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 September 30, 2010:
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 ou r 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 and 2010. The continued slowdown in residential construction and the additional slowdown in commercial construction have impacted the demand for our cement and ready-mixed concrete. Recent economic forecasts from the Portland Cement Association (PCA) indicate the construction industry is likely to remain weak for another year or more. This weakness in the industry is putting downward pressure on the pricing of cement and ready-mixed concrete which adversely impacts revenue s, gross margins, and net profits. In addition, sales of cement and ready-mixed concrete were adversely impacted by a longer period of cold weather for the first quarter of 2010 as compared to the same period in 2009. These conditions delayed construction projects resulting in reduced sales of cement and concrete.
Based on sales forecasts and inventory levels at the beginning of 2009 and again at the beginning of 2010, the Company elected to reduce cement production in the first quarter both years and to undertake plant repairs and maintenance, largely using our own production personnel. The Company normally performs repairs and mainte nance 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. During the remainder of the year, the Company evaluates inventory levels and sales forecasts to determine if reductions in cement production are warranted and can be scheduled around maintenance needs. 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 shutd owns in 2009 and 2010 had an adverse impact on our gross profit margins.
RESULTS OF OPERATIONS - THIRD QUARTER OF 2010 COMPARED TO THIRD QUARTER OF 2009
Consolidated net sales for the three months ended September 30, 2010, decreased by $5.3 million when compared to the three months ended September 30, 2009. Sales in our Cement Business were lower by $2.6 million and sales in our Ready-Mixed Concrete Business were lower by $2.7 million. Cement Business sales decreased $2.5 million due to a 13.7% decrease in volume sold and decreased $.1 million due to price decreases. Ready-mixed Concrete Business sales decreased $2.7 million due to a decline in construction contract sales of $2.7 million. A $.4 million increase in ready-mi xed concrete sales was offset by a $.4 million decrease in sales of brick, block, aggregates and other sundry items.
Consolidated cost of sales for the three months ended September 30, 2010, decreased by $1.1 million when compared to the three months ended September 30, 2009. Cost of sales in our Cement Business were lower by $.6 million and cost of sales in our Ready-Mixed Concrete Busines s were lower by $.5 million. The Cement Business cost of sales decrease of $1.5 million, primarily due to the 13.7% decrease in volume sold, was offset primarily due to higher costs of clinker production resulting from reduced kiln operations. Ready-Mixed Concrete Business cost of sales increased $.6 million due to the 11.7% increase in cubic yards o f ready-mixed concrete sold. The remaining change is primarily due to a decrease of $1.1 million in cost of sales for construction contracts related to the $2.7 million decline in construction contract sales.
Our overall gross profit rate for the three months ended September 30, 2010 was 17.4% versus 25.1% for the three months ended September 30, 2009. As a result of the above sale s and cost of sales factors, the gross profit rate for the Cement Business decreased from 38.3% for the three months ended September 30, 2009 to 31.7% for the three months ended September 30, 2010. The gross profit rate for the Ready-Mixed Concrete Business declined from 15.4% for the three months ended September 30, 2009 to 7.4% for the three months ended September 30, 2010.
Selling, general, and administrative expenses decreased by $.2 million for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. These costs are normally considered fixed costs that do not vary significantly with changes in sa les volume.
Other, net contains miscellaneous nonoperating income (expense) items other than interest income, interest expense, gains on equity investments, realized loss on impairment of equity investments, and dividend income. There were no material items in Other, net during the three months ending September 30, 2010. The $228,000 gain related to the settlement of a contingent liability was a material item included in Other, net for the three months ending September 30, 2009.
The Company recorded a $.9 million impairment loss on equity investments in the general building materials industry due to impairments that were other-than-temporary during the three months ending September 30, 2010. No investments were deemed other-than-temporarily impaired during the three months ending September 30, 2009.
The effective tax rates for the three months ended September 30, 2010 and 2009 were 27.9% and 27.5%, 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.
