SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended April 3, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period
From to
Commission File Number 001-08634
Temple-Inland Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1903917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 MoPac Expressway South, Austin, Texas 78746
(Address of principal executive offices, including Zip Code)
(512) 434-5800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
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 X No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Number of common shares outstanding
Class as of April 3, 2004
Common Stock (par
value $1.00 per share) 55,354,332
Page 1 of 48 The Exhibit Index is page 44.
2
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Parent company financial statements 3
Financial services financial statements 6
Consolidated financial statements 9
Notes to consolidated financial statements 13
Item 2. Management's Discussion and Analysis of Financial 21
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 39
Market Risk
Item 4. Controls and Procedures 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities, Use of Proceeds and 41
Issuer Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security 41
Holders
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMARIZED STATEMENTS OF INCOME
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Quarter
---------------
2004 2003
---- ----
(In millions)
NET REVENUES $ 893 $ 847
COSTS AND EXPENSES
Cost of sales 800 797
Selling 28 29
General and administrative 46 45
Other (income) expense 19 9
----- -----
893 880
----- -----
-- (33)
FINANCIAL SERVICES EARNINGS 53 39
----- -----
OPERATING INCOME 53 6
Interest expense (32) (35)
----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 21 (29)
Income tax (expense) benefit (8) 12
----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS 13 (17)
Discontinued operations -- --
----- -----
INCOME (LOSS) BEFORE ACCOUNTING CHANGE 13 (17)
Effect of accounting change -- (1)
----- -----
NET INCOME (LOSS) $ 13 (18)
===== =====
See the notes to consolidated financial statements.
4
SUMMARIZED BALANCE SHEETS
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Year-
Quarter End
2004 2003
---- ----
(In millions)
ASSETS
Current Assets
Cash and cash equivalents $ 31 $ 20
Receivables, net of allowances of $15 in 2004
and $14 in 2003 408 359
Inventories:
Work in process and finished goods 84 83
Raw materials and supplies 241 247
----- -----
Total inventories 325 330
Prepaid expenses and other 78 69
----- -----
Total current assets 842 778
Investment in Financial Services 1,124 1,123
Timber and Timberlands 497 497
Property and Equipment:
Land and buildings 604 600
Machinery and equipment 3,475 3,454
Construction in progress 39 59
Less allowances for depreciation (2,303) (2,259)
----- -----
Total property and equipment 1,815 1,854
Goodwill 237 237
Assets of Discontinued Operations 47 50
Other Assets 97 99
----- -----
TOTAL ASSETS $ 4,659 $ 4,638
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 204 $ 218
Employee compensation and benefits 50 72
Accrued interest 26 27
Accrued property taxes 15 23
Other accrued expenses 159 141
Liabilities of discontinued operations 22 22
Current portion of long-term debt 2 4
----- -----
Total current liabilities 478 507
Long-Term Debt 1,611 1,611
Deferred Income Taxes 28 25
Postretirement Benefits 146 146
Pension Liability 262 250
Other Long-Term Liabilities 130 131
----- -----
Total Liabilities 2,655 2,670
Shareholders' Equity 2,004 1,968
----- -----
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,659 $ 4,638
===== =====
See the notes to consolidated financial statements.
5
SUMMARIZED STATEMENTS OF CASH FLOW
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited First Quarter
2004 2003
---- ----
(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income (loss) $ 13 $ (18)
Adjustments:
Depreciation and amortization 56 59
Non-cash stock based compensation 9 9
Non-cash pension and postretirement expense 15 14
Cash contribution to pension and postretirement
plans (4) (3)
Other non-cash charges 13 4
Deferred income taxes 3 (13)
Net earnings of financial services (33) (25)
Dividends from financial services 30 35
Net assets of discontinued operations (1) (5)
Cumulative effect of accounting change -- 1
Other (2) 9
---- ----
99 67
Changes in:
Receivables (48) (31)
Inventories 4 25
Prepaid expenses and other (8) (17)
Accounts payable and accrued expenses (27) (24)
---- ----
20 20
---- ----
CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures (28) (29)
Sales of non-strategic assets and operations 6 30
Other acquisitions and joint ventures -- (3)
---- ----
(22) (2)
---- ----
CASH PROVIDED BY (USED FOR) FINANCING
Payments of debt (2) (6)
Cash dividends paid to shareholders (20) (19)
Proceeds from exercise of stock options 35 --
Additions to debt -- 1
---- ----
13 (24)
---- ----
Effect of exchange rate changes on cash -- (2)
---- ----
Net increase (decrease) in cash and cash equivalents 11 (8)
Cash and cash equivalents at beginning of period 20 17
---- ----
Cash and cash equivalents at end of period $ 31 $ 9
==== ====
See the notes to consolidated financial statements.
6
SUMMARIZED STATEMENTS OF INCOME
FINANCIAL SERVICES
Unaudited
First Quarter
2004 2003
---- ----
(In millions)
INTEREST INCOME
Loans and loans held for sale $ 114 $ 133
Securities available-for-sale 15 19
Securities held-to-maturity 46 40
Other earning assets 1 1
---- ----
Total interest income 176 193
INTEREST EXPENSE
Deposits 34 53
Borrowed funds 42 45
---- ----
Total interest expense 76 98
---- ----
NET INTEREST INCOME 100 95
Provision for loan losses -- (11)
---- ----
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 100 84
NONINTEREST INCOME
Loan servicing fees 8 9
Amortization and impairment of servicing rights (7) (18)
Loan origination and sale of loans 37 66
Real estate operations 8 8
Insurance commissions and fees 11 10
Service charges on deposits 9 8
Operating lease income 3 2
Other 10 10
---- ----
Total noninterest income 79 95
---- ----
NONINTEREST EXPENSE
Compensation and benefits 70 83
Loan servicing and origination 2 3
Real estate operations, other than compensation 2 7
Insurance operations, other than compensation 1 2
Occupancy 8 8
Data processing 4 7
Other 39 30
---- ----
Total noninterest expense 126 140
---- ----
INCOME BEFORE TAXES 53 39
Income tax expense (20) (14)
---- ----
NET INCOME $ 33 $ 25
==== ====
See the notes to consolidated financial statements.
7
SUMMARIZED BALANCE SHEETS
FINANCIAL SERVICES
Unaudited
First
Quarter Year-End
2004 2003
---- ----
(In millions)
ASSETS
Cash and cash equivalents $ 301 $ 379
Loans held for sale 610 551
Loans, net of allowance for losses of $113 in 2004
and $111 in 2003 9,139 9,026
Securities available-for-sale 1,323 1,374
Securities held-to-maturity 4,978 5,267
Real estate 295 295
Premises and equipment, net 168 164
Accounts, notes and accrued interest receivable 127 138
Goodwill 158 147
Mortgage servicing rights 85 89
Other assets 200 231
------ ------
TOTAL ASSETS $ 17,384 $ 17,661
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Deposits $ 8,537 $ 8,698
Federal Home Loan Bank advances 5,349 4,992
Securities sold under repurchase agreements 1,363 1,327
Obligations to settle trade date securities -- 567
Other liabilities 468 410
Other borrowings 238 239
Preferred stock issued by subsidiaries 305 305
------ ------
TOTAL LIABILITIES 16,260 16,538
------ ------
SHAREHOLDER'S EQUITY 1,124 1,123
------ ------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 17,384 $ 17,661
====== ======
See the notes to consolidated financial statements.
