Attached files
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EXCEL - IDEA: XBRL DOCUMENT - TEMPLE INLAND INC | Financial_Report.xls |
EX-32.1 - CEO 1350 CERTIFICATION - TEMPLE INLAND INC | tin1q201110qex321.htm |
EX-32.2 - CFO 1350 CERTIFICATION - TEMPLE INLAND INC | tin1q201110qex322.htm |
EX-31.1 - CEO 302 CERTIFICATION - TEMPLE INLAND INC | tin1q201110qex311.htm |
EX-31.2 - CFO 302 CERTIFICATION - TEMPLE INLAND INC | tin1q201110qex312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
(Mark One)
|
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period
Ended _______ April 2, 2011 _______
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OR
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¨
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period
From ____________ to ____________
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Commission File Number: 001-08634
Temple-Inland Inc.
(Exact name of registrant as specified in its charter)
Delaware
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75-1903917
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification Number)
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1300 MoPac Expressway South, 3rd Floor, 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. þ Yes¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
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Accelerated filer ¨
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Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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Smaller reporting company ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class
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Number of common shares outstanding
as of April 2, 2011
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|||
Common Stock (par value $1.00 per share)
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108,313,386 |
Page 1 of 35
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The Exhibit Index is page 29.
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Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Balance Sheets
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3
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Consolidated Statements of Income
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4
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Consolidated Statements of Cash Flows
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5
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Notes to the Consolidated Financial Statements
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6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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14
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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25
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Item 4. Controls and Procedures
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25
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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26
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Item 1A. Risk Factors
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26
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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26
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Item 3. Defaults Upon Senior Securities
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26
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Item 4. (Removed and Reserved)
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26
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Item 5. Other Information
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26
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Item 6. Exhibits
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27
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SIGNATURES
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28
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2
PART I. FINANCIAL INFORMATION
Item 1.
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Financial Statements
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TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)First Quarter-End 2011
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Year-End 2010
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|||||||
(In millions)
|
||||||||
ASSETS
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||||||||
Current Assets
|
||||||||
Cash and cash equivalents
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$ | 24 | $ | 28 | ||||
Trade receivables, net of allowance for doubtful accounts of $16 in 2011 and 2010
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491 | 471 | ||||||
Inventories:
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||||||||
Work in process and finished goods
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105 | 90 | ||||||
Raw materials
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227 | 253 | ||||||
Supplies and other
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148 | 142 | ||||||
Total inventories
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480 | 485 | ||||||
Deferred tax asset
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119 | 108 | ||||||
Income taxes receivable
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3 | — | ||||||
Prepaid expenses and other
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40 | 44 | ||||||
Total current assets
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1,157 | 1,136 | ||||||
Property and Equipment
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||||||||
Land and buildings
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686 | 684 | ||||||
Machinery and equipment
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3,662 | 3,640 | ||||||
Construction in progress
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102 | 74 | ||||||
Less allowances for depreciation
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(2,807 | ) | (2,771 | ) | ||||
Total property and equipment
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1,643 | 1,627 | ||||||
Financial Assets of Special Purpose Entities
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2,474 | 2,475 | ||||||
Goodwill
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394 | 394 | ||||||
Other Assets
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274 | 277 | ||||||
TOTAL ASSETS
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$ | 5,942 | $ | 5,909 | ||||
LIABILITIES
|
||||||||
Current Liabilities
|
||||||||
Accounts payable
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$ | 199 | $ | 219 | ||||
Accrued employee compensation and benefits
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100 | 109 | ||||||
Accrued interest
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12 | 17 | ||||||
Accrued property taxes
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10 | 13 | ||||||
Other accrued expenses
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138 | 134 | ||||||
Current portion of long-term debt
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— | — | ||||||
Current portion of pension and postretirement benefits
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16 | 16 | ||||||
Total current liabilities
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475 | 508 | ||||||
Long-Term Debt
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761 | 718 | ||||||
Nonrecourse Financial Liabilities of Special Purpose Entities
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2,140 | 2,140 | ||||||
Deferred Tax Liability
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719 | 700 | ||||||
Liability for Pension Benefits
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315 | 308 | ||||||
Liability for Postretirement Benefits
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110 | 110 | ||||||
Other Long-Term Liabilities
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384 | 404 | ||||||
TOTAL LIABILITIES
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4,904 | 4,888 | ||||||
SHAREHOLDERS’ EQUITY
|
||||||||
Temple-Inland Inc. Shareholders’ Equity
|
||||||||
Preferred stock — par value $1 per share: authorized 25,000,000 shares; none issued
|
— | — | ||||||
Common stock — par value $1 per share: authorized 200,000,000 shares; issued 123,605,344 shares in 2011 and 2010, including shares held in the treasury
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124 | 124 | ||||||
Additional paid-in capital
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420 | 426 | ||||||
Accumulated other comprehensive loss
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(250 | ) | (257 | ) | ||||
Retained earnings
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1,222 | 1,220 | ||||||
Cost of shares held in the treasury: 15,291,958 shares in 2011 and 15,654,157 shares in 2010
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(569 | ) | (584 | ) | ||||
Total Temple-Inland Inc. shareholders’ equity
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947 | 929 | ||||||
Noncontrolling Interest of Special Purpose Entities
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91 | 92 | ||||||
TOTAL SHAREHOLDERS’ EQUITY
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1,038 | 1,021 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ | 5,942 | $ | 5,909 |
Please read the notes to consolidated financial statements.
3
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(In millions,
except per share)
|
||||||||
NET REVENUES
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$ | 995 | $ | 905 | ||||
COSTS AND EXPENSES
|
||||||||
Cost of sales
|
(860 | ) | (825 | ) | ||||
Selling
|
(30 | ) | (27 | ) | ||||
General and administrative
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(49 | ) | (39 | ) | ||||
Other operating income (expense)
|
(9 | ) | (1 | ) | ||||
(948 | ) | (892 | ) | |||||
OPERATING INCOME
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47 | 13 | ||||||
Other non-operating income (expense)
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(4 | ) | –– | |||||
Interest income on financial assets of special purpose entities
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— | 1 | ||||||
Interest expense on nonrecourse financial liabilities of special purpose entities
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(5 | ) | (4 | ) | ||||
Interest expense on debt
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(12 | ) | (13 | ) | ||||
INCOME (LOSS) BEFORE TAXES
|
26 | (3 | ) | |||||
Income tax expense
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(11 | ) | (2 | ) | ||||
NET INCOME (LOSS)
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15 | (5 | ) | |||||
Net loss attributable to noncontrolling interest of special purpose entities
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1 | 1 | ||||||
NET INCOME (LOSS) ATTRIBUTABLE TO TEMPLE-INLAND INC.
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$ | 16 | $ | (4 | ) | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
||||||||
Basic
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108.3 | 107.7 | ||||||
Diluted
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110.3 | 109.2 | ||||||
EARNINGS PER SHARE
|
||||||||
Basic
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$ | 0.15 | $ | (0.04 | ) | |||
Diluted
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$ | 0.15 | $ | (0.04 | ) | |||
DIVIDENDS PER SHARE
|
$ | 0.13 | $ | 0.11 |
Please read the notes to consolidated financial statements.
