EX-13 2 exhibit13.htm exhibit13.htm
EXHIBIT 13
 
 
 
 
                                                                                              
March 15, 2013
 

Annual Report to Stockholders
 
Mild winter weather during the first quarter of 2012 allowed us to begin the year with improved sales volumes; however, it was unclear whether the increase in sales volume was simply due to the favorable weather conditions or if it was an indication of the beginning of the recovery in our market area. As the year progressed, all indications were that the worst of the recession in our market area was over and that the recovery had begun. Our net sales for each quarter of 2012 exceeded net sales for the similar quarter of 2011 resulting in a total annual increase of $29.7 million – from $122.1 million in 2011 to $151.8 million in 2012. The higher sales volumes created the need for higher production levels allowing us to operate more efficiently and ultimately resulted in an increase in our gross profit of $3.5 million. Contributing to our higher earnings was a 14.5% increase in our cement sales volume during 2012 as compared to 2011 and a 29.4% increase in our ready-mixed concrete sales volume during the same time period. Gross profit in the Ready-Mixed Concrete Business was adversely affected by losses on construction contracts which occurred as we transitioned from having too few contracts to having multiple bids accepted at the same time. Strategic changes in our processes, from bidding through completion of the contract, are being implemented to lessen risks and improve returns on future projects.
 
Other income includes a gain on the sale of equity investments of $4.2 million in 2012 compared to a $5.1 million gain in 2011. Net income for 2012 totaled $3.2 million compared to $1.6 million for 2011.
 
In December 2012, the Environmental Protection Agency amended the National Emission Standard for Hazardous Air Pollutants (NESHAP) altering some of the emission limitations and extending the compliance deadline from September 2013 to September 2015. Our 2013 capital expenditure plans include modifying the roller mill as the next step toward NESHAP compliance. Other cement manufacturing equipment will be modified in the following two years in order to become NESHAP compliant. Additional capital expenditures are planned during 2013 in both the Cement Business and Ready-Mixed Concrete Business to keep our facilities and equipment well-maintained and up-to-date in anticipation of further improvements in our market. We project our capital expenditures during 2013 will exceed our 2012 capital expenditures; however, we believe we can finance our planned capital expenditures with a mixture of cash from operations and our existing credit agreement.
 
The Portland Cement Association’s latest forecast projects an 8.1% growth in cement consumption in 2013 with the majority of the growth occurring later in the year. We look forward to the increased demand for our products and wish to recognize our many loyal customers and our dedicated employees who are committed to providing high quality products and excellent service. With the continued support of our steadfast stockholders and the blessings and support of our Heavenly Father, we will strive to meet the challenges of the coming year. Thank you for your support and God Bless.
 
        Walter H. Wulf, Jr.
President and Chairman of the Board
 
 
 

 
The Monarch Cement Company and Subsidiaries
 
Selected Financial Data
 
For the Five Years Ended December 31, 2012
(Dollar amounts in thousands except per share data)
                               
   
2012
   
2011
   
2010
   
2009
   
2008
 
Net sales
  $ 151,774     $ 122,065     $ 121,185     $ 132,195     $ 153,886  
                                         
Net income
  $ 3,156     $ 1,552     $ 224     $ 4,685     $ 10,233  
                                         
Net income per share
    $0.79       $0.38       $0.06       $1.18       $2.54  
                                         
Total assets
  $ 181,288     $ 173,655     $ 174,099     $ 176,998     $ 174,765  
                                         
Long-term debt obligations
  $ 9,684     $ 7,303     $ 9,154     $ 12,097     $ 17,752  
                                         
Cash dividends declared per share
    $0.92       $0.92       $0.92       $0.92       $0.92  
                                         
Stockholders’ equity per share
    $25.50       $24.44       $25.32       $25.65       $24.98  
                                         


 

 
Description of the Business
 
The Monarch Cement Company (Monarch) was organized as a corporation under the laws of the State of Kansas in 1913.  Since its inception, Monarch has been engaged in the manufacture and sale of portland cement.
 
The manufacture of portland cement by Monarch involves the quarrying of clay and limestone and the crushing, drying and blending of these raw materials into the proper chemical ratio.  The raw materials are then heated in kilns to 2800º Fahrenheit at which time chemical reactions occur forming a new compound called clinker. After the addition of a small amount of gypsum, the clinker is ground into a very fine powder that is known as portland cement. The term “portland cement” is not a brand name but is a term that distinguishes cement manufactured by this chemical process from natural cement, which is no longer widely used. Portland cement is the basic material used in the production of ready-mixed concrete that is used in highway, bridge and building construction where strength and durability are primary requirements.
 
Subsidiaries of Monarch (which together with Monarch are referred to herein as the “Company”) are engaged in the ready-mixed concrete, concrete products and sundry building materials business. Ready-mixed concrete is manufactured by combining aggregates with portland cement, water and chemical admixtures in batch plants. It is then loaded into mixer trucks and mixed in transit to the construction site where it is delivered to the contractor. Concrete products primarily include pre-formed components produced by the Company that are ready for use in the construction of commercial buildings, institutional facilities and parking garages.
 
As used herein, “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.
 
 
1.
 

Lines of Business
 
 
The Company is engaged in two lines of business – Cement Business and Ready-Mixed Concrete Business.
 
The marketing area for Monarch’s products, which is limited by the relatively high cost of transporting cement, consists primarily of the State of Kansas, the State of Iowa, southeast Nebraska, western Missouri, northwest Arkansas and northern Oklahoma. Included within this area are the metropolitan markets of Des Moines, Iowa; Kansas City, Missouri; Springfield, Missouri; Wichita, Kansas; Omaha, Nebraska; Lincoln, Nebraska; Fayetteville, Arkansas and Tulsa, Oklahoma. Sales of cement are made primarily to contractors, ready-mixed concrete plants, concrete products plants, building materials dealers and governmental agencies. Monarch cement is delivered either in bulk or in paper bags and is sold under the “MONARCH” brand name. The cement is distributed both by truck and rail, either common or private carrier.
 
Subsidiaries of Monarch sell ready-mixed concrete, concrete products and sundry building materials in Monarch’s primary market.
 
The following table sets forth for the Company’s last three fiscal years the percentage of total sales by the (1) Cement Business and (2) Ready-Mixed Concrete Business:
 
   
Total Sales
 
   
December 31,
 
   
2012
   
2011
   
2010
 
Cement Business
    35.3%       38.3%       40.8%  
Ready-Mixed Concrete Business
    64.7%       61.7%       59.2%  
      100.0%       100.0%       100.0%  
 
 
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 Annual Report, our Form 10-K report and our other reports filed with the Securities and Exchange Commission (SEC) constitute “forward-looking information”. 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 line of credit; our ability to pay dividends at the current level; the timing and/or collectability of retainage; our anticipated expenditures for benefit plans; 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:
 
 
 
 
2.
·    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. Other factors that we have not identified in this report could also have this effect. 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
         
Ready-Mixed
       
   
Cement
   
Concrete
       
   
Business
   
Business
   
Consolidated
 
For the Year Ended December 31, 2012
                 
Sales to unaffiliated customers
  $ 53,616,941     $ 98,157,043     $ 151,773,984  
Income (loss) from operations
    10,243,708       (9,941,357 )     302,351  
                         
For the Year Ended December 31, 2011
                       
Sales to unaffiliated customers
  $ 46,801,814     $ 75,263,070     $ 122,064,884  
Income (loss) from operations
    1,502,909       (4,478,723 )     (2,975,814 )
                         
For the Year Ended December 31, 2010
                       
Sales to unaffiliated customers
  $ 49,436,170     $ 71,748,664     $ 121,184,834  
Income (loss) from operations
    6,147,514       (6,005,382 )     142,132  
 
See Note 9, Lines of Business, of Notes to Consolidated Financial Statements for further discussion of each of the Company’s reportable operating lines of business.
 
General--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).
 
The Company shut down its cement production facility and laid off the majority of its cement production employees during the first quarter of 2012 due to the continued weakness in the construction industry. Mild weather during the layoff allowed some construction projects to continue through the winter, increasing cement sales, reducing inventory at a faster rate than projected and shortening the length of layoff.
 
Following a three week 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
 
 
3.
 
forecasts and inventory levels, the Company elected to reduce cement production in the first quarter of 2012, 2011 and 2010 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, and in 2011 and 2010 had, a negative impact on our gross profit margins.
 
The Portland Cement Association’s (PCA) latest forecast sites 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.
 
