Eagle Materials - 10-Q quarterly report FY

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
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As of October 31, 2007, the number of outstanding shares of common stock was:

Eagle Materials Inc. and Subsidiaries
Consolidated Statements of Earnings
(dollars in thousands, except per share data)
(unaudited)

Eagle Materials Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)

Eagle Materials Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited — dollars in thousands)

     The accompanying unaudited consolidated financial statements as of and for the three and six month periods ended September 30, 2007, include the accounts of Eagle Materials Inc. and its majority owned subsidiaries (“EXP”, the “Company” or “we”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 29, 2007.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the information in the following unaudited consolidated financial statements of the Company have been included. The results of operations for interim periods are not necessarily indicative of the results for the full year.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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.

     Options. The Company granted a target number of stock options during June 2007 to certain employees (the “Fiscal 2008 Employee Stock Option Grant”) that may be earned, in whole or in part, if certain performance conditions are satisfied. The Fiscal 2008 Employee Stock Option Grant is intended to be a single award covering the next three years, and will vest over a seven year period depending upon the achievement of specified levels of earnings per share and operating earnings. Options are vested as they are earned, and any options not earned at the end of the seven year period will be forfeited. These stock options were valued at the grant date using the Black-Scholes option pricing model. In August 2007, we granted options to members of the Board of Directors. Such options vested immediately, and can be exercised from the date of grant until their expiration at the end of seven years. The weighted-average assumptions used in the Black-Scholes model to value the option awards in fiscal 2008 are as follows: annual dividend rate of 2.0%, expected volatility of 32%, risk free interest rate of 4.7% and expected life of 5.5 years. We are expensing the fair value of the Fiscal 2008 Employee Stock Option Grant over their expected life, as adjusted for expected forfeitures, and expensed the options issued to the Board of Directors at the time of issuance.

     We expensed approximately $2.3 million and $3.1 million for the three and six month periods ended September 30, 2007, respectively, as compared to $1.2 million and $1.9 million expensed for the three and six month periods ended September 30, 2006, respectively. At September 30, 2007, there was approximately $17.2 million of unrecognized compensation cost related to outstanding stock options which is expected to be recognized over a weighted-average period of 5.9 years.

     The following table represents stock option activity for the six months ended September 30, 2007:

     The following table summarizes information about stock options outstanding at September 30, 2007:

     At September 30, 2007, the aggregate intrinsic value of options outstanding was $8.1 million. The aggregate intrinsic value of exercisable options at that date was approximately $24.2 million. The total intrinsic value of options exercised during the six month period ended September 30, 2007 was approximately $4.0 million.

     Restricted Stock Units. The Company granted restricted stock units (“RSU’s”) to employees and directors during fiscal years 2006 and 2007. The value of the RSU’s granted to employees is being amortized over a three year period, while the value of the RSU’s granted to directors is being amortized over a period not to exceed ten years. Expense related to RSU’s was approximately $197,000 and $257,000 for the three and six month periods ended September 30, 2007, as compared to $335,000 and $699,000 for the three and six month periods ended September 30, 2006, respectively. At September 30, 2007 there was approximately $1.2 million of unearned compensation from restricted stock units that will be recognized over a weighted-average period of 3.9 years.

     Shares available for future stock option and restricted stock unit grants under existing plans were 1,177,969 at September 30, 2007.

     We sponsor several defined benefit and defined contribution pension plans which together cover substantially all our employees. Benefits paid under the defined benefit plans covering certain hourly employees are based on years of service and the employee’s qualifying compensation over the last few years of employment.

     The following table shows the components of net periodic cost for our plans:

     A summary of changes in stockholders’ equity follows:

     We repurchased 3,689,600 shares at an average price of $38.52 during the six month period ended September 30, 2007. We also purchased an additional 316,700 shares during the last week of September, which were not settled until the first week of October, at an average price of $35.92. After

considering the shares purchased during the first week of October, we are authorized to purchase an additional 1,489,500 shares.

     Cash payments made for interest were $6.3 million and $5.8 million for the six months ended September 30, 2007 and 2006, respectively. Net payments made for federal and state income taxes during the six months ended September 30, 2007 and 2006, were $35.7 and $50.1 million, respectively.

