<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 March 31, 2000
--------------
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)
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)
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 April 28, 2000, there were 11,840,082 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 Nine Months Ended March 31, 2000
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 March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Gross sales ...................................... $ 53,911,000 $ 35,576,000
Less freight and discounts ....................... 7,103,000 4,686,000
------------ ------------
Net sales ........................................ 46,808,000 30,890,000
Costs and expenses:
Cost of sales ............................... 35,793,000 21,749,000
Selling and administrative expenses ......... 5,619,000 4,907,000
------------ ------------
41,412,000 26,656,000
------------ ------------
Operating profit ................................. 5,396,000 4,234,000
Other expense, net .......................... (699,000) (372,000)
------------ ------------
Income before income taxes ....................... 4,697,000 3,862,000
Provision for income taxes ....................... 1,879,000 1,468,000
------------ ------------
NET INCOME ....................................... $ 2,818,000 $ 2,394,000
============ ============
Basic earnings per share ......................... $ 0.24 $ 0.20
============ ============
Basic weighted-average shares outstanding ........ 11,829,000 11,775,000
============ ============
Diluted earnings per share ....................... $ 0.24 $ 0.20
============ ============
Diluted weighted-average shares outstanding ...... 11,847,000 11,860,000
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 4
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Gross sales ...................................... $ 160,185,000 $ 110,494,000
Less freight and discounts ....................... 20,410,000 14,174,000
------------- -------------
Net sales ........................................ 139,775,000 96,320,000
Costs and expenses:
Cost of sales ............................... 97,021,000 65,327,000
Selling and administrative expenses ......... 16,808,000 14,050,000
------------- -------------
113,829,000 79,377,000
------------- -------------
Operating profit ................................. 25,946,000 16,943,000
Other expense, net .......................... (626,000) (1,687,000)
------------- -------------
Income before income taxes ....................... 25,320,000 15,256,000
Provision for income taxes ....................... 10,127,000 5,799,000
------------- -------------
NET INCOME ....................................... $ 15,193,000 $ 9,457,000
============= =============
Basic earnings per share ......................... $ 1.29 $ 0.80
============= =============
Basic weighted-average shares outstanding ........ 11,819,000 11,764,000
============= =============
Diluted earnings per share ....................... $ 1.28 $ 0.80
============= =============
Diluted weighted-average shares outstanding ...... 11,853,000 11,842,000
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 5
REPUBLIC GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and June 30, 1999
<TABLE>
<CAPTION>
MARCH 31, 2000 June 30, 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 3,465,000 $ 6,192,000
Accounts receivable, net ...................... 23,619,000 18,838,000
Income tax refunds receivable ................. 2,975,000 491,000
Inventories:
Finished goods .............................. 6,664,000 3,396,000
Raw materials and supplies .................. 11,697,000 7,538,000
------------ ------------
18,361,000 10,934,000
Prepaid expenses and other .................... 643,000 902,000
Deferred income taxes ......................... 630,000 630,000
------------ ------------
TOTAL CURRENT ASSETS ........................ 49,693,000 37,987,000
Property, plant and equipment, at cost ........ 361,358,000 285,938,000
Less accumulated depreciation, amortization and
depletion ................................... 69,547,000 61,989,000
------------ ------------
291,811,000 223,949,000
Unamortized debt issue costs ..................... 4,479,000 4,780,000
Other assets ..................................... 1,612,000 1,452,000
------------ ------------
TOTAL ASSETS ..................................... $347,595,000 $268,168,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................. $ 14,299,000 $ 14,021,000
Accrued payroll and employee benefits ......... 3,937,000 3,475,000
Income taxes payable .......................... -- 1,333,000
Accrued interest payable ...................... 2,419,000 4,448,000
Other current liabilities ..................... 1,559,000 1,584,000
Current portion of long-term debt ............. 6,000,000 --
------------ ------------
TOTAL CURRENT LIABILITIES ................... 28,214,000 24,861,000
Long-term debt due after one year ................ 187,000,000 125,000,000
Deferred income taxes ............................ 15,623,000 13,695,000
Other long-term liabilities ...................... 454,000 597,000
Commitments and contingencies-see notes
STOCKHOLDERS' EQUITY:
Common stock, $1 par value .................... 11,835,000 11,800,000