2012 Compared to 2011--Consolidated net sales for the year ended December 31, 2012 were approximately $151.8 million, an increase of $29.7 million as compared to the year ended December 31, 2011. Sales in our Cement Business were higher by $6.8 million while sales in our Ready-Mixed Concrete Business increased $22.9 million. Cement Business sales increased $6.8 million due to a 14.5% increase in volume sold. Ready-mixed concrete sales increased $15.0 million due to a 29.4% increase in cubic yards sold and $0.2 million due to price increases. In addition, construction contract sales in the Ready-Mixed Concrete Business increased $7.7 million.
 
Consolidated cost of sales for 2012 were $26.2 million higher than cost of sales for 2011. Cost of sales in our Cement Business decreased $1.6 million, while cost of sales in our Ready-Mixed Concrete Business increased $27.8 million. Cement Business cost of sales increased $5.5 million due to the 14.5% increase in volume sold.  This was more than offset by a $7.1 million decrease primarily due to lower production costs resulting from the efficiencies of higher production levels. Ready-Mixed Concrete Business cost of sales increased $14.5 million due to the 29.4% increase in cubic yards of ready-mixed concrete sold and $0.2 million due to increases in direct material costs. Ready-Mixed Concrete Business cost of sales also increased by $13.1 million as a result of increased construction contract sales.
 
As a result of the above sales and cost of sales factors, our overall gross profit rate for the year ended December 31, 2012 was 11.0% compared to 10.7% for the year ended December 31, 2011.  The gross profit rate for Ready-Mixed Concrete Business dropped from 5.3% for 2011 to (0.9)% for 2012. The segment’s gross profit rate decline was largely due to the deterioration of the gross profit margin in construction contract sales in 2012. During the economic downturn we substantially reduced our workforce in the construction contract division keeping primarily key personnel on staff. In 2012, we significantly increased the number of construction contracts we were awarded, requiring a larger skilled workforce than we had in place. Finding the personnel with the needed skills proved challenging at best, requiring additional training of new personnel and, in some cases, contracting out work we had intended to perform in house in an attempt to meet construction deadlines. These factors resulted in cost overruns and a gross loss from operations in our Ready-Mixed Concrete Business. The Cement Business gross profit rate improved from 19.4% for 2011 to 32.7% for 2012 which reflects the improvement in overall sales volume combined with efficiencies of higher production levels in 2012.
 
Selling, general and administrative expenses increased by $0.3 million or 1.6% for the year ended December 31, 2012 as compared to the year ended December 31, 2011.  These costs are normally considered fixed costs that do not vary significantly with changes in sales volume.
 
 
 
 
 
4.
 
Other, net contains miscellaneous nonoperating income (expense) items excluding interest income, interest expense, gains (losses) on sale of equity investments, realized loss on impairment of equity investments and dividend income. Significant items in Other, net for 2012 include farm income of approximately $149,000. Significant items in Other, net for 2011 include proceeds from scrap sales of approximately $150,000.
 
During 2011, there was a $0.4 million impairment loss recorded on equity investments due to impairments that were other-than-temporary while no impairment losses were recorded in 2012. See Note 2, Investments, of Notes to Consolidated Financial Statements for further discussion. The Company also recognized $4.2 million and $5.1 million in gains for 2012 and 2011, respectively, from the sale of available-for-sale equity securities.
 
The effective tax rates for 2012 and 2011 were 28.0% and 13.4%, 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. During 2012 and 2011, percentage depletion decreased the effective tax rate by 18.1% and 15.1%, respectively. In 2012, the effective tax rate increased 10.0% as a result of the effects of the valuation allowance.
 
2011 Compared to 2010--Consolidated net sales for the year ended December 31, 2011 were approximately $122.1 million, an increase of $0.9 million as compared to the year ended December 31, 2010. Sales in our Cement Business were lower by $2.6 million while sales in our Ready-Mixed Concrete Business increased $3.5 million. Cement Business sales decreased $1.9 million due to a 3.8% decrease in volume sold and $0.7 million due to price decreases. Ready-mixed concrete sales increased $4.5 million of which $4.0 million is attributable to an 8.6% increase in cubic yards sold and $0.5 million to price increases. These increases were partially offset by a $1.0 million decrease in the sale of block, brick and other sundry items.
 
Consolidated cost of sales for 2011 were $4.0 million higher than cost of sales for 2010. Cost of sales increased in our Cement Business and our Ready-Mixed Concrete Business by $1.9 million and $2.1 million, respectively. Cement Business cost of sales decreased $1.4 million due to the 3.8% decrease in volume sold and was more than offset by the $3.3 million increase related to higher production costs resulting from the continuation of fixed costs during production shutdowns and the inefficiencies of lower production levels. Ready-Mixed Concrete Business cost of sales increased  $4.0 million due to the 8.6% increase in cubic yards of ready-mixed concrete sold partially offset by decreases in delivery costs and direct material costs of $0.8 million. Ready-Mixed Concrete Business cost of sales declined $0.6 million due to decreases in direct and indirect costs for construction contracts in 2011 even though construction contract sales remained virtually the same as those in 2010. The Ready-Mixed Concrete Business segment also realized a $0.5 million decrease in block, brick and other sundry items cost of sales.
 
As a result of the above sales and cost of sales factors, our overall gross profit rate for the year ended December 31, 2011 was 10.7% compared to 13.4% for the year ended December 31, 2010. The decline was primarily due to the Cement Business in which the gross profit rate dropped from 27.5% for 2010 to 19.4% for 2011. The Ready-Mixed Concrete Business gross profit rate improved slightly from 3.6% for 2010 to 5.3% for 2011.
 
Other, net contains miscellaneous nonoperating income (expense) items excluding interest income, interest expense, gains (losses) on sale of equity investments, realized loss on impairment of equity investments and dividend income. Significant items in Other, net for 2011 include proceeds from scrap sales of approximately $150,000. Significant items in Other, net for 2010 include farm income of approximately $154,500, a gain of $700,000 related to the sale of a nonoperating asset and proceeds from scrap sales of approximately $51,000.
 
 
 
 
 
 
 
 
5.
 
During 2011, there was a $0.4 million impairment loss recorded on equity investments due to impairments that were other-than-temporary while the Company realized a $0.9 million impairment loss for 2010. See Note 2, Investments, of Notes to Consolidated Financial Statements for further discussion. The Company also recognized $5.1 million in gains for 2011 while slight losses were recognized in 2010 from the sale of available-for-sale equity securities.
 
The effective tax rates for 2011 and 2010 were 13.4% and 394.3%, 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. For the year 2010, the Company incurred a book loss before taxes of $(76,078) while its taxable income was approximately $2.5 million before percentage depletion and the domestic production activities deduction. The differences between the book loss before taxes and taxable income before percentage depletion and the domestic production activities deduction were primarily timing differences resulting in an increase in the Company’s deferred tax asset.  For example, in 2010, the Company’s net periodic post-retirement benefit cost expensed on the books was $3.1 million; however, the Company’s tax deduction was limited to its actual contributions of $1.3 million. The difference of $1.8 million is a timing difference between book and taxable income which increased our deferred tax asset by approximately $0.8 million. As the Company’s net income decreased, the permanent differences between book and taxable income for percentage depletion and domestic production activities did not decrease proportionately resulting in a reduction in our effective tax rate. The tax deductions for percentage depletion and domestic production activities are permanent book tax differences that resulted in a reduction in taxable income from approximately $2.5 million to $0.8 million. During 2010, percentage depletion increased the tax benefit and changed the effective tax rate by 725.6%. During 2011, percentage depletion decreased the effective tax rate by 15.1%.
 
The effective tax rate for 2010 was also affected by an income tax charge of $685,000 recorded during the first quarter of 2010 as a result of the Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act of 2010. As a result of this legislation, beginning in 2013, we will no longer be able to claim an income tax deduction for prescription drug benefits provided to retirees that were subsequently reimbursed under the Medicare Part D retiree drug subsidy. During 2010, the income tax charges related to postretirement benefits decreased our tax benefit which changed the effective tax rate by 900.4%.
 
 
Liquidity
 
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 December 31, 2012 and 2011, cash equivalents consisted primarily of money market investments and repurchase agreements with various banks. At December 31, 2012, the Company had $1.3 million in sweep arrangement accounts that were not covered by FDIC’s general deposit insurance. See Note 1(e), Cash Equivalents, of Notes to Consolidated Financial Statements for further discussion.
 
