to see benefits in our manufacturing operations
from our initiatives to lower costs, improve asset utilization,
and increase operating efficiencies.
|
|
|
|
Charges related to facility closures were $58 million.
|
|
|
|
In connection with the sale of our Canadian MDF facility, we
recognized a one-time tax benefit of $16 million.
|
|
|
|
Hurricanes Katrina and Rita adversely affected segment operating
income by about $11 million due to production downtime and
re-start expenses.
|
|
|
|
Hurricane related losses and other unusual expenses related to
litigation and the early repayment of debt totaled
$32 million.
|
Business
Segments
As a result of the transformation plan, at year-end 2007, we
have two ongoing business segments: corrugated packaging and
building products. Timber and timberland, which managed our
timber resources, is no longer an active segment as a result of
the sale of our timberlands in fourth quarter 2007. Our
financial information has been reclassified to reflect the
spun-off entities, Forestar and Guaranty, as discontinued
operations.
Our operations are affected to varying degrees by supply and
demand factors and economic conditions including changes in new
housing starts, home repair and remodeling activities, 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.
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. 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.
A summary of our corrugated packaging results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
$
|
3,044
|
|
|
$
|
2,977
|
|
|
$
|
2,825
|
|
Costs and expenses
|
|
|
(2,757
|
)
|
|
|
(2,722
|
)
|
|
|
(2,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
287
|
|
|
$
|
255
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment ROI
|
|
|
14.3
|
%
|
|
|
12.5
|
%
|
|
|
5.6
|
%
|
23
Hurricanes Katrina and Rita adversely affected 2005 segment
operating results by about $10 million principally related
to mill production downtime and re-start expenses at our
Bogalusa, Louisiana and Orange, Texas linerboard mills.
Fluctuations in product pricing, which includes freight and is
net of discounts, and shipments are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Corrugated packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
3
|
%
|
|
|
6
|
%
|
|
|
2
|
%
|
Shipments, average
week(a)
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
2
|
%
|
Industry shipments, average
week(b)
|
|
|
(2
|
)%
|
|
|
1
|
%
|
|
|
1
|
%
|
Linerboard
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
5
|
%
|
|
|
22
|
%
|
|
|
(6
|
)%
|
Shipments, in thousand tons
|
|
|
(7
|
)
|
|
|
46
|
|
|
|
(56
|
)
|
|
|
|
(a) |
|
Excluding the impact of the sale of Performance Sheets in August
2006, our shipments were up one percent in 2007. |
(b) |
|
Source: Fibre Box Association |
In 2007, corrugated packaging prices and linerboard prices moved
higher as a result of price increases implemented in 2006 and
2007. In 2006, corrugated packaging and linerboard prices moved
higher reflecting price increases implemented in late 2005 and
in 2006.
Linerboard shipments to third parties were slightly lower than
in 2006. Linerboard shipments and sales to third parties
increased in 2006 due to increased mill production.
Costs and expenses were up one percent in 2007 compared with
2006 and up one percent in 2006 compared with 2005. In 2007,
higher raw material costs were partially offset by lower pension
and postretirement costs, $8 million in business
interruption and other insurance proceeds primarily related to
an equipment outage and other operational issues at our mills
that occurred in 2006, and cost reductions attributable to the
sale of Performance Sheets. Increased mill reliability and
efficiency resulted in lower maintenance costs and improved raw
material yield and energy usage. In 2006, higher wood fiber and
freight costs were partially offset by lower recycled fiber,
energy, and healthcare costs.
Fluctuations in our significant cost and expense components
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Wood fiber
|
|
$
|
8
|
|
|
$
|
16
|
|
|
$
|
22
|
|
Recycled fiber
|
|
|
77
|
|
|
|
(9
|
)
|
|
|
(6
|
)
|
Energy, principally natural gas
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
30
|
|
Freight
|
|
|
(3
|
)
|
|
|
32
|
|
|
|
40
|
|
Depreciation
|
|
|
(11
|
)
|
|
|
(7
|
)
|
|
|
1
|
|
Health care
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(16
|
)
|
Pension and postretirement
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
The costs of our 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 2008. The decrease in depreciation was principally
due to the continued use of fully depreciated assets and the
sale of Performance Sheets in August 2006.
24
Information about our converting facilities and mills follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of converting facilities (at year end)
|
|
|
64
|
|
|
|
64
|
|
|
|
65
|
|
Corrugated packaging shipments, in million tons
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
Mill production, in million tons
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
3.4
|
|
Percent mill production used internally
|
|
|
92
|
%
|
|
|
91
|
%
|
|
|
92
|
%
|
Percent of total fiber requirements sourced from recycled fiber
|
|
|
36
|
%
|
|
|
34
|
%
|
|
|
36
|
%
|
Corrugating medium purchases from our Premier Boxboard Limited
LLC joint venture, in thousand tons
|
|
|
53
|
|
|
|
85
|
|
|
|
68
|
|
Building
Products
We manufacture lumber, gypsum wallboard, particleboard, medium
density fiberboard (MDF), and fiberboard. Our building products
segment revenues are principally derived from sales of these
products. We also own a 50 percent interest in Del-Tin
Fiber LLC, a joint venture that produces MDF at a facility in El
Dorado, Arkansas.
In 2006, we purchased our partners 50 percent
interest in Standard Gypsum LP, a joint venture that produced
gypsum wallboard. Results of operations have been consolidated
since the date of purchase.
A summary of our building products results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Actual
|
|
|
Actual
|
|
|
Actual
|
|
|
Pro
forma(a)
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
$
|
806
|
|
|
$
|
1,119
|
|
|
$
|
898
|
|
|
$
|
1,095
|
|
Costs and expenses
|
|
|
(798
|
)
|
|
|
(898
|
)
|
|
|
(773
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
8
|
|
|
$
|
221
|
|
|
$
|
125
|
|
|
$
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment ROI
|
|
|
1.4
|
%
|
|
|
37.7
|
%
|
|
|
34.6
|
%
|
|
|
43.5
|
%
|
|
|
|
(a) |
|
Pro forma to reflect the results of operations from Standard
Gypsum LP as if the acquisition occurred at the beginning of
2005. |
Fluctuation in product pricing, which includes freight and is
net of discounts, and shipments are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Lumber:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
(13
|
)%
|
|
|
(16
|
)%
|
|
|
5
|
%
|
Shipments
|
|
|
1
|
%
|
|
|
7
|
%
|
|
|
1
|
%
|
Gypsum wallboard:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
(27
|
)%
|
|
|
26
|
%
|
|
|
16
|
%
|
Shipments
|
|
|
(26
|
)%
|
|
|
132
|
%
|
|
|
12
|
%
|
Particleboard:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
2
|
%
|
|
|
15
|
%
|
|
|
(1
|
)%
|
Shipments
|
|
|
(17
|
)%
|
|
|
(5
|
)%
|
|
|
8
|
%
|
MDF:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prices
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
(1
|
)%
|
Shipments
|
|
|
(5
|
)%
|
|
|
(30
|
)%
|
|
|
(20
|
)%
|
25
Demand for most products was down due to challenging market
conditions in the housing industry. We expect this trend to
continue in 2008.
Segment operating income also includes our share of income from
our gypsum wallboard joint venture (in 2005) and MDF joint
venture of $1 million in 2007, $3 million in 2006, and
$28 million in 2005. The operating results from the joint
ventures generally fluctuate in relation to the price and
shipment changes noted above.
Costs and expenses were down 11 percent in 2007 compared
with 2006, and up 16 percent in 2006 compared with 2005.
The lower costs in 2007 were primarily driven by lower volumes.
The increase in cost in 2006 is primarily attributable to the
acquisition of Standard Gypsum LP in January 2006, partially
offset by lower wood fiber costs and cost reductions
attributable to the sale of our Pembroke MDF facility in June
2005.
Fluctuations in our significant cost and expense components
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year over Year
|
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Wood fiber
|
|
$
|
(32
|
)
|
|
$
|
(12
|
)
|
|
$
|
19
|
|
Energy, principally natural gas
|
|
|
(21
|
)
|
|
|
16
|
|
|
|
13
|
|
Freight
|
|
|
(12
|
)
|
|
|
26
|
|
|
|
11
|
|
Chemicals
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
14
|
|
Depreciation
|
|
|
1
|
|
|
|
9
|
|
|
|
(3
|
)
|
Health care
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Pension and postretirement
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
2
|
|
The cost of our fiber, 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 2008.
Information about our converting and manufacturing facilities
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Number of converting and manufacturing facilities (at year end)
|
|
|
16
|
|
|
|
17
|
|
|
|
17
|
|
Average operating rates for all product lines excluding sold or
closed facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
102
|
%
|
|
|
106
|
%
|
|
|
102
|
%
|
Low
|
|
|
59
|
%
|
|
|
86
|
%
|
|
|
91
|
%
|
Gypsum facing paper purchases from our Premier Boxboard Limited
LLC joint venture, in thousand tons
|
|
|
42
|
|
|
|
68
|
|
|
|
71
|
|
Percent of gypsum facing paper supplied by our Premier Boxboard
Limited LLC joint venture
|
|
|
65
|
%
|
|
|
76
|
%
|
|
|
77
|
%
|
Markets for our building products continue to be challenging.
Production in our converting operations is being reduced to
match demand for our products. In December 2007, we permanently
ceased production at our Mt. Jewett particleboard manufacturing
plant.
Timber
and Timberland
Timber and timberland, which managed our timber resources, is no
longer an active segment as a result of the sale of timber and
timberland in October 2007.
26
A summary of our timber and timberland results follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007(a)
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
$
|
76
|
|
|
$
|
89
|
|
|
$
|
120
|
|
Costs and expenses
|
|
|
(11
|
)
|
|
|
(26
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
65
|
|
|
$
|
63
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment ROI
|
|
|
20.4
|
%
|
|
|
19.5
|
%
|
|
|
18.0
|
%
|
|
|
|
(a) |
|
Reflects ten months of operating results.
|
In 2005, we sold about 7,000 acres of timber and timberland
to a joint venture in which our former real estate segment owned
a 50 percent interest and an unrelated public company owned
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 intended to hold the land for future
development and sale. We recognized about half of the
$10 million gain in income in 2005 and recognized the
remainder in 2007 when we spun-off our real estate segment. As a
result of Hurricane Rita, we recorded a $7 million loss due
to damage to our timberland in 2005, which is not included in
segment operating income.
Information about our timber harvest follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007(a)
|
|
|
2006
|
|
|
2005
|
|
|
Timber harvest, in million tons:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sawtimber
|
|
|
2.1
|
|
|
|
2.6
|
|
|
|
2.4
|
|
Pulpwood
|
|
|
2.9
|
|
|
|
3.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0
|
|
|
|
6.0
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects ten months of operating results.
|
Income
and Expenses Not Allocated to Segments
Unallocated income and 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 interest
income and expense.
The decrease in general and administrative expense in 2007 was
principally due to a decrease in incentive compensation.
Incentive compensation fluctuates based on changes in ROI.
Our share-based compensation fluctuates because a significant
portion of our share-based awards are cash based and are
affected by changes in the market price of our common stock.
Based on our current expectations, it is likely that share-based
compensation expense for 2008 will be in the range of
$20 million to $30 million.
27
Other operating income (expense) not allocated to business
segments consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Transformation costs
|
|
$
|
(69
|
)
|
|
$
|
|
|
|
$
|
|
|
Closure and sale of converting and production facilities and
sale of non-strategic assets
|
|
|
(55
|
)
|
|
|
(4
|
)
|
|
|
(50
|
)
|
Litigation
|
|
|
(56
|
)
|
|
|
(6
|
)
|
|
|
(13
|
)
|
Environmental remediation
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(3
|
)
|
Softwood Lumber Agreement
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Hurricane related costs and, in 2006, related insurance proceeds
|
|
|
|
|
|
|
2
|
|
|
|
(16
|
)
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(188
|
)
|
|
$
|
26
|
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 possibly consolidating
and closing facilities and selling under-performing assets. In
2007, we permanently ceased production at our particleboard
plant in Mt. Jewett, Pennsylvania and recognized a
$64 million charge, primarily related to the present value
of remaining lease payments under our long-term operating lease
of the plant and impairment of the related equipment.
Also, in December 2007, we resolved most of the remaining claims
regarding an alleged violation of Section 1 of the Sherman
Act and recognized a charge of $46 million. We are also
defending two cases in California state court alleging
violations of that states on-duty meal break laws. In
2007, we settled three additional meal break cases.
In 2006, the U.S. and Canada entered into the Softwood
Lumber Agreement, which provided for the refund to domestic
lumber producers of a portion of duties previously collected by
the U.S. government. Our portion of this refund was
$42 million.
Other non-operating income (expense) includes $40 million
of expenses associated with the early repayment of debt in 2007
and a gain of $89 million related to the settlement of tax
litigation in 2006.
Net interest income on financial assets and nonrecourse
financial liabilities of special purpose entities relates to
interest income on the $2.38 billion of notes received from
the sale of our timberland in October 2007 and interest expense
on the $2.14 billion of borrowings secured by a pledge of
the notes receivable in December 2007. The notes receivable were
contributed to and the borrowings were made by two wholly-owned,
bankruptcy-remote special purpose entities, which we consolidate
for financial reporting purposes. The borrowings are nonrecourse
to us.
The change in interest expense in 2007 was due to lower average
levels of debt outstanding compared with 2006. At year-end 2007,
we had $0.9 billion of debt with fixed interest rates that
averaged 7.08 percent. This compares with $1.4 billion
of debt with fixed interest rates that averaged
7.02 percent and $0.2 billion of debt with variable
interest rates that averaged 5.88 percent at year-end 2006.
Income
Taxes
Our effective tax rate, which is income tax expense (benefit) as
a percentage of income from continuing operations before taxes,
was 39 percent in 2007, 26 percent in 2006, and
(64) percent in 2005. These rates reflect in 2007,
non-deductible transformation related expenses, one-time tax
benefit of $3 million related to changes to the State of
Texas margin tax and a $4 million benefit from the
resolution of state tax matters; in 2006, one-time benefits
resulting from settlement of tax litigation with the
U.S. Government and the new State of Texas margin tax; and
in 2005, a one-time benefit related to the sale of a foreign
subsidiary.
We anticipate that our effective tax rate in 2008 will
approximate 40 percent.
28
Discontinued
Operations
On December 28, 2007, we spun off to our shareholders in
tax free distributions, our real estate segment and financial
services segment, which included certain real estate and
minerals activities in our timber and timberland segment.
As a result, we report the results of operations of these
segments as discontinued operations. Expenses allocated to these
discontinued operations included interest expense of
$7 million in 2007, $4 million in 2006, and none in
2005 and share-based compensation expense of $7 million in
2007, $8 million in 2006, and $5 million in 2005.
In addition, on August 31, 2007 we sold our previously
acquired chemical operations. We received cash proceeds of
$1 million and recognized a pre-tax loss of $6 million
on the sale.
A summary of earnings from our discontinued operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Real estate income before taxes
|
|
$
|
41
|
|
|
$
|
83
|
|
|
$
|
59
|
|
Financial services income before taxes
|
|
|
138
|
|
|
|
204
|
|
|
|
192
|
|
Chemical operations and
other(a)
|
|
|
(13
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before taxes
|
|
|
166
|
|
|
|
285
|
|
|
|
252
|
|
Income tax expense
|
|
|
(63
|
)
|
|
|
(104
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
103
|
|
|
$
|
181
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
2007 includes a $6 million charge for environmental
remediation.
|
Average
Shares Outstanding
Average shares outstanding and average diluted shares
outstanding decreased in 2007, 2006, and 2005 due to the effects
of share repurchases in 2006 and 2005.
Capital
Resources and Liquidity
Sources
and Uses of Cash
Cash from operations was $296 million in 2007,
$780 million in 2006, and $508 million in 2005.