4
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter
|
||||||||
2011
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2010
|
|||||||
(In millions)
|
||||||||
CASH PROVIDED BY (USED FOR) OPERATIONS
|
||||||||
Net income (loss)
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$
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15
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$
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(5
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)
|
|||
Adjustments:
|
||||||||
Depreciation and amortization
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48
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48
|
||||||
Asset impairment charges
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1
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8
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||||||
Loss related to purchase and retirement of long-term debt
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4
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––
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||||||
Non-cash share-based and long-term incentive compensation
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19
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6
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||||||
Cash payment for share-based awards settled
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(17
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)
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(13
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)
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||||
Non-cash pension and postretirement expense
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17
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17
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||||||
Cash contribution to pension and postretirement plans
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(3
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)
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(3
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)
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||||
Deferred income taxes
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6
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––
|
||||||
Other
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3
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(6
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)
|
|||||
Changes in:
|
||||||||
Receivables
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(19
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)
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(53
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)
|
||||
Inventories
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6
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(17
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)
|
|||||
Accounts payable and accrued expenses
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(46
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)
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1
|
|||||
Prepaid expenses and other
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1
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18
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||||||
35
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1
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|||||||
CASH PROVIDED BY (USED FOR) INVESTING
|
||||||||
Capital expenditures
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(62
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)
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(33
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)
|
||||
Other
|
(13
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)
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(8
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)
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||||
(75
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)
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(41
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)
|
|||||
CASH PROVIDED BY (USED FOR) FINANCING
|
||||||||
Payments of debt
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(54
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)
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––
|
|||||
Borrowings under accounts receivable securitization facility, net
|
47
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16
|
||||||
Borrowings under revolving credit facility, net
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46
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38
|
||||||
Fees related to special purpose entities
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—
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(3
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)
|
|||||
Changes in book overdrafts
|
5
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(10
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)
|
|||||
Cash dividends paid to shareholders
|
(14
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)
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(11
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)
|
||||
Exercise of stock options
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4
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2
|
||||||
Tax benefit on share-based compensation
|
1
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—
|
||||||
35
|
32
|
|||||||
Effect of exchange rate changes on cash and cash equivalents
|
1
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1
|
||||||
Net decrease in cash and cash equivalents
|
(4
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)
|
(7
|
)
|
||||
Cash and cash equivalents at beginning of period
|
28
|
36
|
||||||
Cash and cash equivalents at end of period
|
$
|
24
|
$
|
29
|
Please read the notes to consolidated financial statements.
5
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 – Basis of Presentation
Our consolidated financial statements include the accounts of Temple-Inland Inc., and its subsidiaries and special purpose and variable interest entities of which we are the primary beneficiary. We account for our investment in other ventures under the equity method.
We prepare our unaudited interim financial statements in accordance with generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. These adjustments are normal recurring accruals, except as noted. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.
Note 2 – Accounting Pronouncements
We have evaluated all the recently issued accounting pronouncements through the filing date of these financial statements and believe that none of these recent accounting pronouncements will have a material effect on our earnings or financial position.
Note 3 – Employee Benefit Plans
Defined benefit and postretirement benefit expense for first quarter consists of:
Defined Benefits
|
Postretirement
|
||||||||||||||||||
Qualified
|
Supplemental
|
Total
|
Benefits
|
||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
(In millions)
|
|||||||||||||||||||
Service costs – benefits earned during the period
|
$
|
6
|
$
|
6
|
$
|
1
|
$
|
––
|
$
|
7
|
$
|
66
|
$
|
––
|
$
|
––
|
|||
Interest cost on projected benefit obligation
|
20
|
20
|
––
|
1
|
20
|
21
|
2
|
2
|
|||||||||||
Expected return on plan assets
|
(19
|
)
|
(19
|
)
|
––
|
––
|
(19
|
)
|
(19
|
)
|
––
|
––
|
|||||||
Amortization of prior service costs
|
1
|
1
|
1
|
1
|
2
|
2
|
––
|
––
|
|||||||||||
Amortization of actuarial net loss
|
5
|
5
|
––
|
––
|
5
|
5
|
––
|
––
|
|||||||||||
Defined benefit expense
|
$
|
13
|
$
|
13
|
$
|
2
|
$
|
2
|
$
|
15
|
$
|
15
|
$
|
2
|
$
|
2
|
We did not make any contributions to our defined benefit plan in first quarter 2011 or first quarter 2010.
Note 4 – Share-Based and Long-Term Incentive Compensation
We have shareholder approved share-based compensation plans that permit awards to key employees and non-employee directors in the form of cash-settled restricted or performance stock units, stock-settled restricted stock units, or options to purchase shares of our common stock. We also have long-term incentives for key employees in the form of fixed value cash awards that vest over multiple years. We generally grant awards annually in February, and we use treasury stock to fulfill awards settled in common stock and stock option exercises.
6
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Share-based and long-term incentive compensation expense consists of:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(In millions)
|
||||||||
Cash-settled restricted or performance stock units
|
$ | 14 | $ | 4 | ||||
Stock-settled restricted stock units
|
1 | –– | ||||||
Stock options
|
3 | 1 | ||||||
Total share-based compensation expense
|
18 | 5 | ||||||
Fixed value cash awards
|
1 | 1 | ||||||
Total share-based and long-term incentive compensation expense
|
$ | 19 | $ | 6 |
Share-based and long-term incentive compensation expense is included in:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(In millions)
|
||||||||
Cost of sales
|
$ | 2 | $ | 1 | ||||
Selling expense
|
1 | –– | ||||||
General and administrative expense
|
16 | 5 | ||||||
Total share-based and long-term incentive compensation expense
|
$ | 19 | $ | 6 |
The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $4 million in first quarter 2011 and $1 million in first quarter 2010. Because options and share-settled awards issued in first quarter 2010 were subject to shareholder approval no expense was recognized until May 2010 when shareholder approval was received.
Unrecognized share-based and long-term incentive compensation for all awards not vested was $50 million at first quarter-end 2011. We expect to recognize this cost over a weighted average period of two years.
Cash-settled restricted or performance stock units
Cash-settled restricted or performance stock units generally have a three-year term and vest after three years from the date of grant or the attainment of stated ROI-based performance goals, generally measured over a three-year period.
A summary of activity for first quarter 2011 follows:
Units
|
Weighted Average Grant Date Fair Value Per Share
|
Aggregate Current Value
|
||||||
(In thousands)
|
(In millions)
|
|||||||
Not vested beginning of year
|
2,627
|
$ 12
|
||||||
Granted
|
417
|
24
|
||||||
Vested and settled
|
(651)
|
19
|
||||||
Forfeited
|
(6)
|
17
|
||||||
Not vested at first quarter-end 2011
|
2,387
|
12
|
$
|
57
|
||||
Not vested units at first quarter-end 2011 subject to:
|
||||||||
Time vesting requirements
|
409
|
$
|
10
|
|||||
Performance requirements
|
1,978
|
47
|
||||||
2,387
|
$
|
57
|
7
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Unrecognized share-based compensation expense related to non-vested cash-settled restricted and performance units was $24 million at first quarter-end 2011 share price of $24 per share. We expect to recognize this cost over a weighted average period of two years. The fair value of awards settled in cash was $17 million in first quarter 2011 and $13 million in first quarter 2010. The fair value of units vested and to be settled in cash, including accrued dividends of $2 million, was $35 million at first quarter-end 2011, of which $26 million is included in other current liabilities and $9 million in long-term liabilities; and $40 million at year-end 2010, of which $14 million was included in other current liabilities and $26 million in long-term liabilities.