We are able to meet our cash needs primarily from a combination of cash from operations, sale of equity investments and bank loans.
 
Net cash provided by operating activities totaled $10.3 million for 2012, a $3.4 million increase from 2011. The positive cash flow from operating activities generated during 2012 was primarily driven by the $3.2 million net income and favorable changes in accounts payable and accrued liabilities partially offset by unfavorable changes in receivables, inventories and refundable income taxes. Net income for 2012 includes realized gains of $4.2 million from the disposal of available-for-sale equity securities and is not indicative of the operating margins for the period. The unfavorable change in inventories is a result of increases in finished cement, work in process inventories and operating and maintenance supplies of
 
 
 
 
 
6.
 
$1.4 million, $1.7 million and $1.4 million, respectively.  The increases in finished cement and work in process inventories are the result of production increases in excess of higher sales volumes. These production increases were planned to compensate for lost production while our facilities are down during the first quarter of 2013 for installation of equipment related to National Emission Standard for Hazardous Air Pollutants (NESHAP) projects. For further discussion on NESHAP, see “Capital Resources” below. The increase in operating and maintenance supplies was primarily due to purchases of repair parts and supplies related to maintenance projects scheduled to be performed in the Cement Business while the production facilities are down. The unfavorable $1.3 million increase in cash used for receivables is primarily related to our construction contracts. The unfavorable $1.1 million change in refundable income taxes is the result of our quarterly estimated tax payments exceeding our 2012 taxes which were based on annualized income as of September 2012.
 
Net cash provided by operating activities totaled $7.0 million for 2011, a $6.9 million decrease from 2010. The positive cash flow from operating activities generated during 2011 was primarily driven by the $1.6 million net income and favorable changes in inventories partially offset by unfavorable changes in receivables. Net income for 2011 includes realized gains of $5.1 million from the disposal of available-for-sale equity securities and is not indicative of the operating margins for the period. The favorable change in inventories is a result of the $1.7 million decrease in finished cement, the $0.7 million decrease in work in process inventories and the $0.5 million decrease in building products which was partially offset by an unfavorable $0.6 million increase in fuel, gypsum, paper sacks and other inventory. The unfavorable $3.6 million increase in cash used for receivables is primarily a result of higher sales in December 2011 compared to December 2010.
 
Net cash provided by operating activities totaled $13.9 million for 2010, a $4.8 million decrease from 2009.  The positive cash flow from operating activities generated during 2010 was primarily driven by the $0.2 million net income and favorable changes in inventories and postretirement benefits and pension expense partially offset by unfavorable changes in accounts payable and accrued liabilities. Net income for 2010 reflects the decline in overall sales volume combined with some decline in gross profit margins. Net income also includes realized losses of $0.9 million on the impairment of available-for-sale equity securities. Cash was provided by the $1.8 million decrease in fuel, gypsum, paper sacks and other inventories primarily resulting from the consumption of coal and petroleum coke in the production process exceeding purchases. The $2.4 million favorable change in postretirement benefits and pension expense was primarily due to the $2.6 million change related to postretirement benefits. Accounts payable and accrued liabilities declined approximately $2.3 million in 2010 from 2009 levels primarily due to a decline in prepayments held on account in accrued liabilities.
 
Net cash used for investing activities totaled $1.3 million in 2012. The cash used for investing activities during 2012 was primarily for the acquisition of $8.1 million of property, plant and equipment which was partially offset by cash inflows from the sale of $6.8 million of available-for-sale equity securities. For a discussion of the property, plant and equipment acquisitions, see “Capital Resources” below.
 
Net cash used for investing activities totaled $3.3 million in 2011. The cash used for investing activities during 2011 was primarily for the acquisition of $7.9 million of property, plant and equipment and $3.5 million of available-for-sale equity securities partially offset by cash inflows from the sale of $8.3 million of available-for-sale equity investments. The capital expenditures were almost equally divided between the Cement Business and Ready-Mixed Concrete Business and were for routine equipment purchases.
 
Net cash used for investing activities totaled $6.0 million in 2010. The cash used for investing activities during 2010 was primarily for the acquisition of $6.2 million of property, plant and equipment and $1.0 million of available-for-sale equity securities partially offset by the cash inflow from the sale of
 
 
 
 
 
 
 
 
7.
 
$0.7 million in nonoperating assets. The capital expenditures were almost equally divided between the Cement Business and Ready-Mixed Concrete Business and were for routine equipment purchases.
 
Net cash used for financing activities totaled $8.8 million, $5.3 million and $7.3 million for 2012, 2011 and 2010, respectively. The differences were primarily due to the purchases of $2.6 million of capital stock in 2011, loan proceeds of $3.1 million in 2012, changes in the line of credit balance each year and a $0.9 million payment in 2012 of the Company’s cash dividends that is typically paid in January of the following year. The line of credit was used to cover operating expenses and for capital expenditures.
 
See Note 4, Line of Credit and Long-Term Debt, of Notes to Consolidated Financial Statements for a discussion of the Company’s credit agreements. The term loan, which originated in 2000, was used to help finance the expansion project at our cement manufacturing facility. The line of credit 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. 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.
 
Contractual obligations at December 31, 2012, consisting of maturities on long-term debt, estimated interest payments on debt, pension, postretirement benefit obligations and open purchase orders are as follows:
 
   
2013
   
2014
   
2015
   
2016
   
2017
   
Thereafter
 
Long-term debt
  $ 1,594,792     $ 1,629,047     $ 1,774,413     $ 1,383,447     $ 4,897,058     $ -  
Interest payments
    254,241       208,175       161,131       115,132       87,928       -  
Pension
    2,470,000       -       -       -       -       -  
Postretirement
                                               
   benefit obligations
    1,627,819       1,783,550       1,897,785       1,940,507       1,994,800       10,529,561  
Open purchase orders
    5,224,000       2,144,000       -       -       -       -  
Total
  $ 11,170,852     $ 5,764,772     $ 3,833,329     $ 3,439,086     $ 6,979,786     $ 10,529,561  

The long-term debt obligation consists of a note related to the acquisition of Kay Concrete Materials Co. (Kay Concrete), short and long-term portions of noncompete payment obligations and the Company’s term loan and revolving note which are assumed to be paid off at maturity. The interest payments are for the term loan based on interest rates in the current credit agreement.
 
The Company has been required to make a pension contribution each of the past three years. In 2012, 2011 and 2010, the Company contributed approximately $3.5 million, $3.2 million and $2.3 million, respectively, to the pension fund. 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 Pension Plans in Note 6, Pension and Other Postretirement Benefits, of Notes to Consolidated Financial Statements for disclosures about 2012 pension contributions.
 
Each segment of the cement manufacturing process requires significant investment in major pieces of equipment. Once installed, this equipment, if properly maintained, can function for many years. Generally we spend several million dollars each year on preventive maintenance and equipment repairs; however, capital expenditures vary from year to year. A piece of equipment that costs $25 - $30 million may remain in service for fifty years. After a period of time, this equipment may be modified to incorporate the latest technology, increasing its efficiency and production capacity and extending its useful life. Modifications may also be required to comply with environmental regulations. In the years Monarch invests in major equipment replacements or enhancements, current operations do not generate enough cash to pay for the improvements,
 
 
 
8.
 
requiring us to use our cash on hand or bank financing. As projects are completed, we seek to reduce the amount needed for major capital expenditures, allowing us to pay off any outstanding bank loans and accumulate cash for the next major plant improvement.
 
The Company has capital improvement 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 line of credit and the advancing term loan.
 
Under the terms and conditions of the loan agreement effective for 2012, the Company’s ability to pay dividends was subject to its satisfaction of certain financial covenants that the Company was in compliance with at year end.  The Company was required to maintain a tangible net worth after accumulated other comprehensive income (loss) of $85.0 million, maintain a minimum tangible net worth before accumulated other comprehensive income (loss) of $95.0 million and restrict cash dividends in any fiscal year to a maximum of $3.8 million. In November 2012, our current lender granted the Company a waiver which enabled the Board of Directors in their December meeting to authorize the payment in December 2012 of $0.9 million of the Company’s cash dividends that are typically paid in January of the following year which resulted in five dividend payments made in 2012. 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).
 
