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 July 3, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transaction Period
From to
Commission File Number 001-08634
Temple-Inland Inc.
(Exact name or registrant as specified in its charter)
Delaware 75-1903917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 July 3, 1999
Common Stock (par
value $1.00 per share) 55,843,041
The Exhibit Index appears on page 24 of this report.
<PAGE>2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Summarized Statements of Income
Parent Company (Temple-Inland Inc.)
Unaudited
Second First
Quarter Six
Months
1999 1998 1999 1998
(in millions)
Revenues
Net sales $ 735 $ 671 $ 1,420 $ 1,353
Financial services earnings 34 41 61 78
------- ------- ------- -------
769 712 1,481 1,431
Costs and Expenses
Cost of sales 609 562 1,195 1,146
Selling and administrative 68 66 135 131
------- ------- ------- -------
677 628 1,330 1,277
Operating Income 92 84 151 154
Interest expense - net
(30) (27) (59) (53)
Other 3 2 6 3
------- ------- ------- -------
Income Before Taxes and Accounting
Change 65 59 98 104
Taxes on income 24 24 38 42
------- ------- ------- -------
Income Before Accounting Change 41 35 60 62
Cumulative effect of accounting
change, net of tax - - - (3)
------- ------- ------- -------
Net Income $ 41 $ 35 $ 60 $ 59
======= ======= ======= =======
See notes to consolidated financial statements.
<PAGE>3
Summarized Balance Sheets
Parent Company (Temple-Inland Inc.)
Unaudited
Second
Quarter Year End
1999 1998
(in millions)
ASSETS
Current Assets
Cash $ 6 $ 15
Receivables, less allowances of $10
million in 1999 and $13 million in 1998 398 297
Inventories:
Work in process and finished goods 94 93
Raw materials 211 242
------ ------
305 335
Prepaid expenses 15 14
------ ------
Total current assets 724 661
Investment in Financial Services 985 708
Property and Equipment
Buildings 574 574
Machinery and equipment 3,854 3,829
Construction in progress 118 104
Less allowances for depreciation (2,334) (2,242)
------ ------
2,212 2,265
Timber and timberlands--less depletion 501 499
Land 35 35
------ ------
Total property and equipment 2,748 2,799
Other Assets 171 174
------ ------
Total Assets $ 4,628 $ 4,342
====== ======
See notes to consolidated financial statements.
<PAGE>4
Summarized Balance Sheets - Continued
Parent Company (Temple-Inland Inc.)
Unaudited
Second
Quarter Year End
1999 1998
(in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 121 $ 138
Accrued expenses 151 171
Employee compensation and benefits 22 28
Current portion of long-term debt 1 2
------ ------
Total current liabillities 295 339
Long-Term Debt 1,868 1,583
Deferred Income Taxes 282 266
Postretirement Benefits 147 145
Other Liabilities 11 11
Shareholders' Equity 2,025 1,998
------ ------
Total Liabilities and Shareholders'
Equity $ 4,628 $ 4,342
====== ======
See notes to consolidated financial statements.
<PAGE>5
Summarized Statements of Cash Flows
Parent Company (Temple-Inland Inc.)
Unaudited
First Six Months
1999 1998
(in millions)
Cash Provided by (Used for) Operations
Net income $ 60 $ 59
Adjustments to reconcile net income to net cash:
Cumulative effect of accounting change,
net of tax - 3
Depreciation and depletion 131 130
Deferred taxes 16 17
Unremitted earnings from financial services (48) (59)
Receivables (102) (38)
Inventories 27 1
Accounts payable and accrued expenses (19) (24)
Other - (18)
------ ------
65 71
Cash Provided by (Used for) Investments
Capital expenditures for property and
equipment (103) (76)
Proceeds from sale of property and equipment 13 2
Acquisitions and joint ventures, net (4) (1)
Capital contributions to financial services (239) (40)
Dividends from financial services - 25
------ ------
(333) (90)
Cash Provided by (Used for) Financing
Additions to debt 308 274
Payments of debt (24) (172)
Purchase of stock for treasury - (48)
Cash dividends paid to shareholders (36) (36)
Other 11 3
------ ------
259 21
Net increase (decrease) in cash (9) 2
Cash at beginning of period 15 13
------ ------
Cash at end of period $ 6 $ 15
====== ======
See notes to consolidated financial statements.
