There were no transfers between levels and there were no significant changes in the valuation techniques during the period ended March 31, 2013. No reconciliation (roll forward) of the beginning and ending balances for Level 3 is 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) at either of the dates reported in the table above. The Company has no liabilities at either date requiring remeasurement to fair value on a recurring basis in the balance sheet. The Company has no additional assets or liabilities at either date requiring remeasurement to fair value on a non-recurring basis in the balance sheet.
The following table shows the 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 trade lots of securities have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012:
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 (SEC) 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, benefits of, and source of funding for our proposed and recently completed capital improvements; our forecasted cement sales; the timing and source of funds for the repayment of our revolving loan; our ability to pay dividends at the current level; the timing and/or collectability of retainage; our anticipated expenditures for benefit plans; our anticipated increase in solid fuels and electricity required to operate our facilities and equipment; and the impact of climate change on our business 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 governmental 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, 2012, 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 statements, 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, 2012 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. We do not anticipate making any further enhancement of our production processes in the foreseeable future other than those required to meet emission limitations included in the latest regulations issued by the Environmental Protection Agency (EPA).
During the first quarter of 2013, the cement production facilities were shut down for installation of equipment related to National Emission Standard for Hazardous Air Pollutants (NESHAP). During the first quarter of 2012, the cement production facilities were shut down and the majority of those production employees were laid off for three weeks. The layoff was shorter than anticipated due to increased cement sales which reduced inventory at a faster rate than projected as a result of the mild weather which allowed some construction projects to continue through the winter. Following the layoff, the employees were recalled to begin approximately three weeks of equipment repairs prior to resuming production. 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. Based on sales forecasts and inventory levels, the Company elected to reduce cement production in the first quarter of 2013 and 2012 to undertake plant repairs and maintenance, largely using our own production personnel. 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. In addition to costs that vary with the volume of production, our cost of sales includes certain fixed costs that do not vary with the volume of production. We have extremely limited ability to reduce these fixed costs in the short term. As a result, lower production levels which result from extended shutdowns generally have a negative impact on our gross profit margins.
The Portland Cement Association's (PCA) latest forecast cites improving underlying economic fundamentals, the existence of large pent-up demand balances and the diminishment of economic fiscal cliff uncertainty as the drivers of strong growth rates in 2013 and an increase in cement consumption. PCA expects an 8.1% growth in cement consumption in 2013 which is significantly higher than the mild volume gains projected in its fall 2012 report. The upward revisions reflect adjustments made in light of the recent fiscal cliff accord, recognition of stronger economic momentum and markedly more optimistic assessments regarding residential construction activity.
RESULTS OF OPERATIONS - FIRST QUARTER OF 2013 COMPARED TO FIRST QUARTER OF 2012
Consolidated net sales for the three months ended March 31, 2013 remained virtually unchanged from the three months ended March 31, 2012. Sales in our Cement Business were lower by $0.7 million and sales in our Ready-Mixed Concrete Business were higher by $0.7 million. Cement Business sales decreased $0.7 million as a result of a 7.6% decrease in volume sold. Ready-Mixed Concrete Business sales increased primarily due to a $1.6 million increase in construction contract sales. In addition, ready-mixed concrete sales increased $0.5 million due to a 3.7% increase in cubic yards sold. These gains were partially offset by a $1.4 million decrease in brick, block and other sundry item sales.
Consolidated cost of sales for the three months ended March 31, 2013 increased by $2.7 million when compared to the three months ended March 31, 2012. Cost of sales in our Cement Business was higher by $0.4 million and cost of sales in our Ready-Mixed Concrete Business was higher by $2.3 million. Cement Business cost of sales decreased $0.7 million due to the 7.6% decrease in volume sold but the decreases were more than offset by higher production costs per ton resulting from the shutdown of the cement production facilities and lower production levels while equipment related to NESHAP was being installed. Cement production during the first three months of 2013 decreased 10.2% from first quarter 2012 production levels. Ready-Mixed Concrete Business cost of sales increased primarily due to a $2.8 million increase in construction contract costs. An additional $0.5 million increase was due to the 3.7% increase in cubic yards of ready-mixed concrete sold. Cost of sales in brick, block and other sundry items decreased by $1.0 million.
