SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended October 3, 1998
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)
303 South Temple Drive, Diboll, Texas 75941
(Address of principal executive offices) (Zip Code)
(409) 829-5511
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for
the past 90 days.
Yes X No_____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Number of common shares outstanding
Class as of October 3, 1998
Common Stock (par
value $1.00 per share) 55,598,796
The Exhibit Index appears on page 25 of this report.
<PAGE>2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Summarized Statements of Income
Parent Company (Temple-Inland Inc.)
Unaudited
Third Quarter First Nine Months
1998 1997 1998 1997
(in millions)
Revenues
Net sales $ 667.4 $ 678.2 $ 2,020.8 $ 2,014.3
Financial services
earnings 36.1 37.4 113.8 99.3
------- ------- --------- ---------
703.5 715.6 2,134.6 2,113.6
Costs and Expenses
Cost of sales 554.3 602.4 1,701.3 1,771.7
Selling and
administrative 80.3 66.0 210.9 193.7
------- ------- --------- ---------
634.6 668.4 1,912.2 1,965.4
Operating Income 68.9 47.2 222.4 148.2
Interest - net (26.0) (27.3) (79.3) (83.4)
Other 1.0 1.8 4.2 4.5
------- ------- --------- ---------
Income Before Taxes 43.9 21.7 147.3 69.3
Taxes on income 19.5 9.1 61.9 27.9
------- ------- --------- ---------
Net Income $ 24.4 $ 12.6 $ 85.4 $ 41.4
======= ======= ========= =========
See notes to consolidated financial statements.
<PAGE>3
Summarized Balance Sheets
Parent Company (Temple-Inland Inc.)
Unaudited
October 3, January 3,
1998 1998
(in millions)
ASSETS
Current Assets
Cash $ 14 $ 13
Receivables, less allowances of
$11 million in 1998 and $9
million in 1997 319 281
Inventories:
Work in process and finished goods 95 109
Raw materials 229 230
------ ------
324 339
Prepaid expenses 20 15
------ ------
Total current assets 677 648
Investment in Financial Services 670 576
Property and Equipment
Buildings 573 554
Machinery and equipment 3,869 3,689
Less allowances for depreciation and
amortization (2,245) (2,086)
------ ------
2,197 2,157
Construction in progress 97 115
------ ------
2,294 2,272
Timber and timberlands--less depletion 514 507
Land 35 34
------ ------
Total property and equipment 2,843 2,813
Other Assets 181 163
------ ------
Total Assets $ 4,371 $ 4,200
====== ======
See notes to consolidated financial statements.
<PAGE>4
Summarized Balance Sheets - Continued
Parent Company (Temple-Inland Inc.)
Unaudited
October 3, January 3,
1998 1998
(in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 126 $ 135
Accrued expenses 159 150
Employee compensation and benefits 22 23
Current portion of long-term debt 1 3
------ ------
Total current liabilities 308 311
Long-Term Debt 1,595 1,438
Deferred Income Taxes 273 252
Postretirement Benefits 144 140
Other Liabilities 12 14
Shareholders' Equity 2,039 2,045
====== ======
Total Liabilities and
Shareholders' Equity $ 4,371 $ 4,200
======= =======
See notes to consolidated financial statements.
<PAGE>5
Summarized Statements of Cash Flows
Parent Company (Temple-Inland Inc.)
Unaudited
First Nine Months
1998 1997
(in millions)
Cash Provided by (Used for) Operations
Net income $ 85.4 $ 41.4
Adjustments to reconcile net
income to net cash:
Depreciation and depletion 193.9 190.1
Deferred taxes 22.8 5.2
Unremitted earnings of affiliates (86.4) (82.3)
Receivables (34.7) (29.1)
Inventories 20.0 4.8
Prepaid expenses (4.4) (4.8)
Accounts payable and accrued expenses (6.6) 29.4
Other (12.2) (39.1)
------- -------
177.8 115.6
Cash Provided by (Used for) Investments
Capital expenditures (124.0) (170.6)
Investment in joint ventures (7.0) (8.1)
Sale of property and equipment 4.0 2.1
Capital contributions to
financial services (40.0) (24.6)
Dividends from financial services 40.0 225.0
Acquisition of two MDF plants (106.3) -
Acquisition of California Financial
Holding Company, net of cash acquired - (22.2)
------- -------
(233.3) 1.6
Cash Provided by (Used for) Financing
Change in debt, net 155.6 (29.3)
Purchase of stock for treasury (48.1) (44.5)
Cash dividends paid to shareholders (53.6) (53.6)
Other 2.7 8.7
------- -------
56.6 (118.7)
Net increase (decrease) in cash and
cash equivalents 1.1 (1.5)
Cash and cash equivalents at beginning
of period 13.4 14.3
------- -------
Cash and cash equivalents at end
of period $ 14.5 $ 12.8
======= =======
See notes to consolidated financial statements.
