##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q (Mark One)þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended April 2, 2005ORo
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Transition Period From  to
 Commission File Number: 001-08634 Temple-Inland Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    75-1903917
(I.R.S. Employer Identification Number)
 1300 MoPac Expressway South, 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 o No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). þ Yes o No Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: Class
    
    Number of common shares outstanding
as of April 2, 2005Common Stock (par value $1.00 per share)
    
    111,922,484




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PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsTemple-Inland Inc. and SubsidiariesConsolidated Balance SheetConsolidated Statements of IncomeConsolidated Statements of Cash FlowsParent Company (Temple-Inland Inc. and its manufacturing subsidiaries)Summarized Balance SheetsSummarized Statements of IncomeSummarized Statements of Cash FlowsFinancial ServicesSummarized Balance SheetsSummarized Statements of IncomeSummarized Statements of Cash FlowsNotes to the Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESLetterCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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PART I. FINANCIAL INFORMATION 
  
 CONSOLIDATED BALANCE SHEET 
 Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Consolidated(In millions)ASSETSCash and cash equivalents
    
    $
    8
    
    
    $
    252
    
    
    $
    260Loans held for sale
    
    
    
    
    
    
    391
    
    
    
    391Loans, net of allowance for loan losses of $82 in 2005
    
    
    
    
    
    
    9,758
    
    
    
    9,758Securities available-for-sale
    
    
    
    
    
    
    1,070
    
    
    
    1,070Securities held-to-maturity
    
    
    
    
    
    
    3,580
    
    
    
    3,580Trade receivables, less allowance of $16 in 2005
    
    
    469
    
    
    
    
    
    
    
    469Inventories
    
    
    433
    
    

    
    
    
    
    
    433Timber and timberland
    
    
    499
    
    
    
    
    
    
    
    499Property, premises, and equipment
    
    
    1,732
    
    
    
    172
    
    
    
    1,904Goodwill
    
    
    236
    
    
    
    164
    
    
    
    400Prepaid expenses and other assets
    
    
    457
    
    
    
    592
    
    
    
    971Investment in financial services
    
    
    1,148
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    $
    4,982
    
    
    $
    15,979
    
    
    $
    19,735LIABILITIES AND SHAREHOLDERS EQUITYDeposits
    
    $
    
    
    
    $
    9,129
    
    
    $
    9,129Federal Home Loan Bank borrowings
    
    
    
    
    
    
    4,278
    
    
    
    4,278Securities sold under repurchase agreements
    
    
    
    
    
    
    711
    
    
    
    711Accounts payable, accrued expenses, and other liabilities
    
    
    740
    
    
    
    197
    
    
    
    901Long-term debt and other borrowings
    
    
    1,582
    
    
    
    211
    
    
    
    1,793Deferred income taxes
    
    
    142
    
    
    
    
    
    
    
    100Pension liability
    
    
    286
    
    
    
    
    
    
    
    286Postretirement benefits
    
    
    143
    
    
    
    
    
    
    
    143Preferred stock issued by subsidiaries
    
    
    
    
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    2,893
    
    
    
    14,831
    
    
    
    17,646SHAREHOLDERS EQUITYPreferred 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, including shares held in the treasury
    
    
    
    
    
    
    
    
    
    
    124Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    374Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (195
    )Retained earnings
    
    
    
    
    
    
    
    
    
    
    2,0862,389Cost of shares held in the treasury: 11,682,860 shares
    
    
    
    
    
    
    
    
    
    
    (300
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    
    2,089TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    $
    19,735
 Common stock and additional paid-in capital and common shares issued and held in treasury have
been adjusted to reflect our two-for-one stock split on April 1, 2005. See the notes to consolidated financial statements. 3




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CONSOLIDATED BALANCE SHEET
TEMPLE-INLAND INC. AND SUBSIDIARIES
Year-End 2004
Unaudited Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Consolidated(In millions)ASSETSCash and cash equivalents
    
    $
    9
    
    
    $
    363
    
    
    $
    372Loans held for sale
    
    
    
    
    
    
    510
    
    
    
    510Loans, net of allowance for loan losses of $85 in 2004
    
    
    
    
    
    
    9,618
    
    
    
    9,618Securities available-for-sale
    
    
    
    
    
    
    1,118
    
    
    
    1,118Securities held-to-maturity
    
    
    
    
    
    
    3,864
    
    
    
    3,864Trade receivables, less allowances of $16 in 2004
    
    
    404
    
    
    
    
    
    
    
    404Inventories
    
    
    427
    
    
    
    
    
    
    
    427Timber and timberland
    
    
    496
    
    
    
    
    
    
    
    496Property, premises, and equipment
    
    
    1,738
    
    
    
    167
    
    
    
    1,905Goodwill
    
    
    236
    
    
    
    152
    
    
    
    388Prepaid expenses and other assets
    
    
    469
    
    
    
    658
    
    
    
    1,042Investment in financial services
    
    
    1,121
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    $
    4,900
    
    
    $
    16,450
    
    
    $
    20,144LIABILITIES AND SHAREHOLDERS EQUITYDeposits
    
    $
    
    
    
    $
    8,964
    
    
    $
    8,964Federal Home Loan Bank borrowings
    
    
    
    
    
    
    4,717
    
    
    
    4,717Securities sold under repurchase agreements
    
    
    
    
    
    
    787
    
    
    
    787Accounts payable, accrued expenses, and other liabilities
    
    
    740
    
    
    
    350
    
    
    
    1,052Long-term debt and other borrowings
    
    
    1,485
    
    
    
    206
    
    
    
    1,691Deferred income taxes
    
    
    136
    
    
    
    
    
    
    
    89Pension liability
    
    
    289
    
    
    
    
    
    
    
    289Postretirement benefits
    
    
    143
    
    
    
    
    
    
    
    143Preferred stock issued by subsidiaries
    
    
    
    
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    2,793
    
    
    
    15,329
    
    
    
    18,037SHAREHOLDERS EQUITYPreferred 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 122,779,104 shares, including shares held in the treasury
    
    
    
    
    
    
    
    
    
    
    123Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    350Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (192
    )Retained earnings
    
    
    
    
    
    
    
    
    
    
    2,0672,348Cost of shares held in the treasury: 10,592,914 shares
    
    
    
    
    
    
    
    
    
    
    (241
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    
    2,107TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    $
    20,144
 Common stock and additional paid-in capital and common shares issued and held in treasury have
been adjusted to reflect our two-for-one stock split on April 1, 2005. See the notes to consolidated financial statements. 4




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CONSOLIDATED STATEMENTS OF INCOME 
 First Quarter2005
    
    
    2004(In millions, exceptper share amounts)REVENUESManufacturing
    
    $
    967
    
    
    $
    893Financial services
    
    
    236
    
    
    
    2611,203
    
    
    
    1,154COSTS AND EXPENSESManufacturing
    
    
    913
    
    
    
    895Financial services
    
    
    189
    
    
    
    2081,102
    
    
    
    1,103OPERATING INCOME
    
    
    101
    
    
    
    51Parent company interest
    
    
    (28
    )
    
    
    (32
    )Other non-operating income (expense)
    
    
    1
    
    
    
    INCOME BEFORE INCOME TAXES
    
    
    74
    
    
    
    19Income tax (expense) benefit
    
    
    (29
    )
    
    
    (7
    )INCOME FROM CONTINUING OPERATIONS
    
    
    45
    
    
    
    12Discontinued operations
    
    
    
    
    
    
    NET INCOME
    
    $
    45
    
    
    $
    12EARNINGS PER SHAREBasic:Income from continuing operations
    
    $
    0.40
    
    
    $
    0.11Discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.40
    
    
    $
    0.11Diluted:Income from continuing operations
    
    $
    0.39
    
    
    $
    0.11Discontinued operations
    
    
    
    
    
    
    Net income
    

    $
    0.39
    
    
    $
    0.11DIVIDENDS PAID PER SHARE OF COMMON STOCK
    
    $
    0.23
    
    
    $
    0.18
 Per share amounts have been adjusted to reflect our two-for-one stock split on April 1, 2005. See the notes to consolidated financial statements. 5




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CONSOLIDATED STATEMENTS OF CASH FLOWS 
 First Quarter2005
    
    
    2004(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    45
    
    
    $
    12Adjustments:Depreciation and amortization
    
    
    62
    
    
    
    64Amortization and accretion of financial instruments
    
    
    4
    
    
    
    11Provision for loan losses
    
    
    2
    
    
    
    Deferred income taxes (benefit)
    
    
    10
    
    
    
    4Other non-cash charges and (credits), net
    
    
    4
    
    
    
    13Net assets of discontinued operations
    
    
    (2
    )
    
    
    (1
    )Other
    
    
    1
    
    
    
    93Changes in:Trade receivables
    
    
    (65
    )
    
    
    (48
    )Inventories
    
    
    (6
    )
    
    
    6Prepaid expenses and other assets
    
    
    9
    
    
    
    (8
    )Accounts payable and accrued expenses
    
    
    13
    
    
    
    (27
    )Loans held for sale, originations
    
    
    (575
    )
    
    
    (1,639
    )Loans held for sale, sales
    
    
    694
    
    
    
    1,576Collections on loans serviced for others, net
    
    
    (117
    )
    
    
    1379
    
    
    
    69CASH PROVIDED BY (USED FOR) INVESTINGCapital expenditures
    
    
    (64
    )
    
    
    (37
    )Sale of non-strategic assets and operations
    
    
    9
    
    
    
    8Securities available-for-sale, net
    
    
    47
    
    
    
    49Securities held-to-maturity, net
    
    
    281
    
    
    
    (283
    )Loans originated or acquired, net of principal collected
    
    
    (144
    )
    
    
    (147
    )Sales of loans and mortgage servicing rights
    
    
    42
    
    
    
    35Acquisitions, net of cash acquired, and joint ventures
    
    
    (22
    )
    
    
    (15
    )Other
    
    
    1
    
    
    
    150
    
    
    
    (390
    )CASH PROVIDED BY (USED FOR) FINANCINGNet increase (decrease) in deposits
    
    
    165
    
    
    
    (161
    )Additions to debt
    
    
    134
    
    
    
    111Payments of debt
    
    
    (214
    )
    