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. We experienced improved pricing and shipments for most of
our products in 2006 and 2005, but experienced deterioration in
pricing and volume for our building products in 2007 due to
challenging conditions in the housing market. 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.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
We received cash from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
296
|
|
|
$
|
649
|
|
|
$
|
508
|
|
Tax litigation settlement, net
|
|
|
|
|
|
|
89
|
|
|
|
|
|
Softwood Lumber Agreement payments
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From operations
|
|
|
296
|
|
|
|
780
|
|
|
|
508
|
|
Exercise of options and in 2005 the settlement of equity
purchase contracts
|
|
|
35
|
|
|
|
57
|
|
|
|
393
|
|
Nonrecourse borrowing secured by financial assets of special
purpose entities (net of costs of $4 million)
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
Borrowings, net
|
|
|
|
|
|
|
40
|
|
|
|
13
|
|
Other
|
|
|
36
|
|
|
|
64
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources
|
|
|
2,503
|
|
|
|
941
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used cash to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduce borrowings, net (including $38 million of debt tender
premium)
|
|
|
(780
|
)
|
|
|
|
|
|
|
|
|
Return to shareholders through:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
(1,212
|
)
|
|
|
(108
|
)
|
|
|
(102
|
)
|
Repurchase of common stock
|
|
|
(24
|
)
|
|
|
(318
|
)
|
|
|
(527
|
)
|
Reinvest in the business through:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(237
|
)
|
|
|
(204
|
)
|
|
|
(220
|
)
|
Acquisition, joint ventures, and other
|
|
|
(21
|
)
|
|
|
(149
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uses
|
|
|
(2,274
|
)
|
|
|
(779
|
)
|
|
|
(872
|
)
|
Discontinued operations, net
|
|
|
(32
|
)
|
|
|
(132
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
$
|
197
|
|
|
$
|
30
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We issued 1,009,246 net shares of common stock in 2007;
1,736,335 net shares of common stock in 2006; and
1,833,688 net shares in 2005 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(sm)
equity purchase contracts.
We paid cash dividends to shareholders of $11.37 per share in
2007 including a special dividend of $10.25 per share, $1.00 per
share in 2006, and $0.90 per share in 2005. On February 1,
2008, our Board of Directors declared a regular quarterly
dividend of $0.10 per share payable on March 14, 2008.
From February 2005 through year-end 2007, our Board of Directors
approved repurchase programs aggregating 29.0 million
shares. As of year-end 2007, we had repurchased
22.4 million shares under these programs. In 2007, we
initiated no share purchases, but we settled $24 million of
share purchases that were initiated in fourth quarter 2006. As
of year-end 2007, there are 6.6 million shares remaining
under current repurchase authorizations.
Capital expenditures and timberland reforestation were
111 percent of depreciation and amortization in 2007,
91 percent in 2006, and 101 percent in 2005. Most of
the 2007 expenditures relate to initiatives to increase
reliability and efficiency at our linerboard mills and increase
asset utilization in our converting facilities. Capital
expenditures are expected to approximate $195 million in
2008, or about 97 percent of expected 2008 depreciation and
amortization.
In 2007, we reduced our outstanding debt by $742 million,
principally with proceeds from the transactions related to our
transformation plan. In 2006, we used $150 million of our
credit facilities to fund
30
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. 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
refinance debt due in 2006 and 2007.
Liquidity
and Contractual Obligations
At year-end 2007 our contractual obligations consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due or Expiring by Year
|
|
|
|
Total
|
|
|
2008
|
|
|
2009-10
|
|
|
2011-12
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Long-term debt (including current
maturities)(a)
|
|
$
|
855
|
|
|
$
|
13
|
|
|
$
|
35
|
|
|
$
|
294
|
|
|
$
|
513
|
|
Nonrecourse financial liabilities of special purposes
entities(a)
|
|
|
2,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,140
|
|
Less, related financial assets of special purpose
entities(a)
|
|
|
(2,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,140
|
)
|
Principal portion of capital lease
obligations(a)
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
Less, related municipal bonds we
own(a)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
Contractual interest payments on fixed- rate, long-term debt and
capital lease obligations, net of interest on related municipal
bonds we own
|
|
|
437
|
|
|
|
60
|
|
|
|
117
|
|
|
|
116
|
|
|
|
144
|
|
Operating
leases(b)
|
|
|
222
|
|
|
|
38
|
|
|
|
61
|
|
|
|
40
|
|
|
|
83
|
|
Purchase
obligations(c)
|
|
|
3,173
|
|
|
|
265
|
|
|
|
445
|
|
|
|
441
|
|
|
|
2,022
|
|
Other long-term
liabilities(a)
|
|
|
37
|
|
|
|
7
|
|
|
|
21
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,724
|
|
|
$
|
383
|
|
|
$
|
679
|
|
|
$
|
893
|
|
|
$
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Denotes items included on our balance sheet.
|
|
(b) |
|
In 2007, we recorded an impairment charge related to a
long-term operating lease. As a result, $60 million present
value of our future operating lease payments are included on our
balance sheet, of which, $3 million is in current
liabilities and $57 million in other long-term liabilities.
|
|
(c) |
|
In 2007, we entered into a
20-year
fiber supply agreement for pulpwood and a
12-year
fiber supply agreement for sawtimber, the terms of which are
both subject to extension. These purchase obligations are valued
at year-end 2007 market prices, however, our actual future
purchases will be at the then current market price.
|
Our sources of short-term funding are our operating cash flows
and borrowings under our credit agreements and accounts
receivable securitization facility. Our contractual obligations
due in 2008 will likely be repaid from our operating cash flow
or from our unused borrowing capacity. At year-end 2007, we had
$1.067 billion in unused borrowing capacity under our
committed credit agreements and accounts receivable
securitization facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
|
|
|
|
Committed
|
|
|
Receivable
|
|
|
|
|
|
|
Credit
|
|
|
Securitization
|
|
|
|
|
|
|
Agreements
|
|
|
Facility
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Committed
|
|
$
|
835
|
|
|
$
|
247
|
|
|
$
|
1,082
|
|
Less: borrowings and commitments
|
|
|
(14
|
)
|
|
|
(1
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused borrowing capacity at year-end 2007
|
|
$
|
821
|
|
|
$
|
246
|
|
|
$
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our committed credit agreements include a $750 million
revolving credit facility that expires in 2011. The remainder of
the committed agreements expire between 2008 and 2010.
31
Our accounts receivable securitization facility expires in 2010.
Under this facility, a wholly-owned, bankruptcy-remote
subsidiary purchases, on an on-going basis, substantially all of
our trade receivables. As we need funds, the 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 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 2007, 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. Under the terms of our Senior Notes due 2016 and
Senior Notes due 2018, the interest rate on the notes
automatically adjusts if our long-term debt rating is decreased
below investment grade by Moodys Investor Services, Inc.
(Moodys) or Standard and Poors Rating Services, a
division of McGraw-Hill, Inc. (S&P). The interest rate on
these notes was increased 25 basis points during third
quarter 2007 following a change in our long-term debt rating by
Moodys. In addition, as required by our operating lease
agreements for our particleboard and MDF facilities in Mt.
Jewett, Pennsylvania, we provided an $11 million letter of
credit to support a portion of our obligations due to this
change in our long-term debt rating. Our long-term debt is
currently rated BBB- by S&P and Ba1 by Moodys. At
year-end 2007, property and equipment having a book value of
$2 million were subject to liens in connection with
$14 million of debt.
Operating leases represent pre-tax obligations and include
$146 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 facilities
and equipment. As a result of an impairment charge in 2007,
$60 million present value of our operating lease
obligations is included on our balance sheet, of which
$3 million is in current liabilities and $57 million
is in other long-term liabilities.
In 2007, we received $2.38 billion in notes from the sale
of timberland, which we contributed to two wholly-owned,
bankruptcy-remote special purpose entities. The notes are
secured by irrevocable letters of credit and are due in 2027.
The special purpose entities pledged the notes and irrevocable
letters of credit to secure $2.14 billion nonrecourse loans
payable in 2027. In the event of liquidation of the special
purpose entities, these creditors would be entitled to satisfy
their claims from the pledged notes and irrevocable letters of
credit prior to distributions back to us. We include these
special purpose entities in our consolidated financial
statements.
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.
Purchase obligations are market priced obligations principally
for pulpwood, timber, and gypsum used in our manufacturing and
converting processes and for major committed capital
expenditures.
We have other long-term liabilities, principally liabilities for
pension and postretirement benefits, unrecognized tax benefits,
and deferred income taxes that are not included in the table
because they do not have scheduled maturities.
32
At year-end 2007, the liability for pension benefits was
$119 million and the liability for postretirement benefits
was $137 million. We expect our 2008 voluntary,
discretionary contributions to our defined benefit pension plan
to approximate 2008 service cost, which is estimated to be about
$30 million. In addition, we have amended our supplemental
defined benefit pension plan to allow for lump-sum settlements
at the time of retirement. We offered a one-time window for our
current retirees to take a lump-sum distribution in January
2008. We expect these lump-sum payments to aggregate
$42 million in 2008. We also estimate that we will be
required to pay in the range of $17 million to $20 million
per year over the next five years to fund payments to
participants of our supplemental defined benefit plan and
retiree health care claims. Please read Pension,
Postretirement Medical and Health Care Matters for
additional information.
At year-end 2007, our net deferred income tax liability was
$663 million, including $286 million of alternative
minimum tax credits related to the 2007 sale of our timberland.
We do not expect any significant changes in our deferred tax
liability in 2008. We expect our cash tax rate in 2008 to be
below 20 percent compared with 15 percent in 2007. The
cash tax rate is impacted by utilization of our alternative
minimum tax credits and deductions for 2008 payments associated
with our 2007 transformation.
We have interest rate derivative instruments outstanding at
year-end 2007. 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 2007, the aggregate
fair value of our interest rate instruments was a
$1 million liability.
Off-Balance
Sheet Arrangements
From time to time, we enter into off-balance sheet arrangements
to facilitate our operating activities. At year-end 2007, 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
|
|
|
2008
|
|
|
2009-10
|
|
|
2011-12
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Joint venture guarantees
|
|
$
|
70
|
|
|
$
|
18
|
|
|
$
|
52
|
|
|
$
|
|
|
|
$
|
|
|
Performance bonds and recourse obligations
|
|
|
56
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126
|
|
|
$
|
74
|
|
|
$
|
52
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We participate in two joint ventures engaged in manufacturing
and selling paper and building products. Our partner in each of
these ventures is a publicly-held company unrelated to us. At
year-end 2007, these ventures had $85 million in long-term
debt and $6 million of debt included in current maturities,
along with various letters of credit. We guaranteed
$70 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.
Performance bonds and recourse obligations are primarily for
workers compensation and general liability claims.
Pension,
Postretirement Medical and Health Care Matters
Our non-cash defined benefit pension expense was
$35 million in 2007, $46 million in 2006, and
$49 million in 2005. For the year 2008, we expect our
non-cash defined benefit pension expense to be about
$37 million. We also expect a one-time expense of
$15 million related to lump sum settlements of supplemental
benefits.
For accounting purposes, we measure the projected benefit
obligation of our defined benefit plans and value the plan
assets as of year-end 2007 to determine the funded status. The
funded status is included on our balance sheet. At year-end
2007, the funded status of our defined benefit plans was a
liability of $119 million compared with a liability of
$231 million at year-end 2006. The change was principally
due to an increase in the discount rate, a better than expected
return on plan assets, and an increase in plan assets due in
part to the $60 million of voluntary, discretionary
contributions we made in 2007. Unrecognized actuarial losses,
which
33
are included in accumulated other comprehensive income and
principally represent the delayed recognition of changes in the
assumed discount rate and differences between expected and
actual returns, were $166 million at year-end 2007 and
$253 million at year-end 2006. These losses will be
recognized over the average remaining service period of our
current employees, which is about nine years. We expect about
$5 million of these losses will be recognized in 2008,
compared with $14 million recognized in 2007.
We did not have any ERISA cash-funding requirement in 2007, and
we expect our cash-funding requirement to be minimal in 2008. We
made voluntary, discretionary contributions of $60 million
to the defined benefit plan in 2007. We expect our 2008
voluntary, discretionary contributions to our defined benefit
plan to approximate 2008 service cost, which is estimated to be
about $30 million. Passage of the Pension Protection Act of
2006, which requires a minimum level of annual funding, is not
expected to affect significantly our annual cash contributions.
The benefits payable from our defined benefit plan are a series
of fixed monthly retirement payments. On an annual basis an
actuarial assessment of the estimated amount and timing of these
retirement payments is performed. The actuarial estimate is
subject to variability due to changes in key assumptions
regarding future wage inflation, participant mortality and other
actuarial risks. Prior to the date of retirement, our obligation
is to accumulate funds in our qualified plan sufficient to meet
these related benefit payments. The weighted average timeframe
of the retirement payments is generally in the
10-15 year
range.
The benefit obligation, which is the present value of the
estimated retirement payments, conceptually is very similar to
the fair value of a portfolio of long-term bonds. The funded
status of our benefit obligation that is matched by long-term
bonds of similar duration should remain relatively unchanged
even if long-term interest rates change.
In the last two months of 2007, we transitioned to a more
matched position between our assets and liabilities in our
qualified defined benefit plan. This action is expected to
reduce the volatility of our defined benefit expense and our
funding requirements. As a result, our expected long-term rate
of return for 2008 expense is 6.875 percent compared with
the 2007 rate of 8 percent. The lower expected long-term rate of
return reflects the higher allocation of invested funds in fixed
income securities that better match our defined benefit
obligation.
For accounting purposes we measure the postretirement medical
plans projected benefit obligation as of year-end 2007 to
determine the funded status. At year-end 2007, the funded status
of these plans was a liability of $137 million compared
with $135 million at year-end 2006.
About 26 percent of our employees participated in a
consumer driven health plan in 2007 compared with
29 percent in 2006. In 2007, the total cost of providing
health benefits was about $88 million of which we incurred
$57 million and our employees incurred $31 million. In
2006, the total cost of providing health benefits was about
$97 million of which we incurred $67 million and our
employees incurred $30 million.
Energy
and the Effects of Inflation
Energy costs decreased $22 million in 2007, increased
$8 million in 2006, and increased $43 million in 2005.
The decrease in 2007 is primarily attributable to reduced
production because of the decreased demand for our building
products as a result of the declines in the housing industry.
The increase in energy costs for 2006 is primarily attributable
to the acquisition of Standard Gypsum LP in January 2006. Our
energy costs fluctuate based on the market prices we pay. We
hedge very little of our energy needs. It is likely that these
costs will continue to fluctuate in 2008.
Inflationary increases in compensation and certain input costs
such as fiber, energy and freight have had a negative impact on
our operating results. However, we have managed to partially
offset the impact of inflation through increased productivity.
Our fixed assets are, and our timber and timberland were,
carried at historical costs. If carried at current replacement
costs, depreciation expense and the cost of timber cut or
timberland sold would have been significantly higher than what
we reported.
34
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 environmental 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.
