Attached files
file | filename |
---|---|
EX-32 - MONARCH CEMENT CO | exhibit32_1.htm |
EX-31 - MONARCH CEMENT CO | exhibit31_1.htm |
EX-31 - MONARCH CEMENT CO | exhibit31_2.htm |
EX-32 - MONARCH CEMENT CO | exhibit32_2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(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,
2010, 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: 0-2757
THE
MONARCH CEMENT COMPANY
(Exact
name of registrant as specified in its charter)
|
|
KANSAS
(state
or other jurisdiction of incorporation or organization)
|
48-0340590
(IRS
employer identification no.)
|
P.O.
BOX 1000, HUMBOLDT, KANSAS
(address
of principal executive offices)
|
66748-0900
(zip
code)
|
Registrant's
telephone number, including area code: (620) 473-2222
(former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X
NO
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES
___ NO ___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
___
|
Accelerated filer |
X
|
|
Non-accelerated filer |
___
|
(Do not check if a smaller reporting company) | Smaller reporting company |
___
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
NO X
As of
May
3,
2010, there were 2,533,213
shares of Capital Stock, par value $2.50 per share outstanding and
1,490,985
shares of Class B Capital Stock, par value $2.50 per
share outstanding.
PART
I - FINANCIAL INFORMATION
The
condensed consolidated financial statements included in this report have been
prepared by our Company without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted. Our Company believes that the disclosures are adequate to make
the information presented not misleading. The accompanying consolidated
financial statements reflect all adjustments that are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. Those adjustments consist only of normal,
recurring adjustments. The condensed consolidated balance sheet of the
Company as of December 31, 2009 has been derived from the audited consolidated
balance sheet of the Company as of that date. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our Company's most recent
annual report on Form 10-K for 2009 filed with the Securities and Exchange
Commission. The results of operations for the period are not necessarily
indicative of the results to be expected for the full year.
Item
1. Financial
Statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
March 31, 2010 and December 31, 2009 |
ASSETS
|
2010
|
2 0
0 9
|
|||||||
CURRENT
ASSETS:
|
(Unaudited)
|
||||||||
Cash
and cash equivalents
|
$ | 1,514,655 | $ | 2,149,397 | |||||
Receivables,
less allowances of $945,500 in 2010 and
|
|||||||||
$911,000
in 2009 for doubtful accounts
|
13,465,719 | 12,558,856 | |||||||
Inventories,
priced at cost which is not in excess of market-
|
|||||||||
Finished
cement
|
$ | 6,339,901 | $ | 5,345,468 | |||||
Work
in process
|
2,258,329 | 2,050,200 | |||||||
Building
products
|
5,349,231 | 5,225,431 | |||||||
Fuel,
gypsum, paper sacks and other
|
7,362,685 | 7,625,573 | |||||||
Operating
and maintenance supplies
|
11,089,000 | 11,538,788 | |||||||
|
Total
inventories
|
$ | 32,399,146 | $ | 31,785,460 | ||||
Refundable federal and state income taxes
|
1,858,696 | 310,795 | |||||||
Deferred
income taxes
|
775,000 | 775,000 | |||||||
Prepaid
expenses
|
689,626 | 324,844 | |||||||
Total
current assets
|
$ | 50,702,842 | $ | 47,904,352 | |||||
PROPERTY,
PLANT AND EQUIPMENT, at cost, less
|
|||||||||
accumulated
depreciation and depletion of $165,355,822
|
|||||||||
in
2010 and $162,880,507 in 2009
|
89,539,609 | 90,817,394 | |||||||
DEFERRED
INCOME TAXES
|
18,841,778 | 19,093,778 | |||||||
INVESTMENTS
|
18,965,280 | 18,419,208 | |||||||
OTHER
ASSETS
|
639,799 | 762,945 | |||||||
$ | 178,689,308 | $ | 176,997,677 | ||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||
CURRENT
LIABILITIES:
|
|||||||||
Accounts
payable
|
$ | 5,553,854 | $ | 5,083,300 | |||||
Line
of credit payable
|
7,098,411 | 511,944 | |||||||
Current
portion of advancing term loan
|
2,754,691 | 2,732,490 | |||||||
Accrued
liabilities
|
8,891,398 | 10,900,596 | |||||||
Total
current liabilities
|
$ | 24,298,354 | $ | 19,228,330 | |||||
LONG-TERM
DEBT
|
11,373,009 | 12,096,835 | |||||||
ACCRUED
POSTRETIREMENT BENEFITS
|
30,671,971 | 30,206,610 | |||||||
ACCRUED
PENSION EXPENSE
|
12,746,436 | 12,250,038 | |||||||
STOCKHOLDERS'
EQUITY:
|
|||||||||
Capital
stock, par value $2.50 per share, one vote per share -
|
|||||||||
Authorized
10,000,000 shares, Issued 2,533,213 shares
|
|||||||||
at
03/31/2010 and 2,532,463 shares at 12/31/2009
|
$ | 6,333,033 | $ | 6,331,158 | |||||
Class
B capital stock, par value $2.50 per share, supervoting
|
|||||||||
rights
of ten votes per share, restricted transferability,
|
|||||||||
convertible
at all times into Capital Stock on a share-for-
|
|||||||||
share basis - Authorized 10,000,000 shares, Issued
1,490,985
|
|||||||||
shares
at 03/31/2010 and 1,491,735 shares at 12/31/2009
|
3,727,462 | 3,729,337 | |||||||
Retained
earnings
|
101,292,386 | 105,989,712 | |||||||
Accumulated
other comprehensive loss
|
(11,753,343 | ) | (12,834,343 | ) | |||||
Total
stockholders'equity
|
$ | 99,599,538 | $ | 103,215,864 | |||||
|
$ | 178,689,308 | $ | 176,997,677 | |||||
See
accompanying Notes to the Condensed Consolidated Financial
Statements
|
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES | |
CONDENSED
CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS
|
|
For the Three Months Ended March 31, 2010 and 2009 (Unaudited) |
2010
|
2009
|
|||||||
NET
SALES
|
$ | 18,194,726 | $ | 25,330,736 | ||||
COST
OF SALES
|
20,658,998 | 24,858,824 | ||||||
Gross
profit (loss) from operations
|
$ | (2,464,272 | ) | $ | 471,912 | |||
SELLING,
GENERAL AND
|
||||||||
ADMINISTRATIVE
EXPENSES
|
3,887,518 | 4,121,633 | ||||||
Loss
from operations
|
$ | (6,351,790 | ) | $ | (3,649,721 | ) | ||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
$ | 50,886 | $ | 34,223 | ||||
Interest
expense
|
(122,123 | ) | (147,694 | ) | ||||
Gains
on equity investments
|
4,172 | 77,535 | ||||||
Dividend
Income
|
74,114 | 34,879 | ||||||
Other,
net
|
772,415 | (53,713 | ) | |||||
$ | 779,464 | $ | (54,770 | ) | ||||
Loss
before taxes on income
|
$ | (5,572,326 | ) | $ | (3,704,491 | ) | ||
PROVISION
FOR INCOME TAXES
|
(875,000 | ) | (1,040,000 | ) | ||||
NET
LOSS
|
$ | (4,697,326 | ) | $ | (2,664,491 | ) | ||
Less:
Net loss attributable to Noncontrolling interests
|
- | (14,364 | ) | |||||
NET
LOSS ATTRIBUTABLE TO THE COMPANY
|
$ | (4,697,326 | ) | $ | (2,650,127 | ) | ||
RETAINED
EARNINGS, beginning of period
|
105,989,712 | 104,958,556 | ||||||
RETAINED
EARNINGS, end of period
|
$ | 101,292,386 | $ | 102,308,429 | ||||
Basic
loss per share
|
$ | (1.17 | ) | $ | (0.66 | ) | ||
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
||||||||
For the Three Months Ended March 31, 2010 and 2009 (Unaudited) | ||||||||
2010 | 2009 | |||||||
NET
LOSS
|
$ | (4,697,326 | ) | $ | (2,664,491 | ) | ||
UNREALIZED
APPRECIATION (DEPRECIATION)
|
||||||||
ON