    
    (179
    )Repurchase agreements and short-term borrowings, net
    
    
    (332
    )
    
    
    459Cash dividends paid to shareholders
    
    
    (25
    )
    
    
    (20
    )Repurchase of common stock
    
    
    (104
    )
    
    
    Exercise of stock options
    
    
    30
    
    
    
    35Settlement of equity purchase contracts
    
    
    26
    
    
    
    Other
    
    
    (21
    )
    
    
    9(341
    )
    
    
    254Net increase (decrease) in cash and cash equivalents
    
    
    (112
    )
    
    
    (67
    )Cash and cash equivalents at beginning of period
    
    
    372
    
    
    
    399Cash and cash equivalents at end of period
    
    $
    260
    
    
    $
    332
 See the notes to consolidated financial statements. 6




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SUMMARIZED BALANCE SHEETS 
 FirstQuarter
    
    
    Year-End2005
    
    
    2004(In millions)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    8
    
    
    $
    9Trade receivables, less allowances of $16 in 2005 and $16 in 2004
    
    
    469
    
    
    
    404Inventories:Work in process and finished goods
    
    
    102
    
    
    
    129Raw materials and supplies
    
    
    331
    
    
    
    298Total inventories
    
    
    433
    
    
    
    427Prepaid expenses and other
    
    
    78
    
    
    
    98Total current assets
    
    
    988
    
    
    
    938Investment in Financial Services
    
    
    1,148
    
    
    
    1,121Timber and Timberland
    
    
    499
    
    
    
    496Property and EquipmentLand and buildings
    
    
    638
    
    
    
    637Machinery and equipment
    
    
    3,344
    
    
    
    3,327Construction in progress
    
    
    101
    
    
    
    86Less allowances for depreciation
    
    
    (2,351
    )
    
    
    (2,312
    )Total property and equipment
    
    
    1,732
    
    
    
    1,738Goodwill
    
    
    236
    
    
    
    236Assets Held for Sale
    
    
    35
    
    
    
    34Other Assets
    
    
    344
    
    
    
    337TOTAL ASSETS
    
    $
    4,982
    
    
    $
    4,900LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    215
    
    
    $
    220Accrued employee compensation and benefits
    
    
    57
    
    
    
    93Accrued interest
    
    
    25
    
    
    
    24Accrued property taxes
    
    
    13
    
    
    
    21Other accrued expenses
    
    
    191
    
    
    
    145Liabilities of discontinued operations
    
    
    7
    
    
    
    7Current portion of long-term debt
    
    
    3
    
    
    
    3Total current liabilities
    
    
    511
    
    
    
    513Long-Term Debt
    
    
    1,582
    
    
    
    1,485Deferred Income Taxes
    
    
    142
    
    
    
    136Pension Liability
    
    
    286
    
    
    
    289Postretirement Benefits
    
    
    143
    
    
    
    143Other Long-Term Liabilities
    
    
    229
    
    
    
    227Total liabilities
    
    
    2,893
    
    
    
    2,793Shareholders Equity
    
    
    2,089
    
    
    
    2,107TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    4,982
    
    
    $
    4,900
 See the notes to consolidated financial statements. 7




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SUMMARIZED STATEMENTS OF INCOME 
 First Quarter2005
    
    
    2004(In millions)REVENUES
    
    $
    967
    
    
    $
    893COSTS AND EXPENSESCost of sales
    
    
    827
    
    
    
    807Selling
    
    
    25
    
    
    
    29General and administrative
    
    
    45
    
    
    
    43Other operating (income) expense
    
    
    16
    
    
    
    16913
    
    
    
    89554
    
    
    
    (2
    )FINANCIAL SERVICES EARNINGS
    
    
    47
    
    
    
    53OPERATING INCOME
    
    
    101
    
    
    
    51Interest expense
    
    
    (28
    )
    
    
    (32
    )Other non-operating income (expense)
    
    
    1
    
    
    
    INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    74
    
    
    
    19Income tax (expense) benefit
    
    
    (29
    )
    
    
    (7
    )INCOME FROM CONTINUING OPERATIONS
    
    
    45
    
    
    
    12Discontinued operations
    
    
    
    
    
    
    NET INCOME
    
    $
    45
    
    
    $
    12
 See the notes to consolidated financial statements. 8




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SUMMARIZED STATEMENTS OF CASH FLOWS 
 First Quarter2005
    
    
    2004(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    45
    
    
    $
    12Adjustments:Depreciation and amortization
    
    
    55
    
    
    
    56Non-cash stock based compensation
    
    
    10
    
    
    
    9Non-cash pension and postretirement expense
    
    
    15
    
    
    
    15Cash contribution to pension and postretirement plans
    
    
    (17
    )
    
    
    (4
    )Deferred income taxes (benefit)
    
    
    7
    
    
    
    2Net earnings of financial services
    
    
    (29
    )
    
    
    (33
    )Dividends from financial services
    
    
    
    
    
    
    30Earnings of joint ventures
    
    
    (8
    )
    
    
    (3
    )Dividends from joint ventures
    
    
    4
    
    
    
    1Other non-cash charges (credits)
    
    
    4
    
    
    
    13Net assets of discontinued operations
    
    
    (2
    )
    
    
    (1
    )Other
    
    
    (1
    )
    
    
    Changes in:Trade receivables
    
    
    (65
    )
    
    
    (48
    )Inventories
    
    
    (6
    )
    
    
    6Prepaid expenses and other assets
    
    
    9
    
    
    
    (8
    )Accounts payable and accrued expenses
    
    
    13
    
    
    
    (27
    )34
    
    
    
    20CASH PROVIDED BY (USED FOR) INVESTINGCapital expenditures
    
    
    (57
    )
    
    
    (28
    )Sales of non-strategic assets and operations
    
    
    1
    
    
    
    6Acquisitions, net of cash acquired, and joint ventures
    
    
    (3
    )
    
    
    (59
    )
    
    
    (22
    )CASH PROVIDED BY (USED FOR) FINANCINGPayments of debt
    
    
    (32
    )
    
    
    (2
    )Cash dividends paid to shareholders
    
    
    (25
    )
    
    
    (20
    )Repurchase of common stock
    
    
    (104
    )
    
    
    Exercise of options
    
    
    30
    
    
    
    35Settlement of equity purchase contracts
    
    
    26
    
    
    
    Additions to debt
    
    
    129
    
    
    
    24
    
    
    
    13Net increase (decrease) in cash and cash equivalents
    
    
    (1
    )
    
    
    11Cash and cash equivalents at beginning of period
    
    
    9
    
    
    
    20Cash and cash equivalents at end of period
    
    $
    8
    
    
    $
    31
 See the notes to consolidated financial statements. 9




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##### Table of Contents



SUMMARIZED BALANCE SHEETS 
 FirstQuarter
    
    
    Year-End2005
    
    
    2004(In millions)ASSETSCash and cash equivalents
    
    $
    252
    
    
    $
    363Loans held for sale
    
    
    391
    
    
    
    510Loans, net of allowance for losses of $82 in 2005 and $85 in 2004
    
    
    9,758
    
    
    
    9,618Securities available-for-sale
    
    
    1,070
    
    
    
    1,118Securities held-to-maturity
    
    
    3,580
    
    
    
    3,864Real estate
    
    
    251
    
    
    
    253Premises and equipment, net
    
    
    172
    
    
    
    167Accounts, notes and accrued interest receivable
    
    
    117
    
    
    
    170Goodwill
    
    
    164
    
    
    
    152Other assets
    
    
    224
    
    
    
    235TOTAL ASSETS
    
    $
    15,979
    
    
    $
    16,450LIABILITIES AND SHAREHOLDERS EQUITYDeposits
    
    $
    9,129
    
    
    $
    8,964Federal Home Loan Bank borrowings
    
    
    4,278
    
    
    
    4,717Securities sold under repurchase agreements
    
    
    711
    
    
    
    787Other liabilities
    
    
    197
    
    
    
    350Other borrowings
    
    
    211
    
    
    
    206Preferred stock issued by subsidiaries
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    14,831
    
    
    
    15,329Shareholders Equity
    
    
    1,148
    
    
    
    1,121TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    15,979
    
    
    $
    16,450
 See the notes to consolidated financial statements. 10




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SUMMARIZED STATEMENTS OF INCOME 
 First Quarter2005
    
    
    2004(In millions)INTEREST INCOMELoans and loans held for sale
    
    $
    129
    
    
    $
    114Securities available-for-sale
    
    
    15
    
    
    
    15Securities held-to-maturity
    
    
    34
    
    
    
    46Other earning assets
    
    
    1
    
    
    
    1Total interest income
    
    
    179
    
    
    
    176INTEREST EXPENSEDeposits
    
    
    39
    
    
    
    34Borrowed funds
    
    
    46
    
    
    
    42Total interest expense
    
    
    85
    
    
    
    76NET INTEREST INCOME
    
    
    94
    
    
    
    100(Provision) credit for loan losses
    
    
    (2
    )
    
    
    NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    92
    
    
    
    100NONINTEREST INCOMELoan servicing fees
    
    
    1
    
    
    
    8Amortization and impairment of servicing rights
    
    
    
    
    
    
    (7
    )Loan origination and sale of loans
    
    
    6
    
    
    
    37Real estate operations
    
    
    14
    
    
    
    15Insurance commissions and fees
    
    
    13
    
    
    
    11Service charges on deposits
    
    
    10
    
    
    
    9Operating lease income
    
    
    1
    
    
    
    3Other
    
    
    12
    
    
    
    9Total noninterest income
    
    
    57
    
    
    
    85NONINTEREST EXPENSECompensation and benefits
    
    
    47
    
    
    
    70Real estate operations, other than compensation
    
    
    6
    
    
    
    8Insurance operations, other than compensation
    
    
    2
    
    
    
    1Occupancy
    
    
    7
    
    
    
    8Data processing
    
    
    4
    
    
    
    4Other
    
    
    36
    
    
    
    41Total noninterest expense
    
    
    102
    
    
    
    132INCOME BEFORE INCOME TAXES
    
    
    47
    
    
    
    53Income tax (expense)
    
    
    (18
    )
    
