<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, 1999
-----------------
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>
<CAPTION>
DELAWARE 75-1155922
-------- ----------
<S> <C>
(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)
316-727-2700
------------------
(Registrant's telephone number, including area code)
</TABLE>
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, 2000, there were 11,823,418 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, 1999
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 (individually
and, together with its subsidiaries, the "Company").
<PAGE> 3
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Gross sales ......................................... $ 53,042,000 $ 36,722,000
Less freight and discounts .......................... 6,563,000 4,477,000
------------ ------------
Net sales ........................................... 46,479,000 32,245,000
Costs and expenses:
Cost of sales .................................. 30,998,000 20,992,000
Selling and administrative expenses ............ 5,543,000 4,620,000
------------ ------------
36,541,000 25,612,000
------------ ------------
Operating profit .................................... 9,938,000 6,633,000
Other income (expense), net .................... 120,000 (539,000)
------------ ------------
Income before income taxes .......................... 10,058,000 6,094,000
Provision for income taxes .......................... 4,024,000 2,316,000
------------ ------------
NET INCOME .......................................... $ 6,034,000 $ 3,778,000
============ ============
Basic earnings per share ............................ $ 0.51 $ 0.32
============ ============
Basic weighted average shares outstanding ........... 11,820,000 11,764,000
============ ============
Diluted earnings per share .......................... $ 0.51 $ 0.32
============ ============
Diluted weighted average shares outstanding ......... 11,864,000 11,829,000
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 4
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended December 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Gross sales ......................................... $106,274,000 $ 74,918,000
Less freight and discounts .......................... 13,307,000 9,488,000
------------ ------------
Net sales ........................................... 92,967,000 65,430,000
Costs and expenses:
Cost of sales .................................. 61,228,000 43,578,000
Selling and administrative expenses ............ 11,189,000 9,143,000
------------ ------------
72,417,000 52,721,000
------------ ------------
Operating profit .................................... 20,550,000 12,709,000
Other income (expense), net .................... 73,000 (1,315,000)
------------ ------------
Income before income taxes .......................... 20,623,000 11,394,000
Provision for income taxes .......................... 8,248,000 4,331,000
------------ ------------
NET INCOME .......................................... $ 12,375,000 $ 7,063,000
============ ============
Basic earnings per share ............................ $ 1.05 $ 0.60
============ ============
Basic weighted average shares outstanding ........... 11,811,000 11,757,000
============ ============
Diluted earnings per share .......................... $ 1.04 $ 0.60
============ ============
Diluted weighted average shares outstanding ......... 11,866,000 11,832,000
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and June 30, 1999
<TABLE>
<CAPTION>
Dec. 31, 1999 June 30, 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 3,139,000 $ 6,192,000
Accounts receivable, net ........................... 19,571,000 18,838,000
Income tax refunds receivable ...................... 330,000 491,000
Inventories:
Finished goods ................................... 4,733,000 3,396,000
Raw materials and supplies ....................... 11,091,000 7,538,000
------------ ------------
15,824,000 10,934,000
Prepaid expenses and other ......................... 668,000 902,000
Deferred income taxes .............................. 630,000 630,000
------------ ------------
TOTAL CURRENT ASSETS ............................. 40,162,000 37,987,000
Property, plant and equipment, at cost ............. 348,768,000 285,938,000
Less accumulated depreciation, amortization and
depletion ........................................ 66,637,000 61,989,000
------------ ------------
282,131,000 223,949,000
Unamortized debt issue costs .......................... 4,458,000 4,780,000
Other assets .......................................... 1,604,000 1,452,000
------------ ------------
TOTAL ASSETS .......................................... $328,355,000 $268,168,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................... $ 16,075,000 $ 14,021,000
Accrued payroll and employee benefits .............. 4,141,000 3,475,000
Income taxes payable ............................... 499,000 1,333,000
Accrued interest payable ........................... 4,676,000 4,448,000
Other current liabilities .......................... 1,670,000 1,584,000
------------ ------------
TOTAL CURRENT LIABILITIES ........................ 27,061,000 24,861,000
Long-term debt due after one year ..................... 172,000,000 125,000,000
Deferred income taxes ................................. 14,299,000 13,695,000
Other long-term liabilities ........................... 545,000 597,000
Commitments and contingencies-see notes
STOCKHOLDERS' EQUITY:
Common stock, $1 par value ......................... 11,820,000 11,800,000
