UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For quarterly period ended September 30, 2004

OR

For the transition period from            to                     

Commission File Number 1-5341

ELKCORP

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

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

     As of close of business on October 31, 2004, the Registrant had outstanding 19,862,708 shares of Common Stock, par value $1 per share.

Elkcorp and Subsidiaries

For The Quarter Ended September 30, 2004

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ELKCORP AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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ELKCORP AND SUBSIDIARIES

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, 2004. 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 periods ended September 30, 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) composite wood decking, marine dock, and fencing products. Building Products accounted for 98% of consolidated sales in the three-month periods ended September 30, 2004 and 2003.

     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. Other, Technologies includes (1) 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, (2) Ortloff Engineers, LTD (Ortloff), which provides proprietary technologies and selected engineering services to the natural gas processing industry, and (3) Elk Technologies, Inc., which 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.

     In December 2003, the company made the decision to discontinue Cybershield, Inc. (Cybershield) and to sell Cybershield or its assets. Cybershield had previously been included in Other, Technologies for segment reporting purposes. Cybershield is reported as a discontinued operation in all periods presented.

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     Financial information by company segment is summarized as follows:

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Note 3 – Product Sales

     The following table summarizes sales from continuing operations by product category, excluding intercompany sales, for the three-month periods ended September 30, 2004 and 2003:

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 unvested restricted shares. 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:

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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. 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 periods ended September 30, 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:

Note 6 – Long-Term Debt

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     In June 2002, the company issued $120,000,000 of Senior Notes (Notes) and in March 2003, issued an incremental $25,000,000 in Notes. Of the Notes, $25,000,000 mature in fiscal 2008 and carry a coupon rate of 4.69%, $60,000,000 mature in fiscal 2009 and carry a coupon rate of 6.99%, and $60,000,000 mature in fiscal 2012 and carry a coupon rate of 7.49%. In June 2004, the company executed an agreement to issue an additional $50,000,000 in Notes scheduled to be closed, subject to the company’s satisfaction of certain conditions, on November 15, 2004. These new Notes mature in November 2014 and carry a coupon rate of 6.28%.

     In June 2002, the company entered into an interest rate swap to effectively convert the interest rate from fixed to floating on $60,000,000 of Notes through 2012. For this fair value hedge, both the fair value of the derivative and the underlying hedged item are reported in the balance sheet. At September 30, 2004, the fair value of the derivative was $4,602,000 and this amount was included in other assets and as an increase in the carrying value of long-term debt. Changes in the fair value of the derivative and the underlying hedged item offset and are recorded each period in other income or expense, as applicable. In July 2004, the company entered into a second interest rate swap to effectively convert the interest rate from fixed to floating on $25,000,000 of Notes through July 15, 2007. This new interest rate swap is also a fair value hedge with the same accounting and reporting as the aforementioned interest rate swap. At September 30, 2004, the fair value of the derivative was $385,000 and is recorded in other assets and as an increase in the fair value of long-term debt.

     At September 30, 2004, the company had $125,000,000 of primary credit available under a Revolving Credit Facility (Facility), including up to a maximum of $10,000,000 in letters of credit through November 30, 2008. At September 30, 2004, $5,000,000 of borrowings were outstanding on the Facility and $3,422,000 of letters of credit were outstanding.

     Both the Notes and the Facility require that the company maintain a specified minimum consolidated net worth, and a maximum debt to capitalization ratio, based on defined terms. The Facility also contains a minimum fixed charge coverage ratio and the Notes contain a minimum interest coverage ratio, also based on defined terms. Dividend payments and stock repurchases are also limited to certain specified levels by the Facility agreement. At September 30, 2004, the company was in compliance with all requirements.

Note 7 – Product Warranties

     The company provides its customers with limited warranties on certain products. Limited warranties relating to products sold by the Building Products segment generally range from 20 to 50 years. Warranties relating to the Other, Technologies companies are not significant to their operations. Warranty reserves are established based on known or probable claims, together with historical experience factors. The company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. Changes in the company’s warranty liability during the current year period were as follows:

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Note 8 – Environmental Risk

               Chromium has engaged in limited remediation activities at its former plating operation, which is located in Lufkin, Texas. Soil sampling results from a pre-closing environmental evaluation of the site indicated the necessity of localized cleanup. Chromium has entered the property into the Texas Voluntary Cleanup Program (VCP). Under this program, the Texas Commission on Environmental Quality (TCEQ) reviews the voluntary cleanup plan the applicant submits, and, when the work is complete, issues a certificate of completion, evidencing cleanup to levels protective of human health and the environment and releasing prospective purchasers and lenders from liability to the state. Properties entered into the VCP are protected from TCEQ enforcement actions.