<PAGE>6
Summarized Statements of Income
Temple-Inland Financial Services
Unaudited
Third Quarter First Nine Months
1998 1997 1998 1997
(in millions)
Interest Income
Loans receivable and mortgage
loans held for sale $ 147.5 $ 143.9 $ 428.9 $ 384.7
Mortgage-backed and
investment securities 35.1 42.9 115.3 117.1
Other earning assets 1.1 5.9 3.1 16.1
------ ------ ------ ------
Total interest income 183.7 192.7 547.3 517.9
Interest Expense
Deposits 90.3 89.3 269.1 240.4
Borrowed funds 30.9 42.2 98.3 115.3
------ ------ ------ ------
Total interest expense 121.2 131.5 367.4 355.7
Net Interest Income 62.5 61.2 179.9 162.2
Provision for loan losses 1.1 .5 2.4 1.2
------ ------ ------ ------
Net Interest Income After
Provision For Loan Losses 61.4 60.7 177.5 161.0
Noninterest Income
Loan servicing fees 19.3 22.3 61.2 54.4
Loan origination and
marketing 34.4 15.7 84.3 32.1
Other 38.9 29.5 115.4 78.5
------ ------ ------ ------
92.6 67.5 260.9 165.0
Noninterest Expense
Compensation and benefits 42.8 37.7 126.0 94.5
Other 71.1 50.4 188.7 128.5
------ ------ ------ ------
Total noninterest expense 113.9 88.1 314.7 223.0
Income Before Taxes and
Minority Interest 40.1 40.1 123.7 103.0
Minority interest in income of
consolidated subsidiary (4.0) (2.7) (9.9) (3.7)
------ ------ ------ ------
Income Before Taxes 36.1 37.4 113.8 99.3
Taxes on income 8.7 5.5 27.4 17.0
------ ------ ------ ------
Net Income $ 27.4 $ 31.9 $ 86.4 $ 82.3
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>7
Summarized Balance Sheets
Temple-Inland Financial Services
Unaudited
October 3, January 3,
1998 1998
(in millions)
ASSETS
Cash and cash equivalents $ 178 $ 175
Mortgage loans held for sale 539 439
Loans receivable 7,220 6,451
Mortgage-backed and investment
securities 2,383 2,806
Other assets 959 914
------ ------
TOTAL ASSETS $ 11,279 $ 10,785
======= =======
LIABILITIES
Deposits $ 7,323 $ 7,375
Securities sold under repurchase
agreements - 270
Federal Home Loan Bank advances 2,207 1,685
Other borrowings 209 167
Other liabilities 645 562
Preferred stock issued by subsidiary 225 150
------ ------
TOTAL LIABILITIES 10,609 10,209
SHAREHOLDER'S EQUITY 670 576
------ ------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $ 11,279 $ 10,785
======= =======
See notes to consolidated financial statements.
<PAGE>8
Summarized Statements of Cash Flows
Temple-Inland Financial Services
Unaudited
First Nine Months
1998 1997
(in millions)
Cash Provided by (Used for) Operations
Net income $ 86.4 $ 82.3
Adjustments to reconcile net income
to net cash:
Amortization, accretion and depreciation 68.7 31.1
Provision for loan losses 2.4 1.2
Mortgage loans held for sale (100.5) (155.4)
Collections and remittances on loans
serviced for others, net (11.1) 138.5
Other (36.4) (19.3)
------ ------
9.5 78.4
Cash Provided by (Used for) Investments
Purchases of securities available-for-sale (34.5) (96.8)
Maturities of securities available-for-sale 228.1 61.4
Maturities of securities held-to-maturity 258.6 328.7
Proceeds from sale of securities available-
for-sale 52.9 441.4
Loans originated or acquired - net of
principal collected on loans (873.2) (1,045.5)
Other (3.6) (2.1)
------ ------
(371.7) (312.9)
Cash Provided by (Used for) Financing
Net increase (decrease) in deposits (51.8) 55.1
Securities sold under repurchase agreements
and short-term borrowings - net (248.0) (53.9)
Change in debt, net 541.1 199.9
Capital contributions from parent 40.0 24.6
Proceeds from sale of subsidiary
preferred stock 75.0 150.1
Dividends paid to parent (40.0) (225.0)
Net increase in advances from borrowers for
taxes and insurance 48.7 76.2
------ ------
365.0 227.0
Net increase (decrease) in cash and cash
equivalents 2.8 (7.5)
Cash and cash equivalents at
beginning of period 175.1 214.4
------ ------
Cash and cash equivalents at
end of period $ 177.9 $ 206.9
======= =======
See notes to consolidated financial statements.
