<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] 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 1-7210
REPUBLIC GROUP INCORPORATED
---------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-1155922
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
811 East 30th Avenue, Hutchinson, Kansas 67502-4341
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Post Office Box 1307, Hutchinson, Kansas 67504-1307
---------------------------------------- ----------
(Mailing Address) (Zip code)
</TABLE>
316-727-2700
------------
(Registrant's telephone number, including area code)
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.
Yes X . No .
--- ---
On January 31, 1999, there were 11,774,261 shares of the registrant's Common
Stock, $1.00 par value outstanding.
<PAGE> 2
REPUBLIC GROUP INCORPORATED
FORM 10-Q
Quarterly Report
For The Three Months and Six Months Ended December 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Reference is made to pages 2 through 10 containing certain
consolidated financial statements of Registrant in accordance
with Part I of Form 10-Q.
The consolidated financial statements include the accounts of
Republic Group Incorporated and its wholly owned subsidiaries
(collectively referred to as the "Company").
<PAGE> 3
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended December 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Gross sales .................................. $ 36,722,000 $ 37,430,000
Less freight and discounts ................... 4,477,000 5,001,000
------------ ------------
Net sales .................................... 32,245,000 32,429,000
Costs and expenses:
Cost of sales ........................... 20,992,000 22,054,000
Selling and administrative expenses ..... 4,620,000 4,022,000
------------ ------------
25,612,000 26,076,000
------------ ------------
Operating profit ............................. 6,633,000 6,353,000
Other income (expense), net .................. (539,000) 44,000
------------ ------------
Income before income taxes ................... 6,094,000 6,397,000
Provision for income taxes ................... 2,316,000 2,430,000
------------ ------------
NET INCOME ................................... $ 3,778,000 $ 3,967,000
============ ============
Basic earnings per share ..................... $ 0.32 $ 0.34
============ ============
Basic weighted average shares outstanding .... 11,764,000 11,697,000
============ ============
Diluted earnings per share ................... $ 0.32 $ 0.34
============ ============
Diluted weighted average shares outstanding .. 11,829,000 11,803,000
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 4
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended December 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Gross sales .................................. $ 74,918,000 $ 74,432,000
Less freight and discounts ................... 9,488,000 10,114,000
------------ ------------
Net sales .................................... 65,430,000 64,318,000
Costs and expenses:
Cost of sales ........................... 43,578,000 43,437,000
Selling and administrative expenses ..... 9,143,000 7,642,000
------------ ------------
52,721,000 51,079,000
------------ ------------
Operating profit ............................. 12,709,000 13,239,000
Other income (expense), net .................. (1,315,000) 135,000
------------ ------------
Income before income taxes ................... 11,394,000 13,374,000
Provision for income taxes ................... 4,331,000 5,081,000
------------ ------------
NET INCOME ................................... $ 7,063,000 $ 8,293,000
============ ============
Basic earnings per share ..................... $ 0.60 $ 0.71
============ ============
Basic weighted average shares outstanding .... 11,757,000 11,691,000
============ ============
Diluted earnings per share ................... $ 0.60 $ 0.70
============ ============
Diluted weighted average shares outstanding .. 11,832,000 11,798,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and June 30, 1998
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 48,659,000 $ 1,124,000
Accounts receivable, net ........................................................ 12,239,000 14,611,000
Income tax refunds receivable ................................................... 249,000 652,000
Inventories:
Finished goods ................................................................ 2,976,000 2,621,000
Raw materials and supplies .................................................... 6,359,000 5,829,000
------------- -------------
9,335,000 8,450,000
Prepaid expenses and other ...................................................... 460,000 851,000
Deferred income taxes ........................................................... 597,000 597,000
------------- -------------
TOTAL CURRENT ASSETS .......................................................... 71,539,000 26,285,000
Property, plant and equipment, at cost ............................................. 207,492,000 151,503,000
Less accumulated depreciation, amortization
and depletion ................................................................. 57,229,000 53,683,000
------------- -------------
150,263,000 97,820,000
Unamortized debt issue costs ....................................................... 5,094,000 291,000
Other assets ....................................................................... 1,076,000 1,079,000
------------- -------------
TOTAL ASSETS ....................................................................... $ 227,972,000 $ 125,475,000
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................ $ 8,399,000 $ 10,632,000
Accrued payroll and employee benefits ........................................... 2,898,000 2,919,000
Income taxes payable ............................................................ 1,142,000 --
Accrued interest payable ........................................................ 4,399,000 --
Other current liabilities ....................................................... 1,648,000 1,710,000
------------- -------------
TOTAL CURRENT LIABILITIES ..................................................... 18,486,000 15,261,000
Long-term debt due after one year .................................................. 100,000,000 5,950,000
Deferred income taxes .............................................................. 11,475,000 11,475,000
Other long-term liabilities ........................................................ 556,000 610,000
STOCKHOLDERS' EQUITY:
Common stock, $1 par value ...................................................... 11,772,000 11,749,000
Additional paid-in capital ...................................................... 28,317,000 28,096,000
Retained earnings ............................................................... 57,454,000 52,544,000
Less: Treasury stock, at cost, 4,000 shares at
December 31, and 10,000 shares at June 30 ................................... (88,000) (210,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY .................................................... 97,455,000 92,179,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 227,972,000 $ 125,475,000
============= =============
</TABLE>
See accompanying notes.
