ITEM 1. BUSINESS
ITEM 1(a). GENERAL DEVELOPMENT OF BUSINESS
RECENT DEVELOPMENTS
1996 FINANCIAL RESULTS
The Company had record sales in 1996, due to the continued acceptance of engineered lumber products in the marketplace. This continued acceptance was due to a combination of factors, including the Company's on-going education efforts in the building community, rising prices for alternative solid-sawn lumber products, and an increase in North American housing starts compared to the prior year.
The Company experienced an increase in sales of $92 million in 1996, compared to 1995. This 19 percent increase in sales came in a period when North American housing starts increased 10 percent from the prior year. Additionally, market prices for certain traditional solid-sawn lumber products, which represent the primary competitor of engineered lumber products, increased 7 percent from prior year levels. Unit volume sales of residential products increased 14 percent per North American housing start.
Income from continuing operations improved as a percent of sales primarily due to the further progress in the ramp-up of the Company's new TimberStrand -Registered Trademark- LSL and combination Parallam -Registered Trademark- PSL and Microllam -Registered Trademark- LVL plants. Additionally, certain raw material costs declined in 1996 compared to 1995 and efficiencies of scale resulted in the Company's selling, general and administrative functions.
Net income from continuing operations increased $6.4 million to $16.2 million in 1996. Income from continuing operations per fully diluted share increased from $0.48 in 1995 to $0.82 in 1996.
Fourth quarter sales were $131.4 million compared to $113.3 million in the corresponding period in 1995. Income from continuing operations improved to $4.1 million or $.21 per fully diluted share in the fourth quarter of 1996, compared to $766,000, or $0.03 per fully diluted share in the fourth quarter of 1995.
The Company completed the sale of its windows division during the third quarter of 1996. As part of the sale, the Company retained all of the existing operating and contingent liabilities of the window operations, which resulted in an $11 million cash outflow. The sale of the segment assets resulted in a net cash inflow of $24 million; $7.4 million of these sale proceeds were then utilized to pay down long-term debt.
MARKET DEVELOPMENTS
The Company believes that its engineered lumber products offer advantages in both performance and cost effectiveness over natural lumber and that such products are achieving increased market acceptance in residential construction. The Company's engineered lumber sales, per North American housing start, increased from $116 per start in 1991 to $289 per start in 1996, an increase of 149%. During 1996, residential engineered lumber sales per start increased 10%. 1996 is the 14th consecutive year of market penetration growth in the key residential construction market. Average prices for 2" x 10" green 14' Douglas fir lumber increased 7%
during 1996 from $433 per thousand board feet in 1995 to $465 per thousand board feet during 1996. Wide dimension lumber remains the primary competition to the Company's engineered lumber products.
COMPANY STRATEGY
The Company's primary objective remains increasing market penetration for its engineered lumber products. The Company believes that the fundamentals which have driven the Company's growth over the past several years remain in place, including the declining availability of high-quality, large diameter timber, the superior performance of engineered lumber products, and the Company's continuing transition to proprietary, lower-cost technologies. In addition, the Company continues to enjoy strong brand name recognition, supported by an extensive North American distribution network. Most importantly, the Company believes there continues to be growth in market acceptance of engineered lumber products.
The Company's strategy, which is composed of two key elements, is focused on continuing its historic dominance in the engineered lumber industry -- a dominance which is reflected in an estimated market share in excess of 60 percent for engineered lumber products sold in North America. The Company's strategy includes the following:
1. LOW-COST PROPRIETARY TECHNOLOGIES AND DOMINANT PRODUCTION CAPACITY. The Company intends to pursue the advantages of its technological leadership. The Company believes its technologies in engineered lumber enable it to use smaller logs and to make more efficient use of wood fiber than the current sawmill production of sawn structural lumber. The Company also intends to capitalize on its proprietary technologies -- Parallam -Registered Trademark- PSL and TimberStrand -Registered Trademark- LSL which allow the Company to manufacture engineered lumber from non-traditional tree species such as aspen and poplar. These species are lower in cost, more abundant and less environmentally sensitive than traditional fir and pine species. The Company believes it is well positioned to benefit from the increasing scarcity and associated higher prices of the high quality, large diameter logs utilized to make the sawn structural lumber products with which its products compete.
The Company has completed its recent capital expansion program and is in the process of attaining full production of its new capacity. The new capacity includes two new technology plants, a TimberStrand -Registered Trademark- LSL plant in Eastern Kentucky and a combination Microllam - -Registered Trademark- LVL and Parallam -Registered Trademark- PSL plant in Buckhannon, West Virginia. This expansion is intended to enhance the Company's leading position in engineered lumber products. Through the expansion of existing plants and the addition of the two new production facilities, as described below, the Company believes it will maintain its dominant 60 percent share of engineered lumber industry capacity.
The Company is examining potential sites for an additional combination LVL and PSL plant or a third TimberStrand -Registered Trademark- LSL plant. Commitment to this new capacity is contingent upon continued market demand and acceptance of engineered lumber products.
The Company believes that the housing construction industry is undergoing a transition toward increased use of engineered lumber for structural building material, as wide-dimension commodity lumber generally increases in price and decreases in quality. The Company believes its expansion plan is appropriate because its proprietary technology plants are expected to give the Company a significant
cost, wood source, and product breadth and flexibility advantage which the Company believes will further strengthen its market leading position. The Company also believes that its recent capital expansion is prudent given the demand for these new technology products and competition in these markets that the Company expects will develop over time. However, there can be no assurance that the market for engineered lumber products will increase or that markets for new products will develop.
The Company has financed its capital expansion program through several sources, including a portion of the proceeds from the sale of common stock of the Company in 1993, equity contributions by TJM's limited partner, the proceeds of bond offerings in 1994, 1995, and 1996 and internally generated funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
2. A SYSTEM OF INTEGRATED COMPONENTS AND SERVICES AND VALUE ADDED MARKETING. The Company intends to focus future marketing efforts on a system of integrated components, rather than individual products. The Company is in the process of developing the FrameWorks -Registered Trademark- Building System, which represents a complete system in engineered lumber to build the entire structural frame of a home. The FrameWorks -Registered Trademark- Building System will include roof, wall, stair, foundation and frame systems, enhancing the overall performance of the home, which the Company believes will be a benefit to architects, builders, dealers and home buyers.
The Company believes it has a competitive advantage over other engineered lumber producers in that it offers a complete support and service system for its products, including (i) a system performance guarantee for the lifetime of the home; (ii) the largest technical service force in the industry; (iii) engineering assistance and performance recommendations; and (iv) computer- generated framing plans and materials specifications from its TJ-Xpert -TM- software, which gives the Company the ability to optimize design on a house-by- house basis.
The Company will continue its emphasis on a broad and aggressive North American distribution network, emphasizing product availability and just-in-time delivery and services. The Company believes that its partnership with MacMillan Bloedel Limited and strategic alliances with Weyerhaeuser Company and other regional distributors and retailers offer it a significant advantage in the distribution of its engineered lumber products.
The Company believes that its extensive product lines, highly-skilled, service-oriented sales force, and its extensive distribution network provide an unparalleled opportunity to meet the modern demands of the building community and the discriminating homeowner.
DIVESTITURE OF WINDOW BUSINESS
In 1995, the Company announced its intention to divest of its window division. The Company completed the sale of its windows division during the third quarter of 1996. The divestiture will allow the Company to focus all of its resources on the engineered lumber business.
ITEM 1(b). Financial information about the Company's industry segments.
The Company divested of its window operations segment in 1996. Accordingly, these operations have been reflected as discontinued operations in the Company's financial statements for all years presented.
ITEM 1(c). NARRATIVE DESCRIPTION OF BUSINESS.
BUSINESS
GENERAL
The Company is the leading manufacturer and marketer of engineered lumber products in the world. Engineered lumber products are high quality substitutes for solid sawn structural lumber historically obtained from the logging of older, large diameter trees. The Company utilizes advanced technology to manufacture engineered lumber at fifteen facilities located in the United States and Canada and estimates that its market share is in excess of 60 percent for engineered lumber products sold in North America.
STRATEGY. The Company is the leading manufacturer and marketer of value-added specialty building products to the residential and light commercial construction industry. The Company believes it is well positioned to benefit from the increasing scarcity and associated higher prices of the high quality, large diameter logs historically utilized to make the sawn structural lumber products with which the Company's products compete. A Company objective is to increase the product acceptance of its engineered lumber products and to strengthen its market leadership in these products. To increase product acceptance, the Company's selling efforts highlight product advantages including consistent quality, superior strength, relatively light weight and ease of installation targeted at end users such as architects and contractors. The Company seeks to strengthen its leading market position through (i) competitive pricing; (ii) value-added marketing of technical support and services; (iii) maintenance of industry production capacity dominance through the construction of new engineered lumber manufacturing facilities, the expansion of existing plants and the construction of other facilities as market conditions warrant; (iv) the ongoing development of proprietary technologies including processes utilizing relatively low-cost wood fiber from tree species, such as aspen and yellow poplar, (v) the promotion of a complete system of structural frame components rather than individual products; and (vi) reliance on an extensive North American distribution network, including its partnership with MacMillan Bloedel Limited and strategic alliances with the Weyerhaeuser Company and other regional distributors and retailers.