Additional paid-in capital .................... 28,796,000 28,568,000
Unrealized gain on marketable securities ...... 192,000 169,000
Retained earnings ............................. 75,481,000 63,478,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .................. 116,304,000 104,015,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $347,595,000 $268,168,000
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 6
REPUBLIC GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 15,193,000 $ 9,457,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization .......... 8,756,000 6,906,000
Non-cash compensation expense ..................... -- 3,000
Deferred income taxes ............................. 1,928,000 1,059,000
Loss on sale of assets ............................ 6,000 124,000
Changes in current assets and liabilities:
Accounts receivable .......................... (4,781,000) (1,306,000)
Income tax refunds receivable ................ (2,484,000) (1,183,000)
Inventories .................................. (7,427,000) (2,397,000)
Prepaid expenses ............................. 259,000 329,000
Accounts payable and accrued liabilities ..... 715,000 (1,224,000)
Income taxes payable ......................... (1,333,000) --
Accrued interest payable ..................... (2,029,000) 1,991,000
Other assets and liabilities ...................... (280,000) (132,000)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 8,523,000 13,627,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............ (76,179,000) (79,187,000)
Proceeds from sale of property, plant and equipment ... 61,000 93,000
Proceeds from life insurance policy ................... -- 1,000,000
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES ................. (76,118,000) (78,094,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ........................................ (3,190,000) (3,176,000)
Net proceeds (payments) under lines of credit ......... 68,000,000 (5,950,000)
Proceeds from issuance of debt ........................ -- 100,000,000
Payments for debt issue costs ......................... (206,000) (5,105,000)
Issuance of common treasury stock ..................... -- 122,000
Proceeds from exercised stock options ................. 264,000 285,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............. 64,868,000 86,176,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... (2,727,000) 21,709,000
Cash and cash equivalents at beginning of year ............. 6,192,000 1,124,000
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 3,465,000 $ 22,833,000
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the nine months ended March 31 for:
Income taxes, net of refunds .......................... $ 12,016,000 $ 5,923,000
------------- -------------
Interest .............................................. $ 12,671,000 $ 5,030,000
------------- -------------
</TABLE>
See accompanying notes.
5
<PAGE> 7
REPUBLIC GROUP INCORPORATED
Notes to Consolidated Financial Statements
March 31, 2000 and 1999 (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 March 31, 2000, and the results of operations and cash flows for the
periods ended March 31, 2000 and 1999. 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
----------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
--------------------------------------- ---------------------------------------
(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 $ 2,818 11,829 $ 0.24 $ 2,394 11,775 $ 0.20
Effects of dilutive
securities-options -- 18 -- -- 85 --
---------- ------ --------- ---------- ------ ---------
Diluted earnings
per share $ 2,818 11,847 $ 0.24 $ 2,394 11,860 $ 0.20
========== ====== ========= ========== ====== =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
--------------------------------------- ---------------------------------------
(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 $ 15,193 11,819 $ 1.29 $ 9,457 11,764 $ 0.80
Effects of dilutive
securities-options -- 34 (.01) -- 78 --
---------- ------ --------- ---------- ------ ---------
Diluted earnings
per share $ 15,193 11,853 $ 1.28 $ 9,457 11,842 $ 0.80
========== ====== ========= ========== ====== =========
</TABLE>
Options to purchase 547,267 shares of common stock at prices ranging
from $12.84 to $20.76 were outstanding for the three months ended March
31, 2000. Options to purchase 397,653 shares of common stock at prices
ranging from $15.23 to $20.76 were outstanding for the nine months
ended March 31, 2000. Options to purchase 153,225 shares of common
stock at prices ranging from $18.00 to $20.76 were outstanding for the
three months and nine months ended March 31, 1999. 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 construction of 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. The
Company and a former owner of the Commerce City paper mill have entered
into a participation agreement to respond to those conditions that
appear to stem from historical underground storage tank use. Under the
participation agreement, Republic and the former owner will share costs
associated with the underground storage tank, if any, 25% and 75%,
respectively. At this time, the Company has not ascertained the future
liability, if any, of the above matters.