4
<PAGE> 6
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997 (Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 7,063,000 $ 8,293,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization ......... 4,334,000 3,685,000
Non-cash compensation expense .................... 3,000 --
Deferred income taxes ............................ -- 541,000
Loss on sale of assets ........................... 142,000 25,000
Changes in current assets and liabilities:
Accounts receivable ......................... 1,372,000 441,000
Income tax refunds receivable ............... 403,000 (21,000)
Inventories ................................. (885,000) (778,000)
Prepaid expenses ............................ 391,000 190,000
Accounts payable and accrued liabilities .... (2,254,000) (1,052,000)
Income taxes payable ........................ 1,142,000 (203,000)
Accrued interest payable .................... 4,399,000 --
Other assets and liabilities ..................... (113,000) (2,000)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 15,997,000 11,119,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ........... (56,688,000) (8,710,000)
Proceeds from sale of property, plant and equipment .. 62,000 17,000
Proceeds from life insurance policy .................. 1,000,000 --
Purchases of investments ............................. -- (6,865,000)
Proceeds from sale of investments .................... -- 6,470,000
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES ................ (55,626,000) (9,088,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ....................................... (2,117,000) (2,105,000)
Net payments under lines of credit ................... (5,950,000) --
Proceeds from issuance of senior subordinated notes .. 100,000,000 --
Payments for debt issue costs ........................ (5,097,000) --
Issuance of common treasury stock .................... 85,000 31,000
Proceeds from exercised stock options ................ 243,000 141,000
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ..... 87,164,000 (1,933,000)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................. 47,535,000 98,000
Cash and cash equivalents at beginning of year ............ 1,124,000 1,436,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 48,659,000 $ 1,534,000
============= =============
</TABLE>
See accompanying notes.
5
<PAGE> 7
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1998 and 1997 (Unaudited)
(1) In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements reflect all adjustments, of a normal
recurring nature, to fairly present the Company's financial position as
of December 31, 1998, and the results of operations and cash flows for
the periods ended December 31, 1998 and 1997. The operating results for
the interim periods are not necessarily indicative of the results to be
expected for a full year. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated
financial statements and the notes included in the Company's Annual
Report on Form 10-K as of June 30, 1998.
(2) Effective October 1, 1997 the Company adopted SFAS No. 128, "Earnings
Per Share".
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed by dividing net income by the
sum of the weighted average number of shares and the number of
equivalent shares assumed outstanding under the Company's stock-based
compensation plans. Diluted earnings per share are computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
---------------------------------------------------------------------------------------------------------
(in thousands) Per-Share (in thousands) Per-Share
Income Shares Amount Income Shares Amount
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share $ 3,778 11,764 $ .32 $ 3,967 11,697 $ .34
Effects of
dilutive
securities-options -- 65 -- -- 106 --
-------------------------------------------------------------------------------------
Diluted earnings
per share $ 3,778 11,829 $ .32 $ 3,967 11,803 $ .34
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
---------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
---------------------------------------------------------------------------------------------------------
(in thousands) Per-Share (in thousands) Per-Share
Income Shares Amount Income Shares Amount
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share $ 7,063 11,757 $ .60 $ 8,293 11,691 $ .71
Effects of
dilutive
securities-options -- 75 -- -- 107 (.01)
-------------------------------------------------------------------------------------
Diluted earnings
per share $ 7,063 11,832 $ .60 $ 8,293 11,798 $ .70
---------------------------------------------------------------------------------------------------------
</TABLE>
All periods prior to October 1, 1997 have been restated to conform with
the requirements of SFAS No. 128.
Options to purchase 162,061 shares of common stock at prices ranging
from $16.36 to $20.76 were outstanding for the three months ended
December 31, 1998. Options to purchase 155,175 shares of common stock
at prices ranging from $18.00 to $20.76 were outstanding for the six
months ended December 31, 1998. Options to purchase 10,541 shares of
common stock at the
6
<PAGE> 8
price of $20.76 were outstanding for the three months and six months
ended December 31, 1997. These shares were not included in the diluted
earnings per share due to the options exercise price being greater than
the average market price of the common shares for the above periods.
(3) Other Commitments and Contingent Liabilities: In connection with the
Company's preparation for a warehouse addition to its paperboard mill
located in Commerce City, Colorado, a suburb of Denver, the Company
discovered and has been investigating the presence of subsurface
petroleum hydrocarbons. The Company retained an environmental
consultant who concluded that fuel oil, jet fuel and gasoline additives
had migrated in the subsurface of the Company's property from an
adjacent property. The Company has conducted its own investigations,
and the adjacent property owner has conducted its own investigations.
