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| TIN > SEC Filings for TIN > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
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;
• 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 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 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 six months 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
In first six months 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 Second Quarter and First Six Months 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:
Second Quarter First Six Months
2009 2008 2009 2008
(In millions, except per share)
Revenues
Corrugated packaging $ 762 $ 798 $ 1,552 $ 1,574
Building products 144 193 295 361
Total revenues $ 906 $ 991 $ 1,847 $ 1,935
Segment operating income
Corrugated packaging $ 91 $ 52 $ 196 $ 107
Building products (3 ) 1 (5 ) (20 )
Total segment operating income 88 53 191 87
Items not included in segments
General and administrative expense (18 ) (21 ) (35 ) (42 )
Share-based and long-term incentive
compensation (17 ) (2 ) (26 ) (6 )
Other operating income (expense) 75 -- 71 (15 )
Other non-operating income (expense) (9 ) 1 1 2
Net interest income (expense) on
financial assets and nonrecourse
financial liabilities of special purpose
entities (1 ) -- 1 (3 )
Interest expense on debt (17 ) (20 ) (36 ) (37 )
Income (loss) before taxes 101 11 167 (14 )
Income tax (expense) benefit (35 ) (3 ) (65 ) 9
Net income (loss) 66 8 102 (5 )
Net income attributable to noncontrolling
interest of special purpose entities -- -- (1 ) --
Net income (loss) attributable to
Temple-Inland Inc. $ 66 $ 8 $ 101 $ (5 )
Average basic shares outstanding 106.7 106.6 106.7 106.7
Average diluted shares outstanding 107.8 107.4 107.2 107.6
Earnings per basic share $ 0.62 $ 0.07 $ 0.95 $ (0.05 )
Earnings per diluted share $ 0.61 $ 0.07 $ 0.94 $ (0.05 )
ROI, annualized 9.4 % 3.1 %
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In first six months 2009, significant items affecting net income included:
• We experienced higher prices and lower volumes for our corrugated packaging products compared with first six months 2008.
• We experienced lower prices and volumes for most of our building products compared with first six months 2008.
• We benefited from a decline in most key input costs compared with first six months 2008 and from our continuing initiatives to lower costs, improve asset utilization, and increase operating efficiencies.
• Share-based and long-term incentive compensation increased $20 million compared with first six months 2008 primarily due to the increase in our share price during the period on our cash-settled awards.
• We recognized other operating income of $77 million related to alternative fuel mixture tax credits, net of related costs.
• We incurred $6 million of other operating expense primarily associated with 2008 facility closures and severance related to headcount reductions.
• We recognized a gain of $18 million in connection with the purchase and retirement of $154 million of our long-term debt.
• We recognized $17 million of non-operating expense associated with the replacement of an issuer of irrevocable letters of credit securing the notes we received in connection with the 2007 sale of our strategic timberland.
In first six months 2008, significant items affecting net income (loss) included:
• We experienced higher prices and slightly higher volumes for our corrugated packaging products compared with first six months 2007.
• We continued to experience lower prices and volumes for most of our building products compared with first six months 2007. Building products benefited from significant cost reduction activities.
• While we continued to see the benefits from our initiative to lower costs, improve asset utilization, and increase operating efficiencies, the increased cost of energy, freight, chemicals, and fiber compared with first six months 2007 more than offset these benefits.
• Share-based compensation decreased compared with first six months 2007 due to the decrease in our share price during the period on our cash-settled awards.
• We incurred $20 million of costs associated with our transformation plan, of which $15 million was 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 pay-off of $286 million of 6.75% Senior 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 manufactured 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:
Second Quarter First Six Months
2009 2008 2009 2008
(Dollars in millions)
Revenues $ 762 $ 798 $ 1,552 $ 1,574
Costs and expenses (671 ) (746 ) (1,356 ) (1,467 )
Segment operating income $ 91 $ 52 $ 196 $ 107
Segment ROI 18.6 % 10.8 %
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Corrugated packaging results for first six months 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:
Second Quarter 2009 First Six Months 2009
versus versus
Second Quarter 2008 First Six Months 2008
Increase/(Decrease)
Corrugated packaging
Average prices (1 )% 1 %
Shipments, average week -- (3 )%
Industry shipments, average week(a) (9 )% (9 )%
Paperboard
Average prices (13 )% (11 )%
Shipments, in thousand tons 14 21
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(a) Source: Fibre Box Association
The increase in second quarter and first six months 2009 paperboard shipments was primarily due to shipments of light-weight gypsum facing paper offset by a decrease in containerboard shipments.
Compared with first quarter 2009, average corrugated packaging prices were down five percent and average weekly shipments were up six percent, principally due to normal seasonal fluctuations, while average linerboard prices were down six percent and shipments were down 3,000 tons.
Costs and expenses in second quarter 2009, which includes the Newport mill that we acquired in July 2008, were down ten percent compared with second quarter 2008, and down two percent compared with first quarter 2009. These decreased costs were primarily the result of lower prices for wood fiber, recycled fiber, energy, and freight; lower converting costs; and reduced outside purchases of white-top linerboard and medium due to the integration of PBL. In addition, in second quarter 2009 we recognized $1 million in business interruption insurance proceeds in cost of sales, related to a first quarter 2009 equipment outage at our mill in Maysville, Kentucky.
