Overview

Rock of Ages is an integrated quarrier and manufacturer of granite and products manufactured from granite. During the first three quarters of 2009, we had two business segments: quarry and manufacturing. The quarry division sells granite blocks to the manufacturing division and to outside manufacturers, as well as to customers outside North America. The manufacturing division's principal products are granite memorials and mausoleums used primarily in cemeteries. It also manufactures specialized granite products for industrial applications.

Historically, the Company's operations have experienced certain seasonal patterns. Generally, our net sales have been highest in the second or third quarter and lowest in the first quarter of each year due primarily to weather. Cemeteries in northern areas generally do not accept granite memorials during winter months when the ground is frozen because they cannot be properly set under those conditions. In addition, we either close or reduce the operations of our Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. As a result, we have historically incurred a significant net loss during the first three months of each calendar year and normally have a year-to-date net loss at the end of the first half of the year as well.

In the first three quarters of 2009 revenue decreased 15% to $33.2 million from $39.3 million for the same period last year and gross profit decreased 17% to $8.0 million from $9.6 million. SG&A expenses decreased 4% and unallocated corporate overhead decreased 20% to $2.4 million from $3.0 million. Net income for the first nine months of 2009 was $193,000 or $0.03 per share compared to net income from continuing operations of $623,000 or $0.08 per share for the same period in 2008. Net income for the first nine months of 2008 was $481,000 or $0.06 per share, which included a loss from discontinued operations of $142,000 or $.02 per share.

Critical Accounting Policies

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Our critical accounting policies are as follows: revenue recognition, impairment of long-lived assets, valuation of deferred tax assets, accounting for pensions and other post-employment benefits and valuation of inventory. There have been no material changes in the Company's critical accounting policies or changes in the methodology applied by management for critical accounting policies from what was previously disclosed in our most recent Form 10-K.

Results of Operations
The following table sets forth certain statement of operations data as a
percentage of total net revenues with the exception of quarry and manufacturing
gross profit and SG&A expenses, which are shown as a percentage of their
respective segment's net revenues.




                           Three Months Ended               Nine Months Ended
                          October    September     October            September 27, 2008
                          3, 2009     27, 2008     3, 2009

Net Revenues:
     Quarry                  45.9%        51.4%       48.0%                        47.7%
     Manufacturing           54.1%        48.6%       52.0%                        52.3%

      Total net             100.0%       100.0%      100.0%                       100.0%
revenues

Gross Profit:
     Quarry                  32.3%        40.0%       21.5%                        21.7%
     Manufacturing           29.0%        31.3%       26.3%                        26.7%

       Total gross           30.5%        35.8%       24.0%                        24.4%
profit

Selling, general and
administrative
expenses:
     Quarry                   8.5%         6.1%       10.2%                         9.3%
     Manufacturing           13.4%        12.7%       17.1%                        14.9%
     Corporate overhead       5.1%         5.0%        7.2%                         7.6%
    Effect of pension            -            -        0.3%                            -
 curtailment

       Total SG&A            16.3%        14.3%       21.3%                        19.9%
expenses

Income from continuing operations before
interest and income taxes                        14.2%    21.5%     2.7%            4.5%

Other income, net                               (0.6%)   (0.3%)   (0.7%)          (0.5%)
Interest expense                                  2.6%     2.0%     2.6%            2.7%

Income from continuing operations before         12.2%    19.8%     0.8%            2.3%
income taxes

Income tax expense                                0.3%     1.4%     0.2%            0.7%

Income from continuing operations                11.9%    18.4%     0.6%            1.6%

Discontinued operations                              -        -        -          (0.4%)

Net income                                       11.9%    18.4%     0.6%            1.2%

Three Months Ended October 3, 2009 Compared to Three Months Ended September 27, 2008

On a consolidated basis for the three-month period ended October 3, 2009, compared to the three-month period ended September 27, 2008, revenue decreased 22%, gross profit decreased 34% and total SG&A expenses, including corporate overhead, decreased 11%. The Company reported a net profit of $1.5 million in the third quarter of 2009 compared with a profit of $3.1 million for the third quarter of 2008.