RESULTS OF OPERATIONS - FIRST NINE MONTHS OF 2010 COMPARED TO THE FIRST NINE MONTHS OF 2009
Consolidated net sales for the nine months ended September 30, 2010, decreased by $14.5 million when compared to the nine months ended September 30, 2009. Sales in our Ce ment Business were lower by $7.3 million and sales in our Ready-Mixed Concrete Business were lower by $7.2 million. Cement Business sales decreased $6.8 million due to a 15.6% decrease in volu me sold and decreased $.5 million due to price decreases. Ready-mixed concrete sales increased $1.5 million as a result of a 4.7% increase in cubic yards sold and declined $.2 million due to price decreases for a net sales increase of $1.3 million. The Ready-mixed Concrete Business increased sales in brick, block, aggregates and other sundry items by $.8 million. This segment's increases were more than offset by declines in construction contract sales of $9.3 million for a net decrease in sales of $7.2 million.
Consolidated cost of sales for the nine months ended September 30, 2010, decreased by $6.7 million when compared to the nine months ended September 30, 2009. Cost of sales in our Cement Business were lower by $4.2 million and cost of sales in our Ready-Mixed Concrete Business were lower by $2.5 million. Cement Business cost of sales decreased $4.8 million due to the 15.6% decrease in volume sold. This decrease was partially offset by higher costs of clinker production resulting from reduced kiln operations. Ready-Mixed Concrete Business cost of sales decreased $5.3 million primarily a result of the $9.3 million decline in construction contract sales. The cost of sales decrease was offset $2.8 million by ready-mixed concrete increases of $1.8 million due to the 4.7% increase in cubic yards sold in addition to a $1.0 million increase in the cost of sales for brick, block and other sundry items for resale.
Our overall gross profit rate for the nine months ended September 30, 2010 was 12.9% versus 18.6% for the nine months ended September 30, 2009. The gross profit rate for the Cement Business was 25.9% and 28.6% for the nine months ended September 30, 2010 and September 30, 2009, respectively. The gross profit rate for the Ready-Mixed Concrete Business declined from 11.5% for the nine months ended September 30, 2009 to 4.0% for the nine months ende d September 30, 2010.
Selling, general, and administrative expenses decreased by $.6 million for the nine months ended September 30, 2010 60;compared to the nine months ended September 30, 2009. These costs are normally considered fixed costs that do not vary significantly with changes in sales volume. The 4.7% decline was primarily due to a decline in administrative legal and professional expenses of $.1 million, a $.2 million decline in insurance expenses related to general liability, property damage and umbrella policies, and a $.2 million decline in bad debts expense during the first nine months of 2010 compared to the first nine months of 2009.
Material items in Other, net during the first nine months of 2010 included a $700,000 gain related to the sale of a non-operating asset. In the first nine months of 2009, material items in Other, net included income from oil properties of $68,000 and a $228,000 gain resulting from the settlement of a contingent liability related to the acquisition of subsidiary stock.
The Company recorded a $.9 million impairment loss on equity investments in the general building materials industry due to impairments that were other-than-temporary during the first nine months ending September 30, 2010. No investments were deemed other-than-temporarily impaired during the first nine months ending September 30, 2009.
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 activ ities deduction and valuation allowance. Taxes for the current year are estimated based on prior years' effective tax rates. The effective tax rates for the nine months ended September 30, 2010 and 2009 were (150.5)% and 27.5%, respectively. The change in the effective tax rate for 2010 as compared with 2009 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. Without the income tax charges related to postretirement benefits, our effective tax rate for the nine months ended September 30, 2010 would have been 28.8%.