Additionally, the Company and the adjacent owner have jointly sponsored
investigations. Discussions between the parties continue. The Company
has completed the construction of the warehouse addition under approval
of the Colorado Department of Health. At this time, the Company has not
ascertained the future liability, if any, of the above matter.
(4) Reclassification: Certain prior year balances have been reclassified to
conform with current year presentation.
(5) Subsequent Event: On January 26, 1999, the Board of Directors of the
Company declared a quarterly cash dividend of $0.09 per share of common
stock to be paid on March 15, 1999 to stockholders of record on
February 26, 1999. Dividend payments will total approximately
$1,060,000.
(6) Income Taxes: The provisions for income taxes are based on estimated
annual effective tax rates, which differ from the federal statutory
rates principally due to state income taxes and certain non-deductible
expenses.
(7) Long Term Debt: On July 15, 1998, the Company received proceeds from
the issuance of $100,000,000 of 9.5% Senior Subordinated Notes (the
"Notes") with a maturity date of July 15, 2008. The proceeds from the
sale of the Notes, along with a new bank credit facility of up to
$85,000,000 entered into with a bank syndicate on July 15, 1998, will
be used primarily to finance the construction of the Lawton, Oklahoma
recycled paperboard mill and for general and corporate purposes
including working capital. On July 15, 1998, the Company used a portion
of the proceeds from the sale of the Notes to repay the outstanding
principal balance of a then existing revolving credit facility dated as
of June 30, 1995 (as amended) with NationsBank, N.A., along with
accrued interest. Upon repayment, the Company ended the NationsBank,
N.A. revolving credit facility. Outstanding balances under the facility
bore interest at a rate equal to LIBOR plus an agreed margin (ranging
from 50 to 150 basis points) or the bank lender's prime rate less
0.75%.
Interest payment dates on the Notes are January 15 and July 15, and
commenced on January 15, 1999. Each interest payment will be
$4,750,000. The Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after July 15, 2003, at a
redemption price of 104.75% which reduces to 100% on or after July 15,
2005. In addition, prior to July 15, 2001, the Company may redeem up to
35% of the principal amount of the Notes with the net cash proceeds
received by the Company from one or more Public Equity Offerings, at a
redemption price of 109.50%. The Notes include financial and other
covenants of the kind generally included in such indebtedness.
7
<PAGE> 9
The $85,000,000 new credit facility will be used as a revolving line of
credit until the conversion date. The conversion date is defined as the
earlier of July 15, 2000 or start-up of the Lawton mill. At that time
the facility will convert into a term loan with a principal amount of
up to $50,000,000 and a revolving credit facility with a $35,000,000
maximum principal amount. After the conversion, the principal of the
term loan will amortize over four years with 10% due during the first
year, 20% during the second year, 30% during the third year and 40%
during the fourth year. The revolving credit facility will mature in
four years. Availability under the new credit facility is not subject
to a borrowing base but is subject to, among other things, a condition
that the lenders receive certain assurances that the construction of
the Lawton mill is progressing on a satisfactory schedule and within
agreed-upon cost parameters. The borrowings under the new credit
facility are guaranteed by each of the Company's material subsidiaries
and are secured by a mortgage on the Lawton mill, a pledge of stock of
the Company's subsidiaries and security interests in substantially all
other personal property of the Company and its subsidiaries. At such
time, if any, as outstanding loans under the new credit facility exceed
$50,000,000, the lenders may require that other real property and
improvements of the Company and its subsidiaries be mortgaged as
security for the new credit facility. Outstanding principal amounts on
the new credit facility bear interest at a variable rate equal to, at
the election of the Company, (i) the London Interbank Offered Rate,
plus an agreed margin (ranging from 75 to 175 points), which is to be
established annually based upon the Company's leverage ratio or (ii)
the higher of (a) the bank's corporate prime rate and (b) the sum of
1/2 of 1% plus the federal funds rate, plus, in each case, an agreed
margin (ranging from 0 to 75 points). Interest payments under the new
credit facility will be payable quarterly. Under the new credit
facility, the Company is required to adhere to a number of financial
and other covenants, including covenants relating to excess cash flow,
debt to EBITDA ratio, interest coverage ratio, minimum EBITDA, and
limitations on capital expenditures and dividends. The Company may pay
cash dividends and/or redeem its stock in aggregate amounts of not more
than (a) $5,300,000 in each fiscal year ending on or before the
conversion date, (b) $5,500,000 in each of the first and second fiscal
years ending after the conversion date, (c) $6,000,000 in each of the
third and fourth fiscal years ending after the conversion date, and (d)
without limitation thereafter. The new credit facility does not
restrict the transfer of funds to the parent by the subsidiaries.