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 valid defenses 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 April 18, 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 June 15, 2000 to stockholders of record on May 31,
2000. Dividend payments will total approximately $1,066,000.
(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 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 were used primarily to finance
the construction of the Lawton mill and for general and corporate
purposes. On
7
<PAGE> 9
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.
Due to the recently expanded scope of the Company's business and
increased working capital requirements, the Company signed an amendment
to the existing credit facility on March 1, 2000, increasing the amount
available to $100,000,000.
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 amended $100,000,000 credit facility includes a $60,000,000 term
loan effective March 1, 2000 and a $40,000,000 revolving credit
facility. The principal of the term loan will be paid quarterly over
four years commencing June 1, 2000 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. 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. During any period that
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 $93,000,000
under the credit facility at March 31, 2000 at a weighted-average
interest rate of 7.85%.
(8) The following is the Company's segment information for the quarters and
nine months ended March 31, 2000 and 1999.
8
<PAGE> 10
Three Months Ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------- ----------------------------------------------
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) 170,153 170,153 129,738 129,738
Recycled paperboard (tons) 50,502 (1,532) 48,970 46,925 (9,699) 37,226
Recovered paper fiber (tons) 82,361 (54,991) 27,370 42,751 (19,608) 23,143
--------- --------- -------- ---------- --------- --------- -------- ---------
Gross sales (in thousands):
Gypsum wallboard $ 30,584 $ $ $ 30,584 $ 19,449 $ $ $ 19,449
Recycled paperboard 19,821 19,821 14,679 14,679
Recovered paper fiber 9,705 (6,203) 3,502 2,674 (1,229) 1,445
Intrasegment fiber sales (6,203) 6,203 -- (1,229) 1,229 --
Intersegment paperboard sales 754 (754) -- 3,530 (3,530) --
Other 4 4 3 3
--------- --------- -------- ---------- --------- --------- -------- ---------
Gross sales 30,584 24,077 (750) 53,911 19,449 19,654 (3,527) 35,576
Less freight and discounts 5,430 1,674 (1) 7,103 3,482 1,202 2 4,686
--------- --------- -------- ---------- --------- --------- -------- ---------
Net sales $ 25,154 $ 22,403 $ (749) $ 46,808 $ 15,967 $ 18,452 $ (3,529) $ 30,890
--------- --------- -------- ---------- --------- --------- -------- ---------
Operating profit $ 10,387 $ (2,693) $ (2,298) $ 5,396 $ 4,733 $ 1,698 $ (2,197) $ 4,234
========= ========= ======== ========== ========= ========= ======== ==========
</TABLE>
Nine Months Ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------- ----------------------------------------------
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) 549,354 549,354 401,032 401,032
Recycled paperboard (tons) 137,649 (12,233) 125,416 138,859 (19,920) 118,939
Recovered paper fiber (tons) 221,247 (136,618) 84,629 129,431 (60,811) 68,620
--------- --------- --------- ---------- --------- --------- -------- ---------
Gross sales (in thousands):
Gypsum wallboard $ 99,654 $ $ $ 99,654 $ 58,411 $ $ $ 58,411
Recycled paperboard 51,258 51,258 47,615 47,615
Recovered paper fiber 23,435 (14,173) 9,262 8,130 (3,667) 4,463
Intrasegment fiber sales (14,173) 14,173 -- (3,667) 3,667 --
Intersegment paperboard sales 4,901 (4,901) -- 7,300 (7,300) --
Other 11 11 5 5
--------- --------- --------- ---------- --------- --------- -------- ---------
Gross sales 99,654 65,421 (4,890) 160,185 58,411 59,378 (7,295) 110,494
Less freight and discounts 16,350 4,060 -- 20,410 10,670 3,503 1 14,174
--------- --------- --------- ---------- --------- --------- -------- ---------
Net sales $ 83,304 $ 61,361 $ (4,890) $ 139,775 $ 47,741 $ 55,875 $ (7,296) $ 96,320
--------- --------- --------- ---------- --------- --------- -------- ---------