AVAILABLE FOR SALE SECURITIES
|
||||||||
(Net
of deferred tax expense (benefit) of $264,000
|
||||||||
and
$(396,000) for 2010 and 2009, respectively)
|
400,172 | (596,465 | ) | |||||
LESS: RECLASSIFICATION
ADJUSTMENT FOR
|
||||||||
REALIZED
GAINS (LOSSES) INCLUDED IN
|
||||||||
NET
INCOME (net of deferred tax (benefit) expense
|
||||||||
of
$-0- and $32,000 for 2010 and 2009, respectively)
|
4,172 | 45,535 | ||||||
POSTRETIREMENT LIABILITY (Net of deferred tax (benefit) | ||||||||
expense of $-0- and $-0- for 2010 and 2009, respectively) | 685,000 | - | ||||||
COMPREHENSIVE
LOSS
|
$ | (3,616,326 | ) | $ | (3,306,491 | ) | ||
See
accompanying Notes to the Condensed Consolidated Financial
Statements
|
THE
MONARCH CEMENT COMPANY AND SUBSIDIARIES
|
||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||
For the Three Months Ended March 31, 2010 and 2009 (Unaudited) |
2010
|
2009
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
loss
|
$ | (4,697,326 | ) | $ | (2,664,491 | ) | ||
Adjustments
to reconcile net loss to
|
||||||||
net
cash provided by operating activities:
|
||||||||
Depreciation,
depletion and amortization
|
2,893,295 | 2,977,641 | ||||||
Deferred
income taxes
|
(12,000 | ) | (13,000 | ) | ||||
Gain
on disposal of assets
|
(34,523 | ) | (40 | ) | ||||
Realized
gain on sale of equity investments
|
(4,172 | ) | (77,535 | ) | ||||
Gain
on disposal of other assets
|
(700,000 | ) | - | |||||
Postretirement benefits and pension expense | 1,646,759 | 936,335 | ||||||
Change
in assets and liabilities:
|
||||||||
Receivables,
net
|
(906,864 | ) | (681,243 | ) | ||||
Inventories
|
(613,687 | ) | (2,975,925 | ) | ||||
Refundable
income taxes
|
(1,547,901 | ) | (983,669 | ) | ||||
Prepaid
expenses
|
(364,782 | ) | (483,598 | ) | ||||
Other
assets
|
750 | 5,687 | ||||||
Accounts
payable and accrued liabilities
|
970,855 | 1,087,773 | ||||||
Net
cash used for operating activities
|
$ | (3,369,596 | ) | $ | (2,872,065 | ) | ||
INVESTING
ACTIVITIES:
|
||||||||
Acquisition
of property, plant and equipment
|
$ | (2,164,332 | ) | $ | (2,278,623 | ) | ||
Proceeds
from disposals of property, plant and equipment
|
47,375 | 200 | ||||||
Proceeds
from disposals of other assets
|
700,000 | - | ||||||
Payment
for purchases of equity investments
|
(47,800 | ) | (2,493,439 | ) | ||||
Proceeds
from disposals of equity investments
|
165,900 | 608,835 | ||||||
Net
cash used for investing activities
|
$ | (1,298,857 | ) | $ | (4,163,027 | ) | ||
FINANCING
ACTIVITIES:
|
||||||||
Increase
in line of credit, net
|
$ | 6,586,466 | $ | 8,483,887 | ||||
Payments
on bank loans
|
(676,008 | ) | (654,879 | ) | ||||
Payments
on other long-term debt
|
(25,616 | ) | (84,316 | ) | ||||
Cash
dividends paid
|
(1,851,131 | ) | (1,851,131 | ) | ||||
Net
cash provided by financing activities
|
$ | 4,033,711 | $ | 5,893,561 | ||||
Net
decrease in cash and cash equivalents
|
$ | (634,742 | ) | $ | (1,141,531 | ) | ||
Cash
and Cash Equivalents, beginning of year
|
2,149,397 | 3,111,509 | ||||||
Cash
and Cash Equivalents, end of period
|
$ | 1,514,655 | $ | 1,969,978 | ||||
Interest
paid, net of amount capitalized
|
$ | 119,826 | $ | 143,227 | ||||
Income
taxes paid, net of refunds
|
$ | - | $ | (45,204 | ) | |||
Capital
equipment additions included in accounts payable
|
$ | 90,111 | $ | 951,002 | ||||
See
accompanying Notes to the Condensed Consolidated Financial
Statements
|
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
March 31, 2010 and 2009 (Unaudited), and December 31, 2009 |
1.
|
For
a summary of accounting policies, the reader should refer to Note 1
of the consolidated financial statements included in our Company's most
recent annual report on Form 10-K.
|
2.
|
Certain
reclassifications have been made to the 2009 financial statements to
conform to the current year presentation. These reclassifications had no
effect on net earnings.
|
3.
|
Our
Ready-Mixed Concrete Business includes precast concrete construction which
involve long-term and short-term contracts. Long-term contracts relate to
specific projects with terms in excess of one year from the contract date.
Short-term contracts for specific projects are generally of three to six
months in duration. The majority of the long-term contracts will allow
only scheduled billings and contain retainage provisions under which 5 to
10% of the contract invoicing may be withheld by the customer pending
project completion. As of March 31, 2010, the amount of billed retainage
which is included in accounts receivable was approximately $640,000, all
of which is expected to be collected within one year. The amount of billed
retainage which was included in accounts receivable at December 31, 2009
was approximately $360,000.
We
recognize revenues under the percentage of completion method of accounting
using cost-to-cost measures. Revenues from contracts using the
cost-to-cost measures of completion are recognized based on the ratio of
contract costs incurred to date to total estimated contract
costs. The amount of unbilled revenue in accounts receivable
was approximately $370,000 and $780,000 at March 31, 2010 and December 31,
2009, respectively. Unbilled revenue contained approximately $120,000 and
$525,000 of not-currently-billable retainage at March 31, 2010 and
December 31, 2009, respectively, which is expected to be collected within
one year.
|
4.
|
As
of March 31, 2010, the amount of accounts payable related to
property, plant and equipment was $90,111 compared to December 31, 2009
which was $748,479.
Depreciation,
depletion and amortization related to manufacturing operations are
recorded in Cost of Sales, those related to general operations
are recorded in Selling, General and Administrative Expenses, and those
related to non-operational activities are in Other, net on the
Condensed Consolidated Statements of Loss and Retained
Earnings.
|
5.
|
For
the three months ended March 31, 2010, we incurred a
temporary LIFO liquidation gain due to reductions in finished cement and
work in process inventory of $.2 million which we expect to be restored by
the end of the year. The temporary LIFO liquidation gain has been deferred
as a component of accrued liabilities. We incurred a temporary LIFO
liquidation gain of $.3 million due to reductions in finished cement
and work in process inventory during the three months ended March 31,
2009.
|
6.
|
Our
Company groups its operations into two lines of business - Cement Business
and Ready-Mixed Concrete Business. The "Cement Business" refers to
our manufacture and sale of cement and "Ready-Mixed Concrete Business"
refers to our ready-mixed concrete, concrete products, precast concrete
construction, and sundry building materials business. Corporate
assets for 2010 include cash and cash
equivalents, refundable income taxes, deferred income taxes,
investments and other assets. Corporate assets for 2009 include cash and cash
equivalents, short-term investments, refundable income taxes,
deferred income taxes, investments and other assets.
