ELKCORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For quarterly period ended March 31, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from_________to_______

Commission File Number 1-5341

ELKCORP

(Exact name of Registrant as specified in its charter)


DELAWARE		75-1217920

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

14911 QUORUM DRIVE, SUITE 600, DALLAS, TEXAS		75254-1491

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code		(972)851-0500

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No o.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x. No o.

As of close of business on May 3, 2004, the Registrant had outstanding 19,710,659 shares of Common Stock, par value $1 per share.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELKCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited, $ in thousands)


	March 31,			June 30,
	2004			2003
Assets
Current Assets
Cash and cash equivalents	$	321		$	5,056
Trade receivables, less allowance of $829 and $935		112,600			118,252
Inventories –
Finished goods		52,484			44,606
Work-in-process		118			89
Raw materials		8,349			8,826

Total inventories		60,951			53,521

Prepaid expenses and other		8,871			6,689
Deferred income taxes		5,405			2,808
Discontinued operations		5,408			19,369

Total current assets		193,556			205,695

Property, Plant and Equipment, at Cost		389,333			348,888
Less — accumulated depreciation		(128,955	)		(122,626	)

Property, plant and equipment, net		260,378			226,262

Other Assets		9,387			10,334

	$	463,321		$	442,291

Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable	$	22,277		$	35,369
Accrued liabilities		22,235			18,958
Discontinued operations		922			1,212

Total current liabilities		45,434			55,539

Long-Term Debt		167,422			152,526
Deferred Income Taxes		42,583			37,698
Shareholders’ Equity -
Common stock ($1 par, 19,988,078 shares issued)		19,988			19,988
Paid-in-capital		57,543			57,331
Unearned compensation – unvested restricted stock		(550	)		(385	)
Accumulated other comprehensive income		9			—
Retained earnings		136,371			126,969

		213,361			203,903
Less — Treasury stock (294,415 and 451,185 shares, at cost)		(5,479	)		(7,375	)

Total shareholders’ equity		207,882			196,528

	$	463,321		$	442,291

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, $ in thousands
except per share data)


	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2004			2003		2004			2003
Sales	$	131,947		$	123,616	$	414,894		$	341,639

Cost and Expenses
Cost of sales		105,332			100,134		327,873			274,790
Selling, general and administrative:
Other selling, general and administrative		15,435			14,911		45,515			41,327
Noncash stock option compensation		—			—		—			(5,378	)

Income from Operations		11,180			8,571		41,506			30,900

Interest Expense, Net		1,185			1,469		3,899			4,522

Income From Continuing Operations
Before Income Taxes		9,995			7,102		37,607			26,378
Provision for income taxes		3,748			2,707		14,289			9,887

Income From Continuing Operations		6,247			4,395		23,318			16,491
Income (Loss) From Discontinued
Operations, Net of Income Taxes		(2,189	)		67		(10,966	)		(217	)

Net Income	$	4,058		$	4,462	$	12,352		$	16,274

Income (Loss) Per Share – Basic
Income from continuing operations	$	.32		$	.23	$	1.19		$	.85
Discontinued operations		(.11	)		—		(.56	)		(.01	)

Net income	$	.21		$	.23	$	.63		$	.84

Income (Loss) Per Share – Diluted
Income from continuing operations	$	.31		$	.23	$	1.17		$	.84
Discontinued operations		(.11	)		—		(.55	)		(.01	)

Net income (loss)	$	.20		$	.23	$	.62		$	.83

Dividends Per Common Share	$	.05		$	.05	$	.15		$	.15

Average Common Shares Outstanding (000’s)
Basic		19,633			19,477		19,588			19,474

Diluted		20,009			19,570		19,914			19,581

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, $ in thousands)


	Nine Months Ended
	March 31,
	2004			2003
Cash Flows From Operating Activities
Income from continuing operations	$	23,318		$	16,491
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:
Depreciation and amortization		13,332			12,751
Deferred income taxes		2,288			3,984
Changes in assets and liabilities:
Trade receivables		5,652			(6,774	)
Inventories		(7,430	)		(12,674	)
Prepaid expenses and other		(2,182	)		1,071
Accounts payable and accrued liabilities		(9,815	)		(2,205	)