35
Calculation
of Non-GAAP Financial Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated
|
|
|
Building
|
|
|
Timber and
|
|
|
|
Consolidated
|
|
|
Packaging
|
|
|
Products
|
|
|
Timberland
|
|
|
|
(Dollars in millions)
|
|
|
Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income determined in accordance with GAAP
|
|
$
|
360
|
|
|
$
|
287
|
|
|
$
|
8
|
|
|
$
|
65
|
|
Expenses not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(100
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Share-based compensation
|
|
|
(34
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
226
|
|
|
$
|
287
|
|
|
$
|
8
|
|
|
$
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year total assets or segment assets determined in
accordance with GAAP
|
|
$
|
20,474
|
|
|
$
|
2,275
|
|
|
$
|
638
|
|
|
$
|
330
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (excluding current portion of long-term debt)
|
|
|
(550
|
)
|
|
|
(271
|
)
|
|
|
(76
|
)
|
|
|
(11
|
)
|
Assets of discontinued operations
|
|
|
(16,847
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Municipal bonds related to capital leases included in other
assets
|
|
|
(188
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,889
|
|
|
$
|
2,004
|
|
|
$
|
562
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROI
|
|
|
7.8
|
%
|
|
|
14.3
|
%
|
|
|
1.4
|
%
|
|
|
20.4
|
%
|
Year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income determined in accordance with GAAP
|
|
$
|
539
|
|
|
$
|
255
|
|
|
$
|
221
|
|
|
$
|
63
|
|
Expenses not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(107
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Share-based compensation
|
|
|
(38
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
394
|
|
|
$
|
255
|
|
|
$
|
221
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year total assets or segment assets determined in
accordance with GAAP
|
|
$
|
21,630
|
|
|
$
|
2,308
|
|
|
$
|
456
|
|
|
$
|
333
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (excluding current portion of long-term debt)
|
|
|
(476
|
)
|
|
|
(269
|
)
|
|
|
(66
|
)
|
|
|
(10
|
)
|
Assets of discontinued operations
|
|
|
(18,219
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Municipal bonds related to capital leases included in other
assets
|
|
|
(188
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Acquisition of Standard Gypsum LP in January 2006
|
|
|
196
|
|
|
|
N/A
|
|
|
|
196
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,943
|
|
|
$
|
2,039
|
|
|
$
|
586
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROI
|
|
|
13.4
|
%
|
|
|
12.5
|
%
|
|
|
37.7
|
%
|
|
|
19.5
|
%
|
Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income determined in accordance with GAAP
|
|
$
|
317
|
|
|
$
|
120
|
|
|
$
|
125
|
|
|
$
|
72
|
|
Expenses not allocated to segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(91
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Share-based compensation
|
|
|
(21
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
205
|
|
|
$
|
120
|
|
|
$
|
125
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year total assets or segment assets determined in
accordance with GAAP
|
|
$
|
20,144
|
|
|
$
|
2,448
|
|
|
$
|
423
|
|
|
$
|
409
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (excluding current portion of long-term debt)
|
|
|
(503
|
)
|
|
|
(323
|
)
|
|
|
(62
|
)
|
|
|
(9
|
)
|
Assets of discontinued operations
|
|
|
(16,622
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Municipal bonds related to capital leases included in other
assets
|
|
|
(188
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,831
|
|
|
$
|
2,125
|
|
|
$
|
361
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROI
|
|
|
7.2
|
%
|
|
|
5.6
|
%
|
|
|
34.6
|
%
|
|
|
18.0
|
%
|
36
Statistical
and Other Data
Revenues and unit sales, excluding joint venture operations,
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
2,905
|
|
|
$
|
2,841
|
|
|
$
|
2,728
|
|
Linerboard
|
|
|
139
|
|
|
|
136
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,044
|
|
|
$
|
2,977
|
|
|
$
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Pine lumber
|
|
$
|
244
|
|
|
$
|
278
|
|
|
$
|
312
|
|
Particleboard
|
|
|
181
|
|
|
|
214
|
|
|
|
195
|
|
Gypsum
wallboard(a)
|
|
|
228
|
|
|
|
420
|
|
|
|
143
|
|
Medium density
fiberboard(a)
|
|
|
62
|
|
|
|
65
|
|
|
|
87
|
|
Fiberboard
|
|
|
52
|
|
|
|
72
|
|
|
|
83
|
|
Other
|
|
|
39
|
|
|
|
70
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
806
|
|
|
$
|
1,119
|
|
|
$
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber and Timberland
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiber and other
|
|
$
|
76
|
|
|
$
|
89
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated Packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging, thousands of tons
|
|
|
3,351
|
|
|
|
3,371
|
|
|
|
3,437
|
|
Linerboard, thousands of tons
|
|
|
303
|
|
|
|
310
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,654
|
|
|
|
3,681
|
|
|
|
3,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Pine lumber, million board feet
|
|
|
838
|
|
|
|
829
|
|
|
|
777
|
|
Particleboard, million square feet
|
|
|
506
|
|
|
|
609
|
|
|
|
640
|
|
Gypsum wallboard, million square
feet(a)
|
|
|
1,475
|
|
|
|
1,990
|
|
|
|
859
|
|
Medium density fiberboard, million square
feet(a)
|
|
|
135
|
|
|
|
142
|
|
|
|
202
|
|
Fiberboard, million square feet
|
|
|
288
|
|
|
|
362
|
|
|
|
431
|
|
|
|
|
(a) |
|
Comparisons of revenue and unit sales of gypsum wallboard are
affected by the 2006 acquisition of our partners interest
in Standard Gypsum LP. Comparisons for MDF are affected by the
sale of the Pembroke facility in second quarter 2005.
|
37
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
Our current level of interest rate risk is primarily due to our
variable-rate, long-term debt and financial assets and
nonrecourse financial liabilities of special purpose entities.
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 2007,
with comparative year-end 2006 information. These estimates
assume 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.
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in
|
|
Change in
|
|
Income Before Taxes
|
|
Interest Rates
|
|
At Year-End 2007
|
|
|
At Year-End 2006
|
|
|
|
(In millions)
|
|
|
+2%
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
+1%
|
|
|
(2
|
)
|
|
|
(2
|
)
|
−1%
|
|
|
2
|
|
|
|
2
|
|
−2%
|
|
|
4
|
|
|
|
4
|
|
Interest rate changes impact earnings due to the resulting
increase or decrease in the cost of our variable-rate, long-term
debt. The interest rate sensitivity change from year-end 2006 is
due to a decrease in variable-rate debt. Additionally, changes
in interest rates will affect the value of our interest rate
swap agreements (currently $50 million notional amount). We
believe that any changes in the value of these agreements would
not be significant.
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 2007, we believe the potential loss in fair value
resulting from a hypothetical ten percent change in the
underlying commodity prices would not be significant.
38
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
Temple-Inland Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
39
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 each year end. 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 year end. Based upon this assessment, management believes
that our internal control over financial reporting is effective
as of year-end 2007.
Ernst & Young LLP, the independent registered public
accounting firm that audited our financial statements included
in this
Form 10-K,
has also audited our internal control over financial reporting.
Their attestation report follows this report of management.
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Temple-Inland Inc.:
We have audited Temple-Inland Incs internal control over
financial reporting as of December 29, 2007 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 including in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, 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, Temple-Inland Inc. and subsidiaries maintained,
in all material respects, effective internal control over
financial reporting as of December 29, 2007 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 29, 2007 and December 30,
2006 and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three
years in the period ended December 29, 2007 and our report
dated February 25, 2008 expressed an unqualified opinion
thereon.
Ernst & Young LLP
Austin, Texas
February 25, 2008
41
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 29, 2007
and December 30, 2006, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 29, 2007. 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 29, 2007 and December 30, 2006, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 29, 2007, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial
Statements, in 2006, the Company changed its method of
accounting for the funded status of defined pension and other
postretirement benefit plans, and in 2007 the Company changed
the measurement date for measuring the funded status of defined
pension and other postretirement benefit plans. Additionally,
during 2007 the Company changed its method of accounting for and
disclosure of uncertainties associated with certain aspects of
measurement and recognition of income taxes.
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 29, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 25, 2008 expressed an unqualified opinion thereon.
Ernst & Young LLP
Austin, Texas
February 25, 2008
42
TEMPLE-INLAND
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
227
|
|
|
$
|
30
|
|
Trade receivables, net of allowance for doubtful accounts of $14
in 2007 and $14 in 2006
|
|
|
433
|
|
|
|
452
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Work in process and finished goods
|
|
|
116
|
|
|
|
109
|
|
Raw materials
|
|
|
224
|
|
|
|
211
|
|
Supplies and other
|
|
|
121
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
461
|
|
|
|
435
|
|
Deferred tax asset
|
|
|
99
|
|
|
|
61
|
|
Prepaid expenses and other
|
|
|
57
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,277
|
|
|
|
1,038
|
|
Timber and Timberland
|
|
|
|
|
|
|
315
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
|
641
|
|
|
|
637
|
|
Machinery and equipment
|
|
|
3,423
|
|
|
|
3,400
|
|
Construction in progress
|
|
|
120
|
|
|
|
82
|
|
Less allowances for depreciation
|
|
|
(2,552
|
)
|
|
|
(2,491
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
1,632
|
|
|
|
1,628
|
|
Financial Assets of Special Purpose Entities
|
|
|
2,383
|
|
|
|
|
|
Goodwill
|
|
|
365
|
|
|
|
365
|
|
Assets of Discontinued Operations
|
|
|
|
|
|
|
16,847
|
|
Other Assets
|
|
|
285
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
5,942
|
|
|
$
|
20,474
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
244
|
|
|
$
|
229
|
|
Accrued employee compensation and benefits
|
|
|
108
|
|
|
|
126
|
|
Accrued interest
|
|
|
31
|
|
|
|
32
|
|
Accrued property taxes
|
|
|
11
|
|
|
|
19
|
|
Accrued income taxes
|
|
|
258
|
|
|
|
|
|
Other accrued expenses
|
|
|
173
|
|
|
|
129
|
|
Current portion of long-term debt
|
|
|
3
|
|
|
|
13
|
|
Current portion of pension and postretirement benefits
|
|
|
62
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
890
|
|
|
|
563
|
|
Long-Term Debt
|
|
|
852
|
|
|
|
1,584
|
|
Nonrecourse Financial Liabilities of Special Purpose
Entities
|
|
|
2,140
|
|
|
|
|
|
Deferred Tax Liability
|
|
|
762
|
|
|
|
244
|
|
Liability for Pension Benefits
|
|
|
71
|
|
|
|
229
|
|
Liability for Postretirement Benefits
|
|
|
123
|
|
|
|
122
|
|
Liabilities of Discontinued Operations
|
|
|
|
|
|
|
15,291
|
|
Other Long-Term Liabilities
|
|
|
324
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
5,162
|
|
|
|
18,285
|
|
|
|
|
|
|
|
|
|
|
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 in 2007
and 2006, including shares held in the treasury
|
|
|
124
|
|
|
|
124
|
|
Additional paid-in capital
|
|
|
475
|
|
|
|
468
|
|
Accumulated other comprehensive loss
|
|
|
(139
|
)
|
|
|
(191
|
)
|
Retained earnings
|
|
|
987
|
|
|
|
2,501
|
|
Cost of shares held in the treasury: 17,464,189 shares in
2007 and 18,754,907 shares in 2006
|
|
|
(667
|
)
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
780
|
|
|
|
2,189
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
5,942
|
|
|
$
|
20,474
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to consolidated financial statements.
43
TEMPLE-INLAND
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
NET REVENUES
|
|
$
|
3,926
|
|
|
$
|
4,185
|
|
|
$
|
3,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(3,390
|
)
|
|
|
(3,476
|
)
|
|
|
(3,382
|
)
|
Selling
|
|
|
(112
|
)
|
|
|
(107
|
)
|
|
|
(97
|
)
|
General and administrative
|
|
|
(197
|
)
|
|
|
(214
|
)
|
|
|
(198
|
)
|
Gain on sale of timberland
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
Other operating income (expense)
|
|
|
(189
|
)
|
|
|
32
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,835
|
)
|
|
|
(3,765
|
)
|
|
|
(3,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
2,091
|
|
|
|
420
|
|
|
|
120
|
|
Other non-operating income (expense)
|
|
|
(35
|
)
|
|
|
93
|
|
|
|
|
|
Interest income on financial assets of special purpose entities
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Interest expense on nonrecourse financial liabilities of special
purpose entities
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Interest expense on debt
|
|
|
(111
|
)
|
|
|
(123
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
|
|
|
1,955
|
|
|
|
390
|
|
|
|
11
|
|
Income tax expense
|
|
|
(753
|
)
|
|
|
(103
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
1,202
|
|
|
|
287
|
|
|
|
18
|
|
Discontinued operations
|
|
|
103
|
|
|
|
181
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,305
|
|
|
$
|
468
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
106.0
|
|
|
|
108.8
|
|
|
|
112.6
|
|
Diluted
|
|
|
108.1
|
|
|
|
110.8
|
|
|
|
114.5
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
11.33
|
|
|
$
|
2.64
|
|
|
$
|
0.16
|
|
Discontinued operations
|
|
|
0.98
|
|
|
|
1.66
|
|
|
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12.31
|
|
|
$
|
4.30
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
11.12
|
|
|
$
|
2.59
|
|
|
$
|
0.16
|
|
Discontinued operations
|
|
|
0.96
|
|
|
|
1.63
|
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12.08
|
|
|
$
|
4.22
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to consolidated financial statements.
44
TEMPLE-INLAND
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
CASH PROVIDED BY (USED FOR) OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,305
|
|
|
$
|
468
|
|
|
$
|
176
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of timberland
|
|
|
(2,053
|
)
|
|
|
|
|
|
|
|
|
Impairments
|
|
|
64
|
|
|
|
|
|
|
|
24
|
|
Loss on early payment of debt
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Loss on sale of Pembroke
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Depreciation and amortization
|
|
|
214
|
|
|
|
225
|
|
|
|
218
|
|
Non-cash share-based compensation
|
|
|
39
|
|
|
|
38
|
|
|
|
26
|
|
Non-cash pension and postretirement expense
|
|
|
44
|
|
|
|
56
|
|
|
|
58
|
|
Cash contribution to pension and postretirement plans
|
|
|
(80
|
)
|
|
|
(76
|
)
|
|
|
(76
|
)
|
Deferred income taxes
|
|
|
435
|
|
|
|
34
|
|
|
|
40
|
|
Earnings of joint ventures
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
(39
|
)
|
Dividends from joint ventures
|
|
|
8
|
|
|
|
12
|
|
|
|
43
|
|
Tax benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Other
|
|
|
14
|
|
|
|
18
|
|
|
|
16
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
19
|
|
|
|
(28
|
)
|
|
|
(16
|
)
|
Inventories
|
|
|
(30
|
)
|
|
|
(10
|
)
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
274
|
|
|
|
32
|
|
|
|
4
|
|
Prepaid expenses and other
|
|
|
8
|
|
|
|
22
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296
|
|
|
|
780
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR) INVESTING
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(225
|
)
|
|
|
(187
|
)
|
|
|
(192
|
)
|
Reforestation and net acquisition of timber and timberland
|
|
|
(12
|
)
|
|
|
(17
|
)
|
|
|
(28
|
)
|
Sale of timberland
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
Sales of non-strategic assets and operations and proceeds from
sale of property and equipment
|
|
|
24
|
|
|
|
64
|
|
|
|
45
|
|
Acquisitions, net of cash acquired, and joint ventures
|
|
|
(5
|
)
|
|
|
(148
|
)
|
|
|
(5
|
)
|
Other
|
|
|
4
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235
|
)
|
|
|
(287
|
)
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR) FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecourse borrowing secured by financial assets of special
purpose entities
|
|
|
2,140
|
|
|
|
|
|
|
|
|
|
Payments of debt
|
|
|
(567
|
)
|
|
|
(47
|
)
|
|
|
(502
|
)
|
Borrowings under accounts receivable securitization facility, net
|
|
|
(163
|
)
|
|
|
133
|
|
|
|
15
|
|
Borrowings under revolving credit facility, net
|
|
|
(12
|
)
|
|
|
(56
|
)
|
|
|
|
|
Change in book overdrafts
|
|
|
13
|
|
|
|
2
|
|
|
|
(13
|
)
|
Fees associated with debt
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
Other additions to debt
|
|
|
|
|
|
|
10
|
|
|
|
500
|
|
Cash dividends paid to shareholders
|
|
|
(1,212
|
)
|
|
|
(108
|
)
|
|
|
(102
|
)
|
Repurchase of common stock
|
|
|
(24
|
)
|
|
|
(318
|
)
|
|
|
(527
|
)
|
Exercise of options
|
|
|
20
|
|
|
|
47
|
|
|
|
48
|
|
Tax benefit of stock options exercised
|
|
|
15
|
|
|
|
10
|
|
|
|
|
|
Settlement of equity purchase contracts
|
|
|
|
|
|
|
|
|
|
|
345
|
|
Other
|
|
|
|
|
|
|
(4
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
|
(331
|
)
|
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
|
(33
|
)
|
|
|
255
|
|
|
|
78
|
|
Net cash provided by (used for) investing activities
|
|
|
(619
|
)
|
|
|
1,056
|
|
|
|
(1,785
|
)
|
Net cash provided by (used for) financing activities
|
|
|
620
|
|
|
|
(1,443
|
)
|
|
|
1,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(132
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
197
|
|
|
|
30
|
|
|
|
(9
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
30
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at year-end
|
|
$
|
227
|
|
|
$
|
30
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to consolidated financial statements.
45
TEMPLE-INLAND
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Income / (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Balance at year-end 2004
|
|
$
|
123
|
|
|
$
|
350
|
|
|
$
|
(192
|
)
|
|
$
|
2,067
|
|
|
$
|
(241
|
)
|
|
$
|
2,107
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
Unrealized gains/(losses) on securities
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Defined benefits
|
|
|
|
|
|
|
|
|
|
|
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, net of distributions
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
468
|
|
Unrealized gains/(losses) on securities
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Defined benefits
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common stock $1.00 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
Share-based compensation, net of distributions
10,289 shares
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
27
|
|
Exercise of stock options 1,736,335 net shares
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
47
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Repurchase of common stock 7,850,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(333
|
)
|
|
|
(333
|
)
|
Adoption of SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2006
|
|
$
|
124
|
|
|
$
|
468
|
|
|
$
|
(191
|
)
|
|
$
|
2,501
|
|
|
$
|
(713
|
)
|
|
$
|
2,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,305
|
|
|
|
|
|
|
|
1,305
|
|
Unrealized gains/(losses) on securities
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
Defined benefits
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular dividends paid on common stock $1.12 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
(118
|
)
|
Special dividend paid on common stock $10.25 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,094
|
)
|
|
|
|
|
|
|
(1,094
|
)
|
Share-based compensation, net of distributions
281,472 shares
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
18
|
|
Exercise of stock options 1,009,246 net shares
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
20
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Adoption of FASB Interpretation No. 48, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Adoption of measurement provisions of SFAS No. 158,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
Spin-off of Forestar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
(434
|
)
|
Spin-off of Guaranty
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2007
|
|
$
|
124
|
|
|
$
|
475
|
|
|
$
|
(139
|
)
|
|
$
|
987
|
|
|
$
|
(667
|
)
|
|
$
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read the notes to consolidated financial statements.