Stock-settled restricted stock units
Stock-settled restricted stock units vest after three years from the date of grant upon attainment of stated ROI-based performance goals. There is no accelerated vesting upon retirement for these awards and cumulative dividends on these awards will be paid at the time of vesting if the stated ROI-based performance goals are met.
A summary of activity for first quarter 2011 follows:
Stock-Settled Units
|
Weighted Average
Grant Date Fair Value Per Share
|
Aggregate Current Value
|
|||||||
(In thousands)
|
(In millions)
|
||||||||
Not vested beginning of year
|
369 | $ | 20 | ||||||
Granted
|
241 | 24 | |||||||
Vested and settled
|
–– | –– | |||||||
Forfeited
|
–– | –– | |||||||
Not vested at first quarter-end 2011
|
610 | 21 | $15 |
Unrecognized share-based compensation expense related to non-vested stock-settled restricted units was $11 million at first quarter-end 2011. We expect to recognize this cost over a weighted average period of two years.
Stock options
Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated vesting upon retirement, death, disability, or if there is a change in control. Options are granted with an option price equal to the market value of common stock on the date of grant.
A summary of activity for first quarter 2011 follows:
Shares
|
Weighted Average Exercise Price Per Share
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value (Current value less exercise price)
|
|||||||||||||
(In thousands)
|
(In years)
|
(In millions)
|
||||||||||||||
Outstanding beginning of year
|
7,416
|
$ 15
|
||||||||||||||
Granted
|
431
|
24
|
||||||||||||||
Exercised
|
(445
|
)
|
14
|
|||||||||||||
Forfeited
|
(22
|
)
|
13
|
|||||||||||||
Outstanding at first quarter-end 2011
|
7,380
|
16
|
6
|
$
|
59
|
|||||||||||
Exercisable at first quarter-end 2011
|
5,272
|
16
|
6
|
$
|
40
|
8
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
We estimated the fair value of our options granted using the Black-Scholes-Merton option-pricing model and the following assumptions:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
Expected dividend yield
|
2.2 | % | 3.2 | % | ||||
Expected stock price volatility
|
65.0 | % | 66.6 | % | ||||
Risk-free interest rate
|
3.3 | % | 3.2 | % | ||||
Expected life of options (in years)
|
8 | 8 | ||||||
Weighted average estimated fair value of options granted
|
$ | 13.40 | $ | 10.23 |
Unrecognized share-based compensation expense related to non-vested stock options awards was $8 million at first quarter-end 2011. We expect to recognize this cost over a weighted average period of three years.
Fixed Value Cash Awards
Long-term incentive compensation expense is related to $18 million of fixed value cash awards that were granted to employees in February and August 2009. These awards are not tied to our stock price. The fixed value cash awards vest after three years and provide for accelerated or continued vesting upon retirement, death, disability, or if there is a change in control.
Unrecognized long-term incentive compensation expense related to fixed value cash awards was $7 million at first quarter-end 2011. We expect to recognize this cost over a weighted average period of three years. Accrued long-term incentive compensation at first quarter-end 2011 was $11 million, of which $9 million is included in other current liabilities and $2 million in long-term liabilities. At year-end 2010, accrued long-term incentive compensation included in long-term liabilities was $10 million.
Note 5 – Other Operating and Non-operating Income (Expense)
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(In millions)
|
||||||||
Costs and asset impairments, primarily related to box plant transformation
|
$ | (9 | ) | $ | (10 | ) | ||
Alternative fuel mixture tax credits
|
–– | 10 | ||||||
Gain (loss) on sale or retirement of operating property and equipment
|
–– | (1 | ) | |||||
Equity in earnings of joint ventures
|
–– | –– | ||||||
Other operating income (expense)
|
$ | (9 | ) | $ | (1 | ) |
In connection with the second phase of our box plant transformation, in first quarter 2011 we announced the closure of our Northlake, Illinois box plant, which is expected to close in second quarter 2011. In first quarter 2011, we recognized transformation related costs of $7 million, primarily related to duplicate and incremental costs associated with production impacted by box plant transformation; asset impairment charges of $1 million; and severance costs of $1 million for about 120 employees. The accrued severance costs will be paid in second quarter 2011. First quarter 2010 transformation related costs includes asset impairment charges of $8 million and accrued severance costs of $2 million for about 200 employees. Our accruals related to our transformation activities for first quarter 2011 follows:
Beginning of year
|
$ | –– | ||
Additions related to involuntary employee terminations
|
1 | |||
Balance at first quarter-end 2011
|
$ | 1 | ||
9
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
In 2009, we generated and claimed alternative fuel mixture tax credits of $228 million, of which we recognized $218 million and provided a $10 million reserve due to an uncertainty in the tax law regarding whether a portion of the alternative fuel we used would qualify for the tax credit. In first quarter 2010, the Internal Revenue Service clarified this uncertainty allowing us to recognize all of the tax credits we claimed. As a result, we reversed the $10 million reserve established in 2009.
Other non-operating expense in first quarter 2011 consists of a $4 million loss resulting from the purchase and retirement of $50 million of our 7.875% Senior Notes due 2012.
Note 6 – Earnings Per Share
We compute earnings per share by dividing income by weighted average shares outstanding using the following:
First Quarter
|
||||||
2011
|
2010
|
|||||
(In millions)
|
||||||
Earnings for basic and diluted earnings per share:
|
||||||
Net income (loss)
|
$
|
15
|
$
|
(5
|
)
|
|
Less: Distributed and undistributed amounts allocated to participating securities
|
––
|
––
|
||||
15
|
(5
|
)
|
||||
Less: Net loss attributable to noncontrolling interest of special purpose entities
|
1
|
1
|
||||
Net income (loss) available to common shareholders
|
$
|
16
|
$
|
(4
|
)
|
|
Weighted average shares outstanding:
|
||||||
Weighted average shares outstanding — basic
|
108.3
|
107.7
|
||||
Dilutive effect of stock options
|
2.0
|
1.5
|
||||
Weighted average shares outstanding — diluted
|
110.3
|
109.2
|
Earnings per share for first quarter 2010 were based on average basic shares outstanding due to our net loss. At first quarter-end 2011 and 2010, 1,057,582 and 3,672,748 stock options outstanding held by our employees were not included in the computation of diluted earnings per share because they were anti-dilutive. In addition, in first quarter 2010, stock options and stock-settled restricted stock units that were granted in February 2010 were not included in the computation of diluted earnings per share because these awards were subject to shareholder approval of our 2010 Incentive Plan, which was received on May 7, 2010.
Certain employees of entities we spun off in 2007 participated in our employee stock option program. Following the spin-offs, these employees retained stock option rights associated with our stock. These stock options will remain a consideration in our dilutive effect of stock options until they are exercised, cancelled or expire. Information regarding options held by employees of spun-off entities follows:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(Shares in thousands)
|
||||||||
Options held
|
421
|
502
|
||||||
Options Exercisable
|
421
|
486
|
||||||
Weighted average exercise price
|
$
|
19
|
$
|
18
|
||||
Weighted average remaining contractual term (in years)
|
4
|
5
|
At first quarter-end 2011 and 2010, 159,990 and 303,712 stock options outstanding held by employees of the spun off entities were not included in the computation of diluted earnings per share because they were anti-dilutive.