Additional paid-in capital ......................... 28,723,000 28,568,000
Unrealized gain on marketable securities ........... 178,000 169,000
Retained earnings .................................. 73,729,000 63,478,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ....................... 114,450,000 104,015,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $328,355,000 $268,168,000
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 6
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 12,375,000 $ 7,063,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization .......... 5,534,000 4,334,000
Non-cash compensation expense ..................... -- 3,000
Deferred income taxes ............................. 604,000 --
Loss (gain) on sale of assets ..................... (29,000) 142,000
Changes in current assets and liabilities:
Accounts receivable .......................... (733,000) 1,372,000
Income tax refunds receivable ................ 161,000 403,000
Inventories .................................. (4,890,000) (885,000)
Prepaid expenses ............................. 234,000 391,000
Accounts payable and accrued liabilities ..... 2,806,000 (2,254,000)
Income taxes payable ......................... (834,000) 1,142,000
Accrued interest payable ..................... 228,000 4,399,000
Other assets and liabilities ...................... (194,000) (113,000)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 15,262,000 15,997,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............ (63,411,000) (56,688,000)
Proceeds from sale of property, plant and equipment ... 46,000 62,000
Proceeds from life insurance policy ................... -- 1,000,000
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES ................. (63,365,000) (55,626,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................ (2,126,000) (2,117,000)
Net proceeds (payments) under lines of credit ......... 47,000,000 (5,950,000)
Proceeds from issuance of debt ........................ -- 100,000,000
Payments for debt issue costs ......................... -- (5,097,000)
Issuance of common treasury stock ..................... -- 85,000
Proceeds from exercised stock options ................. 176,000 243,000
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............. 45,050,000 87,164,000
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... (3,053,000) 47,535,000
Cash and cash equivalents at beginning of year ............. 6,192,000 1,124,000
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 3,139,000 $ 48,659,000
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the six months ended December 31 for:
Income taxes, net of refunds .......................... $ 8,317,000 $ 2,786,000
Interest .............................................. $ 6,378,000 $ 98,000
</TABLE>
See accompanying notes.
5
<PAGE> 7
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1999 and 1998 (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, 1999, and the results of operations and cash flows for
the periods ended December 31, 1999 and 1998. 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, 1999.
(2) 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, 1999 December 31, 1998
----------------------------------------- --------------------------------------
(in thousands) Per-Share (in thousands) Per-Share
Net Income Shares Amount Net Income Shares Amount
------------ ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share $ 6,034 11,820 $ 0.51 $ 3,778 11,764 $ 0.32
Effects of dilutive
securities-options -- 44 -- -- 65 --
------------ ------ --------- ---------- ------ ---------
Diluted earnings
per share $ 6,034 11,864 $ 0.51 $ 3,778 11,829 $ 0.32
============ ====== ========= ========== ====== =========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
December 31, 1999 December 31, 1998
----------------------------------------- --------------------------------------
(in thousands) Per-Share (in thousands) Per-Share
Net Income Shares Amount Net Income Shares Amount
------------ ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share $ 12,375 11,811 $ 1.05 $ 7,063 11,757 $ 0.60
Effects of dilutive
securities-options -- 55 (.01) -- 75 --
------------ ------ --------- ---------- ------ ---------
Diluted earnings
per share $ 12,375 11,866 $ 1.04 $ 7,063 11,832 $ 0.60
============ ====== ========= ========== ====== =========
</TABLE>
Options to purchase 340,186 shares of common stock at prices ranging
from $16.36 to $20.76 were outstanding for the three months ended
December 31, 1999. Options to purchase 333,300 shares of common stock
at prices ranging from $16.75 to $20.76 were outstanding for the six
months ended December 31, 1999. 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. These
shares were not included in the diluted earnings per share calculation
because the options' exercise prices were greater than the average
market price of the common shares for the above periods.
6
<PAGE> 8
(3) Other Commitments and Contingent Liabilities: In connection with the
Company's preparation for a warehouse addition to its paperboard mill
located at 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 owners have conducted their own investigations.
Also, the Company and the adjacent owners have jointly sponsored
investigations. As a result of the most recent jointly sponsored
investigation, the Company again substantially verified the results
obtained in earlier investigations. Additionally, the investigation
uncovered newly discovered environmental conditions that appear to stem
from historical underground storage tank use on the Company's property.