<PAGE>9
Consolidated Statements of Income
Temple-Inland Inc. and Subsidiaries
Unaudited
Third Quarter First Nine Months
1998 1997 1998 1997
(In millions, except for per share data)
Revenues
Manufacturing net sales $ 667.4 $ 678.2 $ 2,020.8 $ 2,014.3
Financial services revenues 276.3 260.2 808.2 682.9
------ ------ ------- -------
943.7 938.4 2,829.0 2,697.2
Costs and Expenses
Manufacturing costs and
expenses 634.6 668.4 1,912.2 1,965.4
Financial services expenses 240.2 222.8 694.4 583.6
------ ------ ------- -------
874.8 891.2 2,606.6 2,549.0
Operating Income 68.9 47.2 222.4 148.2
Parent Company Interest
- net (26.0) (27.3) (79.3) (83.4)
Other 1.0 1.8 4.2 4.5
------ ------ ------- ------
Income Before Taxes 43.9 21.7 147.3 69.3
Taxes on Income 19.5 9.1 61.9 27.9
------ ------ ------- ------
Net Income $ 24.4 $ 12.6 $ 85.4 $ 41.4
====== ====== ======= ======
Weighted Average Shares
Outstanding:
Basic 55.6 56.7 55.8 55.8
====== ====== ======= ======
Diluted 55.6 56.9 55.9 56.1
====== ====== ======= ======
Earnings Per Share:
Basic $ .44 $ .22 $1.53 $ .74
====== ====== ======= ======
Diluted $ .44 $ .22 $1.53 $ .74
====== ====== ======= ======
Dividends Paid Per Share of
Common Stock $ .32 $ .32 $ .96 $ .96
====== ====== ======= ======
See notes to consolidated financial statements.
<PAGE>10
Consolidated Balance Sheets
Temple-Inland Inc. and Subsidiaries
October 3, 1998
Unaudited
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 14 $ 178 $ 192
Mortgage loans held for sale - 539 539
Loans receivable - 7,220 7,220
Mortgage-backed and investment
securities - 2,383 2,383
Trade and other receivables 319 - 314
Inventories 324 - 324
Property & equipment 2,843 118 2,961
Other assets 201 841 1,005
Investment in financial
services 670 - -
------ ------ ------
TOTAL ASSETS $ 4,371 $ 11,279 $14,938
====== ====== ======
LIABILITIES
Deposits $ - $ 7,323 $ 7,323
Securities sold under re-
purchase agreements and Federal
Home Loan Bank advances - 2,207 2,207
Other liabilities 320 645 941
Long-term debt 1,595 209 1,804
Deferred income taxes 273 - 255
Postretirement benefits 144 - 144
Preferred stock issued by
subsidiary - 225 225
------ ------ ------
TOTAL LIABILITIES $ 2,332 $ 10,609 12,899
====== =======
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 356
Accumulated other comprehensive income (loss) (13)
Retained earnings 1,849
------
2,253
Cost of shares held in the treasury:
5,790,756 shares (214)
------
TOTAL SHAREHOLDERS' EQUITY 2,039
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,938
======
See notes to the consolidated financial statements.
<PAGE>11
Consolidated Balance Sheets
Temple-Inland Inc. and Subsidiaries
January 3, 1998
Unaudited
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 13 $ 175 $ 188
Mortgage loans held for sale - 439 439
Loans receivable - 6,451 6,451
Mortgage-backed and investment
securities - 2,806 2,806
Trade and other receivables 281 - 277
Inventories 339 - 339
Property & equipment 2,813 103 2,916
Other assets 178 811 948
Investment in
financial services 576 - -
------ ------ ------
TOTAL ASSETS $ 4,200 $10,785 $14,364
====== ====== ======
LIABILITIES
Deposits $ - $ 7,375 $ 7,375
Securities sold under re-
purchase agreements and Federal
Home Loan Bank advances - 1,955 1,955
Other liabilities 325 562 871
Long-term debt 1,438 167 1,605
Deferred income taxes 252 - 223
Postretirement benefits 140 - 140
Preferred stock issued by
subsidiary - 150 150
------ ------ ------
TOTAL LIABILITIES $ 2,155 $10,209 12,319
====== ======
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 356
Accumulated other comprehensive income (loss) (20)
Retained earnings 1,817
------
2,214
Cost of shares held in the treasury:
5,069,011 shares (169)
------
TOTAL SHAREHOLDERS' EQUITY 2,045
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,364
======
See notes to the consolidated financial statements.