10
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 7 – Shareholders’ Equity
A summary of changes in total shareholders’ equity follows:
First Quarter
|
||||||||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||||||||
Temple-Inland Inc.
Shareholders’
Equity
|
Noncontrolling Interest
|
Total Shareholders’
Equity
|
Temple-Inland Inc.
Shareholders’
Equity
|
Noncontrolling Interest
|
Total Shareholders’
Equity
|
|||||||||||||||||||||||||
(In millions)
|
||||||||||||||||||||||||||||||
Beginning of year
|
$
|
929
|
$
|
92
|
$
|
1,021
|
$
|
794
|
$
|
92
|
$
|
886
|
||||||||||||||||||
Comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||
Net income (loss)
|
16
|
(1
|
)
|
15
|
(4
|
)
|
(1
|
)
|
(5
|
)
|
||||||||||||||||||||
Defined benefit plans
|
4
|
––
|
4
|
5
|
––
|
5
|
||||||||||||||||||||||||
Foreign currency translation adjustment
|
3
|
––
|
3
|
4
|
––
|
4
|
||||||||||||||||||||||||
Total Comprehensive Income
|
22
|
4
|
||||||||||||||||||||||||||||
Dividends paid on common stock — ($0.13 per share in 2011 and $0.11 per share in 2010)
|
(14
|
)
|
––
|
(14
|
)
|
(11
|
)
|
––
|
(11
|
)
|
||||||||||||||||||||
Share-based compensation, net of distributions
|
9
|
––
|
9
|
3
|
––
|
3
|
||||||||||||||||||||||||
Balance at first quarter-end
|
$
|
947
|
$
|
91
|
$
|
1,038
|
$
|
791
|
$
|
91
|
$
|
882
|
We issued 362,199 and 200,656 shares of common stock in first quarter 2011 and 2010 to employees exercising options and for vesting of share-settled units.
Note 8 – Segment Information
We have two business segments: corrugated packaging and building products. Corrugated packaging manufactures linerboard, corrugating medium, and white-top linerboard (collectively referred to as containerboard), which we convert into corrugated packaging, and lightweight gypsum facing paper. Building products manufactures a variety of building products.
We evaluate performance based on operating income before items not included in segments and income taxes. Items not included in segments represent items managed on a company-wide basis and include corporate general and administrative expense, share-based and long-term incentive compensation, other operating and non-operating income (expense), and interest expense. Other operating income (expense) includes gain or loss on sale of assets,
asset impairments, closure related severance costs and unusual income and expense items. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements. Intersegment sales are recorded at market prices. Intersegment sales and business support allocations are netted in costs and expenses.
11
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Corrugated Packaging
|
Building
Products
|
Items Not Included in Segments and Eliminations
|
Total
|
||||||
For First Quarter 2011 or at First Quarter-End 2011:
|
|||||||||
(In millions)
|
|||||||||
Revenues from external customers
|
$ 821
|
$ 174
|
$ ––
|
$ 995
|
|||||
Depreciation and amortization
|
37
|
10
|
1
|
48
|
|||||
Equity income from joint ventures
|
––
|
––
|
––
|
––
|
|||||
Income (loss) before taxes
|
98
|
(6
|
)
|
(66
|
)(a)
|
26
|
|||
Total assets
|
2,489
|
540
|
2,913
|
5,942
|
|||||
Investment in equity method investees and joint ventures
|
2
|
24
|
––
|
26
|
|||||
Goodwill
|
265
|
129
|
––
|
394
|
|||||
Capital expenditures
|
58
|
3
|
1
|
62
|
|||||
For First Quarter 2010 or at First Quarter-End 2010:
|
|||||||||
(In millions)
|
|||||||||
Revenues from external customers
|
$ 752
|
$ 153
|
$ ––
|
$ 905
|
|||||
Depreciation and amortization
|
35
|
11
|
2
|
48
|
|||||
Equity income from joint ventures
|
––
|
––
|
––
|
––
|
|||||
Income (loss) before taxes
|
46
|
(9
|
)
|
(40
|
)(a)
|
(3
|
)
|
||
Total assets
|
2,333
|
555
|
2,845
|
5,733
|
|||||
Investment in equity method investees and joint ventures
|
3
|
26
|
––
|
29
|
|||||
Goodwill
|
265
|
129
|
––
|
394
|
|||||
Capital expenditures
|
25
|
4
|
4
|
33
|
(a) Items not included in segments consist of:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(In millions)
|
||||||||
General and administrative expense
|
$ | (17 | ) | $ | (18 | ) | ||
Share-based and long-term incentive compensation
|
(19 | ) | (6 | ) | ||||
Other operating income (expense)
|
(9 | ) | –– | |||||
Other non-operating income (expense)
|
(4 | ) | –– | |||||
Net interest income (expense) on financial assets and nonrecourse financial liabilities of special purpose entities
|
(5 | ) | (3 | ) | ||||
Interest expense
|
(12 | ) | (13 | ) | ||||
$ | (66 | ) | $ | (40 | ) | |||
Other operating income (expense) in first quarter 2011 applied to our corrugated packaging segment.
Note 9 — Fair Values and Fair Value Measurements of Financial Instruments
Information about our fixed-rate, long-term debt that is not measured at fair value follows:
|
At First Quarter-End 2011
|
At Year-End 2010
|
|
||||||||||||||
|
Carrying Value
|
Fair Value
|
Carrying Value
|
Fair Value
|
Valuation Technique
|
||||||||||||
(In millions)
|
|||||||||||||||||
Financial Liabilities
|
|||||||||||||||||
Fixed rate, long-term debt
|
$ | 490 | $ | 526 | $ | 540 | $ | 577 |
Level 2 - Market Approach
|
Differences between carrying value and fair value are primarily due to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to subsequent movements in interest rates. We excluded financial instruments from the table that are either carried at fair value or have fair values that approximate their carrying amount due to their short-term nature or variable interest rates.
12
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
Note 10 – Contingencies and Other
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. Expenses related to litigation are included in operating income.
On September 9, 2010, we were one of eight containerboard producers named as defendants in a class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v.Packaging Corp. of America (N.D. Ill.). The complaint alleges that the defendants, beginning in August 2005, conspired to limit the supply and thereby increase prices of containerboard products. The alleged class is all persons who purchased containerboard products directly from any defendant for use or delivery in the United States during the period August 2005 to November 2010. The complaint seeks to recover an unspecified amount of treble actual damages and attorney’s fees on behalf of the purported class. Four similar complaints were filed and have been consolidated in the Northern District of Illinois. We strongly dispute the allegations made against us and intend to defend vigorously against this litigation. However, because this action is in its preliminary stages, we are unable to predict an outcome or estimate a range of reasonably possible loss. There were no significant changes to the status of this litigation in first quarter 2011.
In addition, in 2010 we closed our Phoenix, Arizona box plant. Certain of the plant’s employees participated in a multi-employer pension plan. We may incur a claim for additional contributions due to the plan’s unfunded pension obligations. At this time we are unable to predict if such a claim will be made and if so, the amount that might be claimed.
We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible however that charges related to these matters could be significant to our results or cash flows in any one accounting period.
Note 11 – Subsequent Event
On May 6, 2011, our Board of Directors declared a regular quarterly dividend of $0.13 per share payable on June 15, 2011.