Quarry Segment Analysis

Revenue in our quarry division for the three-month period ended October 3, 2009 of $5.9 million was down 31% from the three-month period ended September 27, 2008, of $8.5 million. The volume of our export sales are the reason for the decline. Export sales are heavily dependent on building projects which are affected by economic conditions. We believe as economic conditions improve, construction activity and our export sales will also improve.

Productivity improvements such as the diamond wire sawing technology and the extension of electric power lines into the Bethel quarry are showing positive results which were offset by poor recovery rates in Barre and Bethel resulting in an eight percent decrease in the gross profit margin to 32% for the third quarter of 2009 compared to 40% for the third quarter of 2008. Recovery rate issues are a fact of life when working with a natural product like granite. We occasionally encounter a section with low quality stone and our recovery rate decreases. We are seeing improvements in both of those quarries since the end of the third quarter.

SG&A expenses decreased 4% or $20,000 due to staffing reductions, lower bad debt expense and decreased office expenses. These decreases were somewhat offset by increased convention expenses and professional services related to an appeal of our local property taxes.

Due to all of the factors discussed above, the quarry division operating income decreased 51% to $1.4 million from $2.9 million.

Manufacturing Segment Analysis

Revenue in our manufacturing division for the three-month period ended October 3, 2009 decreased 14% or $1.1 million from the three-month period ended September 27, 2008. Most of the decrease in the manufacturing segment revenue was due to a decrease in mausoleum sales and weakness in the precision products division.

Gross profit dollars from the manufacturing division decreased 20% or $500,000 while gross profit as a percentage of manufacturing revenue decreased by 2 percentage points for the three-month period ended October 3, 2009 compared to the three-month period ended September 27, 2008. The decrease in the gross profit percentage is largely due to reduced revenues and certain price decreases in order to be competitive on some large civic features.

SG&A costs for the three-month period ended October 3, 2009 for the manufacturing division decreased $88,000 or 9% compared to the three-month period ended September 27, 2008. This decrease is due to lower salaries and commission costs and the decrease in value of the Canadian dollar relative to the U.S. dollar offset somewhat by an increase in bad debt expense.

Due to all of the factors discussed above, the manufacturing division operating income decreased 28% to $1.1 million from $1.5 million.

Consolidated Items

Corporate overhead, consisting of operating costs not directly related to an operating segment, decreased 20%, or $162,000, for the three-month period ended October 3, 2009 compared to the three-month period ended September 27, 2008 due to the reduction in personnel and related costs.

Other income, which includes rental income from non-operating properties, was $76,000 compared to $56,000 for the same period last year.

Net interest expense is comparable for both periods which reflects a reduced level of debt offset by an increased interest rate which took effect in April 2009 when our lenders granted a waiver for non-compliance with certain covenants contained in our Amended and Restated Financing Agreement. In consideration of the consents and waivers the unused line fee went from .25% to .50% and the existing interest rate pricing grid was changed and interest rates increased approximately 3%.

Income tax expense was $40,000 for the three-month period ended October 3, 2009, compared to $223,000 for the same three-month period in 2008. The tax expense reported in both periods relates to our Canadian subsidiary and in 2009 is partially offset by a U.S. tax refund. The Company made the election on its 2008 U.S. Federal tax return to monetize certain deferred tax assets, based on available capital expenditures and will receive a refund of $173,000. This refund was accrued in the third quarter of 2009, when the election was made. The Company anticipates making the same election for 2009 and based on current capital expenditures has accrued a refund of $40,000 through October 3, 2009. During the third quarter of both years we continued to fully reserve all our U.S. deferred tax assets.