Our overall gross profit rate for the three months ended March 31, 2013 was (7.9)% versus 1.8% for the three months ended March 31, 2012. As a result of the above sales and cost of sales factors, the gross profit rate for the Cement Business declined from 4.4% for the three months ended March 31, 2012 to (9.0)% for the three months ended March 31, 2013. The gross profit rate for the Ready-Mixed Concrete Business declined from 0.6% for the three months ended March 31, 2012 to (7.4)% for the three months ended March 31, 2013.
Selling, general and administrative expenses increased by $0.3 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. These costs are normally considered fixed costs that do not vary significantly with changes in sales volumes. The 6.4% increase was primarily due to an increase in administrative payroll and related payroll taxes of approximately $0.1 million and an increase in office supplies of $0.1 million with the remaining increase coming from various items.
Sales of equity investments during the three months ended March 31, 2013 and 2012 resulted in gains of approximately $3.1 million and $0.4 million, respectively. Dividend income of $0.7 million for the first three months of 2013 was primarily related to our investment in the oil and gas refining and marketing industry. Dividend income was insignificant for the first three months of 2012.
The effective tax rates for the three months ended March 31, 2013 and 2012 were 27.9% 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 and valuation allowance. Taxes for the current year are estimated based on prior years' effective tax rates.
The Company considers all liquid investments with original maturities of three months or less which we do not intend to roll over beyond three months to be cash equivalents. At March 31, 2013 and December 31, 2012, cash equivalents consisted primarily of money market investments and repurchase agreements with various banks.
We are able to meet our cash needs primarily from a combination of operations, the sale of equity investments and bank loans.
Operating activities used $8.0 million and provided $0.9 million during the three months ended March 31, 2013 and March 31, 2012, respectively. The $8.9 million increase in cash used in 2013 over 2012 was driven by lower sales volumes, negative gross profit margins and unfavorable changes in receivables, accounts payable and accrued liabilities partially offset by favorable changes in refundable income taxes. Realized gains from the disposal of available-for-sale equity securities in net income increased $2.7 million during the first quarter of 2013 compared to the same period of 2012 and are not indicative of the operating margins for the period.
Investing activities used $4.3 million and $0.5 million during the first quarter of 2013 and 2012, respectively. The difference between the two periods is primarily related to the $6.0 million increase in the acquisition of property, plant and equipment and the $0.3 million payment for purchases of equity investments offset by a $2.5 million increase in proceeds from the sale of available-for-sale equity investments during the three months ended March 31, 2013 from the same period in 2012. Property, plant and equipment purchases in the first quarter of 2013 included $4.7 million primarily related to NESHAP compliance in our cement production facilities and $2.9 million related to routine equipment purchases in our Ready-Mixed Concrete Business.
Financing activities provided $11.6 million and used $0.6 million for the three months ended March 31, 2013 and March 31, 2012, respectively. The difference is primarily due to increases in the revolving credit and the advancing term loan during 2013. The bank loans were used to cover operating expenses, inventory increases and for the capital expenditures discussed in the previous paragraph. Additionally, the Company paid a cash dividend in December of 2012 that would have typically been paid in January of 2013 which resulted in only one dividend payment in the first quarter of 2013 (paid in March) instead of the normal two payments. This decreased the usage of cash in the first quarter of 2013 compared to the first quarter of 2012 by $0.9 million.
On December 31, 2012, the Company entered into a new credit agreement with its current lender, BOKF, NA dba Bank of Oklahoma (Bank of Oklahoma), which amended and restated its existing credit agreement. The new agreement provides for a secured credit commitment consisting of a $10.0 million advancing term loan maturing December 31, 2015, a $10.0 million term loan maturing December 31, 2017 and a $15.0 million revolving loan maturing December 31, 2015. Interest rates on the Company's advancing term loan and revolving loan are both variable and based on the rate of interest regularly published by the Wall Street Journal and designated as the U.S. Prime Rate (herein referred to as the WSJ prime rate) less 1.50% with a 1.50% interest rate minimum or floor. Interest rates on the Company's term loan are variable and based on the WSJ prime rate less 1.25% with a 1.75% interest rate minimum or floor. The new agreement requires the Company to pledge its investment account, receivable accounts and inventory to Bank of Oklahoma as collateral for the advancing term loan, the term loan and revolving loan. The Company is obligated to maintain at least $12.0 million in its pledged investment account. The carrying value of receivables, inventory and the investment account pledged as collateral was $18.2 million, $34.1 million and $24.0 million, respectively as of March 31, 2013. The agreement also contains financial covenants requiring the Company, as of the end of any fiscal quarter, to maintain a minimum tangible net worth before accumulated other comprehensive income (loss) of $95.0 million and a minimum tangible net worth after accumulated other comprehensive income (loss) of $85.0 million. The Company was in compliance with these requirements as of March 31, 2013.