8
SUMMARIZED STATEMENTS OF CASH FLOWS
FINANCIAL SERVICES
Unaudited First Quarter
2004 2003
---- ----
(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 33 $ 25
Adjustments:
Depreciation 6 6
Depreciation of leased assets 2 1
Amortization and impairment of servicing rights 7 17
Provision for loan losses -- 11
Amortization and accretion of financial
instruments 4 3
Deferred income taxes 2
(1)
------ ------
54 62
Changes in:
Loans held for sale, originations (1,639) (3,200)
Loans held for sale, sales 1,576 3,362
Collections on loans services for others, net 13 (24)
Other 75 60
------ ------
79 260
------ ------
CASH PROVIDED BY (USED FOR) INVESTING
Securities available-for-sale
Purchases (28) (4)
Principal payments and maturities 77 161
Securities held-to-maturity
Purchases (623) (553)
Principal payments and maturities 340 371
Loans originated or acquired, net of collections (147) (239)
Sale of loans 35 11
Acquisitions, net of cash acquired (10) (1)
Capital expenditures (9) (5)
Other (3) (12)
------ ------
(368) (271)
------ ------
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits (161) 150
Repurchase agreements and short-term borrowings, net 459 2
Additions to long-term FHLB advances and other
borrowings 111 10
Payments of long-term FHLB advances and other
rowings (177) (228)
Dividends paid to parent company (30) (35)
Other 9 1
------ ------
211 (100)
------ ------
Net decrease in cash and cash equivalents (78) (111)
Cash and cash equivalents at beginning of period 379 438
------ ------
Cash and cash equivalents at end of period $ 301 $ 327
====== ======
See the notes to consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF INCOME
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited
First Quarter
2004 2003
---- ----
(In millions,
except per
share amounts)
REVENUES
Manufacturing $ 893 $ 847
Financial Services 255 288
------ ------
1,148 1,135
------ ------
COSTS AND EXPENSES
Manufacturing 893 880
Financial Services 202 249
------ ------
1,095 1,129
------ ------
OPERATING INCOME 53 6
Parent company interest (32) (35)
------ ------
INCOME (LOSS) BEFORE TAXES 21 (29)
Income tax (expense) benefit (8) 12
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS 13 (17)
Discontinued operations -- --
------ ------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE 13 (17)
Effect of accounting change -- (1)
------ ------
NET INCOME (LOSS) $ 13 $ (18)
====== ======
EARNINGS (LOSS) PER SHARE
Basic:
Income (loss) from continuing operations $ 0.24 $ (0.31)
Discontinued operations -- --
Effect of accounting change -- (0.01)
------ ------
Net income (loss) $ 0.24 $ (0.32)
====== ======
Diluted:
Income (loss) from continuing operations $ 0.24 $ (0.31)
Discontinued operations -- --
Effect of accounting change -- (0.01)
------ ------
Net income (loss) $ 0.24 $ (0.32)
====== ======
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.36 $ 0.34
====== ======
See the notes to consolidated financial statements.
10
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
First Quarter 2004
Unaudited
Parent Financial
Company Services Consolidated
------- -------- ------------
(In millions)
ASSETS
Cash and cash equivalents $ 31 $ 301 $ 332
Loans held for sale -- 610 610
Loans receivable -- 9,139 9,139
Securities available-for-sale -- 1,323 1,323
Securities held-to-maturity -- 4,978 4,978
Trade receivables, net 408 -- 408
Inventories 325 -- 325
Timber and timberlands 497 -- 497
Property and equipment 1,815 168 1,983
Goodwill 237 158 395
Other assets 222 707 874
Investment in Financial Services 1,124 -- --
------ ------ ------
TOTAL ASSETS $ 4,659 $ 17,384 $ 20,864
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ -- $ 8,537 $ 8,537
Federal Home Loan Bank advances -- 5,349 5,349
Securities sold under repurchase
agreements -- 1,363 1,363
Obligations to settle trade date
securities -- -- --
Other liabilities 608 468 1,038
Long-term debt 1,611 238 1,849
Deferred income taxes 28 -- 11
Postretirement benefits 146 -- 146
Pension liability 262 -- 262
Preferred stock issued by subsidiaries -- 305 305
------ ------ ------
TOTAL LIABILITIES $ 2,655 $ 16,260 $ 18,860
------ ------ ------
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share:
authorized 25,000,000 shares; none issued --
Common stock - par value $1 per share:
authorized 200,000,000 shares; issued
61,389,552 shares including shares held
in the treasury 61
Additional paid-in capital 388
Accumulated other comprehensive loss (187)
Retained earnings 2,016
------
2,278
Cost of shares held in the treasury:
6,035,220 shares (274)
------
TOTAL SHAREHOLDERS' EQUITY 2,004
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,864
======
See the notes to consolidated financial statements.
11
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Year-End 2003
Unaudited
Parent Financial
Company Services Consolidated
------- -------- ------------
(In millions)
ASSETS
Cash and cash equivalents $ 20 $ 379 $ 399
Loans held for sale -- 551 551
Loans receivable -- 9,026 9,026
Securities available-for-sale -- 1,374 1,374
Securities held-to-maturity -- 5,267 5,267
Trade receivables 359 -- 359
Inventories 330 -- 330
Timber and timberlands 497 -- 497
Property and equipment 1,854 164 2,007
Goodwill 237 147 384
Other assets 218 753 949
Investment in Financial Services 1,123 -- --
------ ------ ------
TOTAL ASSETS $ 4,638 $ 17,661 $ 21,143
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ -- $ 8,698 $ 8,698
Federal Home Loan Bank advances -- 4,992 4,992
Securities sold under repurchase
agreements -- 1,327 1,327
Obligations to settle trade date
securities -- 567 567
Other liabilities 638 410 1,033
Long-term debt 1,611 239 1,850
Deferred income taxes 25 -- 7
Postretirement benefits 146 -- 146
Pension liability 250 -- 250
Preferred stock issued by subsidiaries -- 305 305
------ ------ ------
TOTAL LIABILITIES $ 2,670 $ 16,538 $ 19,175
------ ------ ------
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share:
authorized 25,000,000 shares; none issued --
Common stock - par value $1 per share:
authorized 200,000,000 shares; issued 61
61,389,552 shares including shares held
in the treasury
Additional paid-in capital 377
Accumulated other comprehensive loss (185)
Retained earnings 2,023
------
2,276
Cost of shares held in the treasury:
6,792,410 shares (308)
------
TOTAL SHAREHOLDERS' EQUITY 1,968
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,143
======
See the notes to consolidated financial statements.
12
CONSOLIDATED STATEMENT OF CASH FLOWS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited
First Quarter
2004 2003
---- ----
(In millions)
CASH PROVIDED (USED FOR) OPERATIONS
Net income (loss) $ 13 $ (18)
Adjustments:
Depreciation and amortization 64 66
Amortization and accretion of financial
instruments 11 20
Provision for loan losses -- 11
Deferred income taxes 5 (13)
Other non-cash charges 13 4
Net assets of discontinued operations (1) (5)
Cumulative effect of accounting change -- 1
Other 93 88
----- -----
198 154
Changes in:
Receivables (48) (31)
Inventories 4 25
Prepaid expenses and other (8) (17)
Accounts payable and accrued expenses (27) (24)
Loans held for sale, originations (1,639) (3,200)
Loans held for sale, sales 1,576 3,362
Collections on loans services for others, net 13 (24)
----- -----
69 245
----- -----
CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures (37) (34)
Sale of non-strategic assets and operations 8 40
Securities available-for-sale, net 49 157
Securities held-to-maturity, net (283) (182)
Loans originated or acquired, net of principal
collected (147) (239)
Proceeds from sale of loans 35 11
Acquisitions, net of cash acquired (10) (4)
Other (5) (22)
----- -----
(390) (273)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Deposits, net (161) 150
Additions to long-term debt 111 11
Payments of long-term debt (179) (234)
Repurchase agreements and short-term borrowings, net 459 2
Cash dividends paid to shareholders (20) (19)
Proceeds from exercise of stock options 35 --
Other 9 1
----- -----
254 (89)
----- -----
Effect of exchange rate changes on cash -- (2)
----- -----
Net decrease in cash and cash equivalents (67) (119)
Cash and cash equivalents at beginning of period 399 455
----- -----
Cash and cash equivalents at end of period $ 332 $ 336
===== =====
13
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
We prepared these unaudited interim financial statements in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. As a result, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. However, in our opinion, all adjustments (consisting
only of normal accruals) considered necessary for a fair
presentation have been included. These interim operating results
are not necessarily indicative of the results that may be
expected for the entire year. For further information, refer to
the financial statements and footnotes included in our Annual
Report on Form 10-K for the fiscal year ended January 3, 2004.