LIQUIDITY
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. September 30, 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) through December 31, 2013 has been permanently raised to $250,000 through the Dodd-Frank Wall Street Reform and Consumer Protection Act 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 provided by operating activities totaled $5.3 million and $8.1 million for the nine months ended September 30, 2010 and September 30, 2009, respectively. The $2.8 million decrease in the cash provided by operating activities for the first nine months of 2010 compared to the first nine months of 2009 is primarily 60;due to changes in net income (loss), receivables, inventories, accrued postretirement benefits, gains on the disposal of other assets and the noncash realized loss on the impairment of equity investments. Net income decreased $6.2 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 nine months of 2010 was $.7 million less due to the gain on the disposal of other assets. A $.9 million non-cash adjustment for the other-than-temporary loss on impairment of other investments was realized in the fi rst nine months of 2010 while none were recognized in the corresponding period of 2009. Receivables increased more in the first nine months of 2009 than the first nine months of 2010 despite the greater increase in September sales in 2010 over December sales in 2009 compared to the increase in September sales in 2009 over December sales in 2008. The higher increase in 2009 correlates to the initial weakening of the economy. The net result of production levels and sales volumes in the first nine months of 2010 and 2009 resulted in inventories decreasing $1.3 million in the first nine months of 2010 while inventories increased $2.8 million in the first nine months of 2009. Refundable income taxes increased $.3 million during the first nine months of 2010 over the first nine months of 2009 due to the net loss incurred during 2010. Accrued postretirement benefits liability increased $.7 million in the first nine months of 2010 over the first nine months of 2009 as a result of the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act of 2010 which changed the deductability of prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree drug subsidy.
Net cash used for investing activities totaled $4.7 million in the first nine months of 2010 while $6.7 million was used in the first nine months of 2009 resulting in a $2.0 million decrease in net cash used for investing activities for the first nine months of 2010 compared to the first nine months of 2009. $2.7 million more in cash was used for the purchase of equity security investments in the first nine months of 2009 than in the corresponding period of 2010. The disposal of short-term investments and disposals of equity investments in 2009 provided $2.1 million and $1.5 million in cash, respectively, while equity investments and other assets were disposed of in 2010 to provide $.2 million and $.7 million in cash, respectively. The acquisition of property, plant and equipment was approximately $2.0 million higher in 2009 than the corresponding period in 2010.
Net cash used for financing activities totaled $1.2 million and $1.3 million for the nine months ending September 30, 2010 and September 30, 2009, respectively. In 2009, the Company purchased $.7 million of n oncontrolling interests while in 2010 the Company purchased and retired $.3 million of treasury stock.
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% intere st 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 nine months 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 o f September 30, 2010, we had borrowed $12.6 million on the term loan and $5.4 million on the line of credit leaving a balance available on the line of credit of $9.6 million. The annual weighted average interest rate we paid on the term loan during the third quarter and first nine months of 2010 and 2009 was 3.25%. The annual weighted average interest rate we paid on the line of credit during the third quarter and first nine months of 2010 was 3.50% and during the third quarter and first nine months of 2009 was 2.75%. As of September 30, 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 use d 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 the foreseeable future.
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 nine months of 2010. The minimum net worth requirements could impact the Company's ability to pay divi dends 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 for the foreseeable future.
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 p lan 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 9 in Notes to the Condensed Consolidated Financial Statements for disclosures about 2010 pension contributions.
FINANCIAL CONDITION
Total assets as of September 30, 2010 were $175.5 million, a decrease of $1.5 million since December 31, 2009. Sales were higher in the month of September 2010 compared to the month of December 2009 which led to a $5.1 million increase in receivables. From year-to-year the weather conditions in these two months can vary significantly which impacts sales and resulting receivables at month-end. Increases in receivables are common during the first nine months of the year due to the seasonality of our business (see "Seasonality" below).
Our quarterly estimated tax payments are based on annualized income and in 2009 we overpaid taxes and are due a refund. During the first nine months of 2010, we experienced net losses which resulted in an increase in refundable income taxes of $.3 million over the prior year. Prepaid expenses increased by $.4 million from December 31, 2009 to September 30, 2010 due to the timing of insurance payments. Other assets declined by $.3 million due to the normal amortization of non-compete agreement assets.
Accounts payable increased by $0.9 million primarily due to increases in the Ready-Mixed Concrete Business segment related to increased sales volume in September 2010 over December 2009. Accrued liabilities decreased $4.5 million from December 31, 2009 to Septemb er 30, 2010. The decrease was primarily due to the $1.7 million decrease in prepayments held on account, the $.2 million decrease in non-compete agreements and the $1.9 million decrease in cash dividends liability resulting from the timing of when dividends are declared and paid.
Indebtedness increased $2.8 million during the first nine months of 2010 primarily due to increased utilization of our line of credit to fund the increases in receivables, cash expenditures for property, plant and equipment, and to fund temporary operating expenses.