13
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” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. A variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:
·
|
general economic, market or business conditions
|
·
|
the opportunities (or lack thereof) that may be presented to us and that we may pursue
|
·
|
fluctuations in costs and expenses including the costs of raw materials, purchased energy, and freight
|
·
|
changes in interest rates
|
·
|
demand for new housing
|
·
|
accuracy of accounting assumptions related to impaired assets, pension and postretirement costs, contingency reserves, and income taxes
|
·
|
competitive actions by other companies
|
·
|
changes in laws or regulations
|
·
|
our ability to execute certain strategic and business improvement initiatives
|
·
|
the accuracy of certain judgments and estimates concerning the integration of acquired operations
|
·
|
other factors, many of which are beyond our control
|
Our actual results, performance, or achievement probably will differ from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on our results of operations or financial condition. In view of these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we expressly disclaim any obligation to publicly revise any forward-looking statements contained in this report to reflect the occurrence of events after the date of this report.
Non-GAAP Financial Measure
Return on investment (ROI) is an important internal measure for us because it is a key component of our evaluation of overall performance and the performance of our business segments. Studies have shown that there is a direct correlation between shareholder value and ROI and that shareholder value is created when ROI exceeds the cost of capital. ROI allows us to evaluate our performance on a consistent basis as the amount we earn relative to the amount invested in our business segments. A significant portion of senior management’s compensation is based on achieving ROI targets.
In evaluating overall performance, we define ROI as total segment operating income, less general and administrative expense and share-based and long-term incentive compensation not included in segments, divided by total assets, less certain assets and certain current liabilities. We do not believe there is a comparable GAAP financial measure to our definition of ROI. The reconciliation of our ROI calculation to amounts reported under GAAP is included in a later section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Despite its importance to us, ROI is a non-GAAP financial measure that has no standardized definition and as a result may not be comparable with other companies’ measures using the same or similar terms and should be considered in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. We encourage you to read our consolidated financial statements in their entirety and not to rely on any single financial measure.
14
Accounting Policies
Critical Accounting Estimates
In first quarter 2011, there were no changes in our critical accounting estimates from those we disclosed in our Annual Report on Form 10-K for the year 2010.
New Accounting Pronouncements
We have evaluated all the recently issued accounting pronouncements through the filing date of these financial statements and believe that none of these recent accounting pronouncements will have a material effect on our earnings or financial position.
Box Plant Transformation II
In February 2010, we announced the second phase of our effort to further reduce the cost structure of our box plant system, “Box Plant Transformation II.” We anticipate we will complete Box Plant Transformation II in 2012, and it will result in the closure of up to 12 box plants and the elimination of as many as 900 employee positions. The capital investment for Box Plant Transformation II is estimated to be about $250 million over 2010 - 2012, which we will likely fund from operations or borrowings under our committed credit agreements.
The initial steps in effecting Box Plant Transformation II in 2010 were closing our Santa Fe Springs, California sheet plant and our Phoenix, Arizona; Evansville, Indiana; and Scranton, Pennsylvania box plants. In 2010, we announced we would close our Carol Stream, Illinois box plant and, in first quarter 2011, we announced we would close our Northlake, Illinois box plant. Both of these closures are expected to occur in second quarter 2011. In first quarter 2011, we recognized non-cash asset impairment charges of $1 million; accrued severance costs of $1 million for about 120 employees; and other transformation related costs of $7 million, primarily related to duplicate and incremental costs associated with production impacted by box plant transformation. As we continue to refine and implement Box Plant Transformation II, it is likely we will incur additional asset impairments, severance and other costs, which could be significant.
15
Results of Operations for First Quarter 2011 and 2010
Summary
We manage our operations through two business segments: corrugated packaging and building products. A summary of the results of operations by business segment follows:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(In millions,
except per share)
|
||||||||
Revenues
|
||||||||
Corrugated packaging
|
$
|
821
|
$
|
752
|
||||
Building products
|
174
|
153
|
||||||
Total revenues
|
$
|
995
|
$
|
905
|
||||
Segment operating income
|
||||||||
Corrugated packaging
|
$
|
98
|
$
|
46
|
||||
Building products
|
(6
|
)
|
(9
|
)
|
||||
Total segment operating income
|
92
|
37
|
||||||
Items not included in segments
|
||||||||
General and administrative expense
|
(17
|
)
|
(18
|
)
|
||||
Share-based and long-term incentive compensation
|
(19
|
)
|
(6
|
)
|
||||
Other operating income (expense)
|
(9
|
)
|
––
|
|||||
Other non-operating income (expense)
|
(4
|
)
|
––
|
|||||
Net interest income (expense) on financial assets and nonrecourse financial liabilities of special purpose entities
|
(5
|
)
|
(3
|
)
|
||||
Interest expense on debt
|
(12
|
)
|
(13
|
)
|
||||
Income (loss) before taxes
|
26
|
(3
|
)
|
|||||
Income tax expense
|
(11
|
)
|
(2
|
)
|
||||
Net income (loss)
|
15
|
(5
|
)
|
|||||
Net loss attributable to noncontrolling interest of special purpose entities
|
1
|
1
|
||||||
Net income (loss) attributable to Temple-Inland Inc.
|
$
|
16
|
$
|
(4
|
)
|
|||
Average basic shares outstanding
|
108.3
|
107.7
|
||||||
Average diluted shares outstanding
|
110.3
|
109.2
|
||||||
Earnings (loss) per basic share
|
$
|
0.15
|
$
|
(0.04
|
)
|
|||
Earnings (loss) per diluted share
|
$
|
0.15
|
$
|
(0.04
|
)
|
|||
ROI, annualized
|
8.2
|
%
|
2.0
|
%
|
In first quarter 2011, significant items affecting net income included:
·
|
In corrugated packaging, higher box prices more than offset higher input costs compared with first quarter 2010. In building products, higher lumber volumes more than offset lower lumber prices.
|
·
|
Share-based and long-term incentive compensation expense increased $13 million compared with first quarter 2010, primarily due to the impact of the higher market price of our common stock on our cash-settled awards.
|
·
|
Other operating income (expense) includes a $9 million charge associated with asset impairments, severance and other costs primarily related to Box Plant Transformation II.
|
·
|
We recognized a loss of $4 million related to the purchase and retirement of $50 million of our 7.875% Senior Notes due 2012.
|
16
In first quarter 2010, significant items affecting net income included:
·
|
We experienced lower prices and higher volumes, on a per week basis, for our corrugated packaging products compared with first quarter 2009. We also experienced higher prices and lower volumes for lumber and lower prices and higher volumes for gypsum wallboard.
|
·
|
A significant increase in input costs, principally recycled fiber, more than offset our continuing initiatives to lower costs, improve asset utilization, and increase operating efficiencies.
|
·
|
Other operating income (expense) included a $10 million charge associated with asset impairments, severance and other costs related to Box Plant Transformation II and a $10 million benefit related to alternative fuel mixture tax credits.
|
·
|
We recognized a one-time income tax expense of $3 million related to the impact of the Patient Protection and Affordable Care Act on the Medicare Part D retiree drug subsidy program.
|
Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in energy costs, 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.
Business Segments
We manage our operations through two business segments: corrugated packaging and building products.
Corrugated Packaging
We manufacture linerboard, corrugating medium, and white-top linerboard (collectively referred to as containerboard) that we convert into corrugated packaging. Our corrugated packaging segment revenues are principally derived from the sale of corrugated packaging products and, to a lesser degree, from the sale of containerboard and lightweight gypsum facing paper (collectively referred to as paperboard).