    
    (20
    )NET INCOME
    
    $
    29
    
    
    $
    33
 See the notes to consolidated financial statements. 11




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##### Table of Contents



SUMMARIZED STATEMENTS OF CASH FLOWS 
 First Quarter2005
    
    
    2004(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    29
    
    
    $
    33Adjustments:Depreciation
    
    
    6
    
    
    
    6Depreciation of leased assets
    
    
    1
    
    
    
    2Amortization and impairment of servicing rights
    
    
    
    
    
    
    7Provision for loan losses
    
    
    2
    
    
    
    Amortization and accretion of financial instruments
    
    
    4
    
    
    
    4Deferred income taxes
    
    
    3
    
    
    
    2Changes in:Loans held for sale, originations
    
    
    (575
    )
    
    
    (1,639
    )Loans held for sale, sales
    
    
    694
    
    
    
    1,576Collections on loans serviced for others, net
    
    
    (117
    )
    
    
    13Other
    
    
    (2
    )
    
    
    7545
    
    
    
    79CASH PROVIDED BY (USED FOR) INVESTINGPurchases of securities available-for-sale
    
    
    
    
    
    
    (28
    )Principal payments and maturities of securities available-for-sale
    
    
    47
    
    
    
    77Purchases of securities held-to-maturity
    
    
    (3
    )
    
    
    (623
    )Principal payments and maturities of securities held-to-maturity
    
    
    284
    
    
    
    340Loans originated or acquired, net of collections
    
    
    (144
    )
    
    
    (147
    )Sales of loans and mortgage servicing rights
    
    
    42
    
    
    
    35Acquisitions, net of cash acquired
    
    
    (19
    )
    
    
    (15
    )Capital expenditures
    
    
    (7
    )
    
    
    (9
    )Other
    
    
    9
    
    
    
    2209
    
    
    
    (368
    )CASH PROVIDED BY (USED FOR) FINANCINGNet increase (decrease) in deposits
    
    
    165
    
    
    
    (161
    )Repurchase agreements and short-term borrowings, net
    
    
    (332
    )
    
    
    459Additions to debt and long-term FHLB borrowings
    
    
    5
    
    
    
    111Payments of debt and long-term FHLB borrowings
    
    
    (182
    )
    
    
    (177
    )Dividends paid to parent company
    
    
    
    
    
    
    (30
    )Other
    
    
    (21
    )
    
    
    9(365
    )
    
    
    211Net increase (decrease) in cash and cash equivalents
    
    
    (111
    )
    
    
    (78
    )Cash and cash equivalents at beginning of period
    
    
    363
    
    
    
    379Cash and cash equivalents at end of period
    
    $
    252
    
    
    $
    301
 See the notes to consolidated financial statements. 12




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##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES 
  Note A  Basis of Presentation Our consolidated financial statements are our primary financial statements and include the
accounts of Temple-Inland Inc. and our manufacturing and financial services subsidiaries and
variable interest entities of which we are the primary beneficiary. We also present as an integral
part of the consolidated financial statements, summarized financial statements of Temple-Inland and
our manufacturing subsidiaries, which we refer to as the parent company summarized financial
statements, and summarized financial statements of our financial services subsidiaries. We do so
in order to provide a clearer presentation of our different businesses and because almost all of
the net assets invested in financial services are subject, in varying degrees, to regulatory rules
and restrictions including restrictions on the payment of dividends to the parent company. As a
result, all consolidated assets are not available to satisfy all consolidated liabilities. You should read our parent company summarized financial statements and financial services
summarized financial statements along with these consolidated financial statements. Our parent
company financial statements reflect our financial services subsidiaries using the equity method. We prepared these unaudited interim financial statements in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. As a result, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements.
However, in our opinion, all adjustments (consisting only of normal accruals) considered necessary
for a fair presentation have been included. These interim operating results are not necessarily
indicative of the results that may be expected for the entire year. For further information, refer
to the financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal
year ended January 1, 2005. We have reclassified some prior year amounts to conform to this years classifications. Note B  Earnings Per Share We computed earnings per share using the following denominators: First Quarter2005
    
    
    2004(In millions)Denominator for basic earnings per share, weighted
average common shares outstanding
    
    
    112.5
    
    
    
    110.2Dilutive effect of:Equity purchase contracts
    
    
    1.5
    
    
    
    Stock options
    
    
    1.7
    
    
    
    1.0Denominator for diluted earnings per share
    
    
    115.7
    
    
    
    111.2
 Basic and diluted weighted average shares outstanding have been adjusted to reflect our
two-for-one stock split on April 1, 2005. Some equity purchase contracts were settled in first quarter 2005, and as a result we issued
826,240 shares of common stock based on a fixed price of $31.72 per share and received $26 million
in cash. We anticipate settling the remaining equity purchase contracts in May 2005. At that
time, we will issue common stock and receive $319 million in cash. The actual number of shares we
issue will be based on the average market price of our stock with a floor of $26, in which case we
will issue 12.3 million shares, and a ceiling of $31.72, in which case we will issue 10 million
shares. 13




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##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In first quarter 2005, we repurchased 2.8 million shares of common stock for $104 million
cash under a February 4, 2005 Board of Directors authorization to repurchase up to 12 million
shares. Note C  Comprehensive Income Comprehensive income consists of: First Quarter2005
    
    
    2004(In millions)Net income
    
    $
    45
    
    
    $
    12Other comprehensive income (loss), net of taxes:Unrealized gains (losses) on:Available-for-sale securities
    
    
    (3
    )
    
    
    (2
    )Derivative instruments
    
    
    
    
    
    
    Foreign currency translation adjustments
    
    
    
    
    
    
    Other comprehensive income (loss)
    
    
    (3
    )
    
    
    (2
    )Comprehensive income
    
    $
    42
    
    
    $
    10
 At first quarter-end 2005, the aggregate fair value of our interest rate swap, linerboard and
OCC derivative instruments was a $4 million liability consisting of $4 million of liabilities for
our interest rate swap derivatives and an immaterial asset for our linerboard and OCC derivatives.
Of the interest rate swap derivative liabilities, $2 million is related to a hedged transaction and
$2 million is a non-hedging instrument. Changes in the fair value of the hedged transaction
decreased other comprehensive income by $1 million in first quarter 2005 and an immaterial amount
in first quarter 2004. The gain recognized in other non-operating (income) expense for the change
in the fair value of the non-hedging instrument was $1 million in first quarter 2005.
Additionally, the fair value of our financial services interest rate lock commitments and forward
sales of loans was a liability of $1 million at first quarter-end 2005. Note D  Segment Information We have three reportable segments: corrugated packaging, forest products, and financial
services. Corrugated packaging manufactures containerboard and corrugated packaging. Forest
products manages our timber resources and manufactures a variety of building products. Financial
services operates a savings bank and an insurance agency and engages in real estate development
activities. We evaluate performance based on operating income before unallocated expenses and income
taxes. Unallocated expenses represent expenses managed on a company-wide basis and include
corporate general and administrative expense; other operating and non-operating income (expense);
and parent company interest expense. Other operating income (expense) includes gain or loss on sale
of assets, asset impairments and expenses associated with consolidation initiatives and facility
closures. The accounting policies of the segments are the same as those described in the accounting
policy notes to the financial statements. 14




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##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) UnallocatedFor First Quarter or at
    
    Corrugated
    
    
    Forest
    
    
    Financial
    
    
    Expenses andQuarter-End 2005
    
    Packaging
    
    
    Products
    
    
    Services
    
    
    Eliminations
    
    
    Total(In millions)Revenues from external customers
    
    $
    718
    
    
    $
    249
    
    
    $
    236
    
    
    $
    
    
    
    $
    1,203Depreciation and amortization
    
    
    40
    
    
    
    13
    
    
    
    7
    
    
    
    2
    
    
    
    62Income (loss) before taxes
    
    
    50
    
    
    
    54
    
    
    
    47
    
    
    
    (77
    )(a)
    
    
    74Financial services, net interest
income
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    94Total assets
    
    
    2,473
    
    
    
    1,024
    
    
    
    15,979
    
    
    
    259
    
    
    
    19,735Capital expenditures
    
    
    39
    
    
    
    14
    
    
    
    7
    
    
    
    4
    
    
    
    64Goodwill
    
    
    236
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    400
 For First Quarter or atQuarter-End 2004(In millions)Revenues from external customers
    
    $
    673
    
    
    $
    220
    
    
    $
    261
    
    
    $
    
    
    
    $
    1,154Depreciation and amortization
    
    
    39
    
    
    
    15
    
    
    
    8
    
    
    
    2
    
    
    
    64Income (loss) before taxes
    
    
    8
    
    
    
    32
    
    
    
    53
    
    
    
    (74
    ) (b)
    
    
    19Financial services, net interest
income
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    100Total assets
    
    
    2,359
    
    
    
    1,034
    
    
    
    17,384
    
    
    
    307
    
    
    
    21,084Capital expenditures
    
    
    18
    
    
    
    8
    
    
    
    9
    
    
    
    2
    
    
    
    37Goodwill
    
    
    237
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    395
   (a)
    Includes other operating expenses for first quarter 2005 of $24 million, which
consists of a $11 million charge associated with converting and production facility closures,
a $7 million charge related to antitrust litigation, a $4 million charge associated with the
recently completed proxy contest, and $2 million of other. Of these amounts, $18 million
applies to corrugated packaging and $6 million does not apply to a business segment.(b)
    Includes other operating expenses for first quarter 2004 of $19 million,
which consists of a $14 million charge associated with converting and production facility
closures and asset impairments and a $5 million charge related to consolidation and supply
chain initiatives. Of these amounts, $2 million applies to corrugated packaging, $12 million
applies to forest products, and $5 million does not apply to a business segment. Note E  Employee Benefit Plans The components of net periodic benefit cost of our defined benefit pension plans and
postretirement plans for first quarter are: PostretirementPension Benefits
    
    
    Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004(In millions)Service costs
    
    $
    7
    
    
    $
    6
    
    
    $
    1
    
    
    $
    1Interest cost on projected benefit obligation
    
    
    18
    
    
    
    18
    
    
    
    2
    
    
    
    2Expected return on plan assets
    
    
    (18
    )
    
    
    (17
    )
    
    
    
    
    
    
    Amortization of prior service costs
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Amortization of net loss
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    13
    