(8) Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The following is the Company's segment information for the quarters and
six months ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
QUARTERS (Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Gypsum Recycled Elim.'s Gypsum Recycled Elim.'s
Wallboard Paperboard And Other Consolidated Wallboard Paperboard And Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipments in units:
Wallboard (MSF) 132,339 132,339 144,948 144,948
Recycled paperboard (Tons) 45,618 (5,591) 40,027 45,228 (5,332) 39,896
Recovered paper fiber (Tons) 43,901 (20,825) 23,076 35,594 (16,677) 18,917
- ----------------------------------------------------------------------------------------------------------------------------
Gross sales (in thousands):
Gypsum wallboard $ 19,328 $ $ $ 19,328 $ 19,081 $ $ $ 19,081
Recycled paperboard 15,982 15,982 16,836 16,836
Recovered paper fiber 2,521 (1,111) 1,410 3,111 (1,601) 1,510
Intrasegment fiber sales (1,111) 1,111 -- (1,601) 1,601 --
Intersegment paperboard
sales 2,076 (2,076) -- 2,106 (2,106) --
Other 2 2 3 3
- ----------------------------------------------------------------------------------------------------------------------------
Gross sales 19,328 19,468 (2,074) 36,722 19,081 20,452 (2,103) 37,430
Less freight and discounts 3,534 943 -- 4,477 3,802 1,199 -- 5,001
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 15,794 $ 18,525 $ (2,074) $ 32,245 $ 15,279 $ 19,253 $ (2,103) $ 32,429
- ----------------------------------------------------------------------------------------------------------------------------
Operating profit $ 6,183 $ 2,300 $ (1,850) $ 6,633 $ 6,449 $ 1,615 $ (1,711) $ 6,353
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
SIX MONTHS (Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Gypsum Recycled Elim.'s Gypsum Recycled Elim.'s
Wallboard Paperboard And Other Consolidated Wallboard Paperboard And Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shipments in units:
Wallboard (MSF) 271,294 271,294 288,091 288,091
Recycled paperboard (Tons) 91,934 (10,221) 81,713 93,276 (11,846) 81,430
Recovered paper fiber (Tons) 86,680 (41,203) 45,477 74,324 (33,245) 41,079
- ----------------------------------------------------------------------------------------------------------------------------
Gross sales (in thousands):
Gypsum wallboard $ 38,962 $ $ $ 38,962 $ 37,396 $ $ $ 37,396
Recycled paperboard 32,936 32,936 33,677 33,677
Recovered paper fiber 5,456 (2,438) 3,018 6,791 (3,436) 3,355
Intrasegment fiber sales (2,438) 2,438 -- (3,436) 3,436 --
Intersegment paperboard
sales 3,770 (3,770) -- 4,593 (4,593) --
Other 2 2 4 4
- ----------------------------------------------------------------------------------------------------------------------------
Gross sales 38,962 39,724 (3,768) 74,918 37,396 41,625 (4,589) 74,432
Less freight and discounts 7,188 2,301 (1) 9,488 7,679 2,434 1 10,114
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 31,774 $ 37,423 $ (3,767) $ 65,430 $ 29,717 $ 39,191 $ (4,590) $ 64,318
- ----------------------------------------------------------------------------------------------------------------------------
Operating profit $ 12,623 $ 4,007 $ (3,921) $ 12,709 $ 12,551 $ 3,999 $ (3,311) $ 13,239
Identifiable assets 58,187 109,274 60,511 227,972 33,690 63,304 9,054 106,048
Capital Expenditures 15,932 40,472 284 56,688 5,503 2,694 513 8,710
Depreciation, depletion &
amortization 1,025 2,617 692 4,334 773 2,544 368 3,685
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's operations within the gypsum segment consist of the manufacture
and sale of gypsum wallboard. Operations within the paperboard segment consist
of (i) the manufacture and sale of recycled paperboard to the gypsum industry
and other paperboard converters which manufacture composite cans, cores, tubes
and other packaging products, and (ii) the collection and sale of recovered
paper fiber. The Company's gypsum wallboard operations are located in Duke,
Oklahoma. The Company's primary markets for gypsum wallboard are Texas,
Oklahoma, Colorado and Kansas with additional secondary emphasis in the
midwestern and southeastern regions of the United States. The Company operates
recycled paperboard mills in Hutchinson, Kansas, Commerce City, Colorado, and
Halltown, West Virginia and is in the process of constructing a recycled
paperboard mill in Lawton, Oklahoma. The Lawton mill is expected to be completed
at the end of calendar year 1999. The Company's primary markets for recycled
paperboard generally lie within a 600 mile radius of each facility. The Company
operates reclaimed paper fiber recycling centers in Kansas City, Missouri,
Topeka, Kansas, and Denver, Colorado. The Company's primary markets for
reclaimed paper fiber generally lie within a 600 mile radius of the centers.
Republic Group Incorporated employs approximately 870 people, approximately 635
of whom are covered by collective bargaining units with four labor unions. The
expirations of current bargaining agreements range from 1999 to 2003. The
Company believes its relations with employees are satisfactory.
Operating profit is net sales less operating expenses. Sales between segments
are made at approximately market price. Identifiable assets by industry segment
are those used in each segment at period-end. Eliminations and other include
general corporate assets, principally cash, securities, property and equipment
and expenses.