The Company notified the Oil Inspection Section of the Colorado
Department of Labor and Employment of the most recent results.
Discussions among 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 matters.
The Company is in the process of commissioning the equipment of its new
recycled paperboard mill at Lawton, Oklahoma that is expected to cost
approximately $175,000,000 inclusive of capitalized interest and
working capital requirements. Of that amount, the Company believes, as
of December 31, 1999, it will spend approximately $5,000,000 to
complete construction and commission the equipment of the Lawton mill.
Furthermore, the Company has a ten year supply agreement with James
Hardie Gypsum, Inc. to supply at least 90% of their requirements of
gypsum-grade recycled paperboard from the Lawton mill beginning in the
period between October 2000 and January 2001. This represents
approximately 50% of the Lawton mill's estimated annual productive
capacity of 220,000 tons.
In November 1999, a former management employee of the Company's
Halltown West Virginia recycled paperboard mill filed a civil action
lawsuit in the Circuit Court of Jefferson County West Virginia naming
Republic Group Incorporated, Republic Paperboard Company of West
Virginia, d/b/a Halltown Paperboard Company and three others as
defendants. The plaintiff alleges a work related disability,
retaliation, conspiracy and discrimination and is seeking compensatory
and punitive damages in an unspecified amount. The Company is
contesting the allegations and believes it has a valid defense against
the claim. This lawsuit is in its early stages and, 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 25, 2000, 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, 2000 to stockholders of record on
February 29, 2000. Dividend payments will total approximately
$1,064,000.
(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
7
<PAGE> 9
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, 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 Notes to repay the
outstanding principal balance of a then existing revolving credit
facility dated 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.
Interest payment dates on the Notes are January 15 and July 15, and
commenced on January 15, 1999. Each semi-annual interest payment is
$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 credit facility is being 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 which is
currently expected to occur during the first quarter of calendar year
2000. 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 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 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
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 credit facility. Outstanding principal
amounts on the credit facility bear interest at a variable rate equal
to, at the election of the Company, (i) the LIBOR, 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) Bank of America 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 credit
facility are payable quarterly. Under the 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
(earnings before interest, taxes, depreciation and amortization) ratio,
interest coverage ratio, minimum EBITDA, and limitations on capital
expenditures and dividends. The credit facility does not restrict the
transfer of funds to the parent by the subsidiaries. The Company had
borrowings outstanding of $72,000,000 under the credit facility at
December 31, 1999 at a weighted-average interest rate of 7.60%.
8
<PAGE> 10
(8) The following is the Company's segment information for the quarters and
six months ended December 31, 1999 and 1998.
Three Months Ended December 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ----------------------------------------------
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>
Shipment units:
Wallboard (MSF) 180,084 180,084 132,339 132,339
Recycled paperboard (tons) 44,911 (5,804) 39,107 45,618 (5,591) 40,027
Recovered paper fiber (tons) 78,389 (51,037) 27,352 43,901 (20,825) 23,076
--------- --------- -------- --------- -------- --------- -------- ---------
Gross sales (in thousands):
Gypsum wallboard $ 33,786 $ $ $ 33,786 $ 19,328 $ $ $ 19,328
Recycled paperboard 16,272 16,272 15,982 15,982
Recovered paper fiber 7,950 (4,970) 2,980 2,521 (1,111) 1,410
Intrasegment fiber sales (4,970) 4,970 -- (1,111) 1,111 --
Intersegment paperboard sales 2,269 (2,269) -- 2,076 (2,076) --
Other 4 4 2 2
--------- --------- -------- --------- -------- --------- -------- ---------
Gross sales 33,786 21,521 (2,265) 53,042 19,328 19,468 (2,074) 36,722
Less freight and discounts 5,397 1,166 -- 6,563 3,534 943 -- 4,477