A summary of our corrugated packaging results follows:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(Dollars in millions)
|
||||||||
Revenues
|
$ | 821 | $ | 752 | ||||
Costs and expenses
|
(723 | ) | (706 | ) | ||||
Segment operating income
|
$ | 98 | $ | 46 | ||||
Segment ROI
|
18.3 | % | 9.1 | % |
Fluctuations in corrugated packaging pricing (which includes freight and is net of discounts) and shipments are set forth below:
First Quarter 2011 versus
First Quarter 2010
|
|||
Increase/(Decrease)
|
|||
Corrugated packaging
|
|||
Average prices
|
10
|
%
|
|
Shipments, average week
|
(2
|
)%
|
|
Industry shipments, average week (a)
|
––
|
%
|
|
Paperboard
|
|||
Average prices
|
24
|
%
|
|
Shipments, in thousand tons
|
3
|
(a)
|
Source: Fibre Box Association
|
Compared with fourth quarter 2010, average corrugated packaging prices were flat and total shipments were up four percent, due in part to additional shipping days, while average paperboard prices were down one percent and
17
paperboard shipments were up 6,000 tons. We expect to benefit in second quarter 2011 from improving box demand. However, we have two less shipping days in second quarter 2011.
Costs and expenses in first quarter 2011 were up two percent compared with first quarter 2010 and up three percent compared with fourth quarter 2010. The increase over the prior year was primarily the result of higher costs for recycled fiber, freight, and chemicals, partially offset by lower costs for wood fiber and energy. The increase over the fourth quarter was primarily the result of higher costs for fiber, energy, freight and chemicals.
Fluctuations in our significant cost and expense components included:
First Quarter 2011 versus
First Quarter 2010
|
||||
Increase/(Decrease)
(In millions)
|
||||
Wood fiber
|
$
|
(4
|
)
|
|
Recycled fiber
|
4
|
|||
Energy, principally natural gas
|
(6
|
)
|
||
Freight
|
11
|
|||
Chemicals
|
6
|
|||
Depreciation
|
2
|
The costs of wood, pulp, and recycled fiber; energy; freight; and chemicals fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate for the remainder of 2011.
Information about our converting facilities and mills follows:
First Quarter
|
|||||
2011
|
2010
|
||||
Number of converting facilities (at quarter-end)
|
59
|
(a)
|
62
|
||
Corrugated packaging shipments, in thousand tons
|
840
|
846
|
|||
Paperboard production, in thousand tons
|
1,020
|
993
|
|||
Percent containerboard production used internally
|
93
|
%
|
93
|
%
|
|
Percent of total fiber requirements sourced from recycled fiber
|
41
|
%
|
44
|
%
|
(a)
|
Includes Carol Stream, Illinois and Northlake, Illinois converting facilities that are expected to close in second quarter 2011.
|
In first quarter 2011, we reduced our paperboard production to match our supply with the demand for our products.
We also incurred costs of $9 million in first quarter 2011 related to box plant transformation, which are not included in segment results. Please read Box Plant Transformation II.
Building Products
We manufacture lumber, gypsum wallboard, particleboard, medium density fiberboard (MDF), and fiberboard. Our building products segment revenues are principally derived from sales of these products. We also own a 50 percent interest in Del-Tin Fiber LLC, a joint venture that produces MDF at a facility in El Dorado, Arkansas.
A summary of our building products results follows:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
(Dollars in millions)
|
||||||||
Revenues
|
$ | 174 | $ | 153 | ||||
Costs and expenses
|
(180 | ) | (162 | ) | ||||
Segment operating income (loss)
|
$ | (6 | ) | $ | (9 | ) | ||
Segment ROI
|
(5.0 | )% | (7.2 | )% |
18
Fluctuations in product pricing (which includes freight and is net of discounts) and shipments are set forth below:
First Quarter 2011 versus
First Quarter 2010
|
|||
Increase/(Decrease)
|
|||
Lumber:
|
|||
Average prices
|
(10
|
)%
|
|
Shipments
|
31
|
%
|
|
Gypsum wallboard:
|
|||
Average prices
|
6
|
%
|
|
Shipments
|
7
|
%
|
|
Particleboard:
|
|||
Average prices
|
3
|
%
|
|
Shipments
|
11
|
%
|
|
MDF:
|
|||
Average prices
|
10
|
%
|
|
Shipments
|
––
|
%
|
Compared with fourth quarter 2010, average prices were up 11 percent for lumber, up one percent for gypsum wallboard, up three percent for particleboard, and up one percent for MDF. Shipments were up 11 percent for lumber, up six percent for gypsum wallboard, up 25 percent for particleboard, and up 30 percent for MDF, primarily due to normal seasonal increase in demand.
Costs and expenses in first quarter 2011 were up 11 percent compared with first quarter 2010 and up 12 percent compared with fourth quarter 2010, primarily due to higher production volumes.
Fluctuations in our significant cost and expense components included:
First Quarter 2011 versus
First Quarter 2010
|
||||
Increase/(Decrease)
(In millions)
|
||||
Wood fiber
|
$ | 10 | ||
Energy, principally natural gas
|
–– | |||
Freight
|
6 | |||
Chemicals
|
4 |
The costs of wood fiber, energy, freight, and chemicals fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate for the remainder of 2011.
In recent years we have reduced our production to match our supply with the demand for our products.
Items Not Included In Segments
Items not included in segments are income and expenses that are managed on a company-wide basis and include corporate general and administrative expense, share-based and long-term incentive compensation, other operating and non-operating income (expense), and interest income and expense.
Share-based and long-term incentive compensation expense is affected by the impact on our cash-settled awards of the difference between the market price of our common stock at quarter end compared with the market price at the end of the prior quarter. This expense was $13 million higher in first quarter 2011 than in first quarter 2010, of which $10 million was because this difference in market prices was higher for first quarter 2011 than for first quarter 2010. The remainder of the increase was due to the timing of recognizing expense for options and stock-settled restricted units issued in February of each year. Because the awards issued in February 2010 were subject to shareholder approval, we did not begin recognizing the expense for these awards until May 2010 when shareholder approval was received.
19
In connection with the implementation of Box Plant Transformation II, we incurred $9 million of charges in first quarter 2011, including $1 million of non-cash impairments, $1 million of severance and $7 million of other costs, primarily related to duplicate and incremental costs associated with production impacted by box plant transformation. Please read Box Plant Transformation II.
Other non-operating income for first quarter 2011 consists of a loss of $4 million resulting from the purchase and retirement of $50 million of our 7.875% Senior Notes due 2012.
Net interest income (expense) on financial assets and nonrecourse liabilities of special purpose entities relates to the activities of the special purpose entities created to effect the sale of our timberland in October 2007 and their subsequent nonrecourse borrowings in December 2007. At first quarter-end 2011 and 2010, the interest rate on our financial assets was 0.34 percent and 0.29 percent and the interest rate on our nonrecourse financial liabilities was 0.86 percent and 0.77 percent. These interest rates are variable and are based on different indices and, therefore, may not always reflect the same spread. The increase in net interest income (expense) is due to the lower interest rate spread and amortization of costs related to agreements executed in late first quarter 2010 with potential replacement issuers of letters of credit securing the financial assets.
The reduction in interest expense on debt in first quarter 2011 compared with first quarter 2010 was primarily due to the purchase and retirement of $16 million of 7.875% Senior Notes in fourth quarter 2010 and $50 million in first quarter 2011.