TIMBER SUPPLY. In general, the supply of large diameter logs suitable for wide dimension lumber has declined over the past several years in the Pacific Northwest. In addition, environmental pressures have greatly slowed the harvest of the remaining timber supply. The Company believes that the combined effect of reduced supply and more restrictive environmental regulation on federally- owned timberlands will continue to reduce the volume of high grade timber available from this source.
Most of the Company's technologies can use wood fiber from trees that were previously not suitable for the manufacture of structural lumber, and this allows the Company to access the current inventory of wood fiber in North America. This wood fiber differs from that in the past, primarily in the species and size of the
trees available for harvest. Much of today's potential wood fiber supply consists of smaller second growth logs or is found in the interior forests of Appalachia, the upper Midwest and the Canadian interior forests. These forests include fast-growing, abundant and competitively priced species of trees such as aspen and yellow poplar. These trees are not regarded as sufficiently large, straight, or strong enough to be sawn into structural lumber. The Company's new technologies now allow the use of these species for high grade structural products. The Company will continue to use substantial volumes of Douglas fir in the West and southern yellow pine wood fiber in the South at its existing LVL plants from the available supply of mature trees or smaller second growth logs.
Unlike many of its principal competitors in engineered lumber, the Company does not currently own any timberlands or significant amounts of standing timber. The Company buys its raw materials on contract both from small independent suppliers and larger integrated forest products companies. In addition, a portion of its wood raw materials are purchased on the spot market. The reduced supplies could result in more volatile wood markets. The Company has experienced and believes it may continue to experience volatility in its quarter-to-quarter results due to raw material price volatility.
However, the Company believes it will be able to satisfy its needs for raw materials and it is not currently aware of any potential shortages for its longer-term requirements. The Company is increasingly purchasing standing timber tracts, to be processed at the Company's facilities in place of veneer purchased from other producers. The Company believes that it has significant competitive advantages over companies marketing traditional sawn lumber products in an environment of reduced timber supply because its engineered lumber technologies are able to utilize non-traditional sources of wood fiber, which are both more abundant and less expensive.
ENGINEERED LUMBER PRODUCTS
OVERVIEW. The Company believes that the housing construction industry is undergoing a transition in its use of structural building materials as sawn structural lumber increases in price and decreases in quality. Engineered lumber is enjoying increased market acceptance and is displacing sawn structural lumber.
This transition is driven by the changing composition of the North American timberlands, both in terms of regional log supply restrictions and the type and size of logs currently available for use as raw material. The availability of timber from federally-owned forests in the Pacific Northwest has been greatly restricted, and the size of an average sawlog has decreased to the point where it is often too small to produce significant quantities of high grade, wide- dimension structural lumber.
TECHNOLOGY. The Company is the industry leader in developing and commercializing proprietary technologies that enable the manufacture of engineered lumber products from wood that has been regarded as not sufficiently large, strong, straight, or free of defects to be sawn into structural lumber.
The following table outlines the principal features of the Company's technologies:
The Company's three engineered lumber technologies are: laminated veneer lumber, or LVL, the oldest and most commercialized of the technologies; parallel strand lumber, or PSL, first introduced in the mid-1980's in Canada; and laminated strand lumber, or LSL, a new technology introduced in the fall of 1991. Both PSL and LSL are proprietary to the Company, while equipment to produce LVL is now available from several machinery manufacturers and is utilized by an increasing number of forest products manufacturers. The Company believes its LVL manufacturing process, however, enjoys several advantages which make this process cost-competitive compared to the commercially available alternatives.
Although the Company has been issued and has applied for a number of patents on its current processes, the Company believes that its technological competitiveness also comes from its continued innovation and technical expertise in this industry. The Company will, however, continue to assert its legal rights wherever appropriate.
LAMINATED VENEER LUMBER (LVL): LVL uses thin sheets of veneer peeled from a log. Each sheet is carefully dried and individually graded using ultrasonic measurements to determine its strength characteristics. Sheets are then placed in specific sequence and location within the product to maximize the stronger veneer grades and randomize wood defects, such as knots. This engineered configuration of veneers is then laminated with adhesives under heat and pressure to form a piece of wood in widths of 24 inches or 48 inches, thicknesses from 3/4 inches to 3-1/2 inches, and up to 80 feet in length.
PARALLEL STRAND LUMBER (PSL): This technology, which is proprietary to the Company, starts with sheets of thin veneer peeled from a log. These are then clipped into strands, which are up to eight feet long and 5/8 inches wide. The ability to use this very narrow strand allows a significantly higher percentage of the log to be manufactured into a value-added product. The strand is then coated with adhesive. The next step in the process employs a pressing system in which microwaves are used to cure the adhesives and form a large block, or billet, of engineered lumber measuring up to 11 inches by 20 inches and 66 feet long. The Company's PSL process is protected in the U.S. and in 15 other countries. These patents provide protection through 2008.
The Company believes that the combination of the PSL and LVL technologies in a single manufacturing facility, such as its Buckhannon, West Virginia plant, will
allow it to be among the most efficient converters of wood fiber to a high value product. See "Recent Developments--Company Strategy" above.
LAMINATED STRAND LUMBER (LSL): The Company's other proprietary engineered lumber technology, LSL, begins with small-diameter, 8-foot-long logs such as aspen and yellow poplar. These are species traditionally used in lower value applications such as pulp logs, and are therefore substantially less expensive than traditional sources of sawn lumber. These logs are flaked into strands 12 inches long, which are then treated with an adhesive. The strands are put into a steam-injection press that significantly densifies the wood and creates boards up to 48 feet long, up to 5-1/2 inches thick, and 8 feet wide. The Company's LSL process is protected in the U.S. and in 24 other countries. In addition, one patent is pending approval. These patents provide protection through 2010.
PRODUCTS. The Company produces the broadest line of structural engineered lumber building products in the industry, possesses certain exclusive product technologies, and believes it enjoys a reputation for superior quality and service. The table on the following page lists the Company's products, the technology utilized, product size, and end use of such products.
TJ INTERNATIONAL ENGINEERED LUMBER PRODUCTS
The Company continues to explore the development of new and improved engineered lumber products which have superior performance and quality characteristics relative to traditional sawn lumber. The Company currently has a focused effort to develop further TimberStrand-Registered Trademark- LSL products including an I-joist utilizing TimberStrand-Registered Trademark- LSL as the flange material, a truss system that will allow the easy transformation of wasted attic space into a bonus room, and a solid floor joist targeted at the multi-family construction market and other structural and industrial products, including long-length garage door headers.
The Company owns a number of registered and non-registered trademarks for its promotional literature and engineered lumber products. The Company believes that its engineered lumber trademarks, and in particular, its Silent Floor-Registered Trademark- brand of residential structural products, have achieved significant name recognition in the engineered lumber industry.
MARKETS. The Company's engineered lumber is sold primarily to three markets. The largest market is the new construction residential housing market, which includes single-family detached homes, apartments, condominiums, townhouses, and manufactured housing. Industrial uses are another market and include core components for the millwork and furniture industry, scaffold plank, and concrete forming and shoring products. The third market is light-commercial construction, which includes structures such as warehouses, schools, gymnasiums, shopping centers, and low-rise office buildings.
SALES, MARKETING, AND DISTRIBUTION. The Company's engineered lumber products are sold through its network of wholesale lumber distributors, including MacMillan Bloedel Building Materials Distribution Centers, the Weyerhaeuser Building Materials Customer Service Centers, and a number of other distributors. In addition, the
Company sells directly to stocking retail lumber dealers in the United States and Canada. This distribution network broadens the Company's market to include an extensive range of smaller lumber dealers and outlets. The Company believes this distribution network gives it the broadest and deepest reach into the market of any engineered lumber producer.
Since July 1993, the Company has operated under an arrangement with the Weyerhaeuser Building Material Distribution Division, pursuant to which the Weyerhaeuser customer service centers in the United States and Canada distribute the Company's engineered lumber products. In addition, Weyerhaeuser has assumed an expanded role as a supplier of veneer and oriented strand board to certain of the Company's manufacturing facilities. The Company believes this arrangement has enhanced the visibility and sales of its products.
The Company employs the engineered lumber industry's largest sales force consisting of approximately 165 technical sales representatives who market the Company's products directly to architects, project engineers, contractors, developers, independent lumber dealers, national wholesale building material suppliers, and industrial users. This enables the Company to better educate and assist customers in the use of engineered lumber and simultaneously helps create demand, further enabling the Company to differentiate its products from those of its competitors.