Following is information for each line for the periods
indicated:
|
Ready-
Mixed
|
Adjustments
|
|||||||||||||||
Cement Business |
Concrete
Business
|
and
Eliminations
|
Consolidated
|
|||||||||||||
For
the Three Months Ended 03/31/10
|
||||||||||||||||
Sales
to unaffiliated customers
|
$ | 6,945,883 | $ | 11,248,843 | $ | - | $ | 18,194,726 | ||||||||
Intersegment
sales
|
2,351,659 | - | (2,351,659 | ) | - | |||||||||||
Total
net sales
|
$ | 9,297,542 | $ | 11,248,843 | $ | (2,351,659 | ) | $ | 18,194,726 | |||||||
Loss from
operations
|
$ | (3,260,410 | ) | $ | (3,091,380 | ) | $ | (6,351,790 | ) | |||||||
Other
income, net
|
779,464 | |||||||||||||||
Loss
before income taxes
|
$ | (5,572,326 | ) | |||||||||||||
Capital Expenditures | $ | 465,318 | $ | 1,040,647 | $ | 1,505,965 |
Ready-
Mixed
|
Adjustments
|
|||||||||||||||
Cement Business |
Concrete
Business
|
and
Eliminations
|
Consolidated
|
|||||||||||||
For the Three Months Ended 03/31/09 | ||||||||||||||||
Sales
to unaffiliated customers
|
$ | 9,942,542 | $ | 15,388,194 | $ | - | $ | 25,330,736 | ||||||||
Intersegment
sales
|
2,403,117 | - | (2,403,117 | ) | - | |||||||||||
Total
net sales
|
$ | 12,345,659 | $ | 15,388,194 | $ | (2,403,117 | ) | $ | 25,330,736 | |||||||
Loss from
operations
|
$ | (2,094,957 | ) | $ | (1,554,764 | ) | $ | (3,649,721 | ) | |||||||
Other
loss, net
|
(54,770 | ) | ||||||||||||||
Loss before income taxes
|
$ | (3,704,491 | ) | |||||||||||||
Capital Expenditures | $ | 2,087,052 | $ | 920,659 | $ | 3,007,771 |
Balance
as of 3/31/10
|
|||||||||||||||||
Identifiable
Assets
|
$ | 95,881,164 | $ | 40,212,936 | $ | 136,094,100 | |||||||||||
Corporate
Assets
|
42,595,208 | ||||||||||||||||
|
|
$ | 178,689,308 |
Balance
as of 3/31/09
|
|||||||||||||||||
Identifiable
Assets
|
$ | 98,054,524 | $ | 41,562,652 | $ | 139,617,176 | |||||||||||
Corporate
Assets
|
40,487,739 | ||||||||||||||||
|
|
$ | 180,104,915 |
7.
|
During 2008, the
Company adopted the Financial Accounting Standards Board's (FASB) new
accounting standards on fair value measurements and disclosures for all
financial assets and liabilities. The new accounting principles defined
fair
value, established a framework for measuring fair value under
generally accepted accounting principles and enhanced disclosures about
fair value measurements. During the first quarter of 2009,
the Company adopted the new accounting standards on fair value
measurements and disclosures for all non-financial assets and
non-financial liabilities not recognized or disclosed at least annually at
fair value.
Level
1 - quoted prices in active markets for identical assets or
liabilities.
Level
2 - observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in active markets
that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of
the assets or
liabilities.
Level
3 - unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
Cash
and cash equivalents, short-term investments, receivables, accounts
payable and long-term debt have carrying values that approximate fair
values. Equity
securities for which the Company has no immediate plan to sell but that
may be sold in the future are classified as available for
sale. If the fair value of the equity security is readily
determinable, it is carried at fair value and unrealized gains and losses
are recorded, net of related income tax effects, in stockholders' equity.
Realized gains and losses, based on the specifically identified cost of
the security, are included in net income. The Company's valuation
techniques used to measure the fair value of its marketable equity
securities were derived from quoted prices in active markets for identical
assets. Equity securities whose fair value is not readily determinable are
carried at cost unless the Company is aware of significant adverse effects
which have impaired the investments. Investments that
are recorded at cost are evaluated quarterly for events that may
adversely impact their fair
value.
|
The
aggregate amount of equity securities carried at cost, for which the Company has
not elected the fair value option, was $2.1 million as of March 31, 2010.
The remaining $16.9 million in equity security investments are stated at
fair market value. As of December 31, 2009, the aggregate amount of equity
securities carried at cost was $2.0 million and the remaining $16.4 million in
equity security investments were stated at fair market value. The following
table summarizes the bases used to measure certain assets at fair value on a
recurring basis in the balance sheet:
Fair
Value at Reporting Date Using:
|
||||||||||||||||
|
Quoted
Prices
|
|
||||||||||||||
in
Active
|
Significant
|
|
||||||||||||||
Markets
for
|
Other
|
Significant
|
||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets
|
Inputs
|
Input
|
||||||||||||||
Assets: |
03/31/2010
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
Available-for-sale equity
securities
|
|
|
|
|||||||||||||
Cement industry | $ | 7,892,142 | $ | 7,892,142 | $ | - | $ | - | ||||||||
General building materials industry | 3,670,076 | 3,670,076 | - | - | ||||||||||||
Oil and gas refining and marketing industry | 4,349,625 | 4,349,625 | - | - | ||||||||||||
Residential construction industry
|
981,337 | 981,337 | - | - | ||||||||||||
Total
assets measured at fair value
|
$ | 16,893,180 | $ | 16,893,180 | $ | - | $ | - | ||||||||
Assets:
|
12/31/2009 | |||||||||||||||
Available-for-sale equity securities
|
||||||||||||||||
Cement industry | $ | 7,910,270 | $ | 7,910,270 | $ | - | $ | - | ||||||||
General building materials industry | 4,091,932 | 4,091,932 | - | - | ||||||||||||
Oil and gas refining and marketing industry | 3,410,106 | 3,410,106 | - | - | ||||||||||||
Residential construction industry
|
1,020,500 | 1,020,500 | - | - | ||||||||||||
Total
assets measured at fair value
|
$ | 16,432,808 | $ | 16,432,808 | $ | - | $ | - |
There is
not a reconciliation (roll forward) of the beginning and ending balances for
Level 3 presented since the Company does not have any assets or liabilities
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) during any of the periods reported in the table above. The
Company has no liabilities in either year requiring remeasurement to fair value
on a recurring basis in the balance sheet. The Company has no additional assets
or liabilities in either year requiring remeasurement to fair value on a
non-recurring basis in the balance sheet.