<PAGE>6
Summarized Statements of Income
Financial Services Group
Unaudited
Second Quarter First Six Months
1999 1998 1999 1998
(in millions)
Interest income
Loans receivable and mortgage
loans held for sale $ 166 $ 142 $ 326 $ 281
Mortgage-backed and
investment securities 28 39 61 80
Other earnings assets 1 1 2 2
------ ----- ----- -----
Total interest income 195 182 389 363
Interest expense
Deposits 88 90 173 179
Borrowed funds 39 35 83 67
------ ----- ----- -----
Total interest expense 127 125 256 246
Net interest income 68 57 133 117
Provision for loan losses 8 (1) 18 1
------ ----- ----- -----
Net interest income after
provision for loan losses 60 58 115 116
Noninterest income
Loan servicing fees 19 19 37 42
Loan origination and marketing 20 28 47 50
Other 36 40 68 77
------ ----- ----- -----
Total noninterest income 75 87 152 169
Noninterest expense
Compensation and benefits 40 42 83 83
Other 57 59 116 118
------ ----- ----- -----
Total noninterest expense 97 101 199 201
Income before taxes and
minority interest 38 44 68 84
Minority interest in income
of consolidated subsidiary (3) (3) (7) (6)
------ ----- ----- -----
Income before taxes 35 41 61 78
Taxes on income 7 9 13 19
------ ----- ----- -----
Net income $ 28 $ 32 $ 48 $ 59
====== ===== ===== =====
See notes to consolidated financial statements.
<PAGE>7
Summarized Balance Sheets
Financial Services Group
Unaudited
Second
Quarter Year End
1999 1998
(in millions)
ASSETS
Cash and cash equivalents $ 227 $ 229
Mortgage loans held for sale 422 621
Loans receivable 9,461 8,101
Mortgage-backed and investment
securities 2,437 2,485
Other assets 1,127 964
------- -------
TOTAL ASSETS $ 13,674 $ 12,400
======= =======
LIABILITIES
Deposits $ 8,657 $ 7,338
Federal Home Loan Bank advances 2,959 3,221
Other borrowings 216 210
Other liabilities 632 698
Preferred stock issued by
subsidiary 225 225
------- -------
TOTAL LIABILITIES 12,689 11,692
SHAREHOLDERS' EQUITY 985 708
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 13,674 $ 12,400
======= =======
See notes to consolidated financial statements.
<PAGE>8
Summarized Statements of Cash Flows
Financial Services Group
Unaudited
First Six Months
1999 1998
(in millions)
Cash Provided by (Used for) Operations
Net income $ 48 $ 59
Adjustments to reconcile net income to net cash:
Provision for amortization, depreciation and
accretion 38 40
Provision for loan losses 18 1
Mortgage loans held for sale 199 (64)
Collections and remittances on loans serviced
for others, net (143) (41)
Originated mortgage servicing rights (38) (31)
Minority interest in earnings of consolidated
subsidiary 7 6
Other 103 (16)
------ ------
232 (46)
Cash Provided by (Used for) Investments
Purchases of securities available-for-sale (4) (33)
Maturities of securities available-for-sale 127 155
Maturities and redemptions of securities
held-to-maturity 202 157
Loans originated or acquired, net of principal
collected on loans (698) (532)
Purchase of asset-based lending loans (106) -
Proceeds from sale of securities
available-for-sale - 52
Capital expenditures for property and equipment (13) (16)
Acquisition of HF Bancorp, Inc., net of cash
acquired (90) -
Purchase of Fidelity Funding (19) -
Other (28) 53
------ ------
(629) (164)
Cash Provided by (Used for) Financing
Net increase in deposits 436 10
Securities sold under repurchase agreements and
short-term borrowings, net 36 111
Additions to debt 14 80
Payments of debt (350) (26)
Capital contributions from Parent Company 239 40
Dividends paid to Parent Company - (25)
Proceeds from sale of subsidiary preferred stock - 75
Distributions to minority interest (7) (6)
Net increase in advances from borrowers for
taxes and insurance 26 33
Other 1 -
------ ------
395 292
Net increase (decrease) in cash and cash
equivalents (2) 82
Cash and cash equivalents at beginning of period 229 175
------ ------
Cash and cash equivalents at end of period $ 227 $ 257
====== ======
See notes to consolidated financial statements.