<PAGE>12
Consolidated Statements of Cash Flows
Temple-Inland Inc. and Subsidiaries
Unaudited
First Nine Months
1998 1997
(in millions)
Cash Provided by (Used for) Operations
Net income $ 85.4 $ 41.4
Adjustments to reconcile net income to
net cash:
Depreciation and depletion 204.3 199.8
Amortization and accretion 58.3 21.3
Deferred taxes 28.2 7.1
Trade and other receivables (34.7) (29.1)
Accounts payable and accrued expenses (6.6) 29.4
Inventories 20.0 4.8
Mortgage loans held for sale (100.5) (155.4)
Collections and remittances on loans
serviced for others - net (11.1) 138.5
Other (56.0) (63.8)
------- -------
187.3 194.0
Cash Provided by (Used for) Investments
Capital expenditures (148.1) (181.8)
Purchases of securities available-for-sale (34.5) (96.8)
Maturities of securities available-for-sale 228.1 61.4
Maturities of securities held-to-maturity 258.6 328.7
Proceeds from sale of securities available-
for-sale 52.9 441.4
Loans originated or acquired - net of
principal collected on loans (873.2) (1,045.5)
Acquisition of two MDF plants (106.3) -
Acquisition of California Financial Holding
Company, net of cash acquired - (22.2)
Other 17.5 3.1
------- -------
(605.0) (511.7)
Cash Provided by (Used for) Financing
Additions to debt 934.3 420.3
Payments of debt (237.6) (249.7)
Securities sold under repurchase agreements
and short-term borrowings - net (248.0) (53.9)
Cash dividends paid to shareholders (53.6) (53.6)
Net increase (decrease) in deposits (51.8) 55.1
Net increase in advances from borrowers for
taxes and insurance 48.7 76.2
Purchase of treasury stock (48.1) (44.5)
Proceeds from sale of subsidiary
preferred stock 75.0 150.1
Other 2.7 8.7
------- -------
421.6 308.7
Net increase (decrease) in cash and
cash equivalents 3.9 (9.0)
Cash and cash equivalents at
beginning of period 188.5 228.7
------- -------
Cash and cash equivalents at
end of period $ 192.4 $ 219.7
======= =======
See notes to consolidated financial statements.
<PAGE>13
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of normal accruals) considered
necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and
footnotes included in, or incorporated into, Temple-Inland Inc.'s
(the "company") Annual Report on Form 10-K for the fiscal year
ended January 3, 1998.
The consolidated financial statements include the accounts of
Temple-Inland Inc. and all subsidiaries in which the company has
more than a 50 percent equity ownership. However, because certain
assets and liabilities are in separate corporate entities, the
consolidated assets are not available to satisfy all consolidated
liabilities. All material intercompany amounts and transactions
have been eliminated. Certain amounts have been reclassified to
conform with current year.s classification.
Included as an integral part of the consolidated financial
statements are separate summarized financial statements for the
company's primary business groups.
The Parent Company's (Temple-Inland Inc.) summarized financial
statements include the accounts of Temple-Inland Inc. and its
manufacturing subsidiaries with the Financial Services subsidiaries
and the 20 percent to 50 percent owned companies being reflected in
the financial statements on the equity basis.
The Temple-Inland Financial Services Group summarized financial
statements include savings bank, mortgage banking, real estate
development activities and insurance operations.
Beginning in 1998, the company adopted Financial Accounting
Standards Board Statement 130, "Reporting Comprehensive Income."
Statement 130 establishes new rules for reporting and the display
of comprehensive income and its components; however, the adoption
of this Statement had no impact on the company.s net income or
shareholders' equity. Statement 130 requires unrealized gains or
losses on the company's available-for-sale securities, minimum
pension liability adjustments and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders. equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform
to the requirements of Statement 130.