The
following table shows the gross unrealized losses and fair value of the
Company's investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position at March 31, 2010:
Less
than 12 Months
|
12
Months or Greater
|
Total | ||||||||||||||||||||||
3/31/2010 |
Unrealized
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||
Available-for-sale equity
securities
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
Fair
Value
|
Losses
|
||||||||||||||||||
Cement industry
|
$ | 416,289 | $ | 5,477 | $ | - | $ | - | $ | 416,289 | $ | 5,477 | ||||||||||||
General building | ||||||||||||||||||||||||
materials industry
|
2,234,830 | 227,114 | - | - | 2,234,830 | 227,114 | ||||||||||||||||||
Total
|
$ | 2,651,119 | $ | 232,591 | $ | - | $ | - | $ | 2,651,119 | $ | 232,591 |
12/31/2009 | ||||||||||||||||||||||||
Available-for-sale equity
securities
|
|
|||||||||||||||||||||||
Cement industry
|
$ | 14,600 | $ | 3,516 | $ | - | $ | - | $ | 14,600 | $ | 3,516 | ||||||||||||
Oil & gas refining | ||||||||||||||||||||||||
& marketing industry | 952,168 | 114,528 | 952,168 | 114,528 | ||||||||||||||||||||
Residential construction | ||||||||||||||||||||||||
industry
|
381,580 | 32,198 | 105,300 | 12,724 | 486,880 | 44,922 | ||||||||||||||||||
Total
|
$ | 1,348,348 | $ | 150,242 | $ | 105,300 | $ | 12,724 | $ | 1,453,648 | $ | 162,966 |
Impairment
Analysis
The Company owns stock in
two privately-owned companies accounted for by the cost method; one in the brick
industry and the other in the ethanol production industry. Due to continued
adverse market conditions, these investments were evaluated at December 31, 2009
and at March 31, 2010 for impairment based on average cost and specific
identification, respectively. Since there is not an active market for
the brick industry investment, the Company relied on a discounted future net
cash flow valuation of the brick company for each period's impairment
analysis which did not identify any impairment in either period. As a result of
those evaluations, the Company did not consider these investments to
be impaired
at March 31, 2010 or December 31, 2009. The aggregate cost of the Company's
cost-method investments totaled $2.1 million and $2.0 million at March 31,
2010 and December 31, 2009, respectively.
March 31,
2010
Due to continued
adverse economic conditions in market segments the Company is invested
in, the Company's available-for-sale equity securities carried at fair
value were evaluated for impairment by comparing the specifically identified
cost of each purchase to market price. As a result of these evaluations,
the Company did not identify any other-than-temporary impairments in investments
which would have resulted in a recognized loss in
earnings of equity investments. The Company did identify some specific
purchases of available-for-sale equity securities that were not
other-than-temporarily impaired resulting in the recognition of unrealized losses
(see table above). When the Company
evaluated impairment by comparing the specifically identified cost of each
purchase to market price as of April 26, 2010,
these securities
had recovered all of their March 31, 2010 temporary
impairments. Based
on our evaluation and the Company's ability and intent to hold these
investments for a reasonable period of time sufficient for a forecasted recovery
of the entire cost bases of the securities, the Company does not consider those
investments to be impaired at March 31,
2010.
December
31, 2009
Due to continued
adverse economic conditions, the Company's investments in
available-for-sale equity securities carried at fair value were evaluated
for impairment by comparing the specifically identified cost of each purchase to
market price. As a result of these evaluations, the Company identified $0.5
million in other-than-temporary impairments in an investment in the common stock
of a company that produces construction aggregates, construction materials and
cement resulting in a recognized loss in earnings of equity investments. The
fair value of this impaired investment then became the new cost basis.
The
Company also identified some specific purchases of
available-for-sale equity securities that were not other-than-temporarily
impaired resulting in the recognition of unrealized losses (see table
above). These unrealized losses relate to investments in the common
stock of two companies, one in the oil and gas refinery and marketing industry
and another
whose core business is in the housing industry. When the Company
evaluated the impairments by comparing the specifically identified cost of each
purchase to market price as of February 20, 2010, these securities had recovered
substantially all of their December 31, 2009 temporary impairments. The
Company evaluated the near-term prospects of all of the issuers in relation to
the severity of the impairments (fair value was approximately 8 percent less
than cost in the housing industry investment and approximately 11 percent less
than cost in the oil and gas refinery and marketing industry as of December 31,
2009) and the duration of the impairments (less than three months in both
investments). Based on that evaluation and the Company's ability and intent to
hold these investments for a reasonable period of time sufficient for a
forecasted recovery of the entire cost basis of the securities, the
Company did not consider those investments to be impaired at December 31,
2009.
Investment Results - - The investment results
for March 31, 2010 and December 31, 2009 are as follows:
03/31/2010
|
12/31/2009
|
|||||||
Fair
value of
investments
|
$ | 18,965,280 | $ | 18,419,208 | ||||
Cost
of investments
|
13,895,280 | 14,009,208 | ||||||
Net unrealized gains
|
$ | 5,070,000 | $ | 4,410,000 | ||||
Unrealized
gain recorded in equity
|
||||||||
Investments carried
at fair value
|
$ | 3,042,000 | $ | 2,646,000 | ||||
Deferred income taxes
|
2,028,000 | 1,764,000 | ||||||
$ | 5,070,000 | $ | 4,410,000 | |||||
Proceeds
from sale of equity securities
|
$ | 165,900 | $ | 1,589,076 | ||||
Realized
gains on equity securities
|
$ | 4,172 | $ | 136,853 | ||||
Realized
losses due to other-than-temporary
impairment of equity securities
|
$ | - | $ | (524,188 | ) |
8.
|
The
following table presents the components of net periodic pension and
postretirement benefit costs allocated to Cost of Sales and Selling,
General and Administrative expenses for the three months
ended March 31, 2010 and
2009:
|
Pension Benefits | Other Benefits | |||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Service
cost
|
$ | 167,245 | $ | 421,986 | $ | 136,392 | $ | 131,827 | ||||||||
Interest
cost
|
515,829 | 1,366,437 | 467,122 | 448,716 | ||||||||||||
Less:
Expected return on plan assets
|
431,334 | 1,452,208 | - | - | ||||||||||||
Amortization
of prior service cost
|
27,495 | 98,822 | - | - | ||||||||||||
Recognized
net actuarial loss
|
217,163 | 142,775 | - | - | ||||||||||||
Unrecognized
net loss
|
- | - | 180,227 | 195,748 | ||||||||||||
Net periodic expense
|
$ | 496,398 | $ | 577,812 | $ | 783,741 | $ | 776,291 |
As previously disclosed in
our financial statements for the year ended December 31, 2009, Monarch expects
to contribute approximately $2,335,000 to the pension fund in 2010. As
of March 31, 2010, we have not made any contributions.
The other benefits consist
of postretirement benefits that are self-insured by Monarch and are paid out of
Monarch's general assets. As previously disclosed in our financial
statements for the year ended December 31, 2009, Monarch
expects expenditures of approximately
$1,750,000 for
this plan in 2010. As of March 31, 2010, we
have contributed about $402,000 and anticipate contributing an
additional $1,348,000 on this plan in
2010 for a total of $1,750,000.
9.
|
Other,
net contains miscellaneous nonoperating income (expense) items other than
interest income, interest expense, gains on equity investments and
dividend income.
|
10.
|
Basic
earnings per share of capital stock has been calculated based on the
weighted average shares outstanding during each of the reporting
periods. The weighted average number of shares outstanding was 4,024,198
in
the first quarter of 2010 and 2009. The Company has no
common stock equivalents and therefore, does not report diluted earnings
per share.
|
11.
|
The
Company files income tax returns in the U.S. Federal jurisdiction and
various state jurisdictions. With few exceptions, the Company is no
longer subject to U.S. Federal or state income tax examinations by tax
authorities for years before 2006. The
Company believes it is not subject to any significant tax
risk. The Company does not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor were any
interest expenses recognized during the three months ended March 31,
2010.
