-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
JxZHt92tvPht9/7QAX7iqTPTMqi1fcy6ezrcJCqOG0UkKYf4MX8/hoeKdOBdmeYJ
nvs/4208Wzsp23EUHO8RGw==
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
(Mark
One)
[
] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. THE MONARCH CEMENT COMPANY
KANSAS 48-0340590
P.O. BOX 1000, HUMBOLDT, KANSAS
66748-0900
Registrant's telephone number, including area code:
(620) 473-2222
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 is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As of August 7, 2006, there were
2,471,836 shares of Capital Stock, par value $2.50 per share outstanding
and 1,555,122 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, 2005 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 2005 filed with the Securities & 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 For the Three Months Ended For the Six Months Ended $16,413,531 $ 9,560,873 (758,491) 76,965,363 845,661 For the Three Months Ended For the Six Months Ended June 30, 2006 and 2005 (Unaudited), and December 31, 2005
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.
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
4,026,958 in the second quarter of 2006 and 2005 and in the first six months of
2006 and 2005. The Company has no common
stock equivalents and therefore, does not report diluted earnings per share. 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 and
sundry building materials business. Following is condensed information
for each line for the periods indicated (in thousands): Three Months Ended Six Months Ended
Washington, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended
June 30, 2006, or
For the transition period from
to
.
Commission file number: 0-2757
(Exact name of registrant as specified in its charter)
(state or other jurisdiction of incorporation or
organization)
(IRS employer identification no.)
(address of principal executive offices)
(zip code)
(former name, former address and former fiscal
year, if changed since last report)
YES
NO X
Large accelerated filer ____ Accelerated filer
____ Non-accelerated filer X
YES
NO X
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2006 and December 31, 2005
ASSETS
2 0 0 6
2 0 0 5
CURRENT ASSETS:
(Unaudited)
Cash and cash equivalents
$ 2,706,815
$ 4,895,561
Short-term investments, at cost which approximates market
-
1,500,000
Receivables, less allowances of $599,000 in 2006 and
$602,000 in 2005 for doubtful accounts
20,965,310
14,186,551
Inventories, priced at cost which is not in excess of market-
Finished cement
$ 4,272,889
$ 1,868,412
Work in process
3,068,355
1,632,780
Building products
3,973,578
3,457,813
Fuel, gypsum, paper sacks and other
3,396,654
3,317,283
Operating and maintenance supplies
7,788,702
7,850,617
Total inventories
$ 22,500,178
$ 18,126,905
Deferred income taxes
663,902
665,000
Prepaid expenses
608,229
80,843
Total current assets
$ 47,444,434
$ 39,454,860
PROPERTY, PLANT AND EQUIPMENT, at cost, less
accumulated depreciation and depletion of $125,302,995
in 2006 and $121,060,864 in 2005
93,587,954
85,815,343
DEFERRED INCOME TAXES
3,919,310
4,111,000
INVESTMENTS
13,952,743
13,454,631
OTHER ASSETS
1,108,747
1,219,082
$160,013,188
$144,054,916
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable
$ 9,050,311
$ 8,971,830
Line of credit payable
9,986,551
-
Current portion of advancing term loan
2,080,460
1,965,106
Accrued liabilities
6,651,327
6,499,821
Total current liabilities
$ 27,768,649
$ 17,436,757
LONG-TERM DEBT
20,989,054
22,121,890
ACCRUED POSTRETIREMENT BENEFITS
12,209,873
11,456,039
ACCRUED PENSION EXPENSE
2,305,101
2,121,155
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
1,126,856
1,246,317
STOCKHOLDERS' INVESTMENT:
Capital stock, par value $2.50 per share, one vote per share -
Authorized 10,000,000 shares, Issued 2,471,816 shares
at 6/30/2006 and 2,464,926 shares at 12/31/2005
$ 6,179,540
$ 6,162,315
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 1,555,142
shares at 6/30/2006 and 1,562,032 shares at 12/31/2005
3,887,855
3,905,080
Retained earnings
