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| TIN > SEC Filings for TIN > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
• 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;
• current conditions in financial markets could adversely affect our ability to finance our operations;
• demand for new housing;
• accuracy of accounting assumptions related to impaired assets, pension and postretirement costs, and contingency reserves;
• competitive actions by other companies;
• changes in laws or regulations;
• our ability to execute certain strategic and business improvement initiatives;
• the accuracy of certain judgments and estimates concerning the integration of acquired operations; and
• other factors, many of which are beyond our control.
Our actual results, performance, or achievement probably will differ from
those expressed in, or implied by, these forward-looking statements, and
accordingly, we can give no assurances that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do so,
what impact they will have on our results of operations or financial condition.
In view of these uncertainties, you are cautioned not to place undue reliance on
these forward-looking statements. Except as required by law, we expressly
disclaim any obligation to publicly revise any forward-looking statements
contained in this report to reflect the occurrence of events after the date of
this report.
Non-GAAP Financial Measures
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 expenses and share-based 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. Also there may be limits in
the usefulness of ROI to investors. As a result, we encourage you to read our
consolidated financial statements in their entirety and not to rely on any
single financial measure.
Accounting Policies
Critical Accounting Estimates
In first nine months 2008, there were no changes in our critical accounting
estimates from those we disclosed in our Annual Report on Form 10-K for the year
2007.
New and Pending Accounting Pronouncements
Beginning January 2008, we adopted two new accounting pronouncements neither
of which had a significant effect on our earnings or financial position. In
addition, there are three new accounting pronouncements that we will be required
to adopt in 2009 none of which are expected to have a significant effect on our
earnings or financial position.
Please read Note 2 to the Consolidated Financial Statements for further
information.
Results of Operations for Third Quarter and First Nine Months 2008 and 2007
Summary
We manage our operations through two business segments: corrugated packaging
and building products. Timber and timberland is no longer an active segment as a
result of the sale of our timberland in fourth quarter 2007.
A summary of the results of operations by business segment follows:
Third Quarter First Nine Months
2008 2007 2008 2007
(In millions, except per share)
Revenues
Corrugated packaging $ 797 $ 748 $ 2,371 $ 2,288
Building products 179 195 540 642
Timber and timberland - 20 - 59
Total revenues $ 976 $ 963 $ 2,911 $ 2,989
Segment operating income
Corrugated packaging $ 50 $ 70 $ 157 $ 212
Building products (6 ) (4 ) (26 ) 23
Timber and timberland - 18 - 53
Total segment operating income 44 84 131 288
Items not included in segments
General and administrative expense (17 ) (23 ) (59 ) (75 )
Share-based compensation (10 ) (2 ) (16 ) (34 )
Other operating income (expense) (1 ) (6 ) (16 ) (16 )
Other non-operating income (expense) (3 ) - (1 ) 1
Net interest income (expense) on
financial assets and nonrecourse
financial liabilities of special purpose
entities (1 ) - (4 ) -
Interest expense on debt (21 ) (29 ) (58 ) (86 )
Income (loss) before taxes (9 ) 24 (23 ) 78
Income tax (expense) benefit 12 (13 ) 21 (34 )
Income (loss) from continuing operations 3 11 (2 ) 44
Discontinued operations - 25 - 96
Net income (loss) $ 3 $ 36 $ (2 ) $ 140
Average basic shares outstanding 106.7 106.2 106.7 105.9
Average diluted shares outstanding 107.6 107.8 107.6 107.9
Income (loss) from continuing
operations, per basic share $ 0.03 $ 0.11 $ (0.02 ) $ 0.41
Income from continuing operations, per
diluted share (a) $ 0.03 $ 0.11 $ N/A $ 0.41
ROI, annualized 3.0 % 8.3 %
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(a) Income per diluted share is not applicable for first nine months 2008 due to our loss from continuing operations.
In first nine months 2008, significant items affecting income (loss) from
continuing operations included:
• We experienced lower volumes and higher pricing for our corrugated
packaging products, lower volumes for most of our building products and
lower pricing for gypsum wallboard.
• While we continued to see the benefits in our manufacturing operations from our initiative to lower costs, improve asset utilization, and increase operating efficiencies, the increased cost of energy, freight, chemicals, and fiber more than offset these benefits.
• Share-based compensation decreased due to the effect of the lower share price on our cash-settled awards.
• We incurred $20 million of costs primarily related to our transformation plan, of which $15 million is related to the settlement of supplemental retirement benefits. We also decreased litigation reserves by $5 million due to the settlement of the remaining claim related to our antitrust litigation.
• Interest expense decreased primarily due to the December 2007 early retirement of $286 million of 6.75% Notes and $213 million of 7.875% Senior Notes.
• In July 2008, we purchased the remaining 50 percent interest in Premier Boxboard Limited LLC for $62 million. Subsequent to the purchase we incurred a penalty of $4 million from the prepayment of $50 million in joint venture debt.
In first nine months 2007, significant items affecting income from continuing
operations included:
• We experienced higher prices for our corrugated packaging products and
lower prices and volumes for our building products, principally lumber and
gypsum wallboard.
