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| TIN > SEC Filings for TIN > Form 10-Q on 4-May-2009 | All Recent SEC Filings |
4-May-2009
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, 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; 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 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. 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 quarter 2009, there were no changes in our critical accounting
estimates from those we disclosed in our Annual Report on Form 10-K for the year
2008.
New Accounting Pronouncements
Beginning January 2009, we adopted several new accounting pronouncements none
of which had 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 First Quarter 2009 and 2008
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
2009 2008
(Dollars in millions, except per share)
Revenues
Corrugated packaging $ 790 $ 776
Building products 151 168
Total revenues $ 941 $ 944
Segment operating income
Corrugated packaging $ 105 $ 55
Building products (2 ) (21 )
Total segment operating income 103 34
Items not included in segments
General and administrative expense (17 ) (21 )
Share-based and long-term incentive compensation (9 ) (4 )
Other operating income (expense) (4 ) (15 )
Other non-operating income 10 1
Net interest income (expense) on financial assets and
nonrecourse financial liabilities of special purpose
entities 2 (3 )
Interest expense on debt (19 ) (17 )
Income (loss) before taxes 66 (25 )
Income tax (expense) benefit (30 ) 12
Net income (loss) 36 (13 )
Net income attributable to noncontrolling interest of
special purpose entities (1 ) -
Net income (loss) attributable to Temple-Inland Inc. $ 35 $ (13 )
Average basic shares outstanding 106.7 106.7
Average diluted shares outstanding 106.7 107.6
Earnings per basic share $ 0.33 $ (0.12 )
Earnings per diluted share $ 0.33 $ (0.12 )
ROI, annualized 11.2 % 1.4 %
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In first quarter 2009, significant items affecting net income included:
• We experienced higher prices and lower volumes, on a per week basis, for
our corrugated packaging products compared with first quarter 2008. We
also experienced higher prices for gypsum wallboard and medium density
fiberboard but lower prices for lumber and lower volumes for
particleboard, medium density fiberboard and lumber. Current economic
conditions continue to have a negative impact on our shipments.
• Our manufacturing operations benefited from a decline in most key input costs and from our continuing initiatives to lower costs, improve asset utilization, and increase operating efficiencies.
• Share-based and long-term incentive compensation increased $5 million compared with first quarter 2008, of which $4 million is due to the effect of our higher share price on our cash settled awards compared with our share price at year-end 2008.
• We incurred $4 million of costs, of which $3 million is primarily associated with 2008 facility closures and severance related to headcount reductions.
• We recognized a gain of $10 million in connection with the purchase and retirement of $53 million of our long-term debt.
In first quarter 2008, significant items affecting net income included:
• We experienced higher prices and higher volumes for our corrugated
packaging products, while we continued to experience lower prices and
volumes for most of our building products compared with first quarter
2007.
• 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, and fiber more than offset these benefits.
• Share-based compensation decreased compared with first quarter 2007 due to the effect of our lower share price on our cash settled awards and no share-based compensation expense being recognized on the stock options awarded in first quarter 2008, as they were subject to shareholder approval, which was not obtained until second quarter 2008.
• We incurred $20 million of costs associated with our transformation plan, of which $15 million was related to a one-time 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 compared with first quarter 2007 primarily due to the December 2007 early pay-off of $286 million of 6.75% Notes and $213 million of 7.875% Senior Notes.
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 lightweight gypsum
facing paper at a mill in Newport, Indiana. We have integrated the PBL
operations into our corrugated packaging system. Late in 2008, we began
producing white-top linerboard at the Newport mill. 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
2009 2008
(Dollars in millions)
Revenues $ 790 $ 776
Costs and expenses (685 ) (721 )
Segment operating income $ 105 $ 55
Segment ROI 19.9 % 11.1 %
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Corrugated packaging results for first quarter 2008 would not have been
materially different from those reported assuming the purchase of PBL had
occurred at the beginning of 2008.
Fluctuations in corrugated packaging pricing (which includes freight and is
net of discounts) and shipments are set forth below:
First Quarter 2009
versus
First Quarter 2008
Increase/(Decrease)
Corrugated packaging
Average prices 3 %
Shipments, average week (4) %
Industry shipments, average week (a) (10) %
Paperboard
Average prices (10) %
Shipments, in thousand tons 7
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(a) Source: Fibre Box Association
The increase in first quarter 2009 paperboard shipments was primarily due to
shipments of light-weight gypsum facing paper offset by a decrease in
containerboard shipments.
Compared with fourth quarter 2008, average corrugated packaging prices were
down two percent and actual shipments were up four percent, while average
paperboard prices were down five percent and shipments were down 76,000 tons.
Costs and expenses in first quarter 2009, which included the PBL mill that we
acquired in July 2008, were down five percent compared with first quarter 2008,
and down nine percent compared with fourth quarter 2008. These decreased costs
were the result of lower prices for wood fiber, recycled fiber, and freight;
lower converting costs; and the impact of the integration and white-top
linerboard production at PBL.
Fluctuations in our significant cost and expense components included:
First Quarter 2009
versus
First Quarter 2008
Increase/(Decrease)
(In millions)
Wood fiber $ (9 )
Recycled fiber (20 )
Energy, principally natural gas (1 )
Freight (3 )
Chemicals 3
Depreciation 1
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The costs of our outside purchases of wood and recycled fiber, energy, 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 2009.
Information about our converting facilities and mills follows:
First Quarter
2009 2008
Number of converting facilities (at quarter-end) 63 64
Corrugated packaging shipments, in thousand tons 829 827
Paperboard production, in thousand tons 955 914
Percent containerboard production used internally 93 % 91 %
Percent of total fiber requirements sourced from recycled fiber 44 % 36 %
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First quarter 2009 paperboard production includes production from our PBL
mill that we acquired in July 2008. In first quarter 2009, we reduced our
production by 37,000 tons to match our production to demand.