82,618,260
76,965,363
Accumulated other comprehensive income
2,928,000
2,640,000
Total stockholders' investment
$ 95,613,655
$ 89,672,758
$160,013,188
$144,054,916
See notes to condensed consolidated
financial statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Three Months and Six
Months Ended June 30, 2006 and 2005 (Unaudited)
June 30, 2006
June 30, 2005
June 30, 2006
June 30, 2005
NET SALES
$43,570,624
$37,272,061
$74,782,126
$61,813,142
COST OF SALES
32,004,639
30,303,009
52,140,349
Gross profit from
operations
$ 11,565,985
$ 6,969,052
$ 9,672,793
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
3,419,112
3,270,282
6,852,658
6,092,463
Income from
operations
$ 8,146,873
$ 3,698,770
$ 3,580,330
OTHER INCOME (EXPENSE):
Interest income
$ 102,248
$ 49,482
$ 181,110
$ 136,519
Interest expense
(565,327)
(424,717)
(750,593)
Other, net
257,496
69,488
415,066
624,228
$ (205,583)
$ (305,747)
$ (162,315)
$ 10,154
Income
before taxes on income
$ 7,941,290
$ 3,393,023
$ 3,590,484
PROVISION FOR INCOME TAXES
2,450,000
1,115,000
2,900,000
1,180,000
NET INCOME
$ 5,491,290
$ 2,278,023
$ 6,498,558
$ 2,410,484
RETAINED EARNINGS, beginning of period
77,972,631
70,661,021
70,528,560
Less cash dividends
845,661
805,392
805,392
RETAINED EARNINGS, end of period
$ 82,618,260
$72,133,652
$82,618,260
$72,133,652
Basic earnings per share
$
1.36
$
0.57
$
1.61
$
0.60
Cash dividends per share
$ 0.21
$
0.20
$
0.21
$
0.20
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months and Six Months Ended June 30, 2006 and 2005 (Unaudited)
June 30, 2006
June 30, 2005
June 30, 2006
June 30, 2005
NET INCOME
$ 5,491,290
$ 2,278,023
$ 6,498,558
$ 2,410,484
UNREALIZED APPRECIATION (DEPRECIATION)
ON AVAILABLE FOR SALE SECURITIES (Net
of deferred tax expense (benefit) of $(1,223,000),
$20,000, $192,000 and $(255,000), respectively)
(1,832,000)
30,000
288,000
(340,000)
LESS: RECLASSIFICATION ADJUSTMENT FOR
REALIZED GAINS (LOSSES) INCLUDED
IN
NET INCOME
(net of deferred tax (benefit) expense
of $-0-, $-0-,$-0- and $155,000, respectively)
-
-
-
230,000
COMPREHENSIVE INCOME
$ 3,659,290
$2,308,023
$ 6,786,558
$ 1,840,484
See notes to condensed consolidated financial statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and
2005 (Unaudited)
2006
2005
OPERATING ACTIVITIES:
Net income
$ 6,498,558
$ 2,410,484
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization
4,906,051
5,236,143
Minority interest in earnings
of subsidiaries
24,388
30,635
Deferred income taxes
788
-
Gain on disposal of assets
(169,958)
(125,394)
Realized gain on sale of other
investments
-
(384,376)
Change in assets and liabilities:
Receivables, net
(6,778,759)
(4,728,153)
Inventories
(4,373,273)
(3,380,948)
Refundable income taxes
-
812,807
Prepaid expenses
(527,386)
(418,907)
Other assets
9,775
9,283
Accounts payable and accrued
liabilities
3,686,516
2,209,978
Accrued postretirement benefits
753,834
712,045
Accrued pension expense
183,946
246,435
Net cash
provided by operating activities
$ 4,214,480
$ 2,630,032
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment
$ (14,457,678)
$ (7,958,435)
Proceeds from disposals of property, plant
and equipment
203,788
359,136
Payment for purchases of equity investments
(18,112)
-
Proceeds from disposals of equity
investments
-
1,150,245
Proceeds from short-term investments
1,500,000
-
Purchases of subsidiaries' stock
(118,116)
(105,400)
Net cash used for investing activities
$ (12,890,118)
$ (6,554,454)
FINANCING ACTIVITIES:
Increase in line of credit, net
$ 9,986,551
$ 6,734,282
Payments on bank loans
(915,747)
(951,414)
Payments on other long-term debt
(101,735)
(185,277)
Cash dividends paid
(2,456,444)
(2,416,175)
Subsidiaries' dividends paid to
minority interest
(25,733)
-
Net cash provided by financing
activities
$ 6,486,892
$ 3,181,416
Net decrease in cash and cash equivalents
$ (2,188,746)
$ (743,006)
Cash and Cash Equivalents, beginning of year
4,895,561
4,999,253
Cash and Cash Equivalents, end of period
$ 2,706,815
$ 4,256,247
Interest paid, net of amount capitalized
$
748,225
$ 776,054
Income taxes paid, net of refunds