    
    $
    13
    
    
    $
    2
    
    
    $
    2
 In first quarter 2005, we made a $15 million voluntary, discretionary contribution to the
defined benefit pension plan. Note F  Stock-Based Compensation Beginning January 2003, we voluntarily adopted the prospective transition method of accounting
for stock-based compensation contained in Statement of Financial Accounting Standards (SFAS) No.
148, Accounting for 15




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TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123. The principal effect of adopting the prospective transition method is that the fair value of
stock options granted in 2003 and thereafter is charged to expense over the option-vesting period.
Prior to 2003, we used the intrinsic value method in accounting for stock-based compensation. As a
result, no stock-based compensation expense related to stock options granted prior to 2003 is
reflected in net income, as all stock options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant. Therefore, the cost related to
stock-based compensation recognized in net income for 2005 and 2004 is less than would have been
recognized if the fair value method had been applied to all stock options granted. The following
table illustrates the effect on net income and earnings per share as if the fair value method had
been applied to all stock options granted. First Quarter2005
    
    
    2004(In millions)Net income, as reported
    
    $
    45
    
    
    $
    12Add: Stock-based compensation
expense, net of related tax effects,
included in the determination of
reported net income
    
    
    6
    
    
    
    6Deduct: Total stock-based
compensation expense, net of related
tax effects, determined under the
fair value based method for all
awards
    
    
    (7
    )
    
    
    (8
    )Pro forma net income
    
    $
    44
    
    
    $
    10Earnings per share:Basic, as reported
    
    $
    0.40
    
    
    $
    0.11Basic, pro forma
    
    $
    0.39
    
    
    $
    0.09Diluted, as reported
    
    $
    0.39
    
    
    $
    0.11Diluted, pro forma
    
    $
    0.38
    
    
    $
    0.09
 Note G  Contingencies We are involved in various legal proceedings that arise from time to time in the ordinary
course of doing business. We believe that the possibility of a material liability from any of
these proceedings is remote and we do not believe that the outcome of any of these proceedings
should have a material adverse effect on our financial position, results of operations, or cash
flow. As we have previously reported, on May 14, 1999, two of our subsidiaries and eight other
linerboard manufacturers were named as defendants in a consolidated class action complaint that
alleged a civil violation of Section 1 of the Sherman Act. We executed a settlement agreement on
April 11, 2003, with the representatives of the class, which received final approval by the trial
court. We paid a total of $8 million into escrow to fulfill the terms of the class action
settlement. Twelve individual complaints containing allegations similar to those in the class action have
been filed by certain opt-out plaintiffs and over 3,000 of their named subsidiaries against the
original defendants in the class action. As a result of our periodic assessment of loss
contingencies, we increased our reserve for this matter by $7 million in first quarter 2005. We
continue to believe that the plaintiffs allegations in the opt-out litigation have no merit and
are vigorously defending against the suits. Note H  Assets Held For Sale Assets held for sale include assets of discontinued operations and other non-strategic assets
held for sale. At first quarter-end 2005, discontinued operations consist of the chemical business obtained
in the acquisition of Gaylord Container Corporation. At first quarter-end 2005, the assets and
liabilities of the discontinued
operations include $2 million of working capital and $13 million of property and
equipment. Revenues from discontinued operations were $5 million in first quarter 2005 and $4
million in first quarter 2004. At first quarter-end 2005, the carrying value of non-strategic assets held for sale was $13
million. 16




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TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Note I  Other Operating (Income) Expense First Quarter2005
    
    
    2004(In millions)Equity in earnings of joint ventures
    
    $
    (8
    )
    
    $
    (3
    )Loss on closure of production and converting facilities
    
    
    11
    
    
    
    14Antitrust litigation
    
    
    7
    
    
    
    Proxy contest
    
    
    4
    
    
    
    Expense associated with consolidation of administrative
functions
    
    
    
    
    
    
    5Other
    
    
    2
    
    
    
    Total
    
    $
    16
    
    
    $
    16
 We continue 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 facilities and selling under-performing assets. In first quarter 2005,
we announced our intentions to close our Antioch, California corrugated packaging facility and we
effected workforce reductions at a number of other converting and production facilities. These
actions affected or will affect approximately 185 employees. The Antioch facility is scheduled to
close by June 1, 2005. In connection with these and other actions initiated in 2004, we recognized
$4 million in asset impairments, $4 million in exit costs, and incurred $3 million in retention and
severance obligations, of which $2 million was paid in first quarter 2005, with the remainder to be
paid in second quarter 2005. Activity within our accruals for exit costs follows: Beginning
    
    
    
    
    
    
    Cashof Period
    
    
    Additions
    
    
    Payments
    
    
    End of Period(In millions)Involuntary employee
terminations
    
    $
    2
    
    
    $
    3
    
    
    $
    (3
    )
    
    $
    2Contract termination penalties
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Environmental compliance
    
    
    8
    
    
    
    
    
    
    
    (3
    )
    
    
    5Demolition
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Total
    
    $
    24
    
    
    $
    3
    
    
    $
    (6
    )

    
    $
    21
 In addition, $6 million of financial services exit cost accruals were finalized and paid in
first quarter 2005, and an additional $1 million was accrued. At first quarter-end 2005, financial
services accruals for exit cost was $6 million. Note J  Acquisitions And Other Items In first quarter 2005, our financial services segment completed the acquisition of an
insurance agency for $18 million cash with potential additional consideration of up to $7 million.
This acquisition did not materially affect our financial position, results of operations, or
liquidity. Note K  Change in Method of Accounting and Accounting Pronouncements Change in Method of Accounting for Certain Inventories In January 2005, we changed our method of accounting for our corrugated packaging inventories
from the LIFO method to the average cost method, which approximates FIFO. As a result of our
ongoing efforts to reduce cost permanently and increase asset utilization, we believe the average
cost method is preferable because it: (i) increases the transparency of our financial reporting
through a more balanced income statement and balance sheet presentation; (ii) results in the
valuation of all of our inventories at current cost in our financial statements; and (iii) conforms
all of our inventories to a single method of accounting. 17




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TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) As a result, at the beginning of first-quarter 2005, we increased inventories $25 million,
increased our income tax liability by $10 million and increased retained earnings by $15 million.
In addition, as required by generally accepted accounting principles, we have retrospectively
applied the average cost method to our prior period income statements and segment operating
results, the effect of which is summarized as follows: Corrugated Packaging
    
    
    Income from ContinuingSegment Operating Income
    
    
    Operations
    
    
    Per Diluted ShareAs
    
    
    Retrospective
    
    
    As
    
    
    Retrospective
    
    
    
    
    
    
    RetrospectiveReported
    
    
    Application
    
    
    Reported
    
    
    Application
    
    
    As Reported
    
    
    Application(In millions, except per share)2004First quarter
    
    $
    10
    
    
    $
    8
    
    
    $
    13
    
    
    $
    12
    
    
    $
    0.12
    
    
    $
    0.11Second quarter
    
    
    26
    
    
    
    24
    
    
    
    55
    
    
    
    54
    
    
    
    0.49
    
    
    
    0.48Third quarter
    
    
    42
    
    
    
    40
    
    
    
    40
    
    
    
    39
    
    
    
    0.36
    
    
    
    0.35Fourth quarter
    
    
    27
    
    
    
    24
    
    
    
    54
    
    
    
    52
    
    
    
    0.47
    
    
    
    0.45Year
    
    $
    105
    
    
    $
    96
    
    
    $
    162
    
    
    $
    157
    
    
    $
    1.44
    
    
    $
    1.39
 Pending Accounting Pronouncements In April 2005, the Securities and Exchange Commission adopted a rule delaying the effective
date of FASB SFAS No. 123 (revised December 2004), Share Based Payment, which requires that the
cost of all employee stock options, as well as other equity-based compensation arrangements, be
reflected in the financial statements based on their estimated fair value. As a result, SFAS No.
123R will now be effective for us beginning first quarter 2006. 18




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##### Table of Contents



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 Private Securities Litigation Reform Act of
1995. These forward-looking statements involve risks and uncertainties and are identified by their
use of terms and phrases such as believe, anticipate, could, estimate, 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. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these
forward-looking statements. In order to comply with the terms of the safe harbor, we note that 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 and pursued by us and our subsidiaries;
    the availability and price of raw materials used by us and our subsidiaries;
    fluctuations in the cost of purchased energy;
    fluctuations in the cost we incur to transport the raw materials we use and the
products we manufacture;
    assumptions related to pension and postretirement costs;
    assumptions related to the accounting for impaired assets;
    the collectibility of loans and accounts receivable and related provision for losses;
    competitive actions by other companies;
    changes in laws or regulations and actions or restrictions of regulatory agencies;
    the accuracy of certain judgments and estimates concerning our integration of acquired operations;
    our ability to execute certain strategic and business improvement initiatives; and
    other factors, many of which are beyond our and our subsidiaries control. Our actual results, performance, or achievement could differ materially 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. 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 and a significant portion of senior managements compensation is based on
achieving ROI targets. In evaluating overall performance, we define ROI as operating income, adjusted for significant
unusual items, divided by parent company total assets, less certain assets and current liabilities,
excluding the current portion of debt. In evaluating segment performance, we define ROI as
segment-operating income divided by segment assets less segment 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, remember that ROI is a non-GAAP 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. 19




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##### Table of Contents



Results of Operations for First Quarter 2005 and 2004 Summary A summary of the results of operations by business segment follows: First Quarter2005
    
    
    2004(In millions, exceptper share)RevenuesCorrugated packaging
    
    $
    718
    
    
    $
    673Forest products
    
    
    249
    
    
    
    220Financial services
    
    
    236
    
    
    
    261Total revenues
    
    $
    1,203
    
    
    $
    1,154Segment Operating IncomeCorrugated packaging
    
    $
    50
    
    
    $
    8Forest products
    
    
    54
    
    
    
    32Financial services
    
    
    47
    
    
    
    53Total segment operating income
    
    
    151
    
    
    
    93Expenses not allocated to segmentsGeneral and administrative
    
    
    (26
    )
    
    
    (23
    )Other operating income (expense)
    
    
    (24
    )
    
    
    (19
    )Other non-operating income (expense)
    
    
    1
    
    
    