     We have excluded $11.4 million of non-cash financing activities from the statement of cash flows related to the purchase of 316,700 shares of common stock. The shares were purchased during the last week of September 2007 and settled during the first week of October 2007.

     Comprehensive income for the three and six month periods ended September 30, 2007 and 2006 was identical to net income for the same periods.

     As of September 30, 2007, the Company has an accumulated other comprehensive loss of $0.8 million, in connection with recognizing the difference between the fair value of the pension assets and the projected benefit obligation.

     Inventories are stated at the lower of average cost (including applicable material, labor, depreciation, and plant overhead) or market. Inventories consist of the following:

     The calculation of basic and diluted common shares outstanding is as follows:

     At September 30, 2007 and 2006, 1,258,278 stock options and 66,807 stock options, respectively, were excluded from the diluted earnings per share calculation, as their effect was anti-dilutive.

     Included in accrued expenses are approximately $12.0 million and $19.8 million of accrued incentive compensation at September 30, 2007 and March 31, 2007, respectively.

     We entered into a $350.0 million credit facility on December 16, 2004. On June 30, 2006 we amended the Bank Credit Facility (the “Bank Credit Facility”) to extend the expiration date from December 2009 to June 2011, and to reduce the borrowing rates and commitment fees. On August 31, 2007 we amended the Bank Credit Facility to modify certain covenants to be more consistent with the credit quality of the Company and to provide the Company with additional financial flexibility. This amendment, among other things, increases the permissible leverage ratio; adds additional categories to the definition of “Applicable Rate” to account for the higher potential leverage ratio; and decreases the interest coverage ratio.

     Borrowings under the Bank Credit Facility are guaranteed by all major operating subsidiaries of the Company. Outstanding principal amounts on the Bank Credit Facility bear interest, at the option of the Company, at a variable rate equal to: (i) LIBOR, plus an agreed margin (ranging from 55 to 150 basis points), which is established quarterly based upon our ratio of consolidated EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization, to our consolidated indebtedness; or (ii) an alternate base rate which is the higher of (a) the prime rate or (b) the federal funds rate plus ¹/2% per annum. Interest payments are payable monthly or at the end of the LIBOR advance periods, which can be up to a period of six months at our option. Under the Bank Credit Facility, we are required to adhere to a number of financial and other covenants, including covenants relating to the Company’s interest coverage ratio and consolidated funded indebtedness ratio. At September 30, 2007 we had $120.0 million of borrowings outstanding under the Bank Credit Facility.

     The Bank Credit Facility has a $25 million letter of credit facility. Under the letter of credit facility, the Company pays a fee at a per annum rate equal to the applicable margin for Eurodollar loans in effect from time to time plus a one-time letter of credit fee in an amount equal to 0.125% of the initial stated amount. At September 30, 2007, the Company had $7.7 million of letters of credit outstanding, and $222.3 million of borrowings available under the Bank Credit Facility.

     We entered into a Note Purchase Agreement on November 15, 2005 (the “2005 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2005A Senior Notes (the “Series 2005A Senior Notes”) in a private placement transaction. The Series 2005A Senior Notes, which are guaranteed by substantially all of the Company’s subsidiaries, were sold at par and issued in three tranches on November 15, 2005, as follows:

     Interest for each tranche of Notes is payable semi-annually on the 15^th day of May and the 15^th day of November of each year until all principal is paid for the respective tranche.

     Our obligations under the 2005 Note Purchase Agreement and the Series 2005A Senior Notes are equal in right of payment with all other senior, unsecured debt of the Company, including our debt under the Bank Credit Facility. The 2005 Note Purchase Agreement contains customary restrictive covenants, including covenants that place limits on our ability to encumber our assets, to incur additional debt, to sell assets, or to merge or consolidate with third parties, as well as certain cross covenants with the Bank Credit Facility.