Net cash provided by continuing operations		25,163			12,644
Net cash provided by (used for) discontinued operations		2,706			(104	)

Net cash provided by operating activities		27,869			12,540

Cash Flows From Investing Activities
Additions to property, plant and equipment		(47,449	)		(32,705	)
Acquisition of business		—			(2,224	)
Other		(357	)		(249	)

Net cash used for investing activities		(47,806	)		(35,178	)

Cash Flows From Financing Activities
Proceeds from sale of Senior Notes		—			25,000
Borrowings on Revolving Credit Facility, net		16,200			—
Dividends on common stock		(2,950	)		(2,923	)
Proceeds from stock option purchases		1,952			158

Net cash provided by financing activities		15,202			22,235

Net Decrease in Cash and Cash Equivalents		(4,735	)		(403	)
Cash and Cash Equivalents at Beginning of Year		5,056			12,436

Cash and Cash Equivalents at End of Period	$	321		$	12,033

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — General

The attached condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The company believes that the disclosures included herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The unaudited financial information contained herein has been prepared in conformity with accounting principles generally accepted in the United States of America on a consistent basis and does reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three-month and nine-month periods ended March 31, 2004 and 2003. Because of seasonal, weather-related conditions in some of the company’s market areas, sales can vary at times, and results of any one quarter or other interim reporting period should not necessarily be considered as indicative of results for a full fiscal year.

Note 2 – Company Segments

The Building Products segment consists of Elk Premium Building Products, Inc. and its operating subsidiaries (collectively Elk). These companies manufacture (1) premium laminated fiberglass asphalt shingles, (2) coated and non-coated nonwoven fabrics used in asphalt shingles and other applications in the building and construction, filtration, floor coverings and other industries, and (3) nontoxic composite wood decking, marine dock, and fencing products. Building Products accounted for 94% or more of consolidated sales during all periods presented in this Form 10-Q.

Other, Technologies consists of the company’s other operations. These dissimilar operations are combined, as none individually meets the materiality criteria for separate segment reporting. In fiscal 2003, operating profit from the company’s Engineering, Technologies business, which provides proprietary technologies and related engineering services to the natural gas processing industry as Ortloff Engineers, LTD (Ortloff), exceeded 10% of consolidated operating profit. In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” this business was presented as a separate segment in fiscal 2003 because it exceeded this quantitative threshold. However, this business has not historically met the 10% reporting test, is not expected to in fiscal 2004, nor will it typically be expected to in the future. Accordingly, this business is included in Other, Technologies in fiscal 2004.

- 4 -

Other, Technologies also includes Chromium Corporation (Chromium), which is a leading provider of hard chrome and other surface finishes designed to extend the life of steel machinery components operating in abrasive environments. An additional operation, Elk Technologies, Inc., develops and markets fabrics featuring VersaShield fire retardant coatings designed for use outside of traditional building products applications, including home furnishings and other consumer products. This business has not yet produced significant commercial sales.

In December 2003, the company made the decision to discontinue Cybershield, Inc. (Cybershield) and to sell Cybershield or its assets no later than December 2004. Cybershield had previously been included in Other, Technologies for segment reporting purposes. Prior periods have been restated to present Cybershield as a discontinued operation in all periods presented.

Financial information by company segment is summarized as follows:


	(In thousands)						(In thousands)
	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
Sales from Continuing Operations
Building Products	$	127,804		$	116,981		$	404,213		$	328,919
Other, Technologies		4,143			6,635			10,681			12,720

	$	131,947		$	123,616		$	414,894		$	341,639

Operating Profit from Continuing Operations
Building Products	$	13,517		$	8,092		$	50,329		$	30,081
Other, Technologies		814			2,902			1,516			3,439
Corporate and other, excluding noncash stock option compensation		(3,151	)		(2,423	)		(10,339	)		(7,998	)
Noncash stock option compensation		—			—			—			5,378

		11,180			8,571			41,506			30,900
Interest expense, net		1,185			1,469			3,899			4,522

Income from continuing operations before income taxes	$	9,995		$	7,102		$	37,607		$	26,378

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	(In thousands)				(In thousands)
	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
Depreciation and Amortization
Building Products	$	3,654	$	3,409	$	10,826	$	10,237
Other, Technologies		195		181		520		518
Corporate		686		638		1,986		1,996