$
1,668,235
$ 159,200
Capital equipment additions included in
accounts payable
$
192,092
$ 149,419
See notes to condensed consolidated financial
statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
6/30/06
6/30/05
6/30/06
6/30/05
Sales to
Unaffiliated Customers
Cement Business
$
21,389
$ 17,955
$ 32,362
$ 26,404
Ready-Mixed Concrete Business
22,182
19,317
42,420
35,409
Intersegment Sales
Cement Business
3,549
3,536
6,693
6,045
Ready-Mixed Concrete Business
-
-
-
-
Operating
Income (Loss)
Cement Business
8,067
4,769
9,607
5,565
Ready-Mixed Concrete Business
80
(1,071)
(46)
(1,985)
Capital
Expenditures
Cement Business
2,525
1,345
11,575
4,604
Ready-Mixed Concrete Business
353
1,498
1,037
3,354
Balance as of
6/30/06
12/31/05
Identifiable Assets
Cement Business
$ 99,782
$ 82,406
Ready-Mixed Concrete Business
37,880
35,804
Corporate Assets
22,351
25,845
The following table presents the components of net periodic costs for the six months ended June 30, 2006 and 2005:
Pension Benefits |
Other Benefits |
||||||
2006 |
2005 |
2006 |
2005 |
||||
Service cost | $ 348,838 | $ 255,833 | $ 254,152 |
$ 277,085 |
|||
Interest cost | 1,144,253 | 839,178 | 799,826 | 759,919 | |||
Expected return on plan assets | (1,274,949) | (935,028) | - | - | |||
Amortization of prior service cost | 51,116 | 37,488 | - | - | |||
Recognized net actuarial gain | 66,765 | 48,964 | - | - | |||
Unrecognized net loss | - | - | 400,254 | 278,424 | |||
Net periodic expense | $ 336,023 | $ 246,435 | $ 1,454,232 | $ 1,315,428 |
The following table presents the components of net periodic costs for the three months ended June 30, 2006 and 2005:
Pension Benefits |
Other Benefits |
||||||
2006 |
2005 |
2006 |
2005 |
||||
Service cost | $ 165,785 | $ 127,665 | $ 127,076 |
$ 180,400 |
|||
Interest cost | 543,805 | 418,764 | 399,913 | 494,756 | |||
Expected return on plan assets | (605,918) | (466,595) | - | - | |||
Amortization of prior service cost | 24,293 | 18,707 | - | - | |||
Recognized net actuarial gain | 31,730 | 24,434 | - | - | |||
Unrecognized net loss | - | - | 200,127 | 181,272 | |||
Net periodic expense | $ 159,695 | $ 122,975 | $ 727,116 | $ 856,428 |
As previously disclosed in our financial statements for the year ended December 31, 2005, Monarch expects to contribute approximately $914,000 to the pension fund in 2006. As of June 30, 2006, we have contributed about $152,000 and anticipate contributing an additional $762,000 to this plan in 2006 for a total of $914,000. 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, 2005, Monarch expects to pay approximately $1,360,000 for benefits under this plan in 2006. As of June 30, 2006, we have contributed about $700,000 and anticipate contributing an additional $660,000 to this plan in 2006 for a total of $1,360,000.
A Monarch subsidiary, Monarch and three officers of Monarch are involved in a lawsuit with the former officers of that subsidiary and companies formed by those officers. We believe all claims filed against our subsidiary, Monarch and its officers are without merit and we are pursuing judgment against the former officers and their companies. We plan to vigorously pursue this case and do not anticipate any liability as a result of this lawsuit.
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, 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 line of credit, 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 affect weather has on our business;
the affect of environmental and other government regulation; and
the affect of federal and state funding on demand for our products.
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, 2005 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 we experienced the return of increased demand for our products. The combination of residential, commercial and governmental construction activities resulted in the need for increased production to meet our customers' needs. In response to those needs, we have made, and continue to make, investments in our plant and equipment to increase production and improve efficiencies.