     Pursuant to a Subsidiary Guaranty Agreement, substantially all of our subsidiaries have guaranteed the punctual payment of all principal, interest, and Make-Whole Amounts (as defined in the 2005 Note Purchase Agreement) on the Series 2005A Senior Notes and the other payment and performance obligations of the Company contained in the Series 2005A Senior Notes and in the 2005 Note Purchase Agreement. We are permitted, at our option and without penalty, to prepay from time to time at least 10% of the original aggregate principal amount of the Series 2005A Senior Notes at 100% of the principal amount to be prepaid, together with interest accrued on such amount to be prepaid to the date of payment, plus a Make-Whole Amount. The “Make-Whole Amount” is computed by discounting the remaining scheduled payments of interest and principal of the Series 2005A Senior Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. treasury securities having a maturity equal to the remaining average life of the Series 2005A Senior Notes being prepaid.

     We entered into a Note Purchase Agreement on October 2, 2007 (the “2007 Note Purchase Agreement”) related to our sale of $200 million of senior, unsecured notes, designated as Series 2007A Senior Notes (the “Series 2007A Senior Notes”) in a private placement transaction. The Series 2007A Senior Notes, which are guaranteed by substantially all of the Company’s subsidiaries, were sold at par and issued in four tranches on October 2, 2007, as follows:

     Interest for each tranche of Notes is payable semi-annually on the second day of April and the second day of October of each year until all principal is paid for the respective tranche. The proceeds of the Series 2007A Senior Notes were used to repay the outstanding amounts under our Bank Credit Facility and for general corporate purposes.

     Our obligations under the 2007 Note Purchase Agreement and the Series 2007A Senior Notes are substantially similar to our obligations under the 2005 Note Purchase Agreement and the Series 2005A Senior Notes. Additionally, the Subsidiary Guaranty Agreement contained in the 2007 Note Purchase Agreement is substantially similar to the Subsidiary Guaranty Agreement contained in the 2005 Note Purchase Agreement, including the Make-Whole provisions.

     The Company has certain deductible limits under its workers’ compensation and liability insurance policies for which reserves are established based on the undiscounted estimated costs of known and anticipated claims. We have entered into standby letter of credit agreements relating to workers’ compensation and auto and general liability self-insurance. At September 30, 2007, we had contingent liabilities under these outstanding letters of credit of approximately $7.7 million.

     The following table compares insurance accruals and payments for our operations:

     The Company is currently contingently liable for performance under $7.7 million in performance bonds required by certain states and municipalities, and their related agencies. The bonds are principally for certain reclamation obligations and mining permits. We have indemnified the underwriting insurance company against any exposure under the performance bonds. In the Company’s past experience, no material claims have been made against these financial instruments.

     In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction such as sale of a business. These indemnification obligations might include claims relating to any of the following: environmental and tax matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier, and other commercial contractual relationships; construction contracts and financial matters. While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, it is the opinion of management that these indemnifications are not expected to have a material adverse effect on our consolidated financial position or results of operations. The Company currently has no outstanding guarantees.

     The Internal Revenue Service (the “IRS”) has been examining our federal income tax returns for the fiscal years ended March 31, 2001, 2002, and 2003. On May 10, 2007, the IRS issued to the Company a draft Notice of Proposed Adjustment to reduce the tax basis of, and disallow a portion of the depreciation deductions claimed by the Company with respect to, assets acquired by the Company from Republic Group LLC, in a transaction completed in November 2000 (the “Republic Assets”). Subsequently, on June 26, 2007 the IRS issued a Notice of Proposed Adjustment incorporating the Company’s comments on the draft, including a separate Notice of Proposed Adjustment for statutory civil penalties.

     If sustained, the adjustment proposed by the IRS would result in additional federal income taxes owed by the Company of approximately $27.6 million, plus penalties of $5.7 million and applicable interest. Moreover, for taxable years subsequent to fiscal 2003, which to date have not been audited, the Company also claimed depreciation deductions with respect to the tax basis of the Republic Assets, as originally recorded. If challenged on the same basis as set forth in the Notice of Proposed Adjustment, additional federal income taxes of approximately $37.0 million, plus applicable interest and possible civil penalties, could be asserted by the IRS for those periods. Also, additional state income taxes, interest, and civil penalties of approximately $7.5 million would be owed by the Company for the fiscal years under exam and subsequent taxable years if the IRS’ position is sustained.