The consolidated financial statements include the accounts
of Temple-Inland Inc. and its manufacturing and financial
services subsidiaries. A significant portion of our consolidated
net assets invested in financial services is subject, in varying
degrees, to regulatory rules and restrictions including
restrictions on the ability of financial services to pay
dividends to us. Accordingly, included as an integral part of the
consolidated financial statements are separate summarized
financial statements for our parent company and for our financial
services segment.
The parent company summarized financial statements include
the accounts of Temple-Inland and its manufacturing segments.
The net assets invested in financial services are reflected using
the equity method. Related earnings, however, are presented
before tax to be consistent with the consolidated financial
statements.
We have eliminated all material intercompany amounts and
transactions. We have reclassified certain prior period amounts
to conform to current year's classifications.
14
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - EARNINGS PER SHARE
Denominators used in computing per share amounts were:
First Quarter
2004 2003
---- ----
(In millions)
Denominators for earnings (loss) per share:
Weighted average shares outstanding - basic 55.1 54.0
Dilutive effect of equity purchase contracts -- --
Dilutive effect of stock awards 0.5 --
----- -----
Weighted average shares outstanding - diluted 55.6 54.0
===== =====
NOTE C - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of:
First Quarter
2004 2003
---- ----
(In millions)
Net income (loss) $ 13 $ (18)
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on:
Available-for-sale securities (2) 4
Derivative instruments -- --
Foreign currency translation adjustments -- (3)
---- ----
Other comprehensive income (loss) (2) 1
---- ----
Comprehensive income (loss) $ 11 $ (17)
==== ====
At first quarter-end 2004, the aggregate fair value of our
interest rate swap derivative was an $8 million liability. The
ineffective portion of derivatives charged to earnings and
amounts reclassified from other comprehensive income into
earnings were not material.
NOTE D - SEGMENT INFORMATION
We have three reportable segments: corrugated packaging,
forest products, and financial services. We evaluate performance
based on operating income before other (income) expense and
unallocated expenses, principally general and administrative
expenses. We do not allocate parent company interest to the
business segments. Other (income) expense includes gain or loss
on sale of assets, asset impairments and expenses associated with
consolidation initiatives and facility closures.
15
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unallocated
Expenses and
For First Quarter or at Corrugated Forest Financial Other Income
Quarter-End 2004 Packaging Products Services (Expense) Total
----------------------- ---------- -------- --------- ------------ -----
(In millions)
Revenues from
external customers $ 673 $ 220 $ 255 $ -- $ 1,148
Depreciation and
amortization 39 15 8 2 64
Operating income 10 32 53 (42) 53
Financial services, net
interest income -- -- 100 -- 100
Total assets 2,327 1,034 17,384 119 20,864
Capital expenditures 18 8 9 2 37
Goodwill 237 -- 158 -- 395
------------------------------------------------------------------------------------
For First Quarter or at
Quarter-End 2003
-----------------------
(In millions)
Revenues from
external customers $ 667 $ 180 $ 288 $ -- $ 1,135
Depreciation and
amortization 41 16 7 2 66
Operating income 2 (7) 39 (28) 6
Financial services, net
interest income -- -- 95 -- 95
Total assets 2,444 1,126 18,069 79 21,718
Capital expenditures 20 8 5 1 34
Goodwill 243 -- 149 -- 392
------------------------------------------------------------------------------------
Includes other (income) expense for first quarter 2004 of
$19 million, which consists of a $12 million asset impairment, a
$2 million charge associated with converting facility closures
and a $5 million charge related to consolidation and supply chain
initiatives. Of these amounts, $2 million applies to corrugated
packaging, $12 million applies to forest products, and $5 million
is unallocated.
Includes other (income) expenses for first quarter 2003 of
$9 million, which consists of a $6 million charge related to
converting facility closures, which applies to corrugated
packaging, and a $3 million charge related to consolidation and
supply chain cost reduction initiatives.
As a result of the consolidation of our administrative
functions and adoption of a shared services concept, beginning
first quarter 2004, we changed the way we allocate cost to the
business segments. The effect of this change was to increase
segment operating income and to increase unallocated expenses by
a like amount. First quarter 2003 amounts have been reclassified
to reflect this change as follows:
Originally As
Reported Reclassification Reclassified
-------- ---------------- ------------
(In millions)
Corrugated packaging $ (4) $ 6 $ 2
Forest products (9) 2 (7)
Financial services 39 -- 39
---- ---- ----
Segment operating
income 26 8 34
Unallocated expenses (20) (8) (28)
---- ---- ----
Operating income $ 6 $ -- $ 6
==== ==== ====
NOTE E - EMPLOYEE BENEFIT PLANS
The components of net periodic benefit cost of our defined
benefit and postretirement plans for first quarter are:
16
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pension Postretirement
Benefits Benefits
------------ --------------
2004 2003 2004 2003
---- ---- ---- ----
(In millions)
Service costs $ 6 $ 6 $ 1 $ 1
Interest cost on projected benefit
obligation 18 17 2 3
Expected return on plan assets (17) (16) -- --
Amortization of prior service costs -- 1 (1) (1)
Amortization of net (gain) loss 6 3 -- --
---- ---- ---- ----
Net periodic benefit cost $ 13 $ 11 $ 2 $ 3
==== ==== ==== ====
The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was enacted in December 2003. This act
expands Medicare to include, for the first time, coverage for
prescription drugs. Our postretirement benefit plans provide for
medical coverage, including a prescription drug subsidy, for
certain participants. Due to the absence of detailed regulations
necessary to implement the act, we have not completed the
analysis to determine the effects of the act on our
postretirement benefit plans, though it is likely that the
effects will ultimately reduce our cost for these plans. In
addition, the FASB has not issued specific authoritative guidance
on accounting for the subsidy. In first quarter 2004, the FASB
issued FASB Staff Position, No. 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. This staff position
allows companies to defer recognizing the effects of the act
until authoritative guidance on the accounting for the
prescription drug subsidy is issued or until certain other events
occur. We elected to defer recognition. As a result, our
reported postretirement benefit obligation and the 2004 net
periodic benefit cost do not reflect the effects of the act and
authoritative accounting guidance, when issued, could require us
to change these amounts.
NOTE F - STOCK-BASED COMPENSATION
Prior to 2003, we used the intrinsic value method in
accounting for stock-based compensation. As a result, no stock-
based compensation expense related to stock options granted prior
to 2003 is reflected in net income, as all stock options granted
had an exercise price equal to the market value of the underlying
common stock on the date of grant. Therefore, the cost related to
stock-based compensation recognized in net income (loss) for
first quarter 2004 and 2003 is less than would have been
recognized if the fair value method had been applied to all stock
options granted since 1995. The following table illustrates the
effect on net income (loss) and earnings (loss) per share as if
the fair value method had been applied to all stock options
granted since 1995.