As of March 31, 2013, the Company had $9.6 million outstanding on its term loan, $4.5 million on its advancing term loan, and $8.6 million on its revolving loan leaving balances available of $5.5 million and $6.4 million on the advancing term loan and revolving loan, respectively. The annual weighted average interest rate we paid on the term loan during the first quarter of 2013 and 2012 was 2.00% and 3.25%, respectively. The annual weighted average interest rate we paid on the revolving loan during the first quarter of 2013 and 2012 was 1.75% and 3.50%, respectively. The annual weighted average interest rate we paid on the advancing term loan during the first quarter of 2013 was 1.75%. The Company did not have an advancing term loan during 2012. As of March 31, 2013, the applicable interest rate was 2.00% on the term loan and 1.75% on the revolving loan and advancing term loan. The term loan, which originated in 2000, was used to help finance the expansion project at our cement manufacturing facility. The revolving loan is used to cover operating expenses primarily during the first half of the year when we build inventory due to the seasonality of our business and for capital expenditures. It is anticipated that the advancing term loan will be primarily used to help finance our NESHAP capital expenditures. For further discussion on NESHAP, see "Capital Resources" below. 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 as we do not anticipate the need for financing beyond that available to us under our credit agreement. If additional financing is needed, no assurances can be given that we will be able to obtain it 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 "Capital Resources" below. We anticipate 2013 capital expenditures will exceed 2012 levels, but we do not anticipate the need for bank financing in addition to that available under the existing revolving loan and advancing term loan.
The Board of Directors in their December 2012 meeting authorized the payment in December 2012 of $0.9 million of the Company's cash dividends that would have typically been paid in January of 2013 which resulted in five dividend payments in 2012 and only one payment in the first quarter of 2013. Each was declared as a $0.23 per share dividend by the Board of Directors. For several years prior to 2012, the Company paid a dividend four times during the year - January, March, June and September. Under the terms and conditions of our new credit agreement entered into on December 31, 2012, the Company's ability to pay dividends is subject to its satisfaction of the requirements to maintain a minimum tangible net worth after accumulated other comprehensive income (loss) of $85.0 million and maintain a minimum tangible net worth before accumulated other comprehensive income (loss) of $95.0 million. The requirements could impact the Company's ability to pay and the size of dividends in the future. Although dividends are declared at the Board's discretion and could be impacted by the requirements of the Company's loan agreement, we project future earnings will support the continued payment of dividends at the current level (four quarterly dividends of $0.23 per share).
The Company was required to make a pension contribution for 2012. The Company's contribution was approximately $3.5 million. No estimates of required pension payments have been asked for or scheduled beyond 2013. 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 for disclosures about 2013 pension contributions.
FINANCIAL CONDITION
Total assets as of March 31, 2013 were $188.2 million, an increase of $6.9 million since December 31, 2012. Receivables increased $1.0 million from December 31, 2012 to March 31, 2013 primarily due to sales being $2.2 million higher in the month of March 2013 as compared to the month of December 2012. Total inventories increased $1.3 million primarily due to the $0.8 million increase in fuel, gypsum, paper sacks and other. Increases in finished cement and building products of $0.3 million and $0.2 million, respectively, also contributed to the increase in total inventory. Increases in receivables and inventory are common during the first quarter of the year due to the seasonality of our business (See Seasonality below). During 2013 we experienced a net loss during the first quarter which resulted in an increase in refundable income taxes of $0.5 million over those at December 31, 2012. Prepaid expenses increased by $0.6 million primarily due to insurance deposits. Property, plant and equipment increased $4.7 million, net of accumulated depreciation, primarily as a result of the capital expenditures related to NESHAP compliance in our cement production facilities and routine equipment purchases in our Ready-Mixed Concrete Business segment.
Accounts payable decreased $2.8 million from December 31, 2012 to March 31, 2013 primarily as a result of the timing of payables related to the first quarter 2013 NESHAP compliance project in the Cement Business as well as decreased payables related to construction contracts in the Ready-Mixed Concrete Business.