<PAGE>14
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION--Continued
Comprehensive income (unaudited) is as follows:
Comprehensive Income
(in thousands)
Third Quarter First Nine Months
1998 1997 1998 1997
Net income $24,421 $12,559 $85,441 $41,360
Other comprehensive income, net of
income taxes:
Unrealized gains (losses)
on securities 1,709 5,101 8,065 4,544
Minimum pension liability
adjustments - - (988) -
----- ----- ----- -----
Comprehensive income $26,130 $17,660 $92,518 $45,904
====== ====== ====== ======
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, which requires
costs of start-up and training activities to be expensed as
incurred. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The company plans to adopt
the SOP during the fourth quarter 1998 which will require write-off
of previously capitalized costs. In adopting the SOP, the company
expects to record a charge for the cumulative effect of accounting
change of approximately $3.0 million (net of taxes of $2.0
million).
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The company has not yet determined
what the effect of Statement 133 will be on the earnings and
financial position of the company.
NOTE B - EARNINGS PER SHARE
Numerators and denominators used in computing earnings per share
are as follows:
Earnings Per Share
(in thousands, except for
per share data)
Third Quarter First Nine Months
1998 1997 1998 1997
Numerator for basic and diluted
earnings per share-net income $24,421 $12,559 $85,441 $41,360
====== ====== ====== ======
Denominator for basic earnings per
share - weighted average common
shares outstanding 55,600 56,664 55,813 55,848
Dilutive effect of stock
options 33 268 131 208
------ ------ ------ ------
Denominator for diluted earnings
per share 55,633 56,932 55,944 56,056
====== ====== ====== ======
Net income per share - Basic $ .44 $ .22 $1.53 $ .74
====== ====== ====== ======
Net income per share - Diluted $ .44 $ .22 $1.53 $ .74
====== ====== ====== ======
<PAGE>15
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - OTHER MATTERS
There are pending against the company and its subsidiaries lawsuits
and claims arising in the regular course of business. In the
opinion of management, recoveries, if any, by plaintiffs or
claimants that may result from the foregoing litigation and claims
will not be material in relation to the consolidated financial
statements of the company and its subsidiaries.
Late in the third quarter of 1998, the Financial Services Group
entered into interest rate floor and collar agreements which are
accounted for as hedges. These agreements generally pay the group
on a $1.7 billion notional amount if constant maturity swap ("CMS")
rates fall below 5.25 percent and generally require the group to
pay on a notional amount of $850 million if CMS rates rise above
5.60 percent. The agreements expire within one year.
<PAGE>16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Results of operations, including information regarding the
company's principal business segments, are shown below:
Third Quarter First Nine Months
1998 1997 1998 1997
(in millions)
Revenues
Paper $ 512.4 $ 518.2 $ 1,555.4 $ 1,548.2
Building products 155.0 160.0 465.4 466.1
------ ------ ------- -------
Manufacturing net sales 667.4 678.2 2,020.8 2,014.3
Financial services 276.3 260.2 808.2 682.9
------ ------ ------- -------
Total revenues $ 943.7 $ 938.4 $ 2,829.0 $ 2,697.2
====== ====== ======= =======
Income
Paper $ 9.5 $ (19.0) $ 37.3 $ (36.2)
Building products 29.8 34.7 92.0 103.2
------ ------ ------- -------
Operating profit 39.3 15.7 129.3 67.0
Financial services 36.1 37.4 113.8 99.3
------ ------ ------- -------
75.4 53.1 243.1 166.3
Corporate expenses (6.5) (5.9) (20.7) (18.1)
Parent Company interest -
net (26.0) (27.3) (79.3) (83.4)
Other - net 1.0 1.8 4.2 4.5
------ ------ ------- -------
Income before taxes 43.9 21.7 147.3 69.3
Taxes on income 19.5 9.1 61.9 27.9
------ ------ ------- -------
Net income $ 24.4 $ 12.6 $ 85.4 $ 41.4
====== ====== ======= =======
<PAGE>17
Third Quarter 1998 vs. Third Quarter 1997
Third quarter earnings for 1998 totaled $24.4 million, or $.44 per
diluted share, an increase of 94 percent from prior year third
quarter net income of $12.6 million, or $.22 per diluted share.
Revenues for the period were $943.7 million.
The Paper Group reported earnings of $9.5 million for the quarter
compared with an operating loss of $19.0 million in last year's
third quarter. The improvement in the Paper Group's earnings was
primarily due to higher prices for containerboard and boxes.
Average box prices for the corrugated packaging operation were up
approximately 11 percent compared with the same period last year.