46
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
On December 28, 2007, we completed our transformation plan
that was approved by our board of directors in February 2007. A
summary of the significant elements of the transformation plan
follows:
|
|
|
|
|
On October 31, 2007, we sold 1.55 million acres of
timberland for $2.38 billion to an investment entity
affiliated with The Campbell Group, LLC and recognized a pre-tax
gain of $2.053 billion, which is included in other
operating income. The acreage sold consisted of
1.38 million acres owned in fee and leases covering
175,000 acres. The total consideration consisted almost
entirely of notes due in 2027, which are secured by irrevocable
letters of credit issued by independent financial institutions.
We also entered into a
20-year
fiber supply agreement for pulpwood and a
12-year
fiber supply agreement for sawtimber. Both agreements are at
market prices, and are subject to extension.
|
|
|
|
We contributed the notes and irrevocable letters of credit
received in connection with the sale of our timberlands to two
wholly-owned, bankruptcy-remote special purpose entities. On
December 3, 2007, the special purpose entities pledged the
notes receivable from the sale of timberland as collateral for
$2.14 billion nonrecourse loans payable 2027. The net cash
proceeds, after alternative minimum and other taxes related to
sale of the timberland and transaction costs, were
$1.8 billion. We used $1.1 billion of the net cash
proceeds to pay a $10.25 per share special cash dividend to our
shareholders in December 2007. The remaining $700 million
was used to reduce debt. We have concluded that we are the
primary beneficiary of these special purpose entities. As a
result we include these special purpose entities in our
consolidated financial statements.
|
|
|
|
On December 28, 2007, we completed the spin-off of our real
estate segment, Forestar Real Estate Group Inc. (Forestar), and
our financial services segment, Guaranty Financial Group Inc.
(Guaranty). These spin-offs were effected through tax-free
distributions of one share of Forestar and one share of Guaranty
for every three shares of Temple-Inland common stock. These
spin-offs reduced retained earnings by $1.6 billion. Our
financial information has been reclassified to reflect Forestar
and Guaranty as discontinued operations for all periods
presented.
|
The transformation plan significantly changed our capital
structure and operations. At year-end 2007, Temple-Inland is a
manufacturing company focused on corrugated packaging and
building products.
Our consolidated financial statements include the accounts of
Temple-Inland Inc., its subsidiaries and special purpose and
variable interest entities of which we are the primary
beneficiary. We account for our investment in other entities in
which we have significant influence over operations and
financial policies using the equity method.
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.
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. All of
the periods presented had 52 weeks. Fiscal year 2007 ended
on December 29, 2007, fiscal year 2006 ended on
December 30, 2006, and fiscal year 2005 ended on
December 31, 2005.
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.
47
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Asset
Retirement Obligations and Environmental
Obligations
We recognize legal obligations associated with the retirement of
long-lived assets when the obligation is incurred. 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. At year-end 2005, we adopted Financial
Accounting Standards Board (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. The present value of these asset
retirement obligations was $13 million at year-end 2007 and
$16 million at year-end 2006 and is included in other
long-term liabilities. Accretion expense was less than
$1 million in 2007, $1 million in 2006 and less than
$1 million in 2005.
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 $13 million at year-end 2007, of which
$11 million is included in other accrued expenses and
$2 million in other long-term liabilities. At year-end
2006, accrued remediation liabilities were $13 million of
which $9 million were included in other accrued expenses,
$2 million in other long-term liabilities, and
$2 million in liabilities of discontinued operations.
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 $35 million at year-end 2007 and $46 million at
year-end 2006 and is included in other assets. The amortization
of these capitalized costs was $15 million in 2007,
$17 million in 2006, and $15 million in 2005 and is
included in cost of sales and general and administrative expense.
Cash
and Cash Equivalents
Cash and cash equivalents include cash and other short-term
instruments with original maturities of three months or less.
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 interest rates, product pricing and
manufacturing costs. We do not enter into derivatives for
trading purposes. We defer and include in other comprehensive
income changes in
48
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 income. 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 or 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. In the absence of quoted market prices, we determine
estimated fair value generally based on the present value of
future probability weighted cash flows expected from the use and
eventual disposition of the long-lived asset. We carry assets
held for sale at the lower of carrying value or estimated fair
value less costs to sell.
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. We recognize and value income tax exposures for
the various taxing jurisdictions where we operate based on tax
laws, tax elections, commonly accepted tax positions, and
management estimates. We include tax penalties and interest in
income tax expense.
In 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes.
As a result of the implementation, we increased assets by
$2 million, reduced liabilities by $3 million, and
increased beginning retained earnings by $5 million. We
also reclassified $11 million from deferred income taxes to
other long-term liabilities.
49
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
We carry inventories at the lower of cost or market. We
determine cost using the average cost method, which approximates
the
first-in,
first-out method.
In 2006, we began applying the guidance in Emerging Issues Task
Force (EITF) Issue
No. 04-13,
Accounting for Purchases and Sales of Inventory with the Same
Counterparty. This guidance requires that non-monetary
exchanges of similar inventory be valued at the carrying value
of the inventory given up instead of the fair value of the
inventory received and is applied to exchange agreements entered
into or renewed subsequent to first quarter 2006. Our corrugated
packaging segment enters into these agreements that generally
represent the exchange of linerboard we manufacture for
corrugated medium manufactured by others. We include these
exchanges in cost of sales. The effect of applying this guidance
was to increase cost of sales $2 million in 2007 and
$7 million in 2006.
Pension
and Postretirement Plans
At year-end 2006 we adopted Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
requiring the funded status of defined benefit plans be shown on
the balance sheet. In 2007, we transitioned to a year-end
measurement date for valuing plan assets and obligations for our
defined benefit and postretirement benefit plans as further
required by SFAS No. 158. Previously we used a
measurement date of September 30. Upon transition, we reduced
2007 beginning shareholders equity by $5 million,
representing the net periodic benefit cost of the three month
period from the last measurement date to year-end 2006, net of
tax, and increased liability for pension benefits.
The following table shows the effect of applying
SFAS No. 158 on individual line items in the 2006
consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Application
|
|
|
Adjustments
|
|
|
After Application
|
|
|
|
of SFAS No. 158
|
|
|
Increase (Decrease)
|
|
|
of SFAS No. 158
|
|
|
|
(In millions)
|
|
|
Prepaid expenses and other
|
|
$
|
76
|
|
|
$
|
(16
|
)
|
|
$
|
60
|
|
Deferred tax liability
|
|
|
279
|
|
|
|
(35
|
)
|
|
|
244
|
|
Liability for pension benefits
|
|
|
156
|
|
|
|
73
|
|
|
|
229
|
|
Liability for postretirement benefits
|
|
|
119
|
|
|
|
3
|
|
|
|
122
|
|
Total liabilities
|
|
|
18,244
|
|
|
|
41
|
|
|
|
18,285
|
|
Accumulated other comprehensive loss
|
|
|
134
|
|
|
|
57
|
|
|
|
191
|
|
Total shareholders equity
|
|
|
2,246
|
|
|
|
(57
|
)
|
|
|
2,189
|
|
50
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, including planned major maintenance. 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 At
|
|
|
|
Estimated
|
|
|
Year-End
|
|
Classification
|
|
Useful Lives
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Land and land improvements
|
|
|
N/A
|
|
|
$
|
40
|
|
Buildings and building improvements
|
|
|
10 to 40 years
|
|
|
|
298
|
|
Machinery and equipment:
|
|
|
|
|
|
|
|
|
Paper machines
|
|
|
5 to 25 years
|
|
|
|
632
|
|
Mill equipment
|
|
|
5 to 25 years
|
|
|
|
79
|
|
Converting equipment
|
|
|
3 to 20 years
|
|
|
|
410
|
|
Other production equipment
|
|
|
5 to 25 years
|
|
|
|
5
|
|
Transportation equipment
|
|
|
3 to 20 years
|
|
|
|
28
|
|
Office and other equipment
|
|
|
3 to 5 years
|
|
|
|
20
|
|
Construction in progress
|
|
|
N/A
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,632
|
|
|
|
|
|
|
|
|
|
|
We include in property and equipment $57 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.
Revenue
Recognition
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.
We exclude from revenue, amounts we collect from customers that
represent sales tax or other taxes that are based on the sale.
These amounts are included in other accrued expenses until paid.
Share-Based
Compensation
Beginning January 2006, we adopted the modified prospective
application method contained in SFAS No. 123 (revised
December 2004), Share-Based Payment
(SFAS 123(R)), to account for share-based
payments. As a result, we apply this pronouncement to new awards
or modifications of existing awards in 2006 and thereafter. We
had been expensing over the service period the fair value of
share-based compensation awards granted, modified or settled in
2003 through 2005, using the prospective transition method of
accounting contained in SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, an
amendment of FASB Statement No. 123. The principal
effects of adopting SFAS 123(R) are:
|
|
|
|
|
The fair value of awards granted to retirement eligible
employees is expensed at the date of grant because our stock
option awards and some of our other awards provide for
accelerated or continued
|
51
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
vesting upon retirement. Previously, the fair value of these
awards was expensed over the expected service period. This
change accelerated about $6 million of expense into first
quarter 2006 related to awards granted in 2006. We will continue
to expense the fair value of awards granted prior to 2006 over
the expected service period.
|
|
|
|
|
|
Forfeitures over the expected term of the award are estimated at
the date of grant and the estimates adjusted to reflect actual
subsequent forfeitures. Previously, we had reflected forfeitures
as they occurred. The effect of this change was not significant.
|
|
|
|
Tax benefits recognized as a result of the exercise of employee
stock options are classified as a financing cash flow. Prior to
2006, we classified these tax benefits as an operating cash flow.
|
|
|
|
The fair value of unvested outstanding options at the beginning
of first quarter 2006 will be expensed over the remaining
service period. The effect of this change was not significant
because we began accounting for options at fair value determined
at the date of grant in 2003. As a result, this applied only to
our unvested outstanding options granted prior to 2003.
|
Adoption of this new pronouncement did not change the
methodology we use to determine the fair value of our
share-based compensation arrangements. We use the
Black-Scholes-Merton option-pricing model for stock options and
the grant date or period-end fair value of our common stock for
all other awards.
Prior to 2003, we used the intrinsic value method in accounting
for stock options. As a result, no share-based compensation
expense related to those stock options granted prior to 2003 is
reflected in net income for 2005. The following table
illustrates the effect on net income and earnings per share as
if the fair value method had been applied to all options granted.
|
|
|
|
|
|
|
For the Year
|
|
|
|
2005
|
|
|
|
(In millions,
|
|
|
|
except per share)
|
|
|
Net income, as reported
|
|
$
|
176
|
|
Add: Share-based compensation expense, net of related tax
effects, included in the determination of reported net
income(a)
|
|
|
19
|
|
Deduct: Total share-based compensation expense, net of related
tax effects, determined under the fair value based method for
all
awards(a)
|
|
|
(23
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
172
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
Basic, as reported
|
|
$
|
1.56
|
|
Basic, pro forma
|
|
$
|
1.53
|
|
Diluted, as reported
|
|
$
|
1.54
|
|
Diluted, pro forma
|
|
$
|
1.50
|
|
|
|
|
(a) |
|
Includes treasury stock contributions to fulfill our obligation
for matching contributions to our 401(k) plans of
$3 million, net of related tax effects. |
Special
Purpose and Variable Interest Entities
We account for special purpose and variable interest entities
using 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.
52
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Timber
and Timberland
In 2007, we sold all of our strategic timber and timberland.
We carried timber and timberland at cost, less the cost of
timber cut. We capitalized the costs we paid to purchase timber
and timberland, and we allocated that cost to the timber,
timberland, and if applicable, mineral rights, based on
estimated relative fair values, which in the case of significant
purchases, we based on third-party appraisals.
We expensed 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 included the
cost of timber cut in depreciation expense. We determined 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
information gathering techniques. Changes in yields were
generally due to adjustments in growth rates and similar matters
and were accounted for prospectively as changes in estimates. We
capitalized reforestation 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 expensed all
other costs, such as property taxes and costs of forest
management personnel, as incurred. Once the seedling plantation
was viable, we expensed all costs to maintain the viable
plantations, such as fertilization, herbicide application,
insect and wildlife control, and thinning, as incurred. We
capitalized costs incurred to initially build roads as land
improvements, and we expensed as incurred costs to maintain
these roads.
We determined the carrying value of timberland sold using the
area method by county, which was based on the relationship of
carrying value of timberland to total acres of timberland
multiplied by acres of timberland sold. We determined the
carrying value of timber sold by the average cost method, which
was based on the relationship of timber carrying value to the
estimate of recoverable timber multiplied by the amount of
timber sold.
Pending
Accounting Pronouncements
SFAS No. 141(R), Business Combinations
This new standard requires most identifiable
assets, liabilities, noncontrolling interests, and goodwill
acquired in a business combination to be recorded at full fair
value. The new standard also changes the approach to determining
the purchase price; the accounting for acquisition cost; and the
accounting practices for acquired contingencies, restructuring
costs, long-lived assets, in-process research and development,
share-based payment awards, indemnification costs, and tax
benefits. SFAS No. 141(R) is effective for any
business combination occurring after our year-end 2008.
SFAS No. 157, Fair Value Measures
This standard defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements. This guidance applies to fair
value measurements already required or permitted and will be
effective for our first quarter 2008. We do not expect that
adoption will have a significant effect on our earnings or
financial position.
SFAS No. 159, The Fair Value Options for Financial
Assets and Financial Liabilities This standard
permits the election of fair value as the initial and subsequent
measurement method for many financial assets and liabilities.
Subsequent changes in the fair value would be recognized in
earnings as they occur. Electing the fair value option requires
the disclosure of the fair value of affected assets and
liabilities on the balance sheet or in the notes to the
financial statements. SFAS No. 159 is effective for
our first quarter 2008. We do not anticipate electing this
option.
SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements This new
standard specifies that noncontrolling interests be reported as
a part of equity, not as a liability or other item outside of
53
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equity. SFAS No. 160 is effective for our first
quarter 2009. Based on our current understanding, we do not
expect that adoption will have a significant effect on our
earnings or financial position.
In 2006, we purchased for $150 million our partners
50 percent interest in Standard Gypsum LP, which
manufactured and sold gypsum wallboard. We also paid off the
partnerships $56 million credit agreement, of which
$28 million related to the purchased interest. We financed
this purchase with borrowings under our revolving credit
facilities. We believe that this acquisition will allow us to
continue to generate earnings and returns from our gypsum
wallboard operations, as these operations are low cost and are
located near fast growing markets.
We no longer maintain Standard Gypsum as a separate legal entity
and include all of its assets and liabilities, results of
operations, and cash flows in our consolidated financial
statements. Previously we had accounted for our interest in
Standard Gypsum using the equity method. We allocated the
purchase price to the 50 percent of the assets acquired and
liabilities assumed based on our estimates of their fair value
at the date of acquisition. We based these estimates of fair
values on independent appraisals and other information. Goodwill
is allocated to the building products segment, and we anticipate
that all of the goodwill will be deductible for income tax
purposes. The other 50 percent of the assets and
liabilities, which we already owned, were included at their
carrying value.
A summary of the net assets at the date of acquisition
(50 percent at fair value and 50 percent at carrying
value) follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Current assets
|
|
$
|
35
|
|
Property and equipment
|
|
|
74
|
|
Goodwill
|
|
|
129
|
|
|
|
|
|
|
Total assets
|
|
|
238
|
|
|
|
|
|
|
Current liabilities
|
|
|
(13
|
)
|
Current portion of long-term debt
|
|
|
(56
|
)
|
|
|
|
|
|
Total liabilities
|
|
|
(69
|
)
|
|
|
|
|
|
Net assets at date of acquisition
|
|
$
|
169
|
|
|
|
|
|
|
Unaudited pro forma information assuming this acquisition and
related financing had occurred at the beginning of 2005 would
have resulted in revenues of $4.04 billion, income from
continuing operations of $32 million, and income from
continuing operations per diluted share of $0.28.
We derived these pro forma results by adjusting for the effects
of the purchase price allocations and financing described above.