9
<PAGE> 11
(9) The following components are included in other income (expense), net:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
December 31 December 31
-------------- ----------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest expense $(2,778,000) $ -- $(4,872,000) $ (1,000)
Less: Capitalized portion 1,461,000 -- 2,064,000 --
----------- ----------- ----------- -----------
Net interest expense (1,317,000) -- (2,808,000) (1,000)
Interest income 783,000 36,000 1,594,000 97,000
Miscellaneous income (expense) (5,000) 8,000 (101,000) 39,000
----------- ----------- ----------- -----------
Other income (expense), net $ (539,000) $ 44,000 $(1,315,000) $ 135,000
=========== =========== =========== ===========
</TABLE>
Components of interest expense include interest associated with the Senior
Subordinated Notes and Bank Credit Facility, commitment fees based on the unused
portion of the Bank Credit Facility and amortization of debt issue costs.
10
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarters Ended December 31, 1998 and 1997. Consolidated net income was
$3,778,000, or $0.32 per diluted share, on net sales of $32,245,000 for the
second quarter ended December 31, 1998. This compares to consolidated net income
of $3,967,000, or $0.34 per diluted share, on net sales of $32,429,000 for the
same quarter one year ago.
Consolidated operating profits increased 4% from the December 1997
quarter, principally due to a 42% improvement in operating profits posted by the
Company's paperboard segment. This improvement resulted primarily from a 24%
decline in per unit costs of raw materials, mainly reclaimed paper fiber,
experienced by the Company's recycled paperboard mills. A 5% decline in net
selling prices of recycled paperboard from the December 1997 quarter to the
December 1998 quarter negatively impacted operating profits in the paperboard
segment. Shipments of recycled paperboard increased 1%, compared to the December
1997 quarter.
Operating profits for the Company's gypsum wallboard segment declined
4% from the December 1997 quarter, primarily due to a 9% decline in shipments
and a 19% increase in per unit operating costs. The increase in operating costs
and the reduction in shipments were substantially caused by inefficiencies in
operating the gypsum wallboard plant while constructing the second production
line at the Company's plant in Duke, Oklahoma. Unit production costs were also
adversely affected by the addition and training of new employees for the second
production line. Although shipments decreased due to the production constraints
related to the construction activity, demand for gypsum wallboard remains
strong. This is reflected by a 13% increase in net selling prices from the
December 1997 quarter to the December 1998 quarter.
Consolidated net income was negatively impacted by a $570,000 increase
in net interest expense, net of interest income, associated with the
$100,000,000 Senior Subordinated Notes issued in July 1998. Proceeds from the
sale of these notes are being used primarily to fund the on-going construction
of the Company's new recycled paperboard mill in Lawton, Oklahoma. The Company's
selling and administrative costs as a percent of net sales increased from 12% in
the December 1997 quarter to 14% in the December 1998 quarter. This was chiefly
due to an increase in management and support staff related to the Company's
expansion projects at the Duke plant and the Lawton mill.
Six Months Ended December 31, 1998 and 1997. Consolidated net income
for the six months ended December 31, 1998 was $7,063,000, or $0.60 per diluted
share, on net sales of $65,430,000. This compares to consolidated net income of
$8,293,000, or $0.70 per diluted share, on net sales of $64,318,000 for the same
period in 1997.
Results for the six months ended December 31, 1998 were affected by
factors similar to those affecting the quarter. The 2% increase in consolidated
net sales resulted primarily from a 14% increase in gypsum wallboard net selling
prices. However, this increase was partially offset by both a 6% decrease in
wallboard shipments and a slight decrease in recycled paperboard shipments.
Consolidated operating profits decreased 4% from the six months ended December
1997 primarily due to an 18% increase in unallocated corporate overhead
expenses. This increase in corporate overhead expenses resulted mainly from an
increase in management and support staff related to the Company's expansion
projects. Operating profits for both the gypsum and recycled paperboard segments
were similar to those recorded for the six months ended December 31, 1997. A
$1,310,000 increase in net interest expense, net of interest income, was the
most significant factor contributing to the 15% decrease in consolidated net
income when comparing the two periods.
11
<PAGE> 13
Expansion Projects
Duke, Oklahoma Gypsum Wallboard Plant. In late January of 1999, the
Company began simultaneous operation of both production lines at the Duke plant.
After a ramp-up period, the annual capacity of the plant will ultimately
increase from 570 million to 1.2 billion square feet.
Lawton, Oklahoma Recycled Paperboard Mill. Construction of the
Company's new recycled paperboard mill in Lawton, Oklahoma continues on schedule
with commercial production anticipated to begin in the first quarter of calendar
year 2000. The Lawton mill will be used primarily for the production of
gypsum-grade recycled paperboard and is expected to have an annual productive
capacity of 220,000 tons. The addition of the Lawton mill will essentially
double the Company's current recycled paperboard capacity. Management estimates
that the Lawton mill will cost approximately $170,000,000 including related
working capital requirements and capitalized interest.