• While we continued to see the benefit in our manufacturing operations from our initiatives to lower costs, improve asset utilization, and increase operating efficiencies, the cost of recycled fiber, energy and freight offset some of the benefits.
• We recognized $4 million in business interruption insurance proceeds from a prior year claim related to one of our paper mills and an $8 million gain on sale of non-strategic timber leases.
• We incurred $10 million of costs associated with our transformation plan, primarily legal and advisory fees.
• We recognized a one-time tax benefit of $3 million related to Texas tax legislation enacted in May 2007.
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.
Corrugated Packaging
We manufacture linerboard and corrugating medium (collectively referred to as
containerboard) that we convert into corrugated packaging. In July 2008, we
purchased our partner's 50 percent interest in Premier Boxboard Limited LLC
(PBL), a joint venture that manufactures containerboard and light-weight gypsum
facing paper at a mill in Newport, Indiana. We have integrated the PBL
operations into our corrugated packaging system. Our corrugated packaging
segment revenues are principally derived from the sale of corrugated packaging
and, to a lesser degree, from the sale of containerboard and light-weight gypsum
facing paper (collectively referred to as paperboard).
A summary of our corrugated packaging results follows:
Third Quarter First Nine Months
2008 2007 2008 2007
(Dollars in millions)
Revenues $ 797 $ 748 $ 2,371 $ 2,288
Costs and expenses (747 ) (678 ) (2,214 ) (2,076 )
Segment operating income $ 50 $ 70 $ 157 $ 212
Segment ROI 10.5 % 14.1 %
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Corrugated packaging results would not have been materially different from those reported assuming the purchase of PBL had occurred at beginning of each period presented.
Fluctuations in corrugated packaging and paperboard pricing (which includes freight and is net of discounts) and shipments follow:
Third Quarter 2008 First Nine Months 2008
versus versus
Third Quarter 2007 First Nine Months 2007
Increase/(Decrease)
Corrugated packaging
Average prices 5 % 3 %
Shipments, average week (3) % (1) %
Industry shipments, average week(a) (3) % (3) %
Paperboard
Average prices 1 % 3 %
Shipments, in thousand tons 83 (b) 61 (b)
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(a) Source: Fibre Box Association
(b) The increase includes 18,000 tons of light-weight gypsum facing paper and 9,000 tons of containerboard shipped by PBL since its purchase in July 2008.
Current economic conditions have had a negative effect on our shipments. We
anticipate that this weakness will continue until economic conditions improve.
Compared with second quarter 2008, average corrugated packaging prices were
up two percent and shipments were down five percent, principally due to normal
seasonal fluctuations and current economic conditions, while average paperboard
prices were up two percent and shipments were up 78,000 tons partially as a
result of including the results from our purchase of PBL in July 2008.
Costs and expenses were up 10 percent in third quarter 2008 compared with
third quarter 2007 and up seven percent in first nine months 2008 compared with
first nine months 2007. These increased costs were primarily the result of
higher prices for recycled fiber, energy, chemicals, freight, and the inclusion
of PBL since its purchase in July 2008.
Fluctuations in our significant cost and expense components included:
Third Quarter 2008 First Nine Months 2008
versus versus
Third Quarter 2007 First Nine Months 2007
Increase/(Decrease)
(In millions)
Wood fiber $ (2 ) $ 4
Recycled fiber 3 19
Energy, principally natural gas 23 44
Chemicals 7 15
Freight 10 23
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The costs of our wood and recycled fiber, energy, chemicals, and freight 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 2008.
Information about our converting facilities and mills follows:
Third Quarter First Nine Months
2008 2007 2008 2007
Number of converting facilities (at
quarter-end) 64 64 64 64
Corrugated packaging shipments, in
thousand tons 810 839 2,504 2,535
Paperboard production, in thousand tons 947 909 2775 2,712
Percent containerboard production used
internally 86 % 93 % 90 % 91 %
Percent of total fiber requirements
sourced from recycled fiber 41 % 36 % 37 % 37 %
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In third quarter 2008, we lost production of 38,000 tons of containerboard
due to hurricanes Gustav and Ike.
As part of our continuing efforts to lower cost and improve operating
efficiency and asset utilization, in October 2008 we announced the closure of
our Rome, Georgia converting facility.
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:
Third Quarter First Nine Months
2008 2007 2008 2007
(Dollars in millions)
Revenues $ 179 $ 195 $ 540 $ 642
Costs and expenses (185 ) (199 ) (566 ) (619 )
Segment operating income (loss) $ (6 ) $ (4 ) $ (26 ) $ 23
Segment ROI (6.2) % 5.5 %
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Fluctuations in product pricing (which includes freight and is net of discounts) and shipments follow:
Third Quarter 2008 First Nine Months 2008
versus versus
Third Quarter 2007 First Nine Months 2007
Increase/(Decrease
Lumber:
Average prices 6 % 1 %
Shipments (12 )% (7 )%
Gypsum wallboard:
Average prices (6 )% (23 )%
Shipments (31 )% (30 )%
Particleboard:
Average prices 9 % 2 %
Shipments (2 )% (6 )%
MDF:
Average prices 17 % 10 %
Shipments 6 % 4 %
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While pricing was up for lumber, particleboard and MDF compared with first
nine months 2007, demand is down due to current conditions in the housing
industry. We anticipate that these difficult conditions will continue for the
remainder of 2008 and 2009.