<PAGE>9
Consolidated Statements of Income
Temple-Inland Inc. and Subsidiaries
Unaudited
Second Quarter First Six Months
1999 1998 1999 1998
(in millions)
Revenues
Manufacturing $ 735 $ 671 $ 1,420 $ 1,353
Financial services 270 269 541 532
------ ------ ------ ------
1,005 940 1,961 1,885
Costs and Expenses
Manufacturing 677 628 1,330 1,277
Financial services 236 228 480 454
------ ------ ------ ------
913 856 1,810 1,731
Operating Income 92 84 151 154
Parent company interest - net (30) (27) (59) (53)
Other 3 2 6 3
------ ------ ------ ------
Income Before Taxes and
Accounting Change 65 59 98 104
Taxes on income 24 24 38 42
------ ------ ------ ------
Income Before Accounting Change 41 35 60 62
Cumulative effect of accounting
change, net of tax - - - (3)
------ ------ ------ ------
Net Income $ 41 $ 35 $ 60 $ 59
====== ===== ====== ======
Weighted average shares outstanding:
Basic 55.8 55.8 55.7 55.9
Diluted 56.1 56.0 56.0 56.1
Earnings Per Share
Basic:
Income before accounting
change $ 0.74 $ 0.62 $ 1.08 $ 1.09
Cumulative effect of
accounting change,
net of tax - - - (0.06)
------ ------ ------ ------
Net Income $ 0.74 $ 0.62 $ 1.08 $ 1.03
====== ====== ====== ======
Diluted:
Income before accounting
change $ 0.74 $ 0.62 $ 1.07 $ 1.09
Cumulative effect of
accounting change,
net of tax - - - (0.06)
------ ------ ------ ------
Net Income $ 0.74 $ 0.62 $ 1.07 $ 1.03
====== ====== ====== ======
Dividends paid per share of
common stock $ 0.32 $ 0.32 $ 0.64 $ 0.64
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>10
Consolidating Balance Sheets
Temple-Inland Inc. and Subsidiaries
Second Quarter 1999
Unaudited
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 6 $ 227 $ 233
Mortgage loans held for sale - 422 422
Loans receivable - 9,461 9,461
Mortgage-backed and investment
securities - 2,437 2,437
Trade and other receivables 398 - 391
Inventories 305 - 305
Property and equipment 2,748 140 2,888
Other assets 186 987 1,122
Investment in Financial Services 985 - -
------ ------- ------
TOTAL ASSETS $ 4,628 $ 13,674 $ 17,259
====== ======= ======
LIABILITIES
Deposits $ - $ 8,657 $ 8,657
Federal Home Loan Bank advances - 2,959 2,959
Other liabilities 306 632 910
Long-term debt 1,868 216 2,084
Deferred income taxes 282 - 252
Postretirement benefits 147 - 147
Preferred stock issued by subsidiary - 225 225
------ ------- ------
TOTAL LIABILITIES $ 2,603 $ 12,689 $ 15,234
====== ======= ------
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 360
Accumulated other comprehensive income (loss) (25)
Retained earnings 1,834
------
2,230
Cost of shares held in the treasury:
5,546,511 shares (205)
------
TOTAL SHAREHOLDERS' EQUITY 2,025
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,259
======
See notes to consolidated financial statements.
<PAGE>11
Consolidating Balance Sheets
Temple-Inland Inc. and Subsidiaries
Year End 1998
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 15 $ 229 $ 244
Mortgage loans held for sale - 621 621
Loans receivable - 8,101 8,101
Mortgage-backed and investment
securities - 2,485 2,485
Trade and other receivables 297 - 290
Inventories 335 - 335
Property and equipment 2,799 129 2,928
Other assets 188 835 986
Investment in Financial Services 708 - -
------ ------ ------
TOTAL ASSETS $ 4,342 $12,400 $ 15,990
====== ====== ======
LIABILITIES
Deposits $ - $ 7,338 $ 7,338
Federal Home Loan Bank
advances - 3,221 3,221
Other liabilities 350 698 1,028
Long-term debt 1,583 210 1,793
Deferred income taxes 266 - 242
Postretirement benefits 145 - 145
Preferred stock issued by
subsidiary - 225 225
------ ------ ------
TOTAL LIABILITIES $ 2,344 $11,692 $ 13,992
====== ====== ------
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 357
Accumulated other comprehensive income (loss) (17)
Retained earnings 1,810
------
2,211
Cost of shares held in the treasury:
5,785,139 shares (213)
------
TOTAL SHAREHOLDERS' EQUITY 1,998
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,990
======
See notes to consolidated financial statements.