17
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
First Quarter
---------------------
2004 2003
---- ----
(In millions)
Net income (loss), as reported $ 13 $ (18)
Add: Stock-based compensation
expense, net of related tax
effects, included in the
determination of reported net
income 6 5
Deduct: Total stock-based
compensation expense, net of
related tax effects, determined
under the fair value based
method for all awards (8) (7)
----- -----
Pro forma net income (loss) $ 11 $ (20)
===== =====
Earnings (loss) per share:
Basic, as reported $ 0.24 $(0.32)
Basic, pro forma $ 0.20 $(0.37)
Diluted, as reported $ 0.24 $(0.32)
Diluted, pro forma $ 0.20 $(0.37)
NOTE G - CONTINGENCIES
We are involved in various legal proceedings that arise from
time to time in the ordinary course of doing business. We
believe that the possibility of a material liability from any of
these proceedings is remote and we do not believe that the
outcome of any of these proceedings should have a material
adverse effect on our financial position, results of operations,
or cash flow.
NOTE H - ASSETS HELD FOR SALE
Assets held for sale include assets of discontinued
operations and other assets held for sale.
At first quarter-end 2004, discontinued operations consist
of the chemical business obtained in the Gaylord acquisition and
accruals related to the 1999 sale of our bleached paperboard
operations. At first quarter-end 2004, the assets and
liabilities of the discontinued operations includes $7 million of
working capital, $17 million of property and equipment, and $18
million of environmental and other long-term accruals. Revenues
from discontinued operations for first quarter 2004 were $4
million.
18
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with our previously announced plan, during
first quarter 2004, we entered into an agreement to sell certain
assets used in our specialty packaging operations for $19 million
cash subject to working capital adjustments. The sale closed in
April 2004. The anticipated proceeds approximate the current
carrying value of these assets. During second quarter 2004 we
expect to incur, $1 million in severance and $0.2 million in
other exit costs most of which will be paid during second quarter
2004.
NOTE I - OTHER OPERATING (INCOME) EXPENSE
First Quarter
2004 2003
---- ----
(In millions)
Expenses associated with consolidation
of administrative functions $ 5 $ 3
Closure of production and converting
facilities 14 6
---- ----
Total $ 19 $ 9
==== ====
Expenses associated with the consolidation of administrative
functions consist principally of severance most of which was paid
during first quarter 2004.
In conjunction with our previously announced plans, we
closed one converting facility in March 2004, a second converting
facility in April 2004, and we intend to close a third converting
facility by the end of second quarter 2004. As a result, we paid
$1 million in severance during first quarter 2004 and expect to
incur additional severance and exit costs in second quarter 2004.
Asset impairments were recognized in fourth quarter 2003 in
conjunction with our initial announcement of these plans.
During first quarter 2004, we revised our strategic
alternatives for the intended use of our Clarion MDF facility to
now include a possible sale of this facility during 2004. As a
result, during first quarter 2004, we recognized a $12 million
impairment charge related to the Clarion MDF facility based on
the probability that we will not be able to recover our entire
investment in this facility.
A summary of the activity within production and converting
facility exit costs and consolidation of administrative functions
accruals for first quarter 2004 follow:
19
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Beginning Cash End of
of Period Additions Payments Period
--------- --------- -------- ------
(In millions)
Involuntary employee
terminations $ 9 $ 2 $ (8) $ 3
Contract termination
penalties 6 -- -- 6
Environmental
compliance 11 -- -- 11
Demolition 11 -- -- 11
---- ---- ---- ----
Total $ 37 $ 2 $ (8) $ 31
==== ==== ==== ====
NOTE J - ACQUISITIONS
During first quarter 2004, financial services acquired an
insurance agency for $14 million cash. The purchase price was
allocated to acquired assets and liabilities based upon their
fair values with $11 million allocated to goodwill. The
unaudited pro forma results of operations, assuming the
acquisition had been effected at the beginning of the year, would
not have been materially different from those reported.
NOTE K - ACCOUNTING PRONOUNCEMENTS
During first quarter 2004, we were required to adopt the
following accounting pronouncements:
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. There was no effect on
earnings or financial position of adopting this interpretation.
Disclosures required by this interpretation follow:
* In 1999 we entered into an agreement to lease a
particleboard and medium density fiberboard facility in Mt.
Jewett, PA. The lease is for 20 years and includes fixed price
purchase options in 2014 and at the end of the lease. The
options prices were intended to approximate the estimated fair
value of the facility at those dates and do not represent a
guarantee of the facilities residual value. 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. The lease is accounted for as
an operating lease and our financial interest is limited to our
obligation to make the remaining $191 million of contractual
lease payments, $10 million per year.
20
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
* In 1999 we invested $2 million in the form of equity and
subordinated debt in a residential land development partnership
that meets the definition of a variable interest entity.
However, we have determined that we are not the primary
beneficiary of the entity and, therefore, are not required to
consolidate this entity. At year-end 2003, this partnership had
total assets of $88 million and total liabilities of $89 million.
Our maximum exposure to loss is the carrying amount of our
subordinated debt and equity investments in this partnership,
currently $2 million.
Securities and Exchange Commission Staff Accounting Bulletin
No.105, Application of Accounting Principles to Loan Commitments.
This bulletin applies to loan commitments issued after March 2004
and accounted for as derivative instruments and it precludes the
recognition of an asset at the inception of the loan commitment.
The effect of adopting this bulletin was not significant.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements
that involve risks and uncertainties. Our actual results may
differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences
include general economic, market, or business conditions; the
opportunities or lack thereof that may or may not be presented to
and pursued by us; availability and price of raw materials we
use; competitive actions by others; changes in laws or
regulations; the accuracy of our judgments and estimates
concerning the integration of acquired operations and the
consolidation and supply chain initiatives; and other factors,
many of which are beyond our control.
Results of Operations for First Quarter Ended March 2004 and 2003
Summary
A summary of our consolidated results for first quarter
follows:
First Quarter
2004 2003
---- ----
(In millions, except
per share)
Consolidated revenues $ 1,148 $ 1,135
Income (loss) from continuing operations 13 (17)
Income (loss) from continuing operations,
per diluted share 0.24 (0.31)
Average diluted shares outstanding 55.6 54.0
Significant items affecting 2004 income from continuing
operations included:
* higher corrugated packaging shipments and lower mill and
converting costs more than offset lower corrugated packaging
prices and higher OCC costs;
* higher pricing and shipments within forest products;
* improvements in financial services operating income,
principally due to higher spreads, lower loan loss provisions,
and reduced costs; and
* charges and expenses of $19 million related to under-
performing assets and the consolidation of administrative
functions.
22
Business Segments
We manage our operations through three business segments:
* Corrugated packaging,
* Forest products, and
* Financial services.
Our operations are affected to varying degrees by supply and
demand factors and economic conditions including changes in
interest rates, new housing starts, home repair and remodeling
activities, 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.