     The Notice of Proposed Adjustment is not final, as the IRS has not issued its final examination report. We intend to pursue an administrative appeal and, if necessary, resort to the courts for a final determination. In the event we reach a settlement with the IRS, we will reverse any accrued interest and penalties in excess of the negotiated settlement. In the event we are unable to reach a settlement, we believe we have a substantial basis for our tax position, and intend to vigorously contest the proposed adjustment. Given the preliminary nature of the proposed adjustment, the Company is unable to predict with certainty the ultimate outcome or the total amounts of tax, interest, and penalties owed to the IRS and state taxing authorities, if any. See Footnote (O) to the Unaudited Consolidated Financial Statements.

     Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by our chief operating decision maker in order to allocate resources and assess performance.

     We operate in four business segments: Gypsum Wallboard, Cement, Recycled Paperboard, and Concrete and Aggregates, with Gypsum Wallboard and Cement being our principal lines of business. These operations are conducted in the United States and include the mining of gypsum and the manufacture and sale of gypsum wallboard, mining of limestone and the manufacture, production, distribution and sale of portland cement (a basic construction material which is the essential binding ingredient in concrete), the manufacture and sale of recycled paperboard primarily to the gypsum wallboard industry and other paperboard converters and the sale of readymix concrete and the mining and sale of aggregates (crushed stone, sand and gravel). These products are used primarily in commercial and residential construction, public construction projects and projects to build, expand and repair roads and highways.

     We operate four gypsum wallboard reload centers, a gypsum wallboard distribution center, four cement plants, eleven cement distribution terminals, four gypsum wallboard plants, a recycled paperboard mill, nine readymix concrete batch plant locations and two aggregates processing plant locations. The principal markets for our cement products are Texas, northern Illinois (including Chicago), the Rocky Mountains, northern Nevada, and northern California. Gypsum wallboard and recycled paperboard are distributed throughout the continental United States, except for the Northeast. Concrete and aggregates are sold to local readymix producers and paving contractors in the Austin, Texas area and northern California.

     We conduct one of our four cement plant operations, Texas Lehigh Cement Company LP in Buda, Texas, through a Joint Venture. For segment reporting purposes only, we proportionately consolidate our 50% share of the Joint Venture’s revenues and operating earnings, which is consistent with the way management organizes the segments within the Company for making operating decisions and assessing performance.

     We account for intersegment sales at market prices. The following table sets forth certain financial information relating to our operations by segment:

     Segment operating earnings, including the proportionately consolidated 50% interest in the revenues and expenses of the Joint Venture, represent revenues, less direct operating expenses, segment depreciation, and segment selling, general and administrative expenses. Corporate assets consist primarily of cash and cash equivalents, general office assets, miscellaneous other assets and unrecognized tax benefits. See Footnote (O) of the Unaudited Consolidated Financial Statements for additional information. The segment breakdown of goodwill is as follows:

     Summarized financial information for the Joint Venture that is not consolidated is set out below (this combined summarized financial information includes the total amount for the Joint Venture and not the Company’s 50% interest in those amounts):

     The following components are included in interest expense, net:

     Interest income includes interest on investments of excess cash and interest on notes receivable. Components of interest expense include interest associated with the Series 2005A Senior Notes, the Bank Credit Facility, commitment fees based on the unused portion of the Bank Credit Facility and interest accrued on our unrecognized tax benefits. Other expenses include amortization of debt issue costs, and bank credit facility costs. Interest capitalized during the three month period ended September 30, 2007 relates to the construction of a new wallboard facility by American Gypsum Company.

     Income taxes for the interim periods presented have been included in the accompanying financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, the Company, when appropriate, includes certain items treated as discrete events to arrive at an estimated overall tax amount. The effective tax rate for the three months ended September 30, 2007 was 30.9%. The effective tax rate for the six month period ended September 30, 2007 was 32.0%, which is also the estimated overall tax rate for the full fiscal year 2008.