Income Taxes
Our effective tax rate was 40 percent in first quarter 2011. Differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, the domestic production activities deduction, and deferred taxes on unremitted foreign income.
Average Shares Outstanding
The increase in average shares outstanding in first quarter 2011 was primarily due to shares issued to employees exercising options. The increase in average diluted shares outstanding in first quarter 2011 was due to the increase in the dilutive effect of stock options as a result of the higher market price of our common stock.
Sources and Uses of Cash
We operate in cyclical industries and our operating cash flows vary accordingly. Our principal operating cash requirements are for compensation, wood and recycled fiber, energy, interest, and taxes. Working capital is subject to cyclical operating needs, the timing of collection of receivables and the payment of payables and expenses and, to a lesser extent, to seasonal fluctuations in our operations.
20
First Quarter
|
|||||||
2011
|
2010
|
||||||
(In millions)
|
|||||||
Cash received from:
|
|||||||
Operations
|
$
|
93
|
$
|
52
|
|||
Working capital
|
(58
|
)
|
(51
|
)
|
|||
Cash received from operations
|
35
|
1
|
|||||
Borrowing, net
|
39
|
54
|
|||||
Exercise of options and related tax benefits
|
5
|
2
|
|||||
Total sources
|
79
|
57
|
|||||
Cash used to:
|
|||||||
Pay fees related to special purpose entities
|
––
|
(3
|
)
|
||||
Return to shareholders through dividends
|
(14
|
)
|
(11
|
)
|
|||
Reinvest in the business through:
|
|||||||
Capital expenditures
|
(62
|
)
|
(33
|
)
|
|||
Joint ventures and other
|
(8
|
)
|
(18
|
)
|
|||
Total uses
|
(84
|
)
|
(65
|
)
|
|||
Effect of exchange rate changes on cash and cash equivalents
|
1
|
1
|
|||||
Change in cash and cash equivalents
|
$
|
(4
|
)
|
$
|
(7
|
)
|
Our first quarter 2011 operating cash flows increased compared with first quarter 2010, primarily due to higher earnings and lower working capital needs after adjusting for the $14 million in alternative fuel mixture credits received in first quarter 2010 that were accrued at year-end 2009.
We issued 362,199 and 200,656 net shares of common stock in first quarter 2011 and first quarter 2010 to employees exercising options. We paid cash dividends to shareholders of $0.13 per share in first quarter 2011 and $0.11 per share in first quarter 2010. On May 6, 2011, our Board of Directors declared a regular quarterly dividend of $0.13 per share payable on June 15, 2011.
Our increase in capital expenditures in first quarter 2011 compared with first quarter 2010, was primarily related to Box Plant Transformation II. Capital expenditures are expected to approximate $225 million to $235 million in 2011, a significant portion of which is related to Box Plant Transformation II.
Liquidity
Credit Agreements
Our sources of short-term funding are our operating cash flows and borrowings under our committed credit agreements and accounts receivable securitization facility. At first quarter-end 2011, we had a total of $673 million in unused borrowing capacity under our committed credit agreements and accounts receivable securitization facility.
Committed Credit Agreements
|
Accounts Receivable Securitization Facility
|
Total
|
|||||||||
(In millions)
|
|||||||||||
Committed
|
$
|
710
|
$
|
250
|
$
|
960
|
|||||
Less: Borrowings and letters of credit
|
(87
|
)
|
(200
|
)
|
(287
|
)
|
|||||
Unused borrowing capacity at first quarter-end 2011
|
$
|
623
|
$
|
50
|
$
|
673
|
Our committed credit agreements total $710 million and include a $600 million revolving credit facility that matures in June 2014 and $110 million of other committed credit agreements that mature from 2011 to 2014. At first quarter-end 2011, we had $16 million of letters of credit usage against our revolving credit facility and $71 million of borrowings outstanding against our other committed credit agreements.
Our accounts receivable securitization facility expires in 2013. At first quarter-end 2011, our borrowing base, which is determined by the level of our trade receivables, was $250 million, the maximum committed amount of the facility.
21
Our unused borrowing capacity in first quarter 2011 ranged from a high of $766 million to a low of $649 million. The fluctuating capacity results primarily from activity on our accounts receivable securitization facility. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of collection of receivables, payment of payables and expenses, capital expenditures, and dividends, and to a lesser extent, to seasonal fluctuations in our operations.
Our debt agreements, accounts receivable securitization facility, and credit agreements contain terms, conditions, and financial covenants customary for such agreements, including minimum levels of interest coverage and limitations on leverage. We are currently in compliance with these covenants and do not currently anticipate any change in circumstances that would impair our ability to continue to comply with these covenants.
We believe the amount available under these credit facilities along with our existing cash and cash equivalents and expected cash flows from operations will provide us sufficient funds to meet our operating needs for the foreseeable future. In light of recent conditions in financial markets, we closely monitor the banks in our credit facilities. To date, we have experienced no difficulty in borrowing under the facilities and have not received any indications that any of the participating banks would not be able to honor their commitments under these facilities.
Off-Balance Sheet Arrangements
At first quarter-end 2011, there were no significant changes in off-balance sheet arrangements from that disclosed in our Annual Report on Form 10-K for the year 2010.
Pension, Postretirement Medical and Health Care Matters
Due to credit balances we have accumulated from our voluntary, discretionary contributions in prior years, we anticipate having no funding requirement under ERISA in 2011. We made no contributions to our qualified defined benefit pension plan in first quarter 2011. However, we anticipate making a $30 million contribution later in the year.
Energy
Energy costs were $76 million in first quarter 2011 compared with $82 million in first quarter 2010. 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 continue to reduce our dependency on natural gas. We hedge very little of our energy needs. It is likely that these costs will continue to fluctuate for the remainder of 2011.
Litigation, Contingencies, and Related Matters
We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business, and we believe that adequate reserves have been established for any probable losses. Since we filed our Annual Report on Form 10-K for the year 2010, there have been no material developments in pending legal proceedings other than as disclosed in Part II, Item 1 of this report.