The Company's products are supported by numerous advanced computer-assisted software packages. For residential construction, the Company's proprietary TJ- Xpert -TM- software, which is receiving increasing acceptance by builders, translates a builder's blueprints into a complete framing plan for a structural system using engineered lumber products.
The Company also has sales offices and representatives in Japan, Australia, France, the United Kingdom, Germany, Belgium, and the Middle East. While not currently comprising a significant portion of the Company's business, the Company believes these markets present future growth opportunities for its products.
COMPETITION. Sawn lumber products produced in traditional sawmills remain the primary competition for the Company's engineered lumber products.
The Company's competition in the growing engineered lumber industry includes large competitors producing LVL and I-joists in several plants across North America, and others that are manufacturing wood I-joists only. Competition is expected to continue to increase as a number of the Company's competitors, including Louisiana-Pacific Corporation, Boise Cascade Corporation, and Georgia Pacific Corporation have undertaken capacity expansion plans in the LVL and I-joist business. In particular, competition may emerge or increase from established wood products companies that now sell primarily traditional wood products. A number of existing competitors such as Louisiana-Pacific Corporation, Boise Cascade Corporation, Willamette Industries, Inc., and Georgia-Pacific Corporation, own a significant portion of their own raw materials and generally have greater financial resources than the Company.
The Company believes that the principal competitive factors in the market for engineered lumber are product quality, customer support, distribution capabilities, and price. The Company believes its broader product line, based in part on its proprietary technologies PSL and LSL lumber, provide an important competitive advantage over its competition. In addition, the Company believes it enjoys a leadership position in terms of brand name recognition, value-added services to
builders, an aggressive and broad distribution network and a wide selection of products which have received building code approval in substantially all markets. The Company has adopted a policy of protecting market share by aggressively managing any price differentials between its products and those of its engineered lumber competitors.
Other building materials, including steel, plastic, brick, and cement, are alternative basic materials for construction. However, these materials may not readily lend themselves to traditional residential framing methods or tools and have certain inherent manufacturing and performance deficiencies.
BACKLOG
The Company's order backlog at December 28, 1996 was approximately $31 million compared to approximately $28 million at December 30, 1995. Some portion of the current order backlog will probably not be filled due to extended deliveries or cancellations. In addition, lead times of orders can vary significantly from quarter to quarter and year to year. Accordingly, the Company's backlog on a particular date may not be representative of the level of future sales.
EMPLOYEES
As of December 28, 1996, the Company employed a total of approximately 3,000 employees in its engineered lumber operations.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, provincial, and local environmental laws and regulations, particularly relating to air and water quality and the storage, handling, and disposal of various materials and substances used in the Company's plants and processes. Permits are required for certain of the Company's operations, and these permits are subject to revocation, modification, and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines or the entry of injunctions, or both.
The Company believes that it is in material compliance with existing environmental laws and regulations, and that its expenditures in future years for environmental compliance will not have a material adverse effect on its operations.
ITEM 1(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES.
The Company operates manufacturing facilities in two countries, the United States and Canada; and the majority of all sales are made domestically in those countries. Financial information relating to foreign and domestic operations is presented in Note 10 to the consolidated financial statements, page 44 of this Report.
ITEM 2.
ITEM 2. PROPERTIES
Set forth below are the locations of the Company's manufacturing facilities and the technology and/or products produced at such facilities.
* Produces veneer for LVL and PSL Lumber productions
The Company owns a Boise, Idaho, property of approximately 32 acres of unimproved land. The Company's headquarters staff are located in a location in Boise, Idaho.
The properties at Stayton, Oregon and Natchitoches, Louisiana are subject to mortgages aggregating $16.4 million. Because the costs of these latter properties are financed partially or wholly by Industrial Development Revenue Bonds, record title to a significant portion of the land, buildings, and equipment is being held by the bond-issuing authorities until the bonds are retired.
All properties in use or held for future use are considered suitable for the Company's present and future needs and should have adequate capacity for those needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
No material legal proceedings or claims are pending or known to the Company other than several claims and suits for damages arising in the ordinary conduct of business, resulting primarily from construction accidents and often involving contractors and others as joint defendants.
Based on current facts and knowledge, all material liabilities under any of the pending claims and suits would be covered under the Company's liability insurance policies or are otherwise provided for in the Company's financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Following is a schedule of names and certain information regarding all of the executive officers of the Company, as of December 28, 1996, each of whose term of office is one year.
NAME AND AGE OFFICE
Harold E. Thomas, age 70 Chairman of the Board, TJ International, Inc.
Thomas H. Denig, age 50 President and Chief Executive Officer TJ International, Inc.
Robert J. Dingman, age 55 Senior Vice President, Custom Operations Group, Trus Joist MacMillan
Randy W. Goruk, age 44 Senior Vice President, North American Residential Operations Group, Trus Joist MacMillan
Patrick D. Smith, age 50 Senior Vice President, Manufacturing Operations Group, Trus Joist MacMillan
Valerie A. Heusinkveld, age 38 Vice President, Finance and Chief Financial Officer, TJ International, Inc.
Richard B. Drury, age 47 Secretary and Treasurer, TJ International, Inc.
Jody B. Olson, age 49 Vice President, Corporate Development, TJ International, Inc.
Floyd J. Juday, age 53 Vice President, Marketing Services
James H. Ware, age 53 Vice President, Technology and Engineering
Harold E. Thomas holds a Bachelor of Science Degree in Forestry from the University of Idaho, and worked in sales for lumber mills prior to 1960, when Mr. Thomas and Arthur L. Troutner founded the Company. Mr. Thomas was first elected to the Board of Directors in 1960 and was President of the Company from 1960 to 1971. Mr. Thomas has been Chairman since 1960 and served as Chief Executive Officer from 1971 to 1975 and from 1979 to 1986.
Thomas H. Denig was elected President and Chief Executive Officer of TJ International, Inc. in 1995. Mr. Denig was elected Senior Vice President, Structural Operations in 1990. Mr. Denig was also elected President and Chief Executive Officer of Trus Joist MacMillan in 1991, after having served as President of Trus Joist Corporation since 1990. Mr. Denig joined the Company in 1974 as a salesperson and has subsequently served as California South Sales Manager, Microllam -Registered Trademark- Lumber Industrial Sales Manager, National Sales Manager, Western Division Manager, Eastern Division Manager and had been elected Vice President, Eastern Operations in 1985. Mr. Denig is a graduate of Valparaiso University and served as a lieutenant in the U.S. Marine Corp. before joining the Company.
Robert J. Dingman was appointed Sr. Vice President, Custom Operations Group for Trus Joist MacMillan, in 1995. Mr. Dingman joined the Company in 1983 as the Southwest Division Manager and has subsequently served as Division Manager, Microllam -Registered Trademark- Lumber Operations and Sr. Vice President, Western Operations. Before joining the Company, Mr. Dingman, a graduate of St. Lawrence University, was Vice President and General Manager of the Architectural Building Products Division of Koppers Company, Inc.
Randy W. Goruk was appointed Sr. Vice President, North American Residential Operations Group for Trus Joist MacMillan, in 1995. Mr. Goruk joined the Company in 1974 as a draftsperson and has subsequently served as a salesperson, British Columbia Regional Sales Manager, Canadian Division Sales Manager and Canadian Division Manager, Vice President, Canadian Operations, Vice President, Eastern Operations, and Sr. Vice President, Canadian and Industrial Operations. Mr. Goruk is a graduate of the Northern Alberta Institute of Technology and the University of British Columbia.
Patrick D. Smith was appointed Senior Vice President, Manufacturing Operations Group for Trus Joist MacMillan in 1994. Mr. Smith joined the Company in 1984 as the Plant Manager at the Natchitoches, Louisiana, plant and has subsequently served as Plant Manager at the Colbert, Georgia, Plant, General Manager of the Atlantic Coastal Division, and Vice President of Construction. Before joining the Company, Mr. Smith, a graduate at Edinboro University, began a 15 year career with the Koppers Company in their Forest Products Division. He managed three different manufacturing plants and worked in the industrial relations department.
Valerie A. Heusinkveld was elected Vice President of Finance and Chief Financial Officer of TJ International, Inc., in 1992. Ms. Heusinkveld is an honors graduate of the University of Idaho and a Certified Public Accountant. Before being named CFO, Ms. Heusinkveld served as Vice President of Finance and Treasurer for Trus Joist MacMillan. Ms. Heusinkveld has also served as controller of Norco Windows Western Operations group and as a corporate accountant and assistant to the Vice President of Finance. Ms. Heusinkveld joined TJ International in 1989 after working for Arthur Andersen & Co.
Richard B. Drury was elected Secretary in 1985 and was elected to the additional position of Treasurer in 1991. Mr. Drury is a graduate of Boise State University and a Certified Public Accountant. Prior to joining the Company in 1979, Mr. Drury gained audit and tax experience with Arthur Andersen & Co.