Unrealized holding gain decreased $.3 million ($.5 million net of deferred taxes) during the nine months ending September 30, 2010 primarily due to lower market prices for available-for-sale equity securities held.
CAPITAL RESOURCES
The Company regularly invests in miscellaneous equipment and facility improvements in both the Cement Busin ess and Ready-Mixed Concrete Business. Capital expenditures during the first nine months of 2010 included $1.5 million related to the Cement Business and $2.6 million related to the Ready-Mixed Concrete Business for routine equipment purchases. During the first nine months of 2010, cash expenditures for property, plant and equipment totaled approximately $4.8 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 s et 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 $5.0 million during 2010 and are anticipated to 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 historically 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 mone y 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). KDH E is responsible for the administration and enforcement of Kansas environmental regulations, which typically mirror national regulations.
A recent ruling promulgated by the EPA in 2009 required 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 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.
The EPA published a National Emission Standard for Hazardous Air Pollutants (NESHAP) in the Federal Register on September 9, 2010. This regulation calls for more stringent emission limitation on mercury (Hg), total hydrocarbons (THC), hydrochloric acid (HCL), and particulate matter less than 10 microns in diameter (PM 10). The Portland Cement Association (PCA) estimates that the rule will result in the permanent closure of 18 U. S. cement plants. The compliance date for all current U. S. plants is September 9, 2013. Management anticipates that we will be able to comply and is evaluating the initial cost of compliance which could be material depending upon the number and severity of steps necessary to meet the standard.
On September 9, 2010 the EPA published New Source Performance Standards (NSPS) for nitrous oxide (NOX), sulphur dioxide (SO2) and particulate matter (PM 10). The rule applies to new or modified sources. At this time, management does not anticipate that modifications necessitated to comply with NESHAP will trigger application of NSPS.
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 $17.8 million of equity securities, primarily of publicly traded entities, as of September 30, 2010. The aggregate amount of securities carried at cost, for which the Company has not elected the fair value option, was $2.4 million as of September 30, 2010. The remaining $15.4 million in equity investments, which are stated at fair 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 fair value on the consolidated balance sheets at the end of each p eriod 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 $.9 million effect, net of deferred tax, on comprehensive income. At September 30, 2010, the Company evaluated all of its equity investments for impairment. The results of those evaluations are discussed in Note 8 of Notes to the Condensed Consolidated Financial Statements.
The Company also has $18.0 million of bank loans as of September 30, 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 objectiv es.
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 September 30, 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 t he Company and KDHE. The Company reserves all legal rights in the event such a resolution cannot be reached. As of September 30, 2010, it is probable that losses may result, but such losses are estimated to be insignificant.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the third quarter ended September 30, 2010:
| Period | | (a) Total Number of Shares (or Units) Purchased | | | (b) Average Price Paid per Share (or Unit) | | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs * | |
| July 1-31, 2010 | | | 0 | | | | 0 | | | | 0 | | | | 124,332 | |
| August 1-31, 2010 | | | 7,050 | | | | 24.89 | | | | 7,050 | | | | 117,282 | |
| September 1-30, 2010 | | | 4,130 | | | | 23.83 | | | | 4,130 | | | | 113,152 | |
| Total | | | 11,180 | | | $ | 24.50 | | | | 11,180 | | | | 113,152 | |
| * | In 1996, our Board of Directors authorized the purchase, through open market transactions, of up to 400,000 shares of our Company's common stock. The authorization has no expiration. Management was given discretion to determine the number and pricing of the shares to be purchased as well as the timing of any such purchases. |
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 November 9, 2010.
32.2 18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated November 9, 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 November 9, 2010 | | | | /s/ Walter H. Wulf, Jr. | |
| | | | | Walter H. Wulf, Jr. | |
| | | | | President and | |
| | | | | Chairman of the Board | |
| | | | | (principal executive officer) | |
| | | | | | |
| | | | | | |
| Date November 9, 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 November 9, 2010.
32.2 18 U.S.C. Section 1350 Certificate of the
Chief Financial Officer dated November 9, 2010.