<PAGE>12
Consolidated Statements of Cash Flows
Temple-Inland Inc. and Subsidiaries
Unaudited
First Six Months
1999 1998
(in millions)
CASH PROVIDED (USED FOR) OPERATIONS
Net income $ 60 $ 59
Adjustments to reconcile net income
to net cash:
Cumulative effect of accounting change,
net of tax - 3
Depreciation and depletion 139 137
Amortization of goodwill 4 3
Provision for loan losses 18 1
Deferred taxes 18 19
Amortization and accretion on financial
instruments 28 31
Mortgage loans held for sale 199 (64)
Receivables (102) (38)
Inventories 27 1
Accounts payable and accrued expenses (19) (24)
Collections and remittances on loans
serviced for others, net (143) (41)
Originated mortgage servicing rights (38) (31)
Other 106 (31)
----- -----
297 25
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures for property and
equipment (116) (92)
Proceeds from sale of property and equipment 13 13
Purchases of securities available-for-sale (4) (33)
Maturities of securities available-for-sale 127 155
Maturities and redemptions of securities
held-to-maturity 202 157
Loans originated or acquired, net of principal
collected on loans (698) (532)
Purchase of asset-based lending loans (106) -
Proceeds from sale of securities
available-for-sale - 52
Manufacturing acquisitions and joint ventures,
net (4) (1)
Acquisition of HF Bancorp Inc., net of cash
acquired (90) -
Purchase of Fidelity Funding (19) -
Other (28) 42
------ ------
(723) (239)
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt 322 354
Payments of debt (374) (198)
Securities sold under repurchase agreements
and short-term borrowings, net 36 111
Purchase of stock for treasury - (48)
Cash dividends paid to shareholders (36) (36)
Net increase in deposits 436 10
Proceeds from sale of subsidiary preferred stock - 75
Other 31 30
------ ------
415 298
Net increase (decrease) in cash and
cash equivalents (11) 84
Cash and cash equivalents at beginning of period 244 188
------ ------
Cash and cash equivalents at end of period $ 233 $ 272
====== ======
See the notes to the 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, '""the Annual Report on Form 10-K of Temple-Inland Inc. (the
"Company") for the fiscal year ended January 2, 1999.
The consolidated financial statements include the accounts of the
Company and all subsidiaries in which the Company has more than a
50 percent equity ownership. 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 (Temple-Inland Inc.) summarized financial
statements include the accounts of the Company 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 method.
The Financial Services Group summarized financial statements
include savings bank, mortgage banking, real estate development
activities and insurance operations.
In July 1999, the Financial Accounting Standards Board (FASB)
delayed the effective date of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, to fiscal years beginning after June 15, 2000.
This statement will require derivative positions to be recognized
in the balance sheet at fair value. The Company presently
utilizes derivatives to manage interest rate risk and risk in its
mortgage loan production operations. The Company has not yet
determined the effect on earnings or financial position of
adopting this statement.
<PAGE>14
Effective with the beginning of 1999, the Company adopted AICPA
Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which requires
the capitalization of internal and external costs incurred during
the application development stage. All costs incurred during the
preliminary project stage and post-implementation stage are to be
expensed as incurred. The adoption of this statement did not have
a material effect on the Company's earnings or financial position.