Shipments of boxes, however, were down slightly from last year
levels, and demand for containerboard in the export market was weak
in the quarter. As a result, this operation again reduced
production to control inventory levels.
The Orange, Texas, linerboard mill was down approximately three
weeks in the quarter primarily as a result of a damaged turbine
from a power surge caused by a lightning strike. The mill has been
repaired, but the resulting loss, including the cost of repair, was
approximately $5.0 million.
The price for bleached paperboard was down significantly from third
quarter 1997 levels. Despite the lower prices, profitability for
the bleached paperboard operation in the third quarter was down
only marginally compared with a year ago as lower costs, improved
product mix and increased sales volume offset most of the effect of
declining prices.
The Paper Group continued its program for restructuring its
domestic and international operations and the assessment of
alternatives for overhead reduction and margin enhancement. In
November, the company announced personnel changes and organization
realignment to accommodate this restructuring. The company
anticipates continuing these efforts in the fourth quarter of 1998
and into 1999. The company anticipates charges for restructuring
will be taken during the fourth quarter with such costs anticipated
to be in the $40 million range.
The Building Products Group reported operating earnings in the
third quarter of $29.8 million compared with $34.7 million for the
same period last year. Average lumber prices were down 19 percent
from the third quarter of 1997, which reduced profitability for
this segment by $9.9 million. Particleboard and gypsum prices and
volumes improved from last year levels, partially offsetting the
negative impact from the decline in lumber prices.
The Financial Services Group recorded operating earnings for the
quarter of $36.1 million, compared with $37.4 million in the third
quarter of 1997. While the bank's loan portfolio grew in the
quarter, the loan volumes at the bank have begun to moderate as the
demand for single-family adjustable rate mortgages has decreased
due to the low interest rate environment and flat yield curve. The
mortgage bank continues to experience high levels of new mortgage
originations, but also a significant level of prepayments.
<PAGE>18
Late in the third quarter the Financial Services Group entered into
interest rate floor and collar agreements with notional amounts
totaling $1.7 billion. These agreements are primarily intended to
mitigate the adverse impact of potentially faster prepayments on a
portion of its adjustable rate residential mortgage assets in the
event of declining interest rates going forward. These agreements
which expire in one year, did not materially affect operations
during the third quarter.
Net interest expense decreased to $26.0 million in the third
quarter of 1998 compared with $27.3 million in last year's third
quarter. Gross interest decreased from $27.8 million in 1997, to
$26.3 million in 1998. Capitalized interest decreased slightly
from $.5 million in the third quarter of 1997, to $.3 million in
the third quarter of 1998.
First Nine Months of 1998 vs. First Nine Months of 1997
Earnings for the first nine months of 1998 were $85.4 million, or
$1.53 per diluted share compared with $41.4 million, or $.74 per
diluted share for the first nine months of last year. Revenues of
$2,829.0 million were up five percent from the 1997 first nine
months' revenues of $2,697.2 million.
The Paper Group earned $37.3 million compared with a loss of $36.2
million in the first nine months of 1997. Average box prices for
the corrugated packaging operation were up for the first nine
months of the year compared with the same period last year, while
volumes were down slightly. Prices for bleached paperboard were
slightly lower for the first nine months of 1998, compared with the
same period last year.
The Building Products Group earned $92.0 million in the first nine
months of 1998, compared with $103.2 million in the first nine
months of last year. Although significantly lower market prices
for solid wood products and fiber products reduced earnings by a
combined total of $21.3 million from the first nine months of 1997,
the strong earnings of the particleboard and gypsum operations
somewhat offset this decline. Earnings from the gypsum operation
improved from last year due to higher market prices and increased
shipment volumes. The particleboard operation experienced
significantly higher shipment volumes in the first nine months of
1998, compared with the first nine months of 1997.
Earnings for the Financial Services Group were $113.8 million for
the period, an increase of $14.5 million from last year's
comparable period. The bank's loan portfolio continued to grow and
the credit quality of the loan portfolio remains strong.
Capital Resources and Financial Condition
The company's financial condition continues to be strong.
Internally generated funds, existing credit facilities and the
capacity to issue long-term debt are sufficient to fund projected
capital expenditures, to service existing debt, to pay dividends
and to meet normal working capital requirements.