Nine Months Ended October 3, 2009 Compared to Nine Months Ended September 27, 2008

On a consolidated basis for the nine-month period ended October 3, 2009, compared to the nine-month period ended September 27, 2008, revenue decreased 15%, gross profit decreased 17% (though the gross margin was comparable) and total SG&A expenses, including corporate overhead, decreased 10%. The Company reported net income of $193,000 for the first nine months of 2009 compared with $481,000 for the first nine months of 2008.

Quarry Segment Analysis

Revenue in our quarry division for the nine-month period ended October 3, 2009 of $15.9 million was down $2.8 million or 15% from the nine-month period ended September 27, 2008, of $18.8 million. The decrease was partly due to lower domestic and foreign demand for some of our granites (Barre and Salisbury) as well as lower than expected recovery rates in certain of our quarries where our output was unable to meet demand (Bethel, American Black and Gardenia White).

Productivity improvements such as the diamond wire sawing technology and the extension of electric power lines to the Bethel quarry are showing positive results but these positive results were offset by a decrease in recovery rates of some of our quarries. As a result, while there has been a decrease of $643,000 in gross profit dollars from the same period last year, the gross margin at 22% is comparable to the prior year.

SG&A expenses decreased 7% or $114,000 due to staffing reductions, lower bad debt expense and decreased office expenses. These decreases were somewhat offset by increased professional services related to an appeal of our local property taxes.

Due to all of the factors discussed above, quarry division operating income decreased to $1.8 million for the nine months ended October 3, 2009 from $2.3 million for the nine months ended September 27, 2008.

Manufacturing Segment Analysis

Revenue in our manufacturing division for the nine-month period ended October 3, 2009 decreased 16%, or $3.3 million, from the nine-month period ended September 27, 2008. Most of the decrease in the manufacturing segment revenue reflected:
(1) a 38% reduction in revenue in the precision products division, whose customers have been hard hit by the recession, (2) lower sales to PKDM, the owners of our former retail division, (3) a 21% decrease in mausoleum sales and
(4) the decrease in the value of the Canadian dollar relative to the U.S. dollar compared to last year.

Gross profit dollars from the manufacturing division decreased 17% or $942,000 while gross profit as a percentage of manufacturing revenue decreased by .5 percentage points for the nine-month period ended October 3, 2009 compared to the nine-month period ended September 27, 2008. The decrease in the gross profit percentage is largely due to reduced revenues and the need to decrease our profit margins to be competitive on some large civic features.

SG&A costs for the nine-month period ended October 3, 2009 for the manufacturing division decreased 3% or $95,000 compared to the nine-month period ended September 27, 2008. This decrease is due primarily to the decrease in the value of the Canadian dollar relative to the U.S. dollar offset somewhat by an increase in bad debt expense.

Consolidated Items

Corporate overhead, consisting of operating costs not directly related to an operating segment, decreased 20%, or $605,000, for the nine-month period ended October 3, 2009 compared to the nine-month period ended September 27, 2008 due to the reduction in personnel and related costs and decreased professional fees including legal fees, investor relation fees and outside consultant fees for the implementation of Section 404(a) of the Sarbanes-Oxley Act.

Effective March 31, 2009, the Company's defined benefit pension plan was amended by freezing membership and future benefits in the plan. Accordingly, we recognized an additional pension expense of $95,000 as the effect of the pension curtailment in the first nine months of 2009. If the pension plan had not been frozen, the pension expense for the year would have been $1.3 million. Because the plan was frozen, the 2009 pension expense will be $760,000, which includes the $95,000 expense for the effect of the curtailment.

Other income, which includes rental income from non-operating properties, at $219,000 for the nine-month period ended October 3, 2009, was $40,000 higher than the same period last year.

No interest expense has been allocated to discontinued operations in 2009 and $23,000 was allocated in the first nine months of 2008. Net interest expense, including amounts allocated to discontinued operations, decreased $198,000, or 19%, for the nine-month period ended October 3, 2009 compared to the nine-month period ended September 27, 2008 reflecting a reduced level of debt partially offset by an increased interest rate due to the lenders granting a waiver for non-compliance with certain covenants contained in our Amended and Restated Financing Agreement. In consideration of the consents and waivers the unused line fee went from .25% to .50% and the existing interest rate pricing grid was changed and interest rates increased approximately 3% in April 2009.