NOTE B - EARNINGS PER SHARE
Denominators used in computing earnings per share are as follows:
Second First Six
Quarter Months
1999 1998 1999 1998
(in millions)
Denominator for basic earnings per
share
Weighted average common shares
outstanding 55.8 55.8 55.7 55.9
Dilutive effect of stock options .3 .2 .3 .2
---- ---- ---- ----
Denominator for diluted earnings per
share 56.1 56.0 56.0 56.1
==== ==== ==== ====
NOTE C - COMPREHENSIVE INCOME
Comprehensive income is as follows:
Second First Six
Quarter Months
1999 1998 1999 1998
(in millions)
Net income $41 $35 $60 $59
Other comprehensive income, net of
income taxes:
Unrealized gains (losses) on
available-for-sale securities (8) 1 (9) 6
Foreign currency translation
adjustments - - 1 -
Minimum pension liability adjustments - - - (1)
--- --- --- ---
Other comprehensive income (8) 1 (8) 5
--- --- --- ---
Comprehensive income $33 $36 $52 $64
=== === === ===
NOTE D - SEGMENT INFORMATION
The Company has three reportable segments: paper, building
products, and financial services. The paper segment manufactures
corrugated packaging and bleached paperboard products. The
<PAGE>15
building products segment manufactures a variety of building
materials and manages the Company's timber resources. The
financial services segment operates a savings bank and also
engages in mortgage banking, real estate development, and
insurance activities.
These segments are managed as separate business units. The
Company evaluates performance based on operating income before
special charges, corporate expenses, and income taxes. Corporate
interest expense is not allocated to business segments. The
accounting policies of the segments are the same as those
described in the accounting policy notes to the financial
statements. Corporate and other includes corporate expenses and
special charges.
Building Financial Corporate
Paper Products Services and Other Total
(in millions)
For the second quarter 1999
- ---------------------------
Revenues from external
customers 537 198 270 - 1,005
Operating income 17 49 34 (8) 92
Financial services, net
interest income - - 68 - 68
- -----------------------------------------------------------------------
For the second quarter 1998
- ---------------------------
Revenues from external
customers 515 156 269 - 940
Operating income 18 32 41 (7) 84
Financial Services, net
interest income - - 57 - 57
- -----------------------------------------------------------------------
For the first six months or
at second quarter end 1999
- ---------------------------
Revenues from external
customers 1,050 370 541 - 1,961
Operating income 22 83 61 (15) 151
Financial Services, net
interest income - - 133 - 133
Total assets 2,440 1,074 13,674 71 17,259
- -----------------------------------------------------------------------
For the first six months or
at second quarter end 1998
- ---------------------------
Revenues from external
customers 1,043 310 532 - 1,885
Operating income 28 62 78 (14) 154
Financial services, net
interest income - - 117 - 117
Total assets 2,577 922 11,125 66 14,690
- -----------------------------------------------------------------------
NOTE E - SPECIAL CHARGE
During the fourth quarter of 1998, the Company recorded a special
charge of $47.4 million, which included $13.0 million related to
work force reductions in the Paper Group, $24.5 million related to
asset impairments, principally related to the Paper Group's South
American operation, and $9.9 million of asset impairments related
to the Building Products Group. Of the $13.0 million charge for
<PAGE>16
work force reductions, which included termination benefits
associated with the early retirement offer and severance amounts
for the involuntary terminations, $12.4 million was utilized
during the first six months of 1999. The remaining accrual amount
of $ .6 million is expected to be fully utilized in year 2000.
During the second quarter of 1999, the Company sold its Argentine
operation for $12.0 million (of which $1.0 million was received in
cash and $11.0 million in promissory notes), which approximated
the carrying value of these assets.
NOTE F - CONTINGENCIES
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.
<PAGE>17
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:
Second Quarter First Six Months
1999 1998 1999 1998
(in millions)
Revenues
Paper $ 537 $ 515 $ 1,050 $ 1,043
Building products 198 156 370 310
------ ------ ------ ------
Manufacturing net sales 735 671 1,420 1,353
Financial services 270 269 541 532
------ ------ ------ ------
Total revenues $ 1,005 $ 940 $ 1,961 $ 1,885
====== ====== ====== ======
Income
Paper $ 17 $ 18 $ 22 $ 28
Building products 49 32 83 62
------ ------ ------ ------
66 50 105 90
Financial services 34 41 61 78
------ ------ ------ ------
Segment operating income 100 91 166 168
Corporate expenses (8) (7) (15) (14)
Parent company interest - net (30) (27) (59) (53)
Other - net 3 2 6 3
------ ------ ------ ------
Income before taxes and
accounting change 65 59 98 104
Taxes on income 24 24 38 42
------ ------ ------ ------
Net income before accounting
change 41 35 60 62
Cumulative effect of accounting
change, net of tax - - - (3)
------ ------ ------ ------
Net income $ 41 $ 35 $ 60 $ 59
====== ====== ====== ======
Second quarter 1999 vs. Second quarter 1998
Second quarter earnings for 1999 totaled $41 million, or $0.74 per
diluted share, compared with second quarter 1998 earnings of $35
million, or $0.62 per diluted share. Revenues for the period were
$1 billion, compared with $940 million in the second quarter of
1998.