Operating profit $ 38,714 $ (5,806) $ (6,962) $ 25,946 $ 17,356 $ 5,705 $ (6,118) $ 16,943
Identifiable assets 80,768 248,003 18,824 347,595 65,447 128,191 34,182 227,820
Capital expenditures 9,361 65,300 1,518 76,179 20,027 58,787 373 79,187
Depreciation, depletion and
amortization 3,194 4,361 1,201 8,756 1,953 3,885 1,068 6,906
========= ========= ========= ========== ========= ========= ======== =========
</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 of the United States. The Company
operates recycled paperboard mills at Lawton,
9
<PAGE> 11
Oklahoma, Hutchinson, Kansas, Commerce City, Colorado and Halltown,
West Virginia. 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 1035 people,
approximately 650 of whom are covered by collective bargaining
agreements with four labor unions. The expirations of current
bargaining agreements range from 2002 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 expense, net:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March 31 March 31
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest expense $ (4,209,000) $ (2,605,000) $(11,159,000) $(7,477,000)
Less: Capitalized portion 3,511,000 1,482,000 10,304,000 3,546,000
-------------- -------------- ------------ -----------
Net interest expense (698,000) (1,123,000) (855,000) (3,931,000)
Interest income 28,000 728,000 189,000 2,322,000
Miscellaneous income (expense) (29,000) 23,000 40,000 (78,000)
-------------- -------------- ------------ -----------
Other expense, net $ (699,000) $ (372,000) $ (626,000) $(1,687,000)
============== ============== ============ ===========
</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 March 31, 2000 and 1999.
Consolidated Results. Consolidated net income increased 18% to $2,818,000 or
$0.24 per diluted share for the third quarter ended March 31, 2000 from
$2,394,000 or $0.20 per diluted share in the March 1999 quarter. Net sales
increased 52% for the quarter to $46,808,000 from $30,890,000 in the March 1999
quarter. Operating profits increased 27% to $5,396,000 in the March 2000 quarter
over the same period one-year ago. The principal factors contributing to the
improvements were an increase of 31% and 32%, respectively, in shipments of
gypsum wallboard and recycled paperboard to non-affiliated customers from the
March 1999 quarter. Additionally, selling prices of gypsum wallboard increased
20% and net selling prices of recycled paperboard increased 3% from the same
period one-year ago. The improvement in shipments and selling prices were
partially offset by factors discussed below under the recycled paperboard
segment results. Consolidated selling and administrative expenses as a percent
of net sales decreased to 12% in the March 2000 quarter from 16% last year.
Consolidated net income was negatively affected by a $275,000 increase in
interest expense (net of interest income) from the March 1999 quarter. Prior to
mid-March 2000 the Company capitalized a significant portion of its interest
expense as a cost of constructing and commissioning its new Lawton, Oklahoma
recycled paperboard mill. Interest expense charges will adversely affect the
Company's consolidated net income in future periods. A shift in apportionment of
income between states caused the Company's effective income tax rate to increase
to approximately 40% for fiscal year 2000 versus 38% and 39% for the March 1999
quarter and fiscal year 1999, respectively.
Gypsum Wallboard Segment Results. Operating profits improved 119% to $10,387,000
for the gypsum wallboard segment from $4,733,000 in the March 1999 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 Company experienced an overall softening in demand and lower
selling prices for gypsum wallboard during January and February 2000 but demand
has strengthened since that time although selling prices continue to be under
pressure. While the second production line has added significant additional
capacity at the Duke plant, it is not yet operating at design capacity. The
Company continues to focus on improving operating efficiencies and production
line speeds as well as reducing unit manufacturing costs.