     In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of Financial Accounting Standards Board Statement No. 109.” This interpretation clarifies the accounting and disclosures relating to the uncertainty about whether a tax return position will ultimately be sustained by the respective tax authorities. We adopted this interpretation on April 1, 2007. As part of the adoption, we recorded an increase in our liability for unrecognized tax benefits of $80.7 million relating to the Notice of Proposed Adjustment described in Footnote (L) of the Unaudited Consolidated Financial Statements. We recorded $27.6 million of the unrecognized tax benefit as an increase in federal income taxes payable and $53.1 million as an increase in long-term deferred taxes. We also recorded an increase of $80.7 million to other assets relating to unrecognized tax benefits. Upon resolution, any tax benefit amounts ultimately not recognized will be reclassified to goodwill in accordance with Emerging Issues Task Force abstract 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination”. Additionally, we reduced our April 1, 2007 retained earnings balance by $34.6 million, which represents potential interest and penalties related to our unrecognized tax benefits.

     As of the date of adoption, the total amount of our unrecognized tax benefits was $84.3 million and the total amount of interest and penalties recognized on our consolidated balance sheet was $34.6 million. Approximately $27.6 million of this amount is included in accrued liabilities and the remaining $53.1 million is included in long-term deferred income taxes. During the three and six month periods ended September 30, 2007 we accrued an additional $1.8 million and $3.8 million, respectively, of interest on our unrecognized tax benefit. We classify interest expense related to unrecognized tax benefits as a component of interest expense, while penalties related to unrecognized tax benefits are classified as a component of income tax expense. The total amount of unrecognized tax benefits that, if recognized, would reduce our effective tax rate is $3.6 million. It is reasonably possible that the amount of our unrecognized tax benefits will change in the next 12 months. Any changes in unrecognized tax benefits will be recorded when realized and it is possible that these changes may have a significant impact on our results of operations, financial position or cash flows.

     Eagle Materials Inc. is a diversified producer of basic building products used in residential, industrial, commercial and infrastructure construction. Information presented for the three and six month periods ended September 30, 2007 and 2006, respectively, reflects the Company’s four business segments, consisting of Gypsum Wallboard, Cement, Recycled Paperboard and Concrete and Aggregates. Certain information for each of Concrete and Aggregates is broken out separately in the segment discussions.

     We operate in cyclical commodity businesses. Downturns in overall economic activity usually have a significant adverse effect on these businesses due to decreased demand and reduced pricing. Our operations, depending on each business segment, range from local in nature to national businesses; therefore, we have operations in a variety of geographic markets, subjecting our businesses to the economic conditions in each such geographic market. General economic downturns or localized downturns in the regions where we have operations could have a material adverse effect on our business, financial condition and results of operations. We believe we are well positioned to mitigate the effects of changing industry conditions because of our low-cost, balanced mix of construction products, combined with our geographical location in the sunbelt regions of the U.S. Our Wallboard and Paperboard operations are more national in scope and shipments are made throughout the continental U.S., except for the Northeast; however, our primary markets are in the Southwestern U.S. Demand for wallboard varies between regions with the East and West Coasts representing the largest demand. Our cement companies are located in geographic areas west of the Mississippi River and the Chicago, Illinois metropolitan area. Due to the low value-to-weight ratio of cement, cement is usually shipped within a 150 mile radius of the plants by truck and up to 300 miles by rail. Concrete and aggregates are even more regional as those operations serve the areas immediately surrounding Austin, Texas and north of Sacramento, California. Therefore, demand for cement, concrete and aggregates is tied more closely to the economies of the local and regional markets, which may fluctuate more widely than in the nation as a whole.

     We conduct one of our cement operations through a Joint Venture, Texas Lehigh Cement Company LP, which is located in Buda, Texas. We own a 50% interest in the Joint Venture and account for our interest under the equity method of accounting. We proportionately consolidate our 50% share of the Joint Venture’s revenues and operating earning in the presentation of our cement segment, which is the way management organizes the segment within the Company for making operating decisions and assessing performance.

     The following tables list by line of business the revenues and operating earnings discussed in our operating segments:

     Consolidated operating earnings decreased 43% and 38% during the three and six month periods ended September 30, 2007, respectively, as compared to the similar periods in 2006. The decrease in both the three and six month periods was due primarily to the decrease in operating earnings from our gypsum wallboard division, slightly offset by increases by our cement division. The decrease in operating earnings in the Gypsum Wallboard division was due primarily to lower average net sales prices, coupled with lower sales volumes, while the increase in the Cement division was due to increased sales volumes and prices.

     Other income consists of a variety of items that are non-segment operating in nature and includes non-inventoried aggregates income, gypsum wallboard distribution center income, asset sales and other miscellaneous income and cost items.