Cash dividends liability and prepayments held on account, components of accrued liabilities, decreased by $0.9 million and $0.3 million, respectively, from December 31, 2012 to March 31, 2013. The cash dividends liability decreased due to the timing of when dividends are declared and paid.
Indebtedness increased $12.5 million during the first three months of 2013 primarily due to increased utilization of our revolving loan and advancing term loan to fund the increases in inventories, approximately $7.6 million for cash expenditures for property, plant and equipment, and to fund temporary operating expenses.
CAPITAL RESOURCES
The Company regularly invests in miscellaneous equipment and facility improvements in both the Cement Business and Ready-Mixed Concrete Business. Property, plant and equipment expenditures for the first quarter of 2013 totaled $7.6 million. Approximately 62% of these expenditures were related to the Cement Business primarily for NESHAP compliance projects and 38% were for routine equipment purchases in the Ready-Mixed Concrete Business. Cash expenditures for property, plant and equipment also totaled $7.6 million, excluding the amounts that are included in accounts payable.
The Company does not currently meet certain emission limitations included in the latest regulations issued by the EPA. For discussion on the regulations, see "Environmental Regulations" below. In 2010, the EPA published modifications to the NESHAP regulations with a compliance date for all U.S. cement plants of September 9, 2013. The Company formulated a strategy to attempt to achieve compliance with the then existing regulations and in 2011 began installing additional pollution control equipment in its Cement Business. In December 2012, the EPA issued a final rule amending NESHAP again with a new compliance date of September 2015. As a result of the rule revisions, the Company will reassess its NESHAP strategy and planned capital expenditures, but major modifications to our approach appear unlikely at this time. We have completed installation of a hydrated lime injection system and additional dust collectors on both kilns at a cost of $0.4 million and $3.5 million, respectively. We have also essentially completed the modification to our roller mill and related equipment at a cost of $6.8 million dollars. Other planned modifications (and estimated cost) which are in various phases of implementation include upgraded dust collectors on both clinker coolers ($4.5 million). Current plans are to commence installation and modification of this equipment during the first quarter of 2015. To date, we have expended $11.2 million towards projects related to NESHAP compliance. Cost estimates will be updated as the modifications are engineered and priced for our facility. There is no proven technology that enables us to give 100% assurance that we can reach the limits required by the new regulations; however, we feel compliance is possible at our modern facility.
The Company plans to invest in other miscellaneous equipment and facility improvements in both the Cement Business and Ready-Mixed Concrete Business in 2013. These expenditures, plus the ones discussed in the above paragraphs related to NESHAP compliance, are expected to reach approximately $12.0 million during 2013 and to be funded with a mixture of cash from operations and bank loans. We do not anticipate the need for additional bank financing beyond the amount available through our advancing term loan and revolving loan.
MARKET RISK
Market risks relating to the Company's operations result primarily from changes in demand for our products. Construction activity has been adversely impacted by the global financial crisis even though interest rates are 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 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 EPA. KDHE is responsible for the administration and enforcement of Kansas environmental regulations, which typically mirror national regulations.
A 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 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. In July 2012 the Court of Appeals for the D.C. Circuit affirmed EPA's findings on these two rules. 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.
We are currently not aware of any other final GHG or climate change regulations or legislation. There are many variables making it difficult to predict the overall cost of GHG controls. It is equally difficult to determine when those costs will be realized, or even the feasibility of any additional regulations or legislation being enacted or finalized. We believe there is consensus in the industry that the costs of CO2 limits required through regulation or legislation could be substantial enough to change cement manufacturing processes.
On December 20, 2012, the EPA issued a final rule amending NESHAP for the Portland Cement Manufacturing Industry and the New Source Performance Standards (NSPS) for Portland Cement Plants. The final rule, which extends the compliance date by two years to September 9, 2015 and relaxes particulate matter emission standards for existing and new sources, is the culmination of over two years of reconsideration and litigation surrounding these regulations. The final version adopts the less stringent limits and requirements that were sought by the cement industry. Both the initial rule and the final rule require more stringent emission limitations on mercury (Hg), total hydrocarbons (THC) and hydrochloric acid (HCL). Particulate matter less than 10 microns in diameter (PM 10) limitations were raised from 0.04 lbs./ton of clinker to 0.07 lbs./ton. Our current emission levels are below the limitations for mercury and THC so additional control equipment will not be required for these pollutants; however, we expect to incur increased costs for control equipment for PM 10 and HCL. There will also be additional costs for monitoring, testing and increased maintenance labor. As a result of these rule revisions, the Company will reassess its NESHAP strategy and planned capital expenditures, but major modifications to our approach appear unlikely at this time. Initial estimated costs to comply are discussed above under "Capital Resources". In subsequent events, on April 5, 2013, a coalition of environmental groups filed a Petition for Review with the D.C. Circuit Court of Appeals, expressing concerns about the extension of the NESHAP compliance date and the increase of the particulate matter emission standard. On April 19, 2013 the Portland Cement Association, of which Monarch is a member, filed a brief with the same court in support of the EPA.