Fluctuations in our significant cost and expense components included:
Second Quarter 2009 First Six Months 2009
versus versus
Second Quarter 2008 First Six Months 2008
Increase/(Decrease)
(In millions)
Wood fiber $ (14 ) $ (23 )
Recycled fiber (14 ) (34 )
Energy, principally natural gas (19 ) (20 )
Freight (8 ) (11 )
Chemicals (2 ) 1
Depreciation 1 2
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The costs of 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 2009.
Information about our converting facilities and mills follows:
Second Quarter First Six Months
2009 2008 2009 2008
Number of converting facilities (at
quarter-end) 63 64 63 64
Corrugated packaging shipments, in
thousand tons 836 867 1,665 1,694
Paperboard production, in thousand
tons 960 914 1,915 1,828
Percent containerboard production
used internally 93 % 92 % 93 % 92 %
Percent total fiber requirements
sourced from recycled fiber 45 % 36 % 45 % 36 %
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Second quarter and first six months 2009 paperboard production includes production from our Newport mill that we acquired in July 2008. In first six months 2009, we reduced our production by 37,000 tons to match our production to our 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:
Second Quarter First Six Months
2009 2008 2009 2008
(Dollars in millions)
Revenues $ 144 $ 193 $ 295 $ 361
Costs and expenses (147 ) (192 ) (300 ) (381 )
Segment operating income (loss) $ (3 ) $ 1 $ (5 ) $ (20 )
Segment ROI (1.9 )% (7.1 )%
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Fluctuations in product pricing (which includes freight and is net of discounts) and shipments are set forth below:
Second Quarter 2009 First Six Months 2009
versus versus
Second Quarter 2008 First Six Months 2008
Increase/(Decrease)
Lumber:
Average prices (21 )% (15 )%
Shipments (10 )% (8 )%
Gypsum wallboard:
Average prices 4 % 8 %
Shipments (7 )% (3 )%
Particleboard:
Average prices (5 )% (2 )%
Shipments (27 )% (19 )%
MDF:
Average prices (1 )% 3 %
Shipments (18 )% (14 )%
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Pricing for most and demand for all of our building products were down compared with first six months 2008 due to deteriorating conditions in the housing industry. It is likely these conditions will continue for the remainder of 2009.
Compared with first quarter 2009, average prices were flat for lumber and down three percent for MDF, four percent for particleboard, and six percent for gypsum wallboard. Shipments were down seven percent for particleboard, two percent for lumber, eight percent for gypsum wallboard, and nine percent for MDF.
Costs and expenses were down 21 percent in first six months 2009 compared with first six months 2008. The decrease in costs is primarily attributable to curtailment of production to match demand for our products and headcount reductions. In addition, in second quarter 2009, we recognized a $3 million gain from a sale in lieu of condemnation of land near our lumber mill in Rome, Georgia, and we incurred costs of about $1 million related to an indefinite shutdown of our lumber mill in Buna, Texas. In first six months 2008, we incurred $2 million in severance charges for headcount reductions.
Fluctuations in our significant cost and expense components included:
Second Quarter 2009 First Six Months 2009
versus versus
Second Quarter 2008 First Six Months 2008
Increase/(Decrease)
(In millions)
Wood fiber $ (11 ) $ (17 )
Energy, principally natural gas (10 ) (14 )
Chemicals (8 ) (13 )
Freight (7 ) (10 )
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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 2009.
Information about our converting and manufacturing facilities follows:
Second Quarter First Six Months
2009 2008 2009 2008
Number of converting and
manufacturing facilities (at
quarter-end) 16 16 16 16
Operating rates for:
Lumber 63 % 81 % 71 % 95 %
Gypsum wallboard 51 % 52 % 53 % 52 %
Particleboard 62 % 76 % 62 % 70 %
MDF 93 % 109 % 95 % 101 %
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The number of converting and manufacturing facilities and the operating rates include our lumber mill in Buna, Texas, which was indefinitely shutdown in second quarter 2009. The lower average operating rates in first six months 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 was principally due to the effect on our cash-settled awards from our share price being higher at end of the period compared with our share price at year-end 2008. Please read Note 4 to the Consolidated Financial Statements for further information.
Other operating income not included in business segments totaled $71 million in first six months 2009 and included income of $77 million related to alternative fuel mixture tax credits, net of related costs and, charges of $6 million 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) for first six months 2009 includes costs of $17 million associated with the replacement of SunTrust Bank as an issuer of irrevocable letters of credit securing the notes we received in connection with the sale of our strategic timberland in 2007. The $17 million consists of $15 million in fees that we paid in connection with the issuance of the SunTrust letters of credit, which was being amortized over the life of the letters of credit, and $2 million in other fees associated with terminating the transaction with SunTrust. Other non-operating income (expense) also includes gains of $18 million in connection with the purchase and retirement of $28 million of our 7.875% Senior Notes due in 2012, $120 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 (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 second quarter-end 2009, the interest rate on our financial assets was 1.08 percent and the interest rate on our nonrecourse financial liabilities was 1.23 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 six months 2009 compared with first six months 2008 was primarily due to lower 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 second 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 six months 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 second quarter-end 2009. If economic and market conditions are depressed for a prolonged period, 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 35 percent in second quarter 2009 and 39 percent in first six months 2009. Our effective tax rate was 27 percent in second quarter 2008 and 64 percent in first six months 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 increase in average diluted shares outstanding in second quarter 2009 was due to the increase in the dilutive effect of stock options as a result of our higher share price.
Capital Resources and Liquidity for First Six Months 2009 . . .
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