A summary of the results of operations by business segment
follows:
First Quarter
----------------
2004 2003
---- ----
(In millions)
Revenues
Corrugated packaging $ 673 $ 667
Forest products 220 180
Financial services 255 288
------ ------
Total revenues $ 1,148 $ 1,135
====== ======
Segment Operating Income
Corrugated packaging $ 10 $ 2
Forest products 32 (7)
Financial services 53 39
------ ------
Total segment operating income 95 34
Unallocated expenses (23) (19)
Other income (expense) (19) (9)
Parent company interest (32) (35)
------ ------
Income (loss) before taxes 21 (29)
Income tax (expense) benefit (8) 12
------ ------
Income (loss) from continuing operations 13 (17)
Discontinued operations -- --
Effect of accounting change -- (1)
------ ------
Net income (loss) $ 13 $ (18)
====== ======
As a result of the consolidation of our administrative
functions and adoption of a shared services concept, beginning
first quarter 2004, we changed the way we allocate cost to the
business segments. The effect of this change was to increase
segment operating income and to increase unallocated expenses by
a like amount. First quarter 2003 amounts have been reclassified
to reflect this change as follows:
Originally As
Reported Reclassification Reclassified
-------- ---------------- ------------
(In millions)
Corrugated packaging $ (4) $ 6 $ 2
Forest products (9) 2 (7)
Financial services 39 -- 39
----- ----- -----
Segment operating income 26 8 34
Unallocated expenses (20) (8) (28)
----- ----- -----
Operating income $ 6 $ -- $ 6
===== ===== =====
23
Other (income) expense for first quarter 2004 consists of a
$12 million asset impairment, a $2 million charge associated with
converting facility closures, and a $5 million charge related to
consolidation and supply chain initiatives. Of these amounts, $2
million applies to corrugated packaging, $12 million applies to
forest products, and $5 million is unallocated. Other (income)
expenses for first quarter 2003 consists of a $6 million charge
related to converting facility closures, which applies to
corrugated packaging, and a $3 million charge related to
consolidation and supply chain cost reduction initiatives.
Corrugated Packaging
A summary of our corrugated packaging results follows:
First Quarter
2004 2003
---- ----
(In millions)
Revenues $ 673 $ 667
Segment operating income 10 2
Corrugated packaging prices declined during the quarter.
Corrugated packaging shipments, however, continued to improve and
inventory levels continued to decline. As a result of improved
demand, lower inventories and a generally improving U.S. economy,
we announced a $50 per ton increase in the price of linerboard
effective March 2004 and a similar increase in corrugated
packaging prices effective April 2004. In addition, we recently
announced another $50 per ton increase in the price of linerboard
effective June 2004.
First Quarter 2004 versus
First Quarter 2003
Increase (Decrease)
-------------------------
Corrugated packaging
Average prices (5)%
Shipments per workday 5%
Industry shipments, average week(a) 3%
Linerboard
Average prices (6)%
Shipments, tons (10)%
(a) Source: Fibre Box Association
As discussed later, mill production was up significantly
during the quarter. However, linerboard shipments were down
because the increased production was used in our converting
facilities.
Compared with fourth quarter 2003, average corrugated
packaging prices were down one percent while shipments per
workday were up 0.5 percent. Compared with fourth quarter 2003,
average linerboard prices were flat while shipments were down 26
percent.
24
In addition to reductions in mill and converting costs,
other factors affecting operating income include fluctuations in
the following costs and expenses:
First Quarter 2004 versus
First Quarter 2003
Increase (Decrease)
-------------------------
(In millions)
OCC recycled fiber $ 8
Energy, principally natural gas (3)
Depreciation (2)
Pension and postretirement 2
Our OCC costs averaged $103 per ton during first quarter
2004 and $82 per ton during first quarter 2003. Our OCC and
energy costs fluctuate based on the market prices we pay for
these commodities.
Information about our mills and converting facilities
follows:
First Quarter
2004 2003
---- ----
Number of converting facilities (at
quarter-end 73 77
Mill capacity, in thousand tons 827 827
Mill production, in thousand tons 832 763
Percent mill production used internally 87% 84%
Production downtime, excluding routine -- 46
maintenance, in thousand tons
We purchased 28,000 tons in first quarter 2004 and 26,000
tons in first quarter 2003 of corrugated medium produced by our
Premier Boxboard Limited LLC joint venture.
We continue our efforts to enhance return on investment.
This includes reviewing operations that are unable to meet return
objectives and determining appropriate courses of action,
including possibly consolidating and closing converting
facilities. In conjunction with our previously announced plans:
* We closed one of our Dallas, Texas converting facilities in
March 2004, and closed our Raleigh, North Carolina converting
facility in April 2004. In April 2004, we announced that we
would close one of our Louisville, Kentucky converting facilities
by the end of second quarter 2004. As a result, we paid $1
million in severance cost during first quarter 2004, and we
expect to incur additional severance and other exit costs during
second quarter 2004. Asset impairments were recognized in fourth
quarter 2003 in conjunction with the initial announcement of
these plans.
25
* In April 2004, we sold certain assets used in our specialty
packaging operations for $19 million cash subject to working
capital adjustments. The anticipated proceeds approximate the
current carrying value of these assets. During second quarter
2004, we expect to incur $1 million in severance and other exit
costs, most of which will be paid during second quarter 2004.
The accounting effects of these items are included in other
operating expenses and are excluded from segment operating
income.
Forest Products
A summary of our forest products results follows:
First Quarter
2004 2003
---- ----
(In millions)
Revenues $ 220 $ 180
Segment operating income (loss) 32 (7)
Product prices and shipments continued to improve due in
part to the strong housing and remodeling markets.
First Quarter 2004 versus
First Quarter 2003
Increase (Decrease)
-------------------------
Average
Prices Shipments
------- ---------
Lumber 18% 19%
Particleboard 13% 3%
Gypsum 26% 6%
MDF 2% (11%)
Compared with fourth quarter 2003, average prices were up
nine percent for particleboard, up six percent for gypsum, and up
four percent for MDF, while average prices were down two percent
for lumber. Shipments were up six percent for lumber, four
percent for particleboard, two percent for MDF and flat for
gypsum. First quarter 2004 comparisons of shipments for MDF and
particleboard are affected by the indefinite closures of our
Clarion MDF facility in third quarter 2003 and our Mt. Jewett
particleboard facility in second quarter 2003.
Other factors affecting operating income include
fluctuations in the following costs and expenses:
26
First Quarter 2004 versus
First Quarter 2003
Increase (Decrease)
-------------------------
(In millions)
Energy, principally natural gas $ (2)
Our energy costs fluctuate based on the market prices we pay
for these commodities.
Information about our converting and manufacturing
facilities follows:
First Quarter
2004 2003
---- ----
Number of converting and manufacturing
facilities (at quarter-end) 19 19
Average operating rates for all product lines:
High 92% 76%
Low 57% 66%
Average operating rates for first quarter 2004 include the
effects of the indefinite closures of our Clarion MDF facility in
third quarter 2003 and our Mt. Jewett particleboard facility in
second quarter 2003. Excluding these effects, the average
operating rates for all product lines during the first quarter
2004 would range from a high of 95 percent to a low of 76
percent.
We sold 430 acres of high-value land in first quarter 2004
and 253 acres in first quarter 2003. These sales increased
segment operating income by $3 million in first quarter 2004 and
$1 million in first quarter 2003.
We continue our efforts to enhance return on investment.
This includes reviewing operations that are unable to meet return
objectives and determining appropriate courses of action. In
addition, we are continuing to address market and production cost
issues at our MDF facilities, including the Del-Tin Fiber joint
venture. During first quarter 2004, we revised our strategic
alternatives for the intended use of our Clarion MDF facility to
now include a possible sale of this facility during 2004. As a
result, during first quarter 2004, we recognized a $12 million
impairment charge related to the Clarion MDF facility based on
the probability that we will not be able to recover our entire
investment in this facility. The accounting effect of this item
is included in other operating expenses and is excluded from
segment operating income.
27
Financial Services
A summary of our financial services results follows:
First Quarter
2004 2003
---- ----
(In millions)
Net interest income $ 100 $ 95
Segment operating income 53 39
Information concerning our interest rate spread follows:
First Quarter
-----------------------------------
2004 2003
--------------- ----------------
Average Yield/ Average Yield/
Balance Rate Balance Rate
------- ------ ------- ------
(Dollars in millions)
Earning assets $16,222 4.34% $16,845 4.59%
Interest-bearing liabilities 15,136 2.01% 15,544 2.52%
---- ----
Interest rate spread 2.33% 2.07%
==== ====
Near year-end 2003 a sizable portion of our certificates of
deposit liabilities that were issued in previous years, and that
carried rates substantially above 2003 rates, matured.