 
Financial Condition
 
Total assets as of December 31, 2012 were $181.3 million, an increase of $7.6 million since December 31, 2011. Receivables increased $1.3 million primarily as a result of an increase in receivables related to construction contracts. See “Results of Operations, 2012 Compared to 2011” above for further discussion of construction contracts. Total inventories increased approximately $4.9 million primarily due to increases in finished cement, work in process inventories and operating and maintenance supplies of $1.4 million, $1.7 million and $1.4 million, respectively.  The increases in finished cement and work in process inventories are the result of production increases in excess of higher sales volumes. These production increases were planned to compensate for lost production while our facilities are down during the first quarter of 2013 for installation of equipment related to NESHAP projects. For further discussion on NESHAP, see “Capital Resources” below. The increase in operating and maintenance supplies was primarily due to purchases of repair parts and supplies related to maintenance projects scheduled to be performed in the Cement Business while the production facilities are down. The Company’s quarterly estimated tax payments, based on annualized income as of September 2012, exceeded our 2012 taxes which resulted in an increase in refundable income taxes of $1.1 million. Investments increased $7.4 million primarily due to increases in the fair value of available-for-sale equities held. Deferred income tax asset decreased $3.5 million primarily as the result of the $4.0 million increase in deferred tax liability associated with a $10.0 million increase in unrealized gains on available-for-sale equities as of December 31, 2012 over December 31, 2011. Property, plant and equipment, net of approximately $11.7 million in depreciation and
 
 
 
 
 
 
9.
 
depletion expense, increased $3.5 million primarily due to expenditures of approximately $8.2 million. See “Capital Resources” below for further discussion.
 
Accounts payable increased $5.7 million primarily due to increased payables related to NESHAP projects in the Cement Business and increased payables related to the higher construction contract volumes in the Ready-Mixed Concrete Business. Other accrued liabilities decreased by $0.7 million in 2012 from 2011 levels primarily due to a $0.9 million decline in Dividends payable. The Board of Directors authorized payment in December 2012 of $0.9 million of the Company’s cash dividends that are typically paid in January of the following year which resulted in five dividend payments made in 2012 instead of the normal four. See “Liquidity” above for further discussion.  Indebtedness decreased about $4.1 million during 2012 primarily due to decreased utilization of our line of credit.
 
During 2012, we adjusted the pension liability, resulting in a decrease in long-term accrued pension expense of $0.4 million and a decrease in stockholders’ equity of $0.6 million. The decrease in stockholders’ equity was due to a current year actuarial loss. We also adjusted the postretirement liability, resulting in an increase in accrued postretirement expense of $2.9 million and a decrease in stockholders’ equity of $0.6 million. The decrease in stockholders’ equity was due to a current year actuarial loss. Actuarial gains (losses) are a measure of the difference between actual experience and that expected based upon the actuarial assumptions between two measurement dates.  The gains (losses) are directly calculated and are amortized over average expected future service, to the extent that such gains (losses) are greater than 10% of the greater of the Accrued Postretirement Benefit Obligation and the Plan’s assets.
 
Stockholders’ equity increased $4.3 million (4.4%) during 2012 primarily as a result of net income and the changes in accumulated other comprehensive income (loss) related to unrealized appreciation on available-for-sale equity securities which were partially offset by dividends and the change in postretirement  and pension in accumulated other comprehensive income (loss).  Basic earnings were $0.79 per share and cash dividends declared were $0.92 per share for 2012.
 
 
Capital Resources
 
The Company historically invests $10 million to $12 million per year on capital expenditures to keep its equipment and facilities in good operating condition. Property, plant and equipment expenditures for the year 2012 totaled $8.2 million. Approximately 75% of these expenditures were related to the Cement Business primarily for projects related to NESHAP compliance and 25% were related to the Ready-Mixed Concrete Business for routine equipment purchases. Cash expenditures for property, plant and equipment for 2012 totaled approximately $8.1 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 one kiln at a cost of $0.4 million and $2.2 million, respectively. We have also initiated plans to modify our roller mill and related equipment at an estimated cost of $7.5 million dollars. Other planned modifications (and estimated cost) which are in various phases of implementation include additional dust collectors on our second kiln ($1.5 million) and upgraded dust collectors on both clinker coolers ($4.0 million). To date, we have expended $9.0 million towards projects related to NESHAP compliance. Cost estimates will be updated as
 
 
 
10.
 
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 $11.0 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 line of credit.
 
Accounting Policies--The critical accounting policies with respect to the Company are those related to pension benefits, postretirement benefits and long-lived assets.
 
Monarch has defined benefit pension plans covering substantially all permanent employees in the Cement Business. Plans covering staff (salaried) employees provide pension benefits that are based on years of service and the employee’s last sixty calendar months of earnings or the highest five consecutive calendar years of earnings out of the last ten calendar years of service, whichever is greater. Plans covering production (hourly) employees provide benefits of stated amounts for each year of service. Generally, Monarch’s funding policy is to contribute annually an amount within the minimum/maximum range of tax deductible contributions. Contributions are intended to provide for benefits attributed to service to date and for those expected to be earned in the future. Monarch expects 2013 cash expenditures for these plans to be approximately $2.5 million.
 
Monarch also provides other postretirement employee benefits including health care and life insurance benefits to all retired employees in the Cement Business who, as of their retirement date, have completed ten or more years of credited service under the pension plans and retire with an immediate pension. These benefits are self-insured by Monarch and are paid out of Monarch’s general assets. Monarch expects 2013 cash expenditures for postretirement benefits to be approximately $1.6 million.
 
We account for our pension plans in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 715-30, “Defined Benefit Plans - Pension” and our postretirement benefits in accordance with FASB ASC 715-60, “Defined Benefit Plans - Other Postretirement”.  ASC 715-30 and 715-60 require us to make various estimates and assumptions, including discount rates used to value liabilities, expected rates of return on plan assets, salary increases, employee turnover rates, anticipated employee mortality rates and expected future healthcare costs.  The estimates we used are based on our historical experience as well as current facts and circumstances and are updated at least annually.  These sections of the ASC also require us to recognize the entire overfunded or underfunded status of our defined benefit and postretirement plans as assets or liabilities in the statement of financial position and to recognize changes, net of taxes, in that funded status in the year in which the changes occur through comprehensive income.
 
The Company continually evaluates whether events or changes in circumstances have occurred that would indicate that the carrying amount of long-lived assets may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.  Examples of events or circumstances that could trigger a review could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset or asset group, technological advances in equipment, accumulated costs related to the construction of production equipment or facilities that are significantly higher than originally expected and a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset including an adverse action or assessment by a regulator. Various factors that the Company
 
 
 
 
 
11.
 
considers in its review include changes in expected use of the assets, changes in technology, changes in operating performance and changes in expected future cash flows. No asset impairment was recognized during the years ended December 31, 2012 or 2011.
 
The following additional accounting standard was recently adopted by the Company:
 
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”, which updated the guidance in ASC Topic 820. The amendments in this ASU result in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of Level 3 assets and for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The amendments in this update were effective for the Company beginning January 1, 2012 and they did not have a material impact on our disclosures or our consolidated financial statements.
 
See Note 12, Future Change in Accounting Principles, of Notes to Consolidated Financial Statements for information concerning the accounting pronouncements issued by the Financial Accounting Standards Board that will be effective in future periods.
 
Accounting and Disclosure Rules Impact--Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many areas of our business, such as revenue recognition, accounting for investments, fair value estimates and accounting for pension and postretirement, are very complex and involve significant and sometimes subjective judgments. Changes in these rules or their interpretation could significantly impact our reported earnings and operating income and could add significant volatility to those measurements in the future, without a corresponding change in cash flows.
 
Market Risks--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. See Note 7, Significant Estimates and Certain Concentrations, of Notes to Consolidated Financial Statements for further discussion.
 
The Company invests in equity investments which are subject to market fluctuations. The Company had $27.4 million of equity securities, primarily of publicly traded entities, as of December 31, 2012. 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 December 31, 2012. The remaining $24.8 million in equity investments, which are
 
 
 
 
 
12.
 
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 fair value of our equity securities carried at fair value would have a $1.5 million effect, net of deferred tax, on comprehensive income. At December 31, 2012, the Company evaluated all of its equity investments for impairment. The results of those evaluations are discussed in Note 2, Investments, of Notes to Consolidated Financial Statements.
 