These pro forma results are not necessarily an indication of
what would have occurred if the acquisition and financing had
been completed at the beginning of 2005 and are not intended to
be indicative of future results.
Our significant manufacturing joint venture investments at
year-end 2007 are: Premier Boxboard Limited LLC, a
50 percent owned venture that produces gypsum facing paper
and corrugating medium in Newport, Indiana , and Del-Tin Fiber
LLC, a 50 percent owned venture that produces medium
density fiberboard in El Dorado, Arkansas.. The joint venture
partner in each of these ventures is a publicly-held company
unrelated to us. In January 2006, we purchased our
partners 50 percent interest in Standard Gypsum LP.
As a result,
54
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
beginning in 2006, we include all of its assets and liabilities,
results of operations, and cash flow in our consolidated
financial statements. Please read Note 2 for
additional information.
Combined summarized financial information for these joint
ventures follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Current assets
|
|
$
|
29
|
|
|
$
|
26
|
|
Total assets
|
|
|
234
|
|
|
|
241
|
|
Current
liabilities(a)
|
|
|
25
|
|
|
|
24
|
|
Long-term debt
|
|
|
85
|
|
|
|
90
|
|
Equity
|
|
|
124
|
|
|
|
127
|
|
Our investment in joint ventures:
|
|
|
|
|
|
|
|
|
50 percent share in joint ventures equity
|
|
$
|
62
|
|
|
$
|
63
|
|
Unamortized basis difference
|
|
|
(30
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Investment in joint ventures
|
|
$
|
32
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes current maturities of debt of $6 million in 2007 and $6
million in 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Net revenues
|
|
$
|
200
|
|
|
$
|
192
|
|
|
$
|
378
|
|
Operating income
|
|
|
13
|
|
|
|
24
|
|
|
|
85
|
|
Earnings
|
|
|
5
|
|
|
|
17
|
|
|
|
74
|
|
Our equity in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
50 percent share of earnings
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
37
|
|
Amortization of basis difference
|
|
|
2
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of joint ventures
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We and our joint venture partners contribute to these ventures
and receive distributions from them equally. In 2007, we
contributed $4 million to these ventures and received
$8 million in distributions, in 2006 we contributed
$3 million and received $12 million in distributions,
and in 2005 we contributed $5 million and received
$43 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 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 2007, the unamortized
basis difference was $30 million.
We provide marketing services to the Del-Tin joint venture, and
prior to 2006, we provided marketing and management services to
the Standard Gypsum joint venture. Fees for these services were
$2 million in 2007, $3 million in 2006, and
$8 million in 2005 and are included as a reduction of cost
of sales and selling
55
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense. We also purchase, at market rates, finished products
from the Premier Boxboard joint venture, which aggregated
$47 million in 2007, $62 million in 2006, and
$40 million in 2005.
In 2005, we sold about 7,000 acres of timber and timberland
to a joint venture in which our former real estate segment owned
50 percent and an unrelated public company owned 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 intended to hold the land for future development
and sale. We recognized about half of the $10 million gain
in income in 2005 and recognized the remainder in 2007 when we
spun off our real estate segment.
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Borrowings under bank credit agreements average
interest rate of 6.26% in 2007 and 5.89% in 2006
|
|
$
|
|
|
|
$
|
12
|
|
Accounts receivable securitization facility average
interest rate of 5.44% in 2007 and 5.05% in 2006
|
|
|
1
|
|
|
|
164
|
|
6.75% Notes, payable in 2009
|
|
|
14
|
|
|
|
300
|
|
7.875% Senior Notes, payable in 2012, net of discounts
|
|
|
285
|
|
|
|
498
|
|
6.375% Senior Notes, payable in 2016, net of discounts
|
|
|
249
|
|
|
|
249
|
|
6.625% Senior Notes, payable in 2018, net of discounts
|
|
|
248
|
|
|
|
248
|
|
Revenue bonds, payable 2007 through 2024 average
interest rate of 5.41% in 2007 and 5.75% in 2006
|
|
|
51
|
|
|
|
65
|
|
Other indebtedness due through 2027 average interest
rate of 7.89% in 2007 and 6.99% in 2006
|
|
|
7
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
855
|
|
|
|
1,597
|
|
Less current portion of long-term debt
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
852
|
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
At year-end 2007, we had $835 million in committed credit
agreements. These committed agreements include a
$750 million credit agreement that expires in 2011. The
remaining $85 million of credit agreements expire between
2008 and 2010. At year-end 2007, our unused capacity under these
facilities was $821 million.
At year-end 2007, we had a $250 million accounts receivable
securitization facility that expires in 2010. Under this
facility, a wholly-owned, bankruptcy-remote subsidiary
purchases, on an on-going basis, substantially all our 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 2007, the subsidiary
owned $361 million in net trade receivables against which
it had borrowed $1 million under this facility. At year-end
2007, the unused capacity under this facility was
$246 million. We include this subsidiary in our
consolidated financial statements.
Maturities of our debt during the next five years are (in
millions): 2008 $3; 2009 $33;
2010 $2; 2011 $11; 2012
$293; and thereafter $513. We have classified
$10 million of 2008 stated maturities as long-term
based on our intent and ability to refinance them on a long-term
basis.
In December 2007, we completed a cash tender offer for
$286 million of 6.75% Notes payable in 2009 and
$213 million of 7.875% Senior Notes payable in 2012.
We incurred $40 million in costs related to these tender
offers, which was included in other non-operating (income)
expense.
In December 2005, we completed a cash tender offer for
$425 million of debt. We incurred $6 million in costs
related to this tender offer, which was included in other
non-operating (income) expense.
56
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We capitalized and deducted from interest expense interest
incurred on major construction and information technology
projects of $1 million in 2007, $1 million in 2006,
and $1 million in 2005. We paid interest of
$125 million in 2007, $106 million in 2006, and
$109 million in 2005.
|
|
Note 5
|
Financial
Assets and Nonrecourse Financial Liabilities of Special Purpose
Entities
|
In October 2007, we received $2.38 billion in notes from
the sale of 1.55 million acres of timberland, which we
contributed to two wholly-owned, bankruptcy-remote special
purpose entities. The notes are secured by irrevocable letters
of credit, are due in 2027, and require quarterly interest
payments based on variable interest rates that reset quarterly
(4.98 percent at year-end 2007).
In December 2007, the special purpose entities pledged the notes
and irrevocable letters of credit to secure $2.14 billion
nonrecourse loans payable in 2027. These borrowings require
quarterly interest payments based on variable interest rates
that reset quarterly (5.67 percent at year-end 2007).
We include these special purpose entities in our consolidated
financial statements.
From February 2005 through year-end 2007, our Board of Directors
approved repurchase programs aggregating 29.0 million
shares. As of year-end 2007, we had repurchased
22.4 million shares under these programs. In 2007, we
initiated no share purchases , but we settled $24 million
of share purchases that were initiated in fourth quarter 2006.
As of year-end 2007, there are 6.6 million shares remaining
under current repurchase authorizations.
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 9 for information about additional
shares of common stock that could be issued under terms of our
share-based compensation plans.
57
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7
|
Accumulated
Other Comprehensive Income (Loss)
|
The components of and changes in accumulated other comprehensive
income (loss) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
on Available-
|
|
|
Defined
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
For-Sale
|
|
|
Benefit
|
|
|
Translation
|
|
|
Derivative
|
|
|
|
|
|
|
Securities
|
|
|
Plans
|
|
|
Adjustment
|
|
|
Instruments
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Balance at beginning of year 2005
|
|
$
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year
|
|
|
(1
|
)
|
|
|
95
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
93
|
|
Deferred taxes on changes
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change for 2006
|
|
|
(1
|
)
|
|
|
57
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS No. 158, net of deferred taxes of $35
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2006
|
|
$
|
1
|
|
|
$
|
(168
|
)
|
|
$
|
(24
|
)
|
|
$
|
|
|
|
$
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the year
|
|
|
(56
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Deferred taxes on changes
|
|
|
20
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change for 2007
|
|
|
(36
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Spin-off of Guaranty
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year-end 2007
|
|
$
|
|
|
|
$
|
(115
|
)
|
|
$
|
(24
|
)
|
|
$
|
|
|
|
$
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8
|
Pension
and Postretirement Plans
|
The annual expense of our benefit plans consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
401 (k) matching plan
|
|
$
|
17
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Defined benefit
|
|
|
35
|
|
|
|
46
|
|
|
|
49
|
|
Postretirement medical
|
|
|
8
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60
|
|
|
$
|
71
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our 401(k) matching plan covers substantially all employees and
is fully funded.
Our defined benefit plan covers substantially all salaried and
hourly employees. 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 our qualified defined benefit
plan on an actuarial basis to accumulate assets sufficient to
meet the benefits to be paid in accordance with ERISA
requirements. However, from time to time we may make voluntary,
discretionary contributions. Our 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.
Our postretirement plan
58
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provides for medical coverage, including a prescription drug
subsidy, for certain participants. Our postretirement plan is
funded to the extent of benefit payments.
Additional information about our defined benefit and
postretirement medical plans follows.
Obligations
and Funded Status
Beginning in 2007, we measure the defined benefit and
postretirement medical plans benefit obligation, value plan
assets, and determine funded status and annual expense at year
end. Prior to 2007, we used September 30 as our measurement
date. The projected benefit obligation of our defined benefit
plan represents the present value of benefits earned adjusted
for projected future compensation increases to the date of
retirement. The accumulated postretirement benefit obligation of
our postretirement benefits plan represents the present value of
benefits attributable to employee service periods. The projected
benefit obligation and the accumulated postretirement benefit
obligation are collectively referred to as benefit obligation.
The fair value of plan assets represents the fair value,
generally market value at the measurement date, of all plan
assets. The funded status for the plans represents the
difference between the benefit obligation and the fair value of
the plan assets.
A summary of the changes in the benefit obligation, plan assets,
and funded status follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Defined Benefits
|
|
|
Postretirement
|
|
|
|
Qualified
|
|
|
Supplemental
|
|
|
Total
|
|
|
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Benefit obligation beginning of valuation period
|
|
$
|
(1,284
|
)
|
|
$
|
(1,300
|
)
|
|
$
|
(56
|
)
|
|
$
|
(51
|
)
|
|
$
|
(1,340
|
)
|
|
$
|
(1,351
|
)
|
|
$
|
(139
|
)
|
|
$
|
(155
|
)
|
Service cost
|
|
|
(32
|
)
|
|
|
(27
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(33
|
)
|
|
|
(28
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Interest cost
|
|
|
(94
|
)
|
|
|
(71
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(98
|
)
|
|
|
(73
|
)
|
|
|
(10
|
)
|
|
|
(8
|
)
|
Plan amendments
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain (loss)
|
|
|
16
|
|
|
|
51
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
12
|
|
|
|
47
|
|
|
|
(3
|
)
|
|
|
11
|
|
Benefits paid by the plan
|
|
|
84
|
|
|
|
64
|
|
|
|
6
|
|
|
|
2
|
|
|
|
90
|
|
|
|
66
|
|
|
|
21
|
|
|
|
18
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation end of valuation period
|
|
|
(1,310
|
)
|
|
|
(1,284
|
)
|
|
|
(59
|
)
|
|
|
(56
|
)
|
|
|
(1,369
|
)
|
|
|
(1,340
|
)
|
|
|
(137
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of valuation
period
|
|
|
1,094
|
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
1,094
|
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
Actual return
|
|
|
165
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
Benefits paid by the plan
|
|
|
(84
|
)
|
|
|
(64
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(90
|
)
|
|
|
(66
|
)
|
|
|
(21
|
)
|
|
|
(19
|
)
|
Contributions we made
|
|
|
75
|
|
|
|
60
|
|
|
|
6
|
|
|
|
2
|
|
|
|
81
|
|
|
|
62
|
|
|
|
17
|
|
|
|
16
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets end of valuation period
|
|
|
1,250
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
1,250
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status end of valuation period
|
|
|
(60
|
)
|
|
|
(190
|
)
|
|
|
(59
|
)
|
|
|
(56
|
)
|
|
|
(119
|
)
|
|
|
(246
|
)
|
|
|
(137
|
)
|
|
|
(139
|
)
|
Contributions we made after the annual measurement date
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at year-end
|
|
$
|
(60
|
)
|
|
$
|
(175
|
)
|
|
$
|
(59
|
)
|
|
$
|
(56
|
)
|
|
$
|
(119
|
)
|
|
$
|
(231
|
)
|
|
$
|
(137
|
)
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets and (liabilities) included in the consolidated balance
sheet and a reconciliation to funded status follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
Defined
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Liability/funded status
|
|
$
|
(119
|
)
|
|
$
|
(231
|
)
|
|
$
|
(137
|
)
|
|
$
|
(135
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
|
$
|
166
|
|
|
$
|
253
|
|
|
$
|
21
|
|
|
$
|
19
|
|
Unamortized prior service cost
|
|
|
13
|
|
|
|
16
|
|
|
|
(13
|
)
|
|
|
(16
|
)
|
Additional minimum liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
179
|
|
|
$
|
269
|
|
|
$
|
8
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Information
The accumulated benefit obligation of our defined benefit plan
represents the present value of benefits earned without regard
to projected future compensation increases. Our defined benefit
plans have accumulated benefit obligations in excess of plan
assets as follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Projected benefit obligation
|
|
$
|
(1,369
|
)
|
|
$
|
(1,340
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(1,305
|
)
|
|
$
|
(1,267
|
)
|
Fair value of plan assets
|
|
|
1,250
|
|
|
|
1,094
|
|
Contributions we made after the annual measurement date
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Excess of accumulated benefit obligation over fair value of plan
assets
|
|
$
|
(55
|
)
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
Excess of accumulated benefit obligation over fair value of plan
assets consists of:
|
|
|
|
|
|
|
|
|
Qualified plan
|
|
$
|
(1
|
)
|
|
$
|
(108
|
)
|
Supplemental plan
|
|
|
(54
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(55
|
)
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
60
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components
of Net Periodic Benefit Expense and Other Amounts Recognized in
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Defined Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Net periodic benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs benefits earned during the period
|
|
$
|
27
|
|
|
$
|
28
|
|
|
$
|
25
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost on benefit obligation
|
|
|
78
|
|
|
|
73
|
|
|
|
72
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
Expected return on plan assets
|
|
|
(85
|
)
|
|
|
(78
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Amortization of actuarial net loss
|
|
|
14
|
|
|
|
22
|
|
|
|
23
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit
expense(a)
|
|
|
36
|
|
|
|
47
|
|
|
|
50
|
|
|
|
8
|
|
|
|
9
|
|
|
|
8
|
|
Amounts recognized in other comprehensive income, pre-tax
|
|
|
(90
|
)
|
|
|
(95
|
)
|
|
|
(6
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit expense and other
comprehensive income, pre-tax
|
|
$
|
(54
|
)
|
|
$
|
(48
|
)
|
|
$
|
44
|
|
|
$
|
13
|
|
|
$
|
9
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes amounts allocated to discontinued operations of
$1 million in 2007, 2006, and 2005. |
We estimate that our 2008 net periodic pension expense will
be about $37 million. In addition, we expect a one-time
expense of $15 million in 2008 related to lump-sum
settlements of supplemental benefits. The 2008 net periodic
pension expense includes $5 million of net loss and
$6 million of prior service cost that will be amortized
from accumulated other comprehensive loss. We estimate that our
2008 net periodic postretirement expense will be about
$8 million, which includes $1 million of net loss that
will be amortized from accumulated other comprehensive loss and
a credit of $2 million for prior service cost that will be
amortized from a gain component of the net accumulated other
comprehensive loss.
Assumptions
The assumptions we used to determine defined benefit obligations
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.125
|
%
|
|
|
6.00
|
%
|
|
|
6.125
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
3.70
|
%
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
The assumptions we used to determine annual net periodic benefit
expense were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
3.80
|
%
|
|
|
3.70
|
%
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount rate is used to determine the present value of the
benefit obligations. To arrive at this rate for 2007, we used
the December one-month average of the Moodys AA corporate
bond rate adjusted to reflect the effect of compounding and for
2006, we used the September one-month average. We believe that
this rate is a reasonable proxy for the rate necessary to
accumulate funds required to pay the benefits when due.
61
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. Our
actual return on plan assets was 9.8 percent in 2007,
10.0 percent in 2006, and 15.0 percent in 2005.
We used the 1994 Group Annuity Mortality Tables to determine
benefit obligations and annual defined benefit expense.