--------- --------- -------- --------- -------- --------- -------- ---------
Net sales $ 28,389 $ 20,355 $ (2,265) $ 46,479 $ 15,794 $ 18,525 $ (2,074) $ 32,245
--------- --------- -------- --------- -------- --------- -------- ---------
Operating profit $ 13,717 $ (1,287) $ (2,492) $ 9,938 $ 6,183 $ 2,300 $ (1,850) $ 6,633
========= ========= ======== ========= ======== ========= ======== =========
</TABLE>
Six Months Ended December 31, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ----------------------------------------------
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>
Shipment units:
Wallboard (MSF) 379,201 379,201 271,294 271,294
Recycled paperboard (tons) 87,147 (10,701) 76,446 91,934 (10,221) 81,713
Recovered paper fiber (tons) 138,886 (81,627) 57,259 86,680 (41,203) 45,477
--------- --------- -------- ---------- --------- --------- -------- ----------
Gross sales (in thousands):
Gypsum wallboard $ 69,070 $ $ $ 69,070 $ 38,962 $ $ $ 38,962
Recycled paperboard 31,437 31,437 32,936 32,936
Recovered paper fiber 13,730 (7,970) 5,760 5,456 (2,438) 3,018
Intrasegment fiber sales (7,970) 7,970 -- (2,438) 2,438 --
Intersegment paperboard sales 4,147 (4,147) -- 3,770 (3,770) --
Other 7 7 2 2
--------- --------- -------- ---------- --------- --------- -------- ----------
Gross sales 69,070 41,344 (4,140) 106,274 38,962 39,724 (3,768) 74,918
Less freight and discounts 10,920 2,386 1 13,307 7,188 2,301 (1) 9,488
--------- --------- -------- ---------- --------- --------- -------- ----------
Net sales $ 58,150 $ 38,958 $ (4,141) $ 92,967 $ 31,774 $ 37,423 $ (3,767) $ 65,430
--------- --------- -------- ---------- --------- --------- -------- ----------
Operating profit $ 28,327 $ (3,113) $ (4,664) $ 20,550 $ 12,623 $ 4,007 $ (3,921) $ 12,709
Identifiable assets 73,358 240,197 14,800 328,355 58,187 109,274 60,511 227,972
Capital expenditures 5,269 56,892 1,250 63,411 15,932 40,472 284 56,688
Depreciation, depletion and
amortization 2,102 2,653 779 5,534 1,025 2,617 692 4,334
========= ========= ======== ========== ========= ========= ======== ==========
</TABLE>
The Company's operations within the gypsum industry consist of the
manufacture and sale of gypsum wallboard. Operations within the
paperboard industry 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 at 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
9
<PAGE> 11
of the United States. The Company operates recycled paperboard mills at
Hutchinson, Kansas, Commerce City, Colorado, and Halltown, West
Virginia and is in the process of commissioning the equipment of its
new recycled paperboard mill at Lawton, Oklahoma. The Company's primary
markets for recycled paperboard are generally within a 600 mile radius
of the facilities. The Company operates reclaimed paper fiber recycling
centers at Kansas City, Missouri, Topeka, Kansas, and Denver, Colorado
with the corresponding markets within a 600 mile radius of the centers.
Republic Group Incorporated employs approximately 1,030 people,
approximately 665 of whom are covered by collective bargaining
agreements with four labor unions. The expirations of current
bargaining agreements range from 2000 to 2004. The Company believes its
relations with employees are satisfactory.
Operating profit is net sales less operating expenses. Intersegment and
intrasegment sales 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) The following components are included in other income (expense), net:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
-------------- ----------------
December 31 December 31
----------- -----------
1999 1998 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest expense $ (3,688,000) $ (2,778,000) $ (6,951,000) $ (4,872,000)
Less: Capitalized portion 3,661,000 1,461,000 6,793,000 2,064,000
--------------- -------------- -------------- --------------
Net interest expense (27,000) (1,317,000) (158,000) (2,808,000)
Interest income 95,000 783,000 161,000 1,594,000
Miscellaneous income (expense) 52,000 (5,000) 70,000 (101,000)
--------------- -------------- -------------- --------------
Other income (expense), net $ 120,000 $ (539,000) $ 73,000 $ (1,315,000)
=============== ============== ============== ==============
</TABLE>
Components of interest expense include interest associated with the
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, 1999 and 1998.
Consolidated Results. Consolidated net income increased 60% to $6,034,000 or
$0.51 per diluted share from $3,778,000 or $0.32 per diluted share posted in the
December 1998 quarter. For the December 1999 quarter, net sales increased 44% to
$46,479,000 compared to $32,245,000 recorded in the December 1998 quarter.