22
Calculation of Non-GAAP Financial Measure
Consolidated
|
Corrugated Packaging
|
Building Products
|
||||||||||||
First Quarter 2011
|
(In millions)
|
|||||||||||||
Return:
|
||||||||||||||
Segment operating income determined in accordance with GAAP
|
$
|
92
|
$
|
98
|
$
|
(6
|
)
|
|||||||
Items not included in segments:
|
||||||||||||||
General and administrative expense
|
(17
|
)
|
N/A
|
N/A
|
||||||||||
Share-based and long-term incentive compensation
|
(19
|
)
|
N/A
|
N/A
|
||||||||||
$
|
56
|
$
|
98
|
$
|
(6
|
)
|
||||||||
Investment:
|
||||||||||||||
Beginning of year total assets or segment assets determined in accordance with GAAP
|
$
|
5,909
|
$
|
2,475
|
$
|
532
|
||||||||
Adjustments:
|
||||||||||||||
Current liabilities (excluding current portion of long-term debt)
|
(508
|
)
|
(330
|
)
|
(53
|
)
|
||||||||
Financial assets of special purpose entities
|
(2,475
|
)
|
N/A
|
N/A
|
||||||||||
Municipal bonds related to capital leases included in other assets
|
(188
|
)
|
N/A
|
N/A
|
||||||||||
$
|
2,738
|
$
|
2,145
|
$
|
479
|
|||||||||
ROI, annualized
|
8.2
|
%
|
18.3
|
%
|
(5.0
|
)%
|
||||||||
First Quarter 2010
|
||||||||||||||
Return:
|
||||||||||||||
Segment operating income determined in accordance with GAAP
|
$
|
37
|
$
|
46
|
$
|
(9
|
)
|
|||||||
Items not included in segments:
|
||||||||||||||
General and administrative expense
|
(18
|
)
|
N/A
|
N/A
|
||||||||||
Share-based and long-term incentive compensation
|
(6
|
)
|
N/A
|
N/A
|
||||||||||
$
|
13
|
$
|
46
|
$
|
(9
|
)
|
||||||||
Investment:
|
||||||||||||||
Beginning of year total assets or segment assets determined in accordance with GAAP
|
$
|
5,709
|
$
|
2,295
|
$
|
545
|
||||||||
Adjustments:
|
||||||||||||||
Current liabilities (excluding current portion of long-term debt)
|
(471
|
)
|
(276
|
)
|
(44
|
)
|
||||||||
Financial assets of special purpose entities
|
(2,475
|
)
|
N/A
|
N/A
|
||||||||||
Municipal bonds related to capital leases included in other assets
|
(188
|
)
|
N/A
|
N/A
|
||||||||||
$
|
2,575
|
$
|
2,019
|
$
|
501
|
|||||||||
ROI, annualized
|
2.0
|
%
|
9.1
|
%
|
(7.2
|
)%
|
23
STATISTICAL AND OTHER DATA
Revenues and unit sales, excluding joint venture operations, follows:
First Quarter
|
||||||||
2011
|
2010
|
|||||||
Revenues
|
(Dollars in millions)
|
|||||||
Corrugated Packaging
|
||||||||
Corrugated packaging
|
$ | 772 | $ | 711 | ||||
Paperboard (a)
|
49 | 41 | ||||||
$ | 821 | $ | 752 | |||||
Building Products
|
||||||||
Lumber
|
$ | 59 | $ | 50 | ||||
Gypsum wallboard
|
38 | 33 | ||||||
Particleboard
|
41 | 36 | ||||||
Medium density fiberboard
|
20 | 18 | ||||||
Fiberboard
|
6 | 7 | ||||||
Other
|
10 | 9 | ||||||
$ | 174 | $ | 153 | |||||
Unit sales
|
||||||||
Corrugated Packaging
|
||||||||
Corrugated packaging, thousands of tons
|
840 | 846 | ||||||
Paperboard, thousands of tons (a)
|
94 | 91 | ||||||
934 | 937 | |||||||
Building Products
|
||||||||
Lumber, million board feet
|
207 | 158 | ||||||
Gypsum wallboard, million square feet
|
328 | 306 | ||||||
Particleboard, million square feet
|
119 | 107 | ||||||
Medium density fiberboard, million square feet
|
35 | 35 | ||||||
Fiberboard, million square feet
|
31 | 34 |
_____________
|
|
(a)
|
Paperboard includes linerboard, corrugating medium, white-top linerboard, and light-weight gypsum facing paper.
|
24
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Interest Rate Risk
Our interest rate exposure is primarily related to our variable-rate, long-term debt and to the financial assets and nonrecourse financial liabilities of special purpose entities. This exposure is the result of changes in interest rates and also the use of different base rates and the timing of the quarterly interest rate resets on the financial assets and nonrecourse financial liabilities of special purpose entities.
In first quarter 2011, there were no significant changes in interest rate risk from that disclosed in our Annual Report on Form 10-K for the year 2010.
Foreign Currency Risk
In first quarter 2011, there were no significant changes in foreign currency risk from that disclosed in our Annual Report on Form 10-K for the year 2010.
Commodity Price Risk
In first quarter 2011, there were no significant changes in commodity price risk from that disclosed in our Annual Report on Form 10-K for the year 2010.
Item 4.
|
Controls and Procedures
|
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
PART II. OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
Since we filed our Annual Report on Form 10-K for the year 2010, there have been no material developments in pending legal proceedings, except as set forth below.
We have previously disclosed that at the end of 2007, we spun off Guaranty Financial Group and its wholly-owned subsidiary, Guaranty Bank; in August 2009, regulators closed Guaranty Bank and Guaranty Financial Group filed for bankruptcy; and in 2010, we voluntarily produced documents pursuant to the FDIC’s investigation of the acts of the former officers and directors of Guaranty Bank in connection with its failure.
If the Amended Joint Plan of Liquidation of Guaranty Financial Group dated February 10, 2011 is approved, all rights of action that may exist against us, other than claims derivative of claims retained by the FDIC, would be assigned to the liquidating trustee. The liquidating trustee is currently investigating whether it may have any such claims against us, our current and former officers and directors, or professional firms that advised us in connection with the spin-off.
We are not aware of any claims being filed against us in connection with Guaranty Bank’s failure. As a result of the process we followed in connection with the spin-off, we do not believe that we would have any liability related to the spin-off of Guaranty Financial Group.
Item 1A.
|
Risk Factors
|
There are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year 2010.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Issuer Purchases of Equity Securities (a)
Period
|
Total Number of Shares
Purchased
|
Average Price Paid per Share
|
Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs
|
Maximum Number
of Shares That May
Yet be Purchased Under the Plans or Programs
|
|||||||||||||
Month 1 (1/1/2011 – 1/31/2011)
|
1,733 |
(b)
|
$ | 23.04 | –– | 6,650,000 | |||||||||||
Month 2 (2/1/2011 – 2/28/2011)
|
16,802 |
(b)
|
$ | 24.76 | –– | 6,650,000 | |||||||||||
Month 3 (3/1/2011 – 3/31/2011)
|
1,234 |
(b)
|
$ | 21.99 | –– | 6,650,000 | |||||||||||
Total
|
19,769 | $ | 24.44 | –– |
_________
(a) On August 4, 2006, our Board of Directors authorized the repurchase of up to 6,000,000 shares of our common stock. We have purchased 4,350,000 shares under this authorization, which has no expiration date. On February 2, 2007, our Board of Directors authorized the purchase of up to an additional 5,000,000 shares of our common stock, increasing the maximum number of shares yet to be purchased under our repurchase plans to 6,650,000 shares. We have no plans or programs that expired during the period covered by the table above and no plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
(b) Represents shares purchased from employees to pay taxes related to the exercise of stock options or vesting of restricted shares.
Item 3.
|
Defaults Upon Senior Securities
|
None.
Item 4.
|
(Removed and Reserved)
|
Item 5.
|
Other Information
|
None.
26
Item 6.
|
Exhibits
|
Exhibits.
31.1
|
–
|
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
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.
|
101.1
|
–
|
The following materials from Temple-Inland's Quarterly Report on Form 10-Q for the quarter ended April 2, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.
|
27
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 10, 2011
|
By:
|
/s/ Randall D. Levy
|
Name: Randall D. Levy
|
||
Title: Chief Financial Officer
|
||
By:
|
/s/ Troy L. Hester
|
|
Name: Troy L. Hester
|
||
Title: Corporate Controller and
Principal Accounting Officer
|
28
INDEX TO EXHIBITS
Exhibit No.
|
Description
|
Page No.
|
31.1
|
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
30
|
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
|
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
|
34
|
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
|
35
|
29