Interest rates on the Company’s term loan and line of credit for 2012 were variable, subject to interest rate minimums or floors and were based on the lender’s national prime rate less 0.75% and lender’s national prime rate less 0.50%, respectively. After entering into the new credit agreement with its current lender on December 31, 2012, the interest rates on the Company’s advancing term loan, revolving loan and term loan are all variable, subject to interest rate minimums or floors and based on the rate of interest regularly published by the Wall Street Journal and designated as the U.S. Prime Rate (hereto referred to as the WSJ prime rate) less 1.50%, the WSJ prime rate less 1.50% and the WSJ prime rate less 1.25%, respectively. See Note 4, Line of Credit and Long-Term Debt, of Notes to Consolidated Financial Statements for further discussion.
 
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
 
 
 
 
13.
 
limits required through regulation or legislation could be substantial enough to fundamentally adversely change the cement manufacturing business.
 
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”.
 
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.
 
 
Stock Market and Dividend Data
 
On February 19, 2013, Monarch’s Capital Stock and Class B Capital Stock was held by approximately 560 and 380 record holders, respectively. Monarch is the transfer agent for Monarch’s stock which is traded on the over-the-counter market under the trading symbol “MCEM”.  Over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  Following is a schedule of the range of the low and high bid quotations for Monarch’s stock as reported by Ameriprise, who ascertained this information through a subscription service through Bloomberg and of the dividends declared on Monarch’s stock, for each quarter of our two latest fiscal years: 
 
 
 
 
 
 
14.
 
   
2012
   
2011
 
   
Price
   
Dividends
   
Price
   
Dividends
 
Quarter
 
Low
   
High
   
Declared
   
Low
   
High
   
Declared
 
First
  $ 23.25     $ 28.25     $ -     $ 22.00     $ 25.00     $ -  
Second
  $ 21.50     $ 26.20     $ 0.23     $ 22.00     $ 25.25     $ 0.23  
Third
  $ 21.76     $ 23.59     $ 0.23     $ 15.00     $ 24.80     $ 0.23  
Fourth
  $ 19.85     $ 22.71     $ 0.46 *   $ 20.01     $ 20.01     $ 0.46 **
                                                 
*Reflects declaration of two $0.23 dividends - one payable in the fourth quarter of 2012, one payable in the first quarter of 2013.
**Reflects declaration of two $0.23 dividends payable in the first quarter of 2012.
 
For additional information concerning the Company’s payment of dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity”. The Company’s loan agreement contains a financial covenant that requires the Company to maintain a minimum net worth which it was in compliance with at year end. See Note 4, Line of Credit and Long-Term Debt, of Notes to Consolidated Financial Statements.
 
The following performance graph and table show a five-year comparison of cumulative total returns for the Company, the S&P 500 composite index and an index of a peer group of companies selected by the Company.
 
The cumulative total return on investment for each of the periods for the Company, the S&P 500 and the peer group is based on the stock price or composite index at December 31, 2007. The performance graph assumes that the value of an investment in the Company’s capital stock and each index was $100 at December 31, 2007 and that all dividends were reinvested.  The information presented in the performance graph is historical in nature and is not intended to represent or guarantee future returns.
 
The performance graph compares the performance of the Company with that of the S&P 500 composite index and an index of a peer group of companies in the Company’s industry in which the returns are weighted according to each company’s market capitalization. The peer group consists of Cemex Sab De CV, Eagle Materials, Inc., Lafarge S.A., Texas Industries, Inc. and Vulcan Materials Company.       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.
 
 
                                     
                                     
      12/07       12/08       12/09       12/10       12/11       12/12  
                                                 
Monarch Cement Company (The)
    $100.00       $95.66       $107.46       $98.20       $89.55       $79.20  
S&P 500
    100.00       63.00       79.67       91.67       93.61       108.59  
Peer Group
    100.00       42.84       54.68       47.29       29.40       52.35  

 
Copyright© 2013 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights reserved. (www.researchdatagroup.com/S&P.htm)
 

 
 
 
 
 
 
16.
 

Management’s Report on Internal Control Over Financial Reporting
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.  The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP).  Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.  In making this assessment, management used the framework and criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2012.
 
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 has been audited by BKD, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
 
 
The Monarch Cement Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17.
 
 
Report of Independent Registered Public Accounting Firm
 
Audit Committee, Board of Directors and Stockholders
The Monarch Cement Company
Humboldt, Kansas
 
We have audited the internal control over financial reporting of The Monarch Cement Company and subsidiaries (the Company) as of December 31, 2012 , based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed 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.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company and our report dated March 15, 2013, expressed an unqualified opinion thereon.
BKD, LLP
Kansas City, Missouri
March 15, 2013
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
Audit Committee, Board of Directors and Stockholders
The Monarch Cement Company
Humboldt, Kansas
 
 
We have audited the accompanying consolidated balance sheets of The Monarch Cement Company and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of income, stockholders’ equity and noncontrolling interests, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2012.  The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 

Kansas City, Missouri
March 15, 2013
 
 
 
 
 
 
 
 
 
 
The Monarch Cement Company and Subsidiaries   
Consolidated Balance Sheets   
December 31, 2012 and 2011
 
 
ASSETS
 
2012
   
2011
 
Current Assets:
           
Cash and cash equivalents
  $ 1,440,959     $ 1,123,870  
Receivables, less allowances of $636,000 in 2012 and
               
$670,000 in 2011 for doubtful accounts
    17,235,220       15,970,034  
Inventories, priced at cost which is not in excess of market-
               
Finished cement
  $ 5,385,586     $ 3,963,233  
Work in process
    3,040,112       1,353,361  
Building products
    4,324,133       4,236,266  
Fuel, gypsum, paper sacks and other
    6,760,554       6,416,618  
Operating and maintenance supplies
    13,244,419       11,892,887  
Total inventories
  $ 32,754,804     $ 27,862,365  
Refundable federal and state income taxes
    1,441,206       353,199  
Deferred income taxes
    750,000       750,000  
Prepaid expenses
    658,369       631,461  
Total current assets
  $ 54,280,558     $ 46,690,929  
Property, Plant and Equipment, at cost, less
               
accumulated depreciation and depletion of $193,109,379
               
in 2012 and $182,427,598 in 2011
    83,179,004       86,719,411  
Deferred Income Taxes
    14,964,458       18,416,410  
Investments
    27,380,650       20,026,704  
Other Assets
    1,483,475       1,801,356  
    $ 181,288,145     $ 173,654,810  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 11,186,677     $ 5,451,853  
Line of credit payable
    -                4,844,469  
Current portion of term loan
    1,237,816       2,920,023  
Current portion of other long-term debt
    175,000       175,000  
Accrued liabilities-
               
Dividends
    923,136       1,846,272  
Compensation and benefits
    3,284,587       3,232,168  
Miscellaneous taxes
    1,050,419       594,715  
Other
    1,883,211       2,210,549  
Total current liabilities
  $ 19,740,846     $ 21,275,049  
Long-Term Debt
    9,683,965       7,303,137  
Accrued Postretirement Benefits
    36,262,992       33,327,243  
Accrued Pension Expense
    13,241,529       13,676,003  
Stockholders' Equity:
               
Capital Stock, par value $2.50 per share, one vote per share -
               
Authorized 10,000,000 shares, Issued and Outstanding 2,596,047
               
shares at 12/31/2012 and 2,569,831 shares at 12/31/2011
  $ 6,490,117     $ 6,424,578  
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 and Outstanding
               
1,417,587 shares at 12/31/2012 and 1,443,803 shares at 12/31/2011
    3,543,968       3,609,507  
Additional paid-in-capital
    2,485,125       2,485,125  
Retained earnings
    97,214,376       97,751,202  
Accumulated other comprehensive loss
    (7,374,773 )     (12,197,034 )
Total Stockholders' Equity
  $ 102,358,813     $ 98,073,378  
    $ 181,288,145     $ 173,654,810  
See accompanying Notes to the Consolidated Financial Statements
20. 
The Monarch Cement Company and Subsidiaries   
Consolidated Statements of Income   
For the Years Ended December 31, 2012, 2011 and 2010
 
 
 
 
2012
   
2011
   
2010
 
NET SALES
  $ 151,773,984     $ 122,064,884     $ 121,184,834  
COST OF SALES
    135,142,366       108,962,580       104,977,712  
Gross profit from operations
  $ 16,631,618     $ 13,102,304     $ 16,207,122  
SELLING, GENERAL AND
                       
ADMINISTRATIVE EXPENSES
    16,329,267       16,078,118       16,064,990  
Income (loss) from operations
  $ 302,351     $ (2,975,814 )   $ 142,132  
OTHER INCOME (EXPENSE):
                       