    Parent company interest
    
    
    (28
    )
    
    
    (32
    )Income before income taxes
    
    
    74
    
    
    
    19Income (taxes) benefit
    
    
    (29
    )
    
    
    (7
    )Income from continuing operations
    
    $
    45
    
    
    $
    12Income from continuing operations, per diluted share
    
    $
    0.39
    
    
    $
    0.11Average diluted shares outstanding
    
    
    115.7
    
    
    
    111.2Temple-Inland ROI
    
    
    9.7
    %
    
    
    5.0
    %
 Significant items affecting 2005 income from continuing operations included:  
    In 2005, we continued to see the benefits in our manufacturing operations of our
initiatives to lower costs and improve asset utilization and operating efficiencies.
In addition, market demand strengthened, resulting in higher prices and shipments for
most of our product offerings. Our financial services operations were negatively
impacted by lower net interest income resulting from a decrease in average earning
assets. Actions taken to lower cost and improve asset utilization and operating
efficiencies included the announced closure of our Antioch, California converting
facility and other workforce reductions which resulted in $11 million in charges and
expenses. In addition, we incurred $13 million in charges principally associated with
antitrust litigation and the recently completed proxy contest.
    In 2004, actions taken to lower costs and improve asset utilization and operating
efficiencies resulted in charges and expenses of $19 million, principally related to
the closure of converting and production facilities and the consolidation of
administrative functions. Share and per share amounts for all periods have been adjusted to reflect our two-for-one
stock split on April 1, 2005. 20




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##### Table of Contents



Business Segments We manage our operations through three business segments:  
    Corrugated packaging,
    Forest products, and
    Financial services. 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, loan collateral values, particularly real estate, 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 that we convert into corrugated packaging and
sell in the open market. Our corrugated packaging segment revenues are principally derived from the
sale of corrugated packaging products and, to a lesser degree, from the sale of linerboard in the
domestic and export markets. A summary of our corrugated packaging results follows: First Quarter2005
    
    
    2004(Dollars in millions)Revenues
    
    $
    718
    
    
    $
    673Segment operating income
    
    
    50
    
    
    
    8Segment ROI
    
    
    9.5
    %
    
    
    1.6
    %
 Corrugated packaging pricing and shipments improved due to market demand and market share
growth. First Quarter 2005 versusFirst Quarter 2004Increase (Decrease)Corrugated packagingAverage prices
    
    
    9
    %Shipments, average week
    
    
    5
    %Industry shipments, average week (a)
    
    
    1
    %Linerboard
    
    
    24
    %Average prices
    
    
    24
    %Shipments, tons
    
    
    (38
    )%
   (a)
 The increase in corrugated packaging shipments was generated with five fewer converting
facilities in first quarter 2005 compared with first quarter 2004. Linerboard sales and shipments to third parties were down because more of our production was
used in our converting facilities, which is consistent with our strategy to convert more of the
linerboard we produce in our own converting facilities. Compared with fourth quarter 2004, average corrugated packaging prices were flat and shipments
were up one percent while average linerboard prices were down three percent and shipments were down
14 percent. As part of our continuing efforts to lower cost and improve operating efficiency and asset
utilization, we announced that we would close our Antioch, California converting facility by June
2005. 21




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##### Table of Contents



Fluctuations in our significant cost and expense components included: First Quarter 2005 versusFirst Quarter 2004Increase (Decrease)(In millions)Wood fiber
    
    $
    8Recycled fiber
    
    
    9Energy, principally natural gas
    
    
    4Depreciation
    
    
    1Pension and postretirement
    
    
    (1
    )
 Our wood and recycled fiber and energy costs fluctuate based on the market prices we pay for
these commodities. It is likely that these costs will continue to fluctuate during 2005. Information about our converting facilities and mills follows: First Quarter2005
    
    
    2004Number of converting facilities (at quarter-end)
    
    
    69
    
    
    
    73Mill capacity, in thousand tons
    
    
    892
    
    
    
    827Mill production, in thousand tons
    
    
    875
    
    
    
    832Percent mill production used internally
    
    
    92
    %
    
    
    87
    %Percent of total fiber requirements sourced from recycled fiber
    
    
    36
    %
    
    
    34
    %Corrugating medium purchases from our Premier Boxboard Limited
LLC joint venture, in thousand tons
    
    
    15
    
    
    
    28
 Forest Products We own or lease two million acres of timberland in Texas, Louisiana, Georgia, and Alabama. We
grow timber, cut the timber and convert it into products. We intend to create the infrastructure
necessary for real estate development of our designated high-value timberland in Georgia,
principally near Atlanta. We manufacture lumber, particleboard, gypsum wallboard, fiberboard and
medium density fiberboard (MDF). Our forest products segment revenues are principally derived from
the sales of these products and, to a lesser degree, from sales of fiber and high-value lands and
other income. We also own 50 percent interests in a gypsum wallboard joint venture and in an MDF
joint venture. A summary of our forest products results follows: First Quarter2005
    
    
    2004(Dollars in millions)Revenues
    
    $
    249
    
    
    $
    220Segment operating income
    
    
    54
    
    
    
    32Segment ROI
    
    
    23.1
    %
    
    
    13.1
    %
 22




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##### Table of Contents



Pricing and shipment improved for most product offerings due to the strong housing and
remodeling markets. First Quarter 2005 versusFirst Quarter 2004Increase (Decrease)Lumber:Average prices
    
    
    9
    %Shipments
    
    
    
    %Particleboard:Average prices
    
    
    16
    %Shipments
    
    
    8
    %Gypsum:Average prices
    
    
    13
    %Shipments
    
    
    21
    %MDF:Average prices
    
    
    11
    %Shipments
    
    
    18
    %
 Segment operating income includes our share of gypsum and MDF joint ventures operating
income: $6 million in 2005 and $3 million in 2004. The joint ventures operating results generally
fluctuate in relation to the price and shipment changes noted above. Segment operating income also
includes income from hunting, mineral, and recreational leases of $6 million in 2005 and $4
million in 2004. Compared with fourth quarter 2004, average prices were up four percent for lumber and two
percent for gypsum, while average prices were down three percent for particleboard and four percent
for MDF. Shipments were up seven percent for lumber, 26 percent for particleboard, six percent for
gypsum, and 26 percent for MDF. Information regarding our high-value land sales follows: First Quarter2005
    
    
    2004High-value land:Acres sold
    
    
    448
    
    
    
    430Profit included in segment operating income (in millions)
    
    $
    4
    
    
    $
    3
 Fluctuations in our significant cost and expense components included: First Quarter 2005 versusFirst Quarter 2004Increase (Decrease)(In millions)Wood fiber
    
    $
    8Energy, principally natural gas
    
    
    3Depreciation
    
    
    (2
    )Pension and postretirement
    
    
    1
 Our goal is to increase our use of wood fiber from our timberland and reduce our reliance on
outside purchases. Our outside purchases of fiber and energy costs fluctuate based on the market
prices we pay for these commodities. It is likely that these costs will continue to fluctuate
during 2005. 23




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##### Table of Contents



Information about our timber harvest and converting and manufacturing facilities follows: First Quarter2005
    
    
    2004Timber harvest, in million tons:Sawtimber
    
    
    0.5
    
    
    
    0.6Pulpwood
    
    
    0.8
    
    
    
    0.8Total
    
    
    1.3
    
    
    
    1.4Number of converting and manufacturing facilities (at quarter-end)
    
    
    18
    
    
    
    18Average operating rates for all product lines:High
    
    
    106
    %
    
    
    92
    %Low
    
    
    62
    %
    
    
    57
    %Average operating rates for all products lines excluding sold or closed facilities:High
    
    
    106
    %
    
    
    95
    %Low
    
    
    91
    %
    
    
    76
    %
 In second quarter 2003, we indefinitely closed our Mt. Jewett particleboard facility. Financial Services We own a savings bank, Guaranty Bank, and an insurance agency and engage in real estate
development activities. In late 2004, we repositioned our mortgage origination activities and sold
our third-party mortgage-servicing portfolio. Guaranty makes up the predominant amount of our
financial services segment operating income, revenues, assets, and liabilities. In general, we
gather funds from depositors, borrow money, and invest the resulting cash in loans and securities.
In first quarter 2005, we acquired an insurance agency for $18 million cash with potential
additional consideration of up to $7 million. This acquisition did not significantly affect our
operating results. A summary of our financial services results follows: First Quarter2005
    
    
    2004(Dollars in millions)Net interest income
    
    $
    94
    
    
    $
    100Segment operating income
    
    
    47
    
    
    
    53Segment ROI
    
    
    16.8
    %
    
    
    18.9
    %
 The change in net interest income in first quarter 2005 was principally due to a decline in
our average earning assets, principally single-family mortgage backed securities. Net Interest Income and Earning Assets and Deposits Information concerning our interest rate spread follows: First Quarter2005
    
    
    2004Average
    
    
    Yield/
    
    
    Average
    
    
    Yield/Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in millions)Earning assets
    
    $
    15,137
    
    
    
    4.72
    %
    
    $
    16,222
    
    
    
    4.34
    %Interest-bearing liabilities
    
    
    14,232
    
    
    
    2.39
    %
    
    
    15,136
    
    
    
    2.01
    %Interest rate spread
    
    
    
    
    
    
    2.33
    %
    
    
    
    
    
    
    2.33
    %
 Our interest rate spread remained constant, as the yield on our earning assets and
interest-bearing liabilities moved in tandem. As we are currently positioned, if interest rates
remain relatively stable, it is likely that our net 24




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##### Table of Contents



interest spread will remain near its current level. However, if interest rates change
significantly, it is likely that our interest rate spread will decline. The following tables summarize the composition of earning assets and deposits: First Quarter-End2005
    
    
    2004(Dollars in millions)Residential housing assetsLoans and loans held for sale
    
    $
    7,451
    
    
    $
    7,025Securities
    
    
    4,650
    
    
    
    6,301Total residential housing assets
    
    
    12,101
    
    
    
    13,326Other earning assets
    
    
    2,890
    
    
    
    2,964Total earning assets
    
    $
    14,991
    
    
    $
    16,290Residential housing assets as a percentage of total earning assets
    
    
    81
    %
    
    
    82
    %Transaction accounts
    
    $
    4,751
    
    
    $
    5,236Certificates of deposit
    
    
    4,378
    
    
    