Jody B. Olson was elected Vice President, Corporate Development in 1987. In 1991, Mr. Olson was also elected Secretary of the Board of Trus Joist MacMillan. Previous positions held by Mr. Olson were Microllam -Registered Trademark- Lumber Division Controller; Microllam -Registered Trademark- Lumber Industrial Salesperson and Sales Manager; General Manager of the Company's former trucking subsidiary; Manager, Energy Systems; Assistant to the President, Mergers and Acquisitions; and Manager, Corporate Development. Mr. Olson, who joined the Company in 1979, is a graduate of the University of Idaho and the Lewis and Clark Law School.
Floyd J. Juday was appointed Vice President, Marketing for Trus Joist MacMillan in February of 1996, upon joining the Company. Mr. Juday received his undergraduate degree from Western Michigan University, and graduate degree from Indiana University. Before joining the company, Mr. Juday spent 25 years in the forest products industry with Georgia Pacific and MacMillan Bloedel in various management positions.
James H. Ware was appointed Vice President, Engineering and Technology in October of 1995. Dr. Ware joined the company as Vice President, Research and Development, in February of 1995, after 17 years at Scott Paper Company where his most recent positions were Worldwide Business Applications Leader and Technology Manager for Worldwide Operations. Prior to his career with Scott, Dr. Ware was a Research Scientist at Union Camp Corporation's Princeton Research Center and a faculty member in the School of Engineering at North Carolina State University. Dr. Ware holds BS, MS and Ph.D. degrees in Engineering Mechanics from North Carolina State University.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The approximate number of record holders of the Company's $1.00 par value common stock at March 14, 1997, is set forth below:
(1) (2) Title of Class Number of Record Holders -------------- ------------------------ Common Stock, $1 par value 2,011
There are approximately 14,000 beneficial shareholders. The remainder of this Item 5 is contained in the following sections of the Report at the pages indicated below:
"Market and Dividend Information," on page 30 of this Report, to the extent that said section discusses the principal market or markets on which the Company's common stock is being traded; the range of high and low quoted sales prices (closing) for each quarterly period during the past two years; the source of such quotations; and the frequency and amount of any dividends paid during the past two years with respect to such common stock.
"Note 3 to the consolidated financial statements," page 39 of this Report, to the extent that said Note describes any restriction on the Company's present or future ability to pay such dividends.
ITEMS 6, 7, AND 8.
The information called by Items 6, 7 and 8, inclusive of Part II of this form, is contained in the following sections of this Report at the pages indicated below:
CAPTIONS AND PAGES OF THIS REPORT
ITEM 6
ITEM 6 Selected Financial Data "Selected Financial Data" ......24
ITEM 7
ITEM 7 Management's Discussion "Management's Discussion and Analysis of Financial and Analysis" ..................26 Conditions and Results of Operations
ITEM 8
ITEM 8 Financial Statements and "Consolidated Financial Supplementary Data Statements".....................32
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Identification of the Company's executive officers is included in Item A (following Item 4) in Part I of this Form 10-K.
The balance of this Item 10 is included in the Company's definitive proxy statement, under the caption "Election of Directors;" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Item 11 is included in the Company's definitive proxy statement, under the caption "Compensation of Executive Officers," including the sub-caption "Executive Compensation Tables," and is incorporated herein by reference. The subcaptions "Report of the Executive Compensation Committee on Executive Compensation," and "Performance Graph," under the caption "Compensation of Executive Officers" in the Company's definitive proxy statement are not incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 12 is included in the Company's definitive proxy statement under the caption "Security Ownership of Certain Beneficial Owners and Management;" and is incorporated herein by reference.
For purposes of calculating the aggregate market value of the voting stock held by non-affiliates as set forth on the cover page of this Form 10-K, the Company has assumed that affiliates are those persons identified in the portion of the definitive proxy statement identified above.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 13 is included in Note 9 to the consolidated financial statements, pages 43 of this Report.
- -Registered Trademark- - Microllam, Parallam, TimberStrand, TJI, The Silent Floor, FrameWorks are registered trademarks of the Company.
(TM) - TJ-Xpert is a trademark of the Company
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
A list of the financial statements included herein is set forth in the Index to Financial Statements, Schedules and Exhibits submitted as a separate section of this Report.
(b) Reports on Form 8-K.
There have been no Form 8-K filings during the fourth quarter of 1996.
(c) Exhibits. The following documents are filed as Exhibits to this Form 10-K:
(3) Limited Partnership Agreement between TJ International, Inc. and MacMillan Bloedel of America, Inc. whereby the Partnership was formed. This document was filed as an exhibit to the Company's Form 8-K dated September 30, 1991 and is incorporated herein by reference.
Bylaws of Trus Joist Corporation (a Delaware corporation). This document was filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 28, 1991 and is incorporated herein by reference.
Amendment to Limited Partnership Agreement effective the beginning of the Company's fiscal year 1993. This document was filed as an exhibit to the Company's Form 10-Q for the quarter ended September 26, 1992 and is incorporated herein by reference.
Certificate of Ownership and Merger of TJ Merger Corporation with and into Trus Joist Corporation, whereby the Company changed its name from Trus Joist Corporation to TJ International, Inc. effective September 16, 1988. This document was filed as an exhibit to the Company's Form 10-K for the fiscal year ended January 2, 1993 and is incorporated herein by reference.
Amended Certificate of Incorporation of TJ International Inc. This document was filed as an exhibit to the Company's Form 10-Q for the quarter ended July 2, 1994 (SEC file No. 000-07469) and is incorporated herein by reference.
(4) Second Amendment to Credit Agreement, dated as of November 15, 1996. This document is filed as an exhibit to this Form 10-K for the fiscal year ended December 28, 1996.
Amended and Restated Credit Agreement, dated as of May 31, 1995. This document was filed as an exhibit to the Company's Form 10-Q for the quarter ended July 1, 1995 (SEC file No. 000-07469) and is incorporate herein by reference.
1992 Stock Option Plan. This document was filed as an exhibit to the Company's Form 10-K for the fiscal year ended January 2, 1993 and is incorporated herein by reference.
1993 Stock Option Plan. This document was filed as an exhibit to the Company's Form 10-Q for the quarter ended July 3, 1993 and is incorporated herein by reference.
Amended and Restated Restricted Stock Plan for Non-Employee Directors. This document was filed as an exhibit to the Company's Form 10-Q for the quarter ended July 3, 1993 and is incorporated herein by reference.
Rights Agreement, dated as of August 24, 1989, between TJ International, Inc. and West One Bank. These documents were filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1994 (SEC file No. 000-07469).
1982 Incentive Stock Option Plan, as amended. These documents were filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1994 (SEC file No. 000-07469).
1985 Incentive Stock Option Plan, as amended. These documents were filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1994 (SEC file No. 000-07469).
1988 Stock Option Plan, as amended. These documents were filed as an exhibit to the Company's Form 10-K for the fiscal year ended December 31, 1994 (SEC file No. 000-07469).
(10) Certificate of Designation, Preferences and Rights of ESOP Convertible Preferred Stock; Stock Purchase Agreement; and ESOP Term Note. These documents were filed as an exhibit to the Company's Form 10-Q for the quarter ended September 29, 1990 and are incorporated herein by reference.
Mortgage, Security Interest and Indenture of Trust; Lease Agreement; Guaranty Agreement; Reimbursement Agreement; Remarketing and Interest Services Agreement; pertaining to Stayton, Oregon, plant. These documents were filed as Exhibits to the Company's Form 10-K for the fiscal year ended December 28, 1991 and are incorporated herein by reference.
Trust Indenture; Refunding Agreement; Remarketing Agreement; Reimbursement Agreement; Pledge and Security Agreement; pertaining to the Natchitoches, Louisiana, plant. These documents were filed as Exhibits to the Company's Form 10-K for the fiscal year ended January 2, 1993 and are incorporated by reference.
Amendment to Reimbursement Agreement; Pledge and Security Agreement; pertaining to the Natchitoches, Louisiana plant. These documents were filed as exhibit to the Company's Form 10-K for the fiscal year ended January 1, 1994 (SEC file No. 000-07469) and are incorporated herein by reference.
Stock Purchase and Resale Agreement. These documents were filed as an exhibit to the Company's Form 10-K for the fiscal year ended January 1, 1994 (SEC file No. 000-07469) and are incorporated herein by reference.
Loan Agreement, Trust Indenture and Guaranty pertaining to Hazard, Kentucky, plant. These documents were filed as an exhibit to the Company's Form 10-Q for the quarter ended July 2, 1994 (SEC file No. 000-07469) and are incorporated herein by reference.
(11) Statement regarding computation of per share earnings. The information required by Exhibit (11) is included under the caption "Net Income Per Share" in Note 1 to the consolidated financial statements, page 37 of this Report.