Interest income
  $ 38,829     $ 90,716     $ 120,071  
Interest expense
    (450,422 )     (502,546 )     (540,439 )
Loss on impairment of equity investments
    -               (415,287 )     (858,787 )
Gain (loss) on sale of equity investments
    4,173,141       5,051,406       (79,793 )
Dividend income
    71,177       285,283       249,929  
Other, net
    250,641       258,550       890,809  
    $ 4,083,366     $ 4,768,122     $ (218,210 )
INCOME (LOSS) BEFORE PROVISION FOR
                       
(BENEFIT FROM) INCOME TAXES
  $ 4,385,717     $ 1,792,308     $ (76,078 )
PROVISION FOR (BENEFIT FROM) INCOME TAXES
    1,230,000       240,000       (300,000 )
                         
NET INCOME
  $ 3,155,717     $ 1,552,308     $ 223,922  
                         
Basic earnings per share
  $ 0.79     $ 0.38     $ 0.06  
 
Consolidated Statements of Comprehensive Income  
For the Years Ended December 31, 2012, 2011 and 2010
 
 
 
 
2012
   
2011
   
2010
 
NET INCOME
  $ 3,155,717     $ 1,552,308     $ 223,922  
UNREALIZED APPRECIATION ON AVAILABLE-FOR-SALE
                       
SECURITIES (Net of deferred tax expense of $5,660,000,
                       
$352,000, and $1,972,000 for 2012, 2011 and 2010, respectively)
    8,493,141       524,119       2,959,420  
                         
RECLASSIFICATION ADJUSTMENT FOR SALE OF SECURITIES
                       
INCLUDED IN NET INCOME (Net of deferred tax (benefit) expense
                       
of $1,668,000, $2,024,000 and $(32,000) for 2012, 2011 and 2010,
                       
respectively)
    (2,505,141 )     (3,027,406 )     47,793  
                         
RECLASSIFICATION ADJUSTMENT FOR WRITE-DOWN OF
                       
SECURITIES INCLUDED IN NET INCOME (Net of deferred
                       
tax (benefit) expense of $-0-, $(168,000) and $(344,000) for 2012,
                       
2011 and 2010, respectively)
    -               247,287       514,787  
                         
MINIMUM PENSION LIABILITY (Net of deferred tax benefit of
                       
$(400,000), $(910,000) and $(300,000) for 2012, 2011 and 2010,
                       
respectively)
    (601,778 )     (1,366,399 )     (453,765 )
                         
POSTRETIREMENT LIABILITY (Net of deferred tax (benefit)
                       
expense of $(375,000), $1,400,000 and $(1,050,000) for 2012, 2011
                       
and 2010, respectively)
    (563,961 )     2,099,783       (908,310 )
COMPREHENSIVE INCOME
  $ 7,977,978     $ 29,692     $ 2,383,847  
                         
See accompanying Notes to the Consolidated Financial Statements
 
21.
The Monarch Cement Company and Subsidiaries   
Consolidated Statements of Stockholders' Equity  
For the Years Ended December 31, 2012, 2011 and 2010
 
 
 
Company Stockholders
       
                                  Accumu-        
          Class B    
Additional
                lated Other        
   
Capital
   
Capital
   
Paid-In-
   
Retained
   
Treasury
   
Comprehen-
       
   
Stock
   
Stock
   
Capital
   
Earnings
   
Stock
   
sive Income
   
Total
 
Balance
                                         
January 1, 2010
  $ 6,331,158     $ 3,729,337     $ -     $ 105,989,712     $ -     $ (12,834,343 )   $ 103,215,864  
Net income
    -       -       -       223,922       -       -       223,922  
Dividends declared
                                                       
     ($0.92 per share)
    -       -       -       (3,697,119 )     -       -       (3,697,119 )
Transfer of shares
    27,612       (27,612 )     -       -               -       -       -  
Purchase of capital stock
    -       -       -       -               (273,901 )     -       (273,901 )
Retirement of treasury stock
    (27,950 )     -       -       (245,951 )     273,901       -       -  
Change in unrealized
                                                       
     appreciation on available-
                                                       
     for-sale securities
    -       -       -       -               -       3,522,000       3,522,000  
Adjustment to recognize
                                                       
     minimum pension liability
    -       -       -       -               -       (453,765 )     (453,765 )
Adjustment to recognize
                                                       
     postretirement liability
    -       -       -       -               -       (908,310 )     (908,310 )
Balance
                                                       
December 31, 2010
  $ 6,330,820     $ 3,701,725     $ -     $ 102,270,564     $ -     $ (10,674,418 )   $ 101,628,691  
Net income
    -       -       -       1,552,308       -       -       1,552,308  
Dividends declared
                                                       
     ($0.92 per share)
    -       -       -       (3,720,573 )     -       -       (3,720,573 )
Transfer of shares
    92,218       (92,218 )     -       -               -       -       -  
Purchase of capital stock
    -       -       -       -               (2,613,932 )     -       (2,613,932 )
Retirement of treasury stock
    (262,835 )     -       -       (2,351,097 )     2,613,932       -       -  
Issuance of 105,750 shares
                                                       
     with market value $23.50
                                                       
     per share over par
    264,375       -       2,485,125       -               -       -       2,749,500  
Change in unrealized
                                                       
     appreciation on available-
                                                       
     for-sale securities
    -       -       -       -               -       (2,256,000 )     (2,256,000 )
Adjustment to recognize
                                                       
     minimum pension liability
    -       -       -       -               -       (1,366,399 )     (1,366,399 )
Adjustment to recognize
                                                       
     postretirement liability
    -       -       -       -               -       2,099,783       2,099,783  
Balance
                                                       
December 31, 2011
  $ 6,424,578     $ 3,609,507     $ 2,485,125     $ 97,751,202     $ -     $ (12,197,034 )   $ 98,073,378  
Net income
    -       -       -       3,155,717       -       -       3,155,717  
Dividends declared
                                                       
     ($0.92 per share)
    -       -       -       (3,692,543 )     -       -       (3,692,543 )
Transfer of shares
    65,539       (65,539 )     -       -               -       -       -  
Change in unrealized
                                                       
     appreciation on available-
                                                       
     for-sale securities
    -       -       -       -               -       5,988,000       5,988,000  
Adjustment to recognize
                                                       
     minimum pension liability
    -       -       -       -               -       (601,778 )     (601,778 )
Adjustment to recognize
                                                       
     postretirement liability
    -       -       -       -               -       (563,961 )     (563,961 )
Balance
                                                       
December 31, 2012
  $ 6,490,117     $ 3,543,968     $ 2,485,125     $ 97,214,376     $ -     $ (7,374,773 )   $ 102,358,813  
                                                         
See accompanying Notes to the Consolidated Financial Statements
 
 
22. 
The Monarch Cement Company and Subsidiaries   
Consolidated Statements of Cash Flows  
For the Years Ended December 31, 2012, 2011 and 2010
 
   
2012
   
2011
   
2010
 
OPERATING ACTIVITIES:
                 
Net income
  $ 3,155,717     $ 1,552,308     $ 223,922  
Adjustments to reconcile net income to
                       
net cash provided by operating activities:
                       
Depreciation, depletion and amortization
    12,000,952       11,677,640       11,742,667  
Deferred income taxes
    234,952       1,983       (1,118,615 )
Gain on disposal of assets
    (46,601 )     (279,562 )     (58,335 )
Realized (gain) loss on sale of equity investments
    (4,173,141 )     (5,051,406 )     79,793  
Realized loss on impairment of equity investments
    -               415,287       858,787  
Gain on disposal of other assets
    -               -               (700,000 )
Postretirement benefits and pension expense
    590,536       545,579       2,362,328  
Change in assets and liabilities:
                       
Receivables, net
    (1,265,186 )     (3,589,869 )     541,937  
Inventories
    (4,892,439 )     2,470,155       1,741,560  
Refundable income taxes
    (1,088,007 )     (353,199 )     310,795  
Prepaid expenses
    (26,908 )     (505,674 )     199,057  
Other assets
    43,896       (7,406 )     2,442  
Accounts payable and accrued liabilities
    5,814,747       105,027       (2,281,418 )
Net cash provided by operating activities
  $ 10,348,518     $ 6,980,863     $ 13,904,920  
                         
INVESTING ACTIVITIES:
                       