Operating results for the first six months vary considerably from year-to-year. Sales and the resulting income (loss) are significantly affected by the length and severity of winter weather and the corresponding slowdown in construction activity. Cement and ready-mixed concrete sales for the first six months of 2006 benefited from a shorter period of cold, wet weather in our markets. Volume increases made possible by the favorable weather conditions, combined with increases in price, resulted in a substantial improvement in net income. Price increases play a key role in helping us keep pace with increases in the cost of labor, raw materials, and transportation and the expense of maintaining state-of-the-art equipment in our capital intensive industry. The higher sales volumes resulted in better utilization of our equipment also contributing to the substantial improvement in operating profits. While it is anticipated that higher interest rates, oil prices, and inflation will slow economic growth in the second half of this year, we believe that Monarch will be able to maintain the gains made to date over 2005 through the end of the year.
RESULTS OF OPERATIONS - SECOND QUARTER OF 2006 COMPARED TO SECOND QUARTER OF 2005
Consolidated net sales for the three months ended June 30, 2006, increased by $6.3 million when compared to the three months ended June 30, 2005. Sales in our Cement Business were higher by $3.4 million and sales in our Ready-Mixed Concrete Business were higher by $2.9 million. Cement Business sales increased $.8 million due to increased volume sold and $2.6 million due to price increases. Sales in the Ready-Mixed Concrete Business increased $1.5 million due to increased volume and $1.4 million due to price increases, with such increases primarily attributed to an increase in sales of ready-mixed concrete.
Consolidated cost of sales for the three months ended June 30, 2006, increased by $1.7 million when compared to the three months ended June 30, 2005. Cost of sales in our Cement Business was higher by $.2 million and cost of sales in our Ready-Mixed Concrete Business was higher by $1.5 million. Cement Business cost of sales increased about $.5 million due to the 4.7% increase in volume sold which was partially offset by efficiencies in production. Ready-Mixed Concrete Business cost of sales increased due to a combination of raw material price increases and the increased volume sold. Raw materials, including cement, rock, sand and sundry building materials purchased for resale, increased in price by $.8 million or an average of 9.0% due in large part to higher energy prices. The remaining increase of $.7 million is due to the 7.6% increase in volume.
As a result of the above sales and cost of sales factors, our overall gross profit rate for the three months ended June 30, 2006 was 26.6% versus 18.7% for the three months ended June 30, 2005.
Selling, general, and administrative expenses increased by 4.6% during the second quarter of 2006 compared to the second quarter of 2005. These costs are normally considered fixed costs that do not vary significantly with changes in sales volume. This increase is primarily due to expenses related to pending litigation.
Other, net increased approximately $.2 million during the second quarter of 2006 as compared to the second quarter of 2005. The increase was not due to any one significant activity.
The effective tax rates for the three months ended June 30, 2006 and 2005 were 30.9% and 32.9%, 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, minority interest in consolidated income and valuation allowance. Taxes for the current year are estimated based on prior year effective tax rates.
RESULTS OF OPERATIONS - FIRST SIX MONTHS OF 2006 COMPARED TO THE FIRST SIX MONTHS OF 2005
Consolidated net sales for the six months ended June 30, 2006, increased by $13.0 million when compared to the six months ended June 30, 2005. Sales in our Cement Business were higher by $6.0 million and sales in our Ready-Mixed Concrete Business were higher by $7.0 million. Cement Business sales increased $2.5 million due to increased volume sold and $3.5 million due to price increases. Sales in the Ready-Mixed Concrete Business increased $3.7 million due to increased volume primarily attributed to construction contracts and $3.3 million due to price increases primarily in sales of ready-mixed concrete.
Consolidated cost of sales for the six months ended June 30, 2006, increased by $6.2 million when compared to the six months ended June 30, 2005. Cost of sales in our Cement Business was higher by $1.7 million and cost of sales in our Ready-Mixed Concrete Business was higher by $4.5 million. Cement Business cost of sales increased due to the 9.5% increase in volume sold. Ready-Mixed Concrete Business cost of sales increased due to a combination of raw material price increases and the increased volume sold. Raw materials, including cement, rock, sand and sundry building materials purchased for resale, increased in price by $1.6 million or an average of 9.0% due in large part to higher energy prices. The remaining increase of $2.9 million is due to the 10.4% increase in volume.
As a result of the above sales and cost of sales factors, our overall gross profit rate for the six months ended June 30, 2006 was 22.0% versus 15.6% for the six months ended June 30, 2005.