As
a result of the Patient Protection and Affordable Care Act, as
modified by the Health Care and Education Reconciliation Act of
2010, we will no longer be able to claim an income tax deduction
related to prescription drug benefits provided to retirees and reimbursed
under the Medicare Part D retiree drug subsidy beginning in 2013. This
resulted in a $685,000 charge to income tax provision during the first
quarter of 2010.
|
12.
|
Recently
Adopted Accounting Standards
In
December 2008, the FASB issued an amendment to Accounting Standards
Codification (ASC) 715-20, "Compensation – Retirement
Benefits – Defined Benefit Plans – General", which requires enhanced
disclosures regarding Company benefit plans. Disclosure regarding
plan assets should include discussion about how investment allocation
decisions are made, the major categories of plan assets, the inputs and
valuation techniques used to measure plan assets and significant
concentrations of risk within plan assets. These amendments to ASC
715-20 are effective for fiscal years ending after December 15, 2009,
and earlier application is permitted. Prior year periods presented
for comparative purposes are not required to comply. For the Company,
the amendments to ASC 715-20 were effective beginning December 31,
2009 and their adoption had
no material impact on the Company's financial position, results of
operations or cash flows.
In
January 2010, the FASB issued Accounting Standards Update (ASU) 2010-02,
"Accounting and Reporting for Decreases in Ownership of a Subsidiary--a
Scope Clarification", which clarifies who the scope of the decrease in
ownership provisions of the Subtopic and related guidance apply to and
expands the disclosures about the deconsolidation of a subsidiary or
derecognition of a group of assets within the scope of Subtopic 810-10.
The amendments in this Update were effective for the Company
beginning January 1, 2010 and their adoption did not have a
material impact on our consolidated financial statements.
In
January 2010, the FASB issued ASU
2010-06, "Improving Disclosures About
Fair Value Measurements", which amends Subtopic 820-10 with new disclosure
requirements and clarification of existing disclosure requirements.
Reporting entities must make new disclosures about recurring or
nonrecurring fair-value measurements including significant transfers into
and out of Level 1 and Level 2 fair-value measurements and information on
purchases, sales, issuances, and settlements on a gross basis in the
reconciliation of Level 3 fair-value measurements. The ASU also provides
additional guidance related to the level of disaggregation in determining
classes of assets and liabilities and disclosures about inputs and
valuation techniques. ASU 2010-06 is effective for annual or interim
reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010 and for interim periods within those
fiscal years. For the Company, ASU 2010-06 was effective beginning January
1, 2010. The adoption of ASU
2010-06 did not have a
material impact on our disclosures or our consolidated financial
statements.
In February, 2010, the FASB issued ASU No. 2010-09, "Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements". This ASU provides amendments to Subtopic 855-10 to clarify that SEC filers are required to evaluate subsequent events through the date that the financial statements are issued, but are not required to disclose the date through which subsequent events have been evaluated. ASU 2010-09 was effective upon issuance for the Company and its adoption did not have a material impact on the Company's consolidated financial statements. New
Accounting Standards Issued But Not Yet Adopted
There
are currently no accounting standards that have been issued that are
expected to have a significant impact on the Company’s financial
position, results of operations and cash flows upon
adoption.
|
13.
|
Subsequent
events have been evaluated through the date the financial
statements were issued. During this period, no material recognizable
subsequent events were identified.
|
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS |
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING
STATEMENTS
Certain statements under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-Q
report filed with the Securities and Exchange Commission, constitute
"forward-looking statements". Except for historical information, the
statements made in this report are forward-looking statements that involve risks
and uncertainties. You can identify these statements by forward-looking
words such as "should", "expect", "anticipate", "believe", "intend", "may",
"hope", "forecast" or similar words. In particular, statements with
respect to variations in future demand for our products in our market area or
the future activity of federal and state highway programs and other major
construction projects, the timing, scope, cost and benefits of our proposed and
recently completed capital improvements and expansion plans, including the
resulting increase in production capacity, our forecasted cement sales, the
timing and source of funds for the repayment of our revolving line of credit,
our ability to pay dividends at the current level, the timing
and/or collectability of retainage, our anticipated expenditures for
benefit plans, and our anticipated increase in solid fuels and electricity
required to operate our facilities and equipment are all forward-looking
statements. You should be aware that forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may affect the
actual results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among
others:
-
general economic and business conditions;
-
competition;
-
raw material and other operating costs;
-
costs of capital equipment;
-
changes in business strategy or expansion plans;
-
demand for our Company's products;
-
cyclical and seasonal nature of our business;
-
the effect of weather on our business;
-
the effect of environmental and other government regulations;
-
the availability of credit at reasonable prices; and
-
the effect of federal and state funding on demand for our
products.
We have described under the caption "Risk Factors" in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2009, and in other
reports that we file with the SEC from time to time, additional factors that
could cause actual results to be materially different from those described in
the forward-looking statements. You are cautioned not to put undue reliance on
any forward-looking statement, which speak only as of the date they were
made.
RESULTS
OF OPERATIONS - CRITICAL ACCOUNTING POLICIES
Reference is made to the Management's Discussion and Analysis of Financial
Condition and Results of Operations - Accounting Policies incorporated herein by
reference to Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2009 for accounting policies which are considered by
management to be critical to an understanding of the Company's financial
statements.
RESULTS
OF OPERATIONS - OVERVIEW
Our products are
used in residential, commercial and governmental construction. In recent
years, the Company has spent substantial sums on major plant modifications
designed to increase our cement production capacity to meet our customers' needs
and to improve our production processes. Improvements are planned over the
next few years to further improve our production processes, particularly in the
handling and processing of raw materials.
The slowdown in residential construction suppressed the demand for our
cement and ready-mixed concrete during 2009. The continued slowdown in
residential construction and the additional slowdown in commercial construction,
impacting the demand for our cement and ready-mixed concrete, are expected
to make 2010 an even more financially challenging
year. Recent economic forecasts from the Portland Cement Association (PCA)
indicate the construction industry is likely to remain weak for another year or
more. In addition, sales of cement and ready-mixed concrete have also been
adversely impacted by an excessive amount of wet conditions and a
longer period of cold weather for the first quarter of 2010 as compared to the
same period in 2009. These conditions have delayed construction projects
resulting in reduced sales of cement and concrete.
Based on sales forecasts and inventory levels at the beginning of 2010, the
Company elected to reduce cement production in the first quarter and to
undertake plant repairs and maintenance, largely using our own production
personnel. The Company normally performs repairs and maintenance every winter,
but the decision to use employees or outside contractors is determined by
anticipated sales demand, by whether we have the internal expertise and by our
inventory target levels. The shutdowns in the first quarter of 2010 were
longer in duration than the shutdowns in the first quarter of 2009.
Our Cost of Sales includes certain fixed costs that do not vary with the volume
of production as well as costs which generally vary with production levels. We
have an extremely limited ability to reduce these fixed costs in the short term.
As a result, lower production levels which result from extended shutdowns are
expected to have a negative impact on our gross profit margins. The
shutdowns in the first quarter of 2009 and 2010 had an adverse impact on our
gross profit margins, but there was a greater negative impact on gross profit
margins in the first quarter of 2010 due to the extended duration of that
quarter’s shutdowns.