     Chromium completed a supplemental groundwater and soil assessment at the facility. The assessment further defined the horizontal and vertical extent of metals in soils, assessed the horizontal extent of metals in groundwater, and estimated the direction of groundwater movement. Chromium submitted its Affected Property Assessment Report (“APAR”) to the TCEQ. In June 2004, the TCEQ issued a letter accepting Chromium’s APAR in substantially all respects, indicating that no further assessment of the extent of contamination was necessary. Chromium will now submit a proposed Remedial Action Plan (“RAP”) to the TCEQ in which it will propose activities and engineering controls to cleanup the site under the VCP to a site specific risk-based cleanup standard as prescribed by the Texas Risk Reduction Program.

     Until the significant actions that will be included in the RAP are identified, the estimate of costs to remediate the site are not determinable, nor can the company determine at this point in time if it is reasonably possible that it will incur material additional costs at the site. Certain scenarios, none of which are reasonably expected at this time, could potentially result in material costs to the company. The company believes that sufficient information for establishing a reserve for this environmental exposure in accordance with SFAS No. 5, “Accounting for Contingencies,” and AICPA Statement of Position (SOP) 96-1, may be available by the end of fiscal 2005, and further anticipates that it may be in a position at that time to determine if it is reasonably possible that the company will incur material additional costs with regard to this site.

     The company’s operations are subject to extensive federal, state and local laws and regulations relating to environmental matters. Other than the possible costs associated with the previously described Chromium matter, the company does not believe it will be required to expend amounts which will have a material adverse effect on the company’s consolidated financial position or results of operations by reason of environmental laws and regulations. Such laws and regulations are frequently changed and could result in significantly increased cost of compliance. Further, certain of the company’s manufacturing operations utilize hazardous materials in their production processes. As a result, the company incurs costs for recycling or disposal of such materials and may incur costs for remediation activities at its facilities and off-site from time to time. The company establishes and maintains reserves for such known or probable remediation activities in accordance with SFAS No. 5 and SOP 96-1.

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Note 9 – Income Taxes

     In August 2003, the Internal Revenue Service (IRS) completed audits of the company’s consolidated tax returns through fiscal 2001. A notice of proposed adjustment disallowing the timing of certain deductions for tax years 1998 through 2001 was rendered in connection with these audits. In December 2003, the company reached a tentative agreement with the local office of the IRS. The tentative agreement had no impact on net income or earnings per share. The tentative agreement has been submitted to the Joint Committee of the IRS for final review and approval. The deferred tax balance and income tax receivable were each reduced by approximately $400,000 to reflect the tentative agreement.

     Note 10 – Discontinued Operations

     In December 2003, the company concluded that the risk and prospects for future success of Cybershield did not justify the additional investment of capital and other resources required to continue Cybershield’s operations. Accordingly, the decision was made to discontinue Cybershield and to sell its operations or its assets. Management had previously decided to sell Cybershield’s Canton, Georgia facility. Therefore, the Canton, Georgia facility is included as a component of discontinued operations. As a result of these actions, Cybershield is classified as a discontinued operation in the consolidated financial statements.

     On August 10, 2004, the company sold substantially all assets of Cybershield, excluding the Canton, Georgia facility, to the Cybershield management group for $1,293,000 in cash. The sale price approximated the book value of assets, net of assumed liabilities, at the date of sale. The only remaining assets in discontinued operations are property, plant and equipment related to the Canton, Georgia facility. In the period ended September 30, 2004, the company recorded a pretax impairment charge of $651,000 on remaining Canton assets. In October, 2004, a tentative agreement was reached to sell the Canton land, building and certain equipment for $2,750,000. After the impairment charge, the sales price approximates the book value of the assets to be sold. Subsequent to this sale, the only remaining assets of discontinued operations will be immaterial amounts of equipment held for sale.