We remain in an asset sensitive position, which means that
increases in interest rates generally increase our net interest
income and decreases in interest rates generally decrease our net
interest income. Since first quarter 2003, we have reduced our
asset sensitivity, primarily by increasing our residential
housing assets with loans that have fixed interest rates for the
first three to five years, and by shifting our deposit base to
include more demand deposits and less certificates of deposits.
The following tables summarize the composition of earning
assets and deposits:
First Quarter-End Year-End
----------------- --------
2004 2003 2003
---- ---- ----
(Dollars in millions)
Residential housing assets (loans and
securities) $ 13,326 $ 13,014 $ 13,492
Other earning assets 2,964 3,960 3,010
------ ------ ------
Total earning assets $ 16,290 $ 16,974 $ 16,502
====== ====== ======
Residential housing assets as a
percentage of total earning assets 82% 77% 82%
Demand deposit and savings accounts $ 5,237 $ 4,332 $ 5,115
Certificates of deposit 3,300 4,998 3,583
------ ------ ------
Total deposits $ 8,537 $ 9,330 $ 8,698
====== ====== ======
Other factors affecting operating income include
fluctuations in the following noninterest income and expenses:
28
First Quarter 2004 versus
First Quarter 2003
Increase (Decrease)
-------------------------
(In millions)
Noninterest income:
Gains on mortgage loan sales $ (29)
Servicing rights amortization and impairment (11)
The decrease in gains on mortgage loan sales in first
quarter 2004 was due to the decline in mortgage loan production
activity in first quarter 2004. The decrease in servicing rights
amortization and impairment in first quarter 2004 was due to the
decrease in prepayments. As mortgage interest rates rise,
mortgage loan production activity and servicing rights
amortization and impairment generally decline and as mortgage
interest rates decline, mortgage loan production activity and
servicing rights amortization and impairment generally increase.
Information regarding mortgage loan production activity
follows:
For First Quarter
2004 2003
---- ----
(Dollars in millions)
Loans originated for sale to third parties $ 1,257 $ 2,625
Gains on loan sales as a percent of
originations 2.26% 2.06%
Value of mortgage servicing rights retained $ 4 $ 6
Information regarding the mortgage loans we service for
others and our mortgage servicing rights follows:
At First Quarter-End
or For First Quarter
--------------------
2004 2003
---- ----
(Dollars in millions)
Outstanding balance of loans serviced for third
parties $ 7,938 $ 7,821
Annualized prepayment rate 28% 42%
Carrying amount of mortgage servicing rights as
a percent of principal balance serviced 1.07% 1.19%
Factors affecting noninterest expense follows:
29
First Quarter 2004 versus
First Quarter 2003
Increase (Decrease)
-------------------------
(In millions)
Noninterest expense:
Compensation and benefits $ (13)
Real estate operations (5)
A significant portion of our compensation cost is directly
related to our mortgage banking operations' production volume.
In first quarter 2004, compensation costs declined in conjunction
with the decline in production volume. A substantial portion of
our mortgage banking operations' production-related costs are
directly variable with production activities. However, other
mortgage banking production-related operating costs are fixed or
only partially variable.
Asset Quality and Allowance for Loan Losses
The following table summarizes various asset quality
measures:
First Quarter-End Year-End
----------------- --------
2004 2003 2003
---- ---- ----
(Dollars in millions)
Non-performing loans $ 102 $ 128 $ 65
Restructured operating lease assets 39 42 40
Foreclosed real estate 27 4 26
----- ----- -----
Non-performing assets $ 168 $ 174 $ 131
===== ===== =====
Non-performing loans as a percentage
of total loans 1.10% 1.28% 0.71%
Non-performing assets ratio 1.80% 1.74% 1.42%
Allowance for loan losses as a percent of:
Non-performing loans 111% 96% 172%
Total loans 1.22% 1.22% 1.22%
The increase in non-performing loans at first quarter-end
2004 from year-end 2003 principally related to a $33 million
commercial real estate loan collateralized by a two-building
office complex in which the sole tenant filed bankruptcy. At
year-end 2003 and continuing through first quarter-end 2004 we
were negotiating with the borrower and carried the loan at the
estimated collateral value.
The following table summarizes changes in the allowance for
loan losses:
30
First Quarter
2004 2003
---- ----
(Dollars in millions)
Balance at beginning of period $ 111 $ 132
Net charge-offs (recoveries) 2 (21)
Provision for loan losses -- 11
----- -----
Balance at end of period $ 113 $ 122
===== =====
Net charge-offs as a percentage of
average loans outstanding (0.10%) 0.86%
In first quarter 2004, we received a recovery of $2 million
on a previously charged-off asset-based loan. In first quarter
2004, we increased our allowance for loan losses for several
deteriorating credit loans, but those increases were offset by
improvement in the credit quality of other loans. Charge-offs in
first quarter 2003 related principally to three asset-based loan
and leasing transactions.
Unallocated Expenses, Other (Income) Expense and Interest
Unallocated general and administrative expenses were $23
million in first quarter 2004 and $19 million in first quarter
2003. The change in first quarter 2004 was principally due to an
increase in stock based compensation.
Other operating (income) expense items are not allocated to
business segments. In addition to the items previously discussed
within the segments, the remainder of unallocated other operating
(income) expense includes expenses related to initiatives to
consolidate administrative functions and effect improvements in
supply chain management of $5 million in first quarter 2004 and
$3 million in first quarter 2003.
Our parent company interest expense was $32 million in first
quarter 2004 and $35 million in first quarter 2003. The change
in 2004 was due to a reduction in long-term debt to $1,611
million in first quarter 2004 from $1,879 million in first
quarter 2003.
Income Taxes
Our effective tax rate was 39 percent in first quarter 2004
and 42 percent in first quarter 2003. Differences between the
effective tax rate and the statutory rate are due to state income
taxes, nondeductible items, foreign operating losses, and other
items for which no financial benefit is recognized until
realized.
Average Shares Outstanding
Our average diluted shares outstanding were 55.6 million in
first quarter 2004 and 54.0 million in first quarter 2003. The
change in 2004 was principally due to employee exercises of stock
31
options and the issuance of restricted stock units during first
quarter 2004.
Capital Resources and Liquidity for the First Quarter 2004
A significant portion of our consolidated net assets
invested in financial services is subject, in varying degrees, to
regulatory rules and regulations including restrictions on the
ability of financial services to pay dividends to the parent
company. Accordingly, the parent company and the financial
services capital resources and liquidity are discussed
separately.
Parent Company
Operating Activities
Cash provided by operations was $20 million in first quarter
2004 and first quarter 2003. Depreciation and other non-cash
charges and credits were $96 million in first quarter 2004 and
$86 million in first quarter 2003. Dividends received from
financial services were $30 million in first quarter 2004 and $35
million in first quarter 2003. Our working capital needs
increased $79 million in first quarter 2004 and $47 million in
first quarter 2003. The change was principally due to an
increase in receivables. Working capital is always subject to the
timing of payments on payables and collections on receivables.
Investing Activities
Our investing activities used $22 million in first quarter
2004 and $2 million in first quarter 2003. The change was
principally due to a decrease in proceeds from sales of non-
strategic assets and operations. Capital expenditures were $28
million in first quarter 2004, 50 percent of depreciation, and
$29 million in first quarter 2003, 49 percent of depreciation.
We made no capital contributions to financial services in
first quarter 2004 or first quarter 2003.
Financing Activities
Our financing activities provided $13 million in first
quarter 2004, but used $24 million in first quarter 2003. The
change was principally due to employee exercises of stock
options. Debt was reduced by $2 million in first quarter 2004.