The assumed health care cost trend rates we used to determine
the expense of the postretirement benefit plans were:
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
Health care trend rate assumed for the next year
|
|
|
9.0
|
%
|
|
|
8.0
|
%
|
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
|
|
|
2014
|
|
|
|
2013
|
|
These assumed health care cost trend rates have a significant
effect on the amounts reported for the postretirement benefit
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
|
)
|
Accumulated postretirement benefit obligation
|
|
|
11
|
|
|
|
(9
|
)
|
Plan
Assets
Our defined benefit investment strategies have been developed as
part of a comprehensive asset/liability management process that
considers the interaction between both 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.
In prior years, our principal pension investment strategies
included asset allocation and active asset management. The range
of target asset allocations was 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 employed
an active management approach for the portfolio. Each asset
class was managed by one or more external money managers with
the objective of generating returns, net of management fees that
exceed market-based benchmarks.
In the last two months of 2007, we made significant changes to
our asset allocation to a more matched position between our
assets and liabilities in our qualified defined benefit plan.
This action is expected to reduce the volatility of our defined
benefit expense and our funding requirements. As shown in the
following table, we have moved to an 80 percent asset
allocation of debt securities. This portfolio of debt securities
has a duration that we believe reasonably approximates our
benefit obligation. The remaining 20 percent asset
62
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allocation (15 percent equity securities; 5 percent
real estate) provides market exposure to help mitigate the
effects of inflation risk, mortality risk and actuarial risk.
The defined benefit plan weighted-average asset allocations and
the range of target allocations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
Percentage of
|
|
|
|
Target
|
|
|
Plan Assets at
|
|
|
|
Allocations
|
|
|
Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
78-88
|
%
|
|
|
33-37
|
%
|
|
|
80
|
%
|
|
|
35
|
%
|
Equity securities
|
|
|
10-15
|
%
|
|
|
50-61
|
%
|
|
|
15
|
|
|
|
59
|
|
Real estate
|
|
|
0-7
|
%
|
|
|
0-7
|
%
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities include 591,896 shares of Temple-Inland
common stock totaling $12 million or one percent of total
plan assets at year-end 2007 and $31 million or three
percent of total plan assets as of the 2006 measurement date.
Cash
Flows
We expect our 2008 voluntary, discretionary contributions to our
defined benefit plan to approximate 2008 service cost, which is
estimated to be about $30 million. We have no minimum 2008
funding requirement under ERISA. Beginning in 2008, benefits
earned under the supplemental defined benefit plan will be paid
upon retirement or when the employee terminates. In addition,
existing retirees were given the option to receive, in January
2008, a lump-sum settlement of supplemental benefits earned. We
expect to make lump-sum settlement payments of $42 million
in 2008.
The postretirement benefit plan is not subject to minimum
regulatory funding requirements. Since the postretirement
benefit plans are unfunded, the expected $13 million
contribution represents the estimated health claims to be paid
for plan participants, net of retiree contributions in 2008.
At year-end 2007, the plans are expected to make the following
benefit payments over the next ten years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefits
|
|
|
Postretirement
|
|
|
|
Qualified
|
|
|
Supplemental
|
|
|
Benefits
|
|
|
|
(In millions)
|
|
|
2008(a)
|
|
$
|
72
|
|
|
$
|
49
|
|
|
$
|
13
|
|
2009
|
|
|
75
|
|
|
|
6
|
|
|
|
12
|
|
2010
|
|
|
78
|
|
|
|
6
|
|
|
|
12
|
|
2011
|
|
|
82
|
|
|
|
5
|
|
|
|
12
|
|
2012
|
|
|
85
|
|
|
|
5
|
|
|
|
12
|
|
2013-2017
|
|
|
470
|
|
|
|
17
|
|
|
|
56
|
|
|
|
|
(a) |
|
Includes $42 million in lump-sum settlements in the
supplemental plan. |
|
|
Note 9
|
Share-Based
Compensation
|
We have shareholder approved share-based compensation plans that
permit awards to key employees and non-employee directors in the
form of restricted or performance units, restricted stock, or
options to purchase shares of our common stock. As a result of
the spin-off of Forestar and Guaranty, all outstanding
share-based awards were equitably adjusted into three separate
awards: one related to Temple-Inland common stock, one
63
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to Forestar common stock, and one related to Guaranty
common stock. The adjustment was made so that immediately
following the spin-off, the number of shares relating to each
award were adjusted to reflect the distribution ratios and, for
options, the per share option exercise price of the original
award, was proportionally allocated between Temple-Inland,
Forestar, and Guaranty awards based on relative per share
trading prices of their common stock immediately following the
spin-off. All awards issued as part of this adjustment and the
Temple-Inland awards will continue to be subject to their
original vesting schedules. Share-based compensation expense on
awards held by employees of Temple-Inland will be based on the
original grant date fair value for share settled awards, the
original grant date Black-Scholes-Merton value for stock option
awards, and the sum of the period-end market prices (adjusted
for the distribution ratios) of the three companies stock for
cash settled awards. After the spin-off, Forestar and Guaranty
employees no longer participate in our share-based compensation
plans.
We generally grant awards annually in February, and we use
treasury stock to fulfill awards settled in common stock and
stock option exercises. A summary of these plans follows:
Restricted
or performance units
Restricted or performance units generally have a three-year
term; vest after three years from the date of grant or the
attainment of stated ROI based performance goals, generally
measured over a three-year period; and are settled in cash or
common stock as determined on the date of grant. The restricted
and performance units provide for accelerated vesting upon
retirement, death, disability, or if there is a change in
control. We also have director awards and bonus deferral plans
that can be settled in cash or stock. A summary of activity for
2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
Current
|
|
|
|
Units
|
|
|
Value per Unit
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In millions)
|
|
|
Not vested beginning of 2007
|
|
|
1,408
|
|
|
$
|
39
|
|
|
|
|
|
Granted
|
|
|
949
|
|
|
|
52
|
|
|
|
|
|
Vested
|
|
|
(539
|
)
|
|
|
30
|
|
|
|
|
|
Forfeited
|
|
|
(16
|
)
|
|
|
44
|
|
|
|
|
|
Awards held by Forestar employees at date of spin-off
|
|
|
(121
|
)
|
|
|
50
|
|
|
|
|
|
Awards held by Guaranty employees at date of spin-off
|
|
|
(265
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not vested year-end 2007
|
|
|
1,416
|
|
|
|
48
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not vested year-end 2007 to be settled in cash and subject to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time vesting requirements
|
|
|
711
|
|
|
|
|
|
|
$
|
22
|
|
Performance requirements
|
|
|
705
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,416
|
|
|
|
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of units vested was $26 million in 2007,
less than $1 million in 2006, and $1 million in 2005.
The fair value of units vested and to be settled in cash was
$26 million at year-end 2007 of which $4 million is
included in other current liabilities and $22 million is
included in long-term liabilities. The fair value of awards
settled in cash in 2007 was less than $1 million. There
were no awards settled in cash in 2006 or 2005.
Restricted
stock
Restricted stock awards generally vest after three to six years,
and provide for accelerated vesting upon retirement, death,
disability, or if there is a change in control. Compensation
costs are recognized ratably over the service period. There were
no restricted stock awards granted in 2007. There were 435,600
restricted stock
64
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards outstanding at year-end 2007 with a weighted average
grant date fair value of $33 per share and an aggregate current
value of $13 million or $30 per share. The fair value of
restricted stock vested in 2007 was $4 million.
Stock
options
Stock options have a ten-year term, generally become exercisable
ratably over four years and provide for accelerated or continued
vesting upon retirement, death, disability, or if there is a
change in control. Options are granted with an exercise price
equal to the market value of our common stock on the date of
grant. In addition to the equitable adjustments related to the
Forestar and Guaranty spin-offs, the exercise price of all stock
option awards was equitably adjusted by $9.85 per share to
reflect the effect of the special cash dividend paid in December
2007. The adjustment was based on the difference between the
closing price on the day before the stock traded ex-dividend and
the opening price on the day the stock began trading
ex-dividend. A summary of our activity for 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
(Current value
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
less exercise
|
|
|
|
Shares
|
|
|
per
Share(a)
|
|
|
Term
|
|
|
price)
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
(In millions)
|
|
|
Outstanding beginning of 2007
|
|
|
6,012
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,028
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,057
|
)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(35
|
)
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Awards held by Forestar employees at date of spin-off
|
|
|
(266
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Awards held by Guaranty employees at date of spin-off
|
|
|
(971
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding year-end 2007
|
|
|
4,711
|
|
|
|
15
|
|
|
|
6
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable year-end 2007
|
|
|
2,889
|
|
|
|
12
|
|
|
|
4
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The weighted average exercise price per share has been adjusted
to reflect the spin-off of Forestar and Guaranty, and the
special cash dividend. |
The intrinsic value of options exercised was $29 million in
2007, $31 million in 2006, and $24 million in 2005.
We estimated the fair value of the options granted using the
Black-Scholes-Merton option-pricing model and the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected dividend yield
|
|
|
2.3
|
%
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
Expected stock price volatility
|
|
|
22.8
|
%
|
|
|
25.1
|
%
|
|
|
28.2
|
%
|
Risk-free interest rate
|
|
|
4.9
|
%
|
|
|
4.4
|
%
|
|
|
4.2
|
%
|
Expected life of options in years
|
|
|
6
|
|
|
|
6
|
|
|
|
8
|
|
Weighted average estimated fair value of options granted
adjusted for spin-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Temple-Inland options
|
|
$
|
7.39
|
|
|
$
|
6.82
|
|
|
$
|
6.61
|
|
Forestar options
|
|
|
3.09
|
|
|
|
2.85
|
|
|
|
2.77
|
|
Guaranty options
|
|
|
1.99
|
|
|
|
1.83
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average estimated fair value of options at original
grant date
|
|
$
|
12.47
|
|
|
$
|
11.50
|
|
|
$
|
11.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The share-based compensation expense on awards held by employees
of Temple-Inland will be based on the original grant date
Black-Scholes-Merton value. The expected stock price volatility
is based on historical prices of our common stock for a period
corresponding to the expected life of the options with
appropriate consideration given to current conditions and
events. The expected life of options is based on historical
experience. We use historical data to estimate pre-vesting
forfeitures stratified into two groups based on job level.
Share-based
compensation expense
Share-based compensation expense consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Restricted or performance units-cash
|
|
$
|
23
|
|
|
$
|
15
|
|
|
$
|
3
|
|
Restricted or performance units-stock
|
|
|
6
|
|
|
|
11
|
|
|
|
13
|
|
Stock options
|
|
|
10
|
|
|
|
12
|
|
|
|
5
|
|
401(k) match
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39
|
|
|
$
|
38
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense is included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Cost of sales
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
5
|
|
Selling expense
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
General and administrative
|
|
|
25
|
|
|
|
31
|
|
|
|
20
|
|
Other operating income (expense)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39
|
|
|
$
|
38
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense for awards granted to Forestar
and Guaranty employees is included in discontinued operations.
The amount of share-based compensation capitalized was not
significant. We contributed treasury stock to fulfill our 401(k)
matching obligation in first quarter 2005.
The fair value of awards granted to retirement-eligible
employees and expensed at the date of grant was $3 million
in 2007, primarily related to stock options. The increase in
share-based compensation in 2006 is due to an increase in our
share price.
Unrecognized share-based compensation for all awards not vested
was $23 million at year-end 2007. It is likely that this
cost will be recognized as expense over the next 3 years.
66
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 10
|
Other
Operating Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Transformation costs
|
|
$
|
(69
|
)
|
|
$
|
|
|
|
$
|
|
|
Closures and sales of converting and production facilities and
sales of non-strategic assets
|
|
|
(55
|
)
|
|
|
(4
|
)
|
|
|
(50
|
)
|
Litigation
|
|
|
(56
|
)
|
|
|
(6
|
)
|
|
|
(13
|
)
|
Environmental remediation
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(3
|
)
|
Softwood Lumber Agreement
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Hurricane related costs, and in 2006, related insurance
recoveries
|
|
|
|
|
|
|
2
|
|
|
|
(16
|
)
|
Other charges
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
Equity in earnings of manufacturing joint ventures
|
|
|
5
|
|
|
|
11
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(189
|
)
|
|
$
|
32
|
|
|
$
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2007, we permanently ceased production at our Mt. Jewett
particleboard manufacturing facility, which we lease from a
third party. As a result, we recognized charges of
$64 million, including $60 million that represents the
present value of the $77 million of future operating lease
payments. This charge does not affect our continuing obligations
under the lease, including paying rent and maintaining the
equipment. The present value of the future payments is included
on our balance sheet, of which $3 million is included in
current liabilities and $57 million in other long-term
liabilities.
In December 2007, we entered into arbitration in an effort to
resolve most of the remaining claims regarding an alleged
violation of Section 1 of the Sherman Act. The arbitrator
awarded plaintiffs $46 million on the claims submitted to
arbitration. Also in 2007, we reached agreements to settle three
of the five cases in California state court alleging violations
of that states on duty meal break laws. We recognized
$10 million of litigation expense in 2007 related to this
matter.
In 2006, we sold one corrugated packaging converting facility,
sold certain non-strategic assets, and finalized our estimates
of losses related to the prior years closures. In
addition, we increased accruals for ongoing environmental
remediation at the Antioch, California paper mill site closed in
connection with our acquisition of Gaylord in 2002. As a result
of these actions, we recognized losses of $12 million. Also
in 2006, we received $42 million in connection with the
Softwood Lumber Agreement between the U.S. and Canada, and
we received $2 million of insurance proceeds related to
cost incurred in connection with the 2005 hurricanes.
In 2005, we closed four corrugated packaging facilities, sold
our Pembroke, Canada MDF facility, and effected other workforce
reductions. 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 the Pembroke MDF facility was $25 million,
and other exit costs associated with the sale were
$1 million. Also 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 timberland, $6 million
in facility damages, and $3 million in employee and
community assistance and other costs.
67
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity within our accruals for exit costs was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Additions/
|
|
|
Cash
|
|
|
Year-
|
|
|
|
of Year
|
|
|
Revisions
|
|
|
Payments
|
|
|
End
|
|
|
|
(In millions)
|
|
|
For the Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
Demolition and environmental remediation
|
|
|
8
|
|
|
|
1
|
(a)
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9
|
|
|
$
|
1
|
|
|
$
|
(9
|
)
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
Contract termination penalties
|
|
|
2
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Demolition and environmental remediation
|
|
|
9
|
|
|
|
8
|
(a)
|
|
|
(9
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12
|
|
|
$
|
9
|
|
|
$
|
(12
|
)
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary employee terminations
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
(8
|
)
|
|
$
|
1
|
|
Contract termination penalties
|
|
|
6
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
2
|
|
Demolition and environmental remediation
|
|
|
16
|
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
4
|
|
|
$
|
(16
|
)
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In 2007 and 2006, we revised our estimates relating to the
demolition and related environmental remediation costs
associated with our exit activities. We added $6 million in
2007 and $8 million in 2006 to this accrual by charging
other operating expense. We transferred $6 million to
Forestar as part of the spin-off. |
Income tax expense on income from continuing operations consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(278
|
)
|
|
$
|
(57
|
)
|
|
$
|
57
|
|
State and other
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
|
|
(65
|
)
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(410
|
)
|
|
|
(43
|
)
|
|
|
(47
|
)
|
State and other
|
|
|
(55
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(465
|
)
|
|
|
(38
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(753
|
)
|
|
$
|
(103
|
)
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (paid) refunded, net
|
|
$
|
3
|
|
|
$
|
(88
|
)
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, we recognized one-time tax benefits of $3 million
resulting from changes to the State of Texas margin tax enacted
in May 2007 and another $4 million related to the
settlement of state tax examinations.
In 2006, we entered into a settlement agreement with the
U.S. Government to resolve pending tax litigation we filed
to recover tax benefits promised to us in connection with our
savings and loan acquisitions in 1988. Under the terms of the
settlement agreement, we received a $95 million non-taxable
cash payment
68
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for past and future tax benefits that would have been available
to us had legislation enacted in 1993 not eliminated those tax
benefits and $4 million of taxable interest income. In
connection with the settlement, we incurred legal fees of
$10 million, which were contingent upon the settlement. The
net pre-tax gain related to this settlement was $89 million
and is included in other non-operating income (expense).
Also in 2006, the Texas State Legislature enacted a new margin
tax to replace the existing franchise tax, which for us results
in a lower overall State of Texas tax rate. As a result, we
recognized a one-time, non-cash benefit of $6 million of
which $2 million related to the reduction of previously
provided deferred state income taxes and $4 million related
to reducing the valuation allowance for Texas investment credits.