The Paper Group reported operating earnings of $17 million
compared with $18 million of operating earnings in last year's
second quarter. Corrugated container prices were relatively flat
compared with the second quarter of 1998 but were up approximately
4 percent versus this year's first quarter. Shipment volumes of
corrugated containers were up approximately 3 percent compared
with the second quarter of last year. Prices for old corrugated
containers (OCC), which supply approximately 45 percent of the
total fiber needs of the containerboard mills, began to rise in
<PAGE>18
the quarter and this trend has continued into the third quarter.
Prices for some grades of bleached paperboard began to rise late
in the quarter, but the average paper price per ton remained below
second quarter 1998 prices.
The Building Products Group reported operating income of $49
million compared with $32 million in last year's second quarter.
The group achieved this all-time record earnings despite start-up
losses for its three new medium density fiberboard facilities and
its fiber cement operation. Second quarter sales averages for all
product categories were above the same period last year. These
improved averages were attributable to price increases within the
market segments, and a more profitable product mix, particularly
in particleboard and plywood.
The Financial Services Group recorded operating earnings for the
quarter of $34 million compared with $41 million in the second
quarter of 1998. Net interest income increased by $2 million, the
net effect of an $11 million increase in income (due to higher
loan volumes) and a $9 million increase in the provision for loan
loss. The increase in provision for loan loss is due to
additional reserves required due to loan growth, the change in
asset mix of the bank and required reserves on the mortgage
warehouse portfolio. Noninterest income for the second quarter
decreased by $12 million due primarily to a decrease in loan
production volumes of $8 million and a $4 million decrease in
other noninterest income. Noninterest expense decreased by $4
million from second quarter 1998 due primarily to decreases in
amortization and real estate expenses.
Net interest expense of the Company increased to $30 million in
the second quarter of 1999 compared with $27 million in the second
quarter of last year. The increase is primarily due to higher
levels of debt outstanding.
First half of 1999 vs. First half of 1998
Earnings for the first six months of 1999 were $60 million, or
$1.07 per diluted share compared with $62 million, or $1.09 per
diluted share, before effect of accounting change. Revenues of
$2.0 billion were up four percent from the 1998 first half
revenues of $1.9 billion.
The Paper Group earned $22 million compared with operating income
of $28 million in the first six months of 1998. The decline from
last year's first six months earnings was due to lower prices for
corrugated containers and bleached paperboard. Corrugated
container prices were 2 percent lower than 1998 prices and
bleached paperboard prices were 4 percent lower than 1998 average
prices. However, prices for some grades of bleached paperboard
began to rise late in June, so the full effect will not be
realized until the third quarter. Prices for corrugated containers
should continue to improve in the third quarter.
<PAGE>19
The Building Products Group earned $83 million in the first half
of 1999 compared with $62 million in the first half of last year.
Revenues for the first six months of 1999 were $370 million, up
$60 million from last year's first six months revenues. Sales
averages across all product lines for the first six months of 1999
were higher than last year. Operating losses for the group's
three new medium density fiberboard facilities and its fiber
cement operation had a negative effect on earnings in first half
of 1999.
The Financial Services Group recorded operating earnings of $61
million in the first six months of 1999, compared with $78 million
in the first six months of 1998. Net interest income decreased by
$1 million from the net effect of a $16 million increase in income
due to higher loan volumes, and a $17 million increase in the
provision for loan loss. Noninterest income decreased by $17
million due primarily to decreased loan servicing revenues of $5
million, decreased loan origination income of $3 million,
decreased gains on sale of $3 million by the real estate group in
1999 compared with 1998 and decreased gains of $2 million on sales
of acquired property by the bank in 1999. Noninterest expense
decreased by $2 million in 1999 compared with 1998.
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 first six months of 1999, the Company's debt increased
by $284 million, mainly through issuance of $300 million of medium-
term notes, net decrease in other notes by $7 million, and
payments of $9 million in commercial paper and borrowings under
bank credit agreements. The acquisition of HF Bancorp Inc., for a
cash purchase price of $119 million in the second quarter of 1999,
resulted in an increase in total assets of the Financial Services
Group to $13.7 billion at June 1999. Loans acquired totaling
approximately $600 million as well as the continued growth of the
loan portfolio were the significant components of the increase.