     Corporate general and administrative expenses increased 7%, to $5.8 million for the three month period ended September 30, 2007, compared to $5.1 million for the comparable prior year period, and increased 7%, to $10.1 million for the six month period ended September 30, 2007, compared to $9.4 million for the comparable prior year period. The increases in both the three and six month periods are due primarily to increased compensation costs related to our long term incentive plan.

     Net interest expense increased to $4.3 million and $7.8 million for the three and six month periods ended September 30, 2007, respectively, as compared to $1.1 million and $2.9 million for the three and six month periods ended September 30, 2006, respectively. The increase is primarily due to interest expense on our unrecognized tax position in accordance with the adoption of FIN 48, as well as increased borrowings during the quarter ended September 30, 2007, offset slightly by an increase in capitalized interest related to the construction of our gypsum wallboard plant in Georgetown, South Carolina.

     As of September 30, 2007, the effective tax rate for fiscal 2008 is 32% compared to the prior year effective tax rate of 34%. The expected tax rate for the full fiscal year 2008 is estimated to be 32%.

     Pre-tax earnings of $50.3 million were 49% lower than last year’s second quarter pre-tax earnings of $99.2 million. Net earnings of $34.8 million decreased 47% from net earnings of $66.1 million for last year’s same quarter. Diluted earnings per share of $0.73 were 45% lower than the $1.32 for last year’s same quarter. Year-to-date net earnings and diluted earnings per share of $73.5 million and $1.53, respectively, were down 41% and 38%, respectively, from last year’s year to date amounts.

     Revenues declined 36% and 32% for the three and six month periods ended September 30, 2007, respectively, as compared to the similar periods in 2006, primarily due to the reduction in average sales price of 37% and 30%, respectively, during fiscal 2008. Also contributing to the decline in revenues was the decline in sales volumes during the three and six month periods ended September 30, 2007 as compared to 2006 of 7% and 10%, respectively. The declines in both pricing and volume are due primarily to the softening of demand for residential housing during calendar 2007.

     The decline in operating margins during the three and six month periods ended September 30, 2007 as compared to the similar periods in 2006 is due primarily to the reduction in average net sales price of 37% and 30%, respectively, coupled with declines in sales volumes during both periods. The decline in both average sales price and sales volumes is due primarily to the slowdown in residential housing and the corresponding reduction in industry utilization, which has fallen from the high 90% range to the low 80% range in the last twelve months.

     Increases in revenues for the three and six month periods ended September 30, 2007, as compared to similar periods in 2006, are primarily due to increases in average sales prices, coupled with increased sales volume. The increases in sales prices are related primarily to fully realizing price increases made throughout the latter part of fiscal 2007, coupled with price increases in certain markets during the first quarter of fiscal 2008.

     Operating earnings increased by 4% and 12%, respectively, for the three and six month periods ended September 30, 2007, as compared to similar periods in 2006, primarily due to increased sales prices, coupled with increased sales volume. Operating margins and operating earnings have also been positively impacted by the increased production from Illinois Cement Company, which resulted in a reduction of purchased cement sold during the three and six month periods ended September 30, 2007 as compared to similar periods in 2006. Although sales volumes and average sales prices increased during the second quarter of fiscal 2008 as compared to 2007, operating margins decreased by 5% during this same period, primarily due the impact of the amounts received during the second quarter of fiscal 2007 as a result of the cement industry settlement of the dispute regarding anti-dumping duties on cement from Mexico, and the receipt of insurance proceeds related to a business interruption claim.

     Revenues increased during the three and six month periods of fiscal 2008 as compared to fiscal 2007 primarily due to increased average sales prices and consistent sales volumes. The increase in sales price is related to certain price escalators contained in our long-term sales contract for gypsum paper.

     Operating margins increased during the six month period ended September 30, 2007, as compared to 2006, primarily due to increased average sales prices, and relatively flat sales volumes. Operating margins decreased during the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007 due primarily to increased operating costs, namely fiber, and a decrease in the percentage of higher margin gypsum paper sold from 80% of total paper sold during the second quarter of fiscal 2007 to 73% of total paper sold during the second quarter of fiscal 2008.