Year 2000 Compliance
The Company uses a number of computer software programs, operating
systems, and types of equipment with embedded computer chips in its internal
operations, including applications used in the Company's financial business
systems, manufacturing processes and administrative functions. To the extent
that the programs, operating systems, and equipment contain source code or
embedded computer chips that are unable to interpret appropriately the upcoming
calendar year 2000, some level of modification or possible replacement will be
necessary. The costs necessary to modify or replace the items mentioned above,
or the interruption of administrative or manufacturing processes resulting from
compliance failure, may have a material adverse effect on the Company's business
and financial condition or its results of operations.
In June of 1998, the Company appointed a team of employees to address
the Year 2000 issue. The Company is following a six-step process evaluating
critical software, operating systems and equipment for Year 2000 compliance -
awareness, inventory, assessment, remediation, testing, and risk management
(contingency planning). Currently, the Company is approximately 60% complete
with the assessment phase with some remediation and testing taking place. During
the assessment phase, the Year 2000 team is prioritizing devices and software
into 3 categories. Level 1, the most critical, are those items that could have a
material adverse effect through extended production interruptions, potential
revenue losses or significant expenditures. Level 2 are those items that should
not have a material adverse effect on the Company but are needed to remain
competitive such as telephones or personal computers. Level 3 are those items
that are desirable and enable employees to work more efficiently such as voice
mail, pagers, copiers and fax machines. The Company's Year 2000 team remains on
schedule and anticipates completing the entire process on level 1 and level 2
items by June 30, 1999, although these processes will continue to be in effect
up to and into the Year 2000. To date, the Company believes that the items which
it has identified as level 1 or level 2 will be compliant by the Year 2000 with
no material impact on the Company's financial results.
During the quarter ending March 31, 1999, the Company will be testing
its computer networks, hardware, operating systems and business software. The
Company's internal information technology (IT) department will be leading the
remediation and testing with assistance, as needed, from third parties. The
Company has received a certification from the vendor of its financial and
payroll software that such software is Year 2000 compliant. However, this
software will be internally analyzed and tested for assurance. The Company does
not yet have a contingency plan in place to deal with the most reasonably likely
worst-case scenario although it will begin formulating a contingency plan during
the March 1999 quarter.
12
<PAGE> 14
To date, expenses associated with Year 2000 compliance have been
minimal. Execution of the Year 2000 plan is being accomplished primarily with
internal resources. However, from fiscal 1995 through the present, the Company,
in its normal course of business, replaced substantially all of its business
systems hardware and software. The Company estimates expenditures of
approximately $300,000 in fiscal year 1999 and approximately $200,000 in fiscal
Year 2000 for periodic, scheduled upgrades of hardware and software as well as a
portion for Year 2000 compliance. The Company believes that internally generated
cash together with proceeds from the new credit facility will be sufficient to
fund these expenditures.
Furthermore, there can be no assurance that the Company's customers and
suppliers are, or will be, Year 2000 compliant. The Company believes the most
reasonably likely worst-case Year 2000 scenario would be the failure of key
customers or suppliers to achieve Year 2000 compliance, resulting in the loss of
sales to such customers or lack of available resources from its vendors for an
indefinite period of time. Currently, the Company is not aware of any customers
or suppliers that are not Year 2000 compliant. In order to address the potential
non-compliance with the Year 2000 by the Company's customers and suppliers, the
Company has distributed and is collecting questionnaires requesting them to
respond with their Year 2000 status. The Company is in the process of compiling
and reviewing questionnaires that have been returned and anticipates completing
this process during the first quarter of calendar year 1999. Until this process
is complete, the Company will not be in a position to fully assess its Year 2000
risks.
At this time, the Company believes that it is adequately addressing the
Year 2000 issues, although there can be no assurance that the Year 2000 issues
will not have a material adverse effect on its business, financial conditions or
results of operations. In addition, disruptions in the economy generally
resulting from Year 2000 issues could have a materially adverse effect on the
Company.
Environmental Matters
In connection with the Company's preparation for a warehouse addition
to its paperboard mill located in Commerce City, Colorado, a suburb of Denver,
the Company discovered and has been investigating the presence of subsurface
petroleum hydrocarbons. The Company retained an environmental consultant who
concluded that fuel oil, jet fuel and gasoline additives had migrated in the
subsurface of the Company's property from an adjacent property. The Company has
conducted its own investigations, and the adjacent property owner has conducted
its own investigations. Additionally, the Company and the adjacent owner have
jointly sponsored investigations. Discussions between the parties continue. The
Company has completed the construction of the warehouse addition under approval
of the Colorado Department of Health. At this time, the Company has not
ascertained the future liability, if any, of the above matter.