Total deposits increased to $8.7 billion at quarter end June 1999
due primarily to the deposits acquired of approximately $900
million and deposit campaigns by Guaranty Federal Bank, F.S.B.
("Guaranty") during the first six months. A capital contribution
of $120 million to Guaranty in the first quarter provided
additional capital to maintain 'Guaranty's regulatory capital
requirements. The Company contributed $119 million to Guaranty in
the second quarter for the acquisition of HF Bancorp Inc.
Guaranty continues to meet all three regulatory capital
requirements.
<PAGE>20
Year 2000 Compliance
Year 2000 projects are 95 percent completed and no disruption to
operations is expected. Critical systems have been remediated,
tested, and prepared for production status in the new millennium.
Business and administrative systems supporting all lines of
business are ready for Year 2000. Predominately, these are
purchased software solutions, and the vendor is responsible for
compliance processing. Year 2000 upgrades have been installed with
no date exceptions.
The Company has not found any critical date dependencies in its
manufacturing operations that would inhibit the ability to
manufacture products. Some processes will require manual date
entry at appropriate time to reflect correct date of manufacture
but these have no control of the production process.
The Company continues to review the Year 2000 readiness of its
major suppliers and any potential impact to the Company. No major
problems have risen that would have an impact upon business
operations. Contingency plans are being developed to prepare for
any major suppliers' inability to provide required products and
services. These plans include building inventories of critical
supplies and identifying alternate sources.
Year 2000 readiness for the operations in the Financial Services
Group is subject to review and oversight of various regulatory
agencies. All critical systems have completed testing and
implementation was completed by June 30, 1999. The group is
confident all regulatory requirements will be met and that any
Year 2000 disruption is unlikely. If any disruption that would
significantly affect operations or customer service were to occur,
the group would implement its disaster recovery contingency plans,
which activate backup processing and business support functions at
designated recovery sights.
Year 2000 Project expenditures to date for all lines of business
total $9.2 million.
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 are 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 the Company 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 the Company
and its subsidiaries; the availability and price of raw materials
used by the Company and its subsidiaries; competitive actions by
<PAGE>21
other companies; changes in laws or regulations; and other
factors, many of which are beyond the control of the Company and
its subsidiaries.
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 pretax income of immediate,
parallel, and sustained shifts in interest risks for the
subsequent 12-month period at the end of the second quarter of
1999 with comparative information at year end 1998:
Increase / (Decrease) in Income
before Taxes
( in millions)
Second Quarter Year End
Change in Interest Rates 1999 1998
+2% $ (27) $ (26)
+1% $ ( 8) $ ( 1)
0% $ - $ -
-1% $ ( 4) $ 10
-2% $ 5 $ 29
The fair value of the Financial Services Group's mortgage
servicing rights is also affected by changes in interest rates.
The Company estimates that a one percent decline in interest rates
from quarter end levels would decrease the fair value of the
mortgage servicing rights by approximately $52 million or
approximately 17 percent.
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 F to Notes to
Consolidated Financial Statements in Part I of this
report is incorporated by reference thereto.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
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 three months ended July 3,
1999, the Company did not file a current report on Form 8-K.
<PAGE>23
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: August 11, 1999 By /s/ David H. Dolben
David H. Dolben
Vice President and
Chief Accounting Officer
<PAGE>24
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 25
<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> 6-MOS
<FISCAL-YEAR-END> JAN-1-2000
<PERIOD-END> JUL-03-1999
<CASH> 233
<SECURITIES> 0
<RECEIVABLES> 391
<ALLOWANCES> 0
<INVENTORY> 305
<CURRENT-ASSETS> 0
<PP&E> 2,888
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,259
<CURRENT-LIABILITIES> 0
<BONDS> 2,084
0
0
<COMMON> 61
<OTHER-SE> 1,964
<TOTAL-LIABILITY-AND-EQUITY> 17,259
<SALES> 1,420
<TOTAL-REVENUES> 1,961
<CGS> 1,330
<TOTAL-COSTS> 1,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 98
<INCOME-TAX> 38
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.07
</TABLE>