Selling, general, and administrative expenses increased by 12.5% during the first half of 2006 compared to the first half of 2005. These costs are normally considered fixed costs that do not vary significantly with changes in sales volume. This increase is primarily due to an increase in management personnel in the first quarter of 2006 as compared to the first quarter of 2005. Early in the first quarter of 2005, the departure of management personnel responsible for design/build projects reduced our administrative costs. These personnel have been replaced. Legal and professional fees also increased during the first half of 2006 as compared to the first half of 2005 due to pending litigation.
Other, net decreased approximately $.2 million for the first half of 2006 as compared to the first half of 2005 primarily due to a decrease in the amount of gain realized on the sale of other equity investments.
The effective tax rates for the six months ended June 30, 2006 and 2005 were 30.9% and 32.9%, 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, minority interest in consolidated income and valuation allowance. Taxes for the current year are estimated based on prior year effective tax rates.
LIQUIDITY
We are able to meet our cash needs primarily from a combination of operations and bank loans. Cash decreased during the first six months of 2006 primarily due to increases in receivables and inventories, the purchase of equipment and the payment of dividends.
In December 2005, we renewed our line of credit with our current lender. Our current unsecured credit commitment consists of a $25 million advancing term loan maturing December 31, 2009 and a $10 million line of credit maturing December 31, 2006. The term loan bears a floating interest rate based on JP Morgan Chase prime rate less .75% and the line of credit bears a floating interest rate based on lender's national prime rate less 1.00%. The loan agreement contains a financial covenant related to net worth which the Company was in compliance with at the end of the first six months of 2006. As of June 30, 2006, we had borrowed $22.3 million on the advancing term loan and $10 million on the line of credit leaving a balance available on the line of credit of $0. The annual weighted average interest rate we paid on the advancing term loan during the second quarter of 2006 and 2005 was 7.1% and 5.2%, respectively, and for the first six months of 2006 and 2005 was 6.9% and 4.9%, respectively. The annual weighted average interest rate we paid on the line of credit during the second quarter of 2006 and 2005 was 6.9% and 4.9%, respectively, and for the first six months of 2006 and 2005 was 6.7% and 4.7%, respectively. As of June 30, 2006, the applicable interest rate was 7.3% on the advancing term loan and 7.0% on the line of credit. The advancing term loan was used to help finance the expansion project at our cement manufacturing facility. The line of credit was used to cover operating expenses during the first six months of the year when we build inventory due to the seasonality of our business. We anticipate that the line of credit maturing December 31, 2006 will be paid using funds from operations or replacement bank financing. Our board of directors has given management the authority to borrow an additional $15 million for a maximum of $50 million.
The Company completed the conversion of one of its two preheater kilns to a precalciner kiln in 2001 and completed the conversion of our remaining preheater kiln to a precalciner kiln during the first quarter of 2006 at a total cost of approximately $17.0 million. The conversion of this kiln should increase our production capacity by approximately 200,000 tons per year. Although we had to shut down this kiln for about six weeks during the conversion, we are projecting a 15% increase in total clinker production for the year 2006 as compared to 2005 due to the increased kiln capacity after the conversion. This kiln was also shut down approximately six weeks during early 2005 for the cooler installation. We began depreciating the precalciner equipment and related installation costs in the second quarter of 2006.
The Company is in the process of expanding its corporate office. Completion is anticipated in the third quarter of 2006 at a total cost of approximately $3.4 million. As of the end of the second quarter of 2006, we had spent approximately $2.7 million on this expansion. We have not started depreciating this addition.
Other projects, including changes to our quarrying and grinding operation to supply the raw materials required by the increased kiln capacity and increasing our finished cement storage capacity, are currently under consideration. Although we anticipate an increase in capital expenditures during 2006, we do not anticipate the need for additional bank financing other than that available under existing lines of credit.
For several years the Company has paid a $.20 per share dividend in January, March, June and September. At the April 2006 Board of Directors meeting, the Board elected to increase the dividend payable in June 2006 to $.21 per share. Although dividends are declared at the Board's discretion, we project future earnings will support the continued payment of dividends at the current level.
FINANCIAL CONDITION
Total assets as of June 30, 2006 were $160.0 million, an increase of $16.0 million since December 31, 2005 due to increases in receivables and inventories of approximately $6.8 million and $4.4 million, respectively. These variations are common during the first six months of the year due to the seasonality of our business (see Seasonality below). Property, plant and equipment increased $7.8 million primarily due to the installation of the precalciner during the first six months of 2006. Investments increased approximately $.5 million as a result of an unrealized gain during the first half of 2006.