During the third quarter of 1998, the company completed the
acquisition of the Pembroke, Ontario, and Clarion, Pennsylvania,
medium density fiberboard plants from MacMillan Bloedel Limited for
approximately Cdn
<PAGE>19
$160 million (U.S. $106.3 million). During the quarter, the
company entered into a $61 million term note to finance this
acquisition. During the first nine months of 1998, Parent
Company's debt increased $155.6 million mainly through this term
note, commercial paper and bank debt. Year-to-date 1998, the
company has purchased $48.1 million or 850,500 of common shares as
a part of the five million share repurchase plan. No shares were
repurchased in the third quarter.
Guaranty Federal Bank continues to meet all three regulatory
capital requirements.
New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, which requires costs of
start-up and training activities to be expensed as incurred. The
SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The company plans to adopt the
SOP during the fourth quarter 1998 which will require write-off of
previously capitalized costs. In adopting the SOP, the company
expects to record a charge for the cumulative effect of accounting
change of approximately $3.0 million (net of taxes of $2.0
million).
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. The company has not yet determined
what the effect of Statement 133 will be on the earnings and
financial position of the company.
Year 2000 Compliance
The company's three lines of business, the Paper, Building
Products, and Financial Services Groups, are dependent upon
computer technology and programs for conducting business. Each
line of business has for the past two years been working to ensure
that the Year 2000 has no significant effect on its information,
financial and manufacturing systems. To date, the company has
spent $4.5 million on the Year 2000 compliance, and estimates the
total spending will be approximately $12.8 million. These costs
are being expensed as incurred and are not expected to have a
material impact on the company's financial position.
Year 2000 readiness for the operations in the Financial Services
Group is subject to the review and oversight of various regulatory
agencies. Their foremost requirement is that all critical systems
must have substantially completed testing by December 31, 1998, and
that both system testing and implementation be completed by June
30, 1999. The critical systems are those that service its
portfolio of loans, mortgages, and customer deposits. Based upon
project progress, the company is confident all regulatory
requirements will be met and that any Year 2000 disruption is
unlikely. If any disruption were to occur that significantly
affected operations or customer service, the group will implement
disaster recovery contingency plans.
<PAGE>20
The Paper and Building Products Groups have found few instances of
date dependent information within their manufacturing processes.
There is no indication at this time that production could be
affected by date required fields that cannot be overridden or
entered manually.
A potential risk is that an external provider could have a year
2000 related problem that would affect the ability of the company
to manufacture its products or serve its customers. For instance,
should a utility provider not be able to supply power needs to a
facility, some impact to normal operations would be expected.
Larger facilities with self-power generation would be able to
continue operations with a decline in production rates until
outside power was restored. The company has the flexibility to
produce products in multiple geographic locations, which allows for
scheduling production and shipping from alternate locations should
disruptions occur.
Communications with these and other vendors are ongoing to assess
the risk to the organization and identify the company's exposure to
such outside influences. The company has not identified any such
risk at this time.
No interruption of services is expected within the administrative
support systems. Most software for meeting business needs is
purchased and Year 2000 modifications and testing is performed by
the vendor. The company also tests these purchased systems for
Year 2000 readiness.
While there can be no guarantee that Year 2000 problems will not
occur, the company believes its efforts have addressed the risks
and that contingency plans will be in place for the unexpected.
Forward-Looking Statements
Statements in this report that are not historical are forward-
looking statements that involve risks and uncertainties. The
actual results achieved by Temple-Inland may differ significantly
from the results discussed in the forward-looking statements.
Factors that might cause such differences include general economic,
market, or business conditions; the opportunities (or lack thereof)
that may be presented to and pursued by Temple-Inland and its
subsidiaries; the availability and price of raw materials used by
Temple-Inland and its subsidiaries; competitive actions by other
companies; changes in laws or regulations; and other factors, many
of which are beyond the control of Temple-Inland and its
subsidiaries.
<PAGE>21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
INTEREST RATE RISK:
The company is subject to interest rate risk from the utilization
of financial instruments such as adjustable rate debt and other
borrowings, as well as the lending and deposit gathering activities
of the Financial Services Group. The following table illustrates
the estimated impact on pre-tax income of immediate, parallel and
sustained shifts in interest rates for the subsequent 12-month
period at the end of the third quarter of 1998 with comparative
information at year end 1997:
Increase/(Decrease) in
Income Before Taxes
(in millions)
Change in Interest Rates 1998 1997
+2% $(23) $ 4
+1% $ (6) $ 9
- $ - $ -
-1% $ 2 $(12)
-2% $ 22 $(14)
The change in exposure to interest rate risk from year end 1997 is
due primarily to the Financial Services Group entering into various
interest rate floor and collar agreements to hedge the prepayment
risk inherent in a portion of its adjustable rate mortgage assets
and an increase in the company's adjustable rate debt. At year end
1997, the sensitivity of the Financial Services Group's earnings to
changes in interest rates was inverse to the impact of interest
rate changes on the company's adjustable rate debt. By
substantially decreasing the earnings volatility of the Financial
Services Group to interest rate changes through the use of floor
and collar agreements, the company's sensitivity to interest rate
risk at the end of the third quarter of 1998 is primarily driven by
changes in rates on the company's adjustable rate debt.