Recycled Paperboard Segment Results. The Company's recycled paperboard segment
recorded an operating loss of $2,693,000 in the March 2000 quarter compared to
an operating profit of $1,698,000 in the March 1999 quarter. The primary factors
influencing this decline in the March 2000 quarter compared to the same period
one year ago were a 67% increase in per unit raw material costs, principally
reclaimed paper fiber, anticipated costs associated with the start-up of the
Lawton mill and poor operating results posted by the Company's Halltown, West
Virginia mill. The Company began implementing selling price increases of
approximately $30 to $35 per ton for most grades of its recycled paperboard
products at the beginning of April 2000. This increase in selling prices is
similar to those announced by other manufacturers in the industry. All
gypsum-grade paperboard supply contracts signed to date for the Lawton mill
include periodic, automatic price adjustment mechanisms for most of the major
cost components of the
11
<PAGE> 13
product, including recycled paper fiber. With those in place, the Company
expects the paper margin--the difference between net selling prices and
reclaimed paper fiber costs--of gypsum-grade paperboard to be more stable than
other paperboard products. The poor results posted by the Company's Halltown
mill, in comparison to one year ago, in addition to the increase in raw material
costs, were attributable to continued weakness in the demand for recycled
paperboard products produced at the Halltown mill, competition and pricing
pressures associated with such soft demand.
During March 2000, the Company began commercial production at its new 100%
recycled gypsum-grade paperboard mill at Lawton, Oklahoma. This was the
principal factor contributing to the increase in shipments of recycled
paperboard from 46,925 tons in the March 1999 quarter to 50,502 tons in the
March 2000 quarter. The Lawton mill is currently operating at approximately
60-65% of capacity. This is in line with the Company's expectations for this
stage in the ramp-up of production at that facility. The Company expects to
increase the production rate gradually to the annual design capacity during the
next nine months. The Lawton mill is currently producing and selling other
paperboard products in addition to gypsum-grade paperboard. During the ramp-up
period, the Company plans to produce more gypsum-grade paperboard each month and
less of the other, lower-margined paperboard products as its gypsum wallboard
customers shift from their current suppliers when their existing supply
agreements expire. The majority of the production capacity at the Lawton mill is
committed for the Company's own internal use and under long-term supply
agreements with other gypsum wallboard manufacturers. The Company has a ten year
supply agreement with James Hardie Gypsum, Inc. under which it is required to
commence purchasing significant quantities of gypsum-grade paperboard beginning
October 2000. The Hardie agreement represents approximately 50% of the Lawton
mill's estimated annual capacity.
The Company expects results from its recycled paperboard segment to continue to
be adversely affected during the next two fiscal quarters by the ramp-up of the
Lawton mill, by the high cost of reclaimed paper fiber and by the aforementioned
East Coast markets. Until the majority of the output of the Company's Lawton
mill consists of gypsum-grade paperboard, operating results will negatively
impact the segment. As stated above, the Company was able to implement a general
increase in selling prices of recycled paperboard during April 2000 which
mitigated a portion of the increase in the cost of reclaimed paper fiber
experienced to date. However, the cost of certain grades of reclaimed paper
fiber continued to rise in May 2000.
Nine Months Ended March 31, 2000 and 1999.
Consolidated Results. Consolidated net income increased 61% to $15,193,000, or
$1.28 per diluted share, on net sales of $139,775,000. This compares to
consolidated net income of $9,457,000, or $0.80 per diluted share, on net sales
of $96,320,000 for the same period in 1999.
Results for the nine months ended March 31, 2000 were affected by factors
similar to those affecting the quarter. The 45% increase in consolidated net
sales was primarily attributable to a 37% increase in shipments of gypsum
wallboard and a 25% increase in gypsum wallboard selling prices. Shipments of
recycled paperboard declined 1% to 137,649 tons compared to 138,859 tons during
the March 1999 period. Average net selling prices of recycled paperboard
increased 2%, but the increase was more than offset by a 49% increase in per
unit raw material costs, principally reclaimed paper fiber, when compared to the
same period in 1999. Selling and administrative expenses as a percent of net
sales declined to 12% from 15% recorded in the
12
<PAGE> 14
nine-months ended March 1999. Consolidated net income in the March 2000 period
was augmented by a $943,000 decrease in interest expense (net of interest
income) from the March 1999 period due to capitalizing substantially all of the
Company's interest expense as a cost of constructing the Lawton mill.
Environmental Matters
In connection with the Company's construction of 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. The Company and a former owner of the Commerce City paper
mill have entered into a participation agreement to respond to those conditions
that appear to stem from historical underground storage tank use. Under the
participation agreement, Republic and the former owner will share costs
associated with the underground storage tank, if any, 25% and 75%, respectively.