RESULTS
OF OPERATIONS - FIRST QUARTER OF 2010 COMPARED TO FIRST
QUARTER OF 2009
Consolidated net sales for the three months ended March 31, 2010, decreased
by $7.1 million when compared to the three months ended March 31,
2009. Sales in our Cement Business were lower by $3.0 million and
sales in our Ready-Mixed Concrete Business were lower by $4.1
million. Cement Business sales decreased
$3.1 million due to a 31.5% decrease in volume sold and increased $.1 million
due to price increases. Ready-mixed concrete sales decreased $1.7
million primarily due to a 19.7% decline in cubic yards sold which was
offset $.5 million primarily due to price increases. Additional decreases
were due to a decline in construction
contract sales of $2.8 million and slight decreases in brick, block
and other sundry items sales of $.1 million.
Consolidated cost of sales for the three months ended March 31, 2010,
decreased by $4.2 million when compared to the three months ended March 31,
2009. Cost of sales in our Cement Business was lower by $1.5 million and
cost of sales in our Ready-Mixed Concrete Business was lower by $2.7
million. Cement Business cost of sales decreased $3.1 million primarily due to
the 31.5% decrease in volume sold which was largely offset by higher production
costs primarily resulting from inefficiencies of lower production levels.
Production during the first three months of 2010 declined by 29.7%
from the production levels during the first quarter of 2009. Ready-Mixed
Concrete Business cost of sales decreased $1.1 million primarily due to the
19.7% decrease in cubic yards of ready-mixed concrete sold which was offset
by $.2 million primarily due to increased raw material costs.
Additional decreases of $1.8 million in cost of sales for construction
contracts was primarily a result of the $2.8 million decline in
construction contract sales.
Our overall gross profit rate for the three months ended March
31, 2010 was (13.5)% versus 1.9% for the three months ended March 31,
2009. As a result of the above sales and cost of sales factors, the gross
profit rate for the Cement Business declined from .4% for
the three months ended March 31, 2009 to (21.4)% for the three months
ended March 31, 2010. The gross profit rate for the Ready-Mixed Concrete
Business declined from 2.8% for the three months ended March
31, 2009 to (8.7)% for the three months ended March 31,
2010.
Selling, general,
and administrative expenses decreased by $.2 million for the three months
ended March 31, 2010 compared to the three months ended March 31,
2009. These costs are normally considered fixed costs that do not vary
significantly with changes in sales volume. The 5.7% decline was primarily due
to a decline in administrative legal and professional expenses of $.1
million and a $.1 million decline in administrative miscellaneous
expenses during the first quarter of 2010 compared to the first quarter of
2009. The administrative miscellaneous expenses during the first quarter of 2009
were related to the Company's 100th year anniversary
celebration.
Other, net
increased by $.8 million for the three months ended March 31, 2010 over the
three months ended March 31, 2009 primarily due to income from oil
properties of $70,000 and a $700,000 gain related to the sale of a non-operating
asset during the first three months of 2010. Material items in other, net during
the first three months of 2009 included income from oil properties of $8,300 and
miscellaneous expenses related to dwelling repairs on Company property of
$50,500.
The effective tax rates for the three months ended March 31, 2010 and 2009
were 15.7% and 28.1%, respectively. The Company's effective tax rate
differs from the federal and state statutory income tax rate primarily due to
the effects of percentage depletion, domestic production activities deduction
and valuation allowance. Taxes for the current year are estimated based on
prior years' effective tax rates. The change
in the effective tax rate as compared with the prior year was primarily due to
an income tax charge of $685,000 recorded during the first quarter of 2010 as a
result of the Patient Protection and Affordable Care Act, as modified by the
Health Care and Education Reconciliation Act of 2010. As a result of this
legislation, beginning in 2013, we will no longer be able to claim an income tax
deduction related to prescription drug benefits provided to retirees and
reimbursed under the Medicare Part D retiree drug
subsidy.
LIQUIDITY
The Company considers all liquid investments with original maturities of three
months or less to be cash equivalents. March 31, 2010 and December 31,
2009, cash
equivalents consisted primarily of money market investments and
repurchase agreements with various banks which are not guaranteed by the
FDIC. The
FDIC's temporary increase to $250,000 in the standard maximum deposit insurance
amount (SMDIA) has been extended through December 31, 2013 to fully guarantee
all deposit accounts. Financial institutions participating in the FDIC's
Transaction Account Guarantee Program fully guarantee noninterest-bearing
transaction accounts for the entire amount in the account through December
31, 2010.
We are able to meet our cash needs primarily from a combination of operations
and bank loans.
Net cash used
for operating activities totaled $3.4 million and $2.9 million for the three
months ended March 31, 2010 and March 31, 2009, respectively. The $.5
million increase in the cash used for operating
activities for the first three months of 2010 compared to the
first three months of 2009 is primarily due to changes in
net losses, receivables, inventories, refundable income taxes, accrued
postretirement benefits and gains on the disposal of other
assets. Net losses increased $2.0 million from 2009 to 2010 primarily
due to the decline in overall sales volume combined with the decline
in gross profit margins. The net loss for the first three months of
2010 was $.7 million lower due to the gain on the disposal of other
assets. Receivables increased more in the first three months of 2010
than 2009 due primarily to a greater increase in March sales in 2010 over
December sales in 2009 compared to the increase in March sales in 2009
over December sales in 2008. The net result of production levels and
sales volumes in the first quarter of 2010 and 2009 resulted in
inventories increasing $2.4 million more in the first three months of
2009 than the first three months of 2010. Refundable income taxes
increased $.6 million during the first three months of 2010 over the first
three months of 2009 due to the increased net loss incurred during the first
quarter of 2010. Accrued postretirement benefits liability increased $.8
million in the first three months of 2010 over the first three
months of 2009.
Net cash used for investing activities totaled $1.3 million in the
first three months of 2010 while $4.2 million was used in the
first three months of 2009. The $2.9 million
decrease in net cash used for investing activities for the first three
months of 2010 compared to the first three months of 2009 is
principally due to using $2.4 million more in
cash for the purchase of equity security investments in the first
three months of 2009 than in the corresponding period of 2010
and disposing of equity security investments in 2009 which provided
$.6 million while only $.2 million were disposed of in 2010. The
disposal of other assets also provided $.7 million in cash during the first
three months of 2010 while there were no proceeds in the first three months
of 2009.
Net cash provided by financing activities totaled $4.0 million and
$5.9 million for the three months ending March 31, 2010 and
March 31, 2009, respectively. The $1.9 million
decrease in cash provided in 2010 over 2009 was primarily the result of the
$1.9 million decrease in the line of credit used in the first
quarter of 2010 compared to the same period in 2009.
In December 2009,
Monarch entered into an amendment to the loan agreement with its current lender,
Bank of Oklahoma, N.A., to, among other things, renew and modify the terms of
Monarch's term loan and revolving line of credit. Monarch's current unsecured
credit commitment consists of a $17.8 million term loan maturing December 31,
2014 and a $15.0 million line of credit maturing December 31, 2010. Under
the amended loan agreement, interest on the line of credit varies with the
lender's national prime rate less 0.50% with a 3.50% interest rate minimum or
floor. Interest rates on the Company's term loan were not changed by the
amendment. The loan agreement
contains a financial covenant related to net worth which the Company was in
compliance with at the end of the first quarter of
2010.
For 2009 and 2010, interest
on the Company's term loan is variable and is based on the lender's
national prime rate less 0.75% with a 3.00% interest rate minimum or floor.