In 2005, we recognized a one-time tax benefit of
$16 million as a result of the sale of our Pembroke, Canada
MDF facility.
Income from continuing operations before taxes consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
U.S.
|
|
$
|
1,948
|
|
|
$
|
381
|
|
|
$
|
4
|
|
Non-U.S.
|
|
|
7
|
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,955
|
|
|
$
|
390
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the effective
income tax rate on continuing operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
State, net of federal benefit
|
|
|
3
|
|
|
|
|
|
|
|
15
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
%
|
|
|
35
|
%
|
|
|
83
|
%
|
Settlement of tax litigation
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
State of Texas tax legislation
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Sale of foreign subsidiary
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
39
|
%
|
|
|
26
|
%
|
|
|
(64
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of deferred taxes are:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Property, equipment, and intangible assets
|
|
|
$(350
|
)
|
|
$
|
(330
|
)
|
Timber and timberland, including deferred gain on sale in 2007
|
|
|
(822
|
)
|
|
|
(77
|
)
|
U.S. taxes on unremitted foreign earnings
|
|
|
(16
|
)
|
|
|
(14
|
)
|
Other
|
|
|
(4
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,192
|
)
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Alternative minimum tax credits
|
|
|
286
|
|
|
|
|
|
Foreign and state net operating loss carryforwards
|
|
|
22
|
|
|
|
26
|
|
Pension and postretirement benefits
|
|
|
104
|
|
|
|
140
|
|
Employee benefits
|
|
|
59
|
|
|
|
53
|
|
Accruals not deductible until paid
|
|
|
51
|
|
|
|
31
|
|
Other
|
|
|
35
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
557
|
|
|
|
280
|
|
Less valuation allowance
|
|
|
(28
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liability
|
|
|
$(663
|
)
|
|
$
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
The net deferred tax liability is classified on our balance
sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Current deferred tax assets
|
|
$
|
99
|
|
|
$
|
61
|
|
Non-current deferred tax liabilities
|
|
|
(762
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(663
|
)
|
|
$
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
The increase in deferred taxes primarily reflects the deferred
gain on the sale of our strategic timberland offset by the
resulting payment of alternative minimum taxes. Our alternative
minimum tax credit can be carried forward indefinitely. Our
foreign and state net operating loss carryforwards and credits
will expire from 2008 through 2027. A valuation allowance is
provided for these foreign and state net operating loss
carryforwards and credits.
We or one of our subsidiaries files U.S. federal income tax
returns, and income tax returns in various states and foreign
jurisdictions. The Internal Revenue Service has completed the
examinations of our tax returns through 2003, and we are no
longer subject to examination by state or foreign tax
authorities for years before 2000. We have various income tax
audits in process as of year-end 2007, and we do not expect that
the resolution of these matters will have a significant effect
on our earnings or financial position.
70
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(In millions)
|
|
|
Balance beginning of 2007
|
|
$
|
20
|
|
Additions based on tax positions related to the current year
|
|
|
4
|
|
Reductions for tax positions of prior years
|
|
|
(1
|
)
|
Settlements/collections
|
|
|
3
|
|
|
|
|
|
|
Balance end of 2007
|
|
$
|
26
|
|
|
|
|
|
|
Of the $26 million of unrecognized tax benefits,
$13 million would affect our effective tax rate if
recognized. Interest accrued related to unrecognized tax
benefits is included in income tax (expense) benefit.
Unrecognized tax benefits includes approximately $1 million
of accrued interest and no penalties related to years 2007,
2006, and 2005. We do not expect material changes to our tax
reserve during the next 12 months.
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. Expenses related to litigation are included in
operating income. We do not believe that the outcome of any of
these proceedings should have a significant adverse effect on
our financial position, long-term results of operations, or cash
flows. It is possible, however, that charges related to these
matters could be significant to our results or cash flows in any
one accounting period.
We are a defendant in litigation alleging a civil violation of
Section 1 of the Sherman Act. We and the other defendants
have entered into various settlement agreements that resolved
the class action portion of this litigation and the majority of
the opt-out claims. Our payments under the settlement agreements
have totaled $59 million of which $46 million was paid
in 2007, $5 million in 2005, and $8 million in 2003.
The trial for our one remaining state court claim is presently
scheduled for first quarter 2008. We believe that we have
established adequate reserves for this case.
We are also defending two cases in California state court
alleging violations of that states on duty meal break
laws. In 2007, we settled three additional meal break cases. We
believe we have established adequate reserves for these cases.
|
|
Note 13
|
Commitments
and Other Contingencies
|
We lease 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): 2008 $38;
2009 $34; 2010 $27; 2011
$22; 2012 $18; and thereafter $83. Total
rent expense was $43 million in 2007, $43 million in
2006, and $46 million in 2005. In 2007, we recorded an
impairment charge related to a long-term operating lease. As a
result, $60 million of our future operating lease payments
are included on our balance sheet, of which $3 million is
in current liabilities and $57 million is in other
long-term liabilities.
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 bonds have terms that 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 rates implicit in the leases are the same as the
interest rates 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.
71
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2007, we had unconditional purchase obligations,
principally for sawtimber, pulpwood and gypsum, aggregating
$3.173 billion that will be paid over the next twelve to
twenty years. This includes $1.470 billion related to a
20-year
fiber supply agreement for pulpwood and a
12-year
fiber supply agreement for sawtimber. Both of these agreements
are subject to extension. These purchase obligations are valued
at year-end 2007 market prices, however, our actual future
purchases will be at the then current market price.
In connection with our joint venture operations, we have
guaranteed debt service and other obligations and letters of
credit aggregating $70 million at year-end 2007. Generally
we would fund these guarantees for lack of specific performance
by the joint ventures, such as non-payment of debt.
|
|
Note 14
|
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. At year-end 2007, we have two
interest rate swap agreements that mature in 2008. The two
agreements have a total notional amount of $50 million.
Under these swap agreements, we pay a fixed interest rate of
6.55 percent and receive a floating interest rate
(4.60 percent at year-end 2007). At year-end 2007, the fair
value of these interest rate swaps was a $1 million
liability which is included in other current liabilities. The
interest rate swap agreements were initially designated as a
hedge of interest cash flows anticipated from specific
variable-rate borrowings. By year-end 2007, no portion of the
interest rate swap agreements qualified for hedge accounting
since we have repaid virtually all of our variable-rate
borrowings. Changes in the fair value of the interest rate swap
agreements that qualified for hedge accounting increased other
comprehensive income by $1 million in 2006 and decreased
other comprehensive income $1 million in 2005. There was no
material hedge ineffectiveness in 2006 or 2005. As a result of
the termination of the hedge designation in 2007, we
reclassified less than $1 million from other comprehensive
income and charged other non-operating expense. Changes in the
fair value of the interest rate swap agreements that did not
qualify for hedge accounting were less than $1 million of
expense in 2007, $1 million of income in 2006, and
$2 million of income in 2005, and are included in other
non-operating income (expense).
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 had notional amounts that represent less than one
percent of our annual sales of linerboard and purchases of
recycled fiber. These instruments expired in 2005. Operating
income increased $1 million in 2005 as a result of
linerboard and recycled fiber derivatives, and there was no
material hedge ineffectiveness.
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 2007 our
financial interest was limited to our obligation to make the
remaining $146 million of contractual lease payments,
approximately $12 million per year.
72
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15
|
Other
Information
|
Our allowance for doubtful accounts was $14 million at
year-end 2007 and $14 million at year-end 2006. The
provision for doubtful accounts was $3 million in 2007,
$3 million in 2006, and $4 million in 2005. Accounts
charged-off, net of recoveries were $3 million in 2007,
$3 million in 2006, and $6 million in 2005.
|
|
Note 16
|
Fair
Value of Financial Instruments
|
Carrying value and the estimated fair value of our financial
instruments are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(In millions)
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate, long-term debt
|
|
$
|
854
|
|
|
$
|
909
|
|
|
$
|
1,413
|
|
|
$
|
1,483
|
|
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. We value other financial
instruments using quoted market prices where available or
expected cash flows, discounted using rates that represent
current rates for similar instruments. We excluded financial
instruments from the table that are either carried at fair value
or have fair values that approximate their carrying amount due
to their short-term nature or variable interest rates.
At year-end 2007, we had guaranteed joint venture obligations
principally related to fixed-rate debt instruments totaling
$70 million. The estimated fair value of these guarantees
is not significant.
|
|
Note 17
|
Earnings
Per Share
|
We compute earnings per share by dividing income by weighted
average shares outstanding using the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Earnings for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,202
|
|
|
$
|
287
|
|
|
$
|
18
|
|
Discontinued operations
|
|
|
103
|
|
|
|
181
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,305
|
|
|
$
|
468
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
106.0
|
|
|
|
108.8
|
|
|
|
112.6
|
|
Dilutive effect of equity purchase contracts
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
Dilutive effect of stock options (Note 9)
|
|
|
2.1
|
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
108.1
|
|
|
|
110.8
|
|
|
|
114.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding exclude unvested restricted
shares. At year-end 2007, options for 1,122,545 shares were
antidilutive.
Certain employees of Forestar and Guaranty participated in our
employee stock option program. Following the spin-offs, these
employees retained stock option rights associated with our
stock. These stock options will remain a consideration in our
dilutive effect of stock options until they are exercised,
cancelled or expire. At year-end 2007, employees of Forestar and
Guaranty held options for 1,236,437 shares of Temple-
73
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inland stock, of which 551,627 were exercisable. The weighted
average exercise price of these options at year-end 2007 was $17
per share and the weighted average remaining contractual term is
7 years.
|
|
Note 18
|
Segment
Information
|
At year-end 2007, we have two business segments: corrugated
packaging and building products. Timber and timberland is no
longer an active segment as a result of the sale of our
timberlands in fourth quarter 2007. Corrugated packaging
manufactures containerboard and corrugated packaging. Building
products manufactures a variety of building products. Timber and
timberland managed our timber resources.
We evaluate performance based on operating income before
unallocated items and income taxes. Unallocated items represent
items managed on a company-wide basis and include corporate
general and administrative expense, share-based compensation,
other operating and non-operating income (expense), and interest
expense. Other operating income (expense) includes gain or loss
on sale of assets, 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. Intersegment sales are recorded at market prices.
Intersegment sales and shared service expense allocations are
netted in costs and expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items Not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
Corrugated
|
|
|
Building
|
|
|
Timber and
|
|
|
Segments and
|
|
|
|
|
|
|
Packaging
|
|
|
Products
|
|
|
Timberland
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
For the year or at year-end 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
3,044
|
|
|
$
|
806
|
|
|
$
|
76
|
|
|
$
|
|
|
|
$
|
3,926
|
|
Depreciation and amortization
|
|
|
142
|
|
|
|
45
|
|
|
|
11
|
|
|
|
16
|
|
|
|
214
|
|
Equity income from joint ventures
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Income (loss) from continuing operations before taxes
|
|
|
287
|
|
|
|
8
|
|
|
|
65
|
|
|
|
1,595
|
(b)
|
|
|
1,955
|
|
Total assets
|
|
|
2,301
|
|
|
|
623
|
|
|
|
|
|
|
|
3,018
|
|
|
|
5,942
|
|
Investment in equity method investees and joint ventures
|
|
|
11
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Goodwill
|
|
|
236
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
365
|
|
Capital expenditures and reforestation
|
|
|
167
|
|
|
|
42
|
|
|
|
13
|
|
|
|
15
|
|
|
|
237
|
|
For the year or at year-end 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,977
|
|
|
$
|
1,119
|
|
|
$
|
89
|
|
|
$
|
|
|
|
$
|
4,185
|
|
Depreciation and amortization
|
|
|
153
|
|
|
|
44
|
|
|
|
14
|
|
|
|
14
|
|
|
|
225
|
|
Equity income from joint ventures
|
|
|
8
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Income (loss) from continuing operations before taxes
|
|
|
255
|
|
|
|
221
|
|
|
|
63
|
|
|
|
(149
|
)(b)
|
|
|
390
|
|
Total assets
|
|
|
2,275
|
|
|
|
638
|
|
|
|
330
|
|
|
|
384
|
|
|
|
3,627
|
(a)
|
Investment in equity method investees and joint ventures
|
|
|
11
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Goodwill
|
|
|
236
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
365
|
|
Capital expenditures and reforestation
|
|
|
117
|
|
|
|
46
|
|
|
|
19
|
|
|
|
22
|
|
|
|
204
|
|
For the year or at year-end 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,825
|
|
|
$
|
898
|
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
3,843
|
|
Depreciation and amortization
|
|
|
160
|
|
|
|
35
|
|
|
|
12
|
|
|
|
11
|
|
|
|
218
|
|
Equity income from joint ventures
|
|
|
11
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Income (loss) from continuing operations before taxes
|
|
|
120
|
|
|
|
125
|
|
|
|
72
|
|
|
|
(306
|
)(b)
|
|
|
11
|
|
Total assets
|
|
|
2,308
|
|
|
|
456
|
|
|
|
333
|
|
|
|
314
|
|
|
|
3,411
|
(a)
|
Investment in equity method investees and joint ventures
|
|
|
11
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Goodwill
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236
|
|
Capital expenditures and reforestation
|
|
|
126
|
|
|
|
43
|
|
|
|
30
|
|
|
|
21
|
|
|
|
220
|
|
|
|
|
(a) |
|
Excludes assets of discontinued operations of
$16,847 million in 2006 and $18,219 million in 2005. |
74
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(b) |
|
Items not allocated to segments consists of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In millions)
|
|
General and administrative
|
|
$
|
(100
|
)
|
|
$
|
(107
|
)
|
|
$
|
(91
|
)
|
Share-based compensation
|
|
|
(34
|
)
|
|
|
(38
|
)
|
|
|
(21
|
)
|
Gain on sale of timberland
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
Other operating income (expense)
|
|
|
(188
|
)
|
|
|
26
|
|
|
|
(85
|
)
|
Other non-operating income (expense)
|
|
|
(35
|
)
|
|
|
93
|
|
|
|
|
|
Net interest income on financial assets and nonrecourse
financial liabilities of special purpose entities
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(111
|
)
|
|
|
(123
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,595
|
|
|
$
|
(149
|
)
|
|
$
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income (expense) applies to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrugated packaging
|
|
$
|
(64
|
)
|
|
$
|
(21
|
)
|
|
$
|
(38
|
)
|
Building products
|
|
|
(63
|
)
|
|
|
42
|
|
|
|
(27
|
)
|
Timber and timberland
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
Unallocated
|
|
|
(68
|
)
|
|
|
5
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,865
|
|
|
$
|
26
|
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please read Note 10 for further information about
other operating income (expense).