    3,300Total deposits
    
    $
    9,129
    
    
    $
    8,536
 The change in earning assets at first quarter-end 2005 was principally due to a decrease in
single-family mortgage-backed securities resulting from reduced purchases coupled with prepayments
related to refinancing activity and a decrease in loans held for sale due to the repositioning of
our mortgage origination activities. These changes were partially offset by increases in
single-family mortgage and single-family mortgage warehouse loans. As previously disclosed, we
anticipate our earning assets to remain at first quarter 2005 levels or slightly lower for several
more months, but we expect to begin to see increased funding on new loan commitments beginning in
late 2005. Asset Quality and Allowance for Loan Losses A summary of various asset quality measures we monitor follows: First Quarter-EndYear-2005
    
    
    2004
    
    
    End 2004(Dollars in millions)Non-performing loans
    
    $
    63
    
    
    $
    102
    
    
    $
    50Restructured operating lease assets
    
    
    35
    
    
    
    39
    
    
    
    37Foreclosed real estate
    
    
    4
    
    
    
    27
    
    
    
    4Non-performing assets
    
    $
    102
    
    
    $
    168
    
    
    $
    91Non-performing loans as a percentage of total loans
    
    
    0.64
    %
    
    
    1.10
    %
    
    
    0.51
    %Non-performing assets ratio
    
    
    1.03
    %
    
    
    1.80
    %
    
    
    0.93
    %Allowance for loan losses/non-performing loans
    
    
    130
    %
    
    
    111
    %
    
    
    170
    %Allowance for loan losses/total loans
    
    
    0.83
    %
    
    
    1.22
    %
    
    
    0.88
    %
 The change in non-performing loans at first quarter-end 2005 compared with first quarter-end
2004 was principally a result of repayments or collateral foreclosure on a number of commercial
real estate loans in 2004. The change in non-performing loans at first quarter-end 2005 compared
with year-end 2004 was principally due to a previously disclosed direct-financing lease transaction
with an automotive parts manufacturer that declared bankruptcy in first quarter 2005. The lease
has a carrying value of $11 million and is secured by equipment used to manufacture
original-equipment automotive parts. 25




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##### Table of Contents



The following table summarizes changes in the allowance for loan losses: First Quarter2005
    
    
    2004(Dollars in millions)Balance at beginning of period
    
    $
    85
    
    
    $
    111Net charge-offs
    
    
    (5
    )
    
    
    2Provision (credit) for loan losses
    
    
    2
    
    
    
    Balance at end of period
    
    $
    82
    
    
    $
    113Net charge-offs as a percentage of average loans outstanding
    
    
    0.22
    %
    
    
    (0.10
    )%
 Charge-offs in first quarter 2005 principally relate to the direct-financing lease described
above and to a lesser extent, an asset-based loan. In first quarter 2005, our provision for loan
losses increased. Although changes in credit quality are difficult to predict, it is likely that
the provision will continue to increase throughout 2005. Credit quality improvements in our
portfolio and recoveries on previously charged-off loans resulted in no provision for loan losses
in first quarter 2004. Non-Interest Income and Non-Interest Expense Fluctuations in our non-interest income components included: First Quarter 2005 versusFirst Quarter 2004Increase (Decrease)(In millions)Noninterest income:Loan origination and sale of loans
    
    $
    (31
    )Servicing rights amortization and impairment
    
    
    (7
    )
 The change in loan origination and sale of loans and servicing rights amortization and
impairment was due to the repositioning of our mortgage origination activities and the sale of our
third party mortgage-servicing portfolio in late 2004. Fluctuations in our non-interest expense components included: First Quarter 2005 versusFirst Quarter 2004Increase (Decrease)(In millions)Noninterest expense:Compensation and benefits
    
    $
    (23
    )
 A significant portion of our compensation expense was related to our mortgage loan origination
activity and was directly variable with origination activities. The change in compensation and
benefits was due to the repositioning of our mortgage origination activities in late 2004. Information regarding mortgage loan origination activity follows: First Quarter2005
    
    
    2004(Dollars in millions)Loans originated and retained
    
    $
    208
    
    
    $
    375Loans originated for sale to third parties
    
    
    368
    
    
    
    1,257
 The change in mortgage loan origination activity is due to the repositioning of our mortgage
origination activities in late 2004. 26




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##### Table of Contents



Expenses Not Allocated to Segments Unallocated expenses represent expenses managed on a company-wide basis and include corporate
general and administrative expense; other operating and non-operating income (expense); and parent
company interest expense. The change in general and administrative expenses in first quarter 2005 was principally due to
increases in stock-based compensation. Other operating income (expense) consists of:  
    In first quarter 2005, $24 million, including an $11 million charge associated with
the closure of converting and production facilities, a $7 million charge associated
with antitrust litigation, a $4 million charge associated with the recently completed
proxy contest and $2 million of other charges.
    In first quarter 2004, $19 million, including a $5 million charge associated with
consolidation of administrative functions and $14 million related to the closure or
sale of production and converting facilities. We will continue our efforts to enhance return on investment by lowering cost, 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 and selling under-performing assets. Other non-operating income (expense) includes income of $1 million related to the change in
fair value of non-hedged portion of our interest rate swap. The change in parent company interest expense in first quarter 2005 was due to reductions in
long-term debt and lower interest rates. Income Taxes Our effective tax rate was 39 percent in first quarter 2005, the likely effective tax rate for
the year 2005, and 39 percent in first quarter 2004. Differences between the effective tax rate
and the statutory rate are due to state income taxes, nondeductible items, foreign operating
losses, and other items for which no financial benefit is recognized until realized. Average Shares Outstanding Average shares outstanding has been adjusted to reflect the two-for-one stock split on April
1, 2005. The change in average diluted shares outstanding was principally due to the dilutive
effect of employee stock options and the equity purchase contracts resulting from the increase in
the market price of our common stock in first quarter 2005. The expected settlement of our remaining equity purchase contracts in May 2005 will result in
the issuance of between 10 million and 12.3 million shares of stock, and we will receive $319
million in cash. In first quarter 2005, we repurchased 2.8 million shares of common stock for $104
million cash under a February 4, 2005 Board of Directors authorization to repurchase up to 12
million shares. Capital Resources and Liquidity for First Quarter 2005 We discuss our capital resources and liquidity for Temple-Inland and our manufacturing
subsidiaries, which we refer to as the parent company, and our financial services subsidiaries
separately in order for the reader to better understand our different businesses and because almost
all of the net assets invested in financial services are subject, in varying degrees, to regulatory
rules and regulations including restrictions on the payment of dividends to the parent company. 27




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##### Table of Contents



Sources and Uses of Cash Consolidated cash from operations was $79 million in first quarter 2005 and $69 million in
first quarter 2004. Consolidated cash from operations represents the sum of parent company and
financial services cash from operations, less the dividends from financial services, which are
eliminated upon consolidation. In first quarter 2005,we received no dividends from financial
services and in first quarter 2004 we received $30 million in dividends from financial services. Parent Company Sources and Uses of Cash First Quarter2005
    
    
    2004(In millions)We received cash fromOperations
    
    $
    83
    
    
    $
    67Dividends from financial services (a)
    
    
    
    
    
    
    30Working capital changes
    
    
    (49
    )
    
    
    (77
    )From operations
    
    
    34
    
    
    
    20Sale of non-strategic assets
    
    
    1
    
    
    
    6Exercise of options and in 2005 the settlement of
equity purchase contracts
    
    
    56
    
    
    
    35Borrowings
    
    
    129
    
    
    
    Total sources
    
    
    220
    
    
    
    61We used cash toReduce debt and other obligations
    
    
    (32
    )
    
    
    (2
    )Pay dividends to shareholders
    
    
    (25
    )
    
    
    (20
    )Repurchase common stock
    
    
    (104
    )
    
    
    Reinvest in the business throughCapital expenditures
    
    
    (57
    )
    
    
    (28
    )Joint ventures
    
    
    (3
    )
    
    
    Total uses
    
    
    (221
    )
    
    
    (50
    )Change in cash and cash equivalents
    
    $
    (1
    )
    
    $
    11
 (a)
    
    Dividends we receive from financial services are eliminated in the consolidated
statements of cash flows.
 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. The dividends we receive from financial services are dependent on its level of earnings and
capital needs and are subject to regulatory approval and restrictions. As previously disclosed,
dividends from financial services are expected to be substantially less in 2005 than in 2004
because of an anticipated increase in the capital requirements of Guaranty to support growth in its
earning assets. 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. In 2005 and 2004, many of our employees took advantage of the increasing spread between the
market price of our common stock and the exercise price of employee stock options and exercised
their stock options. As a result, we issued 1,145,058 shares of common stock in first quarter 2005
and 1,330,128 shares in first quarter 2004 to employees exercising options. In addition, in first
quarter 2005, we issued 826,240 shares of our common stock and received $26 million in cash
resulting from the early settlement of a portion of our equity purchase contracts. Debt reductions in 2005 included $21 million of variable rate industrial revenue bonds. We paid cash dividends to shareholders of $0.23 per share in first quarter 2005 and $0.18
per share in first quarter 2004. In February 2005, the Board of Directors increased the quarterly
cash dividend to $0.23 per share. 28




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##### Table of Contents



In February 2005, we announced that our Board of Directors approved a repurchase program of up
to 12 million shares, which represents over 10% of our common stock. In first quarter 2005, we
repurchased 2.8 million shares for $104 million, at an average price of $37.16. Capital expenditures are expected to approximate $225 million in 2005 or about 100% of
expected 2005 depreciation. Most of the expected 2005 expenditures relate to initiatives to
increase reliability at our linerboard mills. Financial Services Sources and Uses of Cash First Quarter2005
    
    
    2004(In millions)We received cash fromOperations
    
    $
    45
    
    
    $
    54Changes in loans held for sale, and other
    
    
    
    
    
    
    25From operations
    
    
    45
    
    
    
    79Sale of non-strategic assets and mortgage servicing rights
    
    
    42
    
    
    
    35Total sources
    
    
    87
    
    
    
    114We used cash toPay dividends to the parent company (a)
    
    
    
    
    