Income tax expense was $59,000 for the nine-month period ended October 3, 2009, compared to $280,000 for the same nine-month period in 2008. The tax expense reported in both periods relates to our Canadian subsidiary and in 2009 is partially offset by a U.S. tax refund. The Company made the election on its 2008 U.S. Federal tax return to monetize certain deferred tax assets, based on available capital expenditures and will receive a refund of $173,000. This refund was accrued in the third quarter of 2009, when the election was made. The Company anticipates making the same election for 2009 and based on current capital expenditures has accrued a refund of $40,000 through October 3, 2009. During the third quarter of both years we continued to fully reserve all our U.S. deferred tax assets.

Liquidity and Capital Resources

Historically, we have met our short-term liquidity requirements primarily from cash generated by operating activities and periodic borrowings under the commercial credit facilities, lead by CIT Business Group, which is scheduled to expire in October 2012. We rely on CIT Business Group, a subsidiary of CIT Group, Inc. ("CIT") to fund our working capital needs. On November 1, 2009, CIT Group filed for Chapter 11 bankruptcy protection in a pre-packaged plan of reorganization. CIT has indicated that it is hopeful it will exit bankruptcy by the end of the year. Since the bankruptcy CIT has continued to fund all requests for advances on the revolving line of credit to date; however, there is no guarantee it will continue to fund our requests and it may not be able to continue to honor its commitment to the Company under the credit facility. During 2009, the Company has consistently had positive cash flow that has been used to reduce its borrowings on the line of credit. Management believes that it has adequate funds available for current operations and continues to monitor the situation closely, including discussions with the co-lender of the facility on their commitment under the facility as well as exploring options with other lenders.

We have historically contributed between $800,000 and $1.0 million per year to the defined benefit pension plan. The Company is not required to make any contribution in 2009 however we did contribute $750,000 to the defined benefit plan in the third quarter for the 2008 plan year.

Our primary need for capital will be to maintain and improve our quarry and manufacturing facilities. We have approximately $2.1 million planned for capital expenditures in 2009 (excluding the purchase of the Stanstead Quarry from Polycor described below) of which $1.4 million has been expended as of October 3, 2009. We believe we will be able to fund these capital expenditures either from cash from operations or borrowings under our credit facilities.

On April 17, 2009, ROA Canada signed an Asset Purchase Agreement and completed the purchase of the real and personal property comprising the Polycor Stanstead Quarry, located in Stanstead, Quebec, Canada from Carrieres Polycor, Inc. ("Polycor"). The purchase price for the quarry, building and inventory was $1.3 million CDN. This purchase was funded by ROA Canada's line of credit with the Royal Bank of Canada and was completely repaid in the second quarter of 2009.

Cash Flows

At October 3, 2009, we had cash and cash equivalents of $842,000 and working capital of $20 million, compared to $1.1 million of cash and cash equivalents and working capital of $22.2 million at September 27, 2008.

Cash Flows from Operations. Net cash provided by operating activities was $7.5 million in the nine-month period ended October 3, 2009 compared to $434,000 in the same nine-month period of 2008. The increase in cash flow from operations is due largely to the increase in the amount of collections on accounts receivable and the decrease in inventory in the first nine months of 2009.

Cash Flows from Investing Activities. Cash flows used in investing activities were $2.6 million in the first nine months of 2009 compared to $4.5 million provided by investing activities in the nine-month period ended September 27, 2008. In 2009, we purchased property, plant and equipment (PP&E) totaling $1.4 million and land and granite reserves from Polycor in Canada for $1.4 million. In the first nine months of 2008 we purchased $3.2 million of PP&E and paid the remainder of $179,000 for a customer list in Canada which was offset by proceeds from the sale of the retail division totaling $7.7 million. Cash used in investing activities comes from either borrowings under our credit facilities or from operations.