Liquidity and Capital Resources
The following is a summary of certain financial statistics related to
the liquidity of the Company at December 31, 1998, and at June 30, 1998.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
------------------------------------
<S> <C> <C>
Cash, cash equivalents and investments $ 48,659,000 $ 1,124,000
Working capital $ 53,053,000 $ 11,024,000
Ratio of current assets to current liabilities 3.9:1 1.7:1
</TABLE>
13
<PAGE> 15
On July 15, 1998, the Company received proceeds from the sale of
$100,000,000 of 9.5% Senior Subordinated Notes (the "Notes") with a maturity
date of July 15, 2008. The proceeds from the Notes, along with a new bank credit
facility of up to $85,000,000 entered into with a bank syndicate on July 15,
1998, will be used primarily to finance the construction of the Lawton mill and
for general and corporate purposes, including working capital. On July 15, 1998,
the Company used a portion of the proceeds from the sale of the Notes to repay
the outstanding principal balance of a then existing revolving credit facility
dated as of June 30, 1995 (as amended) with NationsBank, N.A., along with
accrued interest. Upon repayment, the Company ended the NationsBank, N.A.
revolving credit facility. Outstanding balances under the facility bore interest
at a rate equal to LIBOR plus an agreed margin (ranging from 50 to 150 basis
points) or the bank lender's prime rate less 0.75%.
Interest payment dates on the Notes are January 15 and July 15, and
commenced on January 15, 1999. Each interest payment will be $4,750,000. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after July 15, 2003, at a redemption price of 104.75% which reduces
to 100% on or after July 15, 2005. In addition, prior to July 15, 2001, the
Company may redeem up to 35% of the principal amount of the Notes with the net
cash proceeds received by the Company from one or more Public Equity Offerings,
at a redemption price of 109.50%. The Notes include financial and other
covenants of the kind generally included in such indebtedness.
The $85,000,000 new credit facility will be used as a revolving line of
credit until the conversion date. The conversion date is defined as the earlier
of July 15, 2000 or start-up of the Lawton mill. At that time the facility will
convert into a term loan with a principal amount of up to $50,000,000 and a
revolving credit facility with a $35,000,000 maximum principal amount. After the
conversion, the principal of the term loan will amortize over four years with
10% due during the first year, 20% during the second year, 30% during the third
year and 40% during the fourth year. The revolving credit facility will mature
in four years. Availability under the new credit facility is not subject to a
borrowing base but is subject to, among other things, a condition that the
lenders receive certain assurances that the construction of the Lawton mill is
progressing on a satisfactory schedule and within agreed-upon cost parameters.
The borrowings under the new credit facility are guaranteed by each of the
Company's material subsidiaries and are secured by a mortgage on the Lawton
mill, a pledge of stock of the Company's subsidiaries and security interests in
substantially all other personal property of the Company and its subsidiaries.
At such time, if any, as outstanding loans under the new credit facility exceed
$50,000,000, the lenders may require that other real property and improvements
of the Company and its subsidiaries be mortgaged as security for the new credit
facility. Outstanding principal amounts on the new credit facility bear interest
at a variable rate equal to, at the election of the Company, (i) the London
Interbank Offered Rate, plus an agreed margin (ranging from 75 to 175 points),
which is to be established annually based upon the Company's leverage ratio or
(ii) the higher of (a) the bank's corporate prime rate and (b) the sum of 1/2 of
1% plus the federal funds rate, plus, in each case, an agreed margin (ranging
from 0 to 75 points). Interest payments under the new credit facility will be
payable quarterly. Under the new credit facility, the Company is required to
adhere to a number of financial and other covenants, including covenants
relating to excess cash flow, debt to EBITDA ratio, interest coverage ratio,
minimum EBITDA, and limitations on capital expenditures and dividends. The new
credit facility does not restrict the transfer of funds to the parent by the
subsidiaries.
The Company generated $15,997,000 of net cash from operations and
received proceeds of $100,000,000 from the sale of the Notes in the six months
ended December 31, 1998. The Company used this additional cash to partially fund
$56,688,000 of capital expenditures and $5,097,000 of debt issue costs, to pay
$2,117,000 in dividends and repay the $5,950,000 principal balance under the old
revolving credit facility. Capital expenditures relating to the construction of
the Lawton mill and the expansion of the Duke plant, including the purchase of
related railcars were approximately $38,600,000 and $12,800,000, respectively,
during the six months. Management estimates that the Lawton mill will cost,
14
<PAGE> 16
including capitalized interest and related working capital requirements,
approximately $170,000,000. The Company estimates that capital expenditures for
fiscal 1999 will total approximately $150,300,000, including approximately
$122,000,000 on the Lawton mill, approximately $17,800,000 to complete the
expansion of the Duke plant and the purchase of related railcars and $10,500,000
principally to upgrade equipment at the Company's facilities. The Company
estimates that it will spend $40,000,000 in fiscal year 2000 to complete and
provide working capital for the Lawton mill. The new credit facility imposes
limits on the Company's ability to make capital expenditures, but the Company
believes that those limits will not prevent it from implementing its capital
expenditure program.
The Company believes that the net proceeds from the sale of the Notes
and the $85,000,000 made available under the new credit facility, together with
cash generated by operations, will be sufficient (i) to complete the
construction of the Lawton mill, (ii) to fund the other capital expenditure
requirements identified above, (iii) to fund the Company's working capital
requirements including interest payments, (iv) to pay dividends to stockholders
and (v) to fund other general and corporate requirements.