    
    (30
    )Change in deposits and borrowings
    
    
    (344
    )
    
    
    232Reinvest in the business throughLoans and securities, net of payments
    
    
    184
    
    
    
    (381
    )Capital expenditure, acquisitions and other uses
    
    
    (38
    )
    
    
    (13
    )Total uses
    
    
    (198
    )
    
    
    (192
    )Change in cash and cash equivalents
    
    $
    (111
    )
    
    $
    (78
    )
 (a)
    
    Dividends we pay to the parent company are eliminated in the consolidated statements
of cash flows.
 Our principal operating cash requirements are for compensation, interest, and taxes. Changes
in loans held for sale are subject to the timing of the origination and subsequent sale of the
loans and the level of refinancing activity. A significant portion of our first quarter 2005 cash
from operations was due to the sale of loans held for sale. As a result of the repositioning of
our mortgage origination activities in late 2004, it is likely that the cash flow related to these
activities will decrease substantially in 2005. Guaranty did not pay any dividends to the parent company in first quarter 2005. The changes
in deposits and borrowings and the amounts invested in loans and securities generally move in
tandem because we use deposits and borrowings to finance these investments. The change in first
quarter 2005 was principally due to the decrease in loans and securities from year-end 2004 and our
routine cash management activities. Additionally, in first quarter 2005, we completed the
acquisition of an insurance agency for $18 million cash. We did not increase our loan commitments in first quarter 2005 as much as we anticipated. As
a result, our regulatory capital requirements did not increase substantially. We anticipate
continued loan commitments growth in 2005. However, funding of these commitments, particularly
commercial real estate construction commitments, will not likely increase our earning assets or
significantly increase our capital requirements until the second half of 2005. As a result, it is
likely that Guaranty may pay a dividend to the parent company in second quarter 2005. Liquidity Almost all of the net assets invested in financial services are subject, in varying degrees,
to regulatory rules and restrictions including restrictions on the payment of dividends to
the parent company. As a result, all consolidated assets are not available to satisfy all
consolidated liabilities. For the reader to better understand this and our different businesses,
we discuss our contractual obligations for the parent company and financial services separately. 29




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##### Table of Contents



Parent Company Liquidity Our sources of short-term funding are our operating cash flows, dividends received from
financial services, and borrowings under our existing accounts receivable securitization program
and committed credit agreements. At first quarter-end, we had $582 million in unused borrowing capacity under our credit
agreements and $105 million under our accounts receivable securitization program that expires in
2007. In February 2005, we effected a successful remarketing of our $345 million 6.42% senior notes
payable in 2007. The interest rate on these notes is now 5.003%. We expect to settle the remaining
related equity purchase contracts in May 2005. At that time, we will issue common stock in exchange
for $319 million in cash. The actual number of shares we will issue will be based on the average
market price of our stock, subject to a floor of $26, in which case we will issue 12.3 million
shares, and a ceiling of $31.72, in which case we will issue 10 million shares. In first quarter 2005, we repurchased 2.8 million shares of the 12 million repurchase
authorization. We anticipate that we will repurchase a significant portion of the remainder of the
approved repurchase program, 9.2 million shares, in second quarter 2005. It is likely that a
significant portion of this repurchase will be funded from the proceeds of the settlement of the
equity purchase contracts. We have interest rate and commodity derivative instruments outstanding at year-end 2004. The
interest rate instruments expire in 2008 and the majority of the commodity instruments expire in
2005. These instruments are non-exchange traded and are valued using either third-party resources
or models. At first quarter-end 2005, the aggregate fair value of all derivatives was a $4 million
liability consisting of $4 million of liabilities for our interest rate swaps and an immaterial
asset for our two commodity instruments. Financial Services Liquidity Our sources of short-term funding are our operating cash flows, new deposits, borrowings under
our existing agreements and, if necessary, sales of assets. Assets that can be readily converted to
cash, or against which we can readily borrow, include short-term investments, loans, mortgage loans
held for sale, and securities. At first quarter-end 2005, we had available liquidity of $3.7
billion. Off-Balance Sheet Arrangements Parent Company In first quarter 2005, there were no significant changes in parent company off-balance
arrangements from that disclosed in our Annual Report on Form 10-K for the year 2004. Financial Services We enter into commitments to extend credit for loans, leases, and letters of credit in the
normal course of our business. These commitments carry substantially the same risk as loans. We
generally require collateral upon funding of these commitments, the receipt of which provides
assets that generally increase our liquidity by increasing our borrowing capacity. These
commitments normally include provisions allowing us to exit the commitment under certain
circumstances. At first quarter-end 2005, our off-balance sheet unfunded arrangements consist of: (In millions)Single-family mortgage loans
    
    $
    264Unused lines of credit
    
    
    1,890Unfunded portion of loan commitments
    
    
    3,177Other loan commitments
    
    
    609Letters of credit
    
    
    373Total
    
    $
    6,313
 30




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##### Table of Contents



Capital Adequacy and Other Regulatory Matters At first quarter-end 2005, Guaranty met or exceeded all applicable regulatory capital
requirements. We expect to maintain Guarantys capital at a level that exceeds the minimum required
for designation as well capitalized under the capital adequacy regulations of the Office of
Thrift Supervision (OTS). From time to time, the parent company may make capital contributions to
or receive dividends from Guaranty. Selected financial and regulatory capital data for Guaranty and its consolidated subsidiaries
follows: FirstQuarter-End
    
    
    Year-End2005
    
    
    2004(In millions)Balance sheet data:Total assets
    
    $
    15,594
    
    
    $
    16,065Total deposits
    
    
    9,129
    
    
    
    8,964Shareholders equity
    
    
    1,022
    
    
    
    997
 Regulatory
    
    
    For Categorization asActual
    
    
    Minimum
    
    
    Well CapitalizedRegulatory capital ratios:Tangible capital
    
    
    7.16
    %
    
    
    2.00
    %
    
    
    N/ALeverage capital
    
    
    7.16
    %
    
    
    4.00
    %
    
    
    5.00
    %Risk-based capital
    
    
    11.02
    %
    
    
    8.00
    %
    
    
    10.00
    %
 Guaranty has implemented the corrective actions necessitated by the OTS consent order we
previously disclosed. Accounting Policies Critical Accounting Estimates In first quarter 2005, the only change in our critical accounting estimates from those we
identified in our Annual Report on Form 10-K for the year 2004 was the elimination of accounting
for mortgage servicing rights, as a result of the previously disclosed sale of our third-party
mortgage servicing portfolio in late 2004. Change in Method of Accounting for Inventories In January 2005, we changed our method of accounting for our corrugated packaging inventories
from the LIFO method to the average cost method, which approximates FIFO. As a result of our
ongoing efforts to reduce cost permanently and increase asset utilization, we believe the average
cost method is preferable because it: (i) increases the transparency of our financial reporting
through a more balanced income statement and balance sheet presentation; (ii) results in the
valuation of all of our inventories at current cost in our financial statements; and (iii) conforms
all of our inventories to a single method of accounting. As a result, at the beginning of first quarter 2005, we increased beginning inventories $25
million, increased our income tax liability by $10 million and increased retained earnings by $15
million. In addition, as required by generally accepted accounting principles, we have
retrospectively applied the average cost method to our prior period income statements and segment
operating results, the effect of which is summarized as follows: 31




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##### Table of Contents



Corrugated Packaging
    
    
    Income from ContinuingSegment Operating Income
    
    
    Operations
    
    
    Per Diluted ShareAs
    
    
    Retrospective
    
    
    As
    
    
    Retrospective
    
    
    
    
    
    
    RetrospectiveReported
    
    
    Application
    
    
    Reported
    
    
    Application
    
    
    As Reported
    
    
    Application(In millions, except per share)2004First quarter
    
    $
    10
    
    
    $
    8
    
    
    $
    13
    
    
    $
    12
    
    
    $
    0.12
    
    
    $
    0.11Second quarter
    
    
    26
    
    
    
    24
    
    
    
    55
    
    
    
    54
    
    
    
    0.49
    
    
    
    0.48Third quarter
    
    
    42
    
    
    
    40
    
    
    
    40
    
    
    
    39
    
    
    
    0.36
    
    
    
    0.35Fourth quarter
    
    
    27
    
    
    
    24
    
    
    
    54
    
    
    
    52
    
    
    
    0.47
    
    
    
    0.45Year
    
    $
    105
    
    
    $
    96
    
    
    $
    162
    
    
    $
    157
    
    
    $
    1.44
    
    
    $
    1.39
 Pending Accounting Pronouncements In April 2005, the Securities and Exchange Commission adopted a rule delaying the effective
date of FASB SFAS No. 123 (revised December 2004), Share Based Payment, which requires that the
cost of all employee stock options, as well as other equity-based compensation arrangements, be
reflected in the financial statements based on their estimated fair value. As a result of this
rule, SFAS No. 123R will now be effective for us beginning first quarter 2006. Pension and Postretirement Matters We made a voluntary, discretionary contribution of $15 million to the defined benefit pension
plans in first quarter 2005, and it is likely that we will make additional voluntary, discretionary
contributions to the defined benefit plans in the remainder of 2005 of $45 million, $15 million per
quarter. Energy and the Effects of Inflation Energy costs were $77 million in first quarter 2005 compared with $70 million in first quarter
2004. 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 hedge very little of our energy needs. It
is likely that these costs will continue to fluctuate during 2005. Inflation has had minimal effects on operating results the last three years. Our fixed assets,
timber and timberland, are carried at their historical costs. If carried at current replacement
costs, depreciation expense and the cost of timber cut or timberland sold would be significantly
higher than what we reported. Litigation and Related Matters We are involved in various legal proceedings that arise from time to time in the ordinary
course of business. We believe that the possibility of a material liability from any of these
proceedings is remote, and we do not believe that the outcome of any of these proceedings should
have a material adverse effect on our financial position, results of operations, or cash flow. Since we filed our Annual Report on Form 10-K for the year ended January 1, 2005, there have
been no material developments in pending legal proceedings other than disclosed below. As we have previously reported, on May 14, 1999, two of our subsidiaries were named as
defendants in a consolidated class action complaint that alleged a civil violation of Section 1 of
the Sherman Act. We executed a settlement agreement on April 11, 2003, with the representatives of
the class, which received final approval by the trial court. We paid a total of $8 million into
escrow to fulfill the terms of the class action settlement. Twelve individual complaints containing allegations similar to those in the class action have
been filed by certain opt-out plaintiffs and over 3,000 of their named subsidiaries against the
original defendants in the class action. As a result of our periodic assessment of loss
contingencies, we increased our reserve for this matter by $7 million in first quarter 2005. We
continue to believe that the plaintiffs allegations in the opt-out litigation have no merit and
are vigorously defending against the suits. 32