Operating profits increased 50% to $9,938,000 in the December 1999 quarter over
the same quarter one year ago. The principal factors contributing to these
increases were a 36% increase in shipments and a 28% increase in selling prices
of gypsum wallboard compared to the December 1998 quarter. Additionally,
consolidated selling and administrative expenses decreased from 14% of net sales
in the December 1998 quarter to 12% in the December 1999 quarter. Consolidated
net income in the December 1999 quarter was augmented by a $602,000 pre-tax
decrease in interest expense (net of interest income) from the December 1998
quarter. Substantially all of the Company's interest expense was capitalized
during the December 1999 quarter as a cost of constructing the Company's new
recycled paperboard mill at Lawton, Oklahoma. A shift in apportionment of income
between the states caused the Company's effective income tax rate to increase to
approximately 40% for fiscal year 2000 versus 38% and 39% for the December 1998
quarter and fiscal year 1999, respectively.
Gypsum Wallboard Segment Results. Operating profits improved 122% to $13,717,000
for the gypsum wallboard segment from $6,183,000 in the December 1998 quarter.
Increased shipments, principally due to the addition last year of a second
production line at the Company's Duke, Oklahoma gypsum wallboard plant, and
increased selling prices of gypsum wallboard were the primary factors
contributing to the improved operating results in the Company's gypsum wallboard
segment. The segment's 80% increase in net sales was partially offset by a 12%
increase in total per unit operating costs compared to the December 1998
quarter. Approximately 71% of this increase in total per unit operating costs
was attributable to the rise in the cost of recycled paperboard, which is used
as the facing paper for gypsum wallboard--See Recycled Paperboard Segment
Results. In addition, the Company continues to work on improving operating
efficiencies from the addition of the second production line at the Company's
gypsum wallboard plant. Based on the mix of actual products produced, the
Company believes its annual practical capacity of the expanded plant is
approximately 1.0 to 1.1 billion square feet. Demand for gypsum wallboard did
soften during the latter part of December and into January 2000.
Recycled Paperboard Segment Results. The Company's recycled paperboard segment
recorded an operating loss of $1,287,000 in the December 1999 quarter compared
to an operating profit of $2,300,000 in the December 1998 quarter. The December
1999 quarter was negatively affected by a 71% increase in per unit costs of
reclaimed paper fiber, the principal raw material used in the manufacture of
recycled paperboard. In addition, the December 1999 quarter operating results
were negatively impacted by an expected increase in pre-operating and
commissioning expenses associated with the Company's new paperboard mill being
constructed at Lawton, Oklahoma. The Company has been able to mitigate a portion
of these costs as net selling prices of recycled paperboard increased 4% from
the December 1998 quarter. There is generally a 60-to-90 day lag between the
incidence of fiber cost changes and selling price adjustments. Additionally,
shipments of recycled paperboard fell slightly from 45,618 tons in the December
1998 quarter to 44,911 tons in the December 1999 quarter. The weakness in the
uncoated
11
<PAGE> 13
recycled paperboard market continues in the East Coast markets. The recycled
paperboard segment was positively affected by an increase in shipments and sales
of recovered paper fiber to outside customers of 19% and 111%, respectively.
Six Months Ended December 31, 1999 and 1998.
Consolidated Results. Consolidated net income increased 75% to $12,375,000, or
$1.04 per diluted share, on net sales of $92,967,000. This compares to
consolidated net income of $7,063,000, or $.60 per diluted share, on net sales
of $65,430,000 for the same period in 1998.
Results for the six months ended December 31, 1999 were affected by factors
similar to those affecting the quarter. The increase in consolidated net income
was primarily attributable to a 27% increase in selling prices of gypsum
wallboard and a 40% increase in gypsum wallboard shipments. Shipments for
recycled paperboard decreased 5%. Shipments of reclaimed paper fiber to outside
customers from the Company's paper recycling division increased 26% from the
1998 period. Average net selling prices of recycled paperboard increased 2%, but
the increase was more than offset by a 40% increase in per unit raw material
costs, principally reclaimed paper fiber, when compared to the same period in
1998.