Compared with second quarter 2008, average prices were up three percent for
lumber, seven percent for gypsum, and five percent for particleboard and MDF.
Shipments were down for all products.
Costs and expenses were down seven percent in third quarter 2008 compared
with third quarter 2007 and down nine percent in first nine months 2008 compared
with first nine months 2007. The decrease in costs is primarily attributable to
curtailment of production to match demand for our products and headcount
reductions. We incurred severance charges of $1 million in third quarter 2008
and $3 million in first nine months 2008 related to headcount reductions.
Fluctuations in our significant cost and expense components included:
Third Quarter 2008 First Nine Months 2008
versus versus
Third Quarter 2007 First Nine Months 2007
Increase/(Decrease)
(In millions)
Wood fiber $ (9 ) $ (27 )
Energy, principally natural gas 2 2
Chemicals 7 13
Freight (1 ) (4 )
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The costs of our fiber, energy, chemicals, and freight 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 2008.
Information about our converting and manufacturing facilities follows:
Third Quarter First Nine Months
2008 2007 2008 2007
Number of converting and manufacturing
facilities (at quarter-end) 16 17 16 17
Average operating rates for all product
lines excluding sold or closed
facilities:
High 98 % 104 % 98 % 102 %
Low 51 % 47 % 47 % 59 %
Average 70 % 76 % 69 % 80 %
Gypsum facing paper purchases from
corrugated packaging (previously the PBL
joint venture):
In thousand tons 10 10 24 34
Percent supplied 65 % 68 %
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The lower average operating rates in first nine months 2008 resulted from the
curtailment of production to match demand for our products and, to a lesser
extent, lost production due to hurricanes Gustav and Ike. In December 2007, we
permanently ceased production at our Mt. Jewett particleboard plant.
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 compensation, other operating and non-operating income (expense),
and interest income and expense.
The change in share-based compensation was principally due to the effect of
share price on our cash-based awards. A significant portion of our share-based
awards are cash-settled awards. As a result, changes in our share price have a
direct impact on our share-based compensation expense. Please read Note 5 to the
Consolidated Financial Statements for further information.
Other operating expense not included in business segments totaled $16 million
in first nine months 2008, principally related to the lump-sum settlements of
supplemental pension benefits made as part of our 2007 transformation plan.
Other non-operating expense totaled $1 million in first nine months 2008, of
which $4 million is a penalty associated with the prepayment of the $50 million
PBL joint venture debt, offset with $3 million in interest and other income.
We are continuing our efforts to enhance return on investment by lowering
costs, improving operating efficiencies and increasing asset utilization. As a
result, we will continue to review operations that are unable to meet return
objectives and determine appropriate courses of action, including consolidating
and closing converting facilities.
Net interest income (expense) on financial assets and nonrecourse liabilities
of special purpose entities relates to interest income on the $2.38 billion of
notes received from the sale of our timberland in 2007 and interest expense on
the $2.14 billion of borrowings secured by a pledge of the notes received. The
notes receivable were contributed to and the borrowings were made by two
wholly-owned, bankruptcy-remote special purpose entities, which we consolidate.
The borrowings are nonrecourse beyond these two entities. At third quarter-end
2008, the interest rate on our financial assets was 2.84 percent and the
interest rate on our nonrecourse financial liabilities was 3.36 percent. These
interest rates reset quarterly based on different base rates and may not always
reflect the same net interest spread.
The decrease in interest expense in first nine months 2008 was primarily due
to the December 2007 early retirement of our $286 million of 6.75% Notes payable
in 2009 and $213 million of 7.875% Senior Notes payable in 2012, offset by an
increase in interest expense related to the increase in debt primarily
associated with our purchase of the remaining 50 percent interest in the PBL
joint venture.
Income Taxes
In third quarter 2008, we increased our estimated annual effective tax rate
for 2008 to 89 percent from 64 percent based on our current estimate of 2008
income. As a result, we recognized an additional $4 million tax benefit in third
quarter 2008. Our estimated annual effective tax rate was 44 percent in first
nine months 2007.
Differences between the effective tax rate and the statutory rate are
primarily due to state taxes, nondeductible items, and deferred taxes on
unremitted foreign income. At the current level of earnings or losses, these
differences have a significant effect on our estimated annual effective tax
rate.
Average Shares Outstanding
The increase in average basic shares outstanding was principally due to the
issuance of shares related to stock-based compensation plans. The decrease in
average diluted shares outstanding was due to the decrease in the dilutive
effect of stock options as a result of our lower share price.
Capital Resources and Liquidity for First Nine Months 2008
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, freight, interest, and taxes. Pricing improved
for our corrugated packaging and most of our building products in first nine
months 2008, but shipments continued to decline. 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.
. . .
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