Acquisition of property, plant and equipment
  $ (8,137,693 )   $ (7,909,389 )   $ (6,205,837 )
Proceeds from disposals of property, plant and equipment
    68,596       317,102       120,176  
Proceeds from disposals of other assets
    -               -               700,000  
Payment for acquisition of business, net of cash acquired
    -               (534,392 )     -          
Payment for purchases of equity investments
    -               (3,453,447 )     (1,046,224 )
Proceeds from disposals of equity investments
    6,799,194       8,287,182       412,532  
Net cash used for investing activities
  $ (1,269,903 )   $ (3,292,944 )   $ (6,019,353 )
                         
FINANCING ACTIVITIES:
                       
Increase (decrease) in line of credit, net
  $ (4,734,331 )   $ 4,844,469     $ (511,944 )
Proceeds from bank loans
    3,134,565       -               -          
Payments on bank loans
    (2,178,255 )     (2,952,328 )     (2,731,213 )
Payments on other long-term debt
    (367,826 )     (817,236 )     (120,377 )
Cash dividends paid
    (4,615,679 )     (3,720,289 )     (3,702,262 )
Purchases of capital stock
    -               (2,613,932 )     (273,901 )
Net cash used for financing activities
  $ (8,761,526 )   $ (5,259,316 )   $ (7,339,697 )
                         
Net increase (decrease) in cash and cash equivalents
  $ 317,089     $ (1,571,397 )   $ 545,870  
Cash and Cash Equivalents, beginning of year
    1,123,870       2,695,267       2,149,397  
Cash and Cash Equivalents, end of year
  $ 1,440,959     $ 1,123,870     $ 2,695,267  
Supplemental disclosures:
                       
Interest paid, net of amount capitalized
  $ 450,422     $ 502,546     $ 545,034  
Income taxes paid, net of refunds
    2,083,677       721,938       (303,996 )
Capital equipment additions included in accounts payable
    157,126       86,264       12,495  
Non-cash investing activities:
                       
Issuance of 105,750 shares of capital stock
                       
   related to acquisition of business
  $ -             $ 2,749,500     $ -          
Note payable related to acquisition of business
    -               927,443       -          
 
See accompanying Notes to the Consolidated Financial Statements
 
23.
The Monarch Cement Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
 
(1)        Nature of Operations and Summary of Significant Accounting Policies
 
(a)           Nature of Operations--The Monarch Cement Company (Monarch) is principally engaged in the manufacture and sale of portland cement. The marketing area for Monarch’s products consists primarily of the State of Kansas, the State of Iowa, southeast Nebraska, western Missouri, northwest Arkansas and northern Oklahoma. Sales are made primarily to contractors, ready-mixed concrete plants, concrete products plants, building materials dealers and governmental agencies. Subsidiaries of Monarch (which together with Monarch are referred to herein as the “Company”) sell ready-mixed concrete, concrete products and sundry building materials within Monarch’s marketing area. 
 
(b)           Principles of Consolidation--Monarch has direct control of certain operating companies that have been deemed to be subsidiaries within the meaning of accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. Accordingly, the financial statements of such companies have been consolidated with Monarch’s financial statements. All significant intercompany transactions have been eliminated in consolidation.
 
Pursuant to a Stock Purchase Agreement between Monarch and the owners of Kay Concrete Materials Co. (Kay Concrete) on April 15, 2011, Monarch acquired all of the issued and outstanding shares of common stock of Kay Concrete, a ready-mixed concrete company located in southwest Missouri. The purpose of the acquisition was to expand our ready-mixed concrete business in the region. The aggregate consideration paid by Monarch at closing was approximately $5.0 million consisting of $1.4 million cash, 105,750 shares of Monarch’s capital stock valued at $2.7 million based on the April 15, 2011 price per share of $26.00 and a note payable of $0.9 million. The amount of Kay Concrete’s revenue and earnings included in the Company’s consolidated income statement for the year ended December 31, 2011 is $3.0 million and $(0.5) million, respectively.
 
(c)           Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
(d)           Reclassifications--Certain reclassifications have been made to the 2011 and 2010 financial statements to conform to the current year presentation. These reclassifications had no material effect on net earnings.
 
(e)           Cash Equivalents--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 December 31, 2012 and 2011, cash equivalents consisted primarily of money market investments and repurchase agreements with various banks.
 
The FDIC, through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), has permanently raised the standard maximum deposit insurance amount (SMDIA) to fully guarantee all deposit accounts up to $250,000. In addition, the FDIC has adopted Section 343 of the Dodd-Frank Act, effective December 31, 2010, which provides for unlimited deposit insurance for noninterest-bearing transaction accounts for two years starting December 31, 2010. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.
 
 
 
 
 
24.
 

 
At December 31, 2012, the Company had $1.3 million in sweep arrangement accounts that were not covered by FDIC’s general deposit insurance.
 
(f)           Investments--Equity securities for which the Company has no immediate plan to sell but that may be sold in the future are classified as available for sale. If the fair value of the equity security is readily determinable, it is carried at fair value and unrealized gains and losses are recorded, net of related income tax effects, in stockholders’ equity. Realized gains and losses, based on the specifically identified cost of the security, are included in net income. Equity securities whose fair value is not readily determinable are carried at cost unless the Company is aware of significant adverse effects which have impaired the investments.
 
The Company does not participate in hedging activities and does not use derivative instruments.
 
(g)           Receivables--Accounts receivable are stated at the amount billed to customers. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Accounts past due are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
 
(h)           Inventories--Inventories of finished cement and work in process are recorded at the lower of cost or market on a last-in, first-out (LIFO) basis. Total inventories reported under LIFO amounted to $8.4 million and $5.3 million as of December 31, 2012 and 2011, respectively. Under the average cost method of accounting (which approximates current cost), these inventories would have been $3.2 million, $3.8 million and $4.4 million higher than those reported at December 31, 2012, 2011 and 2010, respectively. The cost of manufactured items includes all material, labor, factory overhead and production-related administrative overhead required in their production.
 
We incurred a permanent reduction in the LIFO layers of work in process and cement inventories resulting in liquidation gains of $0.5 million for the year 2011. The liquidation gains were recognized as reductions of cost of sales. We did not incur any material liquidation gains in the LIFO layers for the years 2012 and 2010.
 
Other inventories are purchased from outside suppliers. Fuel and other materials are priced by the first-in, first-out (FIFO) method while operating and maintenance supplies are recorded using the average cost method.
 
Inventories of fuel, gypsum, paper sacks and other are used in the manufacture of cement. The operating and maintenance supplies consist primarily of spare parts for our cement manufacturing equipment.
 
(i)           Property, Plant and Equipment--Property, plant and equipment are stated at cost of acquisition or construction. The Company capitalizes the cost of interest on borrowed funds used to finance the construction of property, plant and equipment. During 2012, 2011 and 2010, the Company capitalized approximately $117,900, $86,500 and $121,700, respectively, of interest expense related to current construction projects.
 
As of December 31, 2012 and 2011, the amount of accounts payable related to property, plant and equipment was $157,126 and $86,264, respectively. 
 
The Company records depreciation, depletion and amortization related to manufacturing operations in Cost of Sales; those related to general operations are recorded in Selling, General and Administrative Expenses; and those related to non-operational activities are in Other, net on the Consolidated Statements of
 
 
 
 
25.
 
The Monarch Cement Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
 
Income. The approximate amounts included in each line item as of December 31, 2012, 2011 and 2010 are as follows:
 
   
2012
   
2011
   
2010
 
Cost of Sales
  $ 11,300,000     $ 11,000,000     $ 10,900,000  
Selling, General and Administrative Expenses
    400,000       300,000       300,000  
Other, net
    300,000       400,000       500,000  
Total
  $ 12,000,000     $ 11,700,000     $ 11,700,000  

Depreciation of property, plant and equipment is provided by charges to operations over the estimated useful lives of the assets using accelerated methods. The majority of the Company’s buildings, machinery and equipment are depreciated using 200% (double) declining balance depreciation. Some of the assets used in the Cement Business manufacturing process are depreciated using 150% declining balance depreciation. The Company switches to straight line depreciation once it exceeds the amount computed under the declining balance method being used until the asset is fully depreciated. The Company does not depreciate construction in process. Depletion rates for quarry lands are designed to amortize the cost over the estimated recoverable reserves. Expenditures for improvements that significantly increase the assets’ useful lives are capitalized while maintenance and repairs are charged to expense as incurred.
 