Prior to the renewal, interest on the line of credit varied with the lender's
national prime rate less 1.25% with a 2.5% interest rate minimum or floor for
2009. As of March 31,
2010, we had borrowed $13.9 million on the term loan and $7.1
million on the line of credit leaving a balance available on the line of credit
of $7.9 million. The annual weighted average interest rate we paid on the
term loan during the first quarter of 2010 and 2009 was 3.25%. The
annual weighted average interest rate we paid on the line of credit during the
first quarter of 2010 and 2009 was 3.50% and 2.75%, respectively. As
of March 31, 2010, the applicable interest rate was 3.25% on the term
loan and 3.50% on the line of credit. The term loan was
used to help finance the expansion project at our cement manufacturing
facility. The line of credit was used during the year to
fund temporary operating expenses. Our Board of Directors has
given management the authority to borrow a maximum of $50 million. We
have not discussed additional financing with any banks or other financial
institutions; therefore, no assurances can be given that we will be able to
obtain this additional borrowing on favorable terms, if at
all.
The Company has projects in the planning and design phases in addition to
projects already in progress. For discussion of these projects, see second
paragraph under "Capital Resources" below. We anticipate capital
expenditures for 2010 to be lower than 2009 levels and we do not anticipate
the need for additional bank financing other than that available under the
existing line of credit.
For several years the Company has paid a dividend in January, March, June
and September. At the December 2009 Board of Directors' meeting, the
Board declared two dividends, payable in January and March, each
at $.23 per share. Under the terms and conditions of our loan agreement,
the Company's ability to pay dividends is subject to its satisfaction of a
requirement to maintain a tangible net worth of $90 million and an adjusted
tangible net worth, which is tangible net worth before other comprehensive
income, of $95 million. The Company was in compliance with these requirements at
the end of the first quarter of 2010. The minimum net worth
requirements could impact the Company's ability to pay dividends in the future.
Although dividends are declared at the Board's discretion and could be impacted
by the minimum net worth requirements of the Company's loan agreement, we
project future earnings will support the continued payment of dividends at
the current level.
The Company has
been required to make a pension contribution each of the past three years.
In 2009 and 2008, the Company contributed approximately $2.1 million and $1.4
million, respectively, to the pension fund. No estimates of required
pension payments have been asked for or made beyond 2010. The decline in the
bond and stock markets in 2008 significantly reduced the value of our pension
funds at December 31, 2008. By December 31, 2009, actual returns on plan assets
had increased the value of our pension funds enough to recover approximately
half of the prior year reductions. Based on the pension laws currently in
effect, any resulting increases in minimum funding requirements could cause
a negative impact to our liquidity. See Note 8 for disclosures about
2010 pension contributions.
FINANCIAL
CONDITION
Total assets as of March 31, 2010 were $178.7 million, an increase of $1.7
million since December 31, 2009. Sales were higher in the month of March
2010 compared to the month of December 2009 which led to a $.9 million increase in receivables.
This increase is common during the first three months of the year
due to the seasonality of our business (see "Seasonality" below). From
year-to-year the weather conditions in these two months can vary significantly
which impacts sales and resulting receivables at month-end.
Our quarterly estimated tax payments are based on annualized income and in 2009
we overpaid taxes and are due a refund. During 2010, we have experienced net
losses during the first quarter which has resulted in an increase in
refundable income taxes of $1.5 million over the prior
year.
Cash dividends
liability, which is included in accrued liabilities, decreased by $1.9 million
from December 31, 2009 to March 31, 2010 due to the timing of when
dividends are declared and paid.
Indebtedness increased $5.9 million during the first three months of
2010 primarily due to increased utilization of our line of credit to fund the
increases in receivables, inventories, approximately $2.2 million for cash
expenditures for property, plant and equipment, and to fund temporary operting
expenses.
CAPITAL
RESOURCES
The Company regularly invests in miscellaneous equipment and facility
improvements in both the Cement Business and Ready-Mixed Concrete
Business. Capital expenditures included routine
equipment purchases during the first three months of
2010, equally in the Cement Business and in the Ready-Mixed Concrete
Business. During the first three months of 2010, cash expenditures for
property, plant and equipment totaled approximately $2.2 million,
excluding the amounts that are included in accounts
payable.
Projects in the planning and design phases include an overland conveyor system
to improve efficiencies in moving raw materials. The conveyor system and related
projects are expected to cost approximately $15.0 million to $25.0 million
depending on the exact components of the project undertaken and the volatility
of certain material costs, particularly steel. Management has the
discretion to postpone components of the project and the discretion to undertake
part or the entire project. The overland conveyor system and related
projects are estimated to take twenty-four to thirty-six months to complete
after the first purchase order is issued. A date has not been set for issuance
of the purchase order. The Company also plans to invest in other
miscellaneous equipment and facility improvements in both the Cement Business
and Ready-Mixed Concrete Business in 2010. These expenditures are expected
to reach approximately $6.0 million during 2010 and will be funded with a
mixture of cash from operations and temporary bank loans. We do not anticipate
the need for additional bank financing beyond the amount available through our
existing revolving line of credit.
MARKET
RISK
Market risks relating to the Company's operations result primarily from changes
in demand for our products. Construction activity, particularly in the
residential market, has been adversely impacted by the global financial crisis
even though interest rates continue to be at low
levels. A continuation of the financial crisis, including a scarcity
of credit, or a significant increase in interest rates could lead to a further
reduction in construction activities in both the residential and commercial
market. Budget shortfalls during economic slowdowns could cause money to
be diverted away from highway projects, schools, detention facilities and other
governmental construction projects. Reduction in construction activity lowers
the demand for cement, ready-mixed concrete, concrete products and sundry
building materials. As demand decreases, competition to retain sales volume
could create downward pressure on sales prices. The manufacture of cement
requires a significant investment in property, plant and equipment and a trained
workforce to operate and maintain this equipment. These costs do not
materially vary with the level of production. As a result, by operating at
or near capacity, regardless of demand, companies can reduce per unit production
costs. The continual need to control production costs encourages
overproduction during periods of reduced demand.
INFLATION
Inflation directly affects the Company's operating costs. The manufacture
of cement requires the use of a significant amount of energy. The Company
burns primarily solid fuels, such as coal and petroleum coke, and to a lesser
extent natural gas, in its kilns. Increases above the rate of inflation in
the cost of these solid fuels, natural gas, or in the electricity required to
operate our cement manufacturing equipment could adversely affect our operating
profits. Prices of the specialized replacement parts and equipment the Company
must continually purchase tend to increase directly with the rate of inflation
with the exception of equipment and replacement parts containing large amounts
of steel. In recent years, steel prices have tended not to follow inflationary
trends, but rather have been influenced by worldwide demand.
Prices for diesel fuel used in the transportation of our raw materials and
finished products also vary based on supply and demand and in some years exceed
the rate of inflation adversely affecting our operating
profits.
ENVIRONMENTAL
REGULATIONS
The Company's
cement plant emissions are regulated by the Kansas Department of Health and
Environment (KDHE) and the Environmental Protection Agency
(EPA). KDHE is responsible for the administration and enforcement of
Kansas environmental regulations, which typically mirror national
regulations.
The most recent
rulings promulgated by the EPA require us to install carbon dioxide (CO2)
Continuous Emission Monitors (CEMs) to track various aspects of the production
process to effectively establish a Greenhouse Gas (GHG) inventory for our cement
manufacturing facility. The installation of these monitors is not
expected to have a material economic impact on the Company.