(22) Subsidiaries of the registrant.
(24) Consent of independent public accountants to the incorporation of their report dated January 30, 1997, included in this Form 10-K for the year ended December 28, 1996 into TJ International, Inc.'s previously filed Form S-8 Registration Statement for the Trus Joist Corporation Nonstatutory Stock Option Plan with 1982 Incentive Amendment, as amended (Registration No. 2-79209), Form S-8 Registration Statement for the Trus Joist Corporation Employee Stock Ownership Plan (Registration No. 2-96065), Form S-8 Registration Statement for the Trus Joist Corporation Associates' Stock Purchase Plan, as amended (Registration No. 2-96821), Form S-8 Registration Statement for the Trus Joist Corporation Key Employees' 1982 Inventive Stock Option Plan with Nonstatutory feature (Registration No. 2-96964), Form S-8 Registration Statement for the Trus Joist Corporation Employee Stock Ownership Plan (Registration No. 33-4704), Form S-8 Registration Statement for the Trus Joist Corporation Profit Sharing Plan, as amended (Registration No. 33-21870), Form S-8 Registration Statement for the Trus Joist Corporation Key Employees' 1985 Incentive Stock Option Plan with Nonstatutory Feature, as amended (Registration No. 33-22186), Form S-8 Registration Statement for TJ International, Inc. Key Employees' 1988 and 1992 Stock Option Plans (Registration No. 33-54582), Associate Stock Purchase Plan (Registration No. 333-18425) and Leverage Stock Purchase Plan (Registration No. 333-18427).
(25) Powers of Attorney.
(27) Financial Data Schedule.
All other Exhibits are omitted since they are not applicable or not required.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TJ INTERNATIONAL, INC., Registrant
By /s/ Thomas H. Denig -------------------------------------------------------------- Thomas H. Denig - President, Chief Executive Officer, Director and Attorney-in-Fact for Directors listed below.
By /s/ Valerie A. Heusinkveld -------------------------------------------------------------- Valerie A. Heusinkveld - Vice President, Finance and Chief Financial Officer
Each of the above signatures is affixed as of February 13, 1997. Those Directors of TJ International, Inc. listed below executed powers of attorney appointing Thomas H. Denig their attorney-in-fact, empowering him to sign this report on their behalf.
Robert B. Findlay J. L. Scott Jerre L. Stead Harold E. Thomas Arthur L. Troutner J. Robert Tullis Steven C. Wheelwright William J. White
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 28, 1996 Commission File Number 0-7469
TJ INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The following documents are filed as part of this Report: Pages in this Report --------------------
(1) FINANCIAL STATEMENTS:
Selected Financial Data...........................................24
Management's Discussion and Analysis..............................26
Market and Dividend Information...................................30
Report of Independent Public Accountants..........................30
Quarterly Financial Data (Unaudited)..............................31
Consolidated Balance Sheets at December 28, 1996, December 30, 1995 and December 31, 1994........................32
Consolidated Statements of Income for the three years ended December 28, 1996..................................33
Consolidated Statements of Stockholders' Equity for the three years ended December 28, 1996............................34
Consolidated Statements of Cash Flow for the three years ended December 28, 1996........................................35
Notes to Consolidated Financial Statements........................36
The following documents are filed as part of this Report: Pages in this Report -------------------- (3) EXHIBITS
(4) Second Amendment to Credit Agreement, dated as of November 15, 1996. This amendment increases the credit agreement commitment from $100,000,000 to $150,000,000 and extends the termination date until November 15, 2001. This document is filed as an exhibit to this Form 10-K for the fiscal year ended December 28, 1996.....................................Document 2
(21) Subsidiaries of the Registrant.........................Document 3
(24) Consent of Independent Public Accountants..............Document 4
(25) Powers of Attorney.....................................Document 5
(27) Financial Data Schedules for the years ended December 31, 1994, December 30, 1995, and December 28, 1996......................................Document 6
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
FINANCIALS - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
The following table summarizes selected financial data for the five fiscal years ended December 28, 1996, and should be read in conjunction with the more detailed Consolidated Financial Statements included herein.
In 1995, net income (loss) includes ($36,191) for the loss on disposal of discontinued operations. All prior periods have been restated for discontinued operations; see note 2 for further discussion. In 1992, net income and net income per share include income of $900 and $.07, respectively, for the cumulative effect of adopting Statement No. 109, Accounting for Income Taxes.
1996 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMOUNTS IN THOUSANDS EXCEPT PER SHARE FIGURES AND PERCENTAGES
FOR THE TWO YEARS ENDED DECEMBER 28, 1996
ANALYST REPORTS RECENTLY ISSUED
A.G. EDWARDS & SONS, INC., ST. LOUIS, MO. CREDIT SUISSE FIRST BOSTON CORPORATION, NEW YORK, NY. GOLDMAN SACHS & CO., NEW YORK, NY. JENSEN SECURITIES CO., PORTLAND, OR. LEGG MASON, BALTIMORE, MD. PACIFIC CREST SECURITIES, PORTLAND, OR. PIPER JAFFRAY INC., SEATTLE, WA. RAGEN MACKENZIE INCORPORATED, SEATTLE, WA. VALUE LINE, INC., NEW YORK, NY.
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
1996 COMPARED TO 1995
The Company achieved record sales levels in 1996 with sales increasing by $92 million from the prior year. The increase is primarily the result of the growing acceptance of the Company's engineered lumber products as a substitute for commodity solid-sawn lumber. Increased North American housing starts and rising prices for solid-sawn lumber facilitated this transition. North American housing starts increased nearly 10 percent over 1995 levels. Markets for certain solid-sawn lumber products were up an average of 7 percent over 1995 levels, hitting a two-and-a-half-year high in the latter half of 1996. The Company's sales per North American housing start were $289 compared to $263 at year-end 1995, a 10 percent increase. 1996 is the 14th consecutive year the Company has achieved market penetration growth in the key residential construction market.
The Company had a 21 percent increase in unit volume sales compared to the prior year. Volume gains were strongest in the Company's new technology TimberStrand-Registered Trademark- LSL and Parallam-Registered Trademark- PSL products. In particular, new products, such as TimberStrand-Registered Trademark- LSL Wall Framing and Light-Duty Header products and the Parallam- Registered Trademark- PSL Commercial Beam, joined existing new technology products (e.g., TimberStrand-Registered Trademark- LSL Rim Board, window and door parts, furniture components) in achieving these significant volume increases. Additionally, exports of TimberStrand-Registered Trademark- LSL into Pacific Rim countries, such as Japan, increased 186 percent over their 1995 levels. In 1996, Pacific Rim exports represented in excess of 15 percent of total TimberStrand-Registered Trademark- LSL sales.
Sales for the fourth quarter of 1996 were $131.4 million, compared to $113.3 million in the fourth quarter of 1995, a 16 percent increase. The sales increase came from strong volume growth, particularly in the Company's TimberStrand-Registered Trademark- LSL products. Average selling prices were also up in the fourth quarter for all of the Company's product lines over the prior year's levels.
Gross margins for the year ended December 28, 1996, were 24.7 percent compared with 22.4 percent in 1995. The margin gains were primarily the result of the improved operating performance at the Company's new combination Microllam-Registered Trademark- LVL and Parallam-Registered Trademark- PSL plant in Buckhannon, West Virginia, and TimberStrand-Registered Trademark- LSL plant in Eastern Kentucky. The combination Microllam-Registered Trademark- LVL and Parallam-Registered Trademark- PSL plant was a solid contributor to Company margins during 1996. Although the Company's TimberStrand-Registered Trademark- LSL plant in Eastern Kentucky was not profitable for the year as a whole, the facility achieved a positive cash flow in the latter part of the third quarter and throughout the fourth quarter. Margins also were aided by a general decline in the cost of certain key raw materials such as oriented strand board and veneer.
Selling expenses increased $7.6 million in 1996; however, they declined slightly as a percent of sales compared to the prior year. This increase is largely due to variable selling expenses and commissions. Additionally, the Company continues to invest in developing and bringing new and innovative products to the marketplace. General and administrative expenses increased $1.9 million from the prior year. This increase is primarily driven by additional research and development expenses and further development of the Company's product application software, which helps customers incorporate the Company's engineered lumber products into their building plans.
Interest expense was recognized in 1996 due to the end of the construction phase of the two new plants in 1995. Minority interest expense increased $7.6 million from 1995 due to the increase in earnings at the Trus Joist MacMillan (TJM) Partnership.
1995 COMPARED TO 1994
Sales for the year ended December 30, 1995, decreased by $11 million from the prior year. The sales decrease of 2 percent came in a period when North American housing starts declined 9 percent from 1994 levels. Growing acceptance of the Company's engineered lumber products as a substitute for commodity, solid-sawn lumber helped increase sales volumes in a market of declining housing starts. Price pressures due to depressed markets for dimension lumber products had a downward impact on per-unit sales prices. Lumber prices for commodity lumber were down approximately 16 percent from year-end 1994 levels. Despite the market pressures on sales price, sales of the Company's residential products per North American housing start increased to $263 for 1995 from $250 for 1994.