Cash Flows from Financing Activities. Net cash used in financing activities in the nine-month period ended October 3, 2009 was $5.1 million which consisted of repayments on the long-term debt of $251,000 and net repayments on the revolving line of credit of $4.9 million. This compares to $5.7 million used in financing activities in the nine-month period ended September 27, 2008 which consisted of repayments on the long-term debt of $4.7 million and net repayments on the revolving line of credit of $1 million.

CIT Credit Facility

We have a credit facility with the CIT Group/Business Credit and Chittenden Trust Company (the "Lenders") that is scheduled to expire in October 2012 and is secured by substantially all assets of the Company located in the United States. The facility consists of an acquisition term loan line of credit of up to $30.0 million and a revolving credit facility of up to another $20.0 million based on eligible accounts receivable, inventory and certain fixed assets. Amounts outstanding were $2,565,000 and $13,886,000 as of October 3, 2009 and $9,507,000 and $14,356,000 as of September 27, 2008 on the revolving credit facility and the term loan line of credit, respectively. The credit facility financing agreement places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, make capital expenditures, repurchase stock and make investments or guarantees, without pre-approval by the Lenders. The financing agreement also contains certain covenants for a Minimum Fixed Charge Coverage Ratio (the "Ratio") and a limit on the Total Liabilities to Net Worth Ratio of the Company. Due to the non-cash impairment charges on the write-down of inventory and the corporate building, we were in violation of the fixed charge coverage ratio covenant at December 31, 2008. We received a waiver of this covenant from the Lenders and amended the agreement as of March 30, 2009.

Minimum Fixed Charge Coverage Ratio. The credit facility requires the ratio of the sum of earnings before interest, taxes, depreciation and amortization (EBITDA), to the sum of income taxes paid, capital expenditures, interest and scheduled debt repayments be at least 1.10 for the trailing twelve-month period at the end of each quarter. The Company was in compliance with the Ratio covenant at October 3, 2009.

Total Liabilities to Net Worth Ratio. The credit facility also requires that the ratio of our total liabilities to net worth (the "Leverage Ratio") not exceed 2.25 for the first two quarters of 2009 and 2.00 for the remainder of the term of the loan. The Leverage Ratio excludes from the calculation the change in tangible net worth directly resulting from the Company's compliance with the FASB guidance on Compensation - Retirement Benefits of $6.0 million. In relevant part, this Topic also required us to place on our books certain unrecognized and unfunded retirement liabilities beginning December 31, 2006. As of October 3, 2009, we were in compliance with the Leverage Ratio covenant.

Interest Rates. We can elect the interest rate under the credit facility based on the prime rate or LIBOR for both the revolving credit facility and the term loan. The revolving credit facility's rate is based on Prime plus 3% or LIBOR plus 4% with a 2% floor for LIBOR. The term loan's rate is based on Prime plus 3.5% or LIBOR plus 4.5% with a 2% floor for LIBOR.

The rates in effect as of October 3, 2009 were as follows:

                                     Amount         Formula      Effective Rate
      Revolving Credit Facility $ 2.6 million    Prime + 3.00%       6.25%
      Term Loan                   13.9 million   Prime + 3.50%       6.75%

Canadian Credit Facility

The Company's Canadian subsidiary has a line of credit agreement with the Royal Bank of Canada that is renewable annually. Under the terms of this agreement, a maximum of $4.0 million CDN may be advanced based on eligible accounts receivable, eligible inventory, and tangible fixed assets. The line of credit bears interest at the U.S. prime rate. There were no borrowings outstanding as of October 3 2009 and September 27, 2008.

Off-Balance Sheet Arrangements

With the exception of our operating leases and obligations under supply agreements, we do not have any off-balance sheet arrangements, and we do not have, nor do we engage in, transactions with any special purpose entities.