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##### Table of Contents



Calculation of Non-GAAP Financial Measure Parent
    
    
    Corrugated
    
    
    Forest
    
    
    FinancialCompany
    
    
    Packaging
    
    
    Products
    
    
    Services(Dollars in millions)First Quarter 2005ReturnOperating income or segment operating income determined in accordance with GAAP
    
    $
    101
    (a)
    
    $
    50
    
    
    $
    54
    
    
    $
    47Adjustments for significant unusual items
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    101
    
    
    $
    50
    
    
    $
    54
    
    
    $
    47InvestmentBeginning of year total assets, segment assets or investment in financial
services determined in accordance with GAAP
    
    $
    4,900
    
    
    $
    2,431
    
    
    $
    1,006
    
    
    $
    1,121Adjustments:Current liabilities (excluding current
portion of long-term debt)
    
    
    (510
    )
    
    
    (326
    )
    
    
    (71
    )
    
    
    Assets held for sale
    
    
    (34
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMunicipal bonds related to capital leases
    
    
    (188
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    4,168
    
    
    $
    2,105
    
    
    $
    935
    
    
    $
    1,121ROI, annualized
    
    
    9.7
    %
    
    
    9.5
    %
    
    
    23.1
    %
    
    
    16.8
    %First Quarter 2004ReturnOperating income or segment operating income determined in accordance with GAAP
    
    $
    51
    (a)
    
    $
    8
    
    
    $
    32
    
    
    $
    53Adjustments for significant unusual items
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    51
    
    
    $
    8
    
    
    $
    32
    
    
    $
    53InvestmentBeginning of year total assets, segment assets or investment in financial
services determined in accordance with GAAP
    
    $
    4,861
    
    
    $
    2,374
    
    
    $
    1,035
    
    
    $
    1,123Adjustments:Current liabilities (excluding current
portion of long-term debt)
    
    
    (503
    )
    
    
    (323
    )
    
    
    (57
    )
    
    
    Assets held for sale
    
    
    (50
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMunicipal bonds related to capital leases
    
    
    (188
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    4,120
    
    
    $
    2,051
    
    
    $
    978
    
    
    $
    1,123ROI, annualized
    
    
    5.0
    %
    
    
    1.6
    %
    
    
    13.1
    %
    
    
    18.9
    %
   (a)
    
    Net of expenses not allocated to segments of $50 million in 2005 and $42
million in 2004. 33




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##### Table of Contents



STATISTICAL AND OTHER DATA Parent Company Revenues and unit sales of our manufacturing subsidiaries, excluding joint venture operations
follows: First Quarter2005
    
    
    2004(Dollars in millions)RevenuesCorrugated PackagingCorrugated packaging
    
    $
    691
    
    
    $
    637Linerboard
    
    
    27
    
    
    
    36Total
    
    $
    718
    
    
    $
    673Forest ProductsPine lumber
    
    $
    89
    
    
    $
    79Particleboard
    
    
    54
    
    
    
    44Medium density fiberboard
    
    
    31
    
    
    
    25Gypsum wallboard
    
    
    31
    
    
    
    23Fiberboard
    
    
    19
    
    
    
    17Other
    
    
    25
    
    
    
    32Total
    
    $
    249
    
    
    $
    220Unit salesCorrugated PackagingCorrugated packaging, thousands of tons
    
    
    857
    
    
    
    841Linerboard, thousands of tons
    
    
    69
    
    
    
    112Total, thousands of tons
    
    
    926
    
    
    
    953Forest ProductsPine lumber, million board feet
    
    
    235
    
    
    
    236Particleboard, million square feet
    
    
    173
    
    
    
    160Medium density fiberboard, million square feet
    
    
    67
    
    
    
    57Gypsum wallboard, million square feet
    
    
    207
    
    
    
    171Fiberboard, million square feet
    
    
    107
    
    
    
    97
 34




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##### Table of Contents



Financial Services The following table summarizes the composition of our loan portfolio: First Quarter-EndYear-End2005
    
    
    2004
    
    
    2004(In millions)Single-family mortgage
    
    $
    3,598
    
    
    $
    3,351
    
    
    $
    3,560Single-family mortgage warehouse
    
    
    573
    
    
    
    345
    
    
    
    580Single-family construction
    
    
    1,515
    
    
    
    964
    
    
    
    1,303Multifamily and senior housing
    
    
    1,375
    
    
    
    1,756
    
    
    
    1,454Total residential housing
    
    
    7,061
    
    
    
    6,416
    
    
    
    6,897Commercial real estate
    
    
    665
    
    
    
    974
    
    
    
    709Commercial and business
    
    
    762
    
    
    
    601
    
    
    
    746Energy lending
    
    
    729
    
    
    
    618
    
    
    
    717Asset-based lending and leasing
    
    
    410
    
    
    
    467
    
    
    
    428Consumer and other
    
    
    213
    
    
    
    176
    
    
    
    206Total loans
    
    
    9,840
    
    
    
    9,252
    
    
    
    9,703Less allowance for loan losses
    
    
    (82
    )
    
    
    (113
    )
    
    
    (85
    )Loans receivable, net
    
    $
    9,758
    
    
    $
    9,139
    
    
    $
    9,618
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our current level of interest rate risk is primarily due to the lending and funding activities
of our financial services segment. The following table illustrates the estimated effect on our
pre-tax income of immediate, parallel and sustained shifts in interest rates for the next 12-months
at first quarter-end 2005, with comparative year-end 2004 information. This estimate considers the
effect of changing prepayment speeds, repricing characteristics and average balances over the next
12 months. Increase (Decrease) in Income Before Income TaxesFirst Quarter-End 2005
    
    
    Year-End 2004Parent
    
    
    Financial
    
    
    Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Company
    
    
    Services(In millions)Change in
Interest Rates+2%
    
    $
    (3
    )
    
    $
    (22
    )
    
    $
    1
    
    
    $
    (21
    )+1%
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    (1
    )-1%
    
    
    2
    
    
    
    (36
    )
    
    
    
    
    
    
    (34
    )
 We did not present a two percent interest rate decrease because of the current low interest
rate environment. The analysis assumes that debt reductions from contractual payments will be
replaced with short-term variable rate debt; however, that may not be the financing alternative we
choose to follow. Parent company interest rate risk is related to our long-term debt and our interest rate
swap. The change in sensitivity since year-end 2004 is due to an increase in variable rate debt.
Additionally, changes in interest rates will affect the value of the interest rate swap agreements
(currently $50 million notional amount). We believe that any changes in value would not be
significant. Our financial services segment is subject to interest rate risk to the extent
interest-earning assets and interest-bearing liabilities repay or reprice at different times or in
differing amounts or both. Our financial services segments interest rate sensitivity has not
changed significantly from year-end 2004. 35




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##### Table of Contents



Foreign Currency Risk In first quarter 2005, there were no significant changes in foreign currency risk from that
disclosed in our Annual Report on Form 10-K for the year 2004. Commodity Price Risk In first quarter 2005, there were no significant changes in commodity price risk from that
disclosed in our Annual Report on Form 10-K for the year 2004. 
 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures Our chief executive officer and chief financial officer, based on their evaluation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls
and procedures are adequate and effective to ensure that the information required to be disclosed
by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized, and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. (b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during the period
covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings. The information set forth in Note G of the Notes to Consolidated Financial Statements in Part
I of this report is incorporated by reference thereto. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Issuer Purchases of Equity Securities(1)(2)
 MaximumTotal Number
    
    
    Number ofof Shares
    
    
    Shares ThatPurchased as
    
    
    May Yet beAverage
    
    
    Part of Publicly
    
    
    PurchasedTotal Number
    
    
    Price
    
    
    Announced
    
    
    Under theof Shares
    
    
    Paid per
    
    
    Plans or
    
    
    PlansPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    or ProgramsMonth 1(1/2/2005 1/29/2005)
    
    None
    
    
    N/A
    
    
    
    N/A
    
    
    
    12,000,000Month 2(1/30/2005  2/26/2005)
    
    
    600,000
    
    
    $
    38.01
    
    
    
    600,000
    
    
    
    11,400,000Month 3(2/27/2005  4/2/2005)
    
    
    2,200,000
    
    
    $
    36.93
    
    
    
    2,200,000
    
    
    
    9,200,000Total
    
    
    2,800,000
    
    
    $
    37.16
    
    
    
    2,800,000
   (1)
    
    On February 4, 2005, the Company announced that the Board of Directors authorized
the repurchase of up to 12,000,000 shares of the common stock of the Company. The plan has no
expiration date. The Company has no other repurchase plans or programs. The Company has no plans
or programs that expired during the period covered by the table above and no plans or programs that
it intends to terminate prior to expiration or under which it no longer intends to make further
purchases. 36




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##### Table of Contents



(2)
    
    The amounts in the table above have been adjusted to reflect a two-for-one stock
split on April 1, 2005, for shareholders of record on March 1, 2005. 
 Item 3.Defaults Upon Senior Securities. None. 
 Item 4.Submission of Matters to a Vote of Security Holders. None. 
 Item 5.Other Information. None. 
 Item 6.Exhibits. Exhibits. 18.1  Letter from Ernst & Young LLP regarding change in accounting principle.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.
 37




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##### Table of Contents



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, 2005
    
    By
    
    /s/ Louis R. BrillLouis R. Brill      Chief
Accounting Officer
 38




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##### Table of Contents



INDEX TO EXHIBITS Exhibit No.
    
    Description
    
    Page No.18.1
    
    Letter from Ernst & Young LLP regarding change
in accounting principle

    
    
    4031.1
    
    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
    
    
    4131.2
    
    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
    
    
    4332.1
    
    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
    
    
    4532.2
    
    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
    
    
    46
 39