     In the three-month periods ended September 30, 2004 and 2003, the company reported losses from discontinued operations of $491,000 and $943,000, net of tax. Summary operating results of discontinued operations are summarized as follows:

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Note 11 – Restricted Stock and Stock Options

          During fiscal 2004, the Compensation Committee of the Board of Directors, in conjunction with an independent third party compensation consultant, conducted an evaluation of the company’s long-term incentive compensation strategy in light of the Board’s pay for performance philosophy and current developments, including without limitation, emerging accounting issues and shareholder preferences. A detailed description and analysis of the Compensation Committee’s evaluation and conclusions is contained in ElkCorp’s Proxy Statement for the October 26, 2004 Annual Meeting of Shareholders, which has been filed with the Securities and Exchange Commission.

          For fiscal 2005, the Compensation Committee determined that corporate officers will receive 75% of their long-term incentive compensation in the form of restricted stock with a three-year vesting period and 25% in the form of stock options, also with three-year vesting and a ten year term. Other key employees will receive their long-term incentive compensation in the form of awards of restricted stock and stock loan grants in lieu of stock option grants.

          In the three-month period ended September 30, 2004, 134,964 restricted shares were granted at market prices ranging from $23.21 to $24.94. At grant date, the value of restricted stock is reflected as unearned compensation in shareholders’ equity and is amortized over the applicable restriction period. In the three-month period ended September 30, 2004, stock options were granted for 66,273 shares at an exercise price of $23.21.

          For all of fiscal 2004, a total of 12,320 restricted shares were granted at market prices ranging from $24.14 to $29.67 and stock options were granted for 391,385 shares at exercise prices ranging from $22.61 to $25.60.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

     This discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the three-month periods ended September 30, 2004 and 2003. This discussion should be read in conjunction with the Consolidated Condensed Financial Statements and Notes to Consolidated Condensed Financial Statements included elsewhere herein and our annual report on Form 10-K for the year ended June 30, 2004.

     The first quarter of fiscal 2005 was a challenging quarter for ElkCorp’s Building Products businesses in many respects. We experienced lower than expected current year sales in regions affected by storms in the first quarter of the prior fiscal year. Competitive pricing pressures also created a difficult pricing environment for our roofing business. The four recent hurricanes that affected the Southeast and East Coast regions of the United States resulted in delays in the shipments of products to those areas. Escalating raw material and transportation costs resulting from higher oil prices are a continuing concern. We have announced price increases consistent with industry trends that we believe will offset much of these rising costs. We were fortunate that our plants located in regions impacted by Hurricane Ivan sustained no damage, but the Tuscaloosa and Myerstown facilities did experience downtime and/or production slowdowns due to the significant rainfall associated with the storm. From a positive perspective, we believe demand generated by these storms will have a beneficial impact on our operating results beginning in the quarter ending December 31, 2004. Elk’s nonwoven fabrics business experienced a production interruption due to substandard third-party raw materials which resulted in an equipment malfunction. In the composite lumber business, old inventory was recycled because it was not consistent with the current manufacturing formula.

     Our new Tuscaloosa, Alabama facility was placed in service on July 1, 2004 and even though the new plant has increased our operating costs, productivity is significantly better than our expectations for the start-up of this new facility. A project to significantly increase the composite building products line with an investment of approximately $22,000,000 to expand the capabilities of our current composite lumber operations in Lenexa, Kansas is well underway and progressing on schedule. The new facility is expected to be placed in production in December 2004. Start-up of this expanded facility will negatively impact operating results initially, but operating income is expected to improve as the second half of fiscal 2005 progresses.

     Chromium was profitable in the first quarter of fiscal 2005, but due to the deferral of one license fee, Ortloff incurred an operating loss for the quarter. These companies do not fit into our focus on Building Products platforms, and are currently being offered for sale. While we are proactively seeking potential buyers, we do not have an immediate need to sell either business. As a result, we will be selective in seeking buyers for each of these businesses. In December 2003, we made the decision to discontinue Cybershield, Inc. (Cybershield) and to sell Cybershield or its assets. The Lufkin, Texas facility and its operations were sold August 10, 2004. An agreement to sell the idle Canton, Georgia facility is currently pending.

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Performance Data

     The following table and subsequent discussion set forth performance data from our continuing operations, expressed as a percentage of net sales for the periods indicated. This data and the accompanying discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere herein.