Indebtedness increased about $9.0 million during the first six months of 2006 primarily due to capital expenditures of about $14.5 million and funding the increase in inventories and receivables of about $4.4 million and $6.8 million, respectively.
CAPITAL RESOURCES
The Company regularly invests in miscellaneous equipment and facility improvements in both the Cement Business and Ready-Mixed Concrete Business. Capital expenditures during the first six months of 2006 included completion of the installation of a precalciner and work towards the expansion and remodeling of our corporate offices. We also invested in routine equipment purchases during the first half of 2006, primarily in the Ready-Mixed Concrete Business. During the first half of 2006, cash expenditures for property, plant and equipment totaled approximately $14.5 million, excluding the amounts that are included in accounts payable. Other routine equipment purchases are also planned during the remainder of 2006.
The Company plans to complete the office addition in the third quarter of 2006. In addition, preliminary plans under consideration for 2006 include changes to our quarrying and grinding operation to supply the raw materials required by the increased kiln capacity. We do not anticipate the need for additional bank financing beyond the amount available through our existing line of credit.
MARKET RISK
Market risks relating to the Company's operations result primarily from changes in demand for our products. A significant increase in interest rates could lead to a 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 and uses a significant amount of electricity to operate our cement manufacturing equipment. An increase in such manufacturing components could adversely affect us. Prices of the specialized replacement parts and equipment the Company must continually purchase tend to increase directly with the rate of inflation causing manufacturing costs to increase.
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.
FUTURE CHANGE IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board (FASB) has issued the following new accounting pronouncement and exposure draft.
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN48"). FIN 48 clarifies the application of Statement 109 by defining a recognition threshold of "more likely than not" that the position would be sustained upon examination before any part of the benefit of that position be recognized in an enterprise's financial statements. It also provides guidance on the measurement of the tax position. This Interpretation will be effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, that this new pronouncement will have on the Company's consolidated financial statements.
The Financial Accounting Standards Board (FASB) issued the Exposure Draft "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)". The most significant proposed change would impact how companies recognize postretirement pension and medical plans on their balance sheets. If adopted as proposed, companies would have to reflect outstanding balances of prior service costs and gain or loss in Other Comprehensive Income. It is expected to be effective for fiscal years ending after December 15, 2006. The Company has not yet determined the exact amount that this new pronouncement would impact the Company's Consolidated Balance Sheet and Statement of Stockholders' Investment.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company owns $14.0 million of equity securities, primarily publicly traded entities, as of June 30, 2006. These investments are not hedged and are exposed to the risk of changing market prices. The Company classifies these securities as "available-for-sale" for accounting purposes and marks them to market on the balance sheet at the end of each period. Management estimates that its 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 $.8 million effect on comprehensive income.
The Company also has $32.3 million of bank loans as of June 30, 2006. Interest rates on the Company's advancing term loan and line of credit are variable and are based on the JP Morgan Chase prime rate less .75% and lender's national prime rate less 1.00%, 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 Exchange Act) 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) under the Securities Exchange Act of 1934). 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 June 30, 2006 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 and its subsidiary, Tulsa Dynaspan, Inc. ("TDI"), are involved in litigation with David G. Markle ("Markle"), a former director, president and employee of TDI, Richard L. Evilsizer, a former officer and employee of TDI and certain other former employees and companies controlled by one or more of such persons (the "Markle Parties"). Markle and Mr. Evilsizer are also minority shareholders in TDI. In the litigation TDI is seeking damages based on allegations that one or more of the Markle Parties have (1) breached their fiduciary duty to TDI, (2) violated noncompete agreements, (3) improperly used TDI computers in violation of the Federal Computer Fraud and Abuse Act, (4) improperly used TDI trade secrets and other proprietary information and (5) made defamatory and disparaging statements about TDI. The Markle Parties have alleged that the Company has defamed them and interfered with contractual relations. Markle and Mr. Evilsizer have alleged that the Company, as the majority shareholder of TDI, has breached its duty to them as minority shareholders. Certain of the Markle Parties have made claims against three directors of TDI who are also officers of Monarch, as well as derivative claims against TDI and Monarch. The litigation also involves a declaratory judgment as to whether TDI or Markle owns an alleged invention for a method for the construction of parking garages.