The most significant volume increases came from the Company's two new technology product lines, Parallam-Registered Trademark- PSL and TimberStrand- Registered Trademark- LSL. These increases came from established engineered lumber products as well as new product innovations being introduced by the Company.
Sales for the fourth quarter of 1995 increased slightly to $113.3 million, compared to $112.9 million in the comparable period of 1994. The relatively flat sales growth came from significant increases in volumes offset by declining selling prices. The largest volume increases came from the Company's Parallam- Registered Trademark- PSL product lines; however, all other product lines showed increases, as well. While lumber prices were somewhat volatile in 1995, the fourth quarter showed the greatest decline of the year, with prices dropping in excess of 10 percent from the third quarter. On average, lumber prices were 14 percent below fourth quarter 1994 levels.
Gross margins for the year ended December 30, 1995, were 22.4 percent compared with 26.1 percent in 1994. The decline was primarily due to the start- up losses of $12.8 million at the Company's Eastern Kentucky TimberStrand- Registered Trademark- LSL plant and West Virginia combination Parallam- Registered Trademark- PSL and Microllam-Registered Trademark- LVL plant. Both plants experienced start-up delays. Difficulties have come from mechanical areas; there were no fundamental problems with the technology or the production processes. In addition, prices for the Company's products were reduced in response to continuing softness in the lumber market.
Profitability at the Company's initial TimberStrand-Registered Trademark- LSL plant in Deerwood, Minnesota, continued to improve through 1995. This resulted from a combination of improved production efficiencies and improved sales volumes and prices for the products made at this TimberStrand-Registered Trademark- LSL plant.
Selling expenses increased $1.3 million in 1995 compared to the prior year. This increase reflects the Company's continuing investment in new product development, as well as the cost of developing the European marketplace. Administrative costs declined $2.3 million from the prior year. This decline is primarily the result of severance and other accruals recorded in 1994 that were not repeated in 1995.
The Company incurred interest expense in 1995 due to the end of the construction phase of the two new plants in the third and fourth quarters. In 1995, interest payments of $6.5 million were capitalized in connection with this construction. This compares to $4.8 million of capitalized interest in 1994. Minority interest expense declined $10.4 million from 1994 due to the decline in earnings at TJM.
The Company recorded a $36.2 million charge in connection with the disposal of its window operations, which was partially completed in 1995. The loss on disposal is net of a $23.7 million tax benefit related to the loss.
Additionally, a net loss of $3.5 million was incurred on the operations of the window segment during 1995. This is down from a $7.4 million discontinued operating loss in 1994. The decrease is primarily due to the disposal of the Company's Canadian window operations at the end of 1994, which had contributed a $4.9 million loss in 1994. Additionally, a large inventory adjustment associated with the closure of certain distribution facilities in the Eastern United States increased the loss in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from the Company's engineered lumber segment, as measured by net income plus non-cash charges, primarily for depreciation and minority interest, was $92 million during 1996. Of those proceeds, working capital items required $51 million. The most significant working capital requirement was from the increased investment in accounts receivable. The Company introduced a marketing incentive plan in the fourth quarter of 1996 to induce customers into a less seasonal buying pattern. One element of the marketing incentive was extended credit terms, which led to an increased investment in accounts receivable during the winter months. The Company invested $19 million in capital expenditures, which primarily represented its ongoing program for productivity improvements in its manufacturing facilities and an investment in computer hardware and software.
Additionally, the Company completed the sale of its windows division during the third quarter of 1996. The sale of the assets resulted in a net cash inflow of $24 million; $7.4 million of these sale proceeds were then utilized to pay down long-term debt. As part of the sale, the Company retained all of the existing operating and contingent liabilities of the window operations, and in 1996, approximately 10.7 million of cash was used to finance the operations prior to sale and to fund the retained liabilities. Management believes that existing reserves are adequate to meet all subsequent liabilities that may arise related to the discontinued operations.
In the second quarter of 1996, the Company issued $5.7 million of industrial revenue bonds to finance the final stages of construction of the Eastern Kentucky TimberStrand-Registered Trademark- LSL plant. The bonds are due in a single maturity in 2026, with interest payable semi-annually at 6.8 percent.
In the third quarter of 1995, the Company issued $22.5 million of industrial revenue bonds to help finance the construction of the Buckhannon, West Virginia, combination Microllam-Registered Trademark- LVL and Parallam- Registered Trademark- PSL plant. The bonds are due in a single maturity in 2025, with interest payable semi-annually at 7 percent.
In the second quarter of 1994, the Company issued $43.5 million of industrial revenue bonds to finance construction of the Eastern Kentucky TimberStrand-Registered Trademark- LSL plant. The bonds are due in a single maturity in 2024, with interest payable at 7 percent.
The Company is evaluating potential sites for an additional combination Microllam-Registered Trademark- LVL and Parallam-Registered Trademark- PSL plant or a third TimberStrand-Registered Trademark- LSL plant, but has not determined whether or when to proceed with construction. The Company believes that current cash balances, cash generated from operations, and borrowing under a $150 million Revolving Credit Facility will be sufficient to meet the ongoing operating and capital expansion needs of the Company. The Company also believes that additional or expanded lines of credit or appropriate long-term capital can be obtained to fund other major capital requirements as they arise, or to fund an acquisition.
Substantially all of the Company's operating assets are held, and revenue generated, by its TJM partnership. The partnership regularly distributes cash to the partners to fund the tax liabilities generated by the partnership at the corporate level. All other distributions of cash by the partnership are dependent on the affirmative votes of the representatives of the minority partner. Accordingly, there can be no assurance that such distributions will be approved and thereby be available for the payment of dividends or to fund other operations of the Company.
INDUSTRY, COMPETITION, AND CYCLICALITY
The Company's engineered lumber products continue to gain market acceptance as high-quality alternatives to traditional solid-sawn lumber products. Through the Company's intensive marketing efforts, builders and other wood users increasingly recognize the consistent quality, superior strength, lighter weight, and ease of installation of engineered lumber products. The Company believes that this trend will continue well into the future.
No other company possesses the range of engineered lumber products, the levels of service and technical support, or the second-generation technologies of TimberStrand-Registered Trademark- LSL or Parallam-Registered Trademark- PSL. There are, however, a number of companies, including several large forest products companies, that now produce look-alike wood I-joist and laminated veneer lumber products. These look-alike products are manufactured using processes similar to the Company's oldest generation technologies.
The Company believes its network of manufacturing plants and multiple technologies position it as the low-cost producer of engineered lumber. While competition helps expand the market for engineered wood products, including those manufactured by the Company, it may also make the existing markets more price competitive. Traditional wide-dimension lumber, however, remains the predominant structural framing material used in residential construction and is the primary competitor of the Company's products. Commodity lumber prices historically have been subject to high volatility, and during periods of significant lumber price movements the Company's prices have trended in the same direction.
The Company's operations are strongly influenced by the cyclicality and seasonality of residential construction. This industry experiences fluctuations resulting from a number of factors, including the state of the economy, consumer confidence, credit availability, interest rates, and weather patterns. Consistent with the seasonal pattern of the construction industry as a whole, the Company's sales have historically tended to be lowest in the first and fourth quarters and highest in the second and third quarters of each year.
MARKET AND DIVIDEND INFORMATION
The Company's stock is traded on the over-the-counter market and is listed with the National Association of Security Dealers Automated Quotations (NASDAQ) under the symbol TJCO.
The high and low quoted sales prices (closing) and dividends paid per common share for each quarterly period during 1996 and 1995 were as follows:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF TJ INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of TJ International, Inc. (a Delaware corporation) and subsidiaries as of December 28, 1996, December 30, 1995, and December 31, 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TJ International, Inc. and subsidiaries as of December 28, 1996, December 30, 1995, and December 31, 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boise, Idaho January 30, 1997
RESULTS OF QUARTERLY OPERATIONS
Unaudited results of operations by quarter for 1996, 1995, and 1994 are as follows:
Per share calculations are based on the average common shares outstanding for each period presented. Accordingly, the total of the per share figures for the quarters may not equal the per share figures reported for the year.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
A cash balance of $(137) in 1994 has been reflected in net assets from discontinued operations on the balance sheet. The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL The consolidated financial statements include the accounts of the Company and subsidiaries, including the Company's 51-percent interest in Trus Joist MacMillan a Limited Partnership (TJM). All significant inter-company balances and transactions have been eliminated. Certain components of the accompanying balance sheets and statements of income require estimates made by management. Actual results could differ from those estimates.