Expansion Project - Lawton, Oklahoma Recycled Paperboard Mill
Construction of the Company's new recycled paperboard mill at Lawton, Oklahoma
is substantially complete. The mill is now commissioning production equipment
and producing trial runs of gypsum-grade paperboard for the Company's own
internal use as well as for other customers. The capacity of the Lawton mill is
ultimately expected to reach approximately 220,000 tons annually, after the
start-up phase, and will be used primarily for the production of gypsum-grade
recycled paperboard. The addition of the Lawton mill will essentially double the
Company's current recycled paperboard capacity. Management estimates that the
capitalized costs for constructing the Lawton mill will be approximately
$175,000,000 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. The Company's Year 2000
Compliance team began addressing the Year 2000 issue in 1998 to ensure that
the programs, operating systems, and equipment containing source code or
embedded computer chips would be able to appropriately interpret the calendar
year 2000. When the recent rollover occurred, the Company did not experience any
problems interpreting the year 2000 with its computer software, operating
systems or equipment with embedded computer chips.
The Company executed its Year 2000 program primarily with internal resources.
The principal costs associated with these resources were payroll and employee
benefits of the members of the Year 2000 Compliance team and the Company's
information technology ("IT") department, third party consultants, and hardware
and software upgrades. The Company did not separately track the costs
attributable to the Year 2000 program, but estimates it incurred total internal
costs related to payroll, employee benefits, and third party consultants of less
than $350,000 for the Company's Year 2000 Compliance.
12
<PAGE> 14
This disclosure is provided pursuant to Securities Exchange Act Release No.
34-40277. This disclosure is subject to protection under the Year 2000
Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year
2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein.
Environmental Matters
In connection with the Company's preparation for a warehouse addition to its
paperboard mill located at 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 owners have conducted
their own investigations. Also, the Company and the adjacent owners have jointly
sponsored investigations. As a result of the most recent jointly sponsored
investigation, the Company again substantially verified the results obtained in
earlier investigations. Additionally, the investigation uncovered newly
discovered environmental conditions that appear to stem from historical
underground storage tank use on the Company's property. The Company notified the
Oil Inspection Section of the Colorado Department of Labor and Employment of the
most recent results. Discussions among 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 matters.
Liquidity and Capital Resources
The following is a summary of certain financial statistics and balances related
to the liquidity and financial condition of the Company at December 31 and June
30, 1999.
<TABLE>
<CAPTION>
$ in thousands December 31, 1999 June 30, 1999
- -------------- ----------------- -------------
<S> <C> <C>
Working capital $ 13,101 $ 13,126
Current ratio 1.5:1 1.5:1
Cash and cash equivalents $ 3,139 $ 6,192
Interest-bearing debt $ 172,000 $ 125,000
</TABLE>
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 credit facility of up to
$85,000,000 entered into with a bank syndicate on July 15, 1998, is being 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 ($5,950,000) of a then existing revolving credit
facility along with accrued interest. Upon repayment, the Company terminated the
revolving credit facility.
Interest payment dates on the Notes are January 15 and July 15, and commenced on
January 15, 1999. Each semi-annual interest payment is $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.
13
<PAGE> 15
The $85,000,000 credit facility is being 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 which is currently expected to occur
during the first quarter of calendar year 2000. 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 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 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 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 credit facility. Outstanding
principal amounts on the credit facility bear interest at a variable rate equal
to, at the election of the Company, (i) the LIBOR, 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) Bank of America 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 credit facility are payable quarterly. Under the 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 (earnings
before interest, taxes, depreciation and amortization) ratio, interest coverage
ratio, minimum EBITDA, and limitations on capital expenditures and dividends.
The credit facility does not restrict the transfer of funds to the parent by the
subsidiaries. The Company had borrowings outstanding of $72,000,000 under the
credit facility at December 31, 1999 at a weighted-average interest rate of
7.60%.
The Company funded $63,411,000 of additions to property, plant and equipment and
$2,126,000 in dividends to shareholders with $15,262,000 of cash generated from
operations, $47,000,000 of borrowings from its bank credit facility and existing
cash on hand during the six months ended December 31, 1999. Capital expenditures
relating to the construction of the Lawton mill were approximately $54,400,000
during the six-month period. Management estimates that the Lawton mill will
cost, including capitalized interest and related working capital requirements,
approximately $175,000,000. Of that amount, the Company estimates that it will
spend approximately $5,000,000 to complete construction, to commission the
equipment and to provide working capital for the Lawton mill during the
remainder of fiscal year 2000. Additionally, the Company anticipates that it
will spend approximately $8,000,000 to $12,000,000 to upgrade equipment at the
Company's other facilities during the remainder of fiscal year 2000. At December
31, 1999, the Company had available for borrowing, $13,000,000 of the
$85,000,000 bank credit facility. Although the Company believes that the
remaining portion available under the existing credit facility, together with
cash generated by operations during the remainder of fiscal year 2000, will be
sufficient (i) to complete the construction and to commission the equipment at
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, the Company is currently
contemplating increasing its existing credit facility in order to provide the
Company with additional capital if needed.