The Company continually evaluates whether events or changes in circumstances have occurred that would indicate that the carrying amount of long-lived assets may not be recoverable. An impairment loss would be recognized and the asset cost would be adjusted to fair value when undiscounted estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The impairment loss would be the amount by which the carrying amount of a long-lived asset exceeds its fair value. Various factors that the Company considers in its review include changes in expected use of the assets, changes in technology, changes in operating performance and changes in expected future cash flows. No asset impairment was recognized during the years ended December 31, 2012 and 2011.
 
(j)           Other Current Liabilities--Accrued liabilities-Other contains approximately $0.5 million and $1.2 million related to prepayments held on account in 2012 and 2011, respectively.
 
(k)           Income Taxes--Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities.  A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
 
(l)           Revenue Recognition--The Company records revenue from the sale of cement, ready-mixed concrete, concrete products and sundry building materials following delivery of the products to customers.  In the event the Company receives advance payment on orders, we defer revenue recognition until the product is delivered.
 
Our Ready-Mixed Concrete Business includes precast concrete construction which involves short-term and long-term contracts. Short-term contracts for specific projects are generally of three to six months in duration. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Revenues for these contracts are recognized on the percentage-of-completion method based on the ratio of contract costs incurred to date to total estimated costs. Full provision is made for any anticipated losses. The majority of the long-term contracts will allow only scheduled billings and contain retainage provisions under which 5% to 10% of the contract invoicing may be withheld by the customer pending project completion. As of December 31, 2012, the amount of billed retainage which is included in accounts receivable was approximately $170,000, all of which is expected to be collected within one year. The amount of billed retainage which was included in accounts receivable at December 31, 2011 was approximately
 
26.
 

 
$129,000. The amount of unbilled revenue in accounts receivable was approximately $1,231,000 and $802,000 at December 31, 2012 and 2011, respectively. Unbilled revenue contained approximately $526,000 and $125,000 of not-currently-billable retainage at December 31, 2012 and 2011, respectively, which is expected to be collected within one year.
 
(m)           Cost of Sales--The Company considers all production and shipping costs, (gain) loss on disposal of operating assets, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs and internal transfer costs as cost of sales.
 
(n)           Selling, General and Administrative Expenses--Selling, general and administrative expenses consist of sales personnel salaries and expenses, promotional costs, accounting personnel salaries and expenses, director and administrative officer salaries and expenses, legal and professional expenses and other expenses related to overall corporate costs.
 
(o)           Other, net--Other, net contains miscellaneous nonoperating income (expense) items excluding interest income, interest expense, gains (losses) on sale of equity investments, realized loss on impairment of equity investments and dividend income. Significant items in Other, net for 2012 include farm income of approximately $149,000. Significant items in Other, net for 2011 include proceeds from scrap sales of approximately $150,000. Significant items in Other, net for 2010 include farm income of approximately $154,500, a gain of $700,000 related to the sale of a nonoperating asset and proceeds from scrap sales of approximately $51,000.
 
(p)           Earnings per Share--Basic earnings per share is based on the weighted average common shares outstanding during each year. Diluted earnings per share are based on the weighted average common and common equivalent shares outstanding each year. Monarch has no common stock equivalents and therefore does not report diluted earnings per share. The weighted average number of shares outstanding was 4,013,634 in 2012, 4,033,817 in 2011 and 4,020,411 in 2010.
 
(q)           Taxes Collected from Customers and Remitted to Governmental Authorities--Taxes collected from customers and remitted to governmental authorities are presented in the accompanying consolidated statements of income on a net basis.
 
(r)           Self Insurance--The Company has elected to self-insure certain costs related to employee and retiree health and accident benefits programs. Costs resulting from self-insured losses are charged to income when incurred. Health benefits provided to employees in the Ready-Mixed Concrete Business and health and accident benefits provided to employees and retirees in the Cement Business are totally self-insured but are subject to an individual stop loss of $100,000 and $200,000 for the Ready-Mixed Concrete Business and the Cement Business, respectively, with an aggregate stop loss of 120% for both lines of business.
 
(s)           Disclosure about Fair Value of Financial Instruments--Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cash and cash equivalents, receivables, accounts payable and short and long-term debt have carrying values that approximate fair values. Investment fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities. If it is not practicable to estimate the fair value of an investment, the investment is recorded at cost and evaluated quarterly for events that may adversely impact its fair value.
 
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”, which updated the guidance in ASC
 
 
27.
 
The Monarch Cement Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010
 
Topic 820. The amendments in this ASU result in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure that U.S. GAAP and IFRS fair value measurements and disclosure requirements are described in the same way. The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of Level 3 assets and for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The amendments in this update became effective for the Company beginning January 1, 2012 and did not have a material impact on our disclosures or our consolidated financial statements.
 
(t)           Intangibles - Goodwill and Other--In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” which was effective for fiscal years beginning after December 15, 2011. This ASU allows entities to first assess qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test required under Topic 350, Intangible - Goodwill and Other. Topic 350 requires entities to test goodwill on an annual basis by comparing the fair value of a reporting unit to its carrying value including goodwill (Step 1). The second part of the test must be performed to measure the amount of impairment. Entities are not required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not that the unit’s carrying value is greater than its fair value based on an assessment of events and circumstances. Entities may bypass the qualitative assessment during any reporting period. The Company performed a qualitative assessment of its goodwill during the fourth quarter of 2012 and the results of that assessment led to the conclusion that it was not necessary to perform the two-step goodwill impairment test.
 
(2)        Investments
 
Realized gains (losses) on equity investments are computed using the specific identification method. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  There is a hierarchy of three levels of inputs that may be used to measure fair value:
 
Level 1 - quoted prices in active markets for identical assets or liabilities.
 
Level 2 - observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 - unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities.
 
The aggregate amount of equity securities carried at cost, for which the Company has not elected the fair value option, was $2.6 million at December 31, 2012 and 2011. The remaining $24.8 million and $17.4 million in equity security investments at December 31, 2012 and 2011, respectively, are stated at fair value. The following table summarizes the bases used to measure certain assets at fair value on a recurring basis in the balance sheet at December 31, 2012 and 2011: 
 
 
 
 
 
28.
 

 
     
Fair Value Measurements Using:
 
               
   
Quoted Prices
         
     
in Active
 
Significant
     
     
Markets for
 
Other
 
Significant
 
     
Identical
 
Observable
 
Unobservable
 
December 31, 2012: 
   
Assets
 
Inputs
 
Inputs
 
Assets: 
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Available-for-sale equity securities
               
Cement industry
  $ 12,477,760     $ 12,477,760     $ -     $ -  
General building materials industry
    5,751,005       5,751,005       -       -  
Oil and gas refining and marketing industry
    6,532,981       6,532,981       -       -  
Total assets measured at fair value
  $ 24,761,746     $ 24,761,746     $ -     $ -  
 
December 31, 2011:
                       
Assets:                
                       
Available-for-sale equity securities
                       
Cement industry
  $ 8,750,156     $ 8,750,156     $ -     $ -  
General building materials industry
    4,583,882       4,583,882       -       -  
Oil and gas refining and marketing industry
    3,631,747       3,631,747       -       -  
Residential construction industry
    442,015       442,015       -       -  
Total assets measured at fair value
  $ 17,407,800     $ 17,407,800     $ -     $ -  
          
Cash and cash equivalents have carrying values that approximate fair value using Level 1 prices. Receivables, accounts payable and long-term debt have carrying values that approximate fair values using Level 2 inputs. The Company’s valuation techniques used to measure the fair value of its marketable equity securities were derived from quoted prices in active markets for identical assets (Level 1 inputs). Investments that are recorded at cost are evaluated quarterly for events that may adversely impact their carrying value.
 
There were no transfers between levels and there were no significant changes in the valuation techniques during the period ended December 31, 2012. 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 inputs) 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 gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual trade lots of securities have been in a continuous unrealized loss position at December 31, 2012 and 2011:
 
Available-for-sale equity securities
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
       
Unrealized
     
Unrealized
     
Unrealized
 
December 31, 2012
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
   Cement industry
    $ -   $ -   $ 15,379   $ 2,737   $ 15,379   $ 2,737  
Total
    $ -   $ -   $ 15,379   $ 2,737   $ 15,379   $ 2,737  
                                         
December 31, 2011
                                       
   Cement industry
    $ 517,188   $ 53,352   $ 12,900   $ 5,216   $ 530,088   $ 58,568  
   Residential construction industry
      -     -     6,310     4,413     6,310     4,413  
Total
    $ 517,188   $ 53,352   $ 19,210   $ 9,629