On January 26, 1999, the Board of Directors of the Company declared a
quarterly cash dividend of $.09 per share of common stock to be paid on March
15, 1999 to stockholders of record on February 26, 1999. Dividend payments will
total approximately $1,060,000. Quarterly dividends historically have been paid
in September, December, March and June. The schedule and payment of cash
dividends is subject to the approval of the Company's Board of Directors. The
new credit facility and the Indenture impose limits on the Company's ability to
pay dividends, but the Company does not anticipate that such limits will prevent
the payment of dividends at historical levels. In most cases, the limits imposed
by the new credit facility are the most restrictive. Under those limits, the
Company may pay cash dividends and/or redeem its stock in aggregate amounts of
not more than (a) $5,300,000 in each fiscal year ending on or before the
conversion date, (b) $5,500,000 in each of the first and second fiscal years
ending after the conversion date, (c) $6,000,000 in each of the third and fourth
fiscal years ending after the conversion date and (d) without limitation
thereafter.
Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q may
constitute forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements are based on current
expectations and entail various risks and uncertainties that could cause actual
results to differ materially from those contemplated by the forward-looking
statements due to a number of factors, including general economic conditions,
competition, market acceptance of selling price increases, raw material costs,
facility fuel costs, timely completion and successful operation thereafter of
the on-going capital projects at the Duke plant and the Lawton mill, Year 2000
compliance issues and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission, including annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
15
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings involving the
Company or any of its subsidiaries, other than ordinary routine
litigation incidental to the Company's business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Information regarding the submission of matters to a vote of
security holders is set forth in Item 4 of Part II of the
Company's previously filed Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and is incorporated herein by
reference.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Article 5 of Regulation S-X-Financial Data Schedule.
(b) Reports on Form 8-K.
16
<PAGE> 18
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.
REPUBLIC GROUP INCORPORATED
February 11, 1999
------------------------------------
Doyle R. Ramsey
Executive Vice President and
Chief Financial Officer
February 11, 1999
------------------------------------
Michael W. Dirks
Vice President - Finance and
Chief Accounting Officer
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27.1298 Financial Data Schedule for the second quarter of 1998 (for SEC use only)
27.1297 Financial Data Schedule for the second quarter of 1997 (for SEC use only)
27.1296 Financial Data Schedule for the second quarter of 1996 (for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 48,659,000
<SECURITIES> 0
<RECEIVABLES> 12,941,000
<ALLOWANCES> 702,000
<INVENTORY> 9,335,000
<CURRENT-ASSETS> 71,539,000
<PP&E> 207,492,000
<DEPRECIATION> 57,229,000
<TOTAL-ASSETS> 227,972,000
<CURRENT-LIABILITIES> 18,486,000
<BONDS> 100,000,000
0
0
<COMMON> 11,772,000
<OTHER-SE> 85,683,000
<TOTAL-LIABILITY-AND-EQUITY> 227,972,000
<SALES> 74,918,000
<TOTAL-REVENUES> 74,918,000
<CGS> 43,578,000
<TOTAL-COSTS> 43,578,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,808,000
<INCOME-PRETAX> 11,394,000
<INCOME-TAX> 4,331,000
<INCOME-CONTINUING> 7,063,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,063,000
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,534,000
<SECURITIES> 1,045,000
<RECEIVABLES> 14,206,000
<ALLOWANCES> 754,000
<INVENTORY> 8,119,000
<CURRENT-ASSETS> 25,711,000
<PP&E> 129,946,000
<DEPRECIATION> 50,488,000
<TOTAL-ASSETS> 106,048,000
<CURRENT-LIABILITIES> 10,856,000
<BONDS> 0
0
0
<COMMON> 11,740,000
<OTHER-SE> 72,466,000
<TOTAL-LIABILITY-AND-EQUITY> 106,048,000
<SALES> 74,432,000
<TOTAL-REVENUES> 74,432,000
<CGS> 43,437,000
<TOTAL-COSTS> 43,437,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,374,000
<INCOME-TAX> 5,081,000
<INCOME-CONTINUING> 8,293,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,293,000
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 2,870,000
<SECURITIES> 19,310,000
<RECEIVABLES> 13,492,000
<ALLOWANCES> 768,000
<INVENTORY> 6,833,000
<CURRENT-ASSETS> 43,528,000
<PP&E> 113,635,000
<DEPRECIATION> 43,399,000
<TOTAL-ASSETS> 114,608,000
<CURRENT-LIABILITIES> 13,844,000
<BONDS> 0
0
0
<COMMON> 10,631,000
<OTHER-SE> 60,257,000
<TOTAL-LIABILITY-AND-EQUITY> 114,608,000
<SALES> 70,166,000
<TOTAL-REVENUES> 70,166,000
<CGS> 36,850,000
<TOTAL-COSTS> 36,850,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,736,000
<INCOME-TAX> 5,788,000
<INCOME-CONTINUING> 9,948,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,948,000
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