FISCAL YEAR The Company's 52/53-week fiscal year ends on the Saturday closest to December 31 of each year. The additional week, which occurs approximately every fifth year, does not materially affect the comparability of operations between years.
FOREIGN TRANSLATION The accounts of the Company's Canadian subsidiaries are measured using the Canadian dollar as functional currency. These financial statements are translated into U.S. dollars using exchange rates in effect at year-end for assets and liabilities and the average exchange rate during the period for results of operations. The resulting translation adjustment is made directly to the cumulative translation adjustment component of Stockholders' Equity.
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES The Company considers cash on hand, cash in banks, and all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. These assets are recorded at cost, which approximates fair market value, and totaled $36,801,000 at December 28, 1996, $19,715,000 at December 30, 1995, and $57,764,000 at December 31, 1994. Marketable securities include tax- exempt municipal bonds and preferred stocks. These securities are recorded at cost, which approximates fair market value based on quoted market prices.
INVENTORIES Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:
The Last-In, First-Out (LIFO) method is used in determining the cost of lumber, veneer, Microllam-Registered Trademark- LVL, TJI-Registered Trademark- joists, and open-web trusses. Approximately 49 percent of total inventories at the end of 1996, 49 percent of total inventories at the end of 1995, and 53 percent of total inventories at the end of 1994 were valued using the LIFO method of inventory valuation. The First-In, First-Out (FIFO) method of inventory valuation was used to value all remaining inventory. At December 28, 1996, the LIFO valuation approximated the FIFO valuation.
PROPERTY Property and equipment are recorded at cost. Additions, betterments, and replacements of major units of property are capitalized. Maintenance, repairs, and minor replacements are expensed as incurred and approximated $26,607,000 in 1996, $20,377,000 in 1995, and $17,931,000 in 1994. The net book value of property sold or retired is removed from the asset and related depreciation accounts, and any resulting gain or loss is included in income.
The provision for depreciation on certain Microllam-Registered Trademark- LVL, Parallam-Registered Trademark- PSL, and TimberStrand-Registered Trademark- LSL manufacturing equipment is computed on the units-of-production method. Virtually all other property and equipment is depreciated on the straight-line method. Estimated useful lives of the principal items of property and equipment range from three to 30 years.
CAPITALIZED INTEREST The Company capitalizes interest on qualifying assets. There was no capitalization of interest in 1996. Interest expense and income capitalized into property and equipment were $6,838,000 and $336,000 in 1995 and $5,259,000 and $464,000 in 1994, respectively.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Research and development costs charged to expense were approximately $3,221,000 in 1996, $2,262,000 in 1995, and $3,309,000 in 1994.
RECLASSIFICATIONS Certain reclassifications have been made, none of which affected net income (loss), to conform prior years' information to the current year's presentation.
NET INCOME PER SHARE Primary net income (loss) per common share is based on net income (loss) adjusted for preferred stock dividends and related tax benefits divided by the weighted average number of common shares outstanding after giving effect to stock options as common stock equivalents, if dilutive. Fully diluted net income per common share assumes conversion of the Employee Stock Ownership Plan (ESOP) convertible preferred stock (ESOP preferred stock) into common stock at the beginning of the year. Fully diluted net loss per share for 1995 is the same as primary net loss per share since the effect of the assumed conversion of the ESOP preferred stock is anti-dilutive. Primary and fully diluted net income (loss) were calculated as follows:
PRIMARY AND FULLY DILUTED NET INCOME
PARTNERSHIP On September 29, 1991, the Company and MacMillan Bloedel of America, Inc. (MBA), a wholly owned subsidiary of MacMillan Bloedel Limited (MB), formed TJM.
The Company contributed all of its North American engineered lumber technology, manufacturing facilities, and its sales and marketing organization for a 51-percent interest in TJM. MBA and MB contributed all of their North American engineered lumber technology and manufacturing facilities for a 49-percent interest in TJM. The Company, MBA, and MB also contributed all patents and trademarks relating to their combined engineered lumber business.
Goodwill recognized in the transaction is being amortized using the straight-line method over 25 years. As of December 28, 1996, a total of $5,460,000 of this goodwill has been amortized. Goodwill expense was $1,040,000 each year in 1996, 1995, and 1994.
MINORITY INTEREST IN PARTNERSHIP The Company has a 51-percent interest in TJM. Income and losses through December 28,1996, are allocated on a formula basis as agreed to by the partners and in accordance with the Partnership agreements. As a result, the minority owners of the Partnership were allocated $23,956,000 of income in 1996, $16,376,000 of income in 1995, and $26,848,000 of income in 1994. These allocations are reflected as Minority interest in Partnership in the Consolidated Statements of Income. The minority partner's interest in the Partnership-accumulated equity is included in the Consolidated Balance Sheets as Minority interest in Partnership.
2 DISCONTINUED OPERATIONS
The Company completed its plan to divest of its window segment in 1996. Effective July 1, 1996, all of the remaining window operation assets owned by the Company's Norco Windows subsidiary were sold to JELD-WEN, Inc. Net-cash proceeds from the sale were approximately $24 million. The Company retained all of the operating and contingent liabilities of the window segment, and management believes that existing reserves are adequate to satisfy all of the remaining liabilities. This divestiture will allow the Company to devote all of its resources towards its Engineered Lumber segment. All of the Company's window operations have been reflected in the accompanying financial statements as Discontinued Operations for all periods presented.
Sales from these discontinued operations were $32,212,000 in 1996, $95,569,000 in 1995, and $122,617,000 in 1994. There have been no allocations of corporate overhead interest expense to discontinued operations in the accompanying financial statements.
The components of net assets (liabilities) from discontinued operations included in the Consolidated Balance Sheets are as follows:
3 DEBT
At year-end, the Company has available unsecured, committed lines of credit totaling $13,657,000 with foreign and domestic banks. The interest rate on any loan, determined at the time of the borrowing, would not exceed the lending bank's prevailing prime rate. Arrangements with the domestic banks provide for a commitment fee of .25 percent. At December 28, 1996, there were no borrowings under these agreements. At December 30, 1995, and December 31, 1994, there was $2,994,000 at 6.3 percent and $6,358,000 at 6.5 percent, respectively, borrowed under similar arrangements.
The Company has a $150 million Revolving Credit Facility (the Credit Facility) provided by a syndicate of banks. The Credit Facility provides several interest rate options, none of which exceeds prime, and matures on November 15, 2001. At December 28, 1996, there were no borrowings under this facility.
During 1996, $5,740,000 of industrial revenue bonds were issued to finance final stages of construction of a TimberStrand-Registered Trademark- LSL plant in Eastern Kentucky. These bonds have a fixed interest rate of 6.8 percent, provide for semi-annual interest payments, with the principal due in 2026. These bonds are unsecured.
During 1995, $22,500,000 of industrial revenue bonds were issued to finance the construction of a combination Microllam-Registered Trademark- LVL/Parallam- Registered Trademark- PSL manufacturing plant near Buckhannon, West Virginia. These bonds have a fixed interest rate of 7.0 percent, provide for semi-annual interest payments, with the principle due in 2025, and are unsecured. During 1994, $43,500,000 of industrial revenue bonds were issued to finance the construction of a TimberStrand-Registered Trademark- LSL plant in Eastern Kentucky. The bonds also have a fixed interest rate of 7.0 percent, provide for semi-annual interest payments, with the principal due in 2024, and are unsecured.
All of the industrial revenue variable-rate demand bonds are secured by the property and equipment acquired with the bond proceeds. At December 28, 1996, the cost of such property and equipment was approximately $16,400,000. The Company's variable rate demand bonds are supported by irrevocable letters of credit. These letters of credit, together with the Company's Credit Facility, allow the Company to borrow for periods in excess of one year, if drawn upon to repay bondholders.
The debt agreements contain various customary financial covenants, all of which the Company is in compliance with at December 28, 1996. Under the most restrictive of these agreements, retained earnings available for cash dividends at December 28, 1996, were $70,792,000. Debt is recorded at cost, net of any discount or premium, which approximates fair market value based on borrowing rates currently available to the Company for debt with similar terms and maturities.
Long-term debt consisted of the following:
LONG-TERM DEBT
4 ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
5 INCOME TAXES
Income tax information has not been restated to exclude discontinued operations in 1994. Income (loss) before income taxes and income taxes (benefits) include the following:
The Company's effective income tax rate varied from the U.S. federal statutory income tax rate for the following reasons:
The deferred tax liabilities and assets included in the Consolidated Balance Sheets, computed under Statement No. 109, are comprised of the following:
The Company's alternative minimum tax credits of $4,279,000 at December 28, 1996, are available indefinitely. Net operating loss carryforwards, which expire in 1998 through 2010, are expected to be fully utilized based on forecasted conditions and various tax-planning strategies.
6 RETIREMENT PLANS AND INCENTIVE BONUS PROGRAMS
Most of the Company's employees are covered under defined contribution retirement plans which includes participation in the Company's ESOP and 401(k) plan. Benefits under these plans are limited to each individual's fund balances.