Additionally, the fair value (estimated at $234 million at the end
of the third quarter of 1998) of the Financial Services Group's
mortgage servicing rights is also affected by changes in interest
rates. The fair value of the servicing rights has declined by $36
million (13 percent) since year end 1997 due to the recent decline
in interest rates and the smaller size of the servicing portfolio.
The company estimates that a one percent decline in interest rates
from current levels would decrease the fair value of the mortgage
servicing rights by an additional $40 million.
FOREIGN CURRENCY RISK:
The company's exposure to foreign currency fluctuations on its
financial instruments is not material because most of these
instruments are denominated in U.S. dollars.
COMMODITY PRICE RISK:
The company has no financial instruments subject to commodity price
risks.
<PAGE>22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note C to Notes to
Consolidated Financial Statements in Part I of this
report is incorporated by reference thereto.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
On November 14, 1998, the company entered into an
Agreement and Plan of Merger (the "Merger
Agreement") with HF Bancorp, Inc. ("HFB"), the
parent corporation of Hemet Federal Savings & Loan
Association ("Hemet") headquartered in Hemet,
California, by which HFB will be merged into the
company or, under certain circumstances, a subsidiary
of the company will be merged into HFB. The
transaction, which is subject to approval by the HFB
stockholders and by regulatory authorities, is
expected to close during the second quarter of 1999.
Terms of the Merger Agreement provide for HFB
stockholders to receive $18.50 per share in the form
of common stock of the company or cash, for a total
consideration of approximately $120 million. Subject
to certain limitations, each HFB stockholder will be
given the election to have the consideration for their
shares paid in company common stock, cash, or a
combination of the two. The company, however, will
issue no more than 1,225,000 shares of common stock in
the transaction. If the HFB stockholders electing to
receive common stock of the company do not represent a
sufficient portion of the total consideration in order
for the transaction to receive favorable tax treatment
to the HFB stockholders, the entire merger
consideration will be paid only in cash. When the
transaction is completed, the operations of Hemet,
which has approximately $1.0 billion in assets and
operates 18 branches in southern California,
principally in Riverside and San Diego counties, will
be merged into Guaranty. In connection with execution
of the Merger Agreement, HFB granted the company an
option, exercisable under certain circumstances, to
purchase 1,273,000 shares of HFB common stock,
representing approximately 19.9 percent of the shares
presently outstanding, at a price of approximately
$16.00 per share.
<PAGE>23
PART II. OTHER INFORMATION --Continued
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Regulation S-K
Exhibit Number
(27) Financial Data Schedule
(b) Reports on Form 8-K. During the nine months ended
October 3, 1998, the company did not file any reports
on Form 8-K.
<PAGE>24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TEMPLE-INLAND INC.
(Registrant)
Date: November 17, 1998 By /s/ David H. Dolben
David H. Dolben
Vice President and
Chief Accounting Officer
<PAGE>25
EXHIBIT INDEX
The following is an index of the exhibits filed herewith. The page
reference set forth opposite the description of exhibits included
in such index refer to the pages under the sequential numbering
system prescribed by Rule 0-3(b) under the Securities Exchange Act
of 1934.
Regulation S-K
Exhibit Sequential
Number Page Number
(27) Financial Data Schedule 26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
consolidated balance sheets and consolidated income statements for
Temple-Inland Inc. and subsidiaries and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 192
<SECURITIES> 0
<RECEIVABLES> 314
<ALLOWANCES> 0
<INVENTORY> 324
<CURRENT-ASSETS> 0
<PP&E> 2,961
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,938
<CURRENT-LIABILITIES> 0
<BONDS> 1,804
0
0
<COMMON> 61
<OTHER-SE> 1,978
<TOTAL-LIABILITY-AND-EQUITY> 14,938
<SALES> 2,021
<TOTAL-REVENUES> 2,829
<CGS> 1,912
<TOTAL-COSTS> 2,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 147
<INCOME-TAX> 62
<INCOME-CONTINUING> 85
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.53
</TABLE>