Revenues and property and equipment based on the location of our
operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
Geographic Information
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,739
|
|
|
$
|
4,009
|
|
|
$
|
3,660
|
|
Mexico
|
|
|
187
|
|
|
|
176
|
|
|
|
156
|
|
Canada(a)
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,926
|
|
|
$
|
4,185
|
|
|
$
|
3,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year-End
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,596
|
|
|
$
|
1,591
|
|
|
$
|
1,582
|
|
Mexico
|
|
|
36
|
|
|
|
37
|
|
|
|
38
|
|
Canada(a)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,632
|
|
|
$
|
1,628
|
|
|
$
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In 2005, we sold our MDF facility located in Pembroke, Canada,
as a result, we have no significant assets or ongoing operations
in Canada. |
75
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 19
|
Summary
of Quarterly Results of Operations (Unaudited)
|
Selected quarterly financial results for 2007 and 2006 have been
reclassified to reflect Forestar and Guaranty as discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions, except per share)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,003
|
|
|
$
|
1,023
|
|
|
$
|
963
|
|
|
$
|
937
|
|
Gross profit
|
|
$
|
144
|
|
|
$
|
146
|
|
|
$
|
129
|
|
|
$
|
117
|
|
Income from continuing
operations(a)
|
|
$
|
7
|
|
|
$
|
26
|
|
|
$
|
11
|
|
|
$
|
1,158
|
|
Discontinued operations
|
|
|
31
|
|
|
|
40
|
|
|
|
25
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38
|
|
|
$
|
66
|
|
|
$
|
36
|
|
|
$
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.07
|
|
|
$
|
0.24
|
|
|
$
|
0.11
|
|
|
$
|
10.88
|
|
Discontinued operations
|
|
|
0.29
|
|
|
|
0.39
|
|
|
|
0.23
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.36
|
|
|
$
|
0.63
|
|
|
$
|
0.34
|
|
|
$
|
10.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.07
|
|
|
$
|
0.24
|
|
|
$
|
0.11
|
|
|
$
|
10.69
|
|
Discontinued operations
|
|
|
0.28
|
|
|
|
0.38
|
|
|
|
0.22
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.35
|
|
|
$
|
0.62
|
|
|
$
|
0.33
|
|
|
$
|
10.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Income from continuing operations includes the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(In millions)
|
|
Gain on sale of timberland
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation costs (advisory and legal fees, change of control
and employee related)
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(2
|
)
|
|
$
|
(59
|
)
|
Closures and sales of converting and production facilities and
sales of non-strategic assets
|
|
|
|
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
(62
|
)
|
Litigation
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
Environmental remediation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Other
|
|
|
|
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14
|
)
|
|
$
|
(1
|
)
|
|
$
|
(6
|
)
|
|
$
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges related to early repayment of debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(40
|
)
|
Interest and other income
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 for each period. |
76
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions, except per share)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,043
|
|
|
$
|
1,090
|
|
|
$
|
1,051
|
|
|
$
|
1,001
|
|
Gross profit
|
|
$
|
155
|
|
|
$
|
203
|
|
|
$
|
190
|
|
|
$
|
161
|
|
Income from continuing
operations(a)(b)
|
|
$
|
29
|
|
|
$
|
148
|
|
|
$
|
49
|
|
|
$
|
61
|
|
Discontinued operations
|
|
|
50
|
|
|
|
43
|
|
|
|
46
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income(b)
|
|
$
|
79
|
|
|
$
|
191
|
|
|
$
|
95
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations(b)
|
|
$
|
0.26
|
|
|
$
|
1.35
|
|
|
$
|
0.45
|
|
|
$
|
0.59
|
|
Discontinued operations
|
|
|
0.45
|
|
|
|
0.39
|
|
|
|
0.42
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income(b)
|
|
$
|
0.71
|
|
|
$
|
1.74
|
|
|
$
|
0.87
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations(b)
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
0.44
|
|
|
$
|
0.57
|
|
Discontinued operations
|
|
|
0.44
|
|
|
|
0.38
|
|
|
|
0.42
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income(b)
|
|
$
|
0.70
|
|
|
$
|
1.70
|
|
|
$
|
0.86
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Income from continuing operations includes the following items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In millions)
|
|
|
Other operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closures and sales of converting and production facilities and
sales of non-strategic assets
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
1
|
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Environmental remediation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Softwood Lumber Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Hurricane related insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
(8
|
)
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax litigation settlement
|
|
$
|
|
|
|
$
|
89
|
|
|
$
|
|
|
|
$
|
|
|
Interest and other income
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1
|
|
|
$
|
91
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
2006 quarters have been recast for the retrospective application
of FASB Staff Position No. AUG AIR 1
Accounting for Planned Major Maintenance. |
(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 for each period.
|
|
Note 20
|
Discontinued
Operations
|
On December 28, 2007, we spun off to our shareholders in
tax-free distributions, our real estate segment and our
financial services segment, which included certain real estate
and minerals activities in our timber and timberland segment.
77
TEMPLE-INLAND
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result, we report the assets and liabilities and
results of operations of these segments as discontinued
operations. Expense allocated to these discontinued operations
included interest expense of $7 million in 2007,
$4 million in 2006, and none in 2005 and share-based
compensation expense of $7 million in 2007, $8 million
in 2006, and $5 million in 2005.
In addition, on August 31, 2007 we sold the previously
acquired chemical operations. We received cash proceeds of
$1 million and recognized a pre-tax loss of $6 million
on the sale. Assets of this operation were previously reported
as assets held-for-sale. We have ongoing environmental
remediation activities related to this operation for which we
have established a reserve. Any changes to our estimate of cost
will impact current operations.
A summary of the assets and liabilities of discontinued
operations at year-end 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemical
|
|
|
|
|
|
|
Real
|
|
|
Financial
|
|
|
Operations
|
|
|
|
|
|
|
Estate
|
|
|
Services
|
|
|
and Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
3
|
|
|
$
|
372
|
|
|
$
|
5
|
|
|
$
|
380
|
|
Loans and loans held for sale
|
|
|
|
|
|
|
9,640
|
|
|
|
|
|
|
|
9,640
|
|
Securities
|
|
|
|
|
|
|
5,644
|
|
|
|
|
|
|
|
5,644
|
|
Real estate
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
564
|
|
Property and equipment
|
|
|
2
|
|
|
|
214
|
|
|
|
7
|
|
|
|
223
|
|
Other assets
|
|
|
31
|
|
|
|
357
|
|
|
|
8
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
600
|
|
|
$
|
16,227
|
|
|
$
|
20
|
|
|
$
|
16,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
9,486
|
|
|
$
|
|
|
|
$
|
9,486
|
|
Debt
|
|
|
44
|
|
|
|
5,177
|
|
|
|
|
|
|
|
5,221
|
|
Other liabilities
|
|
|
43
|
|
|
|
87
|
|
|
|
7
|
|
|
|
137
|
|
Subordinated notes payable to trust
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
142
|
|
Preferred stock issued by subsidiaries
|
|
|
|
|
|
|
305
|
|
|
|
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
87
|
|
|
$
|
15,197
|
|
|
$
|
7
|
|
|
$
|
15,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of earnings from our discontinued operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Real estate income before taxes
|
|
$
|
41
|
|
|
$
|
83
|
|
|
$
|
59
|
|
Financial services income before taxes
|
|
|
138
|
|
|
|
204
|
|
|
|
192
|
|
Chemical operations and
other(a)
|
|
|
(13
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before taxes
|
|
|
166
|
|
|
|
285
|
|
|
|
252
|
|
Income tax expense
|
|
|
(63
|
)
|
|
|
(104
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
103
|
|
|
$
|
181
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
2007 includes a $6 million charge for environmental
remediation. |
|
|
Note 21
|
Subsequent
Events
|
On February 1, 2008, our Board of Directors declared a
quarterly dividend of $0.10 per share payable on March 14,
2008.
78
|
|
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.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Disclosure controls and procedures
Our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (or the
Exchange Act)) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by us in
the reports that we file or submit under the Exchange Act and
are effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Internal control over financial reporting
Managements report on internal control over financial
reporting is included in Item 8. Financial Statements
and Supplementary Data.
There have not been any changes in our internal control over
financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) in fourth quarter 2007 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
79
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Set forth below is certain information about the members of our
Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year First
|
|
|
|
|
|
|
Elected to
|
|
|
Name
|
|
Age
|
|
the Board
|
|
Principal Occupation
|
|
Doyle R. Simons
|
|
|
44
|
|
|
|
2007
|
|
|
Chairman and Chief Executive Officer of Temple-Inland Inc.
|
Afsaneh M. Beschloss
|
|
|
52
|
|
|
|
2002
|
|
|
President and Chief Executive Officer of The Rock Creek Group
|
Dr. Donald M. Carlton
|
|
|
70
|
|
|
|
2003
|
|
|
Former President and Chief Executive Officer of Radian
International LLC
|
Cassandra C. Carr
|
|
|
63
|
|
|
|
2004
|
|
|
Senior Advisor, Public Strategies, Inc.
|
E. Linn Draper, Jr.
|
|
|
66
|
|
|
|
2004
|
|
|
Former Chairman, President and Chief Executive Officer of
American Electric Power Company, Inc.
|
Larry R. Faulkner
|
|
|
62
|
|
|
|
2005
|
|
|
President of Houston Endowment Inc.
|
James T. Hackett
|
|
|
54
|
|
|
|
2000
|
|
|
Chairman, President and Chief Executive Officer of Anadarko
Petroleum Corporation
|
Jeffrey M. Heller
|
|
|
68
|
|
|
|
2004
|
|
|
Vice Chairman of Electronic Data Systems, Inc.
|
J. Patrick Maley, III
|
|
|
46
|
|
|
|
2007
|
|
|
President and Chief Operating Officer of Temple-Inland Inc.
|
W. Allen Reed
|
|
|
60
|
|
|
|
2000
|
|
|
Former Chairman of the Board of General Motors Asset Management
Corporation
|
Richard M. Smith
|
|
|
62
|
|
|
|
2006
|
|
|
Chairman of Newsweek
|
Arthur Temple III
|
|
|
66
|
|
|
|
1983
|
|
|
Chairman of the Board of First Bank & Trust, East Texas and
the T.L.L. Temple Foundation
|
Larry E. Temple
|
|
|
72
|
|
|
|
1991
|
|
|
Attorney-at-law
|
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). Certain 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.
80
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information at year-end 2007 about our compensation plans under
which our Common Stock may be issued follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
Number of Securities
|
|
|
(a)
|
|
(b)
|
|
Remaining Available
|
|
|
Number of Securities
|
|
Weighted-Average
|
|
for Future Issuance
|
|
|
to be Issued Upon
|
|
Exercise Price of
|
|
Under Equity
|
|
|
Exercise of Outstanding
|
|
Outstanding Options,
|
|
Compensation Plans
|
|
|
Options, Warrants and
|
|
Warrants and
|
|
(Excluding Securities
|
Plan Category
|
|
Rights
|
|
Rights
|
|
Reflected in Column(a))
|
|
Equity compensation plans approved by security holders
|
|
7,108,174
|
|
$15
|
|
None
|
Equity compensation plans not approved by security holders
|
|
None
|
|
None
|
|
None
|
Total
|
|
7,108,174
|
|
$15
|
|
None
|
The remaining information required by this item is incorporated
by reference from our Definitive Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
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.
PART IV
|
|
Item 15.
|
Exhibits,
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
|
|
|
|
Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the
Companys
Form 10-Q
for the quarter ended June 30, 2007, and filed with the
Commission on August 7, 2007)
|
|
3
|
.02
|
|
|
|
Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys
Form 10-Q
for the quarter ended June 30, 2007, and filed with the
Commission on August 7, 2007)
|
|
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 Bank of New York Trust Company, N.A.
(successor to 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)
|
81
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
4
|
.03
|
|
|
|
First Supplemental Indenture to the Senior Notes Indenture,
dated as of April 15, 1988, between the Company and Bank of
New York Trust Company, N.A. (successor to 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 Bank
of New York Trust Company, N.A. (successor to 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 Bank of
New York Trust Company, N.A. (successor to 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
|
|
|
|
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
|
.07
|
|
|
|
Rights Agreement, dated February 20, 1999, between the
Company and Computershare 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
|
.08
|
|
|
|
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
|
.09
|
|
|
|
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
|
.10
|
|
|
|
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
|
.11
|
|
|
|
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*
|
|
|
|
First amendment to Temple-Inland Inc. 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
for the quarter ended September 30, 2006, and filed with
the Commission on November 7, 2006)
|
|
10
|
.04*
|
|
|
|
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
|
.05*
|
|
|
|
First amendment to Temple-Inland Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the
Companys
Form 10-Q
for the quarter ended September 30, 2006, and filed with
the Commission on November 7, 2006)
|
|
10
|
.06*
|
|
|
|
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
|
.07*
|
|
|
|
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)
|
82
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
10
|
.08*
|
|
|
|
First amendment to Temple-Inland Inc. 2001 Stock Incentive Plan
(incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
for the quarter ended September 30, 2006, and filed with
the Commission on November 7, 2006)
|
|
10
|
.09*
|
|
|
|
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
|
.10*
|
|
|
|
First amendment to Temple-Inland Inc. 2003 Stock Incentive Plan
(incorporated by reference to Exhibit 10.4 to the
Companys
Form 10-Q
for the quarter ended September 30, 2006, and filed with
the Commission on November 7, 2006)
|
|
10
|
.11*
|
|
|
|
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
|
.12*
|
|
|
|
Revised Form of Performance Stock Units Agreement issued
pursuant to the Temple-Inland Inc. 2003 Stock Incentive Plan
(incorporated by reference to Exhibit 10.08 to the
Companys
Form 10-K
for the year ended December 31, 2005, and filed with the
commission on March 8, 2006)
|
|
10
|
.13*
|
|
|
|
Revised Form of Restricted Stock Unit Agreement issued pursuant
to the Temple-Inland Inc. 2003 Stock Incentive Plan
(incorporated by reference to Exhibit 10.09 to the
Companys
Form 10-K
for the year ended December 31, 2005, and filed with the
commission on March 8, 2006)
|
|
10
|
.14*
|
|
|
|
Revised Form of Nonqualified Stock Option Agreement for
Non-Employee Directors issued pursuant to the Temple-Inland Inc.
2003 Stock Incentive Plan (incorporated by reference to
Exhibit 10.10 to the Companys
Form 10-K
for the year ended December 31, 2005, and filed with the
commission on March 8, 2006)
|
|
10
|
.15*
|
|
|
|
Amendment to outstanding Temple-Inland Option Agreements and
Restricted Stock Agreements (incorporated by reference to
Exhibit 10.4 to the Companys Current Report on
Form 8-K
filed with the Commission on December 31, 2007)
|
|
10
|
.16*
|
|
|
|
Amended and restated Temple-Inland Nonqualified Deferred
Compensation Plan (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on December 31, 2007)
|
|
10
|
.17*
|
|
|
|
Amended and restated Temple-Inland Directors Fee Deferral
Plan (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed with the Commission on December 31, 2007)
|
|
10
|
.18*
|
|
|
|
Amended and restated Temple-Inland Supplemental Executive
Retirement Plan (incorporated by reference to Exhibit 10.3
to the Companys Current Report on
Form 8-K
filed with the Commission on December 31, 2007)
|
|
10
|
.19*
|
|
|
|
Employment Agreement between the company and Doyle R. Simons,
dated August 9, 2007 (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed with the Commission on August 10, 2007)
|
|
10
|
.20*
|
|
|
|
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
|
.21*
|
|
|
|
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
|
.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
|
|
|
|
Loan Agreement, dated December 3, 2007, by and among TIN
Land Financing, LLC, Citibank, N.A., Citicorp
North America, Inc., as Agent, and the other Lenders named
therein (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on December 4, 2007)
|
|
10
|
.24
|
|
|
|
Loan Agreement, dated December 3, 2007, by and among TIN
Timber Financing, LLC, Citibank, N.A., Citicorp North America,
Inc., as Agent, and the other Lenders named therein
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed with the Commission on December 4, 2007)
|
|
10
|
.25
|
|
|
|
Pulpwood Supply Agreement, dated October 31, 2007, by and
between TIN Inc. and CPT LOGCO, LLC (1)(2)
|
|
10
|
.26
|
|
|
|
Sawtimber Supply Agreement, dated October 31, 2007, by and
between TIN Inc. and CPT LOGCO, LLC (1)(2)
|
|
10
|
.27*
|
|
|
|
Temple-Inland Inc. 2008 Incentive Plan (1) (3)
|
83
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Exhibit
|
|
|
10
|
.28*
|
|
|
|
Form of Nonqualified Stock Option Agreement, as revised in 2008,
issued pursuant to the Temple-Inland Inc. 2003 Stock Incentive
Plan (1)
|
|
10
|
.29*
|
|
|
|
Form of Restricted Stock Units Agreement issued pursuant to the
Temple-Inland Inc. 2008 Incentive Plan (1)
|
|
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 |
|
(2) |
|
Portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed with the Securities and
Exchange Commission. The omissions have been indicated with
asterisks (***), and the omitted text has been filed
separately with the Commission. |
|
(3) |
|
To be submitted for shareholder approval at the 2008 Annual
Meeting of Stockholders. |
84
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)
Doyle R. Simons
Chairman of the Board and
Chief Executive Officer
Date: February 25, 2008
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/ Doyle
R. Simons
Doyle
R. Simons
|
|
Director, Chairman of the Board,
and Chief Executive Officer
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Randall
D. Levy
Randall
D. Levy
|
|
Chief Financial Officer
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Troy
L. Hester
Troy
L. Hester
|
|
Principal Accounting Officer
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Afsaneh
M. Beschloss
Afsaneh
M. Beschloss
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Donald
M. Carlton
Donald
M. Carlton
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Cassandra
C. Carr
Cassandra
C. Carr
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ E.
Linn Draper, Jr.
E.
Linn Draper, Jr.
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Larry
R. Faulkner
Larry
R. Faulkner
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ James
T. Hackett
James
T. Hackett
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Jeffrey
M. Heller
Jeffrey
M. Heller
|
|
Director
|
|
February 25, 2008
|
85
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ J.
Patrick Maley III
J.
Patrick Maley III
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ W.
Allen Reed
W.
Allen Reed
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Richard
M. Smith
Richard
M. Smith
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Arthur
Temple III
Arthur
Temple III
|
|
Director
|
|
February 25, 2008
|
|
|
|
|
|
/s/ Larry
E. Temple
Larry
E. Temple
|
|
Director
|
|
February 25, 2008
|
86