We paid cash dividends to our shareholders of $20 million,
or $0.36 per share, in first quarter 2004 and $19 million, or
$0.34 per share, in first quarter 2003. In February 2004, the
Board of Directors increased the quarterly cash dividend to $0.36
per share.
32
Liquidity
Our sources of short-term funding are our operating cash
flows, which include dividends received from financial services,
and borrowings under our existing credit arrangements and
accounts receivable securitization program. We operate in
cyclical industries, and our operating cash flows vary
accordingly. The dividends we receive from financial services
are dependent on its level of earnings and capital needs and are
subject to regulatory approval and restrictions.
At first quarter-end 2004, we had $562 million in unused
borrowing capacity under our credit agreements and $240 million
under our accounts receivable securitization program, which
matures in May 2007. At quarter-end 2004, we complied with all
the terms and conditions of our credit agreements and of our
accounts receivable securitization program.
In April 2004, we issued a redemption notice for all of the
outstanding notes of all three series of the 9.38% to 9.88%
senior subordinated and senior notes issued by Gaylord. The
redemption dates are in May and June 2004. The principal amount
held by third parties of $44 million and the related redemption
premium of $2 million will be funded by draws under our existing
credit agreements or our accounts receivable securitization
program or with available cash.
In addition, timber rights obligations totaling $61 million
are due in second quarter and third quarter 2004 and will be
funded by draws under our existing credit agreements or our asset
securitization program or with available cash.
Financial Services
Operating Activities
Cash provided by operations was $79 million in first quarter
2004 and $260 million in first quarter 2003. The change was
principally because we originated more loans held for sale than
we sold during first quarter 2004 as a result of increasing
origination volume near the end of the quarter. Loans held for
sale are always subject to the timing of loan originations and
loan sales.
Investing Activities
Our investing activities used $368 million in first quarter
2004 and $271 million in first quarter 2003. The change was
principally because we settled the purchases of forward-dated
securities purchased in 2003.
33
Financing Activities
Our financing activities provided $211 million in first
quarter 2004 and used $100 million in first quarter 2003. The
change was principally because of increased borrowings to fund
our securities settlements.
In first quarter 2004, financial services paid a $30 million
dividend to the parent company.
Liquidity
Our sources of short-term funding are our operating cash
flows, new deposits, borrowings under our existing agreements
and, if necessary, sales of assets. Assets that can be readily
converted to cash or against which we can readily borrow include
short-term investments, loans, mortgage loans held for sale, and
securities. At first quarter-end 2004, we had available
liquidity of $2.4 billion.
Off-Balance Sheet Arrangements
We enter into commitments to extend credit for loans,
leases, and letters of credit in the normal course of our
business. We generally require collateral upon funding of these
commitments and they carry substantially the same risk as loans.
These commitments normally include provisions allowing us to exit
the commitment under certain circumstances. At first quarter-end
2004, our unfunded commitments consist of:
(In millions)
Single-family mortgage loans $ 1,230
Other loans 4,987
Letters of credit 307
------
Total $ 6,524
======
Regulatory Limitations
At first quarter-end 2004, Guaranty met or exceeded all
applicable regulatory capital requirements. We expect to
maintain Guaranty's capital at a level that exceeds the minimum
required for designation as "well capitalized" under the capital
adequacy regulations of the Office of Thrift Supervision (OTS).
From time to time, we may make capital contributions to or
receive dividends from Guaranty.
Selected financial and regulatory capital data for Guaranty
and its consolidated mortgage banking and insurance subsidiaries
follow:
34
First
Quarter-End Year-End
2004 2003
----------- ---------
(In millions)
Balance sheet data:
Total assets $ 16,974 $ 17,247
Total deposits 8,537 8,698
Shareholder's equity 1,004 999
For Categorization
Regulatory as "Well
Actual Minimum Capitalized"
------ ------- ------------
Regulatory capital ratios:
Tangible capital 6.35% 2.00% N/A
Leverage capital 6.35% 4.00% 5.00%
Risk-based capital 11.08% 8.00% 10.00%
Pension and Postretirement Matters
The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was enacted in December 2003. Due to
the absence of detailed regulations necessary to implement the
act, we have not completed the analysis to determine the effects
of the act on our postretirement benefit plans, though it is
likely that the effects will ultimately reduce our cost for these
plans. In first quarter 2004, the FASB issued FASB Staff
Position, No. 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. This staff position allows companies
to defer recognizing the effects of the act until authoritative
guidance on the accounting for the prescription drug subsidy is
issued or until certain other events occur. We elected to defer
recognition. As a result, our reported postretirement benefit
obligation and the 2004 net periodic benefit cost do not reflect
the effects of the act and authoritative accounting guidance when
issued could require us to change these amounts.
Energy and the Effects of Inflation
Energy costs were $70 million in first quarter 2004 compared
with $75 million in first quarter 2003. Our energy costs
fluctuate based on the market prices we pay for these commodities
and on the amount and mix of the types of fuel we may use. We
hedge very little of our energy needs. It is likely that these
costs will continue to fluctuate during 2004.
Accounting Policies
Critical Accounting Estimates
In first quarter 2004, there were no significant changes in
our critical accounting estimates from those we identified in our
Form 10-K for the year 2003.
35
New Accounting Pronouncements Adopted
In first quarter 2004, we were required to adopt the
following accounting pronouncements:
* FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities an interpretation of
ARB No. 51. This interpretation provides guidance for
determining whether an entity is a variable interest entity and
which beneficiary of the variable interest entity, if any, should
consolidate the variable interest entity (the primary
beneficiary).
* Securities and Exchange Commission Staff Accounting Bulletin
No.105, Application of Accounting Principles to Loan Commitments.
This bulletin applies to loan commitments issued after March 2004
and accounted for as derivative instruments and it precludes the
recognition of an asset at the inception of the loan commitment.
The effect of adopting these pronouncements was not significant.
Litigation and Related Matters
We are involved in various legal proceedings that arise from
time to time in the ordinary course of business. We believe that
the possibility of a material liability from any of these
proceedings is remote, and we do not believe that the outcome of
any of these proceedings should have a material adverse effect on
our financial position, results of operations, or cash flow.
Since we filed our Annual Report on Form 10-K for the period
ended January 3, 2004, there have been no material developments
in pending legal proceedings except as noted below:
Gaylord Chemical Litigation
This litigation involves the Louisiana class action and
approximately 4,000 individual actions consolidated in Hinds
County, Mississippi, all of which relate to the October 23, 1995,
explosion of a rail tank car of nitrogen tetroxide at the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a
wholly-owned, independently-operated subsidiary of Gaylord
Container Corporation.
As previously reported, on December 9, 2003, Gaylord and
Gaylord Chemical agreed in principle to settle all claims,
including claims for compensatory and punitive damages, arising
from this accident. In exchange for payments by certain
insurance carriers and assignment of our insurance coverage
rights against the non-settling carriers, Gaylord and Gaylord
Chemical received full releases and/or dismissals of all claims
for damages, including punitive damages. Neither Gaylord nor
Gaylord Chemical contributed to the settlement. The settlement
36
is subject to a fairness hearing and final court approval. The
final fairness hearing is currently scheduled for August 6, 2004.
Environmental
As previously reported, the Ontario Ministry of Environment
filed an enforcement action alleging that air emissions from the
MDF plant at Pembroke, Ontario, Canada adversely affect
surrounding property owners. In April 2004, we agreed to a final
settlement in this action that will require payment of fines in
the amount of approximately $300,000.