14
<PAGE> 16
On January 25, 2000, 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, 2000 to
stockholders of record on February 29, 2000. Dividend payments will total
approximately $1,064,000. Quarterly dividends historically have been paid in
September, December, March and June. Both the schedule and payment of cash
dividends are subject to the approval of the Company's Board of Directors. The
credit facility and the indenture pursuant to which the Notes were issued 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 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
Statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are 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 Company's Duke, Oklahoma gypsum wallboard
plant and the Lawton, Oklahoma recycled paperboard mill, and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission, including its annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K.
15
<PAGE> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company does not use financial instruments for trading or other speculative
purposes and is not a party to any derivative financial instruments. In general,
the Company does not engage in hedging of commodities or other contracts that
would cause material exposure to market risk relating to commodity prices or
foreign currency exchange rates.
The Company is exposed to interest rate risk primarily through its borrowing
activities. At December 31, 1999, the Company had outstanding, $100,000,000 of
Notes carrying a 9.5% fixed interest rate. This fixed rate obligation does not
expose the Company to risk of earnings or cash flow loss due to the changes in
market interest rates; however, the fair value of the Notes is sensitive to
changes in interest rates. A hypothetical 100 basis point change in interest
rates would result in a corresponding change of approximately $5,700,000 in the
fair value of the Notes, assuming a full redemption at July 15, 2008.
At December 31, 1999, the Company had $72,000,000 of borrowings outstanding
under its credit facility under which any outstanding balance bears interest at
variable rates. With respect to all borrowings under the credit facility,
interest rate changes generally do not affect the fair value thereof, but do
impact future earnings and cash flows. A hypothetical 100 basis point change in
interest rates would have a $720,000 annual impact on the Company's future
earnings and cash flows based on the Company's outstanding variable rate
borrowings at December 31, 1999. See-Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources
for additional discussion of the terms of the Notes and the credit facility.
16
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1999, a former management employee of the Company's
Halltown West Virginia recycled paperboard mill filed a civil action
lawsuit in the Circuit Court of Jefferson County West Virginia naming
Republic Group Incorporated, Republic Paperboard Company of West
Virginia, d/b/a Halltown Paperboard Company and three others as
defendants. The plaintiff alleges a work related disability,
retaliation, conspiracy and discrimination and is seeking compensatory
and punitive damages in an unspecified amount. The Company is
contesting the allegations and believes it has a valid defense against
the claim. This lawsuit is in its early stages and, at this time, the
Company has not ascertained the future liability, if any, of the above
matter.
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,
1999 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.
None
17
<PAGE> 19
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 9, 2000 /s/ DOYLE R. RAMSEY
-----------------------------------------
Doyle R. Ramsey
Executive Vice President and
Chief Financial Officer
February 9, 2000 /s/ MICHAEL W. DIRKS
-----------------------------------------
Michael W. Dirks
Vice President - Finance and
Chief Accounting Officer
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27.1299 Financial Data Schedule for the second quarter of 2000
(for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 3,139,000
<SECURITIES> 0
<RECEIVABLES> 20,257,000
<ALLOWANCES> 686,000
<INVENTORY> 15,824,000
<CURRENT-ASSETS> 40,162,000
<PP&E> 348,768,000
<DEPRECIATION> 66,637,000
<TOTAL-ASSETS> 328,355,000
<CURRENT-LIABILITIES> 27,061,000
<BONDS> 0
0
0
<COMMON> 11,820,000
<OTHER-SE> 102,630,000
<TOTAL-LIABILITY-AND-EQUITY> 328,355,000
<SALES> 106,274,000
<TOTAL-REVENUES> 106,274,000
<CGS> 61,228,000
<TOTAL-COSTS> 61,228,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,000
<INCOME-PRETAX> 20,623,000
<INCOME-TAX> 8,248,000
<INCOME-CONTINUING> 12,375,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,375,000
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.04
</TABLE>