In September 1990, the ESOP borrowed $15 million at a 9-percent interest rate from the Company. This term loan matures on March 31, 2011, and has no prepayment penalties. Proceeds from the loan were used by the ESOP to purchase 1,269,842 shares of newly issued ESOP preferred stock from the Company. The ESOP preferred stock is described in Note 7.
In connection with the above transactions, the Company has guaranteed that over the term of the loan, it will make sufficient contributions to the ESOP to allow the ESOP to repay the loan to the Company. This guarantee has been recorded as Guaranteed ESOP benefit in Stockholders' Equity. The Company's annual contributions to the ESOP are based on a formula. The contributions, together with all dividends on the ESOP preferred shares, will be used by the ESOP to make the necessary interest payments and any principal prepayments. With each loan payment, a portion of the ESOP preferred stock is released and allocated to the employees' accounts in the ESOP. The Guaranteed ESOP benefit is amortized based on the shares allocated method of calculating expense. The annual expense associated with the ESOP was approximately $1,022,000 in 1996, $1,153,000 in 1995, and $676,000 in 1994.
The Company matches certain contributions of participating associates to its retirement plans. Contributions to these plans were approximately $13,445,000 in 1996, $11,130,000 in 1995, and $11,361,000 in 1994, of which approximately 49 percent, 57 percent, and 57 percent, respectively, resulted from contributions made under the compensation reduction agreement provision of the plans.
Substantially all of the Company's officers and key employees participate in incentive bonus programs which are based on formulas or are discretionary. Amounts charged to income under the programs were approximately $2,361,000 in 1996, $1,259,000 in 1995, and $2,129,000 in 1994.
7 STOCKHOLDERS' EQUITY
At December 28, 1996, there were 200,000,000 shares of common stock ($1.00 par value) and 10,000,000 shares of preferred stock ($1.00 par value) authorized. In September 1990, the Company issued 1,269,842 shares of $1.00 par value ESOP preferred stock at $11.8125 per share (liquidation preference) to the ESOP. Each share of the ESOP preferred stock is convertible into the Company's common stock at the higher of the liquidation preference or the fair market value of the underlying common stock. The Company has the option to satisfy any conversion in cash, common stock, or any combination thereof. The ESOP preferred stock has voting rights equal to one vote per share and is entitled to preferential dividends of $1.065 per share each year. The ESOP preferred stock is redeemable at the Company's option under certain circumstances.
Effective April 1996, the Company's Board of Directors (the Board) approved the funding of the Company's 401(k) matching contributions by issuance of authorized but previously unissued common stock. Prior to that date, such matching contributions were made in cash.
In December 1996, the Board approved a new stock-option plan, which will be voted on by the stockholders at the Company's annual meeting of stockholders in May 1997. Under terms of this plan, incentive stock options (ISOs) and nonstatutory options (NSOs) may be issued at an exercise price of not less than the fair market value of the stock on the date of grant. The ISOs become exercisable three years after date of grant and the NSOs in 33.3 percent annual installments commencing one year after date of grant. In December 1996, subject to approval of the stock-option plan by the stockholders, the Board granted NSOs to purchase 675,000 shares of the Company's common stock to officers and key associates, with an exercise price of $21.375 per share.
In order to partially mitigate the potential dilutive effect of the 1996 stock-option plan, in December 1996, the Board also authorized a program to repurchase up to $15,000,000 of the Company's common stock at market price. The stock repurchase commenced in February 1997, after release of the Company's 1996 year-end earnings.
The Company also has four previously approved stock-option plans in effect for officers and key associates. Under terms of these plans, which have been approved by the Company's stockholders, ISOs may be issued at an exercise price of not less than the fair market value of the stock on the date of grant and NSOs may be issued at a $1.00 exercise price. The ISOs become exercisable three years after the date of the grant, and, depending on Board determination at the time of the grant, the NSOs either become exercisable three years after date of grant or in 20 percent annual installments commencing five years after date of grant.
At December 28, 1996, a total of 46,700 ISOs and 1,288,145 NSOs were outstanding, and 2,319,000 shares were reserved for issuance under all the stock-option plans. Outstanding options and exercise prices are adjusted to reflect any stock splits and stock dividends. All unexercised options expire 10 years after date of grant. For NSOs, the excess of the fair market value over the exercise price on date of grant is accrued ratably as compensation expense from the date of grant to the exercisable date. No accounting entries are made for ISOs until they are exercised.
In 1989, The Company issued common stock purchase rights (rights) to each stockholder. The rights are not currently exercisable, but would become exercisable if certain events occurred relating to a person or group acquiring or attempting to acquire 20 percent or more of the outstanding shares of common stock. With certain exceptions, if the Company is thereafter involved in a merger or other business combination, the rights permit each holder, other than the person or group that triggered the rights, to purchase common stock of the surviving company at 50 percent of its market value. The rights expire in September 1999, are non-voting, and may be redeemed by the Company at $.005 per right. In connection with these rights, the Board has reserved for issuance the same number of shares as are outstanding at any point in time.
Total compensation expenses recognized from the Company's various stock- option plans were $1,535,000, $987,000, and $1,993,000 in 1996, 1995, and 1994, respectively. The Company has elected not to adopt Statement 123 issued by the Financial Accounting Standards Board; however, Company financial performance would not have been materially different had the Statement been adopted in 1995 or in 1996. Stock-option transactions are summarized as follows:
STOCK-OPTION TRANSACTIONS
8 LEASES
Basic or minimum rental expenses for operating and month-to-month leases amounted to $3,985,000 in 1996, $2,990,000 in 1995, and $3,211,000 in 1994.
The Company has various operating leases with initial or remaining terms of more than one year. These leases have minimum lease payment requirements of $2,710,000 in 1997, $1,820,000 in 1998, $1,329,000 in 1999, $597,000 in 2000, and $566,000 in 2001. In addition to minimum rentals, certain lease agreements provide for usage charges and cost-of-living increases. Lease agreements related to real property have fixed payment terms based upon the lapse of time.
Certain lease agreements provide the Company with the option to purchase the leased property at the end of the lease term at approximately fair market value. Additionally, certain lease agreements contain renewal options of up to three years with substantially the same terms.
9 RELATED-PARTY TRANSACTIONS
TJM sells to MacMillan Bloedel Building Materials (MBBM), a division of MB, on terms comparable to other Company distributors. Sales to MBBM were $168,500,000, $116,900,000, and $116,500,000 in 1996, 1995, and 1994, respectively. Accounts receivable from MBBM were: $16,658,000 at December 28, 1996; $7,163,000 at December 30, 1995; and $2,188,000 at December 31, 1994. Amounts due from MBBM are included in receivables in the accompanying Consolidated Balance Sheets.
MB provides certain technological and research assistance and computer services support to TJM. Amounts incurred under this arrangement with MB were $1,741,000, $1,658,000, and $1,959,000 for 1996, 1995, and 1994, respectively.
Quarterly, the Partnership makes cash distributions to the Partners in lieu of state and federal income taxes. Payments of $7,960,000, $6,387,000, and $10,471,000 were made to MBA in 1996, 1995, and 1994, respectively.
Certain employees who perform services for TJM at the former MB facilities remain on the payroll of MB. The Partnership Agreement provides that MB will be reimbursed for its actual payroll and related benefit costs relating to these employees. Payroll reimbursements to MB for 1996, 1995, and 1994 were $5,756,000, $4,925,000, and $4,290,000, respectively. Total payables to MB and MBA for such services and tax distributions at December 28, 1996, December 30, 1995, and December 31, 1994, were $2,745,000, $844,000, and $1,649,000, respectively, and are included in accounts payable in the accompanying Consolidated Balance Sheets.
10 GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The primary business of the Company is the manufacture and marketing of specialty building products for buildings in the residential and light- construction industries. More than 90 percent of the Company's sales are derived from this activity.
The Company operates primarily in two countries, the United States and Canada; the majority of all sales are made domestically in those countries. Geographic information about the Company's operations for the three years ended December 28,1996, is as follows:
Certain products are transferred between the United States and Canada for further manufacture and marketing; these transfers between geographic areas totaled approximately $43,923,000 in 1996, $26,840,000 in 1995, and $25,115,000 in 1994. The transfer price is approximately the same price charged to similar customers.
The Partnership has a strategic alliance with Weyerhaeuser Company's Building Materials Distribution Division. The arrangement allows the Partnership to expand its distribution network through Weyerhaeuser's customer service centers. Additionally, there are certain supply agreements, whereby the Partnership procures raw materials such as veneer and oriented strand board from Weyerhaeuser. Total sales to Weyerhaeuser for the years ended December 28, 1996, December 30, 1995, and December 31, 1994, were $188,000,000, $146,200,000, and $101,000,000, respectively.