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 March 31, 2000 and
June 30, 1999.
<TABLE>
<CAPTION>
($ in thousands) March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Working capital $ 21,479 $ 13,126
Current ratio 1.8:1 1.5:1
Cash and cash equivalents $ 3,465 $ 6,192
Interest-bearing debt $ 193,000 $ 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 were used
primarily to finance the construction of the Lawton mill and for general and
corporate purposes. 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.
Due to the recently expanded scope of the Company's business and increased
working capital requirements, the Company signed an amendment to the existing
credit facility on March 1, 2000, increasing the amount available to
$100,000,000.
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
13
<PAGE> 15
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 amended $100,000,000 credit facility includes a $60,000,000 term loan
effective March 1, 2000 and a $40,000,000 revolving credit facility. The
principal of the term loan will be paid quarterly over four years commencing
June 1, 2000 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. 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. During any period that 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 $93,000,000 under the credit facility at March 31, 2000 at a
weighted-average interest rate of 7.85%.
For the nine months ended March 31, 2000, the Company funded $76,179,000 of
additions to property, plant and equipment and $3,190,000 in dividends to
shareholders with $8,523,000 of cash generated from operations, $68,000,000 of
borrowings from its bank credit facility and existing cash on hand. Capital
expenditures to complete the construction of the Lawton mill were approximately
$61,000,000 during the nine-month period. Total construction cost for the Lawton
mill, including capitalized interest was approximately $177,000,000. The Company
anticipates that it will spend approximately $4,000,000 to $6,000,000 to upgrade
equipment at the Company's other facilities during the remainder of fiscal year
2000. Currently, the Company is developing its fiscal year 2001 capital budget
and at the present time anticipates spending approximately $15,000,000 to
$20,000,000 to upgrade equipment at its facilities. The amount of planned
expenditures could be reduced significantly during the fiscal year if financial
conditions warrant such a decrease. The Company believes that the remaining
portion available under the existing credit facility, together with additional
borrowing capability, if required, and cash generated by operations, will be
sufficient (i) to meet its repayment obligations under the term portion of the
bank credit facility, (ii) to fund the 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.
14
<PAGE> 16
On April 18, 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 June 15, 2000 to
stockholders of record on May 31, 2000. Dividend payments will total
approximately $1,066,000. 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) $6,500,000 in fiscal
years 2000 and 2001, (b) $7,000,000 in fiscal years 2002 and 2003 and (c)
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, successful attainment of designed production capacity
levels 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 March 31, 2000, 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 $5,600,000 in the
fair value of the Notes, assuming a full redemption at July 15, 2008.
At March 31, 2000, the Company had $93,000,000 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 $930,000 annual impact on the Company's future
earnings and cash flows based on the Company's outstanding variable rate
borrowings at March 31, 2000. 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 valid defenses 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
Not applicable.
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
May 12, 2000 /s/ Doyle R. Ramsey
-------------------------------
Doyle R. Ramsey
Executive Vice President and
Chief Financial Officer
May 12, 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 Financial Data Schedule for the third quarter of 2000 (for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,465,000
<SECURITIES> 0
<RECEIVABLES> 24,389,000
<ALLOWANCES> 770,000
<INVENTORY> 18,361,000
<CURRENT-ASSETS> 49,693,000
<PP&E> 361,358,000
<DEPRECIATION> 69,547,000
<TOTAL-ASSETS> 347,595,000
<CURRENT-LIABILITIES> 28,214,000
<BONDS> 0
0
0
<COMMON> 11,835,000
<OTHER-SE> 104,469,000
<TOTAL-LIABILITY-AND-EQUITY> 347,595,000
<SALES> 160,185,000
<TOTAL-REVENUES> 160,185,000
<CGS> 97,021,000
<TOTAL-COSTS> 97,021,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 855,000
<INCOME-PRETAX> 25,320,000
<INCOME-TAX> 10,127,000
<INCOME-CONTINUING> 15,193,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,193,000
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.28
</TABLE>