37
STATISTICAL AND OTHER DATA
Parent Company
The following table presents revenues and unit sales for our
manufacturing segments:
First Quarter
----------------
2004 2003
---- ----
(Dollars in millions)
Revenues
Corrugated Packaging
Corrugated packaging $ 637 $ 625
Linerboard 36 42
----- -----
Total $ 673 $ 667
===== =====
Forest Products
Pine lumber $ 79 $ 56
Particleboard 44 39
Medium density fiberboard 25 26
Gypsum wallboard 23 18
Fiberboard 17 14
Other 32 27
----- -----
Total $ 220 $ 180
===== =====
Unit sales
Corrugated Packaging
Corrugated packaging, thousands of tons 841 780
Linerboard, thousands of tons 112 124
----- -----
Total, thousands of tons 953 904
===== =====
Forest Products
Pine lumber, mbf 236 198
Particleboard, msf 160 155
Medium density fiberboard, msf 57 64
Gypsum wallboard, msf 171 161
Fiberboard, msf 97 87
Revenues and unit sales do not include joint venture
operations.
38
The following table summarizes the composition of our
loan portfolio:
First Quarter Year-End
--------------
2004 2003 2003
---- ---- ---------
(In millions)
Single-family mortgage $ 3,351 $ 2,743 $ 3,255
Single-family mortgage warehouse 345 463 387
Single-family construction 964 1,028 889
Multifamily and senior housing 1,756 1,892 1,769
----- ----- -----
Total residential housing 6,416 6,126 6,300
Commercial real estate 974 1,766 1,015
Commercial and business 601 662 585
Energy lending 618 529 562
Asset-based lending and leasing 467 695 499
Consumer and other 176 190 176
----- ----- -----
Total loans 9,252 9,968 9,137
Less allowance for loan losses (113) (122) (111)
----- ----- -----
Loans receivable, net $ 9,139 $ 9,846 $ 9,026
===== ===== =====
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk
Our current level of interest rate risk is primarily due to
an asset sensitive position in our financial services segment.
The following table illustrates the estimated effect on our pre-
tax income of immediate, parallel and sustained shifts in
interest rates for the next 12-months at first quarter end 2004,
with comparative year-end 2003 information. This estimate
considers the effect of changing prepayment speeds, repricing
characteristics and average balances over the next 12 months.
Increase (Decrease) in Income Before Taxes
------------------------------------------
First Quarter 2004 Year-End 2003
-------------------- --------------------
Parent Financial Parent Financial
Company Services Company Services
------- --------- ------- ---------
(In millions)
Change in
Interest Rates
--------------
+2% $ (2) $ 14 $ (2) $ 8
+1% (1) 34 (1) 28
-1% 1 (26) 1 (20)
We did not present a two percent interest rate decrease
because of the current low interest rate environment. The
analysis assumes that debt reductions from contractual payments
will be replaced with short-term variable rate debt; however,
that may not be the financing alternative we choose to follow.
Our financial services segment is subject to interest rate
risk to the extent interest-earning assets and interest-bearing
liabilities repay or reprice at different times or in differing
amounts or both. Our financial services segment is in an asset
sensitive position where the rate and prepayment characteristics
of its assets are more responsive to changes in market interest
rates than its liabilities. In an asset sensitive position,
earnings will generally be positively affected in a rising rate
environment, but generally will be negatively affected in a
falling rate environment.
Our financial services segment's interest rate sensitivity
increased in first quarter 2004, principally because of changes
in our deposit base. In first quarter 2004, we issued
certificates of deposit that increased the average duration of
our deposit base. Also, because of current market pricing for
certificates of deposit, we anticipate that in a rising rate
environment, certain certificate of deposit rates will not
increase as much as the rate changes shown in the table above.
Additionally, changes in interest rates affect the fair
value of our mortgage servicing rights (estimated at $92 million
40
at first quarter-end 2004). We estimate a one percent decline
in long-term fixed mortgage rates from current levels would
decrease the fair value of the mortgage servicing rights by $21
million.
Foreign Currency Risk
In first quarter 2004, there were no significant changes in
foreign currency risk from that disclosed in our Annual Report
on Form 10-K for the year 2003.
Commodity Price Risk
In first quarter 2004, there were no significant changes in
commodity price risk from that disclosed in our Annual Report on
Form 10-K for the year 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of disclosure controls and procedures
The Company's chief executive officer and its chief
financial officer, based on their evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of end of the period covered by this Quarterly
Report on Form 10-Q, have concluded that the Company's disclosure
controls and procedures are adequate and effective to ensure that
the information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, summarized,
and reported within the time periods specified in the Securities
and Exchange Commission's ("SEC") rules and forms.
(b) Changes in internal control over financial reporting.
There were no changes in the Company's internal control over
financial reporting during the period covered by this report that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note G to Notes to Consolidated
Financial Statements in Part I of this report is incorporated by
reference thereto.
Since we filed our Annual Report on Form 10-K for the period
ended January 3, 2004, there have been no material developments
in pending legal proceedings except as noted below:
41
Gaylord Chemical Litigation
This litigation involves the Louisiana class action and
approximately 4,000 individual actions consolidated in Hinds
County, Mississippi, all of which relate to the October 23, 1995,
explosion of a rail tank car of nitrogen tetroxide at the
Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a
wholly-owned, independently-operated subsidiary of Gaylord
Container Corporation.
As previously reported, on December 9, 2003, Gaylord and
Gaylord Chemical agreed in principle to settle all claims,
including claims for compensatory and punitive damages, arising
from this accident. In exchange for payments by certain
insurance carriers and assignment of our insurance coverage
rights against the non-settling carriers, Gaylord and Gaylord
Chemical received full releases and/or dismissals of all claims
for damages, including punitive damages. Neither Gaylord nor
Gaylord Chemical contributed to the settlement. The settlement
is subject to a fairness hearing and final court approval. The
final fairness hearing is currently scheduled for August 6, 2004.
Environmental
As previously reported, the Ontario Ministry of Environment
filed an enforcement action alleging that air emissions from the
MDF plant at Pembroke, Ontario, Canada adversely affect
surrounding property owners. In April 2004, we agreed to a final
settlement in this action that will require payment of fines in
the amount of approximately $300,000.
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31.1 - Certification of Chief Executive Officer
pursuant to Exchange Act Rule 13a-14(a), as adopted
42
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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.
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
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
(b) Reports on Form 8-K
During the quarter ended April 3, 2004, the
Company filed the following Current Reports on
Form 8-K:
1. Current Report on Form 8-K dated February 2, 2004, reporting
under Items 9 and 12 a press release issued by the Company
announcing earnings for the period ended January 3, 2004.
2. Current Report on Form 8-K dated February 2, 2004, reporting
under Item 9 presentation materials of Kenneth M. Jastrow, II,
Chief Executive Officer of Temple-Inland Inc., used in Mr.
Jastrow's conference call on February 2, 2004, discussing the
Company's earnings for the quarter and year ended January 3,
2004.
3. Current Report on Form 8-K dated April 26, 2004, reporting
under Items 9 and 12 a press release issued by the Company
announcing earnings for the period ended April 3, 2004.
4. Current Report on Form 8-K dated April 27, 2004, reporting
under Item 9 presentation materials of Kenneth M. Jastrow, II,
Chief Executive Officer of Temple-Inland Inc., used in Mr.
Jastrow's conference call on April 27, 2004, discussing the
Company's earnings for the quarter ended April 3, 2004.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TEMPLE-INLAND INC.
(Registrant)
Dated: May 11, 2004 By /s/ Louis R. Brill
Louis R. Brill
Chief Accounting Officer
44
INDEX TO EXHIBITS
Exhibit No. Description Page No.
31.1 Certification of Chief Executive 45
Officer pursuant to Exchange Act
Rule 13a-14(a), as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial 46
Officer pursuant to Exchange Act
Rule 13a-14(a), as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive 47
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 Certification of Chief Financial 48
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002