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.
Although we are not aware of any proposed or pending climate change regulations apart from the GHG controls noted above, 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 reflected in the price of our products. 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 would increase the number of days with weather conducive for work to proceed on construction projects which in turn would create the potential for greater profitability. Conversely, legislation and regulatory attempts to interfere with a natural warming cycle will, if successful, have an adverse effect 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 typically 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 held $26.9 million of equity securities, primarily of publicly traded entities, as of March 31, 2013. The aggregate amount of securities carried at cost, for which the Company has not elected the fair value option, was $2.6 million as of March 31, 2013. The remaining $24.3 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 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 $1.5 million effect, net of deferred tax, on comprehensive income. At March 31, 2013, 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 $22.7 million of bank loans as of March 31, 2013. Interest rates on the Company's advancing term loan and revolving loan are both variable and based on the WSJ prime rate less 1.50% with a 1.50% interest rate minimum or floor. Interest rates on the Company's term loan are variable and based on the WSJ prime rate less 1.25% with a 1.75% interest rate minimum or floor.
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, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the provisions of Monarch's Articles of Incorporation governing the conversion of its Class B Capital Stock into Capital Stock, a total of 2,278 shares of Monarch's Capital Stock were issued in the first quarter of 2013 upon conversion of an equal number of shares of Monarch's Class B Capital Stock, including the following share conversions as indicated below:
Shares of Capital Stock Issued Upon Conversion of Class B Capital Stock
| Date | | Number of shares | |
| January 21, 2013 | | | 500 | |
| February 11, 2013 | | | 453 | |
| March 8, 2013 | | | 1,325 | |
| Total | | | 2,278 | |
The above shares of Capital Stock were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, which exemption is available for transactions involving securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. The Company received no payment in connection with the issuances of such shares. No underwriters were involved with the issuance of such shares and no commissions were paid in connection with such issuances. There was no advertisement or general solicitation made in connection with the issuance of such shares. Except as described above, Monarch did not issue or sell any shares of its Capital Stock or Class B Capital Stock during the three months ending March 31, 2013. No repurchases of Capital Stock or Class B Capital Stock were made by the Company during the first quarter in 2013.
In 1996, our Board of Directors authorized the purchase, through open market transactions, of up to 400,000 shares of Monarch's Capital Stock. On August 5, 2011, our Board of Directors authorized the purchase, through open market or private transactions, of 101,672 shares of Monarch's Capital Stock in addition to the existing 98,328 shares remaining from the Board's 1996 authorization for a total repurchase authority of 200,000 shares. Management's 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. As of March 31, 2013, Monarch continued to be authorized by the Board, exercisable in management's discretion, to purchase up to 183,266 shares of our Capital Stock.
Item 4. Mine Safety Disclosures
Under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and under the SEC's Item 104 of Regulation S-K, each operator of a coal or other mine is required to include disclosures regarding certain mine safety results in its periodic reports filed with the SEC. The operation of the Company's quarries is subject to regulation by the federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977. The information required under Section 1503(a) and Item 104 of Regulation S-K regarding certain mining safety and health matters is presented in Exhibit 95 to this report.
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 10, 2013. |
| 32.2 | 18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated May 10, 2013. |
| 95 | Mine Safety Disclosures |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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 10, 2013 | | | | /s/ Walter H. Wulf, Jr. | |
| | | | | Walter H. Wulf, Jr. | |
| | | | | President and | |
| | | | | Chairman of the Board | |
| | | | | (principal executive officer) | |
| | | | | | |
| | | | | | |
| Date May 10, 2013 | | | | /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 10, 2013. |
| 32.2 | 18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated May 10, 2013. |
| 95 | Mine Safety Disclosures |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