	$	4,535	$	4,228	$	13,332	$	12,751

Capital Expenditures
Building Products	$	12,679	$	13,225	$	43,253	$	31,789
Other, Technologies		46		44		186		182
Corporate		1,346		144		4,010		734

	$	14,071	$	13,413	$	47,449	$	32,705


	March 31,		June 30,
Identifiable Assets	2004		2003
Building Products	$	409,322	$	376,110
Other, Technologies		20,279		18,772
Corporate		28,312		28,040
Discontinued Operations		5,408		19,369

	$	463,321	$	442,291

Note 3 – Product Sales

The following table summarizes sales from continuing operations by product category, excluding intercompany sales, for the three-month and nine-month periods ended March 31, 2004 and March 31, 2003:


	(In thousands)				(In thousands)
	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
Premium roofing	$	117,700	$	109,251	$	376,499	$	307,072
Performance nonwoven fabrics		8,007		7,484		23,474		21,518
Composite building products		2,097		246		4,240		329
Technology licensing and consulting fees		1,811		4,936		4,698		7,189
Hard chrome and other surface finishes		2,289		1,696		5,938		5,528
Fire-retardant fabrics		43		3		45		3

	$	131,947	$	123,616	$	414,894	$	341,639

Note 4 – Earnings Per Share

Basic earnings per share is computed based on the average number of common shares outstanding. Diluted earnings per share includes outstanding stock options and restricted shares.

- 6 -

In accordance with SFAS No. 128, “Earnings per Share,” diluted earnings per share from discontinued operations presented on the Consolidated Statements of Operations were computed utilizing the same number of potential common shares used in computing the diluted per share amount for income from continuing operations, regardless of whether those amounts were antidilutive to their respective basic per share amounts. The following table sets forth the computation of basic and diluted earnings per share from continuing operations:


	($ In thousands)				($ In thousands)
	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2004		2003		2004		2003
Income from continuing operations	$	6,247	$	4,395	$	23,318	$	16,491

Denominator for basic earnings per share – weighted average shares outstanding		19,633		19,477		19,588		19,474
Effect of dilutive securities:
Restricted shares and employee stock options		376		93		326		107

Denominator for dilutive earnings per share – adjusted weighted average shares and assumed issuance of shares purchased under incentive stock option plan and vesting of restricted shares using the treasury stock method		20,009		19,570		19,914		19,581

Basic earnings per share from continuing operations	$	.32	$	.23	$	1.19	$	.85

Diluted earnings per share from continuing operations	$	.31	$	.23	$	1.17	$	.84

Stock options excluded from computation of diluted earnings per share due to anti-dilutive effect		727,240		1,666,000		727,500		1,623,815

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Note 5 – Accounting for Stock-Based Compensation

The company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations to measure compensation expense for stock-based compensation plans. Refer to Note 6 – Noncash Stock Option Compensation on page 9 of this Form 10-Q for a more detailed description of the company’s application of APB No. 25. If compensation cost for stock-based compensation plans had been determined under SFAS No. 123, pro forma net income, stock option compensation expense, and basic and diluted earnings per common share for the three-month and nine-month periods ended March 31, 2004 and 2003, assuming all options granted in 1996 and thereafter were valued at grant date using the Black-Scholes model, would have been as follows (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2004			2003			2004			2003
Net income as reported	$	4,058		$	4,462		$	12,352		$	16,274

Add: Stock-based employee compensation expense (benefit) included in reported net income, net of related tax effects		—			—			—			(3,496	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards granted since January 1, 1996, net of related tax effects		(585	)		(550	)		(1,936	)		(1,717	)

Pro forma earnings	$	3,473		$	3,912		$	10,416		$	11,061

Earnings per common share:
Basic – as reported	$	.21		$	.23		$	.63		$	.84

Basic – pro forma	$	.18


	Page
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 and June 30, 2003		1
Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2004 and 2003		2
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2004 and 2003		3
Notes to Consolidated Financial Statements		4-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23
Part II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		24
Item 5. Other Information		24
Item 6. Exhibits and Reports on Form 8-K		25
SIGNATURES		26
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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