Two actions have been filed in this litigation. One was filed on December 28, 2004, in the District Court for Tulsa County, Oklahoma by Markle against TDI and the Company (the "State Court Action") . The other was filed by TDI against the Markle Parties on April 27, 2005, in the United States District Court for the Northern District of Oklahoma, but that litigation has been stayed pending judgment in the state court action. All of the Markle Parties are now parties in the State Court Action. This litigation is in the discovery stage and no trial date has been set. The Company and TDI believe that all claims made by the Markle Parties are without merit and intend to vigorously defend such claims. TDI intends to vigorously pursue its claims against the Markle Parties for damages, as well as its ownership of the alleged invention. On April 25, 2006, the District Court partially sustained motions to dismiss filed by Monarch and the directors. A motion for reconsideration by the Plaintiffs has been denied. Plaintiffs were given until August 18th to file an amended petition. No assurances can be given as to the outcome of this litigation.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the stockholders of The Monarch Cement Company held on April 13, 2005, the stockholders elected four Class II Directors, namely, Byron J. Radcliff, Michael R. Wachter, Walter H. Wulf, Jr., and Walter H. Wulf, III to serve terms expiring at the annual meeting of stockholders in 2009. Class I Directors, namely, David L. Deffner, Gayle C. McMillen, and Richard N. Nixon and Class III Directors, namely, Jack R. Callahan, Ronald E. Callaway, Robert M. Kissick and Byron K. Radcliff, continue to serve terms expiring at the annual meetings of stockholders in 2008 and 2007, respectively.
The following is a summary of votes cast:
For |
Withhold Authority/ Against |
Abstentions/Broker
Non-votes |
|||
Byron J. Radcliff | 16,076,434 | 42,014 | 0 | ||
Michael R. Wachter | 16,177,017 | 42,014 | 0 | ||
Walter H. Wulf, Jr. | 16,147,110 | 42,014 | 0 | ||
Walter H. Wulf, III | 16,075,978 | 42,014 | 0 |
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 August 14, 2006.
32.2 18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated August 14, 2006.
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 August 14, 2006 /s/ Walter H. Wulf, Jr.
Walter H. Wulf, Jr.
President and
Chairman of the Board
Date August 14, 2006 /s/ Debra P. Roe
Debra P. Roe, CPA
Chief Financial Officer
and
Assistant
Secretary‑Treasurer
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 August
14, 2006.
32.2 18 U.S.C. Section
1350 Certificate of the
Chief Financial Officer dated August
14, 2006.
Exhibit 31.1
THE MONARCH CEMENT COMPANY
SECTION 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Walter H. Wulf, Jr., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Monarch Cement Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial information.
Date: August 14, 2006
/s/ Walter H. Wulf, Jr.
Walter H. Wulf, Jr.
President and Chairman of the Board
Exhibit 31.2
THE MONARCH CEMENT COMPANY
SECTION 13a-14(a)/15d-14(a)
CERTIFICATIONS
I, Debra P. Roe., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The Monarch Cement Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial information.
Date: August 14, 2006
/s/ Debra P. Roe
Debra P. Roe, CPA
Chief Financial Officer and
Assistant Secretary-Treasurer
Exhibit 32.1
THE MONARCH CEMENT COMPANY
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906
OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Monarch Cement Company (the
"Company") on Form 10-Q
for the quarter ended June 30,
2006, as filed with the Securities and Exchange Commission on the date
hereof
(the "Report"), the undersigned, in the capacity and on the date indicated
below, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects,
the financial condition and results of operations of the
Company.
A signed original of this written statement required by Section 906 has been
provided to The Monarch
Cement Company and will be retained by The Monarch
Cement Company and furnished to the Securities
and Exchange Commission or its
staff upon request.
Dated: August 14, 2006
/s/ Walter H. Wulf, Jr. |
|||
Walter H. Wulf, Jr. President and Chairman of the Board |
Exhibit 32.2
THE MONARCH CEMENT COMPANY
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906
OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Monarch Cement Company (the
"Company") on Form 10-Q
for the quarter ended June 30, 2006, as filed with the
Securities and Exchange Commission on the date
hereof (the "Report"), the
undersigned, in the capacity and on the date indicated below, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects,
the financial condition and results of operations of the
Company.
A signed original of this written statement required by Section 906 has been
provided to The Monarch
Cement Company and will be retained by The Monarch
Cement Company and furnished to the Securities
and Exchange Commission or its
staff upon request.
Dated: August 14, 2006
/s/ Debra P. Roe
Debra P. Roe, CPA
Chief Financial Officer and
Assistant Secretary-Treasurer