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
2009 2008
(Dollars in millions)
Revenues $ 151 $ 168
Costs and expenses (153 ) (189 )
Segment operating income (loss) $ (2 ) $ (21 )
Segment ROI (1.5) % (15.0) %
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Fluctuations in product pricing (which includes freight and is net of discounts) and shipments are set forth below:
First Quarter 2009
versus
First Quarter 2008
Increase/(Decrease)
Lumber:
Average prices (8 )%
Shipments (6 )%
Gypsum wallboard:
Average prices 13 %
Shipments 1 %
Particleboard:
Average prices - %
Shipments (11 )%
MDF:
Average prices 6 %
Shipments (11 )%
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Demand for most of our building products were down compared with first
quarter 2008 due to deteriorating conditions in the housing and remodeling
industries. It is possible these conditions will continue for the remainder of
2009.
Compared with fourth quarter 2008, average prices were flat for MDF and down
two percent for gypsum wallboard, five percent for particleboard, and 11 percent
for lumber. Shipments were up 13 percent for MDF, 14 percent for gypsum
wallboard, and up seven percent for both lumber and particleboard.
Fluctuations in our significant cost and expense components included:
First Quarter 2009
versus
First Quarter 2008
Increase/(Decrease)
(In millions)
Wood fiber $ (6 )
Energy, principally natural gas (4 )
Freight (3 )
Chemicals (5 )
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Costs and expenses were down 19 percent in first quarter 2009 compared with
first quarter 2008. The decrease in cost is primarily attributable to
curtailment of production to match demand for our products, headcount
reductions, the elimination of our hardboard siding production at our fiberboard
operations in December 2008, and lower input costs. In first quarter 2008, we
incurred $2 million in severance charges for headcount reductions.
The costs of our outside purchases of 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 2009.
Information about our converting and manufacturing facilities follows:
First Quarter
2009 2008
Number of converting and manufacturing facilities (at
quarter-end) 16 16
Operating rates for:
Lumber 71 % 80 %
Gypsum wallboard 55 % 51 %
Particleboard 62 % 66 %
MDF 97 % 86 %
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The low average operating rates for lumber, gypsum wallboard, and
particleboard in first quarter 2009 resulted from the curtailment of production
to match 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.
The change in share-based and long-term incentive compensation expense was
principally due to the effect of our higher share price on our cash settled
awards compared with our share price at year-end 2008. No expense was recognized
in first quarter 2008 on options awarded in that quarter as they were subject to
shareholder approval, which was received on May 2, 2008. Please read Note 4 to
the Consolidated Financial Statements for further information.
Other operating expense not included in business segments totaled $4 million
in first quarter 2009 and was primarily associated with 2008 facility closures
and severance related to headcount reductions.
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 possibly
consolidating and closing converting facilities and selling under-performing
assets.
Other non-operating income (expense) includes gains of $10 million in
connection with the purchase and retirement of $20 million of our 7.875% Senior
Notes due in 2012, $27 million of our 6.375% Senior Notes due in 2016, and
$6 million of our 6.625% Senior Notes due in 2018.
Net interest income 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 and a subsequent letter of
credit substitution event. At first quarter-end 2009 and 2008, the interest rate
on our financial assets was 1.21 percent and 3.28 percent and the interest rate
on our nonrecourse financial liabilities was 1.32 percent and 3.86 percent.
These interest rates are variable and are based on different indices and,
therefore, may not always reflect the same spread.
The change in interest expense in first quarter 2009 compared with first
quarter 2008 was primarily due to higher levels of debt outstanding.
Goodwill
Our goodwill totals $394 million of which $265 million is allocated to our
corrugated packaging segment and $129 million to the gypsum wallboard component
of our building products segment. Substantially all our goodwill is deductible
for income tax purposes. We do not believe our goodwill is impaired at first
quarter-end 2009.
Goodwill was tested for impairment at the beginning of fourth quarter 2008 in
conjunction with our annual test and again as of year-end 2008 in conjunction
with an interim test due in part to the decline in our market capitalization.
Both tests indicated that our goodwill was not impaired and that the estimated
fair value of the reporting units substantially exceeded their carrying value.
In performing these tests, we estimated fair value based on discounted cash flow
models, which included estimates of amounts and timing of future cash flows,
discount rates, product pricing and shipments, and input costs. We used discount
rates between 9.5 percent and 13 percent to discount the estimated future cash
flow estimates.
Since year-end 2008 there have been no changes in the composition of our
reporting units and our analysis of first quarter 2009 events and operations,
including the improvement in our market capitalization, did not indicate it was
likely that there had been any significant deterioration in the estimated fair
value of our reporting units. As a result, we did not perform an interim test
for goodwill impairment at first quarter-end 2009. If current economic and
market conditions continue for a prolonged period or get worse, it is possible
that in future periods our goodwill could become impaired, and we would be
required to recognize impairment charges, which could possibly be significant.
Income Taxes
Our effective tax rate was 46 percent in first quarter 2009 and 48 percent in
first quarter 2008. Differences between the effective tax rate and the statutory
rate are due to state income taxes, nondeductible items, and deferred taxes on
unremitted foreign income.
Average Shares Outstanding
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 Quarter 2009
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. Pricing for our corrugated
packaging, gypsum wallboard and MDF improved in first quarter 2009. 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.
First Quarter
2009 2008
(In millions)
Cash received from:
Operations (including payments related to our 2007
transformation plan of $39 million in first quarter 2008) $ 114 $ 19
Working capital (including payments related to our 2007
transformation plan of $276 million in first quarter 2008) (34 ) (358 )
Cash received from (used for) operations 80 (339 )
. . .
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