The EPA
Administrator has also made two important findings clearing the way for EPA
to regulate greenhouse gases under the Clean Air Act. The
"Endangerment Finding" clarifies EPA's belief that current and projected
concentrations of six key greenhouse gases in the atmosphere pose a threat to
human health and welfare. Further, the "Cause or Contribute Finding,"
associates the emissions of the six named GHGs with the threat to public health
and welfare. At this time it is difficult to determine if the EPA
will act on the "Endangerment Finding", what that action may involve and when it
might be put into place.
The American Clean
Energy & Security Act (ACES) passed the U.S. House of Representatives, but
the Senate has yet to act on climate legislation. In general this
legislation encourages the limitation and/or reduction of CO2 using a
method of cap and trade. The economic impact of the pending legislation is
impossible to estimate with much degree of confidence due to the uncertainty of
how the final legislation would be imposed. At this time there are
many variables making it difficult to predict the overall cost of carbon
legislation. It is equally difficult to determine when those costs
will be realized, or even the feasibility of the legislation being
passed. There is consensus in the industry that the costs of CO2 limits
required through regulation or legislation could be substantial enough to
fundamentally change the cement manufacturing business.
Additional emission
restrictions are also possible from the EPA's proposed modifications to the
National Emission Standard for Hazardous Air Pollutants (NESHAP)
regulation. These modifications are expected to be finalized in June
2010. The proposed regulations call for more stringent emission
limitations on Mercury, Total Hydrocarbons (THC), Hydrochloric Acid (HCL), and
Particulate Matter less than 10 microns in diameter (PM10). It is our
current belief that our emission levels are below the proposed limitations for
Mercury and PM10 so additional control equipment would not be required for these
pollutants; however, we would expect to incur increased costs for control
equipment for THC & HCL. There would also be additional costs for
monitoring, testing, and increased maintenance labor. Initial costs to comply
are estimated to be about $350,000 but there can be no assurance that compliance
costs would not exceed this amount.
Climate change
regulation could result in (1) increased energy costs, (2) a shift toward carbon
neutral fuels or carbon neutral offset strategies, and (3) increased labor costs
to acquire the specialized technical expertise needed to comply with the
environmental regulations. Demand for our products could decrease due
to increased pollution control costs. Conversely, demand could
increase as others try to meet their government environmental mandates by using
concrete products known for their sustainability benefits and energy
efficiency.
In management's
opinion, the physical impact of a warmer climate in our market area will
increase the number of days with weather conducive for work to proceed on
construction projects which in turn will create the potential for greater
profitability. Conversely, legislation and regulatory attempts to
interfere with natural warming and cooling cycles will, if successful, have an
adverse affect on profitability. In addition, differences in
environmental regulations in the United States from those of other cement
producing countries could affect our ability to continue to compete with the
cost of cement imported from other countries.
SEASONALITY
Portland cement is the basic
material used in the production of ready-mixed concrete that is used in highway,
bridge and building construction. These construction activities are
seasonal in nature. During winter months when the ground is frozen,
groundwork preparation cannot be completed. Cold temperatures affect
concrete set-time, strength and durability, limiting its use in winter
months. Dry ground conditions are also required for construction
activities to proceed. During the summer, winds and warmer temperatures
tend to dry the ground quicker creating fewer delays in construction
projects.
Variations in weather conditions from year-to-year significantly affect the
demand for our products during any particular quarter; however, our Company's
highest revenue and earnings historically occur in its second and third fiscal
quarters, April through September.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
The Company invests in equity investments which are subject to market
fluctuations. The Company had $19.0 million of equity securities,
primarily of publicly traded entities, as of March 31, 2010. The
aggregate amount of securities carried at cost, for which the Company has not
elected the fair value option, was $2.1 million as of March 31, 2010.
The remaining $16.9 million in equity investments, which are stated at
fair market value, are not hedged and are exposed to the risk of changing market
prices. The Company classifies all securities as "available-for-sale" for
accounting purposes and marks them to market on the balance sheet at the end of
each period unless they are securities for which the Company has not elected the
fair value option. Securities carried at cost are adjusted for impairment,
if conditions warrant. Management estimates that its publicly traded
investments will generally be consistent with trends and movements of the
overall stock market excluding any unusual situations. An immediate 10%
change in the market price of our equity securities would have a $1.0 million
effect on comprehensive income. At March 31, 2010, the Company
evaluated all of its equity investments for impairment. The results of those
evaluations are discussed in Note 7 of Notes to the Condensed Consolidated
Financial Statements.
The Company also has $21.0 million of bank loans as of March 31,
2010. Interest rates on the Company's term loan and line of credit are
variable, subject to interest rate minimums or floors, and are based on the
lender's National Prime rate less .75% and lender's National Prime rate less
0.50%, respectively.
Item
4. Controls
and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13a-5(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in the Company's
reports under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to the Company's management, including its President and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives.
As of the end of the period covered by this report, an evaluation was carried
out by the Company's management, including its President and Chairman of the
Board of Directors and Chief Financial Officer, of the effectiveness of its
disclosure controls and procedures (as defined in Rules 13a-5(e) or 15d-15(e)
under the Exchange Act). Based upon that evaluation, the Company's
President and Chairman of the Board of Directors and Chief Financial Officer
concluded that these disclosure controls and procedures were effective as of the
end of the period covered by this report.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2010 that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal
Proceedings
By letter
dated April 27, 2009, the Company was notified by the Kansas Department of
Health and Environment (KDHE) of allegations by
KDHE that the Company has performed multiple modifications and alterations at
the Company's facility for which the Company did not apply for or obtain the
KDHE construction permits required by the Kansas Air Quality Act and related
regulations. KDHE also alleged that the Company did not apply for or
obtain from KDHE the necessary permits for modifications or alterations to a
facility that are significant for Prevention of Significant Deterioration
(PSD). Based on these allegations, KDHE proposes to assess a civil penalty
of $351,000, and to require the Company to submit a new, complete PSD permit
application, including therein a proposal by the Company for installation of air
emission controls to achieve Best Available Control Technology (BACT) as
provided in applicable regulations. The Company does not agree with
certain of KDHE's factual and legal allegations, and is attempting to resolve
these issues through negotiation and mutual agreement between the Company and
KDHE. The Company reserves
all legal rights in the event such a resolution cannot be reached. As of March
31, 2010, it is reasonably possible that losses may result, but such losses are
not estimable.
Item
6. Exhibits
31.1
Certificate of the President and Chairman of the Board pursuant to Section
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2
Certificate of the Chief Financial Officer pursuant to Section
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1
18 U.S.C. Section 1350 Certificate of the President and Chairman of the Board
dated May 11, 2010.
32.2
18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated May
11, 2010.
S I G N A
T U R E S
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.
The Monarch Cement Company | |||||
(Registrant) | |||||
Date May 11, 2010 | /s/ Walter H. Wulf, Jr. | ||||
Walter H. Wulf, Jr. | |||||
President and | |||||
Chairman of the Board | |||||
(principal executive officer) | |||||
Date May 11, 2010 | /s/ Debra P. Roe | ||||
Debra P. Roe, CPA | |||||
Chief Financial Officer and | |||||
Assistant Secretary-Treasurer | |||||
(principal financial officer and | |||||
principal accounting officer) |
EXHIBIT
INDEX
Exhibit
Number
Description
31.1
Certificate of the President and Chairman of the
Board pursuant to Section 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
31.2
Certificate of the Chief Financial Officer pursuant
to Section 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.
32.1
18 U.S.C. Section 1350 Certificate of the President
and Chairman of the Board dated May 11, 2010.
32.2
18 U.S.C. Section 1350 Certificate of the
Chief Financial Officer dated May 11,
2010.